Mergers and Acquisitions: How did they do it so right?

In recent year’s mergers and acquisition activity has been rising steadily. The UK has seen high levels of acquisitions in the pharmaceutical, banking and electrical sector.  Two factors that fuel an acquisition are strategic and financial forms. Companies may become subject to mergers and acquisition due to the possession of particular value chain strengths. This could be in the form of technology development or even research and development advances. Basically if your company has something they want, and they can create additional value from the activities in excess of the acquisition costs. If this is the case whether it be for market dominance, economy of scales, to diversify or just because of corporate egos, they could just be round the corner.

In the past companies have not always purchased other companies for the right reason, the main strategic goal should always be shareholder wealth maximisation. But sometimes they have got carried away, in pursuit of market dominance and realised that all they have been left with is a big pile of debt.  Vodafone went on a spree in the last decade running up to the economic downturn, which forced a group-wide consolidation of assets during the past three years. The arrival of the new chief executive in 2008 Mr Colao, markets the end of the “empire building “effect. The company has since focused on consolidating its position in its core stable European and growing emerging markets, and disposing of, or merging minority or subscale interests elsewhere, pretty much getting rid of any dead wood, which I’m sure the shareholders will be very happy with, as the money will be distributed amongst them.

This could also be to raise funds for a merger with struggling telecom group Cable and Wireless Worldwide, which they have announced an interest in. The company went through a demerger in 2010, since then they have had several profit warning and the company is not in good shape. But it does have a bunch of subsea cables, some tax assets, data centers and British bulk telecom networks. At the moment Vodafone is using rented land lines from BT, they are BT largest customer. Which, when you put it into context could mean huge savings for Vodafone if it goes ahead with the deal by off-loading some of its mobile data traffic to the fixed lines of the telecom group. As with any company this size, they are also looking at other options including FDI in India if regulations will allow it. At the moment no offers have been made but it will be interesting to see, which route they choose.

A successful merger that took place in 2004 was between General Electric NBC and Vivendi Universal Entertainment (VUE) forming NBC Universal in the largest media deal that year. Universal had come close to bankruptcy and the owners needed to get the debt down, so began the process of trying to sell as many assets as they possibly could, but burdened with €35bn debt agreed to sell its controlling stake in VUE to NBC. NBC revenues were 90% advertising and the rest from cable fees and VUE was the opposite, with box office and DVD’s. When you put this together, makes it 50/50, spreading the risk. This is a perfect example of a merger that gone right, they had other options to buy MGM as well but felt it was not in their best interest right now to grow any larger.  As they try to implement product quality and production efficiency, increasing cash flows.

The merger worked that well that in January last year Comcast completed its purchase of NBC Universal, when it acquired 51 percent of the media group by paying $5.8bn to Vivendi and $7.1bn to GE. The group now also has cable channels worth $30bn that Comcast has thrown into the pot, helping the media company become a successful combination of content and distribution.  In this fast moving environment it pays to be strategic and keep an eye, on what else could be a good cash injecting string to your bow. With this in mind NBC Universal, the media company owned by Comcast, agreed to buy Blackstone 50 percent stake in Universal Studios Florida in a $1bn deal that consolidates its ownership of the theme park. Confirming its long term commitment to NBC Universal, as Universal Park has enjoyed success from the Harry Potter attraction. The park offers consistent and significant return and free cash flow is performing well. As always, what it comes back to is Shareholder wealth maximization and they are bang on the money as it raised dividend payments due to strong earnings.


Source: Arnold, G. (2008), Corporate Financial management
Schoenberg, R. (1999), What Determines Acquisition Activity within an Industry?, European Management Journal, Vol. 17, pp. 93-98,