strategic-management

160 PART 2 • STRATEGY FORMULATION
TABLE 5-9 Some Large Mergers Completed Globally in 2009
Acquiring Firm Acquired Firm
Price
(in $Billions)
InBev Anheuser-Busch Cos. 52.000
Bank of America Corp. Merrill Lynch & Co. 50.0
Wells Fargo & Co. Wachovia Corp. 15.1
Delta Air Lines Northwest Airlines Corp. 2.600
AT&T Centennial Communications 0.937
Johnson & Johnson Mentor Corp. 1.070
King Pharmaceuticals Inc. Alpharma Inc. 1.600
CenturyTel Embark 5.000
Corp. Similarly, Tenaris SA, based in Luxembourg and the world’s biggest maker of steel
tubes used in oil exploration and production, recently acquired rival Hydril Company,
based in Houston, Texas.
Table 5-9 shows some mergers and acquisitions completed in 2009. There are many
potential benefits of merging with or acquiring another firm, as indicated in Table 5-10.
Johnson & Johnson’s (J&J) recent acquisition of Mentor for $1.07 billion was a
hefty 92 percent premium over Mentor’s closing price before the deal was announced,
but was 23 percent below another widely used evaluation method that was number of
shares outstanding times the target firm’s 52-week stock price high. Many companies are
being forced to sell under duress, so firms with a lot of cash such as J&J and Apple can
pick up deals of a lifetime these days. J&J had $14 billion in cash on hand in 2009 when
it purchased Omrix Pharmaceuticals for $438 million. Then the largest health-care
company in the world, J&J purchased Mentor for $1.07 billion in cash. Bristol-Myers
Squibb’s CEO James Cornelius recently said that company is looking to do six or seven
additional acquisitions or partnerships with the $9 billion in cash it has on hand to bolster
its drug pipeline.
The volume of mergers completed annually worldwide is growing dramatically and
exceeds $1 trillion. There are annually more than 10,000 mergers in the United States that
total more than $700 billion. The proliferation of mergers is fueled by companies’ drive
for market share, efficiency, and pricing power, as well as by globalization, the need
for greater economies of scale, reduced regulation and antitrust concerns, the Internet, and
e-commerce.
A leveraged buyout (LBO) occurs when a corporation’s shareholders are bought
(hence buyout) by the company’s management and other private investors using borrowed
funds (hence leverage). 36 Besides trying to avoid a hostile takeover, other reasons for initiating
an LBO are senior management decisions that particular divisions do not fit into an
overall corporate strategy or must be sold to raise cash, or receipt of an attractive offering
price. An LBO takes a corporation private.
TABLE 5-10 Potential Benefits of Merging with or Acquiring
Another Firm
• To provide improved capacity utilization
• To make better use of the existing sales force
• To reduce managerial staff
• To gain economies of scale
• To smooth out seasonal trends in sales
• To gain access to new suppliers, distributors, customers, products, and creditors
• To gain new technology
• To reduce tax obligations