Merger & Acquisition in the Retail Industry

1. Locate a publicly traded company in an industry that interests you. Find a publicly traded competitor which is suitable for a merger or acquisition with this firm.
2. Write a ten page double spaced paper (not including exhibits) on why the company should be acquired and what purchase price should be paid. Your analysis should include the “real” reasons behind the merger and not the standard answers. A financial model with a discounted cash flow valuation is required and should be included in the paper to support your analysis.
3. Major topics should include: A brief background of the industry which the company operates, a background on the company and the management team, the acquisition purchase price (you may want to include a base purchase price and the maximum purchase price your firm would be willing to pay), what makes this merger a good fit, a brief strategy on how the company will operate after the merger, and how the deal would be financed.
4. A financial model with a discounted cash flow valuation is required and should be included in the paper to support your analysis.
5. You have an enormous amount of material to use for this project. Annual Reports and 10Ks can be obtained by contacting the company’s Investor Services Department.

Two of the major evaluation criteria for the paper are:
1) How well do you apply the financial concepts and analysis for your proposed acquisition.
2) The quality and originality of the recommendations (and how well they tie to your analysis) of the company.

The paper must follow APA Format. The maximum length of the paper is 15 double spaced pages, excluding references and abstract. You may attach as many pages as appendixes of data, tables, etc. as you need. A financial model with a discounted cash flow valuation is required and should be included in the paper to support your analysis.

ANSWER

Merger and Acquisition

Introduction

Retail is the method by which suppliers of goods and services provide their products to consumers. Retailers also obtain their merchandise directly from the retailer. It is when a material transforms into a finished product. Retailers may also purchase goods from a wholesaler or broker, who acts as a middleman (Castillo, 2017). The wholesaler brings together goods from all over the country. It repackages them to make selling and delivery smoother. Retail stores are the last link of the production process before the items arrive in the shopping basket. For all forms of retail businesses, the United States has an established distribution network. The retail service sector offers an openly competitive environment that promotes strong market practices and allows developments that improve productivity and dependability.

Background of the Retail Industry

The retail industry is constantly expanding in the current global market. In 2017, total retail sales in the United States, including automobile industry and components sealers, reached $5 trillion from 1 million retail stores. The retail industry in the United States provides employment to about 30 million workers and indirectly supports over forty million jobs. According to Mac-vicar et al. (2017), retail revenues rose by 4 percent in 2017, while e-commerce sales increased by eight percent over the same time. In the United States retail industry, there are many prospects for expansion for retail suppliers of all types, including corporate company limited or direct vendors and small- to medium-sized business owners.

Background of Walmart and Management Team

Wal-Mart Stores Corporation is an American retail company with a global footprint. The corporation operates as Walmart, and its service is a network of supermarket stores, superstores, and retail outlets. In 1962. Mr. Sam Walton established the company in Rogers, Arkansas, USA. The corporation’s offices are located in Bentonville, Arkansas. The organization had 11,620 stores in 2015, and it operated in twenty-eight countries under sixty-five banners (Martinez et al., 2017). The Walton family owns the company and owns more than 52 percent of its shares. It is an American multinational corporation with activities all over the world. In the beginning, Sam Walton founded the company in 1962. The company began as a simple grocery store, according to the founder. Since then, the company has extended its operations well beyond the boundaries of the United States, and in terms of sales, it is now one of the world’s biggest stores. It is also one of the largest employers, with over two million employees employed by the retail behemoth. However, at the time, ineffective media tactics had been implemented. This means that the Japanese community was not taken into account as the retail behemoths expanded their operations into the region.

The corporation’s manager is Gregory B. Penner, and its founder and CEO are Doug McMillon. According to the 2015 Fortune Global List, the organization is the world’s leader in Europe in terms of sales and the world’s most successful employer. The estimated number of workers exceeds 2.2 million, with 1.4 million based in the United States (Martinez et al., 2017). The company’s primary offerings include superstores, groceries, health & beauty, chain store, home renovation, films and games, clothes and boots, dollar stores, and so on. The grocery market accounts for 59.8 percent of the company’s overall income. The corporation’s total sales in 2014 were over five hundred billion dollars, including a net income of over twenty billion dollars. The management of the company governs Walmart’s retail activities. These activities are mainly centered mostly on the retail market, including the online retail facilities. The organizational structure also limits how the company handles its challenges. Structural characteristics help the business execute strategic strategies in order to gain a greater share of the retail market.  Walmart company’s structure has an effect on how workers react to competing priorities. The attitude cultivated by the corporate culture contributes to the long-term viability of the corporation’s human resources. Cultural traits have helped the retail industry in responding to changes and emerging challenges in the global market. Walmart Inc.’s long tradition of international achievement and growth demonstrates that the firm’s corporate structure and organizational philosophy are beneficial in bringing strategic advantages and performance.

