The world's biggest corporate merger in more than a decade is no longer on the menu. US food titan Kraft Heinz announced on Sunday it was withdrawing a massive $143 billion proposal to swallow Anglo-Dutch consumer goods manufacturer and retailer Unilever, ending hopes megabrands from Lipton to Ben & Jerry's and Cadbury would be brought under the same umbrella.
But instead of licking their wounds, dealmakers should take some scraps from the would-be feast in the form of reminders on how best to structure a mega M&A deal – many of which are especially relevant to Chinese and other Asia corporates looking to make a first splash overseas.
First, some context.
To understand just how huge the merger would have been, it's useful to compare it to a few recent jumbo deals. For one, Kraft Heinz was offering almost triple the $43 billion ChemChina is planning to pay for Syngenta, the largest deal announced last year and China's largest ever outbound acquisition.
The offer was nearly six times the size of Alibaba’s $25 billion initial public offering, the world’s largest primary fundraising, and equivalent to about half the Philippines’ gross domestic product in 2015.
It would have been the largest corporate merger in 16 years, since AOL's ill-fated deal with Time Warner in 2000.
Kraft Heinz withdrew just 48 hours after it formally made its bid on Friday. In fact, Unilever’s board of directors declined the $50-per share offer just a couple of hours after receiving it, saying that it fundamentally undervalued the firm and provided no financial or strategic merit for shareholders.
The news underscores three key principles that are already at the heart of many M&A dealmakers' philosophies:
One of the fatal errors for M&A dealmakers is to disclose the buyer’s intention too early and put the deal at risk.
In Kraft Heinz’s case, the company acknowledged its interest in Unilever “was made public at an extremely early stage” and was part of the reason for its ultimate failure.
Unlike an auction sale where higher publicity could attract more potential interest, any disclosure of information before an official bid could break a deal because it could drive the target’s share price up.
Even if that does not kill the deal, it would mean the buyer would end up paying more due to the inflated share price.
Announcing its withdrawal from the offer, Kraft Heinz made the point that it has “the utmost respect for the culture, strategy and leadership of Unilever”. But those kind words did hint at another problem that may have scuppered the deal: profound differences in culture between the two firms.
Analysts have pointed out that the two food giants operate with distinct philosophies. Kraft Heinz has pushed for rapid growth and has been on a buying spree in recent years, while Unilever emphasises sustainability and is developing ethically-positioned brands by moving away from junk foods such as ice cream and chocolate, which Kraft Heinz is well-known for.
As part of due diligence, dealmakers should understand and try to bridge the cultural gap between the buyer and the target. This is particularly true for Chinese dealmakers assisting their clients on overseas acquisitions, since China Inc lacks a long history of buying and operating foreign brands.
Unilever’s statement that Kraft Heinz’s bid “fundamentally undervalues” itself underscores a huge expectation gap on value. Kraft Heinz clearly believed the 18% premium it intended to pay was rich enough to buy a company that has suffered in recent years due to huge exposure to emerging markets. Yet Unilever insists otherwise.
For dealmakers, this expectation mismatch could have been avoided by making private, early approaches to the target company’s management or major shareholders.
In some jurisdictions it is more important to understand the thinking behind owners and company executives. In Taiwan, for instance, many entrepreneurs reject takeover offers of any kind because many of them started their businesses from scratch, and see running the business as a lifelong engagement.
Sometimes an owner may be interested in a sale, but may not be comfortable with the buyer's view on future operational strategies and business plans. Again, this might be a problem for Chinese firms looking to do outbound deals as many of them are virtually unknown to Western firms.
After all, price is far from the only reason a company would reject a takeover bid.