H.J. Heinz M&A Case Solution
1.Describe the activities of Nelson Peltz and the role he played in laying the groundwork for the acquisition by Berkshire Hathaway and 3G.
Mr. Nelson Peltz played the fundamental role after getting a stake of 5.4% in the company. After acquiring the stake, he demanded real control in the management of the company, which he got in terms of two seats on the board. After analyzing the overall market conditions and its comparison with Heinz, the company is incurring useless cost that should be cut in order to focus on some growth opportunities. For this, a massive restructuring took place in which about 27000 employees were fired and a share buyback program was initiated. In addition to this, he was the one who proposed to sell the firm due to its poor performance.
Nelson Peltz wanted the company to reduce the non-core assets and other extra activities by use of liquidation in order to recapitalize for expansion in the operation size and efficiency. They proposed that Heinz should repurchase the stocks from liquidation and try to reduce the risk of over-costing. After the tiring efforts of the active shareholders, the company succeeded in proving itself as an attractive prospect for the buyers to buy, which is evident from the proposal of 3M and Berkshire who were jointly interested in buying H.J Heinz for a price of $72.50 per share.
The overall investment interest of Mr. Shareholder in the company are in such a way that 3,250 shares were held directly and the similar amount indirectly, which are held by Trian Fund Management of which Mr. Nelson was CEO. In addition to this, Trian Fund Management owns shares of about 100,000. With this much percentage of ownership as well as the increased reputation, Mr. Nelson succeeded in getting the buyers with the attractive bid for Heinz.
2.Discuss the positions of various stakeholders including Heinz shareholders, management, employees and citizens of Pittsburgh.
In the given case, Shareholders have the ultimate influence on the control of the company. By looking at the company from a historical perspective, the company was not earning the required rate of return for its shareholders, which created problem for the managers of the company because as it was their ultimate duty. With the increased pressure from the shareholders and the help of Mr. Nelson Peltz, the activist shareholders of the company began to consider selling the company to prospective buyers.
The deal proposed by the merger and acquisition in reverse triangular merger could provide the value for the shareholders of the company as well as can provide the future global growth. The company has always considered its employees as its assets, this has added in the cost of the company. Therefore, after 5.4% stake by Mr. Nelson, he proposed to cut the cost by firing 27,000 employees. From the perspective of employees, the deal created issues.
Some shareholders of the company were in the form of investment advisors, banks, and other investors, who invested some stake within a company and had the authority to make decisions based on future expected results provided by Heinz. However, majority of them were in favor of acquisition due to the high value per share offered by the acquirer.
The management controlled company’s operations; they were engaged in the process of acquisition through legal terms, termination offer, and autonomy due to the positive response from shareholders regarding the company’s acquisition.
Their other responsibility was disclosure of information to the shareholders in order to know the expected future results generated by the Heinz. Therefore, without the efforts of management, the shareholders would not know about the company’s operational activities.
Other main issue was the citizens of Pittsburgh, who were confused about the decision of acquisition because they knew that the operations might relocate into other regions or parts in the world and that could hurt the employment rate of the city and its relationship with the company.
This could decrease the market demand of the company’s products because if the relocation would occur, then the goods might imported to the country with high prices due to import duties and would distract the response of the citizens within Pittsburgh. According to the expected contingencies, the citizens would disagree with the proposal of acquisition by 3M Company and Berkshire.
3.Discuss the go-shop process, explain why it may be necessary and list any potential risks of such a process.
The go-shop process helps the target company in getting optimal price for their company by reviewing alternative proposals. The process starts after the merger agreement is signed with the prospective buyer. Furthermore, on termination of such an agreement, the target company is required to pay a termination fee, which in the given case is about $ 750 million. The termination fees would be paid in case if Heinz decides to sell itself to another prospective buyers rather than the current buyer.
The overall impact of this process is that it helps in getting the optimal price after locking the first offer price. If the company gets even better price, it could avail that opportunity by just paying the termination fees. The first offer could be used as a benchmark for the evaluation of the offers from the other buyers. The overall issue in such kind of a process is the fixation of termination fees, which could be a problem for the target company.
The significant risk in this process from the buyer’s perspective is the window dressing, which is used by the managers of the target company to increase the value of the company. The potential bidders have a limited time to take the deal, which is insufficient to conduct the proper due diligence. This could create significant loss for the potential buyer.
From the seller’s perspective, the risk is the loss of confidential information that is revealed in the market and in the case if the market conditions change, then company can significantly lose its worth.
4.Why investment bankers involved in this transaction and what are their respective roles?
Investment bankers in this deal played an advisory role in order to identify the requirements of activist shareholders, in developing the strategies for the company, as well as work in the best interest of the directors and executive officers in the acquisition.
From the historical analysis of the declining trend of the company’s performance, the activist shareholders were focusing on either the sale of the company or the wind up some of the departments including the firing of the employees, which were only adding cost to the overall company.
The investment bankers help in getting the correct valuation of Heinz and advise on the future aspects of the company. In addition to this, the investment banker can help in financing the deal. It can be seen that the deal requires $ 28 billion, which could be funded from the help of investment banker. Moreover, insurance could also be provided from these banks to finalize the deal.
Lastly, the bankers can provide guidance on the additional premium paid in this deal, after it is finalized. The investment bankers involved in this deal were from the top ten banks who were engaged in such kind of activities previously as well and had positive results every time.
5.What was the reason for an all cash deal and what is the disadvantage of this form of consideration (as opposed to using common stock as consideration). What are the risks and benefits of this transaction for 3G and Berkshire Hathaway?
The reason for all cash deal is that it helps in raising the additional amount of debt when buyers lack the required amount of cash to close the deal. Moreover, this deal could examine the liquidity position as well as the potential rating on credit ratings.
This could be done from the slight positive returns to acquire the shareholders of other company. The deal could provide transparency as well efficiency for both sides of the transaction. In addition to this, it could also help in analyzing immediate gain or loss from the deal.
However, this type of deal could also create some issues in terms of tax consequences for the target shareholders. Moreover, it could also result in the downgrading of the company on major credit ratings. These risk and benefits should be considered by 3M and Berkshire Hathaway in order to close the deal with the company.
As opposed to the cash deal, all stock deal estimates the market risk and fixes it in the price of the deal through the shares. Moreover, it calculates the ownership percentage and the optimal swap ratio for the deal. In addition to this, it has a higher termination fees when compared with the all cash deal……………………….
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