University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Mergers & Acquisitions Paper
Mergers and acquisitions is an important aspect of corporate strategy, finance and management. This is done with the buying, selling, dividing and combining of different companies and similar entities. It can help an enterprise grow rapidly in its sector as well as the new sector it just acquired without the hassle of creating a subsidiary from scratch. This activity is on the rise worldwide. According J. Finnegan in “Global Mergers and Acquisitions Activity Continue to Rise” article, this increase has been accompanied by the return of mega-deals (value exceeding $10 billion) driven primarily by large multinational corporations flush with cash in the U.S. Two of the biggest acquisitions in 2012 are from the Energy Industry and Tech industry where Duke Energy Corporation acquired Progress Energy Inc. and Google acquired Motorola Mobility.
I) Duke Energy Corp. acquired Progress Engergy Inc.
According to Yahoo finance, in the first case in the energy industry, when the merger was announced on January 10, 2011, the transaction value totaled $26 billion, including Progress Energy’s debt. Currently based on Duke Energy’s share price and including Progress Energy’s debt, the transaction is valued at about $32 billion. Duke Energy Corporation (DUK) announced that it has acquired Progress Energy Inc., effective July 2, 2012. The original Duke Engergy includes Duke Energy International, which operates power plants in Central and South America; Duke Energy Renewables, which develops and owns wind and solar projects in the U.S.; and Duke Energy’s Midwest generation and Duke Energy Retail, which generate, market and sell electricity in the Midwest.
Now, the new entity has nearly $49 billion in market capitalization, total assets more than $100 billion and 7.1 million electric users in the Carolinas, Florida, Indiana, Kentucky and Ohio. The transaction makes Duke Energy the largest U.S. utility and increases its ability to build new power plants to meet future greenhouse-gas emissions limits. Earlier, Chicago-based Exelon Corporation (EXC) was the largest U.S. utility. The new company would be known as Duke Energy with headquarters in Charlotte, and substantial operations in Raleigh, North Carolina. Duke Energy would trade on the New York Stock Exchange under the symbol “DUK”. Pursuant to the merger deal, Progress Energy has become a wholly owned direct unit of Duke Energy. On a standalone basis, Duke Energy had an adjusted earnings per share guidance range of $1.40 – $1.45 for 2012.
Under the terms of the merger agreement, each share of Progress Energy common stock has been converted into the right to receive 0.87083 shares of Duke Energy common stock. Due to the effect of the 1-for-3 reverse stock split, which was completed related to this merger transaction, this guidance range is the equivalent of $4.20 – $4.35 per share. The combined company continues to target 2012 adjusted earnings per share range of $4.20 – $4.35. The reverse stock split is designed to reduce the number of outstanding Duke Energy shares. The merger is expected to keep the company’s long-term goal of 4% – 6% growth in good shape. Overall, their strong balance sheet, ongoing capital expansion projects and an above average dividend yield are very good signs that this merger and acquisition is working well for them.
II) Google acquired Motorola Mobility
One of the world’s most valuable brand name in the tech industry is Google, Inc. – a silicon valley native company. Founded in 1988 out of a garage, it has now become the largest and most popular search engine on the Internet. Its strong growth is credited to its creative, think outside the box and risk-taking culture. In recent years, it has been involved in a lot of new ventures and mergers and acquisitions with different industries to expand its operation. One of its new product is the Android operating system offered for free to smartphone manufacturers to compete with the Apple iphone’s iOS system.
Google has also been trying to produce and release its own smart phones but hasn’t met much success. In addition, it is facing the risk of many lawsuits relating to pattern with Apple. So in smart and bold move, Google has decided to acquire phone maker Motorola Mobility and completed this deal in May 2012 for a whopping $12.5 billion which makes it the largest Google acquisition ever! This will definitely push it deeper into the fast growing cell phones industry.
Motorola Mobility used to be a strong player in the cell phone industry but in recent years, it has struggled and suffered constantly. As its line of smartphones has waned in popularity, Motorola Mobility has suffered losses totaling $1.7 billion during the past three years while Google has earned a
total of $25 billion over the same stretch. The acquisition is largely a defensive one from Google’s perspective. Google needs Motorola’s trove of 17,000 cellphone patents (plus an extra 7.500 that are awaiting approval) to defend Android phones against lawsuits by Apple, which accuses them of copying iPhone features. It’s now playing in Apple territory.
Buying Motorola gives Google the ability to control both hardware and software, by making its own integrated smartphones and other devices. Under the term of the acquisition, Google will acquired all outstanding common shares of Motorola for $40 per share and transaction costs were $50 million. Out of the 12.4 billion total purchase price, goodwill takes up to $2.6 billion, patterns takes up to $5.5 billion with only $670 million to other net assets.
Although it initially was drawn to Motorola Mobility for its patents, Google has been signaling recently that it has been drawing up more ambitious plans for Motorola Mobility. Besides producing smartphones and tablet computers, Motorola Mobility also makes cable-TV boxes that could provide Google with a springboard for delivering more of its services, including advertising, to living rooms.
Goldman , David. “Google seals $13 billion Motorola buy.” 22 2012: n. page. Print. <http://money.cnn.com/2012/05/22/technology/google-motorola/index.htm>.
“Google completes $12.5B acquisition of phone maker Motorola Mobility after China clears deal .” 22 2012: n. page. Web. 25 Oct. 2012. <http://finance.yahoo.com/news/google-completes-motorola-mobility-acquisition-152235759.html>.
Finnegan, Jim. “Global mergers and acquisitions activity continues to rise.” 24 2011: n. page. Web. 25 Oct. 2012. <http://americancenturyblog.com/2011/05/global-mergers-and-acquisitions-activity-continues-to-rise/>.