Five biggest mergers in corporate history: overview and lessons to be learned

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When you hear about another big corporate merger what do you think? Well, truth be told, probably not much. It may pique your interest if the merger is directly related to the sector/industry that you work in, and even then, it’s hard to see what the long-term effects of the deal might be. Companies’ directors tend to throw big numbers at journalists, but at the end of the day the initial merger may only be the start of a long-term strategy.

Mergers that are done “just for the sake of merging” — and create a bubble — are doomed from the start, even though they may bring in hefty profits for shareholders short-term. Today we break down top-5 mergers in the corporate history. Each merger had quite a different objective from the other, and while some of the results are yet to play out, we can already begin to see the end-product of these deals.

If you can’t be bothered to read all the details a “simplified takeaway” (lesson learned) is given at the end of each case study. 


“The chemistry was just right”: Dow Chemical and DuPont

Dow Chemical. Prior to the merger, manufacturer of plastics, chemicals and agricultural products. 3rd largest chemical producer in the world (market capitalisation).

DuPont (El du Pont de Nemours). Prior to the merger, 4th largest chemical company in the world (market capitalisation).

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Following the announcement in 2015 this merger took two years to complete and was worth an astounding $130 billion! The combined entity became known as “DowDuPont Inc.” (DWDP). As of early 2019 it is the largest chemical producer in the world.

However, the goal of the merger was not actually the merger itself, but… the subsequent breakup! Edward D. Breen was made the new CEO of DowDuPont, and that was the first sign that the split was imminent. After all, in the words of Wall Street Journal, he was the “breakup expert”.

Projected outcome of the merger at the time:

· Cost savings of $3 billion

· $1 billion in growth synergy

· DWDP was to be split into three publicly traded companies, focusing on three sectors: Corteva Agriscience — agriculture, Dow — materials science and DuPont — speciality products

Ultimate goal

· Increase shareholder value through the subsequent breakup

Result:

· By the end of 2018 DowDuPont reaches the $86 billion mark in sales

· DowDuPont worth $113 billion as of April 2019

· Dow becomes a separate company as of April 2019

· Corteva Agriscience becomes a separate company as of 1st of June 2019

· Shareholders of DowDuPont receive shares in the above companies, increasing the overall value for the shareholders

Side note: Of all of the above the agricultural counterpart (Corteva) proved to be the most valuable (like many other agricultural entities the M&A market), and so will be traded at premium valuation multiple. There are potential setbacks, particularly because of the changing weather conditions (prior to separation DowDuPont’s sales dropped to by 9% in mid-April, due to floods in the U.S., and thus longer products delivery times). However, the industry is bound to continue its growth thanks to the ongoing investment in tech, and the fact that…well, we all have got to eat and there are more of us each year!

— — — — — — 

Simplified takeaway

John has shares in A

Samantha has shares in B

A and B become AB

John and Samantha become shareholders in AB

AB splits into A, B and C

John and Samantha have shares in A, B and C

Their shares value is > than the original value of their shares in just A or B


“The biggest merger of the 20th century”: Exxon and Mobil

Exxon — Prior to the merger, largest oil producer in the U.S.

Mobil — Prior to the merger, second-largest oil producer in the U.S.

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This merger took place on November 30th, 1999. As the 20th century was coming to an end, the $81 billion merger of two oil giants would become the pinnacle of all mergers. With oil prices crisis in 1998, it was time to rethink strategies and instead of competing forming alliances, to solve the growing problem.

Projected outcome of the merger at the time:

· $3.8 billion in revenue gains and savings per year

· Achieve the above by reducing costs + since the two were no longer competing, oil prices could be expected to begin to rise again

· Achieve significant results in R&D (research and development)

Ultimate goal

· Fix the situation with falling oil prices & invest more in research

Result:

· The newly formed company had a capitalisation of $237.53 billion (only behind Microsoft and General Electric at the time)

· Revenue-wise ExxonMobil made a huge leap to $459 billion in 2008, dropping all the way to $279 billion in 2018. However, cash dividends per common share has risen steadily from 0.91 in 2010 to 3.23 U.S. Dollars in 2018

· Investments in renewable energy have already begun to bring in results, and ExxonMobil is betting large on research in this area

· As of the end of 2018, ExxonMobil’s valuation was $289 billion

Side note: Interestingly enough, on the day the merger was confirmed Exxon’s shares fell by 5%. Analysts thought that considering low oil prices (that dropped to $10.43/barrel for crude oil, following the announcement) the deal was overpaid for. In addition to this, Mobil already had a joint venture with BP (British Petroleum), meaning that it attracted unwanted attention from competition law watchdogs. ExxonMobil, however, managed to steer clear of these dangerous waters.

