Lenovo's Acquisition Spree; Vodafone Sells Back

Lenovo recently acquired IBM’s low server business ($2.3 billion) and Motorola Mobility from Google ($2.9 billion), wrapping the two deals up within a week. Lenovo is known for surpassing HP as the largest maker of personal computers; however, the PC market is in steady decline. This acquisition falls into Lenovo’s PC plus strategy—expanding into the international smartphone market with Motorola’s global brand (90% of Lenovo sales are from China). However, Lenovo is going to have to integrate Motorola, which reported losses of 384 million in their last quarter, and the servers that they hope will drive innovation and value in system and software areas such as cloud and cognitive computing, instead of just hardware. This is important in a market where several tech giants are phasing out low end servers for high end servers that can handle more complex tasks.

Vodafone recently approved the sale of its 45% stake in Verizon Wireless, returning $84 billion to Vodafone shareholders; the largest single return of value to shareholders in history. Verizon Communications now has complete ownership of its wireless industry, at the cost of $130 billion, the third largest deal in corporate history. Verizon executives assert that the purchase will give them the financial flexibility to invest in new mobile technologies. Verizon shares were down one cent at $47.68 on the New York Stock Exchange after the news. Vodafone shares closed roughly flat at 223.44 pence in London. After AT&T announced that it was not in talks to buy Vodafone (valued at more than $100 billion) and trading on Vodafone stock dropped 4% in London. Analysts are divided over whether Vodafone can prosper on its own or whether it is better off as a takeover target, especially as the European telecommunications sector faces regulatory uncertainty.
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Brandon Nesfield

A Directionless Sprint

Speculation stirring about whether telecom holding company Sprint Corporation will acquire competitor T-Mobile will soon be put to rest. It was reported yesterday, on February 14, that Sprint executives Masayoshi Son (Chairman) and Dan Hesse (CEO) regrouped their team to discuss the plausibility, or lack thereof, of the potential acquisition. This is after multiple meetings with anti-trust officials from the Justice Department and Federal Communications Commission in Washington, who displayed strong disapproval for the deal. Whereas Sprint believes a merger with T-Mobile will solidify a strong 3rd player to compete with conglomerates Verizon and AT&T in the telecommunications industry, regulators believe that healthy competition requires 4 players who should focus on organic growth. They view T-Mobile as a wild-card competitor that, though much smaller in operations, can put consistent pressure on the others with its speedy LTE network, cheap subscription plans, and ambitious offers to buy out contracts of customers from other. The regulators’ goal is to simply keep a balanced wireless marketplace that will benefit consumers in the long run with innovation and quality service.

Sprint, however, is slowly getting cornered and T-Mobile is ostensibly the most practical way out. The company lost 243,000 subscribers in Q4 2012, and analysts believed the company would lose over 350,000 in Q4 2013. This was primarily due to the fact that Sprint is taking its time with 4G LTE and is currently in the middle of a bumpy network upgrade aimed to handle more capacity at higher speeds for customers. The transition, though necessary, has led to poor voice quality and frequently dropped calls. Fortunately however, Sprint most recent quarterly showed that the company beat analyst estimates by actually adding 58,000 new subscribers and narrowing losses 44 cents per share in the year-ago quarter to 26 cents today. The news was characterized as “better than feared” by Wells Fargo analyst Jennifer Fritzsche, and the market responded as Sprint shares rose 7.4% to $8.26.

The future does not look too bright for the telecom giant. And because this deal is very unlikely to fall through – especially with T-Mobile’s aggressive tactics and recently reported gains – Sprint should target different, cheaper initiatives. The company’s recent Family Plan, a new $25 smartphone offer for large groups of family and friends, is a good start. But in order to truly keep up as a major player, Sprint needs to truly speed up its network restructuring and be creative. For a $30 Billion company, that is much easier said than done.
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Inder Takhar

Silicon Valleys, Mountainous Valuations

Google recently acquired Nest, a smart thermostat maker with $300 million in revenue and no reported profit for 3.2 billion Though Google can afford a high price and high valuations aren’t uncommon in Silicon Valley, purchases like these illustrate how cozy the Valley is and how that coziness contributes to such high prices. Nest was founded in 2010; according to the S&P Capital IQ the company launched three initial investment rounds during which it hoped to raise $150 million in funds. Nest, despite decent sales (reported to be just over one million since 2010) may face difficulties in market penetration—the majority of thermostats are sold through home furnace and air condition repair services, which have longstanding relationships with well-established companies such as Honeywell (a company currently pursuing litigation against Nest for intellectual property violation). Consumers are unaccustomed to self-installation of devices such as thermostats; though Nest boasts its easy-to-install/easy-to-use nature, it is difficult to imagine swaths of average American consumers trading in the ease of repair service installation for a sleeker, shinier thermostat. This large price tag will probably drive up valuations of other similar start-ups and tech giants scramble to find the next big thing within the realm of smart home devices/appliances.

