An Analysis of Jollibee Foods Corporation acquisition of Mang Inasal
The Philippines is a constitutional democracy with three co-equal branches of government, namely, the executive, the legislative and the judicial branches. The Philippines is also a civil law jurisdiction with codified bodies of law. Notable amongst these are the Corporation Code of the Philippines (.CorporationCode.), which deals with domestic corporations in general, and the Civil Code of the Philippines (.Civil Code.), which embodies general laws relating to obligations and contracts. Decisions of the Supreme Court of the Philippines also have the force and effect of law.
Acquisitions are the most common form of mergers and acquisitions ("M&A") transaction in the Philippines. These acquisitions are generally done through full or partial acquisition of shares or assets of the target company. The Philippines also recognizes the concept of a "merger" or "consolidation". In a merger, the surviving company absorbs a target company. In a consolidation, two or more companies consolidate to form a new corporation.The Philippines does not have specific M&A legislation. Generally, the provisions of the Corporation Code, the Securities Regulation Code and the Civil Code will govern M&A transactions.
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The Foreign Investments Act generally governs foreign investments in the Philippines. There are also several pieces of special investment legislation that complement the Foreign Investments Act and demonstrate government efforts to create an investment climate conducive to foreign investment. A new banking law liberalized the entry of foreign banks into the Philippines, enabling foreign banks to operate full branch operations; a new independent central monetary authority, the BangkoSentralngPilipinas ("Central Bank"), has replaced the old Central Bank; 40-year old foreign exchange controls on virtually all foreign exchange transactions have been lifted; a comprehensive build-operate-transfer law has been enacted, allowing private sector participation in infrastructure projects traditionally undertaken only by the public sector; an investors lease act was issued that allows foreign investors to obtain 50-year land leases in many cases; importation has been liberalized by the removal of quantitative restrictions and a reduction in tariffs for raw materials, intermediate goods, and capital equipment; the retail industry has been liberalized allowing foreignretailers to own equity in retail enterprises under specified cases; a new amendment of the Tax Code has, in general, reduced the rates of documentary stamp tax on, among others, transfers and issuances of shares, and increased the number of transactions exempt from this tax; and special economic zones thatoffer attractive fiscal and non-fiscal incentives to investors have been created pursuant to the Special Economic Zone Act of 1995 in many parts of the country. The Board of Investments, an agency attached to the Department of Trade and Industry, is the lead agency of the Philippine government in investmentpromotions. The Board of Investments has a comprehensive promotion program that aims to minimize investment barriers and facilitate the establishment of business ventures throughout the country.
The Board of Investments is mandated to draw up an Investment Priorities Plan that, among other things, includes a list of investment areas or activities that are eligible for fiscal and non-fiscal incentives. On 26 April 2005, President Gloria Macapagal Arroyo signed Memorandum Order No. 169 approving the 2005 Investment Priorities Plan
The Main IdeaÂ
Creating shareholder value higher than the sum of two companies is the key principle behind buying a company. Greater market share and/or greater efficiency are some of the benefits of M&A. Mergers and Acquisitions are commonly done during tough financial times, it is better than closing down the company
Motives behind Mergers and Acquisitions
Increasing financial performance is the most prominent rationale in Mergers and Acquisitions; the following are some that could improve financial performance:
Economy of scale: reducing fixed costs by removing identical departments or operations, thus increasing profit margins
Economy of scope: related with demand-side changes, such as increasing or lessening the scope of marketing and distribution of products
IncreasedÂ revenueÂ orÂ market share: applicable if the buyer will be absorbing a competitor thus increasing its market power
Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externalityÂ problem. A common example is of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power, each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. By merging the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.
