Loblaw takeover of Shoppers Drug Mart, will it create value for Loblaw’s shareholders? Time will tell. I am skeptical. Let’s examine Loblaw’s reasons to buy Shoppers.
Loblaw’s March 28, 2014 press release states:
“Acquisition strengthens Loblaw and Shoppers Drug Mart in competitive marketplace. Will deliver more choice, value and convenience to help Canadians Live Life Well…We will drive growth and profitability through our unmatched mix of store formats, products and offerings. This is truly a case of the whole being greater than the sum of its parts.”
Loblaw believe one plus one will equal three; sadly, research shows most acquisitions lead to one plus one equals one. Here are three questions for Loblaw’s leadership:
- Do they know most acquisitions don’t produce expected results because the acquirer overpays?
Loblaw paid around 30% premium for Shoppers, which delighted me, as a former Shoppers’ shareholder. But, how will the combined company generate an acceptable return from this high base? How do individual customers get more choice? There are no empirical data suggesting the takeover will cause Loblaw’s customers to gravitate to Shoppers or conversely. Then again, how do you create significant sustainable synergies when you keep Shoppers separate?
I believe Shoppers’ Stock Market value before the offer was realistic; a 30% premium on a high market price is a bad omen for Loblaw’s shareholders.
Sears, Roebuck & Company’s purchase of Dean Witter Reynolds and Coldwell Banker & Company real estate services business in the 1980s chronicled in Corporate Governance by Robert A. G. Monks and Nell Minow, gives me an eerie déjà vu feeling about this transaction!
2. Did Loblaw study my former employer, Montreal headquartered Alcan Inc.’s takeover by Rio Tinto?
I was delighted at the substantial premium Rio Tinto paid at the top of the market for my former employer of 32 years, Alcan, Inc. Though ecstatic as a shareholder, it was obvious in foresight that Rio Tinto overpaid. The aluminum industry is cyclical and prices were high by any standard. Rio Tinto shareholders’ only solace come from the CEO who did the deal losing his job, and so can do no further damage. As well, his successor acknowledged the mistake. Meanwhile, my former colleague, then Alcan Inc.’s CEO, Dick Evans, pulled off one of the best deals in recent memory for Alcan’s shareholders.
What went wrong for Rio Tinto? Clearly, they were not focussed on sustainable value and were distracted by industry events. Their due diligence obviously was inadequate, and they did not appreciate the industry’s cyclicality. Realistically, like most CEO’s in these over priced transactions, Rio Tinto CEO’s exuberance during the bull market trapped him.
3. Where does Loblaw expect higher earrings and lower costs to come from?
Here is another comment from Loblaw:
”Consumers are more focused on health and wellness and they are demanding more convenient retail locations,” said Vicente Trius, President, Loblaw Companies Limited. “Working together, we will capitalize on these consumer trends and create a compelling new blueprint for future growth and profitability.”
As part of their approval of the deal, the competition folks required Loblaw to divest some Shoppers’ stores. So, the new entity has fewer locations than the separate companies. As a Shoppers’ customer, how will this transaction alone change my buying habits and drive me to Loblaw? It won’t!
There are no significant synergies to cause the whole to be greater than the parts. What’s the “compelling blueprint”? To be sure, Loblaw’s offering “online pick up” at Shoppers won’t be a value creating juggernaut. Will existing Walmart customers choose to move to the new Loblaw because of the combination? I don’t think so. Will Loblaw go head to head with Walmart on price? This is a daunting prospect for Loblaw’s shareholders.
Loblaw and Shoppers have different cultures. A perceived simple matter as combining purchases will need significant study, patience, and exemplary leadership, to be effective. The good news is business literature are filled with many failures from which leadership intent on learning, can benefit.
If they haven’t, Loblaw’s leadership would benefit from Paul B. Carroll and Chunka Mui research-based book, Billion-Dollar Lessons, What you can learn from the most inexcusable business failures of the last 25 years. They would see clearly similar examples of failed acquisitions.
Many shareholders, including me, chose the full cash option causing Loblaw to restrict cash payment to 80%, issuing Loblaw’s shares for the rest. Accepting cash based on the high premium above market is one sign of Shoppers’ shareholders view of the combined company.
Loblaw’s leadership need to understand it is highly unlikely they will realize most synergies; the probability of unrealized synergies increases if they maintain two separate entities. That’s why Loblaw are likely to break commitments for no lay offs, no reorganizations when one plus one heads towards less than one! Leadership must understand that keeping two separate entities means less than the status quo–Loblaw, plus Shoppers encumbered by Loblaw’s bureaucracy!
I learned several lessons when I was part of Alcan’s mergers and acquisitions activities for several years. First, your investment banker is unlikely to tell you the proposed acquisition is headed for a train wreck.
Second, you tend to over estimate potential synergies; not consciously, but you can’t anticipate implementation challenges. As well, often you will compromise and defer or neglect tough people decisions. Third, in the heat of the deal, you are likely to forget where you are in the business cycle. Don’t believe me? Review the Alcan and Rio Tinto deal!
Michel A. Bell follows Jesus, is author of five books, speaker, founder and president of Managing God’s Money, and adjunct professor of business administration at Briercrest College and Seminary. Michel was a senior executive at Alcan Inc., now Rio Tinto Alcan. For information on living a debt free lifestyle, visit http://www.managinggodsmoney.com/essentialtools/capitalfund.php.
© 2014, Michel A. Bell