Have Tech Deals recovered from the Financial Mushroom Cloud?

Introduction

In this article, I will be discussing briefly but with just enough detail if technology M&A has recovered from the financial crisis of 2008, short and long term trends from my own perspective.

What happened to technology M&A?

Global GDP growth. Source: World Bank

Global GDP growth. Source: World Bank

Before I discuss about the sector, I will go through briefly the cause of the it’s decline in the M&A value. Global GDP growth fell sharply from 3.98% in 2007 to -2.11% 2009 due to the fears of many consumers and businesses, some of them have poor or non-existent credit record, were unable to repay their loans (1). This was caused by a combination of factors such as:

  • Some say, bankers telling their computers to say ‘yes’ to printing new money at will when loans were issued, often without adequate checks
  • Packaging of these loans into ‘safe’ investments for sale to inspecting investors and other factors
  • Lowering of interest rates in many advanced economies to encourage economic growth in the aftermath of 9/11 and dot-com bust. This created ideal conditions for businesses and consumers to take out loans to respectively for investment and non-productive spending, like bling goods. This in turn led to many taking on unsustainable debt once interest rates rose
  • Real estate and other bubbles due to low interest rates and the over-confidence of the belief that the good times will not end
  • Financial institutions biting more than they can chew through excessive leverage (using debt to make extra profits)

This in turn led to annual and first quarter announced technology M&A values respectively decreased from $146.8 billion and $40.2 billion in 2008 to $124.35 billion and $9.45 billion in 2009 (2)(3)(4)(5). This is because of falling confidence in the global economy so many technology companies held back their business plans until they made were sure things were on the mend.

Global annual and first quarter announced values in technology M&A. Note – All Q1 values are estimates based on multiplying global M&A Q1values by global sector share of High Technology, except for years 2007, 2013 and 2014 which are actual values (6)(7)(8). Annual figure is estimated (6). Source: Thomson Reuters

Details of the calculation of the values are found through this link.

After 2009, annual and first quarter announced M&A values have recovered. The former has risen to $181.89 billion in 2013, highest since 2008 but 22.8% below it’s 2007 level, and the latter increased to $70.09 billion in the first quarter of 2014, just 11% shy of it’s 2008 level (7)(8). I believe that this year’s annual M&A value might exceed that level. This is because of the following:

  • Global inflation has remained quite stable from 2009 onwards after a sharp drop from it’s 2008 peak (9)(10). This provided a relatively stable economic environment to encourage investment.
Global inflation. Source: World Bank.

Global inflation. Source: World Bank.

  • After the financial crisis has slightly dented global earnings and income per person, the global economy has continued to grow from 2009 because major developing economies such as China took appropriate actions at the time to keep theirs running at an astonishing speed (11)(12).
Economic growth in terms of earnings and income per person respectively. Source: World Bank

Economic growth in terms of earnings and income per person respectively. Source: World Bank

  • The ongoing battle for dominance in the mobile market between the major players, such as Samsung, Apple and Google, to provide consumers more entertaining and better productive experience. For example:
    • Samsung acquired CSR, a UK startup, in July 2012 for $300 million to gain the necessary expertise in order to develop better WiFi and Bluetooth, satellite positioning capabilities for their own future smartphone models (13)
    • They also bought mSpot in May 2012 to use their technology to provide better music, video and radio services for their smartphone users and offer their cloud services to a wider audience (14)
    • In August 2011, Google bought Motorola Mobility Holdings for $9.4 billion to gain the necessary patents and technology in order to enable the firm to develop it’s own smartphones without relying on joint ventures and directly compete against major producers such as Apple, Samsung, Sony and LG (15). However, they sold it to Lenovo for $2.91 billion in January 2014 after struggling to turn the business around. This enables Lenovo to gain access to the US smartphone market, forming one part of their plan to increase global market share (16)
    • They also acquired Bump Technologies in September 2013 to help users choose and share their own information even easier than before (17)
    • Apple bought SnappyLabs in January 2014 to improve the camera capabilities of their line of smartphones (18)
    • The firm also purchased Novauris recently in 2013 to improve their own speech recognition software Siri on their own devices (19)
  • The challenge of the social media providers to help people easily connect with each other around the world and providing the right adverts and recommendations based on their own information and use of the services. For example:
    • LinkedIn acquired Bright for $120 million in February 2014 to use their computer programs to show relevant jobs to their users based on their expertise, experience and preferences (20)
    • In the same month, Facebook bought WhatsApp for $19 billion to gain 450 million users, many of them who are young and do not use social networks. This new asset means that users do not have to use traditional mobile networks to keep in touch with their contacts, lowering costs of communication further (21)
    • Google bought Titan Aerospace in the same month, for at least $60 million in my opinion, to use solar powered drones to deliver internet connection to remote and often inaccessible areas. This will definitely benefit developing countries the most because using drones can be used to set up internet connections at a lower cost compared to the traditional under the ground wired connections. Also, it enables more opportunities for social connections (22)
    • Twitter purchased MoPub for $350 million in September 2013 to use their expertise to deliver better advertising based on the users’ location (23)
Global device shipments (in thousands). Source: Gartner

