Question

B- In light of your study of the course subjects and your readings through the Internet and/or the university e-library, Provide examples from the real world for successful and unsuccessful mergers and acquisitions cases in recent years and state the specific reasons behind their success or failure. (Do not provide general reasons behind success or failure & only one example should be provided for each case).

Answer 1

Solution:

Successful:

Amazon and Whole foods

Amazon is an American E-commerce and cloud computing company based in Seattle, Washington. It is a largest Internet based retailer in the world by total net sales [around $ 136 billion (Dec 16) and by market capitalisation which is currently stood at around $ 465 Billion. Amazon also manufactures and sell electronic devices (Kindle e-readers, Fire tablets, Fire TV, and Echo) and world largest provider of cloud infrastructure services.

Whole Foods Market, is the leading natural and organic foods supermarket based in US, having a current market capitalization of around $ 13.46 Billion. In fiscal year 2016, the Company had sales of approximately $16 billion and has more than 460 stores in the United States, Canada, and the United Kingdom and averaging over eight million customers visits each week. It is the sixth largest grocery store.

Unsucessful:

New York Central and Pennsylvania Railroad

In 1968, the New York Central and Pennsylvania railroads merged to form Penn Central, which became the sixth largest corporation in America. But just two years later, the company shocked Wall Street by filing for bankruptcy protection, making it the largest corporate bankruptcy in American history at the time.

The railroads, which were bitter industry rivals, both traced their roots back to the early- to mid-nineteenth century. Management pushed for a merger in a somewhat desperate attempt to adjust to disadvantageous trends in the industry. Railroads operating outside of the northeastern U.S. generally enjoyed stable business from long-distance shipments of commodities, but the densely populated Northeast, with its concentration of heavy industries and various waterway shipping points, had a more diverse revenue stream. Local railroads catered to daily commuters, longer-distance passengers, express freight service and bulk freight service. These offerings provided transportation at shorter distances and resulted in less-predictable, higher-risk cash flow for the Northeast-based railroads.

Problems had been growing throughout the decade, as an increasing number of consumers and businesses began to favor, respectively, driving and trucking, using the newly constructed wide-lane highways. Short-distance transportation also involved more personnel hours (thus incurring higher labor costs), and strict government regulation restricted railroad companies' ability to adjust rates charged to shippers and passengers, making post-merger cost-cutting seemingly the only way to impact the bottom line positively. Of course, the resultant declines in service only exacerbated the loss of customers.

Penn Central presents a classic case of cost-cutting as "the only way out" in a constrained industry, but this was not the only factor contributing to its demise. Other problems included poor foresight and long-term planning on behalf of both companies' management and boards, overly optimistic expectations for positive changes after the merger, culture clash, territorialism and poor execution of plans to integrate the companies' differing processes and systems

Transaction

On June 16, 2017, Amazon and Whole Foods Market, Inc. announced that they have entered into a definitive merger agreement under which Amazon will acquire Whole Foods Market for $42 per share in an all-cash transaction valued at approximately $13.7 billion, including Whole Foods Market’s net debt.

Whole Foods Market will continue to operate stores under the Whole Foods Market brand and source from trusted vendors and partners around the world. John Mackey will remain as CEO of Whole Foods Market and Whole Foods Market’s headquarters will stay in Austin, Texas.

Completion of the transaction is subject to approval by Whole Foods Market’s shareholders, regulatory approvals and other customary closing conditions. The parties expect to close the transaction during the second half of 2017.

Amazon’s offer of $42/share represent almost 27% premium over last closing share price whole food market.

Since scheme is yet to filed with the regulatory authority we have assumed that majority shares of promoter and Institutional investors (holds 92% stake) are bought by Amazon.

Conclusion

Amazon last December revealed Amazon Go Store a machine learning technology enabled store but which were small compared to big super markets. With successful acceptance in the market now it wants to expand into grocery store market with aggressive approach. Therefore, with ready infrastructure, it acquired Whole Food Market who was losing market share and revenue. Amazon now will start competing with other big players viz. Walmart. Other players will have to collaborate for a greater market share and update or bring latest innovative technology to compete Amazon. The exit by promoters of Whole Food Market and Institutional investors has helped them to avoid further losses. Whereas it seems other shareholders of whole food market will have options to surrender the share as this premium or participate in the future expansion. Synergy benefits and quick scaling up of offline distribution will benefit Amazon to create more shareholders value