Nest's "Smart" Thermostat

In Silicon Valley, it would appear that nobody wants to be the company that can’t keep up. Google is making a bet on Nest—a very large one at that—and this is nothing new in Silicon Valley, where we’ve seen Facebook shell out $1 billion for Instagram to keep Facebookers where they belong, Google purchase Waze for $1 billion to keep the navigation app away from Facebook, and Yahoo acquire Tumblr for $1.1 billion just to keep up with the social media-sharing Joneses. NYT Dealbook analyst/contributor Steven Davidoff recently elaborated on this trend, noting, "The purchases are driven by a venture community that must feed the beast. Their friends at the few dominant players in technology — Google, Microsoft and Facebook — are all trying to find the next big thing and have core products that are money machines. The money is redirected into these acquisitions that are add-on products with great hype, but are undeveloped. It all builds the Silicon Valley prestige, driving valuations higher." Everyone wins...until the concepts don’t, and the bubble pumped up by the soaring prices bursts. I encourage you to think back to when Yahoo bought broadcast.com for $5.7 billion in 1997, before the dot.com bubble burst, which led to a frenzy of overvalued acquisitions culminating in AOL’s infamous $165 billion dollar, deal with Time Warner. This deal is commonly known as the biggest mistake in corporate history.
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Brandon Nesfield

Quarter Review

With a strong performance from the S&P in the first quarter, one would expect increased mergers and acquisitions. However, the S&P was up for the quarter, 12 percent, which are the best results in fourteen years but M&A activity failed to follow suit. A recent article in the Wall Street Journal titled "Bankers Await Rebound in Mergers", Gina Chon writes, "Globally, the first quarter saw about $545.2 billion of announced deals, the slowest start to a year since the first quarter of 2003." Bankers and investors hope to see a surge in M&A activity in the upcoming quarter. We will have to see if M&A activity will correlate with the markets performance for the remainder of the year. Additionally, investors doubt the S&P will continue to perform at its current rate.
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Editorial Staff

Carlyle Buys Controlling Stake in Brazilian Specialty Furniture Retailer

The Carlyle Group announced a deal to purchase a 60 percent stake in Brazil’s largest furniture retailer by sales (~$495 million in 2011), Tok&Stok, for a reported $347 million on Thursday. The agreement marks growing confidence in the 200 million consumer market as government tax cuts have seen recent marked growth in consumer spending. Only two weeks ago, the firm struck a deal to purchase a 25 percent stake in the Brazilian equipment rental company Grupo Orguel. Both announcements add to Carlyle’s Brazilian portfolio, which includes CVC (a tourism company), Qualicorp (a health plan broker), Scalina (a lingerie manufacturer) and Ri Happy (Brazil’s largest chain of toy stores).
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Editorial Staff

M&A Activity Review

Michaels Stores Files for I.P.O.
Michael Stores looks to raise about $500 million with the company’s initial public offering. Michael Stores is an arts and crafts chain and the company will trade under the ticker MIK. The company looks to pay down debt through the IPO and expand in the future. The Blackstone Group and Bain capital owned Michaels for about 6 years in a previous $6 billion deal.  

K.K.R. buys Shale Assets from WPX for $306 Million
Kohlberg Kravis Roberts purchased natural gas shale assets from WPX Energy for $306 million. K.K.R. is a private equity firm now owns 27,000 acres in the Barnett Shale region and 66,000 acres in the Arkoma Basin. This transaction is another move by K.K.R. in the energy business.

DBS to Buy Bank Danamon 
The DBS Bank, the largest bank in Singapore, and the DBS group holdings bought Bank Danamon on Indonesia for $7.2 billion. DBS looks to grow and expand in Indonesia-- one of Asia’s rapidly expanding economies. RIM, Research in Motion, continues to struggle. RIM announced a $125 million loss and continues to post declining sales. With continuing losses, RIM may look to partner up or consider other ventures. RIM’s current market value is $7.3 billion which is significantly down from the $29.4 billion that it was worth one year ago. RIM may look to be acquired if it continues to struggle.
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Editorial Staff

M&A Activity Review

Carl Icahn bids $2.6 Billion for CVR 
Icahn bids $2.6 billion for CVR, an oil refinery corporation, only two days after publically stating that the company should sell itself. The current offer would pay $30 a share wich is an 8.7 percent of the prior day’s closing. Icahn’s attempt to takeover the company may turn hostile. Icahn wants to avoid another failed acquisition as he was unsuccessful after making many attempts to buy Clorox last year.

