The aborted merger between consumer giants : KRAFT AND UNILEVER

Lately, the M&A market has been experiencing a lot of hustle, and the recent failure of a mega-deal between two consumer giants Kraft and Unilever, stunned the food industry as well as the financial world.

Warren Buffett, the best known American investor and owner of Berkshire Hathaway, proposed a mega-deal in the global food industry. Kraft Heinz, a company run by 3G Capital Partners and Buffet, made a $143 billion bid for the global giant Unilever which is an Anglo-Dutch multinational consumer goods company with headquarters in Rotterdam, Netherlands, and London, United Kingdom.

Post this announcement, a strong prediction about the success of this bid was made by most analysts. It was also assumed that this bid would eventually increase the share prices of both the companies, hence creating a global consumer goods behemoth (The Guardian, 2017)

Shockingly, within 48 hours of this audacious bid, the bid was withdrawn by Kraft. This sudden withdrawal brought a lot of speculation about the two companies. It is assumed that the deal’s economics were apt, but analysts missed on the politics around this merger.  

This tie-up has been one of the biggest news in the market since last week because of the sudden withdrawal of the proposed merger by Buffet.

What was the intention behind Kraft’s bid for Unilever?

Kraft being a packaged food business has been doing poorly on the Dow Jones, DJIA in the previous year, suffering from stagnant sales. Some of the reasons for this underperformance of the packaged food industry are:

  • Slowdown of sales and profits.
  • Change in consumer taste from packaged to fresh foods.
  • Challenges posed by new entrants in the food industry.
  • Dividend-hungry investors came up with pricey stocks.

As stated by Mark Astrachan, an analyst with Stifel, “Food doesn’t grow as a fast as [home and personal care].” It was predicted that this tie-up would bring together the fifth and third-largest consumer food firms (The Economic Times, 2017).

Hence, I feel, in order to revive the company and its profits, Kraft needs a deal that would help in cutting costs.  A merger with Unilever, which is both a food and personal care company, Kraft Heinz, could have benefitted from this mega-deal, creating mega FMCG player in the market.

What are the potential reasons behind failure of this mega-deal?

According to Thomson Reuters, the success of this deal could have made history, being the third-biggest takeover till date with $82 billion sales in the combined entity. But, analysts say that there are several reasons for the public withdrawal of this offer, which have created a buzz in the M&A market. Some of these assumptions have been around the regulatory requirements and takeover rules in U.K. Some other key concerns responsible for this withdrawal have been the differences in the cultures and business models of the two companies.  

One of the major controversies around this news has brought in light the statements by the British Prime Minister Theresa May. May has previously criticised  Kraft’s acquisition of Cadbury Plc, another British household name. She has recently voiced her opinions about the government playing a prominent role in proposed foreign acquisitions of UK companies.

In my opinion, the success of this deal could have increased the job loss in UK, which encouraged the UK government to attempt to block this deal. Also, this deal would have been against Trump’s policy of investing money in the States, making the success of this deal a possible reason for sour relations between the two nations (, 2017).

I feel, the most important outcome of this dubious deal between these two consumer giants has been the plunging share prices of Unilever after this sudden withdrawal. Unilever saw the worst day in more than a decade after Kraft Heinz’s walkout from the takeover bid.

Kraft Heinz, backed by Berkshire Hathaway, run by Warren Buffett has a good financial capacity for a large acquisition and can easily make successful deals with large brand conglomerates. Unilever, on the other hand, is facing pressure to speed up shareholders’ returns, following this bid from Kraft Heinz, which has put Unilever group’s structure and profitability under public scrutiny. Therefore, Unilever group has decided to conduct a root-and-branch review of its business just few days after an aborted deal from Kraft Heinz.

The failure of such a strong proposition was surely unprecedented becoming the third largest deal in the M&A market, that has collapsed (, 2017).



Snapchat IPO – Wall Street ready for Tech’s biggest IPO

Snapchat is all set to begin its roadshow to pitch the stock to potential investors, becoming the largest U.S.-listed tech offering since Alibaba Group Holding Ltd.’s (BABA) IPO in 2014.

