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Three Active Public Company Acquirers

Reasons for Mergers and Acquisitions (M&A) Activity

The three firms, Symantec Corporation, Republic Industries, and U.S. Office Products, chose to grow by acquisition due to various reasons. Symantec saw mergers and acquisitions both as a way to supplement its own in-house product development activities and to exploit technology-finance-arbitrage opportunities. Republic Industries redirected its resources into an active acquisition program to buy auto dealerships and rental-car agencies and create the nation’s largest auto-retailing business, AutoNation USA. U.S. Office Products merged with small retailers to enjoy the benefits of investment diversification, expanded purchasing power, effective logistics management, and possibly branding.

While the acquisition strategies of the three firms shared some similarities such as the use of stock-for-stock acquisitions, they also had differences. Symantec’s acquisition strategy evolved to exploit technology-finance-arbitrage opportunities, while Republic Industries’ strategy was to create a dominant position in the industry by building a nationally branded retailer and using a new format, the megastore. U.S. Office Products’ strategy was to consolidate assets in a highly fragmented industry and improve the margins of the target operations to realize rapid earnings growth.

Analyzing the firms’ acquisition activities and evaluating their investment performance can provide valuable insights into the impact of growth by acquisition on firms and the key success factors for such strategies. These include target selection criteria, acquisition structure, transaction, and integration strategies. The firms’ acquisition activities also had an impact on industry trends and consolidation, which can be examined in the broader context of industry trends.

Forms of Acquisition of Target Companies

The three firms, Symantec Corporation, Republic Industries, and U.S. Office Products, have a different acquisition strategies, but each have the same objective of supporting their growth aims.

Symantec typically used shares of its own stock for acquisitions, accounting for them on a pooling-of-interests basis. The firm acquired small, early-stage, high-growth firms that needed capital and various other capabilities in manufacturing, sales, and distribution. Symantec believed that acquiring products with strengths that were complementary to its existing products would make the resulting firm stronger and more attractive to investors. The principal focus of analysis was the target’s revenue momentum, market position, and contribution to Symantec’s forward EPS, paying due diligence and particular attention to possible EPS dilution. Cost-management opportunities were of less importance.

Republic Industries initially preferred stock for stock, pooling of interests, and tax-deferred acquisition deals. However, more recently, the firm’s acquisitions were for cash, making them immediately taxable and subject to purchase accounting. Republic Industries’ acquisition strategy was to buy auto dealerships and rental-car agencies, creating the nation’s largest auto-retailing business, AutoNation USA. Huizenga believed that the future of the automotive industry lay in exploiting economies of scale that would propel companies of Republic into a dominant position in the industry.

U.S. Office Products undertook an acquisition program in which the deal volume and annual value acquired grew exponentially. Most of the deals were stock-for-stock acquisitions accounted for on a pooling-of-interests basis. In 1995, the firm went public in an IPO, giving its investors the benefits of a buoyant price-earnings multiple and liquid trading in their shares. Local management always remained in place, and new information systems were installed at the target firm, and advertising and supply contracts with private companies were consolidated with the parent for greater purchasing power.

Despite different acquisition strategies for two companies, the typical acquisition deal structures for each firm supported their growth aims by exploiting economies of scale, gaining a competitive advantage, and realizing rapid earnings growth. Symantec’s acquisition strategy supported its growth aims by supplementing its in-house product development activities, and as a result, the firm acquired small, early-stage, high-growth firms that needed capital and various other capabilities in manufacturing, sales, and distribution. Republic Industries’ strategy supported its growth aims by creating the nation’s largest auto-retailing business by buying auto dealerships and rental-car agencies, exploiting economies of scale that would propel Republic into a dominant position in the industry. U.S. Office Products’ strategy supported its growth aims by consolidating the highly fragmented office supplies retail industry by merging small retailers into U.S. Office Products, enabling them to enjoy the benefits of investment diversification, expanded purchasing power, effective logistics management, and possibly branding.

Acquiring Company Performance Recent Years

Symantec Corporation, Republic Industries, and U.S. Office Products are three firms that have had active mergers and acquisition strategies. Symantec has been acquiring small, early-stage, high-growth firms that needed capital and various other capabilities in manufacturing, sales, and distribution. While the company believed that if it acquired products with strengths that were complementary to its existing products, the resulting firm would be stronger and more attractive to investors, its share price only appreciated at a compound annual rate of 12.7% from 1989 to 1997, underperforming both the S&P 500 Index and the Morgan Stanley Dean Witter Computing and Software Index. It seemed that Symantec’s sales growth was mainly acquisition-driven since 1993, and the company had not met the investment expectations of its investors.

Republic Industries, on the other hand, was transformed by H. Wayne Huizenga between 1995 and 1999. Huizenga sold its waste-management business and security-services division and redirected the resources of the firm into an active acquisition program to buy auto dealerships and rental-car agencies, creating the nation’s largest auto-retailing business, AutoNation USA. However, despite almost all the securities analysts’ reports on Republic supporting Huizenga’s vision, the firm’s share prices had sagged, badly underperforming the strongest bull market in private equity history. In reviewing Republic’s performance record, one columnist offered comments that suggested that Huizenga was grossly overpaying for his acquisitions. Before Republic’s share price peaked, the firm’s preferred acquisition-deal structure was stock-for-stock, pooling of interests, and tax deferred. More recently, the firm’s acquisitions were for cash, thus making them immediately taxable and subject to purchase accounting.