Global device shipments (in thousands). Source: Gartner

  • The computing market is expected to lose more market share compared mobile devices, such as tablets and smartphones, because the latter is more affordable to purchase, maintain and upgrading to new devices meaning more people have the opportunity to use the internet to social and productive reasons (24). Manufacturers in this market have to adapt fast in order to survive and prosper. For example:
    • Lenovo decided to buy back their mobile and tablet division for $200 miilion in November 2009, a year after selling it in 2008 for $100 million, to diversify into these markets after they realised that smartphones had become increasingly popular since the launch of the first iPhone back in 2007 (25)
    • Microsoft bought Nokia’s mobile phone business in September 2013 for $7.2 billion because they had missed out on the rapid growth of the smartphone and tablet markets. This helps them to gain a foothold in these markets to allow them to compete against more established players such as Apple, Samsung and LG (26)
    • Dell purchased Wyse, a global market leader in thin-client systems (a computer that has just enough features to allow the user to do various tasks while connected a network), in April 2012 to diversify away from their personal computing business and gain expertise in the former market (27)
  • Services to help people and organisations provide better and consistent presence on web. For example, Yext bought Citrrus in April 2014 to enable them to better help businesses synchronize the content and data on their listings on services such as Yelp (28)
  • Due to the rapid growth of the mobile device market, temporary demand for extra computing power for research and productive reasons, users desire to use their device to control their other devices, monitoring, and the people’s desire to access their data whenever and wherever they choose, there is a rising demand for cloud computing services:
    • Lenovo bought Stoneware in September 2012 to allow the latter to offer a broader range of cloud computing services and acquire the relevant expertise to develop better services in the future (29)
    • Microsoft acquired Greenbutton in May 2014 to offer a wider range of services to allow more users to take advantage of their high performance cloud computing infrastructure to process large amounts of information in an increasing variety of situations (30)
    • In June 2013, IBM purchased SoftLayer Technologies for about $2 billion to bolster their cloud computing capabilities and offer a wider range of services to small and medium sized businesses and consumers (31)
  • 3D-printing was invented in 1984 and the industry took 25 years to take off when the average price of a 3D-printer for personal use fell dramatically because manufacturing methods and parts costs went down.. The global 3D-printing market has experienced stable growth from $1.1 billion in 2009 to $2.6 billion in 2013. As 3D-printing becomes even more widespread among consumers and organisations and applied in an ever increasing range of applications from health to musical instruments, the market is expected to expand to about $6.5 billion in 2019. (32) Many 3D printer makers are acquiring relevant assets and firms to speed up development of new technologies and provide a broader range of products and services. For example:
    • 3D Systemcompleted their acquisition of Xerox’s solid ink engineering and development assets and relevant patents for $32.5 million in January 2014 to accelerate development of new models of printers incorporating solid ink technology (33)
    • In June 2013, Stratasys bought MakerBot for $403 million to diversify into the desktop 3D printer market and offer affordable printers (34)
    • ExOne has purchased MWT and Machin-A-Mation $4.8 million and about $5 million respectively in March 2014.  These allow the buyer to respectively incorporate complete their production line and improve production methods of industrial 3D printers (35)
Bitcoins in circulation

Bitcoins in circulation. Source: Blockchain.info

Bitcoin transactions in USD.

Bitcoin transactions in USD. Source: Blockchain.info

  • Bitcoin was first mention in 2008 in an research paper, Bitcoin: A Peer-to-Peer Electronic Cash System. Details of how the currency works in plain English is described on the Bitcoin website. It was invented a year later and the number of Bitcoins in circulation, users and transactions has risen over the past 5 years to 2014 (36)(37)(38). These are still increasing fast and I expect that more consumers and businesses to use the currency in a wide variety of transactions in the future when all of the problems will be resolved. A number of firms are making purchases in their quest to dominate their niches in the Bitcoin market. For example:
    • In March 2014, Blockchain bought RTBTC.com, a trading platform that users to trade bitcoins in various digital currency exchanges, in order to build one of the first comprehensive trading platform in bitcoin. This complements well with their bitcoin wallet and block explorer to provide a one-stop shop for researching bitcoin data, holding and trading bitcoins (39)
    • An unnamed buyer bought SatoshiDice, a gambling platform for bitcoins, for $11.5 million in July 2013 (40)
    • Efftec International acquired BitBank application in January 2014 to expand it to achieve their goal for it to become the first source of information for Bitcoin and other digital currencies (41).

Where might technology M&A go in the future?

In the short term:

  • Global technology M&A activity in terms of value will rise as the global economic climate improves when many developed economies currently trying to lower their debts, such as Greece and Italy, start to recover. However, M&A may rise a little slower because of China’s economy developed fast due to the bank sector expanded very fast. The government is trying to figure out how to shrink the sector without affecting economic growth too much.
  • M&A activity in the smartphone market may go up because smartphone manufacturers want to dominate the market through various means such as new technologies and various smartphone models to suit different types of consumers.
  • Social media M&A activity may increase because major players, such as Facebook and Google, are still racing to the ultimate goal of helping everyone connect with each other no matter where they are in the world, providers want to find new ways to help people express themselves and communicate with others online, and some want to find new ways to collect even more data from people, from their own will, and increase profits from advertising.
  • Bitcoin and 3D-printing M&A may rise slowly as the society slowly adapts to new technology, overcome fears of associated with these new technologies and the cost of 3D-printers fall even further.
  • M&A in the mobile device market may go up because usage will increase and manufacturers will acquire relevant firms and assets to diversify into different markets and offer better user experience. However, traditional computing will have a place because of their superior power, compared to mobile devices, which is suitable for high performance applications, such as video editing, gaming and computer-aided design. Therefore, M&A is this sector may involve market consolidation and acquiring relevant assets and firms to allow manufacturers to focus on various niches.
  • Cloud computing M&A activity will go up because of the rise in the usage of mobile devices means that there will be rising demand for users wanting access data at any time, from anywhere and from any device. Also, there will be more users who will temporarily need extra computing power for high intensive uses such as mathematical calculations for simulation and research.

