Mergers, Acquisitions, Divestitures, and Other Restructurings. Paul Pignataro
section of the company website. To locate this press release, you can navigate to www.officedepot.com. At the bottom of the Office Depot home page is an “Investor Relations” button. (See Exhibit 1.1.)
Exhibit 1.1 Office Depot Website – Investor Relations
To the left of this page under “Company Information,” you can click the “Press Releases” link, where the press release can be found. You may have to adjust the drop-box located right under the “Keyword Search” box to select press releases from 2013, and then scroll down to find the exact February 20, 2013, press release entitled “OfficeMax and Office Depot Announce Merger of Equals to Create $18 Billion Global Office Solutions Company” (see Exhibit 1.2). We could have also gone to the Investor Relations section of OfficeMax to find a press release on the transaction.
Exhibit 1.2 Office Depot Website – Press Releases
U.S. Securities and Exchange Commission (SEC) filings are also a key resource for financial data on the companies involved in the transaction. A proxy statement, Form S-4, and Form 8-K are examples of filings that may contain financial details on a transaction. The company's 10-K (annual financial filing) or 10-Q (quarterly financial filing) can also contain a paragraph discussing the consolidation.
We can navigate to the SEC website by typing “www.sec.gov.”
At the top right of Exhibit 1.3 there is a “Company Filings” link. Clicking this link takes us to another page, where we can type in “Office Depot” in the “Company Name” search box, and click the “Search” button. This will reveal a list of filings for Office Depot. (See Exhibit 1.4.) We could have also done the same for “OfficeMax,” the other entity involved in the transaction.
Exhibit 1.3 SEC Home Page
Exhibit 1.4 SEC Office Depot Public Filings
Here you may want to take some time poking around to look for documents that contain relevant information. After some searching, we found the Form S-4 dated April 9, 2013, entitled “Registration of Securities, Business Combinations.” The title was an indicator that this document will describe the transaction. Opening this document reveals significant information on the merger. So we will use this document. (See Exhibit 1.5.) You can also find this document entitled “Form_S-4.pdf” on the website associated with the book.
Exhibit 1.5 Office Depot S-4 Document
Note that by the time this book is published more recent documents will certainly be available. For purposes of following the analysis in this book, I recommend digging up the documents described here. You can later update your model with more recent information once you have established the core modeling and analysis skills learned in this book.
Finally, other information sources, such as news releases or research reports, are good resources that may contain financial information on a merger. For now let's utilize just the information found in the S-4 report.
At the top of page 2 of the S-4 document, the title “JOINT PROXY STATEMENT/PROSPECTUS PROPOSED MERGER – YOUR VOTE IS IMPORTANT” indicates the document's purpose. This is a document soliciting shareholders to vote and approve the transaction. It is in this document where they explain the transaction in some detail, and so we will use this document to further analyze the transaction. Let's look at the first paragraph of page 2:
The board of directors of each of Office Depot, Inc. (“Office Depot”) and OfficeMax Incorporated (“OfficeMax”) unanimously approved a strategic business combination structured as a merger of equals. Based upon the estimated number of shares of capital stock of the parties that will be outstanding immediately prior to the consummation of this business combination, we estimate that, upon consummation of the business combination, Office Depot stockholders will hold approximately [ – ]% and OfficeMax stockholders will hold approximately [ – ]% of the outstanding common stock of the combined company (assuming redemption of all outstanding shares of Office Depot convertible preferred stock).
Here it is clearly stated in the first sentence that this is a merger. Office Depot and OfficeMax are two very large entities of similar size, combining to form one entity. The mechanics behind how this is done will be laid out in Part Three.
Is this transaction horizontal or vertical? Although such transactions can be a gray area in that there are likely elements of both, this would clearly lean toward a horizontal transaction. OfficeMax and Office Depot are not only both in the same industry but also clear competitors of each other, and so such a consolidation would increase their market share in this industry.
So from a subjective level this chapter should at least give you the very basic definitions relating to the M&A framework and process. Again I kept this brief as the true purpose of this book is to give a mechanical and technical understanding of the M&A process. The mechanics of M&A can be quite complex, so Part Two attempts to provide instruction on core transaction mechanics that we can use to piece together and form a large consolidation in Part Three. Before doing so, the next chapter will provide a refresher on financial statements as preparation.
Chapter 2
Financial Statements Refresher
Before getting into M&A analysis, it is important to give a brief overview of the six major statements in a standard financial operating model and how they work together:
1. Income statement
2. Cash flow statement
3. Balance sheet
4. Depreciation schedule
5. Working capital schedule
6. Debt schedule
The general concepts in this chapter are necessary to understand the merger processes in the subsequent chapters.
The Income Statement
The income statement measures a company's profit (or loss) over a specific period of time. A business is generally required to report and record the sales it generates for tax purposes. And, of course, taxes on sales made can be reduced by the expenses incurred while generating those sales. Although there are specific rules that govern when and how those expense reductions can be utilized, there is still a general concept:
A company is taxed on profit. So:
However, income statements have grown to be quite complex. The multifaceted categories of expenses can vary from company to company. As analysts, we need to identify major categories within the income statement in order to facilitate proper analysis. For this reason, one should always categorize income statement line items into nine major categories:
1. Revenue (sales)
2. Cost of goods sold (COGS)
3. Operating expenses
4. Other income
5. Depreciation and amortization
6. Interest
7. Taxes
8. Nonrecurring