The credit crunch is not going away, and as a result, there has been a sharp fall-off in leveraged buyouts (LBOs). Basically, only relatively small LBOs -- between $1 billion to $2 billion -- are getting done.
But there is a bright spot: strategic acquisitions. If anything, we are seeing a variety of mega deals in this category. A survey from Dealogic shows that – as of June 25 – there were $597 billion in strategic M&A transactions, only 2% down from last year's total.
When it comes to a mega M&A deal that involves an old-line company and a founding family, Warren Buffett is on speed-dial. For example, his firm, Berkshire Hathaway (NYSE: BRK.A), provided $4.4 billion in financing for the Wrigley Co. (NYSE: WWY) buyout.
Now, Warren is plunking down some more cash on another big deal: Dow Chemical Co's (NYSE: DOW) $18.8 billion cash purchase of Rohm & Haas Co. (NYSE: ROH). In this case, the contribution comes to about $3 billion (in the form of a convertible preferred structure, which has a nice 8.5% coupon rate). As a result, Berkshire will become Dow's largest shareholder.
Yes, the US economy continues to be bleak and there is lots of fear. But, for long-term investors – such as Warren – this is an ideal time to pick up juicy opportunities.
In fact, this is evidence that the smart money sees lots of value from M&A deals – especially transformative ones. Then again, in order to compete on a global scale, there is a need for economies of scale.
For the most part, Dow focuses on petroleum-based chemicals. As for Rohm & Haas, it deals primarily with adhesives, personal care products, paints and so on. In other words, Dow is trying to find ways to diversify things.
Although, the deal for Rohm & Haas is no slam dunk. It's not easy to make such a transaction in a tough economic environment. Plus, Dow is paying a massive premium – thus setting a high bar for performance.
TheStreet.com's Jim Cramer says its stunning buy of Rohm & Haas will get people thinking about an energy top.
Just when you thought it was safe to short anything, particularly anything with any commodity exposure, Dow Chemical (NYSE: DOW) (Cramer's Take) comes along and inexplicably pays a gigantic amount of money, $78 in cash, for Rohm & Haas (NYSE: ROH) (Cramer's Take)? My first thought was that it must be a joke. That is inconceivable. A hoax. Something perpetrated by frustrated longs to spook the shorts.
I mean, a chemical company? Two chemical companies? Ground Zero for slowing economic activity and raw costs? People unsure if Dow could even pay its nearly 5% yield? I mean, even last night on my show, I made fun of the idea that people are confusing Becton Dickinson (NYSE: BDX) (Cramer's Take), a medical supply company, with a chemical company because it uses resin.
TheStreet.com's Jim Cramer says with few exceptions, the landscape is littered with corpses.
Sell everything. Nothing's working. Revisit when the prices are adjusted for a big recession, soaring inflation and a crushed consumer. Sell at 12,000 and come back at 10,000. Even better: short it.
Are you going to argue with any of that? Do you have a case against it? What's the counter? Takeovers? We've had a couple: Anheuser-Busch (NYSE: BUD) (Cramer's Take), Wrigley (NYSE: WWY) (Cramer's Take). Good if you owned them.
Lower rates? Can the Fed help? We assume the Fed is done. The odds favor higher rates. Bank turnarounds? How, with short-rates going up? With housing prices going down?
Can oil go down? Only with a worldwide crash, and with a worldwide crash, why would we come back at 10,000?
Can the consumer get more liquid? How? Unemployment's going higher. Wages won't go up in that environment.
That's the environment. It's pretty bulletproof when it comes to its logic.
Hershey (NYSE: HSY) is having growth problems. Not only is it tough just navigating this high-inflationary period, but it's difficult keeping up with the competition. Consumers have a lot of candy choices, and even though Hershey is a big brand name in confections, it thinks it can do better in the marketing department. According to thisWall Street Journal (subscription required) piece, Hershey intends on implementing a 20% increase in spending for promotions.
This double-digit jump in marketing is a smart move, but it won't be easy to digest. With the aforementioned inflationary pressures on the rise, Hershey is going to be sufficiently challenged to push growth while balancing the upward trends in input costs. But is there really a choice here? When you have a super brand like Hershey running into trouble, the thing you need to do is get out there and prop up the inherent equity of the product portfolio.
Yet, there's a bit of a conundrum here, I think. Hershey needs to get people to buy its delicious candies (I'm certainly a fan of the awesome Reese's Peanut Butter Cup). Which demographic loves sweets? Younger kids. They would have represented a great group for growth opportunities, but Hershey has to be careful about marketing too much to this demo since the country has, rightly so, been focusing on healthy alternatives to fatty foods. Even though Hershey has been trying to make some of its portfolio healthier, the flagship brands will always be, one assumes, sugary and full of empty calories. In fact, Hershey is more than aware of this issue, as this corporate link demonstrates.
