overpayment for EDS, HP announced in August 2012 that it would take an accounting charge of $8 billion related to
its EDS acquisition four years earlier. The write down amounted to a staggering 58% of what the firm had paid for
EDS.
What went wrong? Was it due to poor planning, a bad strategy, or poor execution? Probably each had a role.
important tool supplementing but not replacing executive judgment.
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.
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.
As of the September 28, 2008 closing date, Wrigley became a separate stand–alone subsidiary of Mars, with $5.4
billion in sales. The deal is expected to help Wrigley augment its sales, marketing, and distribution capabilities. To
categories: chocolate, nonchocolate confectionary, gum, food, drinks, and pet care products. While there is little
product overlap between the two firms, there is considerable geographic overlap. Mars is located in 100 countries,
while Wrigley relies heavily on independent distributors in its growing international distribution network.
Furthermore, the two firms have extensive sales forces, often covering the same set of customers.
While mergers among competitors are not unusual, the deal’s highly leveraged financial structure is atypical of
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?
Answer: Firm’s having substantial market relative to their next largest competitor are likely to have lower
2. It what way did the acquisition of Wrigley’s represent a strategic blow to Cadbury?
3. How might the additional product and geographic diversity achieved by combining Mars and Wrigley
benefit the combined firms?
4. Speculate as to the potential sources of synergy associated with the deal. Based on this speculation what
additional information would you want to know in order to determine the potential value of this synergy?
Answer: The product offerings of the two firms show little duplication. Therefore, there is significant
potential for cross-selling each firm’s products into the other’s customers. This would require training the
sales forces in each firm’s product offering. The cost of this training would need to be estimated and
deducted from cash flows generated by cross-selling.
5. Given the terms of the agreement, Wrigley shareholders would own what percent of the combined
companies? Explain your answer
Tribune Company Acquires the Times Mirror Corporation
in a Tale of Corporate Intrigue
Background: Oh, What Tangled Webs We Weave. .
.
CEO Mark Willes had reason to be optimistic about the future. Operating profits had grown at a double–digit rate,
and earnings per share had grown at a 55% annual rate between 1995 to 1999. Many shareholders appeared to be
satisfied. However, some were not. Although pleased with the improvement in profitability, they were concerned
about the long-term growth prospects of the firm. Reflecting this disenchantment, Times Mirror’s largest
shareholder, the Chandler family, was contemplating the sale of the company and along with it the crown jewel Los
with the Tribune.
Following months of secret negotiations, the Chicago-based Tribune Company and the Times Mirror Corporation
announced a merger of the two companies in a cash and stock deal valued at approximately $7.2 billion, including
$5.7 billion in equity and $1.5 billion in assumed debt. The transaction, announced March 13, 2000, created a media
giant that has national reach and a major presence in 18 of the nation’s top 30 U.S. markets, including New York,
Los Angeles, and Chicago. The combined company has 22 television stations, four radio stations, and 11 daily
newspapers—including the Los Angeles Times, the nation’s largest metropolitan daily newspaper and flagship of the
Times Mirror chain.
Transaction Terms: Tribune Shareholders Get Choice of Cash or Stock
The Tribune agreed to buy 48% of the outstanding Times Mirror stock, about 28 million shares, through a tender
offer. After completion of the tender offer, each remaining Times Mirror share would be exchanged for 2.5 shares of
Tribune stock. Under the terms of the transaction, Times Mirror shareholders could elect to receive $95 in cash or
(Table 1).
Table 1. Times Mirror Transaction Terms
As of June 12, 2000 Transaction Value
Times Mirror Shares Outstanding @ 3/13/00 59,700,000
No. of Times Mirror Shares Exchanged for 2.3
Shares of Tribune Stock 27,238,253 $2,587,634,0351
Times Mirror Shares Outstanding after Tender Offer 21,813,429
No. of New Tribune Shares Issued for Remaining
Times Mirror Shares 54,533,5735 $2,072,275,7743
Equity Value of Offer $5,671,446,777
127,238,253 2.5 $38/share of Tribune stock.
2$41.70 in cash + 1.4025 shares of Tribune stock $38 per share for each Times Mirror share remaining
10,648,318.
3Equals 2.5 shares 21,813,429 $38 per Tribune share.
