Romance Between Corporations: Generating Shareholder Value Through M&A?

Education| 02 December 2011

Generating shareholder value through M&A?

When two become one, doesn’t that sound poetic? However, reality has that tendency to sometimes throw a spanner into romantic relationships. Romance, as it already seems, is not limited to sentient beings. In this day and age, corporations have thrown themselves into courtships where flirting takes place in an otherwise deadly game of mergers and acquisitions (M&A).

Deadly? Hardly an adjective to use in an otherwise lucrative M&A industry, isn’t it? But if you look closer, when Google acquired Motorola Mobility, didn’t the entity which is the latter, cease to exist? And yet, out of the ashes, a stronger and more viable Google emerged, a Google, that analysts say, can now take on smart phone giants such as Apple and Samsung. You would think that Motorola Mobility took on the role of the self-sacrificing phoenix. But this is hardly the case, as it turns out, shareholders of Motorola made a cool 63% premium over its closing price on announcement date. So, the question on many minds is, when does one cash out?

We do not pretend to uncover the answers for you, the reader. But perhaps, we can shed some light by sharing two important case studies of typically large corporation M&As. It is thus important that the reader keeps in mind these questions whilst going through our case studies: Does the M&A generate value for the typical stakeholder? If the answer to that question is yes, is it really that clear cut an answer to accept the M&A? Or are there other factors that are worth exploring before accepting the conditions spelt out in the M&A proposal?

When Mickey Mouse Meets Toy Story : A Disney-Pixar Case Study

On 24 Jan 2006, Walt Disney announced that it would acquire its long-time partner, Pixar animation studio for US$7.4 billion in stock – a deal that would bring together Disney’s historic cell animated characters like “Donald Duck”, “Minnie Mouse” and Pixar’s stable of digitally created cartoon hits like “Toy Story” and “Finding Nemo”.

As part of the deal, Disney issued 2.3 Disney shares for every Pixar share held, with Steve Jobs becoming the largest shareholder (7%-ownership at that time) and having a seat on Disney’s board. Upon the announcement, shares of Disney fell 2.1% to US$25.10. Pixar, on the other hand, gained 2.5% to $59, further extending to over 10% jump on takeover speculation.

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Source: FactSet: Walt Disney 2006-2011 Monthly Share Price Chart (Top), 2006 Daily Stock Price Chart (Bottom)

Pixar was a pricey acquisition for Disney – so say the critics. In fact, the deal had prompted Disney to announce a reduction in its earning in 2006 as well as fiscal year 2007, further raising concerns of shareholders from both companies on Disney’s financial health going forward.

From the Hollywood point of view, this deal certainly marks a win-win for both parties. Disney, like so many industries, has been impacted by the digital revolution that has been going on in the entertainment industry. Coupled with its idle share price prior to the M&A, the move definitely enables Disney to gain access to Pixar’s paramount creative and technological resources, and further enhance its competitive advantage.

In truth, Disney’s offer price is 4% premium over Pixar’s closing price of $57.57 on 24 January 2006. In addition, as the two companies will remain separate upon M&A, this further ensures the sustainability of Pixar’s unique culture in the merged firm.

To date, Disney’s share price has jumped 38% to US$35.85, translating into a market capitalisation of US$64 billion as of 30 November and an average annual capital gain of 7.6%, as well as an average annual dividend yield of 1.1% since 2006. Also, given a recent US$16 billion share buyback as well as a 12% rise in 4Q11 revenue at Disney Parks despite the European debt crisis, it is believed that the merged Disney-Pixar will continue to entertain movie-goers all across the world, and not to mention, its shareholders in the years to come.

Back home, SingTel’s acquisition of Australian Telco, Optus, was also seen as being too generous. However, that deal is currently bearing fruit as Optus’ 2Q12 translated Singapore dollar revenue grew 5.6% year-on-year amidst a highly competitive Australian telecommunications market.

More Than Meets The Eye: A SGX-ASX Case Study

The “Premier International Exchange in the Asia Pacific” which would be the “heart of global growth”. Well, at least that was what the M&A proposal said it would create.

It was at about 9am local time on the 25 October 2010, when the SGX dropped the bombshell. The SGX had offered to take over its Australian counterpart in a whopping $10.7 billion (A$8.4 billion) or approximately $61.17 (A$48) for each ASX share. The scheme would offer a cash component of $28.04 (A$22.00) for each ASX share as well as 3.473 new SGX shares. In view of the issuance of new SGX shares to ASX shareholders, the scheme was widely touted as a merger rather than an acquisition proposal.

Numbers wise, the scheme represented a 37.3% premium over the share price of ASX at the start of the announcement date (ASX shares closed at A$34.96 on Friday, 22 October 2010). The proposal was deemed to be accretive to SGX’s earnings per share by approximately 20%. In addition, it had expected that its shareholders, both current and new, would enjoy higher absolute dividends per SGX share with a minimum dividend payout ratio of 70% of net profits.

While ASX investors warmed to the offer immediately, politically, the deal appeared doomed from the start. Australian treasurer, Wayne Swan, who holds veto powers over deals involving foreign owners, ultimately pulled the plug on 5 April 2011.

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Source: FactsSet: SGX Stock Price Chart (Top), ASX Stock Price Chart (Bottom)

In the immediate aftermath of the rejection, SGX shares rebounded to $8.32, regaining some ground from mid March 2011 lows of $7.27. On the other hand, ASX shares traded down to A$33.75, shedding some 19.2% from its dizzying heights of A$41.75 since the merger proposal was announced. ASX shares have refused to regain those highs partly due to fierce economic headwinds currently experienced by the global economy.

In its latest financial results report, the SGX reported a lower-than-expected net profit for its financial year ended on 30 June 2011, after booking $12 million in costs related to the failed takeover bid. Now, analysts say, the talk in the market is that SGX itself is a takeover target. SGX CEO, Magnus Bocker says he’ll pocket the lessons learned and continue to seek out strategic opportunities.

Mergers & Acquisitions: Guaranteed Potential?

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Table 1: 5 Major M&A in 2011, source: FactSet

In short, not all M&As live up to their guaranteed potential. And it is never possible for shareholders to predict with confidence that an M&A will be successful. But bear in mind that as a shareholder of an involved company, one’s decision on whether to accept the offer should reflect a combination of the best interest for yourself, the target company as well as the benefit in combining business operations.

Hopefully by reading this article, you would have gained a fair bit of knowledge in understanding the intricacies of M&A proposals. By understanding what is happening to your stock during a takeover or attempted takeover, investments would definitely be a little bit easier.