Good Mergers And Acquisitions: Weyerhaeuser Versus Willamette Case Study Example
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Willamette’s book value at the time of acquisition
Essentially, book value refers to the total value of assets less the value of liabilities. With 110 million shares outstanding going for $55.5 per share, the company had $6.105 billion. Out of this, the company owed $1.7 billion to Weyerhaeuser (although Weyerhaeuser did forgo that debt as part of the deal). The book value is $6.105 minus $1.7 billion. That comes to $4.405 billion.
Willamette’s value: DCF Model
The DCF (discounted cash flow) model takes into consideration the money the company is likely to make in the future.
Willamette’s market capitalization at the time of sale
Essentially, market capitalization refers to the value of all stock shares the company has at a point in time; that is, the total number of shares multiplied by the value. By the time of acquisition by Weyerhaeuser, Willamette had 110 million shares outstanding going at the-then current market rates of $46.46 per share. Therefore, the market capitalization was as follows:
$110,000,000 x 46.46, which is equal to $5,110,600,000 (that is, approximately $5.1 billion).
Total premium Weyerhaeuser paid for Willamette
After months of battle, Willamette finally agreed to settle to an agreement that would be favorable for majority of its shareholders. In this respect, Weyerhaeuser paid Willamette a total of $7.9 billion. Of this, equity share accounted for $6.2 billion. The other $1.7 billion was a debt that Willamette owed Weyerhaeuser, and which Weyerhaeuser assumed.
Weyerhaeuser’s goals in pursuing the acquisition of Willamette
Some would argue that Weyerhaeuser did not have to go to all the trouble of a hostile takeover. However, this was not just about acquisition, there was more to it. Besides, Weyerhaeuser under Steve Rogel, the CEO (formerly of Willamette), had been known for acquiring competitors (to expand its market share), squeezing costs and boosting margins. Willamette, according to many, would be the ultimate prize. Willamette was a major rival, although not of the same status.
One goal may have been as simple as getting rid of a competitor. The company had used mergers and acquisitions as a strategy for getting rid of competition. This was just another of those tactics, except it was inspired by the fact that Rogel believed his attachment to the company would make it an easier acquisition. If course, things did not go as planned. Still, Weyerhaeuser succeeded in the end.
Other issues that may have been at the center of this drive for Weyerhaeuser were the questions of costs and shareholder value and responsibility. At the time, the question of shareholder value was becoming increasingly important. At the same time, large customers (including Home Depot and Office Depot) were growing bolder and asking that fewer suppliers be involved in the process, including filling all their paper and lumber needs. In this regard, these customers were putting pressure on pricing, and this was forcing forest-product companies (including Weyerhaeuser, Willamette, International Paper, among others) to look for ways to shave costs and, therefore, offer lower prices for customers while also maintaining high shareholder value. In this regard, these companies found consolidation to be an answer, helping to eliminate inefficient businesses and unneeded capacity that comes with fragmentation. Mergers were a way to achieve that consolidation and the advantages that come with it. More particularly, estimates showed that the combination could save $300 million annually (Bloomberg Business 1).
Third, since taking over, Rogel had managed to make Weyerhaeuser the third-largest forest-product company in the world. Other bigger competitors in the industry were acquiring and growing in size. Weyerhaeuser may have felt threatened by the growing power of its competitors and went after the one that could give them that power. The company was pursuing the global peak and Willamette would do that, build to its customer, financial and asset base, among others. Moreover, many believed the two would make a good fit. The two companies owned, managed and operated major forest land holdings (Weyerhaeuser operating a total of 714,000 acres of land holding and Willamette 355,000 acres) as well as manufacturing and sales enterprises across the US. Moreover, while Weyerhaeuser was leading in timber and plywood, Willamette ran a string white-paper business. Moreover, the increased annual savings would mean more investment into the company and, consequently, organic growth (Bloomberg Business 1).
However, one cannot deny the possibility of a personal drive for Steve Rogel. Rogel worked for Willamette for 25 years. In fact, it is in Willamette that Rogel learned everything he came to know about timber, pulp and paper business. Finally, holding the CEO position, he resigned and moved to take over the same position in the bigger Weyerhaeuser. It is only natural that Rogel may have felt a sense of ownership of Willamette and wanted to run what he strongly felt was part of his life. Besides, people do not just walk away from a relationship of 25 years. Rogel may have wanted to have both: the big job at Weyerhaeuser, but also Willamette, his lifetime of work.
What Justified the $7.9 Billion Premium Weyerhaeuser Paid for Willamette
In the 14 months of Weyerhaeuser’s pursuit of Willamette and the latter’s resistance, the bid changed from the initial $5.3 billion to $5.4 billion and finally to $7.9 billion (in total equity value of $6.2 billion and $1.7 worth of Willamette debt to Weyerhaeuser, which the latter would assume). This was $2.6 billion more than the initial bid.
The justification for this has been explained better above. Acquiring Willamette would bring the advantages of consolidation: financial savings, an expanded customer base and organic growth, among others.
