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