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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
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
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
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?
Answer: Firm’s having substantial market relative to their next largest competitor are likely to have lower cost
structures due to economies of scale and purchasing, as well as lower sales, general and administrative costs.
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–
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)
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
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P&G’s corporate culture was often described as conservative, with a “promote-from-within” philosophy. While
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.
Answer: a. Economies of scope.
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?
Answer: The cultures between the two firms may differ significantly. P&G’s “not invented here” culture may
make it difficult to transfer skills and technologies between product lines in the two firms. Gillette managers
businesses to recover some of the purchase price
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,
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
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
reached an agreement.
Discussion Questions:
1. To what do you attribute Warren Buffet’s long-term success?
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
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
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
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
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
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
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
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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,
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
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
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
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
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?
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AOL is buying access to branded products, a huge potential subscriber base, and broadband technology. The
new company will be able to deliver various branded content to a diverse set of audiences using high-speed
transmission channels (e.g., cable).
This transaction reflects many of the traditional motives for combining businesses:
a. Improved operating efficiency resulting from both economies of scale and scope. With respect to so–
should be more efficient, because both AOL and Time Warner can promote their services to the other’s
subscribers at minimal additional cost.
b. Diversification. From AOL’s viewpoint, it is integrating down the value chain by acquiring a company
that produces original, branded content in the form of magazines, music, and films. By owning this
content, AOL will be able to distribute it without having to incur licensing fees.
By gaining access to Time Warner’s cable network, enhanced to carry voice, video, and data, AOL will be
able to improve both upload and download speeds for its subscribers. AOL has priced this service at a
premium to regular dial-up subscriptions.
d. Hubris. AOL was willing to pay a 71 percent premium over Time Warner’s current share price to gain
control. This premium is very high by historical standards and assumes that the challenges inherent in
commerce transactions are not subject to tax, and restrictions on the use of personal information have been
limited.
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?
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While AOL has control of the new company in terms of ownership, the extent to which they can exert control
in practice may be quite different. AOL could become a captive of the more ponderous Time Warner empire
and its 82,000 employees. Time Warner’s management style and largely independent culture, as evidenced by
5. What would be an appropriate arbitrage strategy for this all-stock transaction?
Arbitrageurs make a profit on the difference between a deal’s offer price and the current price of the target’s
stock. Following a merger announcement, the target’s stock price normally rises but not to the offer price
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
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
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.
Answer: Deeply concerned about the increasingly important role that software was playing in the development
and marketing of toys, Mattel may have been frantic to acquire a leading maker of software for toys to remain
2. Was this related or unrelated diversification for Mattel? How might this have influenced the outcome?
Answer: The Learning Company represented the application of software to the toy industry; however, it was
3. Why could Gores Technology do in a matter of weeks what the behemoth toy company, Mattel, could not
do?
Answer: Gores was in the business of turning around companies. They knew what to do and appreciated the
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.
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.
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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.
Answer: The deal was an attempt to generate cost savings from being able to operate manufacturing facilities
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.
Answer: The size of the premium Pfizer is willing to pay may suggest that it is overpaying for Pharmacia and
will find it difficult to meet or exceed its cost of capital. While it is true that the combination of the two firms
4. Would you anticipate continued consolidation in the global pharmaceutical industry? Why or why not?
Answer: With the industry focused on growth in EPS, increasing consolidation is likely as firms seek to
generate cost savings by buying a competitor, by gaining access to hopefully more productive R&D