This past week, Wrigley Co. (NYSE: WWY) filed a proxy statement for its $23 billion sale to Mars. And, if you go to page 18, you'll see an account of the transaction -- and how Goldman Sachs Group (NYSE: GS) was a key player.
Actually, it was back in 2006 that Goldman arranged a meeting between Wrigley and Mars. After signing confidentiality agreements, the parties talked about possible business arrangements (although, a buyout was not mentioned -- but, I'm sure, it was something everyone was thinking about, especially Goldman).
However, by August 2007, Mars and Goldman talked about possible strategic options. One suggestion: buy Wrigley. To this end, Goldman arranged a meeting with Berkshire Hathaway (NYSE: BRK.A) to explore financing possibilities.
By April 2008, Mars had made an overture to William Wrigley, Jr., to discuss a possible transaction. The result: Mars offered $75 per share.
Of course, the price was not enough. As a result, there were several more bids -- with the final one at $80 per share.
Late last year, the Campbell Soup Company (NYSE: CPB) sold off Godiva Chocolatier for a cool $850 million. So why give up such a prized brand?
Well, it will mean that Campbell can focus on its core business of soups and snacks. Next, the chocolate market is highly competitive -- especially in light of the recent deal between Mars and Wm. Wrigley Jr. Company (NYSE: WWY).
The deal was also a big help for the Q1 results. Net income went from $217 million, or $0.55 per share, to $532 million, or $1.40 per share. Revenue increased 7.4% to $1.88 billion. Unfortunately, soup revenues were meager, falling 3%. Simply put, Campbell's competitors are getting the upper hand. It also doesn't help that there is commodities inflation.
On the conference call, Campbell was upbeat. After all, the company is launching a variety of health-conscious offerings. But so far, investors aren't convinced. In today's trading, Campbell's shares fell 6% to $33.70. It was the lowest level in eight years.
TheStreet.com's Jim Cramer says they have successfully increased price, and their stocks have room to run.
It's tough not to be a Pollyanna after talking to Bill Johnson, the CEO of Heinz (NYSE: HNZ) (Cramer's Take), and after reading the Procter & Gamble (NYSE: PG) (Cramer's Take) quarterly transcript. Both of these companies have had to deal with hundreds and hundreds of millions of dollars of raw cost increases, and both have not only come through with flying colors but are more profitable than I bet even they thought they could be.
PG is amazing. Almost every business was up much more than people thought possible, with divisions like razors and hair care (shampoo) so strong that you would think that suddenly a large part of the populace has decided to start shaving and shampooing for the first time.
Innovations, like the Fusion blade, have produced remarkable returns in a short time, as Fusion is yet another billion-dollar brand that didn't exist a couple of years ago.
Stocks futures were lower early Tuesday morning ahead of the Federal Reserve Open Committee two-day meeting set to start today. On Wednesday, Fed chairman Bernanke will announce the policy decided, and while most investors expect a quarter point rate cut, they also expect the Fed to announce a pause in the cuts following some inflationary pressures.
On Monday, stocks finished the day little change ahead of the Fed meeting and despite some big deal news involving candy maker Mars and Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) buying chewing gum maker Wrigley (NYSE: WWY) for some $22 billion. Also, Kirk Kerkorian's Tracinda Corp. announced its intention to purchase 20 million of Ford (NYSE: F)'s shares at $8.50 per share. With that, the Dow industrials ended the day down 20 points, or 0.16%, the S&P 500 fell 1 point, or 0.11%, while the Nasdaq rose 1 point, or 0.06%.
Not many economic releases today. Still, already RealtyTrac reported that foreclosures soared 112% in the first quarter, compared to a year earlier. And still in the housing sector that doesn't seem to be able to find a bottom yet, before the bell, the S&P/Case-Shiller home price index is due for release. Also today at 10 a.m. EDT, April consumer confidence index will be reported and economists are expecting the index will slide from the previous month. With higher food and energy prices, along with the troubles in the housing sector and the increasing troubles in the labor market, this is far from surprising.
Today was a mixed day, which is evident in the tape. Today we had one of the top food deals announced, yet Warren Buffett came out and said we were in a recession. There were also concerns that the housing market will continue to slide along with general credit conditions, and that black stuff in the barrels was up $0.25 at $118.77 on last look.. Here were the unofficial closing levels:
Bebe Stores, Inc. (NASDAQ: BEBE) fell after a downgrade by Roth Capital Partners from a Buy to a Hold rating, citing disappointing sales and conservative guidance. The company reports earnings Thursday. Shares fell by more than 10% to $9.86 on the news.
