by Will Ashworth | November 8, 2013 12:38 pm
The new Office Depot (ODP) started trading Nov. 6 after completing its $1.2 billion merger with Office Max (OMX) the day before. The merged company will have $17 billion in annual revenue, still far behind Staples (SPLS), the office supply company’s biggest competitor.
The highlight of the deal is annual cost savings of up to $600 million within three years. Separately, both companies have too much debt, and the companies are hoping the merger will help them overcome that debt … but I wouldn’t hold your breath. Bain Management suggests that up to 70% of corporate mergers fail or don’t produce the savings anticipated.
With that in mind, I’ve put together a list of five big-name mergers from recent corporate history — three that worked and two that didn’t.
In an August 2011 commentary, Matthew Dalton of the Wall Street Journal remarked:
“InBev’s $52 billion purchase of Anheuser-Busch in 2008 must rank as one of the most successful mergers in recent memory…InBev initially promised $1.5 billion in ‘merger synergies’ from the deal; it soon increased the target to $2.25 billion. The brewers second-quarter results, released Thursday, show that the target has nearly been achieved.”
Dalton goes on to say that once the fat was trimmed, its core profit growth began to dwindle. However, two years after Dalton’s article, it’s clear that InBev Anheuser-Busch (BUD) is doing just fine.
The company’s net profit in the third quarter ended September were $2.37 billion, an increase of 31% over last year. Its global sales of Budweiser increased by 8.1% in the quarter; related to cost synergies, it was able to find $250 million in annual cost savings between June and September from its purchase of Grupo Modelo, the makers of Corona. It expects to find $1 billion in cost savings by the end of 2016, and is well on its way already.
Anheuser-Busch brought one very important attribute to the merger: a real knack for marketing, which InBev’s bean counters didn’t have. If there were any doubts about the merger, this year’s Super Bowl in New York should wipe those clear from your memory. InBev Anheuser-Busch is taking over Norwegian Cruise Line’s (NCLH) newest ship, the Norwegian Getaway, turning it into a Bud Light-themed hotel.
Eddie Lampert acquired control of Kmart by purchasing more than $1 billion of its debt, which was converted to 51% of the new equity when it emerged from bankruptcy in June 2003. He then used Kmart to buy Sears in March 2005 for $12.3 billion. At the time of the merger, the combined companies had $55 billion in annual revenue. But in fiscal 2013, Sears Holdings (SHLD) managed to generate just $39.9 billion in revenue.
There have been so many chess moves by Lampert in the nine years since the merger it’s almost impossible to tell the players without a score card. For instance, he tightened the company’s grip on Sears Canada (SEARF) in 2010, buying up more than 90% of its shares. In January of this year, he distributed 44.5% of Sears Canada’s shares to SHLD shareholders.
Considering 55% of SHLD is owned by Lampert’s hedge fund, ESL Investments Inc., Lampert ends up owning 50% of Sears Canada. His latest — and greatest — idea to rescue SHLD is to spinoff Lands End and sell its automotive centers, raising as much as $2.5 billion in cash.
As far as I’m concerned, the only people benefiting from this man’s shenanigans are lawyers, accountants and investment bankers. He’s single-handedly ruined two once-upon-a-time iconic retail brands. That’s not how a merger is supposed to work.
This was quite possibly one of the most hotly contested and contentious takeovers in the history of mergers and acquisitions. In late August 2009, the CEO of pre-split Kraft, Irene Rosenfeld, met with Cadbury chairman Roger Carr to make an offer for the U.K. chocolate company. Carr rebuffed her immediately. They went back and forth over the next four-and-half months until Cadbury accepted Rosenfeld’s offer of $19.4 billion in January 2010 — a 50% premium to where Cadbury’s shares traded before Kraft’s bid the previous August.
Kraft got increased exposure to emerging markets, Cadbury gained a bigger foothold in North America, and the combined businesses generated cost and revenue synergies of almost $2 billion. More importantly, the merger allowed Rosenfeld to execute her next grand plan — splitting Kraft into two companies. While Kraft Foods Group’s (KRFT) North American grocery business has some great brands — Maxwell House, Cracker Barrel, Planters — it simply doesn’t have enough growth. Mondelez International (MDLZ), which Rosenfeld runs, has the global scale and brand strength to grow its business exponentially … at least, that was the theory.
Mondelez has hit some bumps in the road in 2013; however, its business model is very much intact. Its long-term goals of organic net revenue growth of 5% to 7% and double-digit adjusted EPS growth are both still in sight. But make no mistake, none of this would have been possible without the original merger of Cadbury and Kraft.
I hate to go so far back, but this one is epic. Quaker, now part of PepsiCo (PEP), acquired Snapple in December 1994 for $1.7 billion, paying 28.6 times earnings and 3.3 times sales. The plan was to combine Gatorade with Snapple in a single beverage-related division.
Unfortunately, distributors didn’t want to give up some of their Snapple business in return for some Gatorade sales. Nothing Quaker was trying to implement at Snapple was moving nearly fast enough. In 1995, it lost $75 million — the worst loss in Snapple history. Businessweek called it one of the worst mergers of the 1990s.
By 1997, Quaker had seen enough, selling Snapple to Nelson Peltz’s Triarc Companies for $300 million. Three years later, Triarc sold Snapple to Cadbury Schweppes — now part of Dr Pepper Snapple Group (DPS) — for $1.45 billion. Interestingly, Cadbury Schweppes had originally passed on Snapple in 1997 because it felt $300 million for too much for the drink maker. Bill Smithburg, the Quaker CEO when the Snapple debacle went down, resigned from the company in November 2000 after PepsiCo agreed to purchase Quaker for $13.4 billion.
How much did Snapple cost Quaker Oats? Businessweek estimates it might have been as high as $1.5 billion when you take into account the profitable brands that were sold to pay for the deal. Sometimes, a deal sounds good on paper, but ends up being utter crap.
It has been almost four years since the merger between Berkshire Hathaway (BRK.B) and Burlington Northern in February 2010, and it’s hard to imagine Warren Buffett’s company without the railroad in its portfolio of investments.
In the first nine months of 2013, BNSF contributed $2.7 billion in earnings to Berkshire Hathaway’s bottom line, by far the largest dollar amount by a single entity anywhere in the company. Buffett was happy when he bought it and he’s even happier today. In his 2012 annual letter to shareholders he stated, “Had we instead allocated the funds required for this purchase to dividends or repurchases, you and I would have been worse off.”
The transaction was a combination of cash and stock involving $15.87 billion in cash plus the issuance of 80,932 Class A shares and 21 million Class B. When the election results were tallied, 40% of BNSF shareholders received stock with 60% settling for cash instead. Those BNSF shareholders who accepted stock and are still holding are sitting on cumulative returns of 51% for the Class A and 49% for the Class B.
In my opinion, this was one of the smartest deals in American corporate history because he bought BNSF on the cheap just before it became apparent railways were about to experience a renaissance thanks to oil and gas. A year or two later he wouldn’t have been so lucky.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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