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all of Perot Systems’ outstanding shares of Class A common stock was initiated in early November and completed on
November 19, 2009, with Dell receiving more than 90 percent of Perot’s outstanding shares.
Mars Buys Wrigley in One Sweet Deal
Under considerable profit pressure from escalating commodity prices and eroding market share, Wrigley Corporation, a
U.S. based leader in gum and confectionery products, faced increasing competition from Cadbury Schweppes in the
U.S. gum market. Wrigley had been losing market share to Cadbury since 2006. Mars Corporation, a privately owned
candy company with annual global sales of $22 billion, sensed an opportunity to achieve sales, marketing, and
distribution synergies by acquiring Wrigley Corporation.
On April 28, 2008, Mars announced that it had reached an agreement to merge with Wrigley Corporation for $23
billion in cash. Under the terms of the agreement, unanimously approved by the boards of the two firms, shareholders of
Wrigley would receive $80 in cash for each share of common stock outstanding. The purchase price represented a 28
percent premium to Wrigley's closing share price of $62.45 on the announcement date. The merged firms in 2008 would
have a 14.4 percent share of the global confectionary market, annual revenue of $27 billion, and 64,000 employees
worldwide. The merger of the two family-controlled firms represents a strategic blow to competitor Cadbury
Schweppes's efforts to continue as the market leader in the global confectionary market with its gum and chocolate
business. Prior to the announcement, Cadbury had a 10 percent worldwide market share.
Wrigley would become a separate stand-alone subsidiary of Mars, with $5.4 billion in sales. The deal would help
Wrigley augment its sales, marketing, and distribution capabilities. To provide more focus to Mars' brands in an effort
to stimulate growth, Mars would transfer its global nonchocolate confectionery sugar brands to Wrigley. Bill Wrigley,
Jr., who controls 37 percent of the firm's outstanding shares, would remain executive chairman of Wrigley. The Wrigley
management team also would remain in place after closing. The combined companies would have substantial brand
recognition and product diversity in six growth categories: chocolate, nonchocolate confectionary, gum, food, drinks,
and pet-care products. The resulting confectionary powerhouse also would expect to achieve significant cost savings by
combining manufacturing operations and have a substantial presence in emerging markets.
While mergers among competitors are not unusual, the deal's highly leveraged financial structure is atypical of
transactions of this type. Almost 90 percent of the purchase price would be financed through borrowed funds, with the
remainder financed largely by a third party equity investor. Mars's upfront costs would consist of paying for closing
costs from its cash balances in excess of its operating needs. The debt financing for the transaction would consist of $11
billion and $5.5 billion provided by J.P. Morgan Chase and Goldman Sachs, respectively. An additional $4.4 billion in
subordinated debt would come from Warren Buffet's investment company, Berkshire Hathaway, a nontraditional source
of high-yield financing. Historically, such financing would have been provided by investment banks or hedge funds and
subsequently repackaged into securities and sold to long-term investors, such as pension funds, insurance companies,
and foreign investors. However, the meltdown in the global credit markets in 2008 forced investment banks and hedge
funds to withdraw from the high-yield market in an effort to strengthen their balance sheets. Berkshire Hathaway
completed the financing of the purchase price by providing $2.1 billion in equity financing for a 9.1 percent ownership
stake in Wrigley.
Discussion Questions:
1. Why was market share in the confectionery business an important factor in Mars’ decision to acquire Wrigley?
2. It what way did the acquisition of Wrigley’s represent a strategic blow to Cadbury?
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3. How might the additional product and geographic diversity achieved by combining Mars and Wrigley benefit
the combined firms?
Assessing Procter & Gamble’s Acquisition of Gillette
The potential seemed almost limitless, as Procter & Gamble Company (P&G) announced that it had completed its
purchase of Gillette Company (Gillette) in late 2005. P&G’s chairman and CEO, A.G. Lafley, predicted that the
acquisition of Gillette would add one percentage point to the firm’s annual revenue growth rate, while Gillette’s
chairman and CEO, Jim Kilts, opined that the successful integration of the two best companies in consumer products
would be studied in business schools for years to come.
