As is so often the case, once again an acquisition target's howls of protest have been soothed by a modest increase in the price of the deal. On Tuesday morning, International Paper (NYSE:IP) announced that it has reached an agreement with Temple-Inland (NYSE:TIN) on a friendly acquisition with a slightly higher price than IP's original bid.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Small Bump To "Yes"
International Paper secured the support of Temple-Inland's board by offering $32 a share in cash and the assumption of $600 million in debt - a total deal value of $4.3 billion. At that price, Temple-Inland shareholders are seeing a roughly 30% premium to Friday's close and a trailing EV/EBTIDA valuation of roughly 10 - a slight discount to Rock-Tenn (NYSE:RKT), but a premium to Packaging Corp (NYSE:PKG) and the larger packaging sector.

Strategic Petulance
Investors may recall that the road to "yes" has been a little bumpy for International Paper. IP originally made its play for Temple-Inland back in early June, with an unsolicited bid of $30.60 - a 46% premium to TIN's price at the time. The way Temple-Inland's board responded, you'd have thought that IP shot their dog and then tried to bill them for the bullet. Temple-Inland called the deal grossly unfair and then launched a poison pill when IP threatened to take its offer straight to shareholders via a tender offer.

Now, though, things have settled down. IP bumped up its offer by about 5% and Temple-Inland is now (apparently) happy, or at least willing, to sell.

At this new slightly higher price, IP shareholders are still capturing more than half of the benefits of the combination (assuming that IP can deliver most of the synergies it projects). Moreover, shareholders should not be thrilled that Temple-Inland management presumed to deny them the chance to decide for themselves on the merits of the deal. All of that said, though, Temple-Inland got roughly $150 million out of IP by fighting, and even granting that actions like launching poison pills cost money, TIN shareholders are richer for having their board fight this battle.

Trouble Afoot?
While we're at it, though, it is worth speculating whether an outside influence might have helped this deal move along. Specifically, word came out just a couple of weeks ago that Temple-Inland is being sued by a liquidation trustee for more than $1 billion in a dispute relating to how Temple-Inland handled the spin-off its Guaranty Financial Group subsidiary; a financial services business (or bank) that went bankrupt under the weight of mortgage-backed bonds and the collapse of the residential construction market.

The New Market
Assuming this deal goes through, IP will widen its lead in corrugated packaging - IP was number one before this deal and Temple-Inland was number three. Rock-Tenn was the number-two player before this deal and Georgia-Pacific and Packaging Corp will still be trailing players. This is a business that seriously rewards scale and operating efficiency, so it is logical that big players want to continue to consolidate. Corrugated packaging is a noticeable cost item for packaged food companies like Kraft (NYSE:KFT) and Kellogg (NYSE:K), though, so there could be some opposition to this deal and "number-one plus number-two deals" do tend to get the attention of regulators.

The Bottom Line
Rock-Tenn and Packaging Corp were interesting companies and stocks before this deal and still are interesting now that IP and Temple-Inland have found a middle ground. Likewise, other peripheral players like MeadWestvaco (NYSE:MWV) and KapStone (NYSE:KS) are worth a look - both from the perspective of market consolidation and their own inherent performance potential.

Temple-Inland shareholders should probably be content with this deal. It's not full value for their assets, but the recent lawsuit likely means that full value isn't attainable. Private equity or rival bidders could yet get involved here (akin to how Silgan (Nasdaq:SLGN) thought it had a deal for Graham before Reynolds jumped in), but few buyers will have the same synergy potential as IP. What's more, since IP is paying cash and the market's aren't especially healthy, Temple-Inland shareholders can likely afford to sit tight and see how this all plays out. (For additional reading, check out Mergers And Acquisitions: Understanding Takeovers.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center