There are a number of motives for companies which
adopt a strategy of Mergers and Acquisitions (M&A’s). M&A’s generate synergies that can, in
turn, foster corporate growth, increase market power, boost profitability, and
improve shareholder wealth (Alexandridis, Petmezas and Travlos 2010). Other benefits may be incremental cash flows
and reductions in the cost of capital (Antoniou, Arbour & Zhao, 2008).
Recently it was
announced that two food giants, namely Kraft and Heinz have agreed to merge. The deal was struck by Heinz’s owners, the
Brazilian investment firm 3G Capital, and the billionaire investor Warren
Buffett’s Berkshire Hathaway (BBC News, 2015).
Buffett is no stranger to the business world through his opinions and
actions, his name having occurred frequently in my previous blog posts.
When the news
of the merger was publicly released, Buffett commented, ‘This is my kind of
transaction, uniting two world-class organisations and delivering shareholder
value.’ This may be the case in terms of
this particular merger as Kraft shareholders will receive a special cash
dividend of $16.50 per share as part of the deal, (BBC News, 2015)
and on the day of the news announcement the share price surged by 36% to $83.17
(the significance of which is shown in figure 1), its highest since 2012 (Cimilluca,
Mattioli & Dulaney, 2015).
Yes, the shareholders of Kraft may have benefited
already as there has been a significant rise in share price and the guarantee
of a special cash dividend but can there be any guarantee that this merger is
going to lead to corporate growth, increased market power and
profitability? Only time will tell. This leads to a more fundamental question,
namely how successful mergers and acquisitions have been in reaching their
goals.
Considering that 20 percent of mergers worth more than
$10 billion announced in the last two years have collapsed and of those deals
that failed, $278 billion of the total and $784 billion in announced deal was
lost (Bloomberg, 2015), some people may say that Buffett and 3G have made a
brave move in engineering the merger between Kraft and Heinz.
There are a number of possible reasons for the failure
of mergers and acquisitions. The market
for corporate control of public companies is extremely competitive. As a result, acquirers tend to bid more
aggressively and offer hefty premiums for target firms which could result in a
value-destroying merger and aquistion deal.
(Antoniou,
Arbour & Zhao, 2008). This is known as Roll’s (1986) Hubris hypothesis. This is also related to the Agency problem
(Jenson and Meckling, 1976) discussed back in Blog 1 where I discussed how
managers can act in self-interest at the expense of shareholders which results
in the destruction of shareholder value.
Competitiveness between CEOs to acquire control of public companies can
become marked as we have witnessed with some recent comments made by one CEO in
relation to a failure of a merged company which took place a year ago. Siemens CEO Josef Kaesar, who lost out to US
rival GE in a bid to acquire the energy assets of Alstrom, was quoted by a
media outlet as saying that his company was at a disadvantage because Alstrom
CEO Patrick Kron ‘declared on several occasions that he felt resentment towards
Germany and Siemens’ (Rosemain & Webb, 2015). These are strong comments to make, especially
from a CEO of a leading organisation.
This shows that company management are willing to go to extreme lengths
to compete with other companies when it comes to mergers and acquisitions which
explains why some CEO’s may overpay for acquisitions, thereby damaging shareholder
value.
Mergers and Acquisitions are also not as ‘plain sailing’ as stakeholders
may think. Take the recent
Lafarge/Holcim merger discussions. The initial
terms and management line-up became a significant area of debate between the
boards of both companies after Lafarge’s results had lagged behind Holcim. Lafarge CEO Bruni Lafont, who has been
designated as CEO of the merged company, has lost out as a result of Holcim
managers coming out to say that they did not want him to become CEO of the
merged group because of Lafarge’s recent lacklustre performance (Financial
Times, 2015).
In conclusion, there are a number of arguments both for and against mergers
and acquisitions. I find it difficult to
argue with someone as successful as Warren Buffett who seems very confident
that the recent merger in which he has been involved is going to enhance
shareholder value. However, it is quite
clear to see that there are a number of barriers to overcome in order to ensure
the success of a merger or acquisition. There
therefore needs to be a very effective integration process to ensure that as
many synergies as possible are achieved in order to reduce overhead costs of
the merged companies and thereby create a solid basis for shareholder value.
Alexandridis, G., Petmezas, D., & Travlos, N. (2010). Gains from
Mergers and Acquisitions Around the World: New Evidence. Financial
Management, 39(4), 1671-1695. doi:10.1111/j.1755-053x.2010.01126.x
Antoniou, A., Arbour, P., & Zhao, H. (2008). How Much Is Too Much:
Are Merger Premiums Too High?. European Financial Management, 14(2),
268-287. doi:10.1111/j.1468-036x.2007.00404.x
BBC News,.
(2015). Kraft shares soar on Heinz merger. Retrieved 26 March 2015, from
http://www.bbc.co.uk/news/business-32050266
Cimilluca, D., Mattioli, D., & Dulaney, C. (2015). Kraft, Heinz
to Merge, Forming Food Giant. WSJ. Retrieved 26 March 2015, from
http://www.wsj.com/articles/kraft-foods-h-j-heinz-to-merge-1427278332
Financial Times,. (2015). Holcim and Lafarge: A merger of egos -
FT.com. Retrieved 26 March 2015, from http://www.ft.com/cms/s/0/41d317c8-d14e-11e4-98a4-00144feab7de.html#axzz3VWkDRKhD
Inc, K. (2015). KRFT:NASDAQ GS Stock Chart - Kraft Foods Group Inc.
Bloomberg. Retrieved 26 March 2015, from
http://www.bloomberg.com/quote/KRFT:US/chart
Roll, R.,
(2008). ‘The hubris hypothesis of corporate takeovers’, Journal of
Business, Vol. 59, 1986, pp. 197-216.
Retrieved 21st March 2015 from http://www.jstor.org/stable/2353017
Rosemain, M.,
& Webb, A. (2015). Battle for Alstom Lives on via Executive Barbs After GE
Deal. Bloomberg.com. Retrieved 26 March 2015, from http://www.bloomberg.com/news/articles/2015-03-11/alstom-ceo-rebuffs-siemens-overtures-of-possible-train-merger
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