The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Chinese business has grown and expanded into all areas, especially technology, but countries such as the USA have been reluctant to allow mergers and takeovers of some of their businesses. Notably, the takeovers that have been resisted have been in key sectors, particularly oil, energy and technology. However, it seems as though pork is an industry that is less important or, at least, a lower risk to national security.
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:
This transaction will create a leading global animal protein enterprise. Shuanghui International and Smithfield have a long and consistent track record of providing customers around the world with high-quality food, and we look forward to moving ahead together as one company.
The date of September 24th looks to be the decider, when a shareholder meeting is scheduled to take place. There is still resistance to the deal, but if it goes ahead it will certainly help other Chinese companies looking for the ‘OK’ from US regulators for their own business deals. The following articles consider the controversy and impact of this takeover.
US clears Smithfield’s acquisition by China’s Shuanghui Penn Energy, Reuters, Lisa Baertlein and Aditi Shrivastava (10/9/13)
Chinese takeover of US Smithfield Foods gets US security approval Telegraph (7/9/13)
US clears Smithfield acquisition by China’s Shuanghui Reuters (7/9/13)
Go-ahead for Shuanghui’s $4.7bn Smithfield deal Financial Times, Gina Chon (6/9/13)
US security panel approves Smithfield takeover Wall Street Journal, William Mauldin (6/9/13)
Questions
- What type of takeover would you classify this as? Explain your answer.
- Why have other takeovers in oil, energy and technology not met with approval?
- Some people have raised concerns about the impact of the takeover on US pork prices. Using a demand and supply diagram, illustrate the possible effects of this takeover.
- What do you think will happen to the price of pork in the US based on you answer to question 3?
- Why do Smithfield’s shareholders have to meet before the deal can go ahead?
- Is there likely to be an impact on share prices if the deal does go ahead?
Few people have £18bn worth of funds to spend. But someone that does is Warren Buffett and a Brazilian firm, who look set to purchase Heinz for this sum. Heinz, known for things like baked beans and ketchup already has an exceptionally strong brand and is cash rich – these are two ingredients which Warren Buffett likes and have undoubtedly played their part in securing what looks to be a tasty deal.
The company’s Board has already approved the deal, but shareholders still need to have their say and have been offered $72.50 per share. 650 million bottles of Heinz ketchup are sold every year and its baked beans, at the least in the UK, are second to none. Products like this have given Heinz its global brand name and have provided the opportunity to shareholders to make significant gains. Its Chairman said:
The Heinz brand is one of the most respected brands in the global food industry and this historic transaction provides tremendous value to Heinz shareolders.
This statement was certainly reciprocated by Warren Buffett when he spoke to CNBC, saying:
It is our kind of company … I’ve sampled it many times … Anytime we see a deal is attractive and it’s our kind of business and we’ve got the money, I’m ready to do.
The deal therefore looks to be profitable to both sides, but is there more to it? An investigation has already been launched by the Securities and Exchange Commission as to whether information about this purchase was leaked early and was used to make money. Insider trading occurs when someone is given information early about a merger such as the one described above. They then use this information, before it is made public, to buy up a company’s stock. It is incredibly difficult to prosecute and huge amounts of money can be made by hedge funds, amongst others. This is certainly one aspect of the deal to keep your eye on.
So, what does the future hold for Warren Buffett and Heinz? Buffett likes to extract extra value from companies he purchases and has in the past split up his businesses to create separate trading companies. However, given his taste for ketchup and his appreciation for strong global brands, it’s unlikely that we’ll see a change to the recipe of any of the well-known products. The following articles consider the takeover and the case of insider trading.
Will Buffet ‘squeeze value’ from Heinz BBC News (15/2/13)
Heinz-Buffett deal: will anyone spill the beans on insider trading? The Guardian, Heidi Moore (15/2/13)
Heinz bought by Warren Buffett’s Berkshire Hathaway for $28bn BBC News (14/2/13)
Traders sued over Heinz share bets Independent, Nikhil Kumar (16/2/13)
Heinz deal brings it back to its roots Financial Times, Alan Rappeport, Dan McCrum and Anoushka Sakoui (14/2/13)
Beanz means Buffet: Heinz purchased in $28bn takeover The Guardian, Dominic Rush (14/2/13)
US SEC sues over Heinz option trading before buyout Reuters (15/2/13)
Warren Buffet and Brazil’s ‘Sage’ Jorge Leman strike £18bn Heinz deal The Telegraph, Richard Blackden (15/2/13)
Questions
- What type of take-over would you class this as?