In the long term:

  • Global technology M&A will roughly follow global economic cycles of boom and bust because virtually all of the world’s economies, some say, [legally] allow private banks to create money at will through new loans. Also, the sector activity will stay roughly stable due to the ongoing trend of the entrepreneurial revolution where technology is increasingly replacing people in more  jobs and disputing the society because the former can perform in them more efficiently at a lower cost. This mean that there will be a shift of power from the organisation to the individuals. Even some large firms are recognising this trend today.
  • Bitcoin M&A activity will go up because the digital currency will be used by more people and businesses in the future once all of the problems have been resolved and firms in the market acquire relevant assets and firms to enable them to dominate their niches such as accepting bitcoin and converting them into national currencies like the dollar. Eventually, bitcoin may be a widely accepted form of currency alongside national currencies.
  • 3D-printing M&A activity will increase because the more people and businesses will use them to manufacture their products, design and make one-off products at the consumers’ own preferences, make prototypes to test their products and iron out potential problems before formal launch at lower costs. Eventually, 3D-printers will be in most homes and businesses. This means that firms will acquire or merge with others to diversify into different markets, cater for different types of consumers and businesses and further improve user experience.
  • Cloud computing, smartphone, social media and mobile device M&A activities will rise because more people and businesses will be connected to the internet through existing and new technologies, demand for these products and services will rise, especially in the developing economies. Therefore, deals will typically involve around improving user experience, innovation, developing new products and diversifying into these markets. Traditional computers may not be used in the long run due to improvements in computing power in mobile devices will result in high intensive applications such as complex photo and video editing may be possible.

Sources

  1. Thomson Reuters Mergers & Acquisitions Review First Quarter Review 2008
  2. Thomson Reuters Mergers & Acquisitions Review First Quarter Review 2009
  3. Thomson Reuters Mergers & Acquisitions Review Forth Quarter Review 2008
  4. Thomson Reuters Mergers & Acquisitions Review Forth Quarter Review 2009
  5. Thomson Reuters DAILY DEALS INSIGHT Facebook’s 2nd largest acquisition boosts Tech M&A to $65.2 bln YTD 26 March 2014
  6. Thomson Reuters Mergers & Acquisitions Review First Quarter Review 2014
  7. Thomson Reuters Mergers & Acquisitions Review Forth Quarter Review 2013 Note: Sources 2 to 8 can be accessed through Thomson Reuters Deal Making Intelligence website.
  8. World Bank – Inflation consumer prices annual retrieved 1-5-2014
  9. World Bank – Inflation GDP deflator annual retrieved 1-5-2014
  10. World Bank – GNI per capita PPP current international $ retrieved 1-5-2014
  11. Samsung hits the acquisition trail, 17 June 2012 retrieved 2-5-2014
  12. Samsung Acquires Mobile Entertainment And Music Streaming Startup mSpot, 9 May 2012 retrieved 2-5-2014
  13. Google to buy Motorola Mobility in biggest deal ever retrieved 2-5-2014
  14. Lenovo to buy Google’s Motorola in China’s largest tech deal retrieved 2-5-2014
  15. Google Buys Bump App for Easy Sharing retrieved 2-5-2014
  16. Apple Acquires Rapid-Fire Camera App Developer SnappyLabs [Update: Confirmed] retrieved 2-5-2014
  17. Speech Recognition Pioneer Novauris Bought By Apple, Team Now Works On Siri retrieved 2-5-2014
  18. LinkedIn makes its biggest acquisition by paying $120m for job matching service Bright retrieved 4-5-2014
  19. Facebook to buy WhatsApp for $19 billion retrieved 4-5-2014
  20. Google to buy drone-maker Titan Aerospace retrieved 4-5-2014
  21. Twitter Buys MoPub For $350M To Up The Ante In Mobile Advertising retrieved 4-5-2014
  22. Gartner Says Worldwide Traditional PC, Tablet, Ultramobile and Mobile Phone Shipments On Pace to Grow 7.6 Percent in 2014 retrieved 5-5-2014
  23. Lenovo to Acquire Mobile Handset Business retrieved 5-5-2014
  24. For Microsoft, Nokia Deal Was Long and Arduous retrieved 5-5-2014
  25. Dell buys Wyse, plays ‘cloud client’ game retrieved 5-5-2014
  26. Yext Acquires Software Consulting Firm Citrrus To Build Its Professional Services Team retrieved 6-5-2014
  27. Lenovo Acquires U.S. Software Firm  retrieved 5-5-2014
  28. Microsoft Buys New Zealand Start-up GreenButton to Boost Azure Platform retrieved 5-5-2014
  29. IBM Pumps Up in Cloud Computing by Buying SoftLayer retrieved 5-5-2014
  30. A WHOLE NEW DIMENSION retrieved 6-5-2014
  31. 3D Systems Completes Acquisition of Xerox’s Oregon Based Solid Ink Engineering and Development Teams retrieved 6-5-2014
  32. Stratasys to Acquire MakerBot, Merging Two Global 3D Printing Industry Leaders retrieved 6-5-2014
  33. ExOne Announces Acquisitions retrieved 6-5-2014
  34. Blockchain – Total Bitcoins in Circulation retrieved 6-5-2014
  35. Blockchain – My Wallet Number of Users retrieved 6-5-2014
  36. Blockchain – Number of Transactions per Day retrieved 6-5-2014
  37. Blockchain Acquires Trading Platform to Expand ZeroBlock
    retrieved 6-5-2014
  38. First big Bitcoin acquisition: gambling site SatoshiDice bought for $11.5M retrieved 6-5-2014
  39. Efftec Fully Completes Acquisition of BitBank, a Bitcoin Market and Valuation Application for iOS retrieved 6-5-2014

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Has ConAgra Foods made the right choice buying Ralcorp at a higher price?