Competitor Company

The Target Corporation is the second-largest discount retailer in the United States, behind only Wal-Mart. Target has over two thousand stores in the United States, as well as an online retail marketplace at Target.com. It sells a wide variety of household goods, food and pet equipment, clothing and footwear, electronics, furniture, and other things under regional and operated and exclusive names. Target also sells products through unique technology and advanced collaborations on a regular basis and generates sales from in-store facilities like Target Café and rented or approved departments like Target Optical, Starbucks, and other food marketing services.

Fig 1: Target Corporation Revenue from 2002-2011 (Brandner, 2019)

Acquisition Purchase Price

Target Corporation operates in the same industry as Wal-Mart. Target Corporation is an over one hundred-year-old organization with over one thousand eight hundred branches in various cities throughout the United States. Most of the items sold by Target are the same as those offered by Wal-Mart, but Target outperforms Wal-Mart when it relates to fashion-conscious shoppers. Wal-Mart prioritizes volume and low prices, while Target retailers prioritize consistency. After making this acquisition, Wal-Mart would be able to target buyers who are interested in apparel and excellent quality. The firm has extensive retail expertise and is well-versed in the heartbeat of the United States industry. Target’s workforce of over 347,000 workers is the greatest asset. Wal-Mart will benefit greatly from highly skilled management and workforce. Owing to the closure of its Canadian activities, the company suffered a $1.636 billion loss in 2014. The company’s combined assets exceed $41.404 billion. Losses incurred by the company and the closure of its activities in Canada will be used to negotiate the price of the purchase. Walmart’s sales and net assets will also grow as a result of the takeover. The minimum acquisition price for Target is $209 billion dollars which it is currently valued at.

Why Merger is a Good Fit

The basic concept behind mergers is that one with one equals three. The two firms together are more valuable than two classified organizations, at least according to the reasoning behind mergers. A merger is the integration of two or more companies, usually by giving the owners in one company’s stock in the acquiring firm to accept their stock in the acquiring firm. A merger is the joining of two or more businesses to form a single entity or the formation of a holding corporation. In other words, a merger occurs as two companies join to become a single company with common capital and organizational goals. It entails the joint decision of two companies to combine to become one group, and it can be seen as a choice made between two equals. The mutual corporation would benefit from the merger’s structural and organizational gains, which will lower costs and maximize earnings, raising stockholder equity for each number of investors. In other words, it entails two or more relatively equivalent companies merging to become one administrative organization with the intention of increasing the entity’s valuation above the total of its elements. During a merger between two companies, the former company’s stockholders’ equity is often exchanged for an equivalent number of stocks of the merged business. The underlying theory underlying the formation of a company is to create shareholder capital that is greater than or equal to the wealth of two businesses.

The benefits of the merger vary according to the new company’s short- and long-term goals and efforts. This is due to reasons such as the operating climate, changes in corporate practice, capital expenditures, and alterations in financial power affecting the business identified (Schmidt, 2015). From a huge advantage, both Walmart and Target have challenges that make winning in this current economy more difficult. In the modern shopping landscape, large retail stores like Amazon and Alibaba are increasingly relying on their multichannel campaigns, beefing up online retail shops, upgrading in-store experiences, and introducing new ranges of branded merchandise in categories like home decor and clothing. The collaboration will provide the companies with a more robust defense against Walmart, the world’s biggest supermarket, which controls the largest share of the $800 billion United States food industry. The business expects to expand its distribution services and introduce a contemporary focused retail brand on its online marketplace.

