Tuesday, March 22, 2011

Vertical and horizontal deals

In class we talk often of the differences between vertical and horizontal mergers. This week's news will give much food for thought in class:

General Mills Set to Buy Yoplait Stake for $1.1 Billion - NYTimes.com:
From notes: "Reasons for vertical mergers include reduction of the transaction costs of negotiation."

This is a will become a classic example:
"A crucial aspect of the deal is that the agreement would resolve an outstanding dispute between Yoplait and General Mills, which has held the license to sell the brand in the United States since 1977.

With the licensing agreement up for renewal in 2012, and the two companies unable to come to terms, Yoplait had threatened to terminate the partnership, pushing General Mills to seek arbitration last year.

“This deal represents a solution,” a spokesman for PAI said."

Horizontal deals on the other hand are more regularly to combine operations in order to gain market share (pricing power) or when barriers to entry (Buffet's "Moats") make growth by other means prohibitively expensive due to high fixed costs.

This week's example is the AT&T-TMobile $39 billion deal.   Several class based things worth noting here.  Bondholders of acquiring firms can often lose in acquisitions.

Fitch (via BusinessWeek)  is already warning of a possible downgrade of AT&T debt:
"Fitch Ratings said Monday it has placed AT&T Inc.'s credit ratings on negative watch following the news that the wireless carrier plans to buy its smaller rival, T-Mobile USA, in a cash-and-stock deal valued at $39 billion....The ratings agency noted that much of the cash portion of the buyout will be financed with debt."
Because of increased market power (ie a wee bit closer to a monopoly) horizontal deals come under close scrutiny by regulators.  The rationale is that with increased size, comes increased power to raise prices.  This is brought forward in the  WSJ :

"The companies will have a tough road to prove to regulators that a combined AT&T-T-Mobile won’t have too much power to control wireless pricing."
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1 comment:

rallystocks said...

Interesting article. Seems horizontal acquisitions have a lot more to offer an acquiring company. Improved processes products etc. However, vertical would give you opportunities to enter a new industry.