Five years after closing, things have not turned out as expected. While cost savings targets were achieved, operating
margins faltered due to lagging sales. Gillette’s businesses, such as its pricey razors, have been buffeted by the 2008–
2009 recession and have been a drag on P&G’s top line rather than a boost. Moreover, most of Gillette’s top managers
have left. P&G’s stock price at the end of 2010 stood about 12 percent above its level on the acquisition announcement
date, less than one-fourth the appreciation of the share prices of such competitors as Unilever and Colgate-Palmolive
Company during the same period.
On January 28, 2005, P&G enthusiastically announced that it had reached an agreement to buy Gillette in a share-
for-share exchange valued at $55.6 billion. This represented an 18 percent premium over Gillette's preannouncement
share price. P&G also announced a stock buyback of $18 billion to $22 billion, funded largely by issuing new debt. The
combined companies would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the
new firm's product portfolio would consist of personal care, healthcare, and beauty products, with the remainder
consisting of razors and blades, and batteries. The deal was expected to dilute P&G's 2006 earnings by about 15 cents
per share. To gain regulatory approval, the two firms would have to divest overlapping operations, such as deodorants
and oral care.
P&G had long been viewed as a premier marketing and product innovator. Consequently, P&G assumed that its
R&D and marketing skills in developing and promoting women's personal care products could be used to enhance and
promote Gillette's women's razors. Gillette was best known for its ability to sell an inexpensive product (e.g., razors)
and hook customers to a lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2
supplier in the lucrative toothbrush and men's deodorant markets, respectively, it has been much less successful in
improving the profitability of its Duracell battery brand. Despite its number 1 market share position, it had been beset
by intense price competition from Energizer and Rayovac Corp., which generally sell for less than Duracell batteries.
Suppliers such as P&G and Gillette had been under considerable pressure from the continuing consolidation in the
retail industry due to the ongoing growth of Wal-Mart and industry mergers at that time, such as Sears and Kmart.
About 17 percent of P&G's $51 billion in 2005 revenues and 13 percent of Gillette's $9 billion annual revenue came
from sales to Wal-Mart. Moreover, the sales of both Gillette and P&G to Wal-Mart had grown much faster than sales to
other retailers. The new company, P&G believed, would have more negotiating leverage with retailers for shelf space
and in determining selling prices, as well as with its own suppliers, such as advertisers and media companies. The broad
geographic presence of P&G was expected to facilitate the marketing of such products as razors and batteries in huge
developing markets, such as China and India. Cumulative cost cutting was expected to reach $16 billion, including
layoffs of about 4 percent of the new company's workforce of 140,000. Such cost reductions were to be realized by
integrating Gillette's deodorant products into P&G's structure as quickly as possible. Other Gillette product lines, such
as the razor and battery businesses, were to remain intact.
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P&G's corporate culture was often described as conservative, with a "promote-from-within" philosophy. While
Gillette's CEO was to become vice chairman of the new company, the role of other senior Gillette managers was less
clear in view of the perception that P&G is laden with highly talented top management. To obtain regulatory approval,
Gillette agreed to divest its Rembrandt toothpaste and its Right Guard deodorant businesses, while P&G agreed to
divest its Crest toothbrush business.
The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and acquisitions for
acquiring company shareholders. Assessing the true impact of the Gillette acquisition remains elusive, even after five
years. Though the acquisition represented a substantial expansion of P&G’s product offering and geographic presence,
the ability to isolate the specific impact of a single event (i.e., an acquisition) becomes clouded by the introduction of
other major and often uncontrollable events (e.g., the 2008–2009 recession) and their lingering effects. While revenue
and margin improvement have been below expectations, Gillette has bolstered P&G’s competitive position in the fast-
growing Brazilian and Indian markets, thereby boosting the firm’s longer-term growth potential, and has strengthened
its operations in Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult
with each passing year to identify the portion of revenue growth and margin improvement attributable to the Gillette
acquisition and that due to other factors.
Discussion Questions:
1. Is this deal a merger or a consolidation from a legal standpoint? Explain your answer.
2. Is this a horizontal or vertical merger? What is the significance of this distinction? Explain your answer.
3. What are the motives for the deal? Discuss the logic underlying each motive you identify.
4. Immediately following the announcement, P&G’s share price dropped by 2 percent and Gillette’s share price
rose by 13 percent. Explain why this may have happened?
