Twelve Huge M&A Deals For 2010: The Stuff That Dreams Are Made Of
M&A activity picked up in the second half of 2009 as the market moved up and access to capital for big companies improved. Corporate debt offerings soared and banks began to make capital available for deals such as the proposed Kraft (NYSE:KFT) offer to buy Cadbury. Kraft has already lined up bridge loans for the potential buyout.
Every deal on the 24/7 Wall St. list of mega-mergers for 2010 faces regulatory challenges because of its size and scope. These hurdles would be present in both the US and EU. Antitrust issues are not a part of the calculus for any large deal. The Yahoo! (NASDAQ:YHOO) search partnership with Microsoft (NASDAQ:MSFT) will be reviewed as will almost any deal to buy Cadbury. The Oracle (NASDAQ:ORCL) buyout of Sun (NASDAQ:JAVA) may fall apart due to EU challenges. Exxon’s (NYSE:XOM) $41 billion buy-out of XTO Energy (NYSE:XTO) could draw scrutiny from regulators.
Many of the transactions on this list will be done with stock and need no cash component. Others can be done with the cash on the balance sheets of the purchasers. Some would be outright mergers of equals.
There are no transactions on this list that do not make immediate strategic sense. Some of the companies are weak enough so that a buyout will be necessary for them to remain viable businesses. Each deal was rated on a scale of 1 to 10 with 10 being the transactions most likely to close and 1 representing the least likely.
1). The Washington Post Company (NYSE:WPO) and The New York Times Company (NYSE:NYT). The newspaper industry’s demise may slow as the economy improves, but it will not stop. Many newspapers have already folded, or are on the brink of closing. The Times has already threatened to shut The Boston Globe, one of the largest and most respected dailies in the country. The Times has done a good job of pushing its debt obligations further into the future, but it still faces the threat that an outside investor like current bond-holder Carlos Slim may be able to make a bid for the company as its fixed income obligations mature. The Washington Post was unusually fortunate when it bought the Kaplan learning business. The Washington Post education group brought in $684 million in the last quarter. Advertising revenue for the entire company was only $195 million for the same period. The Post has a pristine balance sheet. Combining The New York Times and The Washington Post would involve the dissolution of the trust that controls the Times. That would be difficult but not impossible if it meant the Times would remain independent. One company with ownership of The Times, The Post, and The Globe would have a better chance of erecting a “pay wall” for content in all three publications in order to force subscribers to pay for the papers’ online editions, perhaps as a package. The new entity would probably have to close money losing operations like Newsweek and sell non-strategic assets like About.com which would raise several tens of millions of dollars. The New York Times has a market cap of $1.3 billion and The Washington Post’s is $4 billion. Rating: 9
2). Time Warner (TWX) and Viacom (VIA). Viacom is a fairly weak company among the entertainment business giants on its own and Sumner Redstone, its controlling shareholder, is 86. Viacom has two divisions, both of which dovetail almost perfectly with Time Warner now that it has spun-off AOL and its cable infrastructure operations. The first is a line-up of strong cable TV network brands. The other is a film studio. Viacom’s revenue in the last quarter was $3.3 billion. Over $2.1 billion came from media networks and $1.2 billion from studios. Both operations were profitable. Viacom has $6.7 billion in debt, but its maturity is spread over several years. Time Warner had revenue of $7.2 billion in the last quarter, with $777 million of that coming from AOL, which is gone. Jeff Bewkes has almost completely retooled the company and the spin-off of Time Warner Cable (NYSE:TWX) has improved Time Warner’s balance sheet so the firm has over $7 billion in cash. Bewkes wants to increase his company’s presence in the content industry and his strongest divisions are cable networks and film. Viacom is a perfect match. Time Warner’s market cap is $37 billion and Viacom’s is $19 billion. Rating: 9
3). Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA). The regulatory hurdles to this transaction would be high. Intel just gave up its plan to build its own graphics chip. That gave Nvidia an important advantage by eliminating a possible competitor. Intel’s rival AMD already has a graphics chip operation. Nvidia and Intel both are critical suppliers to the global PC industry. Intel is embroiled in antitrust problems with the US and EU which would make approval of a Nvidia deal challenging. Nvidia still faces the prospect that AMD’s success in graphics chips could push down its market share and another processor company like Texas Instruments (NYSE:TXN) or Qualcomm (NASDAQ:QCOM) might move into the industry. Nvidia is a relatively small company with sales in the quarter ending October 25 of $903 million. Net income was $107 million. Nvidia has no significant debt, but its cash and securities balance is under $1.7 billion which among major tech companies makes it fairly balance sheet poor. Nvidia’s market cap is $8.4 billion. Intel controls over three-quarters of the core processor business in the PC and server markets. Its sales in the last quarter were $9.4 billion and net income was over $2.5 billion. Intel has close to $10 billion in cash. Intel and Nvidia both face a new challenge in computing devices because netbooks and smart phones are taking market share from PCs and laptops. Each company needs to rapidly develop a greater array of products for these devices. Intel has a market cap of $110 billion and could buy Nvidia without any outside help. Rating: 7
