Deals of the Year for 2013

Deal activity was much higher this year than last, but not at the pace we expected.  See Joe's recent post 'Something is happening here, what it is ain't exactly clear.'  Still, the years is over and we can look back at the highlights.

Investor Place gives a nice tally of the ten biggest deals of the year.  There's an interesting set of stories here, from bankruptcy and regulatory issues (US Air/American Airlines),  private equity (Silverlake and Dell)  Warren Buffett (H. J. Heinz), industry consolidations (Publicis Groupe/Omnicom Group and Applied Materials/Tokyo Electron) and size - the third largest transaction of all time (Verizon and Vodaphone).  See the complete list and more detail here.

All the best,

Ralph

US Air American Airlines Merger Blocked, Implications for European Deals

The Justice department has announced that it is suing to block the USAIR-American Airlines, Merger.  We have previously written about the use of concentration ratios to ascertain the competitive impact of a merger involving Annheuser Busch and Modelo.

The arguments for and against are standard.  On the pro-merger side, the combination is expected to lower costs through economies of scale and permit lower pricing for consumers. In addition, since the service routes of the two airlines are complimentary, the merger could provide better linkage for consumers.

On the anti-merger side is the recognition that with increased market share, especially in selected 'hubs', the airlines will be able to charge higher prices with their more monopolistic standing.

In Europe, airline margins are tighter than the US.  In a very interesting article, the CAPA Center for Aviation discusses concentration ratios and margins around the world focusing on the opportunities for additional concentration in Europe.  See European Airlines, Few Deals to be Done.

All the best,

Ralph

Social Terms in Mergers, US Air, American, Office Max and Office Depot

We've noted before on this blog the importance of negotiating on all aspects of the deal, not just price. (See, The Interrelated Nature of Deal Design.) The recently announced  mergers of US Air and American Airlines and also Office Max and Office Depot  are good examples of the importance of social terms.  

Social terms include things like the name of the merged firm, where it will be headquartered, who will be the CEO and how the board of directors will be constructed.

Consider the US Air - American Airlines merger.  Although US Air pursued this deal vigorously and is the acquiring firm, the combination retains American's name and will remain headquartered at its Fort Worth location.  Doug Parker, CEO and Chairman of US Air becomes CEO and board member of the new firm and after one year, Chairman of the Board.  Thomas Horton, Chairman, President and CEO of American Airlines will be Chairman of the Board for only one year.  

The Board of Directors of the combined firm will consist of 12 members, three from American Airlines,   four from US Air, and five from the creditors of American Airlines.   I'm a bit surprised that US Air doesn't dominate the board.   

Think that board composition isn't important?  Recall the merger of Duke Energy and Progress Energy that closed in July 2012.  Bill Johnson, the former CEO of Progress was to be CEO of the new firm, but was fired within 24 hours.  Replacing him was Jim Rodgers, the former CEO of Duke.  Under the merger terms, Rodgers was supposed to have been Chairman of the Board.  Reportedly, both of these CEOs had suffered errors in their stewardship as CEO.  Why did Rodgers survive?  One possibility has to do with board composition: the combined firm had 18 board seats, 11 from Rodger's Duke Energy and 7 from Johnson's Progress Energy.  

And then there is the merger of Office Max and Office Depot announced yesterday.  According to the announcement (which was, incidentally inadvertently leaked on Wednesday) the name and headquarters will be announced after the company appoints a CEO?

Huh?  Social terms are important components of any deal determined in the give and take of normal negotiations.  And social terms are costly - they involve real changes with real economic effects.  But not knowing the social terms?  That, would seem to be even more costly.  Not knowing these items as a deal is announced does not seem like the start of a prudent, coherent strategy.  Integration is fraught with uncertainty in the best of deals.  Starting out without  knowing the basic game-plan can only increase integration costs.  

Knowing your social terms? Important.  

Not knowing your board (if you are a new CEO)?  Courageous or some other adjective. 

Not knowing your CEO or name or headquarters? 

Priceless.  (Not.)

Just a thought,

Ralph

US Air Merges with American Airlines

US Air announced that it will acquire American Airlines today in an all stock deal valued at $11 billion.  Shares of USAIR dropped $0.67 to close at $13.99, a 4.6% drop in value.   Shares of American Airlines rose  $0.82 to close at $2.12 a 63%  rise in value!  We've noted before that (ignoring the effects  of anticipation) bidders tend to break even or report small losses upon the announcement of a deal for a public company.  This is especially true when stock is involved.  The prevailing logic on the drop in value when stock is issued involves a signaling effect:  "Hmmm, they offered stock.  Guess they wouldn't have done that if they thought it was undervalued."

 In contrast,  shareholders of target firms typically earn 20 - 40%.  The results of this deal are loosely consistent with those statistics.  One can argue, however that although the dramatic rise for American Airlines and the sharp loss for US Air are surprising, since the deal was widely expected to happen.  The price changes may reflect surprise not in the deal itself, but in the particular terms of the offer.  Certainly, shareholders of American Airlines, a company in bankruptcy must be esctatic.  (See, for example,  AMR shareholders to receive rare value from Chapter 11.)

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Next week we'll talk about a dramatic rise in merger related litigation and also begin exploring motives for mergers.  I think there is a good probability that we may have a bit more to say about the Dell LBO as well!

All the best,

Ralph