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Decoding the Wall Street Journal: M&A Special Report

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The ABB-Thomas & Betts deal represents the essence of what the 2012 mergers and acquisitions climate will look like.

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Editor's note: This newsletter originally appeared on Decoding The Wall Street Journal, a new website based on a book co-authored by former CNBC anchor Nicole Lapin and former Wall Street analyst Brian Sozzi. Like the book, this newsletter aims to unlock hidden financial clues embedded in world news.

Is this the type of steamy deal that gets talked about from sunup to sundown on financial news TV? No; it doesn't have the same pizzazz as Apple (AAPL) buying Nike (NKE) would have (which Apple technically could do, given the amount of cash it has in a sack at the local bank branch -- $97 billion). My colleagues and I chose to highlight this deal because one company opting to buy another (sound smart: M&A activity, short for mergers and acquisitions) is a natural process in business, and a deal north of $1 billion, rest assured, will always make the front pages of the Wall Street Journal. A couple basics on M&A:
  • Buying a company with all cash (sound smart: all cash transaction), as ABB (ABB) is doing with Thomas & Betts (TNB), is usually good for the acquired company. That company's shareholders are receiving a known value (cash) instead of something especially unknown (if ABB were to offer its stock instead of cash, ABB's stock could tank and Thomas & Betts shareholders would feel as if they were done dirty).
  • A larger company decides to buy a smaller company for the following reasons: 1) to add revenue and profits to an existing business, really making it the big kahuna in a specfic market; 2) to enter a new market in terms of products and geography; or 3) to join forces with a rival under the "four eyes is better than two" mantra.
M&A Toolbox
  • Premium: That extra distance a company goes monetarily to pay for its target. Think of it as a guy stepping up his game, so to speak, on a first date.
  • Extract cost savings and revenue gains: two concepts always uttered by CEOs to justify a deal. Extracting cost savings basically means consolidating overlapping parts of the businesses, say by firing people that do the same job. Extracting revenue gains involves, perhaps, shipping products from ABB to customers of Thomas & Betts on the same truck.
  • Bridge financing: temporary money from a bank used to seal the deal initially. Bridge financing provides, well, a bridge (aka time) for a company to raise long-term debt (sound smart: financing) to pay for its shiny new trophy.
  • Portfolio balancing: Here's an example. If a razor company produces mostly razors and one type of shaving cream, it may want to go out and buy a company that sells 80 different shave gels in order to balance its product portfolio.
  • Inorganic sales growth: the sales that were acquired from another company. Over time, these sales will become known as organic sales.
  • Hostile takeovers: the most intriguing deals to watch unfold, for the targeted company doesn't want to be taken over! Hostile takeovers drag out, and in the end, may not even occur.
Sleuth Confidential: It sure is good to finally awake to a Monday morning takeover announcement, though we are fooling ourselves if we think the ABB deal is a signal of 2006 merger mania reoccurring. As of January 20, 221 deals were announced in North America compared to 396 at that point a year ago. The dollar value of those deals was down a whopping 80%, reflecting smaller (sound smart: bolt-on) acquisitions rather than mega transformations. My colleagues and I think the M&A market is set for an upswing from its slow start in 2012 as larger companies opt for the attractiveness of smaller, highly profitable companies to grow; repurchasing stock shouldn't be the only focus by bonus-seeking management teams. The ABB-Thomas & Betts deal represents the essence of what the 2012 deal climate will look like; the low-voltage products division is the smallest in terms of revenue of ABB's four divisions but the most profitable. Adding another profitable business in Thomas & Betts should only enhance the performance of the pre-existing businesses in the future, or so is the thinking of the bankers who advised the company on the transaction.


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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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