Corporate merger activity is rising as many public companies are looking to put to work the large cash holdings that have built up over the last two years. Private equity firms are also heavily involved in these deals as they look to the resurgent stock market to exit old deals and generate returns for future investors with new purchases. Here's a look at the winners and losers from some deals announced over the last few months. (Learn about what makes an M&A deal go wrong in Biggest Merger and Acquisition Disasters.)
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In March 2011, AT&T announced the purchase of T-Mobile USA from Deutsche Telekom AG for $39 billion in cash and stock. The deal immediately raised protests from AT&T's remaining competitors, as it would give the company 129 million customers, making it the largest wireless provider in the U.S.
AT&T and its shareholders are clear winners as the stock has rallied 10% since the deal was announced, an atypical performance as the acquirer usually sees weak performance after a major deal. The company also takes out a large competitor and one that has a reputation as a discounter in the wireless business.
Intuitively, the consumer appears to be the loser as less choice of providers is never a positive development. AT&T argues that there will still be multiple providers in most markets and that the deal will improve service quality for customers of both companies. A lobbying battle is shaping up in Washington, D.C,. as AT&T lines up against the rest of the wireless industry to get the deal approved.
On April 15, Chesapeake Energy announced the purchase of Bronco Drilling at $11 per share in a cash deal worth approximately $315 million. Bronco Drilling is a land oil driller that owns 22 rigs operating in various onshore areas of the United States.
Chesapeake Energy and its shareholders are winners; Chesapeake paid only a 6% premium to the closing price of Bronco Drilling on the day before the deal was announced. The company also gets additional rigs to add to its Nomac Drilling subsidiary, which already owns 95 rigs. Chesapeake Energy is ramping up its drilling in the United States and has now secured ample rig supply through 2012.
Bronco Drilling's shareholders received only a 6% premium, a pittance compared to other recent deals. However, the deal was at a 24% premium to the average price of Bronco Drilling over the previous 90 days. Also, the stock has nearly tripled since December 2010 due to the strong rally in energy in 2011.
On April 19, Wal-Mart announced the purchase of Kosmix, a social media site founded in 2005. The company hopes to use the Kosmix platform to promote social and mobile commerce to capture additional sales. Wal-Mart did not disclose what it paid for Kosmix, but unconfirmed reports put the price at more than $300 million.
Venky Harinarayan and Anand Rajaraman, the founders of Kosmix, are the obvious winners as they are likely to walk away with untold millions. This is not the first home run for the two as they created Junglee, a major shopping search engine, and sold it to Amazon in 1998.
The losers here might well be Kosmix, as the corporate culture of large companies like Wal-Mart might not be conducive to the nimble and unconventional decision making process that marks entrepreneurial startups in the technology sector. (This analysis tool is an effective way to value mergers and acquisitions. The deal's on the table, but should you sign the papers? Check out Accretion / Dilution Analysis: A Merger Mystery.)
Emergency Medical Services Corporation recently announced that Clayton, Dubilier & Rice, LLC, a private equity firm, was taking the company private for $64 per share in cash. However, any initial joy experienced by shareholders was quickly dampened after a quick check revealed that this offer was 9.4% below the closing price prior to the offer.
The lack of premium in the take-under deal may have been due to Emergency Medical's sharp rise beginning in mid December 2010, when the company indicated that it was looking for a buyer.
Lawyers may the big winners as the below-market offer spurred several law firms to begin investigations. Many analysts see Clayton, Dubilier & Rice, LLC, as a winner as well, because they believe Emergency Medical Services was worth more than what the private equity firm paid for it.
Investors who purchased Emergency Medical Services Corporation over the last four months are looking at a minor loss.
The Bottom Line
Corporate deals are proliferating as companies look to spend part of the cash that was squirreled away during the recent recession and financial crisis. These recent deals have produced both winners and losers. (Learn about the components of the statement of financial position and how they relate to each other. See Reading The Balance Sheet.)