This article has been written by Karan Shekle, pursuing the Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Share acquisition is a purchase of shares by one company in the share capital of another company. Often companies and other investors wish to proceed with share acquisition when they foresee it to be profitable, notwithstanding any other factor.
The objective behind these activities is the maximization of assets and profits. Through a share acquisition, an acquirer company can improve its economies of scale if the target and the acquirer are complementary to each other. Additionally, the acquirer can diversify and boost their growth by getting broader market access which can be a strategic realignment.
The pandemic year of 2020 has had a crippling effect on many businesses. Some of them were forced to sell as many companies and investors saw an opportunity to acquire under-valued targets.
Therefore, it came as no surprise that by the end of 2020, India saw heavy M&A activity which even surpassed the total deal value achieved in 2019. The author in this article will list down famous cases of share acquisitions and their intended outcomes, benefits and challenges faced by that transaction from a regulatory perspective.
Disney and Pixar/Marvel
Back when Bob Iger was the CEO of Disney, he led the charge to acquire Pixar and Marvel. The deal of $7.4 billion saw Disney Acquire Pixar, a well-established brand in making animated movies and series. But Iger simply did not stop after he acquired Pixar. Disney further went on to acquire Marvel, a comic book company for more than $4 billion. Since releasing its first Disney-produced Marvel movie in 2012, the combined entities have earned more than $18 billion at the global box office. The numbers are a reflection of why acquisitions of both Pixar and Marvel have turned out to be great deals.
Google and Android
Even without the numbers, it would be right to say that Android is the best bet Google has ever made. Android, a mobile operating system, has more than 70% market share worldwide. The official acquisition amount paid by Google to buy Android Inc is undisclosed but it is rumoured that Google paid merely $50 million. While the company does charge for licensing the Android operating system to mobile manufacturers, the actual profits that Google makes from Android is through mobile ads displayed on Android phones. Google executives back in 2010 once told investors that mobile ads bring $1 billion annual business for the tech mammoth.
Google did not face any regulatory challenge when the acquired Android back in 2005. However, Google is currently facing regulatory fire from major jurisdictions on allegations that Google is using Android’s strong market position to push its apps on mobile phones. According to a complaint filed by Epic, such vertical tie-up of Android and Google’s apps can result in the elimination of app developers which is against the spirit of competition law.
Exxon and Mobil
Exxon, an oil giant acquired Mobil which was another oil giant back in 1998 in a deal which was valued at $81 billion. The acquisition came amid low oil and natural gas prices which were attributed to overproduction.
A combined giant at that time was forced to be reckoned with $11.8 billion in profits back in 1997. The purchase faced scrutiny from US federal regulators and European governments on antitrust and environmental issues. However, the deal was cleared by all regulators of different jurisdictions with conditions and divestitures. The acquisition reunited two of the biggest remnants of John D. Rockefeller’s Standard Oil which was broken up under antitrust law.
Vodafone and Mannesmann
The largest acquisition in history was made in 2000, when Vodafone, a multinational telecom giant decided to acquire Mannesmann AG in a hostile takeover for $190 billion. A horizontal acquisition which was approved by the EU Commission only after Mannesmann AG was directed to divest some of its holding in telecom companies. Early 2000 marked an era with technological advancement in the global telecommunications landscape and no one wanted to be left behind amid a telecom and a dotcom boom. However, target companies during acquisitions are mostly overvalued and with the dotcom boom, Mannesmann was highly overvalued by Vodafone.
In another deal involving Vodafone, Verizon decided to acquire Vodafone’s 45% stake in Verizon Wireless for a $130 billion deal which gave Verizon full control of the most profitable mobile phone carrier in the USA. The exit of Vodafone from Verizon can be attributed to Europe’s debt crisis triggered after Greece went bankrupt. The decision of Verizon to fully commit to wireless networks in 2014 is bearing its fruit after the exponential rise of demand for telecom/data services, especially, during the pandemic period. The deal was the biggest since Vodafone’s acquisition of Mannesmann AG which did not turn out well for Vodafone.
Pfizer and Warner-Lambert
Another hostile takeover saw US Pharma giant acquire shares of Warner-Lambert for $90 billion. Both the companies initially promoted a drug called Lipitor which was revolutionary in dealing with patients with high cholesterol and cardiovascular diseases.
The hostile takeover began when American Home Products and Warner-Lambert announced plans to merge which would have created the world’s largest pharmaceutical company.
However, Pfizer offered to buy out Warner-Lambert which was not well received by them. With initial reluctance, eventually, Warner-Lambert agreed to get acquired by Pfizer after Pfizer increased its bid. Additionally, American Home Products faced liability worth billions of dollars which was considered risky by shareholders of Warner-Lambert.
