Recent Deals: Berkshire Hathaway & 3G Capital Buy Heinz, Office Depot-Office Max Merger

Recently, there have been some fairly significant transactions, and I want to mention these and tell you what they may mean for corporate executives.

The first deal we have is Berkshire Hathaway and 3G Capital acquiring Heinz for $23.2 billion. Really, if you include debt, that transaction looks to be just under a $30 billion transaction.  There are two fundamental reasons why this deal is going on. One is the belief that brand names are important and a great differentiator in many markets.

The second reason is that Heinz has a significant platform and provides a great opportunity for growth. There is particular opportunity on a global basis to leverage, not only the brand name, but also the infrastructure and capabilities that Heinz brings to the table.

This growth may not be in the US. That’s not to say there is no growth in the US, but there’s a belief that there’s significant opportunity to continue leveraging the Heinz platform in emerging markets.

The second deal, which was announced a few weeks ago, is Office Depot acquiring OfficeMax. Technically this transaction is a merger, so the deal will be trading stock for stock and not cash. However, valuation still has to take place and the deal is valued around $976 million.

Once again, we’re continuing to see something I’ve been talking about: very strategic transactions.  In the marketplace, Staples is the market leader with about 40% market share, Office Depot is number two with about 20% market share, then OfficeMax with about 15%. So combined, the newly merged Office Depot and OfficeMax will be a much more significant player, just a little bit behind Staples, with 35% market share.

If you are a buyer and know strategically what you want to do, there are three things likely to impact your plans:

1. Low Interest Rates: Assuming you’ve got a strong balance sheet and have the ability to attract, in particular, senior debt financing, now is a good opportunity to start leveraging your balance sheet.
2. No Growth: For most companies and most markets, especially here in the US, there is no significant growth.
3. Excess Cash: There’s a lot of excess cash out in the marketplace.

To me, those three factors create a recipe for a continuation of strategic transactions.

Also, keep in mind that regardless of what the fundamentals say you should be doing from a financial or strategic position, the reality is we have a marketplace where most CEOs react to what other CEOs are doing. When people see major transactions like the Office Depot— OfficeMax merger, I guarantee you they’re going to start talking about it more in their board meetings.  We will begin to see more activity.

I have been saying for some time that this year is going to be a very strong year for M&A. I still think there is a window of opportunity for strategic acquisitions. Assuming you have a solid plan, I encourage you to really consider the timing of when you’re going to take action.

On the other side, my concern is that looking ahead, say into 2014, we are may start seeing people overpay because of that recipe I just talked about. More on that in later posts. Meanwhile, that’s a little bit of what I see going right now in the M&A world.

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