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June 15 Forum Update: 'Mega Mergers' Edition

A deeper understanding of mergers and acquisitions

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Jun 15, 2018
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During May and June, GuruFocus Forum users discussed mergers and acquisitions in light of the landmark federal court ruling that enabled AT&T Inc. (

T, Financial) to complete its merger with Time Warner Inc. (TWX, Financial).

Telecom company completes merger with Time Warner days after federal approval

AT&T closed its merger with Time Warner two days after U.S. District Court Judge Richard Leon approved the transaction. The Dallas-based telecom company issued 1.437 shares of its common stock and paid $53.75 in cash per Time Warner share, for a total transaction of 1.185 billion AT&T common shares and $42.5 billion in cash. AT&T also assumed Time Warner’s long-term debt, bringing AT&T’s debt to $180.4 billion.

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AT&T Chairman and CEO Randall Stephenson said the combined company will “bring a fresh approach to how the media and entertainment industry works for consumers, content creators, distributors and advertisers.” Key financial benefits include $1.5 billion in annual cost synergies and $1 billion in annual revenue synergies by June 2021.

Berkshire invested in Monsanto as probability of merger completion increases

One Forum post inquired about

Warren Buffett ’s holding in Monsanto Co. (MON, Financial). The company's stock began trading at approximately $120 on April 9, the day Monsanto expressed optimism that its merger with Bayer AG (XTER:BAYN, Financial)(BAYRY, Financial) would close by June.

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According to a Motley Fool article, Buffett started investing in Monsanto in September 2016, when Bayer announced a definitive merger agreement with the St. Louis-based agriculture company. Buffett then increased his holding in Monsanto as the merger “[was] more likely to go through," finishing with 18,970,134 shares as of March 31. Monsanto averaged $120.33 per share during the first quarter, approximately $7.62 less than its June 6 closing price of $127.95.

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Mergers can be “horizontal” or “vertical”

Investopedia describes a horizontal merger as one that “occurs between companies in the same space,” i.e., a combination of two companies in the same industry. On the other hand, vertical mergers combine companies from two separate parts of the supply chain to “make production processes more efficient or cost effective.” The telecommunication services industry has seen both types of mergers over the past two months: T-Mobile US Inc.’s (

TMUS, Financial) merger with Sprint Corp. (S, Financial) is horizontal, while AT&T’s merger with Time Warner is vertical.

See also

GuruFocus launched detailed industry overview pages in April, allowing users to look at various metrics like median price-sales and median return on equity for a specific industry.

The

John Paulson (Trades, Portfolio) Merger Arbitrage Checklist identifies seven characteristics that determine how likely a merger will succeed. Such items include definitive agreement, good strategic rationale, no financing or due diligence conditions, good-performing target, reasonable valuation and limited liability risk.

Disclosure: No positions.

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