5. P&G announced that it would be buying back $18 to $22 billion of its stock over the eighteen months
following closing. Much of the cash required to repurchase these shares requires significant new borrowing by
the new companies. Explain what P&G’s objective may have been trying to achieve in deciding to repurchase
stock? Explain how the incremental borrowing help or hurt P&G achieve their objectives?
6. Explain how actions required by antitrust regulators may hurt P&G’s ability to realize anticipated synergy. Be
specific.
7. Explain some of the obstacles that P&G and Gillette are likely to face in integrating the two businesses. Be
specific. How would you overcome these obstacles?
The Man Behind the Legend at Berkshire Hathaway
Although not exactly a household name, Berkshire Hathaway (“Berkshire”) has long been a high flier on Wall Street.
The firm’s share price has outperformed the total return on the Standard and Poor’s 500 stock index in 32 of the 36
years that Warren Buffet has managed the firm. Berkshire Hathaway’s share price rose from $12 per share to $71,000 at
the end of 2000, an annual rate of growth of 27%. With revenue in excess of $30 billion, Berkshire is among the top 50
of the Fortune 500 companies.
What makes the company unusual is that it is one of the few highly diversified companies to outperform consistently
the S&P 500 over many years. As a conglomerate, Berkshire acquires or makes investments in a broad cross-section of
companies. It owns operations in such diverse areas as insurance, furniture, flight services, vacuum cleaners, retailing,
carpet manufacturing, paint, insulation and roofing products, newspapers, candy, shoes, steel warehousing, uniforms,
and an electric utility. The firm also has “passive” investments in such major companies as Coca-Cola, American
Express, Gillette, and the Washington Post.
Warren Buffet’s investing philosophy is relatively simple. It consists of buying businesses that generate an attractive
sustainable growth in earnings and leaving them alone. He is a long-term investor. Synergy among his holdings never
seems to play an important role. He has shown a propensity to invest in relatively mundane businesses that have a
preeminent position in their markets; he has assiduously avoided businesses he felt that he did not understand such as
those in high technology industries. He also has shown a tendency to acquire businesses that were “out of favor” on
Wall Street.
He has built a cash-generating machine, principally through his insurance operations that produce “float” (i.e.,
premium revenues that insurers invest in advance of paying claims). In 2000, Berkshire acquired eight firms. Usually
flush with cash, Buffet has developed a reputation for being nimble. This most recently was demonstrated in his
acquisition of Johns Manville in late 2000. Manville generated $2 billion in revenue from insulation and roofing
products and more than $200 million in after-tax profits. Manville’s controlling stockholder was a trust that had been set
up to assume the firm’s asbestos liabilities when Manville had emerged from bankruptcy in the late 1980s. After a
buyout group that had offered to buy the company for $2.8 billion backed out of the transaction on December 8, 2000,
Berkshire contacted the trust and acquired Manville for $2.2 billion in cash. By December 20, Manville and Berkshire
reached an agreement.
Discussion Questions:
1. To what do you attribute Warren Buffet’s long-term success?
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2. In what ways might Warren Buffet use “financial synergy” to grow Berkshire Hathaway? Explain your answer.
America Online Acquires Time Warner:
The Rise and Fall of an Internet and Media Giant
Time Warner, itself the product of the world’s largest media merger in a $14.1 billion deal a decade ago, celebrated its
10th birthday by announcing on January 10, 2000, that it had agreed to be taken over by America Online (AOL) at a
71% premium to its share price on the announcement date. AOL had proposed the acquisition in October 1999. In less
than 3 months, the deal, valued at $160 billion as of the announcement date ($178 billion including Time Warner debt
assumed by AOL), became the largest on record up to that time. AOL had less than one-fifth of the revenue and
workforce of Time Warner, but AOL had almost twice the market value. As if to confirm the move to the new
electronic revolution in media and entertainment, the ticker symbol of the new company was changed to AOL.
However, the meteoric rise of AOL and its wunderkind CEO, Steve Case, to stardom was to be short-lived.
