Almost every day the financial pages and websites are abuzz with rumours of mergers and acquisitions or news about how the negotiations are thought to be developing. As we live in an increasingly globalised world, this trend is likely to continue and increase as organisations seek to create an even stronger position for themselves in their particular sector. In fact even the Harvard Law School is predicting that in the US conditions are ripe for a very busy year on the M & A front.
This follows on from some of the big deals that took place in 2017 including Amazon’s $13.7 billion takeover of Wholefoods and the merging of Dr Pepper Snapple with Keurig to create a company estimated to generate a revenue of around $11 billion per year. But these are nowhere near the biggest mergers of all time such as when Vodafone acquired Mannesmann in Germany for $180 billion in February 2000 or AOL’s acquisition of Time Warner for $164 billion in January of the same year.
There are a number of factors that bring about mergers like these including the desire to achieve economies of scale, to create a monopoly in the particular market or simply to bring together two complementary businesses to create one even stronger. Naturally, there are also circumstances when one organisation is failing and sees being acquired as the best way out of its troubles.
GKN and Melrose Industries
One such example is the tussle going on in the UK between the engineering firm GKN and Melrose Industries. The former makes many car parts as well as components for both civilian and military aircraft and last year issued a profits warning to its shareholders. Melrose, a business that specialises in acquiring failing companies and transforming their fortunes, approached GKN soon after in an attempt to persuade them to sell for an estimated £8.1 billion.
So far GKN has resisted the bid and has been working hard to persuade shareholders to reject the offer by promising both to give them a total of $2.5 billion as well as to merge their car parts division with the US company Dana. Because the company is also involved in defence contracts there have also been appeals to the UK Government to block the bid on the grounds of national security and these two factors are starting to make Melrose’s takeover seem less likely.
Something else that the putative GKN/Melrose deal underlines is the role and power of shareholders in accepting or rejecting a deal. This was demonstrated in another merger negotiation in 2016 when the UK betting firm William Hill was being courted by two rivals, Rank and 888 Holdings.
Despite offering £3.2 billion at 346p a share it’s thought that one of the reasons the bid was rejected was because of major pressure from a leading William Hill shareholder who believed it was undervaluing the company. At the time this was the latest of a long line of mergers in the gambling sector as operators sought to create mega companies capable of seeing off the competition. 888 Holdings operate several gaming websites, some of the gaming websites include online poker, sports betting and a whole host of casino games, and clearly, they were eager to expand even further. However, it seems as though the bidders have benefitted from the failed acquisition. 888 Holdings in particular continue to thrive and recently announced its highest ever shareholder dividend.
CBS and Viacom
One of the longer running merger sagas in America has been the proposed merger between broadcast giants CBS and Viacom. Negotiations have been moving on in fits and starts since 2016 and the constant stumbling block has been the inability to agree on a value for Viacom along with a failure to decide who would be in charge of the new company which would be created.
In April 2018, CBS made an offer of $12.3 billion, below Viacom’s market capitalization, hoping that the latter’s unstable business state would lead to acceptance but it seems as though they will need to substantially increase this to have any prospect of success. However, the advantages for both organisations would be considerable if the merger could go through as it would bring together the highly successful CBS broadcast network with Viacom’s premium cable channels as well as Paramount Pictures.
Accolade and the Carlyle Group
One takeover that’s on the verge of going through at the moment truly shows the global nature of today’s business environment. It’s the acquisition of an Australian wine by an American private equity firm with an eye on exploiting the Chinese market. It’s been reported that Accolade, the biggest wine company by volume both in Australia and the UK whose brands include Echo Falls and Banrock Station, has agreed to being purchased by the Carlyle Group for A$1 billion. The feeling is that with this backing Accolade will be able to take even more advantage of the free trade agreement that’s been in place since 2015 and which cut tariffs on Australian wine entering China from 20% to just 3%. Already, Accolade are predicting their exports will rise by up to 80% by the end of 2018 bolstered by their acquisition.
CVS and Aetna
One final area to examine is the healthcare sector in the US where the proposed merger between CVS and Aetna is expected to be the first of many similar examples of so-called convergence. The shareholders of both companies have agreed in principle to the deal in which CVS proposes to buy the health insurer for around $69 billion in cash and stock. It’s a marriage forced by necessity as CVS is coming under increasing pressure from online pharmacy outlets including Amazon, while health insurers are also looking to ways of decreasing costs.
A key element of this will be to make use of the CVS walk-in Minute Clinics to carry out simple procedures that would otherwise represent a considerable expense for Aetna. So now all that stands in the way is Department of Justice approval which should be forthcoming later in the year.
So, as we can see, there are many motivations for companies to merge or to be acquired and it’s often not a straightforward process. However, when it does go right the new organisation it creates is definitely greater than the sum of its parts – as all of the companies we’ve talked about here will be very much be hoping.