Section 15 Flashcards
Name the phases of an evolution of a deal
indication of interest; letter of intent executed; negotiation; closing; post-closing
Elaborate on efficiency theory:
synergies
what do financial synergies result in?
lower costs of capital
what do operational synergies result in?
stem from combining operations of hitherto separate units (joint sales force) from knowledge transfers
explain managerial synergies
realized when bidders managers posses superior planning and monitoring abilities that benefit the targets’ performance
define monopoly theory in relation to mergers
believes mergers are planed to achieve market power, gaining market share, wealth transfer from customers to shareholders (beatrice)
explain disturbance theory
changing macroeconomic circumstances and economic conditions (internet, digitalization, e-business (time warner AOL, google, motorola); financial crisis (constellation-midamerican)
describe valuation theory
argues that mergers are planned and executed by mangers who have better information about targets value than stock market (underpriced target, like constellation and midamerican)
what is the first rule of successful acquisitions?
based on business, not financial or strategy
what is the second rule about acquisitions?
acquirer must consider what it can contribute to acquisition, not reverse
what is third rule of mergers?
acquisition requires common core of unity between acquiring and acquired company
what is fourth rule of mergers?
acquirer must respect the business, products, and customers of the acquired company, as well as its values
Beatrice company founded when?
1891 as small creamery
beatrice growth was led by what?
acquisition
beatrice after growth turned into?
diversified consumer and industrial products firm
beatrice participated in more than..?
400 acquisitions, 90 divestures (Esmark, take over of E-JI Holdings)
what is the first distinct period of beatrice?
1890-1939: moving from local creamery into national company
what is second distinct period of beatrice?
1940-1976: diversification into foods and beyond
what is third period of beatrice?
1977-1986: large scale acquisitions and change in strategy
what is fourth period of beatrice?
1986-1990: lbo and divestures
period 1 for beatrice how did they do?
they grew and prospered during this period of dairy acquisitions
what was the source of value in dairy acquisitions for beatrice in 1st period?
economy of scale in marketing and production
in period 2, what kind of acquisition did beatrice make?
first non-dairy acquisition of La Choy Food (Chinese speciality). 1943
in 1955 what acquisition did beatrice make?
DL Clark (national candy bar manufacturer)
in 1964 what kind of acquisition did beatrice make?
bloomfield industries (food service equipment for restaurants). unrelated diversification
what were factors of success for beatrice in period 1 and 2?
decentralized organizational structure; centralized control of funds; ability to bring capital and professional management techniques to small private firms; almost all acquisitions were family held private firms
what were some obstacles during 1st and 2nd period for beatrice?
commercial banks hesittant to lend to small unsophisticated mangement team; imperfect external capital markets; benefit of an internal capital market
characterize period 3 for Beatrice
management and strategic changes by new CEO; five executive presidents to supervise sections of operations to concentrate on corporate goals; headcount in HQ goes from 160 to 750
what were some corporate perks for beatrice in 3rd period?
hq moved to Chicago and occupied luxurious four and a half floor office
describe free cash flow for beatrice in 3rd period
problem: analysts and invstors calling for stock buy back; new CEO disagreed saying he thought he had better use of money
what was the new acquisition strategy for beatrice in period 3?
bought publically traded Tropicana products for $490M in cash and preffered stock. over six times the size of their largest acquisition. then in 85 $2.7Bn takeover of Esmark
describe destruction of value from their acquisitions
street skeptical of Dutt’s leadership; almost $2Bn in market value destroyed; every acquisiton that’s larger than $30M was met with reduction in value; every divesture or withdrawal is increase in market value
Describe Period 4
Dutt resigned August 86; LBO KKR rumors; KKR offered $45 per share; KKR finally bought at $50 a share then largest LBO ever; premium of 53% in price
KKR recaptured…?
all value lost during Rasmussen-Dutt period ($1bn); brought in 4 esmark execs to manage beatrice; spun off bulk of business in nine major sales in 2 year period; $3.5Bn in proceeds in 86; paid down all bank debt in first year
Describe results of LBO of beatrice
changed strategy and restored confience in governance of firm; restored decentralized organizational structure; reduction in HQ staff of 70% down to 12 people and streamlined operations
what did beatrice initially do that was so profitable?
bought small private companies with limited access to capital markets/bank financing - added value by providing internal capital and training
by the mid 1970’s…?
availability of high yield bonds securitized commercial lends for small firms; influence of professionally trained managers into ranks of american management
what is a cost of integration?
disadvantage of corporate ownership. weakened incentives due to lack of equity stake for the unit managers