The parent company Snapchat has announced its intention of raising $3 billion in its IPO. Listed as a camera company in the New York Stock Exchange, SNAP will be a Class A common stock with a valuation between $19.5 billion and $22.2 billion. A remarkable increase in the revenues of the company, from $58.7 million in 2015  to $404.5 million in  2016, changed the financial landscape of the company. The difference between 2015’s fourth quarter revenue of $32.7 million and 2016’s fourth-quarter revenue of $165.7 million is commendable, with a sheer majority of its revenue from North America, followed by $14.7 million from Europe and $5.7 million from the rest of the world. The major source of this upsurge in revenues has been advertising. The number of the application’s daily active users rose from 110 million in December 2015 to 161 million in December 2016 (Ciaccia, 2017).

The recent launch of wearable glasses, Spectacles as an extension of the company has also been an important reason for its revenue growth. This new addition of this hardware product is likely to bring additional competition for the company.

However, Snapchat is not all about increasing revenues, its losses have also been on an increasing trend. During the year 2016,the company incurred a loss of $515 million which is much more than the loss of $372.9 million in the previous year. One of the major causes of this increasing loss is the increase in operating losses. Negative cash flows from operations and operating losses are expected to be a part of an ever-changing and dynamic company. Hence, unforeseen expenses, operating delays and other unknown factors are expected to bring these losses even in future periods,making profitability a big challenge (Investopedia, 2017).

Its IPO filing is also expected to bring additional legal and accounting expenses. Therefore, increase in revenues, especially at a greater rate than the increase in expenses is very crucial for the company at present. Snapchat has been one of the most innovative companies, hence being the strongest contender for the title, Company of the Year by Inc. Magazine. in 2016.

CEO Evan Spiegel has proved that he believes in making things new and has showed a penchant for innovation. Partnerships with dozens of publishers on the Discover platform has been key to expanding its audience. This year, the company capitalized on its Discover feature, that kicked off in 2015. In addition, deals and tie-ups with major publishers, including NBC and The Wall Street Journal, as well as sports leagues like the NFL, where these publishers own and publish content on their own snapchat channels, proved to be one of the most successful features and an essential source of increasing revenues for the company. 

One of the chief concerns for Snap is engagement with maximum users between age groups of 18-34 years. The launch of Instagram Stories feature has been attracting some engagement away from Snapchat. Hence, Snap’s S-1 specifically called out Instagram as competition for the company. It faces competition from various other applications, but in the year 2016, it surpassed rivals as big as Twitter and Pinterest, hence, turning out to be the fastest-growing social media company in the U.S.

In my opinion, in a very short five year history of Snapchat, it has made good decisions that have worked in the best interest of the company. One of them being, turning down a $4 billion acquisition offer from Facebook in 2014. In 2017, with its IPO expected to be in the $19.5 – $22.2 Billion range, the company is already worth five times Facebook’s offering price turning out to be the one of the biggest U.S.-listed tech IPOs in history.

Proposed merger = Vodafone + Idea

January 30, 2017 brought the big news for the Indian Telecom industry when British Telecom giant Vodafone Plc confirmed a merger between Vodafone  India and Idea Cellular.

This merger between Vodafone and Idea is expected to have a huge impact on the Indian telecom Industry with Vodafone + Idea capturing 43 percent of the market share beating the market leader, Bharti Airtel which currently holds 33% of market share. The upsurge of 29 percent in intra-day trade in the share capital of Idea Cellular is a  fair representation of this  all-stock merger.

I think it is a great development for our economy because it will improve the financial health of the telecom industry and India’s position in the mass-market. This consolidation will be a solution for many persistent problems in the telecommunication sector. Some of the highlights are:

  • Vodafone and Idea together will be able to have the highest spectrum in this industry, enabling the provision of highest 4G spectrum in the 1800MHz band. This will be a great boom for the data market of India.
  • This will also make Vodafone-Idea, Airtel and Reliance Jio the biggest telecom players in the Indian telecom industry with sufficient market share for each of these players, thus promoting significant investments in the sector.
  • With Idea listed on the Indian stock market, this deal would automatically give Vodafone a listing on the Indian stock exchanges.

Therefore, Vodafone and Idea together will be able to offer cheap high-value products. Hence, this merged entity will have the best-in-class coverage and capacity spectrum. The consolidation will leave enough market share for each player to make significant investments in the Indian entity. As mentioned in a report by JM Financial, the success of this deal will create a three player mobile market which may be more sustainable and profitable in the long-term (Chatterjee, 2017).