Distinction between Mergers and AcquisitionsÂ
Though they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself asÂ the new owner, the purchase is called an acquisition. From a legal point of view, theÂ target companyÂ ceases to exist, the buyer "swallows" the business and the buyer'sÂ stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a singleÂ new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when bothÂ CEOsÂ agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company'sÂ board of directors, employees andÂ shareholders.Â
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Acquisitions versus Mergers and Consolidations
Mergers and consolidations are procedurally more complicated to effect than either type of acquisition. In a merger or consolidation, all the assets and liabilities of the absorbed corporation or the consolidating corporations are transferred to the surviving corporation, or the consolidated corporation, as the case may be. In the case of a merger, the shareholders of the absorbed corporation receive shares of the surviving corporation in exchange for their shares in the absorbed corporation. In a consolidation, the shareholders of the consolidating corporations receive shares in the newly consolidated corporation in exchange for their shares in the consolidating corporations. Thus, both transactions basically involve both the transfer of shares and the transfer of categories of assets and liabilities among the various participants.
SynergyÂ is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:Â
Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.Â
Economies of scaleÂ - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.Â
Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company canÂ maintain or developÂ a competitive edge.Â
Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimesÂ a mergerÂ does just the opposite. In many cases, one and one add up to less than two.Â
Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try toÂ create anÂ image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it aÂ discountedÂ share price. We'll talk more about why M&A may fail in a later section of this tutorial.Â
Varieties of MergersÂ
From the perspective of business structures, thereÂ is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:Â
Horizontal mergerÂ - Two companies that are in direct competition and shareÂ the same product lines and markets.Â
Vertical mergerÂ - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.Â
Market-extension mergerÂ -Â Two companies that sell the same products in different markets.Â
Product-extension mergerÂ -Â Two companies selling different but related products in the same market.Â
ConglomerationÂ - Two companies that have no common business areas.Â
There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:Â
Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is madeÂ with cash or through the issue of some kind ofÂ debt instrument; the sale is taxable.Â
Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between theÂ book valueÂ and theÂ purchase price of the assets canÂ depreciateÂ annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.Â
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Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock orÂ consolidationÂ as a new company. Acquisitions are often congenial,Â and all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventuallyÂ liquidateÂ or enter another area of business. Another type of acquisition is aÂ reverse merger, a deal that enables aÂ private companyÂ to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into theÂ public company, and together they become an entirely new publicÂ corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends onÂ whether this synergy is achieved.Â
Investors in a company thatÂ areÂ aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of anÂ M&AÂ deal will have different ideas about the worth of a target company: its seller will tend to valueÂ the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing aÂ target company. Here are just a few of them:Â
Comparative RatiosÂ - The following are two examples of the many comparative metrics on which acquiring companiesÂ may base their offers:Â
Price-EarningsÂ RatioÂ (P/E Ratio)Â - With the use of this ratio, an acquiring companyÂ makes an offerÂ that isÂ a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring companyÂ good guidance for what the target's P/E multiple should be.Â
Enterprise-Value-to-SalesÂ RatioÂ (EV/Sales)Â - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of theÂ price-to-sales ratioÂ of other companies in the industry.Â
Replacement CostÂ - In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop.Â
Discounted Cash FlowÂ (DCF)Â -Â A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (net incomeÂ + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company'sÂ weighted average costs of capitalÂ (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.
Synergy: The Premium for Potential SuccessÂ
For the most part, acquiring companiesÂ nearly always pay a substantialÂ premiumÂ on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion ofÂ synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. Let's face it; it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determineÂ whether a deal makes sense. The equation solves for the minimum required synergy:Â
In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal makers might just fall short.Â
What to Look ForÂ
It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company. To find mergers that have a chance of success, investors should start by looking for some of these simple criteria:Â
A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests.
Cash transactions - Companies that pay in cash tend to be more careful when calculating bids and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside.
Sensible appetite - An acquiring company should be targeting a company that is smaller and in businesses that the acquiring company knows intimately. Synergy is hard to create from companies in disparate business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers.