Introduction

This is my first post since taking a break from this blog because of my ongoing attempt to build a merger model of Google and Motorola Holdings and I have been through a few things in general not related to the blog. In this article, I will discuss from my own perspective whether ConAgra Foods Inc. offer of $90 per share for Ralcorp Holdings Inc. benefits both companies or not.

I discussed briefly the background and the previous analysis of the deal in this post below:

Will the takeover of Ralcorp Holdings Inc. by ConAgra Foods Inc. succeed?

Why did ConAgra never gave up buying Ralcorp?

ConAgra announced the cash offer of $90 per share for Ralcorp on 27/11/12. The former believed that the deal would benefit them in terms of increased profits through an expanded offer of brands to consumers. Looking at the transaction in more detail, this would benefit both them and Ralcorp:

CAG-RAH $86 and $90 cash offers

Table 1: Comparison of cash offers of $86 and 90 for Ralcorp Holdings Inc.

  • The weighted average cost of capital (WACC) of the combined company is 8.35%, which is higher than the WACC of the $86 cash offer. This is because the market capitalisation of Ralcorp fell from $4563.9m to $3864.94m whereas ConAgra’s has risen from $10635.08m to $11529.07m between the announcements of the $86 and $90 cash offers. This meant that latter firm would have a even larger proportion of the combined firm after the deal has been completed. Also, ConAgra’s WACC has almost doubled from 5.5% to 10% whereas Ralcorp’s fell from 3.5% to 3%.
  • It is obviously clear that the higher offer price worked out better for Ralcorp. The post-deal return is 28.2% compared to 3.2% from the previous offer. However, the post-deal return for ConAgra significantly worse compared that that under the previous offer, which are respectively at 13.9% and 28.2%.
  • The acquirer’s Shareholder Value at Risk (SVAR) has almost tripled from 4.3%, from the previous offer, to 13.5%. This meant that they had to take on more risk to earn smaller returns from the transaction. However, their long-term return could work out better.

Details of my analysis and how I calculated the WACC for ConAgra, Ralcorp and the combined firm are shown in the links below:

Did the Ralcorp deal work out well for ConAgra?

The transaction has benefited ConAgra so far because:

  • Normalised earnings per share (EPS), that is earnings from the firm’s day-to-day activities, has increased $1.12 in 2012 to $1.85 in 2013. Generally, analysts expect their earnings to go up in the near future at a slower pace going back to it’s long-term average growth of 10.28%..
  • They managed to raise their dividend conservatively from 96c in 2012 to $1 in 2013. Again, analysts expect that to go up in the near future. However, dividend yield fell from 3.82% to 2.97%.
  • Return on equity and operating margin has gone up respectively from 10.38% and 6.2% in 2012 to 162.% and 9.19% in 2013. Also return of cash invested (ROCI) and cash return on cash invested (CROCI) has improved slightly.
Normalised EPS grwoth of ConAgra pre and post deal of Ralcorp. Forecast years are 2014 and 2015 at the time of writing.

Normalised EPS grwoth of ConAgra pre and post deal of Ralcorp. Forecast years are 2014 and 2015 at the time of writing.

However, comparing at the company results in 2012 and 2013 the firm had to increase their borrowing pay for the transaction and investment to fully integrate Ralcorp into their corporate structure as well as in new capital which meant return on capital employed (ROCE) fell very slightly, current ratio fell from 1.45 to 1.29 and quick ratio has fallen slightly. They still have enough assets to clear all of their debts in case they go insolvent. Also, they increased their cash flow to such an extent that they can afford to service the increased borrowings. Interest cover is at 5.11 in 2013 compared to 3.99 in the previous year.

The rolling price-to-earnings (P/E) of 14.4 is still conservative compared to the firm’s peers in the market and industry. Dividend yield is high compared to it’s peers. However, the firm’s price-to-book value (P/BV) and price-to-cashflow (P/CF) are not attractive compared to market and industry.

More details are found in the two links below:

Based on the above analysis, ConAgra has made the correct decision of offering $90 per share in cash for Ralcorp in the short term. The increased risk taking has resulted in an increase in sales, operating profit and almost doubling in post-tax profit. This has in turn led to the firm increased dividend for their shareholders. The firm can also service their increased borrowing for the time being. The share price has only risen by 4.89% to $31.08 at the close of 7/4/2014 from $29.63 on the date of announcement of the deal. (3) This is because, in my opinion, of consumer confidence recovering at a cautious pace in the markets the firm operates in and their fundamentals not that attractive to investors at the moment. Whether ConAgra has made the correct decision or not is up to the jury in the long run.

Source:

  1. Sharescope retrieved 7-4-2014. Note – Most of the analysis can be obtained easily through Digital Look.
  2. Sharescope retrieved 7-4-2014. Note – Most of the company results can be obtained through Digital Look.
  3. Google Finance NYSE:CAG retireved 7-4-2014
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Which factors are currently driving technology M&A?

In this post, I will go briefly through the following factors that I believe are currently driving M&A activity in the technology sector. For each factor, I will provide at least an example whenever possible to back my opinions.

Firstly, we all noticed that the smartphone market has grown rapidly in the recent years. Back in 2006, I noticed that there were not many smartphones compared to other kinds of mobile phones as the consumers were mainly business users. When Apple launched the first iPhone, the product completely revolutionised the smartphone market forcing many players to change the way they design and manufacture these devices. Fast forward to today, we see that there are many models of smartphones, many of which are customisable to suit the preferences of the user.