Kellogg to Buy Procter & Gamble’s Pringles Group 
Kellogg announced on Wednesday that it will buy Procter & Gamble’s Pringles. The recent deal is valued at $2.695 billion after a recent transaction with Diamond Foods failed to take place. Kellogg looks to gain an edge with the snack brand that had $1.5 billion in annual sales. Kellogg will also be adding $2 billion in debt through the deal which already has $5 billion in long-term debt.
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Editorial Staff

M&A Activity Review

TNT Express Rejects Bid by U.P.S. 
TNT announced on Friday that the company turned down a bid from UPS that valued the company at $6.4 billion. However, U.P.S., United Parcel Service, is continuing talks with TNT. The U.P.S. offer valued TNT at 9 euros a share which is about a 46 percent premium to the closing price. This potential deal would represent the largest merger in U.P.S. history. As a result of the talks about a deal, shares of TNT rose 2.6 percent on Friday.

Advent and Goldman Agree to Buy TransUnion for $3 Billion 
Transunion accepted an offer to sell the company to Advent International and GS Capital Partners, two private equity firms. GS Capital Partners, a branch of Goldman Sachs, and Advent bought the company from Madison Dearborn Partners and the Pritzker family. The buyout is the largest private equity deal of the year.

Mitsubishi Buys 40% Stake in Encana Shale Gas Assets 
Mitsubishi invested $2.9 billion in Encana’s holdings in British Columbia. Encana, a Canadian natural gas producer, owns about 409,000 acres in British Columbia. The $2.9 billion investment was made in exchange for 40% of the company. This deal represents another investment made for shale gas assets. Shale formations and fracking, a method of extracting natural gas and oil from sedimentary rock, have prompted new and increased investments.
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Editorial Staff

Corporate Finance Activity Review

Starbucks Acquires Juice Company 
Starbucks bought Evolution Fresh, a juice company, for $30 million. The recent purchase represents a shift for the company in seeking juice profits. Starbucks main competitors in the juice industry will be Odwalla, owned by Coca-Cola, and Naked Juice, owned by PepsiCo. In purchasing Evolution Fresh, Starbucks is looking to expand its menu and entice a different sort of customers.

Energy BP Fails to Sell Argentinian Oil Company Stake
Energy BP plans to sell its majority stake in Pan American Energy, an Argentinean oil producer, for an estimated $7.1 billion. However, the potential deal ended after the buyer, Bridas Corporation backed out.

TransCanada Pipeline 
The approval process for the Keystone XL pipeline has been delayed; the pipeline would cross the international border with Canada and new possible alternate routes are being discussed. Initial estimates on the cost of the project have reached $1.9 billio. 
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Editorial Staff 

M&A Activity Review

Kinder Morgan Acquires Rival 
Pipeline giant Kinder Morgan announced that it will buy rival company El Paso Corp. for $21.1 billion in cash and stock. With the acquisition, Kinder Morgan will become the largest operator of nature-gas pipelines in the United States. This deal puts increased faith in the future of natural gas a potential energy source and will catapult Kinder Morgan to the fourth largest energy company in America. Kinder Morgan recently became a public company this year and raised $2.9 Billion in its February IPO.

Groupon Strides Toward I.P.O.
Groupon, which is heading towards its public offering, expects to sell 30 million shares at about $16 to $18 a share, valuing the company at as much as $11.4 billion. Groupon hopes to break even before their public offering around November 3rd. Groupon is an internet start up that finds discounts at local restaurants and stores, and now is approaching 150 millions subscribers. 

Carlyle and Blackstone Compete for Merger Market 
The Carlyle Group and Blackstone were active in the merger market during the first three quarters this year, with Carlyle group completing 20 deals assessed at $4.1 billion and Blackstone signed 11 deals approximately valued at $16.9 billion. Overall data from Q3 from 2011 was up 7.4% from Q3 2010, and private equity firms completed $76.4 billion worth of deals internationally.
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Editorial Staff