Mergers are awfully hard to get right, so investors should look for acquiring companiesÂ with a healthy grasp of reality.Â
DOING THE DEAL
Start with an Offer
When theÂ CEO and top managers of a company decide that they want to do a merger or acquisition; they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, orÂ building a position. Once the acquiring company starts to purchase shares in the open market, it is restricted to buying 5% of the totalÂ outstanding sharesÂ before it must file with theÂ SEC. In the filing, the company must formally declare how many shares it owns and whether it intends to buy the company or keep the shares purely as an investment.Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's willing to pay for its target in cash, shares or both. The tender offer is then frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it.Â
The Target's ResponseÂ
Once the tender offer has been made; the target company can do one of several things:Â
Accept the Terms of the OfferÂ - If the target firm's top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal.Â
Attempt to NegotiateÂ - The tender offer price may not be high enough for the target company's shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be much at stake for the management of the target - their jobs, in particular. If they're not satisfied with the terms laid out in the tender offer, the target's management may try to work out more agreeable terms that let them keep their jobs or, even better, send them off with a nice, big compensation package.Not surprisingly, highly sought-after target companies that are the object of several bidders will have greater latitude for negotiation. Furthermore,Â managers have more negotiating power if they can show that they are crucial to the merger's future success.Â
Execute aÂ Poison Pill or Some OtherÂ Hostile Takeover DefenseÂ - AÂ poison pillÂ scheme can be triggered by a target company when a hostile suitor acquires a predetermined percentage of company stock. To execute its defense, the target company grants all shareholders - except the acquiring company - options to buy additional stock at a dramatic discount. ThisÂ dilutesÂ the acquiring company'sÂ share and intercepts its control of the company.Â
Find aÂ White KnightÂ - As an alternative, the target company's management may seek out a friendlier potential acquiring company, orÂ white knight. If a white knight is found, it will offer an equal or higher price for the shares than the hostile bidder.
Closing the DealÂ
Finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some transaction. In a merger in which one company buys another, the acquiring companyÂ will pay for the target company's shares with cash, stock or both. A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company. If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share certificates. The desire to steer clear of the tax man explains why so many M&A deals are carried out as stock-for-stock transactions.Â
When a company is purchased with stock, new shares from the acquiring company'sÂ stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target company shareholders. The shareholders of the target company are only taxed when theyÂ sell their new shares. When the deal is closed, investors usually receive a new stock in theirÂ portfoliosÂ - the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal.Â
As mergers capture the imagination of many investors and companies, the idea of getting smaller might seem counterintuitive. But corporate break-ups, orÂ de-mergers, can be very attractive options for companies and their shareholders.Â
The rationale behind aÂ spinoff,Â tracking stockÂ orÂ carve-outÂ is that "the parts are greater than the whole." These corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can help a company raise additional equity funds. A break-up can also boost a company's valuation by providing powerful incentives to the people who work in the separating unit, and help the parent's management to focus on core operations.Most importantly, shareholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company's traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent corporation. The parent company might attract more investors and, ultimately, more capital.Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that's great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company. For employees of the new separate entity, there is a publicly traded stock to motivate and reward them.Â Stock optionsin the parent often provide little incentive to subsidiary managers, especially because their efforts are buried in the firm's overall performance.Â
That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap credit markets and costlier finance that may be affordable only for larger companies. And the smaller size of the firm may mean it has less representation on majorÂ indexes, making it more difficult to attract interest from institutional investors.Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into smaller units, it may be losing theÂ synergyÂ that it had as a larger entity. For instance, the division of expenses such as marketing, administration andÂ research and developmentÂ (R&D) into different business units may cause redundant costs without increasing overall revenues.Â
There are several restructuring methods: doing an outright sell-off, doing an equity carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages and disadvantages for companies and investors. All of these deals are quite complex.Â
