H.J. Heinz M&A Harvard Case Solution & Analysis

H.J. Heinz M&A Case Study Analysis

Recommended price for both acquirers (3G and Berkshire Hathaway) and for Heinz.

The bid and walk away price for both the acquirers (3G and Berkshire Hathaway) and for Heinz is amounted to $72.60 with the paid premium per share of the .121 showing 71 percent per share premium.

Evaluation of Synergies:

There appears to be zero synergy as Heinz will operate as an independent company whereas synergy means win win situation for both the companies. Operating as an independent company will prevent the organization to gain synergies as synergy refers to sharing of strengths and weaknesses, merger of respective values and performance leading to increase in the value and performance of the overall oranginziation. Working together will decline the cost for the organizations as there will be no duplication of resources.

Moreover, financial synergy is achieved in merger and acquisitions as cash flow position of the company is increased due to additional finance contributed by the acquire. As both the companies will operate independently, additional value will not be generated as each company will be responsible for its own performance. In addition, duplication of resources will be made as each organization will be responsible for its own cost and investment decisions.

All Cash Transaction:

The pros and cons in relation to financing the deal with all cash are mentioned as follows:

Pros:

1. The liquidity position of the company will deteriorate as significant cash will be paid for acquiring the company.
2. Managing day to day operations might be difficult for the organization due to lack of cash.
3. Dividends might need to be cut thus, leading to low confidence on investors and decline in share price of the company due to rumors in the stock market regarding the financial sustainability and going concern for the company.
4. Profitable opportunities might not be seized due to lack of cash required to fund the investment projects

Cons:

1. The financing structure of the organization will remain the same as leverage risk and systematic risk will be the same due to financing the deal with all cash.
2. Due to low level of debt, the credit rating of the organization might be improved thus, leading to low finance cost as debt will be obtained at low interest rates
3. The investors will be satisfied as their control in the organization affairs will not be diluted as finance will not be raised through equity issue.

Possible Financing Alternatives

Debt:

Alternatively, the organization can finance the deal by obtaining debt or issuing bonds and debentures. However, this will increase the finance cost and debt level of the company leading to decline in profitability. In addition, financing the deal with debt will ensure that the shareholding structure of the organization is not diluted and will be a cheaper source of finance as tax relief are provided on debt finance.

Rights Issue:

The finance can also be raised by issuing shares to general public. However, this will result in dilution of control of existing shareholders and will result in less dividend to the shareholders due to increase in number of shareholders. In addition, the alternative will allow the organization to raise significant finance and will ensure the profitability of the business as significant finance cost will not be incurred.

Benefits and Risks of Heinz Acquisition to 3G and Berkshire:

Benefits:

1. 3G will have control for day to day operations despite ownership of 50% in the company
2. Berkshire Hathaway will receive annual dividend of 9%
3. Significant share in Asian and emerging markets will be captured as Heinz is making lot of progress in this region and owns 5 of the 15 brands in the emerging market

Risk:

1. 3G and Berkshire Hathaway will need to contribute 4 billion for joint ownership of the company.
2. The acquirers will need to pay $23.5 billion cash in U.S dollars
3. Preferred shares will be issued to Berkshire and 3G which contains zero voting rights thus, the acquirers will have no contribution in the day to day affairs of the organization or key decisions.............................

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