- Consider the Boston matrix – in which category would you place Heinz when you think about its market share and market growth?
- Why is a company that has a global brand and that is cash rich so tempting?
- Given your answer to question 3, why have other investors not taken an interest in purchasing Heinz?
- If you were a shareholder in Heinz, what factors would you consider when deciding whether or not to vote for the takeover?
- What growth strategy has Heinz used to establish its current position in the global market place?
- What is insider trading? Explain how early information can be used to make money in the case of Heinz.
- Explain how the share price of $72.50 is set. How does the market have a role?
If you want to buy a newly released DVD, a cheaper option than buying off the high-street tends to be to buy online, in particular through Amazon, the world’s largest online retailer. However, Amazon has been facing increasing competition from another US giant, Netflix that has over 16 million subscribers and is looking at entering the British market. Arguably, in a response to this threat, Amazon has agreed to purchase Lovefilm, the online movie rental service that has grown rapidly over the past few years, with over 1.4 million members around the UK.
As of 2008, Amazon already had a 42% stake in the business, but as Lovefilm has been running into difficulties, their senior management team has been looking at the possibility of selling the remaining 58% share. Enter Amazon in a bid to cement and defend their place in the British market to companies such as Netflix. Below are a few articles concerning this takeover – more will be added, as further details emerge.
Amazon acquires Lovefilm for £200m Financial Times, Tim Bradshaw (20/1/11)
Can Lovefilm survive the streaming revolution? Telegraph, James Hurley (27/1/11)
Amazon takes full control of Lovefilm Guardian, Josh Halliday(20/1/11)
Amazon buys remaining stake in Lovefilm DVD service BBC News (20/1/11)
Amazon takes control of Lovefilm Broadband TV News, Julian Clover (20/1/11)
Amazon acquires Lovefilm, the Netflix of Europe Tech Crunch, Mike Butcher (20/1/11)
Questions
- What type of takeover is this and what are the main motives behind it?
- How are consumers likely to a) benefit and b) suffer from Amazon’s takeover bid for Lovefilm?
- Who are Amazon’s main competitors? (Think of all the products they sell.)
- Will the Competition authorities be interested in this takeover? Explain your answer.
- In which type of market structure would you place Amazon, Netflix and Lovefilm? Explain your answer.
The market for food in the UK is highly competitive. From dining in style to a simple take-away, one of the key words when it comes to dining seems to be choice. Competitive prices and high quality are on offer, which is largely due to the sheer number of restaurants available to consumers. However, consolidation seems to be on the menu.
Nando’s is a well known restaurant and a popular eating destination on UK and Irish high streets, with more than 230 restaurants. This chicken restaurant group has made a £30 million bid for Clapham House, the company behind the Gourmet Burger Kitchen chain with 53 branches. Clapham’s shareholders were advised to accept the deal and on the 17th September 2010, it is reported that a deal was reached with Nando’s Group Holdings and its private equity owner Capricorn Ventures International. The 74 pence per share deal was met with disappointment by some analysts, who felt that the company was under-valued, despite failed attempts by Clapham House’s Board to persuade Capricorn to raise the offer price or find an alternative bidder.
The restaurant industry has suffered from the recession and especially by the weak economic recovery, so perhaps lower valuations are to be expected. Nando’s said:
‘As macroeconomic weakness has persisted in the UK, the trading environment for restaurant businesses in the UK has been difficult. This is evidenced by Clapham House’s vaolatile weekly trading performance.’
Nando’s intend to invest significantly in Clapham Houses’ businesses to reinvigorate their previous competitor. This may be essential, given the expectation that conditions in the UK will remain fragile, with consumer confidence staying low, as well as a somewhat untimely rise in VAT in January next year, which is almost certain to have an adverse effect on the restaurant business.
This take-over deal is not the first in the restaurant industry and nor is it likely to be the last, as the UK economy remains in a vulnerable state. The following articles look at this and over takeovers.