A sell-off, also known as aÂ divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy. The market may beÂ undervaluingÂ the combined businesses due to a lack of synergy between the parent and subsidiary. As a result, management and the board decide that the subsidiary is better off under different ownership.Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late 1980s and early 1990s, corporateÂ raidersÂ would use debt to finance acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders' method certainly makes sense if the sum of the parts is greater than the whole. When it isn't, deals are unsuccessful.Â
More and more companies are using equity carve-outs to boost shareholder value. A parent firm makes a subsidiary public through anÂ initial public offeringÂ (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary.A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder value.The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In these cases, some portion of the parent firm's board of directors may be shared. Since the parent has a controlling stake, meaning both firms have common shareholders, the connection between the two will likely be strong.That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a burden. Such an intention won't lead to a successful result, especially if a carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the parent and is lacking an established track record for growing revenues and profits.Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers of the carved-out company must be accountable to their public shareholders as well as the owners of the parent company. This can create divided loyalties.Â
A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the subsidiary to its shareholders through aÂ stock dividend. Since this transaction is a dividend distribution, no cash is generated. Thus, spinoffs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity with a distinct management and board.Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases, spinoffs unlock hidden shareholder value. For the parent company, it sharpens management focus. For the spinoff company, management doesn't have to compete for the parent's attention and capital. Once they are set free, managers can explore new opportunities.Investors, however, should beware of throw-away subsidiaries the parent created to separate legal liability or to off-load debt. Once spinoff shares are issued to parent company shareholders, some shareholders may be tempted to quickly dump these shares on the market, depressing the share valuation.Â
A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. The stock allows the different segments of the company to be valued differently by investors.Let's say a slow-growth company trading at a lowÂ price-earnings ratioÂ (P/E ratio) happens to have a fast growing business unit. The company might issue a tracking stock so the market can value the new business separately from the old one and at a significantly higher P/E rating.Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for shareholders? The company retains control over the subsidiary; the two businesses can continue to enjoy synergies and share marketing, administrative support functions, a headquarters and so on. Finally, and most importantly, if the tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions.Still, shareholders need to remember that tracking stocks areÂ class B, meaning they don't grant shareholders the same voting rights as those of the main stock. Each share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of tracking stock have no vote at all.
WHY THEY CAN FAIL
It's no secret that plenty ofÂ mergersÂ don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies fromÂ economies of scaleÂ may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.Â
For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit.A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.On the other side of the coin, mergers can be driven by generalized fear.Â Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.Â
The Obstacles to Making it WorkÂ
Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.Â
JOLLIBEE acquires MANG INASAL for P3-B
The country's biggest food retailer is acquiring majority control of a fast-growing barbeque fastfood chain in a continuing bid to beef up its business portfolio.In aÂ disclosureÂ to the stock exchange, Jollibee Foods Corporation said it is acquiring 70% of MangInasal Philippines Inc, the owner and operator of MangInasal, a chain of 303 restaurants all over the country serving grilled chicken and other Filipino food.Of the estimated P3 billion transaction price, Jollibee has paid P200 million to parent firm Injap Investments Inc., which will continue to hold 30% of MangInasal.Ninety-percent of the balance will be paid when the two parties sign a share purchase agreement, which is subject to a 30-day due diligence conducted by PriceWaterhouse Coopers-Isla Lipana& Co. auditing firm and Romulo MabantaSayoc De los Angeles law firm. The remaining 10% will be paid over 3 years.MangInasal's network will add about 5% to Jollibee's worldwide systemwide sales, 5% to its revenues, and 7% to its operating income. Once completed, the deal will also increase Jollibee's current 1,578 stores in the Philippines and 375 abroad by 16%.Jollibee has recentlyÂ sold its stake in Delifrance, aÂ French pastry store thatÂ it acquired in 2006Â andÂ divested from two businesses in Taiwan and ChinaÂ in line with its thrust to concentrate on larger quick-server restaurant businesses.
Jollibee was the brainchild of Chinese-Filipino entrepreneur Tony Tan Caktiong. His 1975-era ice cream parlor business-turned popular burger chain has become a textbook classic on the how a small local business could surpass a multinational giant, in this case McDonalds, in the Philippine market. Jollibee infused local food preferences in its menu and adapted to the changing business landscape.