Indian telecom market is one of the toughest and most competitive markets in the world. Also, with demonetisation and the attempt to make India a digital economy means a lot for the telecom players. The ‘cashless’ economy will promote mobile governance and hence, make way for a digital payments ecosystem. Hence, companies capturing the market at this time will have a distinct competitive edge.

On the contrary, I think the entry of Reliance Jio has caused pressure on the telecom market leaders such as Airtel, Vodafone and Idea. Reliance Jio’s free distribution of SIM cards has actually been a catalyst for this consolidation, giving this deal the required push. With Reliance Jio and its investment of Rs 150,000 crore in wireless services in India, Reliance captured about 19 percent of the market share with 72 million subscribers in the telecom industry. I believe this merger between Vodafone and Idea will add fuel to fire and increase the spectre of price war in the telecom space. Hence, this deal is likely to start a new competition and mark the beginning of a bitter battle amongst the biggest names in the industry (, 2017).

The combination of two significant players wanting to join forces, and yet not having the money to pay for it is seen as an inflection point in the Indian telecom sector which will have a huge impact in this competitive landscape (Firstpost, 2017).

Do you think the Vodafone and Idea merger is a panacea for Indian telecom sector?


The Reality of Cross-Border Mergers and Acquisitions

In the globalisation period, the cross-border mergers and acquisitions have massively increased in the last two decades. Policies of free trade and financial liberalisation have been essential contributors to the global expansion of markets.(, 2017)

Previously, we highlighted and discussed a series of political events and global currents that have been influencing global M&A trends. As observed by head of German conglomerate Bayer, Werner Baumann, cross-border transactions and deal-making remain a significant feature of global markets despite the volatility and uncertainty in the economic and political world scenarios. (Financial Times)

In the present world scenario, there have been major highlights that make this sector an attractive feature of global markets. Some of them are:

  • The need for massive consolidation.
  • An opportunity to expand and exploit potential growth in new scale markets.
  • Low rates of debt financing stimulate purchase of corporate debt.

The year 2016 witnessed $900bn-worth of cross-border deals , accounting for about 40 percent of the $2.37tn of the overall M&A transactions.

The shortage of growth prospects in developed nations make them a bright marketplace, especially for the developing nations such as China and Japan. Hence, growth opportunities in the US will attract a lot of investment in  the US companies by Asian as well as European companies. As highlighted in my previous post, the longer term trends observed in the UK will also drive cross-border M&A.

On the contrary, a controversy has been observed in China conflicting with the strong deal volume that had been maintained throughout 2016. Due to increased scrutiny of outbound M&A by the regulators in China, acquisitions done with purposes of prestige or political gain have been discouraged and hence, in the last quarters of 2016 saw a decline in acquisitions. (Financial Times, 2017)

Cross-border transactions include numerous uncertain variables, in terms of carrying legal proceedings in the host country as well as following requirements and activities that are bound to become complex in a foreign jurisdiction. (Cross – Border M&A Trends in 2016, 2017). Hence, compliance guidelines play a discouraging role for companies to make cross-border deals and encourage domestic deals instead. In a panel discussion on challenges and threats caused by Brexit for the mergers and acquisitions market, CEO of Domtar Corp, John Williams said that a merger or an acquisition is simply an international expansion of a business irrespective of the fact whether it is a global or a domestic deal. The uncertainty involved in the legal compliance could be resolved by having a flexible and well-versed process agent as a trusted point of contact who maintains the swiftness that is a requisite for M&A deal-making. (, 2017)

With one of the most volatile times, cross-border deal-making has witnessed decelerating growth in 2016, but factors such as cheap finance, strong corporate balance sheets and decent growth across markets and key sectors will definitely improve the run-rate of M&A cross-border deal making in 2017 with an upward graph in 2018. (Baker & Mckenzie). I believe a soft-ish Brexit and friendly trade policies in the post-Trump world will play a major role in expansion of the global M&A market.

Hence, I feel the speculative trends in the present world will definitely have an impact on the M&A cross-border deal making and the global market, especially in the wake of radical changes in some of the strongest economies in the global M&A market.

BREXIT: the start of a depressed M&A market?

After having talked about the impact of political and economic changes in the global M&A activity, we saw Brexit, the shocking exit of UK from the European Union as the key concern and an essential factor in the expansion of M&A activity within the UK as well as globally.

