Mergers, Acquisitions, Divestitures, and Other Restructurings. Paul Pignataro
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able to compete in the rapidly changing office solutions industry. Customers will benefit from enhanced offerings across multiple distribution channels and geographies. The combined company, which would have had pro forma combined revenue for the 12 months ended December 29, 2012 of approximately $18 billion, will also have significantly improved financial strength and flexibility, with the ability to deliver long-term operating performance and improvements through its increased scale and significant synergy opportunities.
Under the terms of the agreement, OfficeMax stockholders will receive 2.69 Office Depot common shares for each share of OfficeMax common stock.
“In the past decade, with the growth of the internet, our industry has changed dramatically. Combining our two companies will enhance our ability to serve customers around the world, offer new opportunities for our employees, make us a more attractive partner to our vendors, and increase stockholder value,” said Neil Austrian, Chairman and Chief Executive Officer of Office Depot. “Office Depot and OfficeMax share a similar vision and culture, and will greatly benefit from drawing on the industry's most talented people, combining our best practices and realizing significant savings. We are confident that this merger of equals represents a new beginning for our two companies and will allow us to build a more competitive enterprise for the long term.”
“We are excited to bring together two companies intent on accelerating innovation for our customers and better differentiating us for success in a dynamic and highly competitive global industry,” said Ravi Saligram, President and CEO of OfficeMax. “We are confident that there will be exciting new opportunities for employees as part of a truly global business. Together, we will have the opportunity to build on our strong digital platforms and to expand our multichannel capabilities to better serve our customers and to compete more effectively. Importantly, this merger of equals transaction will provide stockholders of both companies with a compelling opportunity to participate in the long-term upside potential of the combined company.” (OfficeMax, Office Depot press release, February 20, 2013)
In this press release dated February 20, 2013, Office Depot and OfficeMax announce a proposed merger.
OfficeMax provides office supplies and paper, print and document services, technology products and solutions, and furniture to businesses and consumers. OfficeMax consumers and business customers are served by approximately 29,000 associates through OfficeMax.com, OfficeMaxWorkplace.com, and Reliable.com, more than 900 stores in the United States and Mexico, and direct sales and catalogs.
Office Depot provides office supplies and services through 1,628 worldwide retail stores, a field sales force, top-rated catalogs, and global e-commerce operations. Office Depot has annual sales of approximately $10.7 billion, employs about 38,000 associates, and serves customers in 60 countries around the world.
What is the purpose and viability of such a merger? How will the merger be funded? What happens to each entity involved? What happens to the shareholders? What are the potential impact, benefits, and drawbacks to such a merger? There are technical analyses used by Wall Street analysts to help answer such questions. We will walk you through the complete merger analysis as a Wall Street analyst would.
It is important to note that the modeling methodology presented in this book is just one view. The analysis of OfficeMax and Office Depot and the results of that analysis do not directly reflect my belief, but rather, are a possible conclusion for instructional purposes based only on limiting the most extreme of variables. There are other possibilities and paths that I have chosen not to include in this book. Many ideas presented here are debatable, and I welcome the debate. The point is to understand the methods and, further, the concepts behind the methods to equip you properly with the tools to drive your own analyses.
How This Book Is Structured
This book is divided into three parts:
1. Introduction
2. M&A Analyses
3. Office Depot/OfficeMax Merger
In Part One, we explain the M&A framework from a high level, overviewing types of transactions and the M&A process. We will also provide a refresher on the core financial statements, which will help you understand concepts demonstrated in Parts Two and Three.
Part Two will step through the process of an equity raise, a debt raise, a simple asset acquisition, an asset divestiture, and an accretion/dilution analysis. In each analysis we will illustrate the concepts and model example situations. These high-level analyses help us to understand the importance of key variables and are crucial to understanding how various assumption drivers affect potential results. The understanding of these analyses will help conceptualize the mechanics of a fully integrated merger, which will be detailed in Part Three.
In Part Three, we build a complete merger model of Office Depot and OfficeMax. We utilize the companies' historical performance and step through techniques to make accurate projections of the business's future combined performance. The goal of this part is not only to understand how to build a fully integrated merger model but also to understand the merger integration concepts to best interpret the merger results, understand how various drivers affect the analysis, and be able to create a transactional model based on any unique situation.
The book is designed to have you build your own merger models step-by-step. The model template can be found on the companion website associated with this book and is titled “NYSF_Merger_Model_Template.xls.” To access the site, see the “About the Companion Website” section at the back of this book. If you have no prior technical experience in the subject of modeling, I would recommend reading the book that precedes this one, entitled Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity, which steps through the building of a core model on Walmart.
Part One
Introduction
Mergers, acquisitions, divestitures, and restructurings (M&A) are fundamental yet complex transactions commonly used in the investment banking and private equity industries. In this part we will overview the types of transactions that can be considered “M&A.” This will help you define and better understand the various M&A strategies and motivations behind large transactions. We will overview the M&A process to give you perspective on how transactions are originated. Finally, to best prepare you for M&A analysis in the subsequent parts, we will provide a financial statement refresher, detailing the core financial statements, including the income statement, cash flow statement, and balance sheet. The concepts behind what drives each statement and how each work together are important to form a functional model.
Chapter 1
Merger and Acquisitions Overview
The distinction between a merger, an acquisition, a divestiture, and other types of restructurings warrants some clarification. Transactions can come in a multitude of forms, can be a hybrid of several classifications, or in new markets can create a brand new classification altogether. Often some of the definitions are used interchangeably or are categorized differently. There has really been no set standard for these definitions, but I will attempt to simplify and clarify ahead. It is important to understand these core structures to better classify any individual transaction explored. Note that there are many excellent books that go through the subjective, regulatory, and legal aspects of mergers and acquisitions. This book is designed to give a technical and procedural approach, so I will brief you only on the major keywords.
Merger: A merger is fundamentally the combination of two or more business entities in which only one entity remains. The firms are typically similar in size. (Company A + Company B = Company A).
Consolidation: A consolidation is a combination of more than one business entity; however, an entirely new entity is created. (Company A + Company B = Company C).
Acquisition: An acquisition is the purchase of a business entity, entities, an asset, or assets. Although often used interchangeably, an acquisition differs from a merger in that