Time Warner is the world’s largest media and entertainment company, and it views its primary business as the
creation and distribution of branded content throughout the world. Its major business segments include cable networks,
magazine publishing, book publishing and direct marketing, recorded music and music publishing, and filmed
entertainment consisting of TV production and broadcasting as well as interests in other film companies. The 1990
merger between Time and Warner Communications was supposed to create a seamless marriage of magazine publishing
and film production, but the company never was able to put that vision into place. Time Warner’s stock underperformed
the market through much of the 1990s until the company bought the Turner Broadcasting System in 1996.
Founded in 1985, AOL viewed itself as the world leader in providing interactive services, Web brands, Internet
technologies, and electronic commerce services. AOL operates two subscription-based Internet services and, at the time
of the announcement, had 20 million subscribers plus another 2 million through CompuServe.
Strategic Fit (A 1999 Perspective)
On the surface, the two companies looked quite different. Time Warner was a media and entertainment content
company dealing in movies, music, and magazines, whereas AOL was largely an Internet Service Provider offering
access to content and commerce. There was very little overlap between the two businesses. AOL said it was buying
access to rich and varied branded content, to a huge potential subscriber base, and to broadband technology to create the
world’s largest vertically integrated media and entertainment company. At the time, Time Warner cable systems served
20% of the country, giving AOL a more direct path into broadband transmission than it had with its ongoing efforts to
gain access to DSL technology and satellite TV. The cable connection would facilitate the introduction of AOL TV, a
service introduced in 2000 and designed to deliver access to the Internet through TV transmission. Together, the two
companies had relationships with almost 100 million consumers. At the time of the announcement, AOL had 23 million
subscribers and Time Warner had 28 million magazine subscribers, 13 million cable subscribers, and 35 million HBO
subscribers. The combined companies expected to profit from its huge customer database to assist in the cross
promotion of each other’s products.
Market Confusion Following the Announcement
AOL’s stock was immediately hammered following the announcement, losing about 19% of its market value in 2 days.
Despite a greater than 20% jump in Time Warner’s stock during the same period, the market value of the combined
companies was actually $10 billion lower 2 days after the announcement than it had been immediately before making
the deal public. Investors appeared to be confused about how to value the new company. The two companies’
shareholders represented investors with different motivations, risk tolerances, and expectations. AOL shareholders
bought their company as a pure play in the Internet, whereas investors in Time Warner were interested in a media
38
company. Before the announcement, AOL’s shares traded at 55 times earnings before interest, taxes, depreciation, and
amortization have been deducted. Reflecting its much lower growth rate, Time Warner traded at 14 times the same
measure of its earnings. Could the new company achieve growth rates comparable to the 70% annual growth that AOL
had achieved before the announcement? In contrast, Time Warner had been growing at less than one-third of this rate.
Integration Challenges
Integrating two vastly different organizations is a daunting task. Internet company AOL tended to make decisions
quickly and without a lot of bureaucracy. Media and entertainment giant Time Warner is a collection of separate
fiefdoms, from magazine publishing to cable systems, each with its own subculture. During the 1990s, Time Warner
executives did not demonstrate a sterling record in achieving their vision of leveraging the complementary elements of
their vast empire of media properties. The diverse set of businesses never seemed to reach agreement on how to handle
online strategies among the various businesses.
Top management of the combined companies included icons such as Steve Case and Robert Pittman of the digital
world and Gerald Levin and Ted Turner of the media and entertainment industry. Steve Case, former chair and CEO of
AOL, was appointed chair of the new company, and Gerald Levin, former chair and CEO of Time Warner, remained as
chair. Under the terms of the agreement, Levin could not be removed until at least 2003, unless at least three-quarters of
the new board consisting of eight directors from each company agreed. Ted Turner was appointed as vice chair. The
presidents of the two companies, Bob Pittman of AOL and Richard Parsons of Time Warner, were named co-chief
operating officers (COOs) of the new company. Managers from AOL were put into many of the top management
positions of the new company in order to “shake up” the bureaucratic Time Warner culture.