4Times Mirror share price on announcement date of $47 times 59,700,000.
5The total number of new Tribute shares issued equals 27,238,318 2.5 + 10,648,318 2.5 + 54,533, 573 or
137,537,013.
Newspaper Advertising Revenues Continue to Shrink
Most U.S. newspapers are mired in the mature or declining phase of their product life cycle. For the past half-
century, newspapers have watched their portion of the advertising market shrink because of increased competition
2000).
Tribune Company Profile: The Face of New Media?
Unlike the Times Mirror, Tribune has built its strategy around four business groups: broadcasting, publishing,
education, and interactive. The Tribune is also an equity investor in America Online and other leading internet
Financial Analysis
The present values of the Tribune, Times Mirror, and the combined firms are $8.5 billion, $2.4 billion, and $16.5
billion, respectively; the estimated present value of synergy is $5.6 billion (Table 3). This assumes that pretax cost
savings are phased in as follows: $25 million in 2000, $100 million in 2001, and $200 million thereafter. The cost
Table 2. Annual Merger-Related Cost Savings
Total Annual Savings $200,000,000
1Assumes Tribune will close overlapping bureaus in United States (9) and most of the Times Mirror’s foreign
bureaus (21 abroad).
2As a result of bulk purchasing and more favorable terms with different suppliers, 15% of the newsprint expense of
the combined companies is expected to be saved.
3Layoffs of 120 L.A. Times Mirror Corporate Office personnel at an average salary of $125,000 and benefits equal
to 30% of base salaries. Total payroll expenses equal $19,500,000 (i.e., $125,000 1.3 120). Lease, travel and
entertainment, and other support expenses added another $14.5 million.
Source: Moore, Kathryn, Tim Schnabel, and Mark Yemma, “A Media Marriage,” paper prepared for Chapman
University, EMBA 696, May 18, 2000, p. 9.
Table 3. Merger Evaluation
1997
1999
2000
2001
2002
2003
2004
2005
Tribune
($ Millions)
Sales
2891.5
3221.9
3261.5
3473.5
3699.3
3939.7
4195.8
4468.5
Operating
Expenses
2232.5
2451.0
2283.1
2431.4
2589.5
2757.8
2937.1
3128.0
EBIT
559.0
770.9
978.5
1042.0
1109.8
1181.9
1258.7
1340.6
EBIT(1 – t)
395.4
421.1
462.5
587.1
625.2
665.9
709.2
755.2
804.3
Depreciation
172.5
195.5
221.1
212.0
225.8
240.5
256.1
272.7
290.5
Equipment
Change in
Working Capital
147.7
1107.0
260.9
243.1
258.9
275.8
293.7
312.8
Free Cash Flow
to Firm
511.8
-558.1
375.1
434.2
462.4
492.5
524.5
558.6
PV (2001–2005)
@8.5
51.5
PV (Terminal
Value) @8.5
11144.2
Less: Long-
Term Debt
2694.2
Plus: Excess
Cash Balances
0
Equity Value
8501.5
Shares
Outstanding
237.4
Equity Value Per
Share
35.81
Times Mirror
($Millions)
Sales
2728.2
3029.2
3140.0
3297.0
3461.9
3634.9
3816.7
4007.5
Operating
Expenses
2337.0
2558.7
2449.2
2571.7
2700.2
2835.3
2977.0
3125.9
EBIT
391.2
470.5
690.8
725.3
761.6
799.7
839.7
881.7
EBIT(1 – t)
234.7
282.3
414.5
435.2
457.0
479.8
503.8
529.0
Depreciation
133.4
152.1
166.4
188.4
197.8
207.7
218.1
229.0
240.5
Gross Plant &
173.4
131.5
113.0
125.6
131.9
138.5
145.4
152.7
160.3
Equipment
Working Capital
Change in
199.2
551.1
-791.1
251.2
257.2
270.0
283.5
297.7
312.6
Free Cash Flow
to Firm
-4.5
1126.8
226.1
244.0
256.2
269.0
282.4
296.6
PV (2001–2005)
@ 9.5%
25.8
PV (Terminal
Value) @ 9.5%
Value
Less: Long-
1562.2
3937.2
Term Debt1
Plus: Excess
Cash Balances
0
Equity Value
2375.0
Shares
Outstanding
59.7
Equity Value Per
Share
39.8
Firms
Sales
5619.7
6251.1