3). Colgate (NYSE:CL) and Procter & Gamble (NYSE:PG) There were recently rumors that Reckitt Benckiser would buy Colgate. Colgate has a market cap of $42 billion which made that transaction unlikely. The war for global market share in the consumer products industry will get brutal over the next five years, if P&G comments about its determination to increase its market presence outside the US are any indication. A number of small companies will be competing in consumer niches and in small geographic regions around the world, but the firms with the scale to compete for sales across all these markets are Unilver, Colgate, and P&G. Unilever and Colgate get almost half of their sales from overseas markets. P&G’s number is closer to 34% even though it is the largest of the companies. P&G can “buy” or “build” its way into the markets outside the US. The firm had almost $20 billion in sales in the last quarter and $3.3 billion in net income. P&G has $23 billion in long-term debt and a market cap of $182 billion. Colgate’s sales in the last quarter were $4 billion and net income of $590. P&G was fairly successful integrating Gillette after buying the company. The Colgate product line is a nearly perfect fit with P&G. Antitrust issues would almost certainly force a combined company to sell some products lines. Unilever could be a bidder for Colgate as well. Rating: 7
4). Kraft (NYSE:KFT) and Sara Lee (NYSE:SLE). Sara Lee sold its body care division to Unilever for $1.9 billion a year ago. It sold its air freshener business to P&G last month for $468 million. These transactions leave Sara Lee with a little over $2 billion in sales a quarter and a very modest $284 million in net income. Sara Lee has manageable debt of $2.7 billion. Kraft is facing an uphill battle to close its deal to buy Cadbury (NYSE:CBY) so it will almost certainly turn its attention somewhere else. Sara Lee’s market cap is down to down to $8.5 billon and Kraft has already gone through the process of lining up bank financing of $9 billion to support its Cadbury offer. The Sara Lee brand packaged meat products, fresh and frozen bakery line of foods, and roasted and ground coffee product lines are an almost perfect fit for Kraft. Rating: 8
5). GM and VW. The US government wants to return to taxpayers the $50 billion it put into GM. That is not likely anytime soon. GM would probably have to go public again and for the time being, its financial results are extraordinary weak. The decision of GM’s board to allow Ed Whitacre to take over as CEO and re-arrange most of the car company’s senior management almost certainly extends the time-table of any GM turnaround. There are simply too many new people in too many new jobs who will need months to gain experience in their assignments. VW made the mistake of not taking over management control of Chrysler which would have gotten it 10% of the US market for almost no risk. GM’s value is much greater to VW than Chrysler’s. VW must have a large part of the American market to be a worldwide success in the car business. GM has a US market share of 20%. VW has less 1% of the American market. GM and VW are the two leading car companies in China. Combined, the two firms would have a substantial lead among the car companies in the world’s largest and fastest growing auto market. A buyout of GM would make VW that largest car manufacturer in the world by a large margin. It would allow VW to cut costs in Europe by combining manufacturing operations with Opel, which GM has just elected to keep. VW has very little incentive to make job cuts in the US because that work has been done and what remains is enough factory capacity to keep manufacturing in North America at current levels and accommodate some modest growth. The US government would be more likely to approve a purchase by a foreign buyer if American jobs could be preserved. In the first nine months, VW had sales of over 77 billion euros. VW has taken over almost 50% of Porsche and intends to buy the balance. VW’s Audi division has done well. VW recently said it will buy 20% of Suzuki to increase its presence in Asia. Rating: 5
