At a purchase price of $23 billion, Wm. Wrigley Jr. Co., we learned Monday, is worth 32 times expected 2008 earnings to Mars Inc., and somewhat less to Warren Buffett. His Berkshire Hathaway Inc.
gets to buy a 10%-plus equity stake in Wrigley at a discount (surprise, surprise), though we don't yet know how much of one.
In 2002, by contrast, Cadbury Schweppes plc bought Adams, maker of Trident gum, from Pfizer Inc. for $4.2 billion, a price that represented 2 times 2001 sales and 12.8 times Ebitda,
according to The Deal. Investors hammered Cadbury for the deal, which was expected to dilute 2003 earnings.
Aside from the fact that it's probably more fun to make acquisitions as a private company, what this comparison highlights is one of the central issues in corporate development: the art, science and politics of determining and defending the price one pays for a company.
Valuation is the theme for the next issue of Corporate Dealmaker magazine, coming to you with the June 9 issue of The Deal newsweekly. And as it happens, it was also the topic of a lively panel at the Conference Board
business development conference in New York last Friday. The session was led by Tony Aaron of Ernst &Young's Transaction Advisory Services who, coincidentally, is also one of the main interviews for our upcoming cover story.
Joined by dealmakers from Covidien Ltd. (Scott Miller), Fidelity Investments (Maureen Burke) and Pfizer (Doug Giordano), Aaron traced valuation issues through the transaction life cycle, with input from the audience in the form of answers to electronic survey questions. A few highlights:
Discounted cash flow was the overwhelmingly favorite tool, but some folks are using option pricing models. The tricky part of DCF, of course, is determining the discount rate, which can be a source of tension between optimistic business leaders and paid-to-be-skeptical corporate deal professionals. Interestingly, in answer to the question of whether they used the same valuation models for every deal, only 37% of the audience said yes; 59% said it depends.
They covered a lot of territory in an hour -- from the need to do multiple scenarios for an acquisition, to the wisdom of being conservative about revenue synergies, to the tension between near-term accretion-dilution analysis and longer-term value creation. These are all topics will be examining in our next issue. Who knows -- we may even be able to shed a little light on the price of gum these days. -
Kenneth Klee
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