6401.5
6770.5
7161.1
7574.7
8012.5
8476.1
Operating
Expenses
4569.5
5009.7
4732.3
5003.1
5289.7
5593.1
5914.1
6253.8
Synergy
25.0
100.0
200.0
200.0
200.0
200.0
EBIT
1050.2
1241.4
1694.3
1867.4
2071.4
2181.6
2298.4
2422.2
EBIT(1 – t)
630.1
663.2
744.8
1016.6
1120.4
1242.8
1309.0
1379.0
1453.3
Depreciation
305.9
347.6
387.5
400.4
423.6
448.2
474.2
501.7
530.9
Change in
Working Capital
151.5
315.9
512.1
500.3
529.0
559.3
591.4
625.4
Free Cash Flow
to Firm
507.3
568.7
616.2
738.2
838.6
881.5
926.9
975.1
PV (2001–2005)
@ 9.5%
88.1
PV (Terminal
22805.6
Value) @ 9.5%
22893.8
Less: Long-
4256.4
Term Debt
Less:
Acquisition-
Related Debt
2193.7
Plus: Excess
Cash Balances
0
Equity Value
16443.7
Equity Value Per
Share
43.9
1Book values for long-term debt may be used if the coupon rate on the debt approximates competitive market rates.
Table 4. Offer Price Determination
Tribune
Times Mirror
Combined Incl.
Synergy
Value of Synergy
Equity Valuations
8501.5
2375.0
16443.7
5567.3
Minimum Offer
Price1
2805.9
Maximum Offer
Price
Actual Offer Price
5671.4
% Maximum Offer
Price
67.7%
Premium
New Tribune Shares
Ownership
Distribution
8373.2
TM Shareholders
0.37
Tribune
Shareholders
0.63
1Market value of Times Mirror on the merger announcement date.
Epilogue
Only time will tell if actual returns to shareholders in the combined Tribune and Times Mirror company exceed the
expected financial returns provided in the valuation models in this case study. Times Mirror shareholders earned a
substantial 102% purchase price premium over the value of their shares on the day the merger was announced. Some
portion of those undoubtedly “cashed out” of their investment following receipt of the new Tribune shares.
However, for those former Times Mirror shareholders continuing to hold their Tribune stock and for Tribune
shareholders of record on the day the transaction closed, it is unclear if the transaction made good economic sense.
Discussion Questions:
1. In your judgment, did it make good strategic sense to combine the Tribune and Times Mirror?
corporations? Why? / Why not?
Yes, the combination of the two firms offers substantial cost savings in closing overlapping news bureaus
2. Using the Merger Evaluation table given in the case, determine the estimated equity values of Tribune,
Times Mirror and the combined firms. Why is long-term debt deducted from the total present value
estimates in order to obtain equity value?
3. Despite the merger having closed in mid-2000, the full effects of synergy are not expected until 2002.
Why? What factors could account for the delay?
The full effects of synergy are not realized immediately because of bureau leases that must expire or be
4. The estimated equity value for the Times Mirror Corporation on the day the merger was announced was
about $2.8 billion. Moreover, as shown in the offer price evaluation table, the equity value estimated using
discounted cash flow analysis is given has $2.4 billion. Why is the minimum offer price shown as $2.8
billion rather than the lower $2.4 billion figure? How is the maximum offer price determined in the Offer
Price Evaluation Table? How much of the estimated synergy value generated by combining the two
businesses is being transferred to the Times Mirror shareholders? Why?
5. Does the Times Mirror-Tribune Corporation merger create value? If so, how much? What percentage of
this value goes to Times Mirror shareholders and what percentage to Tribune shareholders? Why?