Why Willamette Tried to Buy a Division of Georgia-Pacific, and How this Affected the Final Premium
Willamette refused Weyerhaeuser’s bid for a long time, maintaining that it wanted to remain independent. Many thought that the company were only buying time, looking for a better bid. In this regard, when Willamette made the bid to buy Georgia-Pacific’s troubled building products division, many assumed that this was a negotiation strategy, that it was looking for a way to have Weyerhaeuser increase its value. However, although Weyerhaeuser did revise its bid to $55 per share (from the initial $48 per share), bringing the value to $6 billion (from $5.4 billion), Willamette refused to yield. It was then that it started to become clear that the bid was not to push Weyerhaeuser to increase its bid, but a strategy to push Willamette’s own ambition to remain independent. According to estimates, acquiring the building products division of G-P would make it much bigger, increasing its capacity for shareholder responsibility, the one thing that was encouraging its shareholders to consider voting in favor of the acquisition. But also keep it independent in Oregon, its primary ambition. By Weyerhaeuser’s own admission, if the deal between Willamette and G-P went through, it would cut off its own interests. In other words, Willamette’s ambition was to remain independent and this G-P deal would have made that possible (AccessNorthGa.com 1).
Although the deal did not go through, it showed Weyerhaeuser that Willamette was serious about remaining independent and would do everything to do that. Therefore, Weyerhaeuser decided to offer a deal that would be hard for the shareholders to resist.
Other Options for Willamette in Trying to avoid the Takeover
That Willamette was intent on avoiding the takeover is not doubted, and it made much effort to ensure that the takeover would not take place. William Swindel, Willamette’s board chairman tried to appeal to the shareholders to remind them of the company’s values. While this was aimed at manipulating the shareholder rights plan, it was the same thing that Weyerhaeuser targeted in its efforts. The staggered board of directors’ strategy worked against it. The attempt to buy the building products division of the G-P may have been the most aggressive and perhaps desperate.
At the most desperate, Willamette could have considered increasing its debts. Weyerhaeuser would then worry about repaying it. Unfortunately, this could further hurt stock prices and concern shareholders. This is what got shareholders worried about Willamette’s G-P acquisition strategy. It would be the same thing with the greenmail strategy, which would involve Willamette buying back its recently acquired stock from Weyerhaeuser at higher prices. This would also lead to a fall in shareholder value. The same (fall in shareholder value) would happen with making acquisitions.
Willamette did not want to seem to risk shareholder value because this is what was getting the shareholders to consider favoring the acquisition in the first place. In other words, Willamette did not have much option. The G-P deal having failed to go through, the only thing left was to get the most of it. On that note, $7.9 billion was not so bad.
Was Weyerhaeuser Takeover a Good Idea?
The key factor here is from whose perspective one considers this question. From Willamette’s point of view, it could not have been a good idea. The company wanted to stay independent. The acquisition made it hard to do that. They fought as hard they could but Weyerhaeuser won. To the shareholders’ point of view, they did not lose money, which they may have thought better than risking it all in a fight.
But having said that, this deal was evidence of the jungle that is the business arena, a place where the fittest survive. To think that Weyerhaeuser could just go for what is technically not theirs and have it challenges the notion f the American dream. Living a dream is not just about money, so the $7.9 billion still does not make up for the fact that the takeover killed the dreams and values that constitute Willamette. Maybe the business world is good as it is. Some may say it favors all- for all people have the right to takeovers (friendly or hostile). But it certainly favors big money entities and that is the problem- which may also be for everyone but certainly against the weaker entities (in this case Willamette) than for the stronger entities (that is, Weyerhaeuser). But most importantly, it is hard to separate the personal from the business. The same way that Weyerhaeuser accused Swindel (Willamette board chairman) was accused of being driven by personal ambitions in his adamancy against the acquisition, so it could be for Rogel. This makes for bad business.
The law allows hostile takeover, which is good for big fish like Weyerhaeuser. As already shown, Willamette was important to the goals and strategies of Weyerhaeuser. Therefore, it is only understandable that Weyerhaeuser pushed as hard as it did.
However, a hostile takeover can pose several challenges for the acquiring company. In this case, Weyerhaeuser could have problems with integration especially after such a fight that saw some bitterness on both sides of it. It can hard to defuse the tensions and get to work soonest, which means it could take years before the acquirer can enjoy the benefits for which it made the acquisition in the first place. Although there is ample literature on management and leadership in such a situation, it is always best to avoid such hostile takeovers.
The better option would have been a merge. Merge would mean that Willamette becomes subsidy of Weyerhaeuser. In this arrangement, Willamette retains some degree of its autonomy. Of course, this would hardly be a favorable idea for Willamette. But it is a lot better than having to be pushed out of business entirely as the acquisition (hostile) threatened to. The terms of agreement would smooth everything else. Most importantly, the merger would make for smooth integration and transition. Retaining the top leadership of Willamette would save the costs of having to recruit new leadership. This would perhaps better serve the interests of both parties. Besides, they are in the same line of business.
Bloomberg Business. Why Weyerhaeuser Pines for Willamette. March 11, 2001. Web.
AccessNorthGa.com. Willamette Purchase Could Form Oregon’s Largest Company. 2015. Web.
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