Thursday, June 12, 2014

Unique Synergies and the Tyson Foods/Hillshire Merger

The Tyson Foods/Hillshire merger provides an excellent illustration of Joe's Blog regarding the gains to merger (see Chance Favors the Prepared Mind).  Joe wrote that:

 Net Value Added to Acquiring Firm = (Unique Synergies + Common Synergies) -  (Market Cycle Premium/Discount + Common Synergies)  = Unique Synergies - Market   Cycle Premium/Discount

The basic idea behind this equation is simple.  Value added is the difference between what you get and what you pay.  The amount you pay is the premium over the pre-market value of the target.  This premium is driven by the competitive position of the bidder/target and also the competitive pressure of other bidders.  Hence the winning bidder will pay at least the common synergies.  

Now normally, we don't know what the unique synergies are in a merger.  But in this case there were multiple bidders for Hillshire and we know that the second highest bidder ( Pilgrim's Pride) offered $55./share.  Tyson "won" the contest by offering $63. per share.  

In this case, we can estimate the common synergies as the difference between the final bid price of the losing bidder (i.e., the $55 offered by Pilgrim) and Hillshire's $37.  stock price on May 9, the day before the merger activity began.  Thus, the common synergies of $18. (= 55 - 37) are included in the price paid by the "winning" bidder (Tyson).  Tyson paid $8. per share more than the common synergies to acquire Hillshire offering a final bid price of $63. 

 So how much must Tyson earn in unique synergies for the contest to be worthwhile?  Enough so the net value added exceed zero. 

Thus, for Tyson to succeed the deal must ultimately be worth over $8. per share in unique synergies.

Net Value Added to Acquiring Firm 

(Unique Synergies + Common Synergies) -  (Market Cycle Premium/Discount + Common Synergies)  
= (      ?                      +       18          ) -  (                  8                           +          18          )

Which implies Unique Synergies must be at least $8.  to succeed.

But that's not all.  To succeed, Tyson must earn greater than the $8. premium and  successfully earn the common synergies of $18.  

Also note, we estimate the market cycle premium or discount as the difference between the highest and second highest bids.  The actual value is more complex than this and depends in part on whether the target's pre-market value was already over or under inflated.  That is, we are assuming here that Hillshire's pre-merger value of $37. per share was a fair value of the company as a stand alone.

The bids for Hillshire illustrate many important points about mergers and acquisitions:
  • When multiple bidders compete, target shareholders win.
  • Multiple bidders will emerge when there are common synergies, available to multiple parties.
  • Bidders are likely to earn higher returns in cases without common synergies and in cases where the combination of this bidder/target produces unique gains unattainable by other bidders.
  • Bidders face a tension between paying too little and losing the deal, and overpaying and reducing their rate of return.
  • Unique synergies can also include precluding a rival (like Pilgrim) from establishing a competitive position.  That is, one motivation for Tyson's purchase is likely to be preventing Pilgrim from occupying the same space.
  • Synergies that look good on paper may fail to materialize because of misestimation or problems of integration.  
  • The Winner's Curse is a distinct possibility.

All the best,


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