As 2013 comes to an end, we look back at some major M&A deals of the year and how they changed the industry landscape.
American / US Air: The end of major US airline consolidation?
2013 M&A deal making started on a strong note with the proposed merger of US Air and American airlines in February. With this deal, American Airlines and US Air hoped to join together to create the world’s largest airline. Left unchecked, American and US Air, the fourth and fifth largest airlines, would have held over 20% of the US market and completely dominated some of the regional markets.
The deal hit an expected anti-trust roadblock, but the airlines reached a settlement with the Department of Justice in November. As part of the deal, which is expected to close in December, the combined airline would be divesting several assets at key hubs to low cost competitors.
At the close of this deal, approximately 70% of US airline traffic will be under the control of four airlines – American, Delta, United and Southwest. Given the high level of concentration, further consolidation among these players is unlikely in the near future.
Dell MBO: The changing face of the PC industry
2013 marked the end of the PC era, with falling sales for most of the major PC companies around the world. The industry was shell shocked by how quickly the PC business changed after the introduction of Apple and Google tablets. Michael Dell, along with Private Equity Group Silver Lake Partners, chose to steer Dell’s namesake company in a different direction by taking the company private.
Michael Dell’s $13.65 a share offer marked one of the biggest MBOs in history. In spite of the rapidly deteriorating financials at Dell, investors felt that Michael Dell’s offer undervalued the company. Activist investors, including Carl Icahn, pressured management to make concessions on deal terms and increase the offer.
Investors successfully got a few concessions and helped raise the offer price to $13.88 a share, but could push Michael Dell no further when alternative bids did not materialize. The deal is done but Dell’s future in the post-PC era is far from certain.
H.J. Heinz: One more global brand goes to private equity
Berkshire Hathaway and 3G capital acquired H. J. Heinz Co for $72.50 a share or $28 billion. The per share price reflected a 20% premium compared to the company’s value prior to the acquisition. With $8 billion of Berkshire’s $12 billion investment coming in the form a 9% preferred stock, this is a very nice deal for Buffett!
In addition to the premium paid, the Heinz deal breaks the mold from Buffett’s typical deals in other ways. The deal was financed with debt – increasing debt burden on companies is very un-Buffett like and is something that Buffett has criticized in the past. The acquisition also led to a new CEO and changes in the company’s senior management – again, a significant departure from Buffett’s playbook.
Some analysts see 3G Capitals ownership of Burger King as a potential problem for Heinz customers – the high profile defection of McDonalds is an example of the challenges Heinz will face in the short term. Regardless, this acquisition is likely to pay big dividends to Berkshire and 3G Capital shareholders for years to come.
Global brands have been prime targets for many private equity companies. Heinz’s acquisition by Berkshire and 3G Capital marks the continuation of that trend.
Sprint/Softbank: Tough be not a leader
As we entered 2013, Sprint was having a difficult time keeping up with AT&T and Verizon in the wireless business. It was lagging behind the market leaders in customer acquisition, and falling further behind its competitors on the 4G LTE rollout. As customer frustration with its older generation 3G increased, Sprint was looking vulnerable. The future was starting to look bleak as the company did not have the capital to compete with stronger players.
Softbank’s acquisition of 78% of Sprint for $21.6 billion was a good deal for a company in desperate need of capital. With the new capital infusion, Sprint has another shot at going after the market leaders. The synergies with Softbank will also lead to better economies of scale. A revitalized Sprint is good for the consumers and an effective counter to AT&T and Verizon.
Moving into 2014, Sprint is using its newfound capital to rapidly deploy its own cutting edge 4G LTE technology.
Blackberry / Fairfax: The deal that never was
Blackberry, a company that defined mobile email and the run-away market share leader until 2008, is in trouble. After several mis-steps and bungled product launches, the company finds itself a technology laggard rapidly losing market share. By the end of 2012, Apple iOS and Google Android had taken over the smartphone market, leaving Blackberry in third place.
The company was in a financial and technology tailspin when Fairfax Financial, a 10% owner of the company, launched a $9 per share bid that valued BlackBerry at $4.7 billion. The street doubted the deal would happen. BlackBerry stock traded consistently well below the offer price. However, Fairfax CEO and the legendary Canadian executive Prem Watsa would have none of that.
“We wouldn’t put our name to such a high-profile deal if we didn’t feel confident that at the end of the day that our due diligence would be fine and we’d be able to finance it,” Watsa said in a Reuters interview.
On the day that the deal was to be finalized, Fairfax announced that it had dropped out of the deal. Instead, Fairfax worked with Blackberry’s board and announced new financing, an outside CEO, and a new business strategy for Blackberry.
The deal that never was tarnished Watsa’s reputation as “Canada’s Buffett”. As 2013 ends, Blackberry finds itself in further trouble as its market share position slipped another notch to fourth position, behind Google, Apple, and Microsoft.