Mergers, Mergers Everywhere, and Not a Drop to Spare

Warren Buffet gets to play Willy Wonka, as he facilitates the acquisition of chewing gum giant Wrigley by closely-held candy conglomerate Mars Corporation, maker of M&Ms, Snickers, Mars and Milky Way bars. The deal, announced on April 29, 2008, will involve Mars and Warren Buffet’s Berkshire Hathaway teaming up to acquire Wrigley for $23 billion. Wrigley shareholders will receive $80 per share in the buyout, which represents a 28% premium over the share price at the market close on Friday. After the announcement of the news, Wrigley stock prices were on the rise.

The resulting privately-held company will be a major force in global candy markets. A spokesman for Mars indicated that the company plans to use the Wrigley brand to improve market penetration in fast growing areas Russia, Asia and India. Financing for this deal was provided by Goldman Sachs and JP Morgan, which was widely seen as a sign of confidence in the capital markets that these investment powerhouses were able to get behind this deal with significant financing.

Meanwhile, in other merger news, Circuit City’s largest shareholder, hedge fund HBK Capital Management, has urged the electronics retailer to sell itself to video rental giant Blockbuster. A Monday letter from HBK to the company stated, “We have concluded that the combination of the two companies would create significant value for all shareholders.” In February, Blockbuster made a $1.35 billion cash bid for the retailer, which was refused. Expect a long proxy fight over board members who either favor or oppose the deal.

In tech news, Microsoft continues to try to sweeten the pot on its offer to acquire Yahoo, indicating in a court transcript in the context of shareholder’s litigation over the proposed merger that it would devote $1.5 billion to employee retention at Yahoo. Merger talks are still in the works, but are being held up by a variety of factors, including weaker than expected first quarter earnings from both companies. Microsoft has bid $44.6 billion for Yahoo, but the deadline for responding to the offer passed without comment by either company, raising the odds that the takeover could go hostile.

The airline industry’s recent struggles to keep flights on time, as fuel costs mount, passenger service declines, and ticket prices rise has become legendary. Amid several high profile airline bankruptcies, including NWA and EOS airlines, the remaining giants are considering merger possibilities. On Monday, Continental Airlines broke off merger talks with United, citing the other airlines’ huge first-quarter losses as a reason why the risks of the deal might outweigh the benefits. United is now said to be courting US Airways.

So, why so many mergers in hard economic times? On one hand, shortage of capital and tighter terms for borrowing from banks still reeling from the credit crunch should make mergers less likely to take place. But, when reduced spending on consumer goods like candy, electronics and airline tickets makes it tougher for competitors to compete in a down market, the school-yard psychology of “if you can’t beat ‘em, join ‘em” prevails. When companies merge, they can improve efficiency, eliminate redundancy and pool resources to create a leaner, stripped-down version of operations for both businesses that may have greater market penetration and global reach. Mars and Wrigley, for example, can combine sales and distribution networks, a major plus. And, the merged entity can fire lots of people, reducing one of their biggest costs — employee payrolls — and thus increasing the bottom line.

What do you think about the recent spate of mega-mergers, both actual and theoretical? Specifically, do you think that these mergers are likely to lead to lower prices for consumers, of just greater profits for struggling corporations? We want your feedback.