None of the Time Warner division heads were in favor of the merger. They resented having been left out of the
initial negotiations and the conspicuous wealth of Pittman and his subordinates. More profoundly, they did not share
Levin’s and Case’s view of the digital future of the combined firms. To align the goals of each Time Warner division
with the overarching goals of the new firm, cash bonuses based on the performance of the individual business unit were
eliminated and replaced with stock options. The more the Time Warner division heads worked with the AOL managers
to develop potential synergies, the less confident they were in the ability of the new company to achieve its financial
projections (Munk: 2004, pp. 198-199).
The speed with which the merger took place suggested to some insiders that neither party had spent much assessing
the implications of the vastly different corporate cultures of the two organizations and the huge egos of key individual
managers. Once Steve Case and Jerry Levin reached agreement on purchase price and who would fill key management
positions, their subordinates were given one weekend to work out the “details.” These included drafting a merger
agreement and accompanying documents such as employment agreements, deal termination contracts, breakup fees,
share exchange processes, accounting methods, pension plans, press releases, capital structures, charters and bylaws,
appraisal rights, etc. Investment bankers for both firms worked feverishly on their respective fairness opinions. While
never a science, the opinions had to be sufficiently compelling to convince the boards and the shareholders of the two
firms to vote for the merger and to minimize postmerger lawsuits against individual directors. The merger would
ultimately generate $180 million in fees for the investment banks hired to support the transaction. (Munk: 2004, pp.
164-166).
The Disparity Between Projected and Actual Performance Becomes Apparent
Despite all the hype about the emergence of a vertically integrated new media company, AOL seems to be more like a
traditional media company, similar to Bertelsmann in Germany, Vivendi in France, and Australia’s News Corp. A key
part of the AOL Time Warner strategy was to position AOL as the preeminent provider of high-speed access in the
world, just as it is in the current online dial-up world.
Despite pronouncements to the contrary, AOL Time Warner seems to be backing away from its attempt to become
the premier provider of broadband services. The firm has had considerable difficulty in convincing other cable
companies, who compete directly with Time Warner Communications, to open up their networks to AOL. Cable
companies are concerned that AOL could deliver video over the Internet and steal their core television customers.
Moreover, cable companies are competing head-on with AOL’s dial-up and high-speed services by offering a tiered
pricing system giving subscribers more options than AOL.
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At $23 billion at the end of 2001, concerns mounted about AOL’s leverage. Under a contract signed in March 2000,
AOL gave German media giant Bertelsmann, an owner of one-half of AOL Europe, a put option to sell its half of AOL
Europe to AOL for $6.75 billion. In early 2002, Bertelsmann gave notice of its intent to exercise the option. AOL had to
borrow heavily to meet its obligation and was stuck with all of AOL Europe’s losses, which totaled $600 million in
2001. In late April 2002, AOL Time Warner rocked Wall Street with a first quarter loss of $54 billion. Although
investors had been expecting bad news, the reported loss simply reinforced anxieties about the firm’s ability to even
come close to its growth targets set immediately following closing. Rather than growing at a projected double-digit
pace, earnings actually declined by more than 6% from the first quarter of 2001. Most of the sub-par performance
stemmed from the Internet side of the business. What had been billed as the greatest media company of the twenty-first
century appeared to be on the verge of a meltdown!
Epilogue
The AOL Time Warner story went from a fairy tale to a horror story in less than three years. On January 7, 2000, the
merger announcement date, AOL and Time Warner had market values of $165 billion and $76 billion, respectively, for
a combined value of $241 billion. By the end of 2004, the combined value of the two firms slumped to about $78
billion, only slightly more than Time Warner’s value on the merger announcement date. This dramatic deterioration in
value reflected an ill-advised strategy, overpayment, poor integration planning, slow post-merger integration, and the
confluence of a series of external events that could not have been predicted when the merger was put together. Who
knew when the merger was conceived that the dot-com bubble would burst, that the longest economic boom in U.S.
history would fizzle, and that terrorists would attach the World Trade Center towers? While these were largely
uncontrollable and unforeseeable events, other factors were within the control of those who engineered the transaction.