The advantages of mergers and acquisitions derive from a term known as synergy, which states that a merged entity is valued more than the total sum of its components, implying that two companies’ combined are valued more than the share price of the corporations separately (Ullrich & Van Dick, 2007). One advantage of this is an improvement in market strength, which is a company’s ability to exert some price leverage over a commodity. This can be accomplished in a variety of ways, but for instance, if a company merges with another and then finds itself in a competitive marketplace, it will be able to increase the cost of its goods because customers will have fewer alternatives. Synergy refers to the additional benefit that one business may derive from the acquisition of another. Most transactions fail to yield the synergies anticipated at the acquisition or merger acquisition because the synergies are overestimated. The acquiring company business pays a fair price at the time of sale, demonstrating that no additional value is created. According to studies, the idea of synergy is all about generating value by exchanging resources and receiving advantages that were previously not available or could only be obtained at a greater price. Another benefit that will result from this merger is the increased economies of scale that can be realized. In this case, the bigger the business, the lower the cost per unit of production because value propositions are best utilized. For instance, if the two companies in the same industry combined, they might achieve marketing cost savings through joint ads and management costs through integrating accounting and management functions. There will also be money leverage because funding borrowed on the bond market would be available at lower prices and with more favorable interest terms.

Internalization of transactions is also advantageous when two firms at various stages of the production chain merge, greater efficiency in collaboration of the various levels could result. Cost savings could accomplish this in areas such as correspondence, supervision, contract compliance, and bargaining. Typically, acquiring new customers or business requires years of work and can even result in losses in the initial phases; but, through the process of mergers and acquisitions, this once intimidating challenge can become much smoother. By purchasing an established firm that already possesses the requisite skills and potential competitors, the need for them to be produced internally is eliminated. In certain countries, transactions have tax benefits because losses of affiliates can be used to cover the current taxable income of the parent corporation, resulting in a lower taxable income (Kwilinski, et al., 2019). As a result, purchasing firms with accrued tax losses can be advantageous; however, this benefit is not available in the United States due to much stricter regulations in the state. The merger will be used as a tool to increase value for shareholders, which is the primary goal; however, managerial motivations appear to be involved. When Walmart acquires Target corporation, it becomes a more prominent organization, which means executives have more responsibilities and could be rewarded in receiving a much higher salary. Because of this, some may feel more competitive and significant, and this sense of accomplishment may become a powerful motivator for management to carry out the merger and ensure its success. Another advantage of the merger is the sustenance that it will bring to the two firms. The senior management will begin to believe that the best way to prevent being purchased over or conquered is to expand internally, mainly if frequent mergers occur in the companies’ market. This could result in companies combining not just for the benefit of investors but also for ensuring the leadership team’s longevity. Overall, a partnership between Target and Walmart will broaden both organizations’ market opportunities, providing Target with the facilities it requires for a new technological retail environment while further expanding the organization’s retail industry with improved productivity and size.

Brief strategy on how the company will operate after the merger

Wal-Mart will be regarded as the parent company during the merger process, while Target Corporation will be treated as the subsidiary corporation. According to IAS 27.13, ownership is presumed when the acquirer corporation obtains more than half of the suffrage of the other corporation. According to paragraph 9 of Statement 141, in order for an acquisition of equity interests to be considered a corporate merger, the person purchasing the equity interests must gain ownership. The primary reasons for two firms merging in America and outside the States are expanding their business, obtaining new raw materials, and gaining access to a broad financial market. Walmart is a commonly used and operational improvement means for foreign companies seeking to broaden their business scope, open new manufacturing facilities, expand new sources of supply materials, and access capital markets. Acquisitions outside the boundaries of the United States have been numerous and massive in recent years, and such transactions are likely to reach greater levels as a result of changing dynamics, a reduction in cumbersome regulations on business and government regulations, and the advancement of standardized financial statements by numerous capital-starved nations. Furthermore, the primary goal is to expand their company or industry and create better outlets for target audiences. In general, dominance is implied by one corporation owning more than half of another corporation’s remaining share capital, either explicitly or implicitly. The majority shareholder is mandated by IFRS 10 to facilitate timely financial reports. It further specifies the rules for deciding whether or not the investor has influence over the investee. IAS 27.4 requires all entities to file joint financial statements and report them as a specific business body. As a result, in all cases, Wal-Mart will be considered the holding entity and will be forced to provide accounting standard reports.

