Exam 1: Introduction to Mergers, acquisitions, and Other Restructuring Activities

Mattel Overpays for The Learning Company Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company (TLC), a leading developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion on May 13, 1999. Mattel had determined that TLC's receivables were overstated because product returns from distributors were not deducted from receivables and its allowance for bad debt was inadequate. A $50 million licensing deal also had been prematurely put on the balance sheet. Finally, TLC's brands were becoming outdated. TLC had substantially exaggerated the amount of money put into research and development for new software products. Nevertheless, driven by the appeal of rapidly becoming a big player in the children's software market, Mattel closed on the transaction aware that TLC's cash flows were overstated. For all of 1999, TLC represented a pretax loss of $206 million. After restructuring charges, Mattel's consolidated 1999 net loss was $82.4 million on sales of $5.5 billion. TLC's top executives left Mattel and sold their Mattel shares in August, just before the third quarter's financial performance was released. Mattel's stock fell by more than 35% during 1999 to end the year at about $14 per share. On February 3, 2000, Mattel announced that its chief executive officer (CEO), Jill Barrad, was leaving the company. On September 30, 2000, Mattel virtually gave away The Learning Company to rid itself of what had become a seemingly intractable problem. This ended what had become a disastrous foray into software publishing that had cost the firm literally hundreds of millions of dollars. Mattel, which had paid $3.5 billion for the firm in 1999, sold the unit to an affiliate of Gores Technology Group for rights to a share of future profits. Essentially, the deal consisted of no cash upfront and only a share of potential future revenues. In lieu of cash, Gores agreed to give Mattel 50 percent of any profits and part of any future sale of TLC. In a matter of weeks, Gores was able to do what Mattel could not do in a year. Gores restructured TLC's seven units into three, set strong controls on spending, sifted through 467 software titles to focus on the key brands, and repaired relationships with distributors. Gores also has sold the entertainment division. : -Why could Gores Technology do in a matter of weeks what the behemoth toy company,Mattel,could not do?

Takeover attempts are likely to increase when the market value of a firm's assets is more than their replacement value.

Assessing Procter & Gamble's Acquisition of Gillette The potential seemed almost limitless, as Procter & Gamble Company (P&G) announced that it had completed its purchase of Gillette Company (Gillette) in late 2005. P&G's chairman and CEO, A.G. Lafley, predicted that the acquisition of Gillette would add one percentage point to the firm's annual revenue growth rate, while Gillette's chairman and CEO, Jim Kilts, opined that the successful integration of the two best companies in consumer products would be studied in business schools for years to come. Five years after closing, things have not turned out as expected. While cost savings targets were achieved, operating margins faltered due to lagging sales. Gillette's businesses, such as its pricey razors, have been buffeted by the 2008-2009 recession and have been a drag on P&G's top line rather than a boost. Moreover, most of Gillette's top managers have left. P&G's stock price at the end of 2010 stood about 12 percent above its level on the acquisition announcement date, less than one-fourth the appreciation of the share prices of such competitors as Unilever and Colgate-Palmolive Company during the same period. On January 28, 2005, P&G enthusiastically announced that it had reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. This represented an 18 percent premium over Gillette's preannouncement share price. P&G also announced a stock buyback of $18 billion to $22 billion, funded largely by issuing new debt. The combined companies would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new firm's product portfolio would consist of personal care, healthcare, and beauty products, with the remainder consisting of razors and blades, and batteries. The deal was expected to dilute P&G's 2006 earnings by about 15 cents per share. To gain regulatory approval, the two firms would have to divest overlapping operations, such as deodorants and oral care. P&G had long been viewed as a premier marketing and product innovator. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting women's personal care products could be used to enhance and promote Gillette's women's razors. Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the lucrative toothbrush and men's deodorant markets, respectively, it has been much less successful in improving the profitability of its Duracell battery brand. Despite its number 1 market share position, it had been beset by intense price competition from Energizer and Rayovac Corp., which generally sell for less than Duracell batteries. Suppliers such as P&G and Gillette had been under considerable pressure from the continuing consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that time, such as Sears and Kmart. About 17 percent of P&G's $51 billion in 2005 revenues and 13 percent of Gillette's $9 billion annual revenue came from sales to Wal-Mart. Moreover, the sales of both Gillette and P&G to Wal-Mart had grown much faster than sales to other retailers. The new company, P&G believed, would have more negotiating leverage with retailers for shelf space and in determining selling prices, as well as with its own suppliers, such as advertisers and media companies. The broad geographic presence of P&G was expected to facilitate the marketing of such products as razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was expected to reach $16 billion, including layoffs of about 4 percent of the new company's workforce of 140,000. Such cost reductions were to be realized by integrating Gillette's deodorant products into P&G's structure as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain intact. P&G's corporate culture was often described as conservative, with a "promote-from-within" philosophy. While Gillette's CEO was to become vice chairman of the new company, the role of other senior Gillette managers was less clear in view of the perception that P&G is laden with highly talented top management. To obtain regulatory approval, Gillette agreed to divest its Rembrandt toothpaste and its Right Guard deodorant businesses, while P&G agreed to divest its Crest toothbrush business. The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition remains elusive, even after five years. Though the acquisition represented a substantial expansion of P&G's product offering and geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition) becomes clouded by the introduction of other major and often uncontrollable events (e.g., the 2008-2009 recession) and their lingering effects. While revenue and margin improvement have been below expectations, Gillette has bolstered P&G's competitive position in the fast-growing Brazilian and Indian markets, thereby boosting the firm's longer-term growth potential, and has strengthened its operations in Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult with each passing year to identify the portion of revenue growth and margin improvement attributable to the Gillette acquisition and that due to other factors. : -Explain some of the obstacles that P&G and Gillette are likely to face in integrating the two businesses.Be specific.How would you overcome these obstacles?

A leveraged buyout is the purchase of a company financed primarily by debt.This is a term more frequently applied to a firm going private financed primarily by debt.

Which of the following are generally considered restructuring activities?

An acquisition is the purchase of an entire company or a controlling interest in a company.

Deregulated industries often experience an upsurge in M&A activity shortly after regulations are removed.

Because of hubris,managers of acquiring firms often believe their valuation of a target firm is superior to the market's valuation.Consequently,they often end up overpaying for the firm.True and False