— — — — — —

Simplified takeaway

Low oil prices, declining revenue for A

Low oil prices, declining revenue for B

A and B merge à oil prices fall further à cost cuts, people with duplicate roles fired, operational efficiency à oil prices rise (partially due to far less competition post-merger)

Growth rather slow, but investment in long-term research = faster growth in the future


“Let the beer flow”: AB InBev and SABMiller

AB InBev — Prior to the merger, the second-largest brewer in the world (by revenue).

SABMiller — Prior to the merger, largest brewer in the world, $45.5 billion in revenue (2015).

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This merger took place on October 10th, 2016. Despite being called a “merger” it was more of an acquisition on AB Inbev’s part, as it pretty much bought SABMiller. It was the biggest merger in British history…however, it came at the time of uncertainty, with Brexit news hitting the pound hard. As the result of this AB InBev had to come back to SABMiller multiple times with an upped offer, to satisfy their shareholders. At the end, the final price of the merger was $104 billion.

Projected outcome of the merger at the time:

· Beer volumes in Africa are expected to grow by 44% in the 10-year period between 2014 and 2025

· New company’s global workforce to be cut by 3%

· Savings synergy to be achieved — $3.2 billion

Ultimate goal

· Take full advantage of growing opportunities in emerging markets (in developing countries, in particular those in Africa)

Result:

· Sales of Budweiser, Corona and Stella Artois increased outside of the U.S.

· AB InBev now represents over 500 brands worldwide

· Exposure of brands in diverse markets, means that there is far less dependency on any particular sector of the market — meaning higher chance of stable growth in the near future

· $1.3 billion of cost savings in 2018

· Despite rising profit margins, the company still has to face huge debts (which in part resulted from their continuous acquisitions in the 2000’s). Because of this, AB InBev’s stock prices fell below 2013 levels, and price-to-earnings multiple is lower than its closest competitor’s — Heineken

Side note: Just as in the case with Exxon and Mobil, the merger raised a few questions with regards to anti-trust rules and practices. To appease the courts worldwide, AB InBev and SABMiller agreed to spin off a number of its popular beer brands (making up for it, however, with bigger presence in Africa and South America), and divested its interests in U.S. and Europe — which in turn helped recover over $27 billion, which AB InBev spent on the deal.

— — — — — —

Simplified takeaway

A — the biggest brewer on the market

B — second biggest brewer on the market, but with important foothold in emerging markets

“A” faces a problem — its big debt bubble — acquires “B”.

Results (still playing out): bigger presence in the emerging markets, less competition (biggest competitor swallowed), diminished presence in the U.S., growing revenue.

BUT, continuous decline in share prices for the shareholders.


“The spilled ketchup”: H.J. Heinz Co. and The Kraft Foods Group

H.J. Heinz Co. — Prior to the merger, $657 million operational profit in 2014. 37th on the list of Food and Beverages companies (as of 2014).

The Kraft Foods Group — Prior to the merger, operating loss of $614 million, with sales falling to $2.7 billion in 2014. 19th on the list of Food and Beverages companies (as of 2014).

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This merger took place on July 2nd, 2015 and was worth $100 billion at the time. With both companies seeing their sales plummet under market conditions where less and less people were interested in buying frozen and processed food, something had to give. The merger shook the Food and Beverages market, but as of 2019, the results have been more than disappointing.

Projected outcome of the merger at the time:

· Current shareholders of Heinz to hold 51% (majority) of shares in the new company

· $10 billion will go to Kraft shareholders as part of the deal

· With Kraft deriving 98% of its sales from North America, and Heinz 25% from emerging markets, the new company will look to expand its influence across the globe

· Annual revenue predicted to be $28 billion

· $1.5 billion in cost savings by 2017

· Better bargains with supermarket stores and chains, due to larger volumes of sales (which have now been combined)

Ultimate goal

· Diversify product and brand portfolio to meet the customers’ needs

· Finance company’s debt, as Kraft’s credit rating was so much higher than Heinz’s

· Cost cuts — reducing debt

· Potentially continue aggressive acquisitions, to capitalise on the companies’ market dominance

Result:

· Kraft Heinz Company became the fifth largest food and beverage company in the world, and third largest company in the U.S.

· Cost synergies initial targets were not achieved due to underestimated manufacturing and logistical costs, and simply could not keep up with falling margins

· Loss of $10.22 billion in 2018 primarily due to lack of innovation and new healthy alternatives (which are becoming ever so popular nowadays) and non-processed foods

· Shares fell to $27 in May 2019 (record low) following a huge $15.4 billion write-down of assets

· With the above “bubble burst”, the question is whether the company can deliver the promised “sustainable growth” from 2020 — and even if it can, would that be enough?

Side note: This and the Anheuser-Busch InBev deals were both sponsored by 3G Capital — a Brazilian-American investment firm. One of the firm’s primary strategies is zero-based budgeting — where all costs must be justified prior to new budget period. Sounds good in theory, doesn’t it? Well, as it turns out, basic accounting sometimes just isn’t good enough.