The smartphone revolution has resulted in the rapid growth of the social gaming industry and the appearance of many essential applications, such as medical and office, which enable users to carry out tasks more easily than before. Many developers have produced many applications that have gone viral and became an instant hit with the general consumer. Therefore, many technology firms have acquired developers of mobile phone applications so that they can produce new applications and social games that they hope will go viral and become successful. For example, Red Robot Labs has announced on December 9th that they have acquired Supermono Studios. They want to fulfil their vision of ‘creating the most engaging and dynamic location-based games in mobile ‘ (1).

Secondly, Google is not competing effectively against Apple in terms of the smartphone handset market.  They entered the market late compared to other competitors as they only launched their first phone in 2010, the Nexus which was manufactured by HTC. However, Google’s Android operating system was first used since they acquired it back in 2005 when HTC launched HTC Dream in 2008. Google has done very well in terms of the smartphone operating system market after initially lagging behind Apple’s iOS. In 2010, the market share of Android overtook that of the iOS into second place. After the first quarter of this year, they eventually surpassed Symbian to become the leading smartphone operating system with 43.4% of the market share.

Source: Gartner November 2011 http://www.gartner.com/it/page.jsp?id=1848514 retrived 19-12-2011

Even though Apple’s smartphone handset market share for the third quarter if this year is only 14.5%, they have the highest operating profit share at 52% (2). Google has a lot of work to do in order to dominate this market.

They decided to purchase Motorola Motability Holdings, a struggling handset maker, for $12.5 billion, $40 per share to acquire vast quantities of their patents (3).  These are more likely to be used to produce a number of handsets to appeal a wide variety of consumers and to improve the Android operating system. However, I believe that Google is trying to protect itself from lawsuits from their competitors as they believe that former has infringed on their intellectual properties (4). Google will have to work very hard to overcome the huge challenges they face right now.

Source: IDC November 2011 http://www.idc.com/getdoc.jsp?containerId=prUS23123911 retrieved 19-12-2011

Thirdly, there is a shift towards cloud computing from traditional computing as businesses and individuals want to access information from any device while on the move. Many companies, including major firms such as Oracle and HP, are buying cloud service providers in order to gain access to their expertise and develop their own services to their customers to enhance their profit margins. They also want to refine their existing services in order to make it even better. For example, Citrix bought Sharefile to refine their services in order to fulfil their vision of providing individuals access to their data anywhere from any device (5). GlobalSCAPE has bought Tappln for $9m to combine the former’s expertise in providing secure cloud storage and data exchange service with the latter’s service which lets users access their data stored on their storage devices anywhere via internet or smartphone (6) (7). Oracle acquired Rightnow for $1.5bn to expand their cloud computing services for their enterprise customers (8).

Finally, Yahoo has been struggling to compete against Google for many years in the search engine and advertising market. A combination of poor management and innovation has partially lead to falling profit margins and share price. In order to survive, they are seeking to sell themselves for the best possible price. A number of parties are interested in acquiring the struggling firm:

  • a consortium consisting of Ali Baba, Softbank Corp, Blackstone Group and Bain Capital (9)
  • Microsoft (10) as they are hoping to gain their expertise in the search engine and advertising market to compete against Google more effectively
  • KKR (10)
  • TPG Capital (10) (11)

The latter three are conducting due diligence, that is, checking thoroughly what exactly are they buying. The former are planning to make a bid for the company for about $25bn.

Sources:

  1. Red Robot Labs Expands Global Presence in the Gaming Industry – Marketwire http://www.marketwire.com/press-release/red-robot-labs-expands-global-presence-in-the-gaming-industry-1596733.htm retrieved 19-12-2011
  2. Apple, With 4 Percent of Handset Market, Captures 52 Percent of Profits http://www.pcmag.com/article2/0,2817,2395951,00.asp#fbid=SLgcdJun7IU retrieved 19-12-2011
  3. Google to buy Motorola Mobility in biggest deal ever – Reuters http://www.reuters.com/article/2011/08/15/us-motorolamobility-google-idUSTRE77E1XF20110815 retrieved 19-12-2011
  4. Google Agrees to Acquire Motorola Mobility for $12.5 Billion – Bloomberg Businessweek http://www.businessweek.com/news/2011-08-15/google-agrees-to-acquire-motorola-mobility-for-12-5-billion.html retrieved 19-12-2011
  5. Citrix Acquires ShareFile, The “Dropbox For Enterprises” – Techcruch http://techcrunch.com/2011/10/13/citrix-acquires-sharefile-the-dropbox-for-enterprises/ retrieved 19-12-2011
  6. GlobalSCAPE® Acquires Innovative Mobile File Sharing Company TappIn™ – Businesswire http://www.businesswire.com/news/home/20111205005044/en/GlobalSCAPE%C2%AE-Acquires-Innovative-Mobile-File-Sharing-Company retrieved 19-12-2011
  7. GlobalSCAPE Acquires File Sharing Service TappIn For Up To $17 Million – Techcruch http://techcrunch.com/2011/12/05/globalscape-acquires-file-sharing-service-tappin-for-up-to-17-million/ retrieved 19-12-2011
  8. Oracle to beef up cloud offer with RightNow buy – Reuters http://www.reuters.com/article/2011/10/24/us-rightnow-oracle-idUSTRE79N34V20111024 retrieved 19-12-2011
  9. Alibaba seeks $4 billion in financing for Yahoo – Reuters http://www.reuters.com/article/2011/12/08/us-alibaba-yahoo-idUSTRE7B70KZ20111208 retrieved 19-12-2011
  10. Microsoft signs confidentiality pact with Yahoo Reuters http://www.reuters.com/article/2011/11/23/us-yahoo-microsoft-idUSTRE7AM21920111123 retrieved 19-12-2011
  11. TPG Capital Enters the Fray for Yahoo – DealBook http://dealbook.nytimes.com/2011/11/03/tpg-capital-enters-the-fray-for-yahoo/ retrieved 19-12-2011
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Will the takeover of Ralcorp Holdings Inc. by ConAgra Foods Inc. succeed?

This is my second short M&A analysis. This time I am going to analyse the takeover of Ralcorp Holdings Inc. (RAH) by ConAgra Foods Inc. (CAG). I will talk about the background of the deal briefly before giving my analysis of the transaction.

The descriptions from both companies and the stated benefits of the transaction are based on the deal fact sheet (1).

ConAgra Foods is one of North America’s leading packaged food companies, with brands in 97 percent of America’s households. Many of its brands are sold in grocery, convenience, mass merchandise and club stores. The company has a strong commercial presence, supplying frozen potato and sweet potato products as well as other vegetable, spice, and grain products to a variety of restaurants, food service operators, and commercial customers.

Ralcorp Holdings is a leading manufacturer of private label foods, a major producer of food service products, and the owner of the highly regarded Post cereal brand. The company produces a variety of value and store brand consumer foods sold under the individual labels of various grocery, mass merchandise and drugstore retailers as well as frozen bakery products sold to in-store bakeries, restaurants and other food service customers.

According to ConAgra Foods the acquisition would result in:

  • the top 3rd packaged food company in the US in terms of net sales
  • expansion of their presence in fast growing private label segment in the US food market
  • increases the range of products offered to a wide range of consumers
  • expansion into the high-growth private label category
  • having an international presence in selected fast-growing emerging markets
  • growth in its core branded business and in branded strategic adjacencies

Additional details of the transaction are in this document (2).

Ralcorp Holdings rejects ConAgra’s takeover proposal for a variety of reasons:

  • track record of delivering superior results and shareholder value since they have delivered total shareholder returns of 418% over the past 10 years and 114% over the past five years (3)
  • divestment of Post Foods from Ralcorp would allow each company to focus on specific strategies that would result in better shareholder return compared to Post Foods remaining part of Ralcorp (4)
  • overall the firm has strong fundamentals as of at the close of 18/8/2011. Most importantly, the price to earnings (P/E), price to sales, price to book and price to cash flow for the firm are below the industry and sector averages. These are also below overall market average, except price to earnings and price to cash flow. Current ratio is above 1 so the firm will still be able to pay all of its debts if recalled immediately. Return on assets, return on investments and return on equity ratios are a little disappointing compared to industry, sector and market averages. However, these are minor, in my opinion. Also the firm does not currently pay dividends.

Table 1: Financial ratios of Ralcorp Holdings Inc. compared to those of the Food Industry, Consumer/Non-Cyclical sector and the S&P500 index (5).

From my perspective, in addition to ConAgra Foods’ stated reasons for the takeover, consumers may benefit from this in terms of lower prices for existing products due to lower costs. Consumers in emerging markets which Ralcorp operates in would have access to products offered by ConAgra therefore they have additional choices.

The analysis of the transaction is shown below:

Note that the original offer of $82 consisting of cash and stock is not included in the analysis because the lack of information regarding the composition of the deal, that is, the proportion of the offer in cash and the remainder in stock. For the hypothetical offer of $100 cash and stock, I picked an arbitrary value of $50 cash and 2.0202 ConAgra shares for each Ralcrop share.

The values used for calculating the weighted average cost of capital (WACC) are shown in this document.

Table 2: Comparison of offers that ConAgra Foods Inc. could offer to purchase Ralcorp Holdings Inc.

Looking at all cash offers:

  • These do not represent a good deal for Ralcorp considering its good fundamentals overall and track record of delivering shareholder value. However, these offers do represent a very good deal for ConAgra.
  • WACC for the combined company is 4.9% based on the market capitalisation of respective companies just before the announcement of the takeover.
  • Under the Shareholder value at risk (SVAR) and premium at risk analysis, the higher the offer value post-deal return assuming no synergies are realised for Ralcorp increases exponentially whereas this gets worse for ConAgra. The latter’s SVAR also rises.
  • Ralcorp’s premium at risk is 0% for all offers.
  • Under pre-market reaction analysis, higher the offer, post-deal return for Ralcorp increases exponentially whereas ConAgra’s return falls almost linearly.
  • Under post-market reaction analysis, Ralcorp’s premium at risk is 0%. Higher the offer, ConAgra’s SVAR rises.

Looking at the hypothetical offer of $100 cash and fixed shares:

  • This does represent a much better offer compared to the cash offers since Ralcorp ends up with just over a fifth of merged firm whereas ConAgra would end up with just under 80%.
  • WACC is 5.1%, which is the highest compared to other offers.
  • Under the SVAR and premium at risk model, post-deal returns for Ralcorp if no synergies are realised is 15.9% whereas ConAgra’s is -6.8%. Premium at risk for Ralcorp is 20.5% and SVAR for ConAgra is 6.8%.
  • Under the pre-market reaction analysis model, post-deal returns for Ralcorp and ConAgra are 37.9% and 29.9% respectively.
  • Under post-market reaction analysis, premium at risk for Ralcorp is 27.8% and ConAgra’s SVAR is 9%.
  • This deal is slightly more risky compared to the revised cash offer of $94. However, both firms would receive a fairer and decent amount of return if the deal goes well.
  • Both Ralcorp and ConAgra would end up with good returns if the synergies are realised and strategies go their way.