It is one of the headwinds we come across in the face of global M&A deals, that froze the dealmaking activity involving British companies, hence, deaccelerating the M&A activity.

Tim Gee, M&A partner of the law firm Baker & McKenzie discuss how the volatility in the market will definitely lead to a decline in the M&A activity, but this decline might vary with the size of companies and the impact of deals.

Brexit, the result of EU referendum might slow down the UK to UK M&A activity but will not precisely affect investment into the UK. As said by the chief executive of the listed investment firm Zegona, Eamonn O’Hare, the decline in British currency will open doors for foreign investment in the UK and lead to depreciation of UK assets,  making them vulnerable to international takeovers.

Hence, the decline in sterling and cheap borrowing rates in UK have been reasons for a positive future of the British M&A market and hence, are the prime reasons for robustness in this sector despite the so-called aftermath of the EU Referendum. (Mathew Smith, Barclays).

This continuous uncertainty that has been discussed and brought into light in the post Brexit world could have various elements. Some of these elements could be:

  • Separation of a UK merger clearance process and an EU merger clearance process
  • Duplication of costs
  • Different timelines

As argued by the CEO of Domtar Corp, John Williams, buying a UK company is simply buying an international business and hence, Brexit would not be a barrier for large M&A deals considering they are global expansions. But the effect of Brexit might have an adverse impact on the middle ground companies of FTSE 250 because of their size and the uncertainty mentioned above, might affect such mid-size M&A deals.Such companies might become a part of the “wait and see mode” around this market volatility, leading to longer transaction processes in order to create high-value investments.

In my opinion, the nature of activity of M&A deals will definitely affect the large cross-border deals involving UK companies. I believe, takeover of UK companies might be stabilized because of the positive influence of downfall of the UK currency in the long run, but will definitely impact the relevance of UK, especially in European M&A. The lack of free trade with the exit of UK from the EU and  increase in regulation-related provisions will be factors slowing down the M&A market for UK companies.

The M&A ecosystem might shrink since, London, the capital city, might not be an appealing entry point for corporate and financial investors around the world.

The post Brexit Britain still involves a lot of uncertain and pending decisions around the trade and investment policies leading to volatile market conditions and a dynamic political environment. Therefore, 2017 is likely to bring in a lot of new surprises and shocks in the global M&A world.

2016 – A year of revelations in the world of mergers and acquisitions

As 2016 draws to a close, I reflect on what a momentous year it has been in the world of Mergers & Acquisitions. This year witnessed some of the big changes in the strongest economies of the world.

  • Volatility in the markets caused because of slow growth in China
  • Brexit in Britain
  • Trump’s election to Presidency in the USA

The year 2016 marked a year of change in the history of global M&A activity, as said by Matthew Toole, director of Deals Intelligence at Thomson Reuters. A year beginning with slowdown of aggressive acquisitions by Chinese firms, a downfall in M&A activity in North America and Europe because of market responses to political instability ahead of the US presidential election and the UK vote to leave the EU, 2016 was marked as the slowest first half around cross-border dealmaking since 2013. Dealogic revealed that the total M&A value  was $1.71 trillion with an 18 percent year-on-year drop, from $2.09 trillion in 2015. 

But opposed to the predictions, the second half of 2016 changed the vibe around M&A activity with Microsoft’s acquisition of LinkedIn for a deal of $26.2 billion and a $85.4 billion cash-and-stock takeover of Time Warner Inc by AT&T Inc. With two biggest deals in the technology and telecom sector, the year has continued to set records in the world of mergers & acquisitions.

With Asian companies acquiring the European ones and European companies targeting the US companies, the highlight of this year has been the east-to-west theme in global capital flows, as quoted by Colm Donlon, head of M&A for Europe, Middle East and Asia at Morgan Stanley. Thus, cross-border deal making has seen a rising trend this year.

I believe, the economic and geopolitical uncertainty around the world will cause a decrease in the world of cross-border deal making. With a rise in nationalist politics in such a globalised world, domestic M&A activity might increase in 2017, especially in regions such as China and Europe. With Brexit and the alterations in tax regimes due to election of Donald Trump in the USA, global M&A activity might see a downfall, giving rise to small and domestic M&A deals.  

Do you think the changes in 2016 will cause uncertainty and dampen the global M&A activity or create room for new oppurtunities in the world of M&A?