Nando’s to buy Gourmet Burger Kitchen for £30m BBC News (17/9/10)
UK restaurants serve up £50m in takeover deals Management Today, Emma Haslett (17/9/10)
Nando’s swallows Gourmet Burger Daily Mirror News, Clinton Manning (18/9/10)
GBK team plots next move after Nandos deal Telegraph, Jonathan Sibun (18/9/10)
Nando’s to buy Real Greek chain for £30m Independent, Alistair Dawber (18/9/10)
Mithcells & Butlers and Nando’s to feast on rival restaurant chains Mail Online, Ben Laurance (17/9/10)
GBK owner Clapham agrees to Nando’s offer Reuters (17/9/10)
Questions
- What type of takeover is Nando’s purchase of Clapham House?
- Why has the weak macroeconomic environment adversely affected the restaurant industry? What might be the impact of next January’s rise in VAT?
- Will Nando’s takeover (or indeed any other takeover in the restaurant industry) allow the company to prosper from the weak economic climate?
- In which type of market structure would you place the restaurant industry in the UK? Explain the characteristics of the market structure you choose and why you have placed the restaurant industry in it.
- How was the finance for the deal raised by Nando’s Holdings Group? What other sources of finance are available to firms for this purpose? What are the (a) advantages and (b) disadvantages of each?
- What other takeovers have occurred recently in the restaurant industry? What types of takeovers are they?
Kraft was seeking to take over Cadbury since September 2009, (see Cadbury: Chocolate all change and A Krafty approach to Cadbury). But the Cadbury board had rejected previous bids as being too low. The September bid, for example, was valued at £10.2bn. On 19 January 2010, however, after heated negotiations the board accepted the latest offer by Kraft valued at £11.5bn ($19bn).
But is the deal good news? Or will what is sweet for senior management and the financial institutions which brokered the deal be dark bitter news for the main stakeholders – consumers, workers and shareholders? The following articles explore the issues.
Cadbury battle ends with midnight handshake Financial Times, Lina Saigol (19/1/10)
Cadbury takeover: a crafty bit of business or an overpriced confection? Telegraph, Jonathan Sibun (20/1/10)
Cadbury’s sweet City deal leaves a bitter taste in Bournville Guardian, Heather Stewart and Nick Mathiason (19/1/10)
Thousands of Cadbury jobs under threat as Kraft swallows a British icon (including video) Times Online, Helen Nugent and Catherine Boyle (20/1/10)
Cadbury deal ‘the price of globalisation’ Financial Times, Jenny Wiggins and Jonathan Guthrie (19/1/10)
Cadbury sale ‘right thing to do’ FT video (19/1/10)
Bitterness as Kraft wins Cadbury Independent, Nick Clark (20/1/10)
The winners: Management duo in line for bumper pay packet from takeover deal Independent, Nick Clark (20/1/10)
Kraft came hunting in the only country that would sell – Britain Independent, James Moore (20/1/10)
Kraft’s takeover leaves a bitter taste in the mouth Telegraph, Tracy Corrigan (19/1/10)
A sweet deal – or a takeover that is hard to swallow? Independent, Hamish McRae (20/1/10)
Cadbury: banks are the real winners BBC News blogs: Peston’s Picks, Robert Peston (20/1/10)
Warren Buffett blasts Kraft’s takeover of Cadbury Guardian, Graeme Wearden (20/1/10)
Cadbury says job cuts inevitable after Kraft takeover (including videos) BBC News (19/1/10)
Cadbury and the open market theory: they’d better be right Guardian blog, Michael White (20/1/10)
The Business: Bonus season and the Cadbury takeover Guardian podcast, Aditya Chakrabortty
How did Quakers conquer the British sweet shop? BBC News Magazine, Peter Jackson (20/1/10)
Why Kraft must keep organic cacao farmers sweet Guardian blog, Craig Sams (20/1/10)
Questions
- What were the incentives for the Cadbury board to accept the proposed offer by Kraft?
- Do such incentives lead to the efficient operation of markets?
- Explain what is meant by ‘competition for corporate control’. To what extent is such competition in the interests of consumers?
- What economies or diseconomies of scale are likely to result from the takeover? What will determine the extent to which changes in costs are passed on to the consumer?
- How will the following stakeholders fare from the takeover, both in the short run and in the long run: (a) consumers; (b) workers; (c) shareholders?
- Examine Warren Buffet’s arguments for rejecting the deal.
The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said: