Mergers - how long till the benefits are realised?

We spoke in class this week about the time it might take for merger benefits to be apparent. This is relevant when trying to value any merger or takeover 'synergies', as well as when trying to 'measure' the benefits of mergers or takeovers (using say financial statement data). According to this article, the retail expert Wesfarmers has brought in to advise on the Coles merger thinks turnaround time will be at least 5 years. That seems reasonable to me.

More on Coles' profit

Elizabeth Knight in the Herald follows up on the Coles profit, and makes the point that I've made in class repeatedly: pro forma earnings numbers are problematic in that it is not clear what has been included and excluded from GAAP income, which makes it difficult to compare with both previous earnings numbers from (in this case) Coles, or to compare Coles with other companies.
Key quote:

And it is fair to say that this week's results support their views to the extent of the rot within the all important supermarkets business is greater than even the harsher critics had expected.

The variance in the analysts' views on the underlying profit also suggests that there is a lack of transparency in the earnings numbers and a lack of trust in how they were presented.

They all came to the conclusion that they were poor but were at odds about degree.

It seems that creating confusion, rather than clarity, appears to be one motivation for using pro forma numbers. Not always, mind you.

Earnings quality - Coles

Elizabeth Knight in the Herald has a look at Coles' recent earnings announcement (you can find both the profit announcement and the media release on the ASX website here). The "underlying profit' (i.e. pro forma income) for Coles is just under $45m higher than their net profit. No surprise there. Here's how Elizabeth Knight describes them:

But here come the adjustments. Take off $34.5 million for accounting changes, adjust $55.9 million for ownership review costs, add another $23.9 million in advisory costs and $51.5 million in redundancy costs, then take out $53.5 million in property gains, then tax-effect it and, bingo, the end result is a profit 1 per cent down on last year. And this is not too far off the amount the company has indicated.

A more cynical analysis could come up with a result that was 16 per cent below last year, even after the adjustments.

Yep. That can happen. From the perspective of the Wesfarmers board, it's probably best for Coles to get as much 'bad news' out in the accounts now, so that WES can document improved performance going forward. Assuming that WES can find good managers, improving performance of the Coles stores shouldn't be beyond them!

Not fair or reasonable, but the only one you'll get...

More on the Wesfarmers takeover of Coles; the "independent expert report" (see prior discussion here) is in; the offer is apparently not fair, nor reasonable. However, with no realistic prospect of a better offer, the recommendation is for Coles shareholders to accept. Grant Samuel says that the Coles Group is worth $16.21-$18.23 a share (at time of posting this, CGJ is trading at $14.57 (up 6c for the day)). As Matthew Stevens says:

Let's be blunt here: the $930 million gap between the price Wesfarmers will pay and the Grant Samuel valuation is effectively the price Coles shareholders have to surrender to replace the company's crippled management.

The fact is, the board has been forced to accept an offer that undervalues Coles by at least $930 million because it has absolutely no other alternative.

We'll have a look at how they arrived at that valuation when the document proper is released to the market - hopefully in time for class 11 this semester (when we're discussing takeovers).

Wesfarmers, Coles, strategy & takeovers

Nice little article from Matthew Stevens in the Weekend Australian (Aug 4-5; annoyingly I can't find an online reference) that links business strategy analysis with mergers & acquisitions. He's talking about the (currently) proposed takeover of Coles by Wesfarmers, and focuses on what happens if the bid doesn't go ahead. An interesting time forecast for Coles CEO John Fletcher and Chairman Rick Allert.

Wesfarmers and value creation

How will Wesfarmers make money out of buying Coles? Only by selling off part of the business, according to Paul Kerin in The Australian. A good article to read about trying to realise synergies in corporate acquisitions.