6. T-Mobile and Sprint (NYSE:S). This transaction has been discussed for more than two years and some analysts have argued that a merger would be too complex because the companies have incompatible technology platforms. As Sprint moves toward WiMax 4G, compatibility maybe less of an issue if T-Mobile elects to use the WiMax platform as well. The reason this merger is likely is simple. Sprint and T-Mobile are too small to compete with AT&T Wireless and Verizon Wireless. Each of the larger companies is still growing although some of the growth is due to acquisition. AT&T has already spent tens of millions of dollars with Apple to have an exclusive partnership to market the iPhone and to upgrade the AT&T Wireless network to make it more iPhone-ready. Verizon Wireless will probably begin to market the iPhone next year. Google (NASDAQ:GOOG) is coming to market with its own wireless handset which will not be sold in conjunction with any carrier. Holding the No.3 and No.4 spots in the American market, which is growing very slowly overall, is not tenable. Deutsche Telekom (NYSE:DT), T-Mobile’s parent, has the financial capacity to buy Sprint even if the deal is presented as a merger with T-Mobile. Rating: 9
7). Samsung and Research –In-Motion (NASDAQ:RIMM). Samsung is larger than IBM (NYSE:IBM) with sales of well over $100 billion. Samsung’s handset business is the second largest in the world. For Samsung to make a real run at market leader Nokia (NYSE:NOK) it needs a premier smart phone operation. RIM (NASDAQ:RIMM), which makes the Blackberry, is the most logical company to give Samsung that product line. From Wall St.’s perspective RIM is under siege from Apple and may quickly fall to the No.2 spot with the iPhone taking first place as the leading enterprise handset. Google has announced that it will enter the smart phone market with its own product. All handset manufacturers must know global sales were flat last year and may only rise 10% in 2010. RIM has a market cap of $36 billion and last quarter had revenue of $3.5 billion. Net income was $659 million. RIM can gamble that it can be successful in a world in which companies like Dell and Google, which are not established in the smart phone industry, are making inroads into the business. There is also competition from operations like Apple (NASDAQ:AAPL) and Nokia that will almost certainly do well either because of product popularity or the scale of their global marketing and sales businesses. RIM will not be independent in a year. Nokia and LG could also be bidders for RIM. Rating: 7
8. Amazon (NASDAQ:AMZN) and Ebay (NASDAQ:EBAY). These are the two most successful e-commerce companies to come out of the internet boom, Web 1.0 as some might call it. Recently, their fortunes have diverged as Amazon has become one of the most successful companies in the world and the Ebay core auction business has stagnated. Amazon’s market cap has risen to $57 billion and Ebay’s has fallen to $29 billion. There is a great deal for Amazon to like about Ebay now that the auction company has gotten rid of Skype. Ebay’s PayPal division is the dominant online payment system which dovetails nicely with Amazon’s e-commerce operations. PayPal’s revenue rose to $688 million in the third quarter, up from $597 million in the same period a year ago. Ebay’s auction business is no longer growing. Revenue in the third quarter was flat at $1.37 billion. But, Ebay’s auction operation could be a very strong compliment to Amazon’s e-commerce programs. The customer database information among Ebay, PayPal, and Amazon would run into the tens of millions of customers. The sites as a group would have tremendous traffic. Among the 50 most visited websites in the US in October, Amazon ranked 8th with 70 million unique visitors and Ebay ranked 10th with 67 million. The combined audience of the two sites without taking out duplicate visitors would be larger that AOL (NYSE:AOL) or Microsoft (NYSE:MSFT). If any company can breathe life back into Ebay’s auction business it is Amazon, which has the relationships with online retailers to help Ebay get more customers for its core business. Rating: 8
9. Berkshire Hathaway (NYSE:BRK.A) and American Express (NYSE:AXP) Warren Buffett proved two things with his buyout of railroad firm Burlington Northern (NYSE:BNI). The first is that he is willing to make a large bet on the industrial part of the economy. The other is that he is willing to buy all of a company in which he previously held a minority interest. Buffett’s next logical move would be to bet on the recovery of the financial services industry and consumer spending. The best proxy for this the in Berkshire Hathaway portfolio is American Express of which Berkshire owns 13%. It would cost Buffett about $50 billion to buy the balance of Amex which only trades at about two-thirds of its price before the credit crisis. Amex earned $ 640 million on $6.6 billion in revenue last quarter. Earnings should improve substantially as the trouble in the credit economy eases. In 2007, Amex had net income of over $4 billion. Buffett appears to be in the process of moving away from operating Berkshire Hathaway as primarily a mutual fund of disparate holdings. In its place he is creating an umbrella company with management control over fewer firms in which Berkshire expects to make large returns. American Express is the perfect bookend to Burlington Northern. Rating: 7.