Financing the merger

Funding a merger is a difficult task since the combining firms must balance the interests of their shareholders. Walmart’s purchase of Target will be one of the most important acquisitions in the context of the retail industry. Walmart Inc. and Target Corporation instructed and specified the acquisition of the business, which culminated in one of the most profitable transactions. The acquisition required both debt funding and total liabilities. Walmart and Target will negotiate debt funding as well as advise on derivative contracts in the sum of the appraised value. The two companies have arranged to fund the debt in equity financing simultaneously, which was made possible by the sale of the company’s share capital and mandatory convertible corporate bonds. The overall value of the transaction was expected to be around $209 billion, and it was to be done with extreme caution. Walmart and Target were strategically chosen to fund and document the procurement process. The decision is aimed to define an optimum financial framework that will ensure the corporation’s credit ratings are high. The procurement process necessitates expert assistance and direction to ensure the best possible protection of stakeholders’ interests. Sharing the approval processes with other companies would boost the operating expenses. Financing processes led by a dual consultant are typically done quickly and positively impact the purchasing process. Negotiating with smaller firms instead of sharing the claims processing with larger firms would reduce the organization’s risk aversion. This is due to the fact that both companies have agreed to bridge loans. This will ensure that the merger phase was completed successfully and without risk.

Financial model

The financial model to be utilized is the equity strategy used when the acquiring corporation can greatly impact the activities of the investee corporation. The acquiring company, however, does not have complete leverage over the investee company. This approach is used when the Investee Corporation’s interest is greater than 20percentage but less than 50 percent (Konečný & Zinecker, 2017). After an agreed-upon time, the form of assessment of the subsidiary’s resources in its financial statements would be the fair value of the assets for the share sale. The assets are measured at their valuation price using this approach. Target Corporation’s assets are often in the form of supermarkets and convenience stores, and their market price is simple to calculate. Target Corporation lost money in the year it was acquired, but it is expected to lose money again in the next few years. The company’s losses would have a detrimental impact on the stock price valuation. However, the high valuation of the assets would entice investors to purchase the company’s shares. The Wal-Mart executive committee will benefit from the sale of the securities in this manner.

Discounted Cash Flow (**in millions)

The Discounted Cash Flow represents the evaluation method for the acquisition of Target corporation and the value of the investment places in the next five years. The first yearly fraction is 0.5 which later doubles to 1.0 used to evaluate the company for the four years. These figures are an estimation of expected valuation in the future after the merger.

Conclusion

In conclusion, the merger between Target and Walmart will be beneficial to both firms and form one of the biggest retail industries in the world. The merger will also enable gaining competitive advantage over companies such as Amazon and Alibaba, which are expanding globally. The integration of human resources will enable the organization to increase experienced human capital without an extra expense. After a thorough analysis of the corporation’s history and their financial position, it is clear that the merger will be a success.

References

Brandner, T. (2019). Financial Analysis: Sleep Number Corporation.

Castillo, J. (2017). The relationship between big five personality traits, customer empowerment and customer satisfaction in the retail industry. Journal of Business and Retail Management Research (JBRMR), 11(2). https://www.researchgate.net/publication/313599627_The_relationship_between_big_five_personality_traits_customer_empowerment_and_customer_satisfaction_in_the_retail_industry

Konečný, Z., & Zinecker, M. (2017). Corporate life cycle identification: a model based on relationship between return on equity and cost of equity. Scientific papers of the University of Pardubice. Series D, Faculty of Economics and Administration. 41/2017.

Kwilinski, A., Drobyazko, S., & Derevyanko, B. (2019, November). Synergetic and Value Effects in Corporate Mergers and Acquisitions of International Companies. In Proceedings of the 34th International Business Information Management Association Conference (IBIMA) (pp. 13-14). https://www.researchgate.net/publication/345714693_Synergetic_and_Value_Effects_in_Corporate_Mergers_and_Acquisitions_of_International_Companies

Mac-Vicar, M., Ferrer, J. C., Muñoz, J. C., & Henao, C. A. (2017). Real-time recovering strategies on personnel scheduling in the retail industry. Computers & Industrial Engineering, 113, 589-601.

Martínez, A. B., Galván, R. S., & Alam, S. (2017). Financial Analysis of Retail Business Organization: A Case of Wal-Mart Stores, Inc. Nile Journal of Business and Economics, 3(5), 67-89. https://www.researchgate.net/publication/320824848_Financial_Analysis_of_Retail_Business_Organization_A_Case_of_Wal-Mart_Stores_Inc

Schmidt, B. (2015). Costs and benefits of friendly boards during mergers and acquisitions. Journal of Financial Economics, 117(2), 424-447.

Target. (2020). Investors.target.com. Retrieved 22 April 2021, from https://investors.target.com/static-files/84b61f80-290f-48a2-b98b-99652641f14f.

Ullrich, J., & Van Dick, R. (2007). The group psychology of mergers & acquisitions: Lessons from the social identity approach. Advances in mergers and acquisitions.

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