U.S. Office Products undertook an acquisition program in which the deal volume and annual value acquired grew exponentially. Most of the deals were stock-for-stock acquisitions, accounted for on a pooling-of-interests basis. By early 1998, the firm had consummated more than 200 acquisitions. However, an agreement with some of one company and early investors obligated U.S. Office Products to repurchase their shares in the company, and U.S. securities regulations prohibited the use of pooling-of-interests accounting within 18 months of share repurchases. Accordingly, the firm had to revise its financial statements to reflect purchase accounting instead. The adjustments sent the company’s share price into a tailspin, dropping nearly 50% in a few days.

Overall, while all three firms had an active acquisition strategy, they have had varying degrees of success. Symantec Corporation has not met investors’ expectations despite an aggressive acquisition strategy, while Republic Industries’ acquisition strategy had not translated into rising share prices. U.S. Office Products had seen rapid expansion, but the obligation to repurchase shares and the prohibition on further transactions using pooling-of-interests accounting within 18 months of share repurchases led to a significant drop in the company’s share price.

M & A is often defined as a merger and acquisition that involves the consolidation of a group or its most important assets through financial transfers. Similarly, he or she might purchase or take on a subsidiary in an attempt to establish a new firm or purchase the assets of the other company or a competitor to make or offer the company shares or stage a hostile acquisition of. This is an M&A activity. The terms M&A also refer to businesses units of a firm that perform these activities.

Poole’s Explanation Mergers and Acquisitions (M&A): Types, Structures, Valuations

Nelson Poole, a blend of “value investing” and “growth investing” investor, had taken sizable positions in Symantec Corporation, Republic Industries, and U.S. Office Products during the late 1990s. He wanted to determine the impact of public companies and their acquisition plans on his investment returns and how his portfolio management should be modified to respond to merger-and-acquisition (M&A) activity among corporations. None of the three firms had met his investment expectations. Therefore, he hoped that a consideration of these three cases would offer practical approaches for assessing a firm’s plans to grow by acquisition.

From Symantec’s acquisition history, Poole can learn the importance of diversification of acquisition targets, focus on revenue momentum and EPS dilution, and cost-management opportunities. Symantec acquired 20 other firms over seven years, primarily for technology-finance-arbitrage opportunities. Poole can consider asking how Symantec identifies potential targets and how it integrates them into the existing company culture to create a stronger and more attractive firm. Symantec’s principal focus of analysis in their acquisition strategy was the target’s revenue momentum, steadiness of growth in revenue, market position, and contribution to Symantec’s forward EPS, paying particular attention to possible EPS dilution. Poole can consider asking how Symantec measures revenue momentum and EPS dilution when evaluating potential targets. Symantec believed that its managerial and distribution capabilities would help the various target companies achieve profitability, and thus translate revenue momentum into earnings momentum. EPS momentum was the ultimate objective. Poole can consider asking how Symantec manages costs and improves profitability after an acquisition.

From Republic Industries, Poole can learn the importance of market franchise, growth prospects, and accounting for acquisitions. Republic Industries had not established a sufficient market franchise to challenge its rivals before H. Wayne Huizenga acquired a minority controlling interest in the firm and assumed the role of CEO. Huizenga successfully built two other firms, Waste Management and Blockbuster Video, through aggressive growth strategies, relying primarily on public capital-market financing and the issuance of high-multiple common stock. Poole can consider asking how Republic Industries plans to establish a market franchise and what its growth strategy is. Nelson Poole’s investment style had been a blend of “value investing” and “growth investing.” He had invested in each of the three firms because of their growth potential. None of the three had met his investment expectations. Poole can consider asking how Republic Industries, Symantec, and U.S. Office Products plan to maximize growth and how they measure growth. U.S. Office Products had to revise its financial statements to reflect an asset purchase back accounting instead of pooling-of-interests accounting within 18 months of share repurchases. The adjustments sent the company’s share price into a tailspin, dropping nearly 50% in a few days. Poole can consider asking how a company accounts for acquisitions and how it plans to manage the potential impact on share prices.

From U.S. Office Products, Poole can learn the importance of diversification of acquisitions, integration of local management, market trends, performance records, and shareholder value. U.S. Office Products offered small retailers the benefits of investment diversification, expanded purchasing power, effective logistics management, and possibly branding by merging into U.S. Office Products. Poole can consider asking how U.S. Office Products integrates local management after an acquisition and how it manages to improve the margins of the target company and operations. The year 1999 was shaping up to be another record-setting year for M&As. Market trends can significantly impact a company’s acquisition strategy and share prices. Poole can consider asking how a company plans to manage the impact of market trends on its acquisition strategy. Nelson Poole noted that none of the three firms he invested in had met his investment expectations, and he wondered why they had fallen short. Poole can consider asking how a company measures performance and how it plans to improve its performance records. Symantec, Republic Industries, and U.S. Office Products all had different acquisition strategies, but they all aimed to maximize shareholder value. Poole can consider asking how a company plans to maximize shareholder value after an acquisition.

In conclusion, Nelson Poole and clients can learn from the three acquirers the importance of diversification of acquisition targets, focus on revenue momentum and EPS dilution, cost-management opportunities, market franchise, growth prospects, integration of local management, accounting for acquisitions, market trends, performance records, and shareholder value if considering investing. These lessons from the three acquirers can help Nelson Poole modify his portfolio management to respond to merger-and-acquisition (M&A) activity among corporations.

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