Case 1
General Mills’ Acquisition of Pillsbury from Diageo PLC 1. What are General Mills’ motives for this deal? Estimate the present value of the expected cost savings (synergies).
In the spring of 1998 General Mills began studying areas where they could add to the company and advanced a strategy of acquisition-driven growth. General Mills has several motives for pursuing a deal to acquire Pillsbury. Pillsbury was identified as an ideal target due to its ability to complement General Mills’ other existing businesses and Diageo’s readiness to sell. The potential acquisition of Pillsbury would create value for shareholders by “accelerated sales and earnings growth…..through product innovation, channel expansion, international
To bridge the gap between the differing valuations of GM’s share price, a contingent payment clause is included in the transaction. The contingent payment clause was designed so if GM was correct in its valuation and the share price rose, GM would profit. If Diageo was correct and the share price either remained constant or decreased, Diageo would benefit. When the deal was negotiated, GM was trading at $38, and the contingent payment was designed to benefit both the buyer and the seller if the value of GM differed from this price upon the first anniversary of the closing. At the closing, Diageo established an escrow fund of $642 million, out of which it would make various payments contingent upon GM’s share price.
If GM’s average daily share price for 20 days were $42.55 or more, then GM would receive payment of $642 million. The ‘claw-back’ affect is that when GM’s stock is 42.55, GM can reclaim (42.55-38=4.55*141million=641.55) of the escrow fund back. The closer the stock price is to 42.55, the more money that GM can claw back. The deal is attractive to GM, because they receive the additional payment required to make the deal profitable for them. The deal also beneficial to Diageo, because they own 33% of GM, so they will profit from share appreciation.
If GM’s average daily share price were $38 or less, Diageo would pay $0.45 million to GM. Diageo will benefit from this because it will only