Ford Acquires Volvo’s Passenger Car Operations
This case illustrates how the dynamically changing worldwide automotive market is spurring a move toward
consolidation among automotive manufacturers. The Volvo financials used in the valuation are for illustration
only— they include revenue and costs for all of the firm’s product lines. For purposes of exposition, we shall
assume that Ford’s acquisition strategy with respect to Volvo was to acquire all of Volvo’s operations and later to
divest all but the passenger car and possibly the truck operations. Note that synergy in this business case is
determined by valuing projected cash flows generated by combining the Ford and Volvo businesses rather than by
subtracting the standalone values for the Ford and Volvo passenger car operations from their combined value
including the effects of synergy. This was done because of the difficulty in obtaining sufficient data on the Ford
passenger car operations.
$3 billion, companies were finding mergers and joint ventures an attractive means to distribute risk and maintain
market share in this highly competitive environment.
By acquiring Volvo, Ford hoped to expand its 10% worldwide market share with a broader line of near-luxury
Volvo sedans and station wagons as well as to strengthen its presence in Europe. Ford saw Volvo as a means of
improving its product weaknesses, expanding distribution channels, entering new markets, reducing development
size.
Historical and Projected Data
The initial review of Volvo’s historical data suggests that cash flow is highly volatile. However, by removing
nonrecurring events, it is apparent that Volvo’s cash flow is steadily trending downward from its high in 1997. Table
9-10 displays a common-sized, normalized income statement, balance sheet, and cash–flow statement for Volvo,
including both the historical period from 1993 through 1999 and a forecast period from 2000 through 2004.
Although Volvo has managed to stabilize its cost of goods sold as a percentage of net sales, operating expenses as a
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Income Statement
Net Sales 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Cost of Goods Sold .772 .738 .749 .777 .757 .757 .757 .757 .757 .757 .757 .757
Operation Expense .167 .101 .120 .077 .119 .133 .132 .131 .129 .128 .127 .126
Net Income .028 .087 .054 .079 .057 .035 .036 .037 .038 .039 .040 .040
Balance Sheet
Current Assets .632 .503 .444 .524 .497 .500 .500 .500 .500 .500 .500 .500
Current Liabilities .596 .400 .283 .298 .304 .350 .350 .350 .350 .350 .350 .350
Working Capital .036 .103 .161 .226 .192 .150 .150 .150 .150 .150 .150 .150
Capital Expenditures .031 .027 .033 .053 .054 .061 .069 .078 .088 .099 .112 .126
Working Capital .025 .077 .068 .049 .000 .017 .020 .020 .020 .020 .020 .020
Free Cash Flow .047 .079 .053 .059 .088 .087 .044 .036 .027 .017 .005 (.008)
to the Firm (FCFF)
Determining the Initial Offer Price
reflecting only about one-fourth of the total potential synergy resulting from combining the two businesses. Other valuation
methodologies tended to confirm this purchase price estimate. The market value of Volvo was $11.9 billion on January 29, 1999. To
gain a controlling interest, Ford had to pay a premium to the market value on January 29, 1999. Applying the 26% premium Ford paid
for Jaguar, the estimated purchase price including the premium is $15 billion, or $34 per share. This compares to $34.50 per share
estimated by dividing the initial offer price of $15.25 billion by Volvo’s total common shares outstanding of 442 million.
return, including the effects of synergy, exceeds the cost of capital. Moreover, by using this excess cash, Ford also is making itself less
attractive as a potential acquisition target. The acquisition is expected to increase Ford’s EPS. The loss of interest earnings on the
excess cash balances would be more than offset by the addition of Volvo’s pretax earnings.
Epilogue
Seven months after the megamerger between Chrysler and Daimler-Benz in 1998, Ford Motor Company announced that it was
Discussion Questions and Answers:
1. What is the purpose of the common–size financial statements developed for Volvo (see Table 8–8 in the textbook)? What
insights does this table provide about the historical trend in Volvo’s historical performance? Based on past performance,
how realistic do you think the projections are for 2000–2004?
Answer: The common size financial statements for Volvo reveal the historical relationship between key operating variables
2. Ford anticipates substantial synergies from acquiring Volvo. What are these potential synergies? As a consultant hired to
value Volvo, what additional information would you need to estimate the value of potential synergy from each of these areas?
Answer: By acquiring Volvo, Ford hoped to expand its global market share with a broader product offering as well as to
3. How was the initial offer price determined according to this case study? Do you find the logic underlying the initial offer
price compelling? Explain your answer.
4. What was the composition of the purchase price? Why was this composition selected according to this case study?