This mega-merger would have reunited Altria and Philip Morris, which was spun out in 2008. The deal would have given Altria access to Philip Morris’s international markets. However, the deal never materialised as investors were frenzy of Altria investment of $12.8 billion in July, a company engaged in making e-cigarettes after it ran into trouble from regulators in the US and China.
Walmart, a company which exerts pressure in the US retail decided to stop selling e-cigarettes which was another blow to Altria and its investment. This transaction is unique to be mentioned in this article as it was never finalised due to regulatory concerns.
AT&T, a telecommunication company, was broken up in 1984 by the Department of Justice into 7 companies which included Bell South. The $85.8 billion deal recreated the pre-break-up of AT&T which was met with reluctance by the Federal Communications Commission.
The deal was cleared only after AT&T offered to maintain “network neutrality”. The deal proved to be a good investment as AT&T reported doubled income after the acquisition of Bell South. Being the largest telecommunication company in the US, it is crucial to state that deals like Bell South played a role for AT&T in achieving such a market position.
America Online and Time Warner
2020 marked 20 years since Time Warner merged with American Online in a deal valued at $182 billion. The deal was a union of the world’s largest media conglomerate with the world’s largest internet provider. However, like the Vodafone Mannesmann deal, American Online and Time Warner deals were made just before the Dotcom burst which caused a recession.
That was followed by a fierce competition in the internet provider market which resulted in undercutting of profits. In 2002, the combined entity posted a record loss of $98.7 billion which is a record for the worst annual loss in corporate history. In 2009, Time Warner spun off American Online as an independent company and was later bought by Verizon for $4.4 billion. It is fair to say that not every mega M&A deal.
Citigroup, an American multinational investment bank and one of the largest banking institutions in the United States was formed after a merger between banking conglomerate Citicorp and financial giant Travelers Group.
The Federal Reserve Board approved the merger, subject to the divestiture of some insurance activities within five years. One of the reasons why both the companies entered into merger was to cross-sell its product to consumers.
Cross-selling is an action or practice of selling among or between established clients, traders or that of selling an additional product or service to an existing customer. After the merger, Citigroup as a combined entity was able to provide a package of financial services instead of the individually characterized service.
Dow Chemical and DuPont
Dow Chemical and DuPont merged in 2015 to create the world’s biggest chemical company which was valued at $130 billion. As a merger of equals, the new combined entity was split into three separate business entities: agriculture, speciality chemicals and materials.
The two giants in chemical engineering formed a conglomerate which changed market dynamics of the industry as Bayer and Monsanto, two companies who deal in agriculture and speciality chemicals decided to merge in 2019 which was influenced after the merger of Dow Chemical and DuPont. This transaction is famous as it caused a domino effect of consolidation in the industry which was met with reluctance by various regulators who approved the deal only after certain undertakings were accepted.
Anheuser-Busch InBev and SABMiller
Anheuser-Busch InBev decided to acquire SABMiller for $104 billion which will see the world’s two largest brewers come together. In the world of beer, the company will sell 27 per cent of global beer volume and make up 47 per cent of global profits. The merger of both the companies seems to have paid off as its net profit continued to grow in the next quarters.
H. J. Heinz and Kraft Food
The Kraft Heinz merger was considered to be a strategic move as both the companies had a wide presence in the food processing industry. Both the companies publicly announced in March 2015 that they intend to have a merger. In a $46 billion deal, the management of both Heinz and Kraft hoped to leverage the synergies through the merger of these giant food companies. While Kraft is dominant in the USA, Heinz has a global presence in the markets across the globe. While the merger resulted in the creation of the fifth largest food and beverage company in the world.
Some of the famous share acquisitions in history were not the most highly valued but they turned out to be the best investments. Google’s acquisition of Android is one such example. Some acquisitions of high-value deals turned out to be value-enhancing for their shareholders. Transactions between Exon and Mobil, Travellers Group and Citicorp, AT&T and Bell South and Pfizer and Warner-Lambert were some high value deals which turned out to be great strategic investments.
Long term gains on investments like Dow Chemical and DuPont, H. J. Heinz and Kraft Food and Anheuser-Busch InBev and SABMiller are yet to be realised. Hostile takeovers and boardroom battles are common characteristics of famous share acquisitions. Some of the transactions mentioned above were anything but ‘business as usual’ transactions which required intense boardroom negotiations, close scrutiny from regulators, dissent from some shareholders concerning valuation of transactions and much more. For any M&A and market admirer, such deals are a catalyst to their enthusiasm.
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