10. IBM (NYSE:IBM) and Dell (NASDAQ:DELL). IBM (NYSE:IBM) may rue the day that it sold its PC operations to Lenovo. The PC/netbook/small server industry has become critical to large and medium-sized enterprises. Hewlett-Packard (NYSE:HPQ) has proven the value of an integrated hardware/software/consulting company. HP’s PC and printer businesses remain among the most successful parts of its operations even with the slowdown in global computer sales. The rise of the netbook and other inexpensive computing devices and the move towards server-side computing make PCs a strategic weapon in the fight to control IT relationships with enterprises and government clients. Dell is the most poorly run and weakest of the four largest PC companies. It has fallen well behind HP and IBM as a provider of consulting and software solutions. Dell’s stock price has dropped from $40 four years ago to $13 more recently and its market cap is down to $25 billion. At the end of the last quarter, Dell had $13 billion in cash and $3.4 billion in long-term debt. IBM’s current market cap is $171 billion, and over $10 billion in cash. IBM is also the most brutal cost cutter in the IT industry and could bring Dell’s operating cost substantially. Rating: 6
11. Oracle (NASDAQ:ORCL) and Salesforce.com (NYSE:CRM) Oracle and Cisco (NASDAQ:CSCO) share the role as the most avaricious buyers of tech companies in their sectors of the IT industry. Oracle is near the end of a long process of buying Sun (NASDAQ:JAVA). The management of Salesforce.com has said publicly how little it thinks of Oracle founder Larry Ellison, but being disliked has not stopped Ellison from taking over companies in the past. The web-based sales management business that Salesforce.com has pioneered has become critical to many of the IT solutions being used by the world’s largest companies. The sector is so important that Oracle rival SAP (NYSE:SAP) will start a division to compete directly with Salesforce.com next year. Salesforce.com has a market cap of $7.9 billion. On an EPS basis the company is very expensive, but Oracle would look at this as a strategic transaction. Salesforce.com has no long-term debt. Its net income doubled last quarter to $21 million on revenue of $307 million. Oracle’s market cap is close to $120 billion. It has $20 billion in cash and short-term securities and no long-term debt. In the last quarter Oracle had net income of $1.1 billion on revenue of $5.1 billion. Oracle has elected to buy when faced with “build” or “buy” options of getting into new businesses in the past. Rating: 8
12. Sinopec (NYSE:SNP) and ConocoPhillips (NYSE:COP) China appears to be willing to do almost anything to acquire oil reserves. So far that has included getting leases in oil rich and undeveloped fields and making loans for drilling costs to large countries like Brazil. The fastest way to get the reserves China desperately needs to keep up with the growth in its economy is to buy one of the world’s largest integrated energy companies. ConocoPhillips is the most likely target because of its market cap, which at $75 billion is lower than its peers. ConocoPhillips produces 725,000 barrels of oil a day with about a third of that coming from its fields in Alaska. The Chinese government has the capital to finance a Sinopec purchase of ConocoPhillips. The US government would probably block the deal because it is against the country’s strategic interests in the energy sector. Shareholders would fight for a deal if the premium was large enough. Rating: 2
Douglas A. McIntyre