Caktiong has since earned his place in global business after Ernst and Young chose him as Entrepreneur of the Year in 2004. A US-based Jollibee branch evenÂ appeared on HYPERLINK "http://www.abs-cbnnews.com/lifestyle/05/19/10/jollibee-appears-glee-episode""HYPERLINK "http://www.abs-cbnnews.com/lifestyle/05/19/10/jollibee-appears-glee-episode"Glee,HYPERLINK "http://www.abs-cbnnews.com/lifestyle/05/19/10/jollibee-appears-glee-episode""Â a popular American TV show "Glee". CaktiongÂ has since expanded the business mostly through organic growth and aggressive acquisitions. Other brands now include Chowking, Greenwich, Red Ribbon, ManongPepe's, Yonghe King and Hong Zhuang Yuan (China).Â During the first half of the year, Jollibee posted a net income of P1.43 billion, up 9.8% from P1.3 billion booked in the same perid last year on strong performance of local and foreign stores. Jollibee's success story has inspired other entrepreneurs in the country, including the Iloilo-based Sia family who established MangInasal in 2003. Edgar Sia II, who has Chinese roots like Caktiong, positioned MangInasal as an alternative quick service restaurant among a sea of food chains that have mushroomed all over the country. MangInasal serves charcoal-grilled chicken ("Inasal" in Ilongo dialect), wraps its rice in banana leaves sourced from Guimarasisland, and uses bamboo sticks sourced from various cooperatives in the province for skewers. It is also known for serving unlimited rice.MangInasal's owners were going to tap its success story, which has inspired province-based entrepreneurs who aspire to go nationwide, for its plans to tap the stock market in 2010. The additional capital was supposed to fund its plan to have 500 stores by 2012. Currently has a chain of 24 company-owned stores and 279 franchised ones. It has 2 commissaries. It has annual total revenues of P2.6 billion.Jollibee's unsolicited offer proved too difficult to refuse, however. Jollibee said it will continue the "expansion of MangInasal's store network, cost improvement on its raw materials, and greater operational efficiency by applying [Jollibee's] technology and scale."The Jollibee burger chain also currently offers barbeque chicken.
Valuation Methods Used
JFC (Jollibee Foods Corporation) used discounted cash flows method and market-based valuation methods such as EBITDA multiple and Price/Earnings multiple, comparable with the used in other previous acquisitions.
JFC will build shareholder value by growing the sales of MangInasal's existing stores through the application of JFC's knowledge of consumers and its available recipes and products, continued expansion of MangInasal's network, cost improvement on its raw materials, and greater operational efficiency by applying JFC's technology and scale.
As of September 2010, Jollibee currently has more than 1,000 stores (Jollibee, Greenwich, Chowking, Red Ribbon, Delifrance and ManongPepe's) nationwide and still the market leader in terms of retail food chain, MangInasal has around 300 branches as of October 2010 of which 24 are company-owned and 279 are franchised and has an estimated annual total revenues of 2.6 billion pesos and system wide sales of 3.8 billion pesos. Established only last December 12, 2003 the growth rate of MangInasal Phil. Inc. is remarkable, its appeal to the general public could be attributed to the Filipinos love for grilled food matched with the fast food's unlimited rice scheme and affordable prices (the cheapest grilled chicken rice meal the company currently offers is priced at PHP 49.00). Apparently the obvious objective of JFC in acquiring a company with such remarkable growth is because of its potential revenue-generating capacity which makes it a threat to JFC since JFC also offers chicken products, although JFC remains the market leader MangInasal still has a noticeable market share. By acquiring MangInasal, not only does JFC kills the competition but also re-acquires MangInasal's current market share.
Currently there are bills pending in the Philippine Congress that aims to protect the business sectors against anti-trust and monopoly activities, currently the Philippines does not have a comprehensive and developed legislation relating to such activities. Although, the Philippine Constitution provides the state policy of regulating or prohibiting monopolies when the public interest requires; the Revised Penal Code in relation to the state policy against monopolies penalizes parties entering into any contract or agreement or taking part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce, as well as penalizing those who prevent, by artificial means, free competition in the market. It also imposes penalties on parties who monopolize any merchandise or object of trade or commerce, or who combine with any other person or persons to monopolize said merchandise or object in order to alter the prices thereof or who spread false rumours or make use of any other artifice to restrain free competition in the market. The Civil Code on the other hand, allows the recovery of damages in cases of unfair competition in agricultural, commercial or industrial enterprises. The Price Act identifies illegal acts of price manipulation such as hoarding, profiteering and cartels, while the Consumer Act of the Philippines provides for consumer product quality and safety standards. There are also other laws on unfair competition pertaining to the protection of intellectual property rights.
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