Examining the hypothetical offer of $100 fixed shares:

  • This offer is superior to the cash offers since Ralcorp would get just over a third of the combined firm whereas ConAgra receives just under two-thirds. This is the most equal of deals compared to others.
  • WACC is 4.8% which is lowest compared to other offers.
  • Under SVAR and premium at risk, post-deal returns assuming no synergies for Ralcorp and ConAgra are 13.2% and -5.7% respectively, premium at risk for Ralcorp is 34% and SVAR for ConAgra is 5.7%.
  • Under pre-market reaction analysis, post-deal returns for Ralcorp and ConAgra are 51.8% and 26.5% respectively.
  • Under post-market reaction analysis, premium at risk for Ralcorp is 46.2% and ConAgra’s SVAR is 7.5%.
  • Ralcorp would end up with a very good return whereas ConAgra would end up with slightly worse one compared to $100 cash and stock offer. The former does take on more risk and the latter has a little less risk.

Based on the analysis above, I would recommend that ConAgra should offer of $100 consisting of $50 cash per Ralcorp share and exchange of 2.0202 ConAgra shares for each share. This is because this deal would represent a good deal for ConAgra and Ralcorp, though the former would end up with a larger return than the latter, and WACC for the combined firm is just a bit higher compared to all cash offers. ConAgra would take a reasonable amount of risk for a decent return if the synergies are realised even though the amount is less than that of Ralcorp’s. The former would lose a small proportion of its value if no synergies. SVAR for ConAgra and premium at risk for Ralcorp is reasonable.

Relevant documents:

  1. Takeover of Ralcorp Holdings Inc. (RAH) by ConAgra Foods Inc. (CAG) – Weighted Average Cost of Capital. Sources used in this document are (5) to (13).
  2. Takeover of Ralcorp Holdings Inc. (RAH) by ConAgra Foods Inc. (CAG) $86 cash
  3. Takeover of Ralcorp Holdings Inc. (RAH) by ConAgra Foods Inc. (CAG) $94 cash
  4. Takeover of Ralcorp Holdings Inc. (RAH) by ConAgra Foods Inc. (CAG) $100 cash
  5. Takeover of Ralcorp Holdings Inc. (RAH) by ConAgra Foods Inc. (CAG) $100 cash and fixed shares
  6. Takeover of Ralcorp Holdings Inc. (RAH) by ConAgra Foods Inc. (CAG) $100 fixed shares

Source:

  1. ConAgra Foods Proposes $4.9 billion Combination with Ralcorp Holdings retrieved 18/8/2011
  2. ConAgra Foods’ Proposed  All-Cash Acquisition of Ralcorp May 4, 2011 retrieved 18/8/2011
  3. Ralcorp Board of Directors Unanimously Rejects Unsolicited Proposal from ConAgra; Adopts Shareholder Rights Plan retrieved 18/8/2011
  4. Ralcorp Board of Directors Unanimously Rejects Revised, Unsolicited Proposal From ConAgra retrieved 18/8/2011
  5. Financials: Ralcorp Hldg Inc (RAH) retrieved 18/8/2011
  6. US Federal Reserve – Selected Interest Rates (Daily) – H.15 retrieved 13-8-2011
  7. Google Finance NYSE:CAG retrieved 13-8-2011
  8. Google Finance NYSE:RAH retrieved 14-8-2011
  9. Zacks Investment Research CAG: CONAGRA FOODS INC – Stock Earnings Estimates (regarding forecasts) retrieved 14-8-2011
  10. Digital Look – ConAgra Foods Inc. (regarding dividends) retrieved 14-8-2011
  11. Zacks Investment Research RAH: RALCORP HLDGS INC NEW – Stock Earnings Estimates retrieved 14-8-2011
  12. ConAgra Foods Annual Report 2011 p.22, 54 and 56 retrieved 13-8-2011
  13. Ralcorp Holdings 10-Q Quarterly report pursuant to sections 13 or 15(d) 05/05/2011 p.7, 13 and 22 retrieved 14-8-2011
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Would the acquisition of TMX Group Inc. be a good deal for LSE Group plc?

This is my first M&A analysis in this blog. This time I will analyse the merger of London Stock Exchange (LSE) Group plc and TMX Group Inc. I will talk about the background of the deal briefly before giving my analysis of the transaction.

LSE Group plc stated that this transaction would be a merger of equals. The stated benefits of the transaction are (1):

  • the merged firm would be jointly head-quartered in London and Toronto with a roughly equal proportion of directors from both firms holding new positions on the new board
  • businesses from both firms will have operational autonomy so that the centres of both firms would continue to have specialist roles, such as London for international listing of firms and Montreal for derivatives,
  • the TMX Group businesses will continue to operate in Canada, the country will benefit economically and socially from the merger due to their centres of operation continuing to specialise in certain fields and jobs not moving abroad
  • the strengths of both firms will complement each other to create a stronger and more diversified exchange group that will be able to complete even more effectively against the likes of New York Stock Exchange Euronext
  • the combined group will be the financial market information leader providing a wide range of relevant products
  • the users will be able to trade more types of assets including cash equities, fixed income and derivatives
  • technologies will be shared to enable the merged firm to develop new products and systems even faster which will benefit users in terms of lower trading and capital costs, reduced spreads and increased certainty of trade execution
  • competition between rival Canadian exchanges would be maintained for the benefit of clients
  • the merged firm would be the global leading venue for natural resources, mining, energy, clean technology, international listings from emerging and growth markets, alternative market and in terms of the number of listings
  • and the sales network from both firms will be combined so that they can distribute their products and services easier.

From my perspective, the merger between the two firms would benefit virtually all stakeholders from shareholders of both firms, governments of UK and Canada would benefit economically to users experiencing lower costs. As in all mergers and acquisitions transactions, some employees will lose their jobs and costs need to be reduced.

