Mergers & Acquisitions Roundup

The mergers and acquisitions (M&A) activity in this quarter was slow compared to the two most recent quarters in the financial world. The total amount of the deals was reportedly higher in dollar volume than the prior quarter, but the overall M&A picture is overshadowed by the unknown impact of new antitrust policies coming from Washington.

Those policies remain unrevealed to the public by the White House, and has placed most of the potential M&A activity on hold until further details emerge. However, amid all those changes some pending deals made progress and others fell apart. The past few months were still busy when it came to consolidations and other types of acquisitions.

Amazon Enters The Grocery Aisle

Amazon made a bold move into the retail grocery channel by acquiring Whole Foods in an all cash deal in June. The deal will give Amazon a foothold into an industry they have been trying to tap into for a long time without having to spend major capital on leasing or building store locations, training management and staff, as well as developing a distribution network specifically for those stores.

The addition of Whole Foods is going to make Amazon an even greater threat to the other players in the fresh grocery business segment. Amazon plans on keeping Whole Foods operational strategies mostly intact with retaining their business headquarters in Austin and keeping the brick and mortar store experience largely the same.

Walgreens Proposed Merger With Rite Aid Shelved

In the opposite direction, the M&A area was dealt a blow when Walgreens and Rite Aid announced that their long-pursued foray into merging together was being abandoned completely.

This proposed marriage of two of the largest retail pharmacy chains in the U.S. was riddled with issues from the outset. The regulatory boards involved have consistently been concerned with the fact that Walgreens and Rite Aid both had to divest a certain number of stores to meet antitrust requirements. This was further complicated because the industry contains a lack of suitable buyers for those locations.

Walgreens/ Rite Aid identified Fred’s, a largely Southeastern U.S. based chain of both pharmacies and discount type dollar stores, as the partner to absorb the locations that they both would have to sell off in order to meet approval on the merger. The regulators were not sure that Fred’s could double in size basically overnight and survive, especially expanding into the Northeast and other areas where they had no previous presence.

The sheer potential size of a combined Walgreens and Rite Aid ultimately doomed this proposed M&A transaction. Walgreens now has to determine another consolidation strategy in order to compete with CVS Caremark. Rite Aid, while pretty healthy overall with their business, has to be concerned about the tough competition from CVS and Walgreens in the Northeast. They also have to be concerned that another company is going to try to obtain them and absorb them in the short term.

The Big Get Bigger

In perhaps the most under the radar move of the year, AT&T is poised to become even bigger than they are currently with a proposed $85 billion acquisition of Time Warner. This is not just the cable television unit of Time Warner, this is the entire company.

This merger is expected, according to analysts close to the deal, to close and meet all final approval metrics within the next 60 days. This is a controversial merger in the eyes of many in the general public who have justifiable concerns about a multimedia conglomerate with that much influence.

AT&T and DirecTV are the same company, and they will now have control over broadcast channels such as TBS, TNT, CNN, and HLN. This represents a monopoly which can exert pressure upon advertisers and control the message in the media in a way that could be very dangerous.

Some consumers will feel that this is a conflict of interest with AT&T controlling a major satellite television platform as well as a full stable of broadcast channels.

New Rules Coming Soon

The White House will announce some sort of new rules for M&A activity that could make it potentially easier to consummate some of these mega deals. The Dow – DuPont merger looks like it is going to meet regulatory approval regardless of these future changes to the antitrust regulatory requirements.

The rules could allow for less oversight of potential monopolistic deals and could lead to a road where all the consumer is left with are very small “mom & pop” type stores or a store owned by some giant conglomerate with nothing in between.

The Dow-DuPont merger would be one of the largest in history and would be a very complex deal that would eventually create a corporate structure with separate divisions running as autonomous companies based on their shared specialty.

The analysts expect that the Dow-DuPont approval coupled with the regulatory changes could create conditions where M&A activity will ramp up significantly.

The “Q” Gobbles Up HSN

Liberty Interactive/QVC announced on Thursday that they have purchased the remaining stake in HSN (Home Shopping Network) to complete the acquisition of the network. QVC, or “the Q” as it is known in shopping circles, now has control of their top competitor, HSN, and the company is touting the cost savings from the shared core synergies for both networks.

It stands to reason that the systems for ordering and shipping will be upgraded to a unified platform. The knock on HSN is that the ordering process could be more cumbersome and the return process more complicated than that of the processes used by QVC. An improvement to any of those processes at HSN would be a real win for the consumer. This deal is also an indication of how robust the online competition from Amazon and other sites have been to the sales for twenty-four-hour home shopping networks.

Those networks, QVC and HSN respectively, were the advent of online shopping. They provided the first convenience factor of shopping from home, before the genesis of eBay, Amazon, and Craig’s List. Some feel that this merger could be seen as a monopoly, but the reality is that it is a necessary move for the survival of home shopping networks amid intense marketplace competition.

Berkshire Bets Big On Electricity

Berkshire Hathaway and their high-profile owner, Warren Buffet, announced on Friday that they have purchased Oncor, a Texas based power grid leader, for $9 billion in cash.

The acquisition is one of the largest that Berkshire Hathaway has ever undertaken. They are intrigued by the steady demand for electricity and the continued importance of electricity infrastructure in the future.

This move also pulls Oncor out of bankruptcy and into a stable of other companies and brands owned by Berkshire which could provide opportunities for strategic partnerships in energy delivery in the future.

Europe Cracks Down

The news on Thursday that the E.U. has reviewed the M&A activity of certain major players and decided to take punitive steps came as a surprise to some, and as no surprise to others within the business world.

The E.U. is investigating whether GE mislead their regulatory compliance process when the consumer products giant purchased a wind farming operation. The line of defense for GE, according to their spokespeople, is that the company did nothing to intentionally misguide the process. The E.U. law is written in a way that GE should they be found guilty of any wrongdoing would have to pay a fine in excess of one billion dollars.

The E.U. is also investigating Merck (the German company not the American pharmaceutical titan) for a similar matter in a completed merger where the valuations might have been altered to mislead the regulatory powers involved. They also face a hefty fine and the potential for an increased level of scrutiny whenever they decide to consolidate in the future.

The E.U. is also investigating electronics giant, Canon, for some alleged deceptive practices during their purchase of Toshiba’s medical imaging business unit. It would not reverse the acquisition, but it would be a significant fine if guilt is established. The reputation and corporate image of Canon could also take a hit in this situation as well.

The M&A activity has been largely put on hold in recent months. However, some of the largest merger activity could become reality in the next few months. These transactions will have an undeniable impact on the average consumer and will have influence over entire industry segments moving forward. It is important to understand how they can impact you and your family from the way it can impact costs of goods and services. The future will bring more of the same, so stay prepared.