Side note II: In 2017, the new conglomerate approached, Unilever, and offered to buy it up for an astonishing $143 billion, despite its shortcomings after its previous deal. The new proposal was refused and retracted that year.

— — — — — —

Simplified takeaway

A suffering from losses in the market

B suffering from losses in the market

C comes in and sponsors A to buy B

AB covers a big portion of the market; less competition, potential cost synergies, higher sales (meaning better negotiating position with distributors and retailers), cost cuts

AB does not expand its “product range”, fails to recognize growing trend for non-processed foods, underestimates costs (cost cuts = not enough); share prices plummet, big question about the future growth of the company, unless another big acquisition “saves the day” (which may have been planned from the start considering the Unilever approach)


“The biggest deal failure in history”: America Online (AOL) and Time Warner

Time Warner — Prior to the merger, world’s top media conglomerate. Market value of $83 billion.

AOL — Prior to the merger, world’s top internet service provider. Market value of $163 billion.

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This merger took place on January 10th, 2000 and was worth at the time, $182 billion (including Time Warner’s debt). This king or queen of deals consolidated huge resources in the hands of one company. These hands spread over TV, music, publishing, internet industries and more. Years before the merger, Time Warner began to seek out opportunities and tried to establish its own online presence, to no avail. The Dotcom bubble hasn’t burst yet, and online companies were popping up all over the place, quickly raising investments and growing their capitalisation like there was no tomorrow. AOL, in its turn, wanted access to Time Warner’s cable network and customers.

Projected outcome of the merger at the time:

· Combine forces to reach more customers and utilise each other’s networks

· Some raising questions about different work cultures in two companies

· Cross promotion of companies’ services to their audiences

· $40 in annual revenue generated in the first post-deal year

· $1 billion in EBITDA synergies

Ultimate goal

· Dominate the market and take full advantage of favourable market conditions, where capitalisation was the main barometer of success for many business owners and investors

Result:

· Every Time Warner shareholder received 1.5 shares in the new company for every one share they owned in Time Warner

· Every AOL shareholder received 1 share in the new company for every one share they owned in AOL, but owning 55% of the new company

· In 2002 the dotcom bubble burst — AOL stock plummeted from $226 billion to just $20 billion

· Steve Case (co-founder of AOL) was later quoted, saying that there was a “cultural problem”, with too many people in both companies not willing to move forward via the digital path

· 2009 — Time Warner spins off AOL, finalizing “the divorce”

· Quite possibly the worst deal in corporate history

Side note: One of AOL’s main mistake was also underestimating the next leap in internet technology. Dial-up internet was no longer that “hot” (and that was AOl’s main bet). Broadband was quickly spreading and would soon replace the former completely.

— — — — — —

Simplified takeaway

A — a leading media company

B — a leading service provider

AB — merger of technologies and channels to utilise each other’s capabilities, and progress further down the “digital road”

A and B cultures collide, lack of teams’ belief and effort to invest in new technology. Underestimation of competitive technology. The dotcom hits the companies hard, which means the above errors cost 10x.

A and B dissolve into many smaller companies, that are reacquired and refinanced in the 2000’s and 2010’s.



There are many reasons why mergers may take place. The companies may look to increase their market share, prepare for growing market challenges or increase shares’ value for their shareholders (Dow Chemical and Du Pont). When these multi-billion deals work out, everyone is quick to assume that any deal of such magnitude must bring value to shareholders, companies, etc. However, history shows that that is not the case.

A merger that is not well thought out can have catastrophic outcomes (AOL and Time Warner). No one knows exactly when the next financial crisis will happen, and when the bubble will burst. For this reason, it is extremely risky to hide behind the “big bucks”. At the end of the day, if no one is buying your products, acquisitions or mergers may only delay your destruction. It may take years, or just weeks, but the collapse will come.

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As a common shareholder, while it is often impossible to foresee all scenarios, you can sometimes see the common signs of what’s going to happen. If you foresee that the merger will only worsen the situation long-term, take advantage of the short spike in share value following the deal… and SELL. You may be ridiculed at that point in time, but who cares? You will have the last laugh.

Should the analysts be sceptical about the merger, but you see something that they don’t in terms of companies’ synergies — BUY the shares, before they skyrocket in a few years’ time!

As for the company itself, employees should always watch out for news about the mergers, as these most of the time lead to job cuts (too many jobs are duplicated). Also, while the synergy may be perfect, the two can also be completely incompatible, which will create problems down the supply/production line.

At the end of the day, for the companies to come out as the ultimate winners there needs to be increase in value after the merger; be it lower production costs, new collaborations that lead to technological advances, or market domination. As we have learned, simple accounting — effective as it may be at a basic level — is not enough.

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