Shares of Hershey Co. (NYSE: HSY) have jumped more than 6% on the news of the $23 billion takeover of Wm. J. Wrigley Co. (NYSE: WWY) by Mars Inc. and Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A) as investors bet that the maker of the eponymous chocolate bar won't stay independent for long.
Hershey, though, is a basket case thanks to soaring commodity costs and hopefully the growing interest in healthier eating. That will heighten the pressure on Hershey management to do a deal with Cadbury Schweppes Plc. or find another sugar daddy (pun intended).
"The deal would have clear strategic logic, as Cadbury, the world's biggest confectionery group, lacks presence in the U.S. chocolate market, while Hershey is looking to expand overseas," according to the news service.
During the first quarter earnings conference call, Chief Executive David West sounded upbeat, saying the company was "making progress, while it is slower than we would like, we do see the initial signs of improving marketplace trends." He has high hopes for new products such as the Hershey Bliss. Investors, though, may not be patient.
The Hershey Trust Co., the chocolate company's largest shareholder, has resisted buyout offers in the past from Wrigley and has vowed to keep the company independent. You have to figure that the trust's board will change its tune at the right price.
On CNBC today, Warren Buffett talked about politics, foreign currency – and oh, his financing of Mars's $23 billion deal for Wrigley (NYSE: WWY). He likes the deal for a variety of core reasons: a sustainable long-term business, strong management and the fact that the business is something that's easy to understand (chewing gum is fairly basic, right?)
Yes, this is vintage Buffett.
As usual, the deal started with a phone call to the oracle of Omaha, and he wasted little time in getting things moving.
Wrigley is the largest maker of gum and Mars is a large maker of candies, with Snickers, M&Ms and so on in its arsenal of products. In all likelihood, this deal will spur further M&A activity in the global sector. Such deals will help companies deal with spiking commodities' prices as well as the difficulties in creating new brands.
What's more, both Wrigley and Mars are family dynasties. The former got its start in 1891 and the latter was launched in 1911. Basically, for such firms to link up, it's important that the principals understand the complexities of family dynamics. And, for the most part, Buffett seems to understand such things. In other words, he is a value-added investor who takes the long view. More importantly, he has a war chest of over $40 billion. So as time goes by – and more family businesses look to consolidate -- I'm sure Buffett will get more phone calls. Tom Taulli is the author of various books, including The Complete M&A Handbook (www.mergerbook.com) and is also a principal in Averiware, which provides an ERP system to small and midsize businesses.
Hershey (NYSE: HSY) has a market cap of $7.9 billion with long term debt of $1.5 billion.
HSY reported Q1 consolidated net sales of $1.6 billion on April 24. The Hershey Trust Co. holds the largest stake in HSY.
The WSJ reported Mars and Warren Buffett's Berkshire Hathaway (NYSE: BRK.B) were close to a pact to acquire WM. Wrigley Jr.Co (NYSE: WWY) for more than $22 billion according to people familiar with the situation.
HSY May option implied volatility of 25 is below its 26-week average of 27 according to Track Data, suggesting slightly less price uncertainty.
Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Mars Inc. and Warren Buffett's Berkshire Hathaway (NYSE: BRK.B) were close to a pact to acquire WM. Wrigley Jr.Co (NYSE: WWY) for more than $22 billion according to people familiar with the situation at The Wall Street Journal.
WWY over all option implied volatility of 24 is near its 26-week average according to Track Data, suggesting non-directional price risk.
Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Biggest Stock Losers Since the market slump began six months ago, U.S. companies have bled away trillions of dollars in value. 80% of companies in the Standard & Poor's 500-stock index have fallen in value, according to data provider Capital IQ. Here's a damage report. The biggest loser is Bear Stearns which lost $16.7 billion in value. Other big losers include National City Bank, Ambac, CIT, Countrywide, E*Trade, WaMu, Sprint Nextel & Freddie Mac. The Stock Market's Biggest Losers
6 Ways to Buy Checking 'Float' Time Is your bank speeding money out of your checking account faster than you can put it in? Do you feel like someone just set your financial hamster wheel on fast-spin? Welcome to the new reality of check "float" -- or lack thereof. Float refers to the time it takes for money to leave your checking account. Nowadays, it's harder to buy extra time to pay your bills. Here are six moves you can make today to reclaim some lost "float" time. 6 ways to buy checking 'float' time -Bankrate.com
The credit crunch is not going away, and as a result, there has been a sharp fall-off in leveraged buyouts (LBOs). Basically, only relatively small LBOs -- between $1 billion to $2 billion -- are getting done.
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Earnings preview: Does Kraft have the recipe for a successful quarter?
Fed reports stagflation
RadioShack (RSH) soars after reporting second quarter numbers
