Posted: December 15, 2015 |  AUTHOR: KEN FOX | CONTACT ME

 

Dramatic changes are taking place in corporate America. The rate of major corporate structural changes from divestitures, mergers, acquisitions and inversions is the highest seen in many years. These are mostly prompted by the desire to reduce costs or claims of adding shareholder value Sometimes they are prompted by “activist investors” or investment banking organizations, which facilitates the acquisition.

Some global 2015 mergers and acquisitions include:

Screen Shot 2015-12-22 at 1.41.07 PM

Source: Wall Street Journal, December 10, 2015 

*Adjusted from original published $149 billion

dow

  Several other global mergers or acquisitions pending at the close of 2015 include:

  • Between DuPont and Dow Chemical (U.S.). Valued at $130 billion.
  • The acquisition of Syngenta AG (Switzerland) (the world’s largest pesticide producer) by China National Chemical Corp. (China). Potential valued at $42 billion.
  • Marriot’s acquisition of Starwood hotels, valued at $12.2 billion

Several pending U.S. company spin-offs include:

  • Danaher Corporation is expected to launch a new company in 2016, Fortive Corporation, which will consist of two segments, Professional Instrumentation and Industrial Technologies.
  • YUM will split off its China operation in 2016, listing it as a separate company on the NYSE.
  • Yahoo may sell its internet business or split in some other way.

hp

Hewlett-Packard officially split in two during 2015. One split company, HP Enterprises will be headed by current CEO Meg Whitman. It will consist of five segments: the Enterprise Group, Enterprise Services, Software, Financial Services and Corporate Investments. HP, Inc., the other split company, will sell printers and personal computers.

Simultaneously, the U.S. government has blocked several major mergers in 2015, including:

  • Electrolux (Sweden) from acquiring General Electric’s appliance unit (U.S. Justice Department)
  • Staples and Office Deport (U.S. Department of Commerce)
  • Sysco (Houston, Texas food service company) and US Foods (Rosemont, Illinois) (by the US Federal Trade Commission)

 other

  A merger with Medtronic  (the second largest U.S. manufacturer of medical devices) and Covidien (a large medical supply company based in Ireland) was approved and took place in January 2015. This merger, valued at about $50 billion, represents a tax inversion, where the headquarters of the new company, Medtronic PLC, will be domiciled in Dublin, Ireland. The deal will effectively lower Medtronic’s 35% corporate tax rate in the U.S. to Ireland’s tax rate of 12.5%. The merger is complicated and involves personnel in more than 160 countries. Costs will additionally be reduced by eliminating redundant jobs in areas such as accounting and finance, and where duplicate real estate ownership exists in similar locations. Covidien’s U.S. operational headquarters are located in Mansfield, MA and Medtronic’s operational U.S. headquarters will continue to be in Minneapolis, MN.

Medtronic’s CEO, Omar Ishrak, stated the objective and benefits of the merger this way:

“…with an underlying objective to solve healthcare’s biggest challenge–expanding access and improving clinical outcomes, while lowering costs.”

  pfizer

Increased tax inversions are expected to continue despite U.S. Treasury efforts to dissuade them. Another example is Pfizer’s acquisition of Allergan (maker of botox) which is also also based in Dublin, Ireland. This very large deal is valued at $160 billion. Some analysts say this deal price was allowed to likely increase because of Pfizer’s tax savings from the inversion, due to its pending base in Ireland.

In reality, as the U.S. Treasury department tried to prevent more inversions it has prompted U.S. companies to pay more than they used to.

Commentary

The trend to consolidate companies is disconcerting in many ways. It reflects a changing corporate America landscape with fewer companies, more unemployed and challenges for merging cultures, computer systems and more international operations. It also reflects a tremendous cost reduction emphasis and make more profit mentality. It also reflects the failure of some companies to implement successful in-house growth strategies. They are opting to merge in order to expand their product and service lines, and hopefully increase profitability.

Additional companies such as PEPSICO are being pressured to split by “activist investors.” Thankfully, Indra Nooyi, CEO, has refused, in essence, saying PEPSICO is doing fine, thank you.

The U.S. trend to merge, divest or combine with another company will also incent the U.S. government to scrutinize these deals more carefully. Watch for new laws making it harder for companies to do inversions. This is  where their U.S. tax bills are meaningfully reduced, hopefully freeing up capital for new investment and increased payments to employees and shareholders.

Globally, the impact includes:

1. Other companies in relatively high corporate tax nations doing the same

2. Increased unemployment due to downsizing and consolidation

3. Significant accounting changes and SEC (if relevant) reporting

4. Corporate investment ratings will be more challenging, e.g. how does one assess a new giant merger?

5. Employee stress will increase as they await for their merged companies to announce downsize plans, reorganizations and new reporting structures.

Resources:

  1. Medtronic, Covidien in Talks to Merge, USA Today, June 16, 2014
  2. Pfizer-Allergan could Be A Super Inversion Deal, Fortune, Oct. 29, 2015
  3. Data: Tax Inversion Still Going Strong as M&A Weakens, CNBC News, November 24, 2015
  4. How Hewlett-Packard Plans to Split in Two, Fortune, July 1, 2015
  5. ChemChina is in Talks to Acquire Syngenta, Bloomberg Business, November 12, 2015
  6. Electrolux Will Pay Breakup Fee; Heat on CEO Rises, Wall Street Journal, December 10, 2015
  7. Challenge of Integration Awaits Medtronic after Covidien Acquisition, Star Tribune, February 3, 2015
  8. U.S. Department of the Treasury, Fact Sheet: Additional Treasury Actions to Rein in Corporate Tax inversions, Nov. 19, 2015
  9. Medtronic Completes Acquisition of Covidien, Medtronic Corporation Press Release, January 26, 2015, Dublin, Ireland
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©2017, The Global Galaxy blog is produced by The Soundings Group, LLC, Charleston, South Carolina, USA, www.thesoundingsgroup.com. The company is an international business consulting firm, specializing in new market assessments, market entry strategies and marketing guidance. The scope of Global Galaxy is to cover timely international trends, issues and business building ideas. Its purpose is to educate, inform and stimulate thinking for business opportunity analyses.

 

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