A Tale of Five Mergers


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A Tale of Five Mergers
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Merger 1
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ATT and Media One

• ATT wants to acquire cable
• Acquires MediaOne for 58B in 2000 announced
  1999
• Cash-financed merger
• Who bears risk in this transaction?
• Two years later ATT effectively sells cable
  assets at a 50 loss

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Merger 2
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Koch-Georgia Pacific

• Koch Industries announces November 13 2005 will
  acquire Georgia-Pacific for 13.2B 48/share at
  a 38.5 premium over the prior-day close of
  34.65
• Koch is the second largest privately-held firm in
  the U.S. behind Cargill at the time thus
  cash-financed acquisition
• Georgia-Pacific produces paper products 32 of
  toilet paper market and 23 of paper towel
  market
• Brands include Brawny towels Dixie cups
  Quilted Northern
• Koch is a commodities conglomerate
• operates refineries and pipelines
• trades commodities
• manufactures pulp paper and fibers
• operates ranching business and produces
  fertilizer

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Why?

• Exploit economies of scope vertical integration
• Koch and Georgia-Pacific have had an ongoing
  relationship that has worked well May 2004 Koch
  acquired two pulp mills from GP
• Shield profits from govt by taking on more debt
  13.2 billion to buy out GP and also assuming
  7.8B in GPs outstanding debt combined revenue
  of new company 80 billion
• Koch currently has AA debt rating from SP
• avoid distraction of quarterly reports GP can
  now expand into packaging and building products
  business Wall Street viewed as dubious
  expenditures

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Market reaction? GP price closes at 47.28
offer is 48
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Stock basically at all-time high as result of
offer.Tax implications?
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Merger 3
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AOL Time Warner

• AOL announces stock-financed merger with Time
  Warner 1/10/2000
• Terms of trade
• AOL has 55 stock of AOL-TW
• Time Warner has 45 stock of AOL-TW
• Who bears risk in this transaction?
• In 2000 AOL accounts for 25 of Time Warners
  cash flow estimated to grow to 67 of Time
  Warners cash flow by 2002

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What if deal struck now?

• Since merger announcement relative valuations
  have changed considerably
• Internet index has fallen 72 from 1/10/2000 to
  11/12/2004 Yahoo off 65 through 11/12/2004 and
  87 through 10/27/2008
• Disney has fallen 62 since the merger
  announcement
• If merger done today AOL shareholders would get
  about 29 as opposed to 55 of the merged firm
• Aronson Partners estimate AOL would get 15 of
  company in 2002

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Merger 4
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Kmart Sears

• Kmart Sears announce merger morning of
  11/17/2004
• Before merger Kmart market cap at 9B and Sears
  market cap at 9.4B
• Terms
• 90M Kmart stockholders each get one share in the
  new Sears Holdings
• 207M Sears shareholders have a choice either
  take 50 in cash or ½ share in the new Sears
  Holdings

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Kmart Sears Background

• Kmart filed for bankruptcy in early 2002 Chapter
  11 reorganization as opposed to Chapter 7
  liquidation
• Emerged from bankruptcy May 2003
• Stock price has risen nearly 7-fold from its
  initial 15 in May of 2003 to over 100 in fall
  of 2004
• Four profitable quarters in a row in part by
  successfully shedding unprofitable stores
• Meanwhile Sears has endured sluggish sales for
  years and had VERY disappointing earnings the
  past two years leading up to the merger

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Why?

• Payment of 50 for Sears stock a premium of 10
  over prior-day close of 45.02 roughly 1B
  increase in total for Sears
• At a minimum merger is expected to generate
  500M in annual cost revenue synergies over the
  next three years
• After merger new company will be third largest
  retailer

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Why cash option for Sears?

• 7 of 10 Board members from Kmart
• Given poor performance of Sears recently likely
  not that many accrued capital gains held by Sears
  shareholders

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Market reaction

• Sears opened at 53.80 11/17/2004 up 19 from
  45.20
• Kmart opened at 113.55 11/17/2004 up 12 from
  101.22
• Thus market expects synergies from merger of 16
  
• 9.40.199.00.12/9.49.0
• Total synergies of 2.9B with roughly 3/5 of gain
  accrues to Sears and 2/5 to Kmart given market
  reaction at open
• Where else should we expect a market reaction?

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Merger 5
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When friendly merger becomes unfriendly
HP-Compaq

• Hewlett Packard-Compaq announce stock swap
  September 3 2001
• 64 to HP 36 to Compaq
• On merger announcement stock prices of both
  firms fell HP lost 25 of value in next few days
• HPs debt downgraded

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What to do?

• Walter Hewitt son of HP cofounder opposed the
  deal
• Concern that management teams would not mesh
  well merger would dilute ownership of HPs
  thriving printing/imaging businesses and increase
  exposure to risky PC-business
• Filed a proxy statement to ask shareholders to
  vote against the Compaq merger at special meeting
  3/19/2002
• Stock price of HP rose following announcement of
  Hewitts opposition

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What happened?

• Proxy contest was close
• Management of HP beat opposition group 51 to 49
• Merger consummated and new HP launched May 2002
• After merger stock price languishes for next few
  years
• CEO that launched merger fired