The architects of the deal were largely incompatible, as were their companies. Early on, Steve Case and Jerry Levin
were locked in a power struggle. The companies’ cultural differences were apparent early on when their management
teams battled over presenting rosy projections to Wall Street. It soon became apparent that the assumptions underlying
the financial projections were unrealistic as new online subscribers and advertising revenue stalled. By mid 2002, the
nearly $7 billion paid to buy out Bertelsmann’s interest in AOL Europe caused the firm’s total debt to balloon to $28
billion. The total net loss, including the write down of goodwill, for 2002 reached $100 billion, the largest corporate
loss in U.S. history. Furthermore, The Washington Post uncovered accounting improprieties. The strategy of delivering
Time Warner’s rich array of proprietary content online proved to be much more attractive in concept than in practice.
Despite all the talk about culture of cooperation, business at Time Warner was continuing as it always had. Despite
numerous cross-divisional meetings in which creative proposals were made, nothing happened (Munk: 2004, p. 219).
AOL’s limited broadband capability and archaic email and instant messaging systems encouraged erosion in its
customer base and converting the wealth of Time Warner content to an electronic format proved to be more daunting
than it had appeared. Finally, Both the Securities and Exchange Commission and the Justice Department investigated
AOL Time Warner due to accounting improprieties. The firm admitted having inflated revenue by $190 million during
the 21 month period ending in fall of 2000. Scores of lawsuits have been filed against the firm.
The resignation of Steve Case in January 2003 marked the restoration of Time Warner as the dominant partner in the
merger, but with Richard Parsons at the new CEO. On October 16, 2003 the company was renamed Time Warner.
Time Warner seemed appeared to be on the mend. Parson’s vowed to simplify the company by divesting non-core
businesses, reduce debt, boost sagging morale, and to revitalize AOL. By late 2003, Parsons had reduced debt by more
than $6 billion, about $2.6 billion coming from the sale of Warner Music and another $1.2 billion from the sale of its
50% stake in the Comedy Central cable network to the network’s other owner, Viacom Music. With their autonomy
largely restored, Time Warner’s businesses were beginning to generate enviable amounts of cash flow with a resurgence
in advertising revenues, but AOL continued to stumble having lost 2.6 million subscribers during 2003. In mid-2004,
improving cash flow enabled the Time Warner to acquire Advertising.com for $435 million in cash.
Discussion Questions:
1. What were the primary motives for this transaction? How would you categorize them in terms of the historical
motives for mergers and acquisitions discussed in this chapter?
40
2. Although the AOL-Time Warner deal is referred to as an acquisition in the case, why is it technically more
correct to refer to it as a consolidation? Explain your answer.
3. Would you classify this business combination as a horizontal, vertical, or conglomerate transaction? Explain
your answer.
4. What are some of the reasons AOL Time Warner may fail to satisfy investor expectations?
41
5. What would be an appropriate arbitrage strategy for this all-stock transaction?
Mattel Overpays for The Learning Company
Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company (TLC), a leading
developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion on May 13, 1999. Mattel had
determined that TLC’s receivables were overstated because product returns from distributors were not deducted from
receivables and its allowance for bad debt was inadequate. A $50 million licensing deal also had been prematurely put
on the balance sheet. Finally, TLC’s brands were becoming outdated. TLC had substantially exaggerated the amount of
money put into research and development for new software products. Nevertheless, driven by the appeal of rapidly
becoming a big player in the children’s software market, Mattel closed on the transaction aware that TLC’s cash flows
were overstated.
For all of 1999, TLC represented a pretax loss of $206 million. After restructuring charges, Mattel’s consolidated
1999 net loss was $82.4 million on sales of $5.5 billion. TLC’s top executives left Mattel and sold their Mattel shares in
August, just before the third quarter’s financial performance was released. Mattel’s stock fell by more than 35% during
1999 to end the year at about $14 per share. On February 3, 2000, Mattel announced that its chief executive officer
(CEO), Jill Barrad, was leaving the company.
On September 30, 2000, Mattel virtually gave away The Learning Company to rid itself of what had become a
seemingly intractable problem. This ended what had become a disastrous foray into software publishing that had cost
the firm literally hundreds of millions of dollars. Mattel, which had paid $3.5 billion for the firm in 1999, sold the unit
to an affiliate of Gores Technology Group for rights to a share of future profits. Essentially, the deal consisted of no
cash upfront and only a share of potential future revenues. In lieu of cash, Gores agreed to give Mattel 50 percent of any
profits and part of any future sale of TLC. In a matter of weeks, Gores was able to do what Mattel could not do in a
year. Gores restructured TLC’s seven units into three, set strong controls on spending, sifted through 467 software titles
to focus on the key brands, and repaired relationships with distributors. Gores also has sold the entertainment division.