The analysis of the transaction is shown below:

Comparison of offers that LSE Group plc could offer to purchase TMX Group Inc.

Note that the exchange rate between the British pound and the Canadian dollar on the day of the announcement (9/2/2011) is 1.60121. This rate is used to calculate the value of LSE Group’s offer for TMX.

Looking at LSEs actual offer of 2.9963 LSE shares for each TMX share, equivalent of $42.25 per TMX share, the deal would overall represent good value for both LSE and TMX. If no synergies from the deal are achieved, LSE would lose a small value whereas TMX would lose significant proportion of its premium over the share price of $40.28 on 8/2/2011. The weighted average cost of capital (WACC) post-merger is 7.3%.

If LSE raised its offer to 3.1915 shares for each TMX share, $45 per TMX share, the deal would still represent a good value for both firms. However, LSE’s return will be worse whereas TMX’s has improved. If no synergies are achieved, than LSE would lose more value, in comparison to its actual offer, whereas TMX would still lose significant proportion of its premium. The premium at risk has increased slightly. From the post-market reaction analysis model, the post announcement premium at risk for TMX has fallen by almost 5%. The proportion of the merged company that TMX will own would increase to 46.7% whereas the proportion owned by LSE would decrease to 53.3%. WACC post-merger will fall to 7.2%.

If LSE matched any of the Maple Group’s offers for TMX, the deal would not represent a good value for LSE as the costs of the deal would outweigh the benefits. It does obviously represent a good deal for TMX in either of Maple Group’s offers. If LSE matched Maple Group’s original offer of $48 per share than the former would end up losing about 8% of its value and make a loss of about the same amount if the stated synergies are not realised. The firm would end up losing about a 10% of its value and make a loss of 10% under the same situation if LSE matched Maple Group’s revised offer of $50 per share. On the brighter side, the divergence between LSE and TMXs proportion of ownership will fall to 51.7% and 48.3% respectively, compared to the previous two deals mentioned earlier, if LSE matched Maple Group’s original offer. If LSE offered $50 per share, the proportion of ownership between the two will be almost equal.

Based on the analysis above, I believe LSE should offer 3.1915 shares for each TMX share, equivalent to $45 per TMX share. This is because this would;

  • represent a good deal for both LSE and TMX in terms of the post deal returns, though LSE would have to sacrifice some proportion of it, they would achieve assuming the synergies are realised
  • mean lower WACC post-merger
  • proportion of ownership of merged firm would be more equal, better illustrating LSEs intentions regarding the merger
  • and still benefiting virtually all stakeholders in terms of the contributing to the growth of the UK and Canadian economies, higher profit margins for the combined firm, better provision of products and services and lower costs for users.

I have provided the relevant excel documents that I have used to analyse the above deal and calculate the best possible estimate of WACC for LSE, TMX and the combined group:

  1. LSE-TMX merger using LSEs actual offer
  2. LSE-TMX merger using hypothetical higher actual offer from LSE
  3. LSE-TMX merger if LSE matched Maple Group’s original offer
  4. LSE-TMX merger if LSE matched Maple Group’s revised offer
  5. Calculation of weighted average cost of capital for each firm involved in the merger

Source:

  1. Management Information Circular TMX Group Inc. with respect to a proposed merger involving LSE Group PLC 25/5/2011 retrieved 19/7/2011
  2. TMX Group Inc. Annual Report 2010 retrieved 19/7/2011
  3. Digital Look (forecast of TMX) retrieved 1-8-2011
  4. Digital Look (forecast of LSE) retrieved 2-8-2011
  5. Google Finance (TMX share price) retrieved 1-8-2011
  6. Google Finance (LSE share price) retrieved 2-8-2011
  7. Bank of Canada retrieved 2-8-2011
  8. Bank of England retrieved 2-8-2011
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What are the effects of entrepreneurial revolution and social media on the M&A industry?

Welcome to MartinYau.org.

As this is my first post, I will not analyse a M&A transaction. I will do that in my next post. Instead, I will briefly talk about the effects of the entrepreneurial revolution and social media on the M&A industry  from my own prospective.

You may be asking yourself this – What is the entrepreneurial revolution?

The entrepreneurial revolution is a time where people are setting up their own small businesses therefore becoming suppliers of goods and services to consumers and businesses in the economy. The video below by Daniel Priestley explains this concept.

Why does the entrepreneurial revolution and social media matter to the M&A industry?

The entrepreneurial revolution means that we will see investment bankers will leave their jobs and set up their own boutiques specialising in their own niche. They will provide the same services as the bulge brackets at a fraction of the cost compared to the latter. This means that the boutiques can bring in the same amount of revenue as a bulge bracket while carrying less fat. This also means fatter profit margins for the former. Since these specialists can serve their clients better within their own niche compared to a generalist bulge bracket this means that the latter will be in trouble unless they form partnerships with the former.

Social media is definitely changing the way how investment banks operate. We will see the investment bankers using social media to work together on transactions while still being subject to regulations. Prospectuses will be shared to shareholders and those interested in transactions. News of transactions would be posted after being vetted. Detailed analysis of transactions will be shared publicly. Therefore, the processes in the transactions will be more transparent.

Putting the above two together, bulge brackets and mid caps have slim down to cut costs dramatically so that they can be very profitable. Investment banks will have to be more open [as the regulations allow them to be and without adversely affecting the share price of companies] and more supportive of their clients and other stakeholders [I’m not saying that they not in the first place].

Posted in IB, Investment Banking, Other, Social Media | Tagged , , , , | 4 Comments