Discussion Questions:
1. Why did Mattel disregard the warning signs uncovered during due diligence? Identify which motives for
acquisitions discussed in this chapter may have been at work.
42
2. Was this related or unrelated diversification for Mattel? How might this have influenced the outcome?
3. Why could Gores Technology do in a matter of weeks what the behemoth toy company, Mattel, could not
do?
Pfizer Acquires Pharmacia to Solidify Its Top Position
In 1990, the European and U.S. markets were about the same size; by 2000, the U.S. market had grown to twice that of
the European market. This rapid growth in the U.S. market propelled American companies to ever increasing market
share positions. In particular, Pfizer moved from 14th in terms of market share in 1990 to the top spot in 2000. With the
acquisition of Pharmacia in 2002, Pfizer’s global market share increased by three percentage points to 11%. The top ten
drug firms controlled more than 50 percent of the global market, up from 22 percent in 1990.
Pfizer is betting that size is what matters in the new millennium. As the market leader, Pfizer was finding it
increasingly difficult to sustain the double-digit earnings growth demanded by investors. Such growth meant the firm
needed to grow revenue by $3-$5 billion annually while maintaining or improving profit margins. This became more
difficult due to the skyrocketing costs of developing and commercializing new drugs. Expiring patents on a number of
so-called blockbuster drugs (i.e., those with potential annual sales of more than $1 billion) intensified pressure to bring
new drugs to market.
Pfizer and Pharmacia knew each other well. They had been in a partnership since 1998 to market the world’s leading
arthritis medicine and the 7th largest selling drug globally in terms of annual sales in Celebrex. The companies were
continuing the partnership with 2nd generation drugs such as Bextra launched in the spring of 2002. For Pharmacia’s
management, the potential for combining with Pfizer represented a way for Pharmacia and its shareholders to participate
in the biggest and fastest growing company in the industry, a firm more capable of bringing more products to market
than any other.
The deal offered substantial cost savings, immediate access to new products and markets, and access to a number of
potentially new blockbuster drugs. Projected cost savings are $1.4 billion in 2003, $2.2 billion in 2004, and $2.5 billion
in 2005 and thereafter. Moreover, Pfizer gained access to four more drug lines with annual revenue of more than $1
billion each, whose patents extend through 2010. That gives Pfizer, a portfolio, including its own, of 12 blockbuster
drugs. The deal also enabled Pfizer to enter three new markets, cancer treatment, ophthalmology, and endocrinology.
Pfizer expects to spend $5.3 billion on R&D in 2002. Adding Pharmacia’s $2.2 billion brings combined company
spending to $7.5 billion annually. With an enlarged research and development budget Pfizer hopes to discover and
develop more new drugs faster than its competitors.
On July 15, 2002, the two firms jointly announced they had agreed that Pfizer would exchange 1.4 shares of its stock
for each outstanding share of Pharmacia stock or $45 a share based on the announcement date closing price of Pfizer
stock. The total value of the transaction on the announcement was $60 billion. The offer price represented a 38%
premium over Pharmacia’s closing stock price of $32.59 on the announcement date. Pfizer’s shareholders would own
77% of the combined firms and Pharmcia’s shareholders 23%. The market punished Pfizer, sending its shares down
$3.42 or 11% to $28.78 on the announcement date. Meanwhile, Pharmacia’s shares climbed $6.66 or 20% to $39.25.
Discussion Questions:
1. In your judgment, what were the primary motivations for Pfizer wanting to acquire Pharmacia? Categorize
these in terms of the primary motivations for mergers and acquisitions discussed in this chapter.
2. Why do you think Pfizer’s stock initially fell and Pharmacia’s increased?
3. In your opinion, is this transaction likely to succeed or fail to meet investor expectations? Explain your answer.
4. Would you anticipate continued consolidation in the global pharmaceutical industry? Why or why not?
