VideoSo Happy Together: M&A Picking Up
Yesterday, outgoing White House press spokesman Ari Fleischer said the trend for U.S. economic growth "appears to be going up." Added Fleischer: it's a question of how far up and how fast ... This does remain an economy that has mixed signals."
One not-so-confusing signal: the M&A market appears to hotting up. Economists say increasing M&A activity often signals an economy on the upswing, as executives seek to make deals before corporate earnings -- and hence, stock prices -- shoot up.
Several fairly large acquisitions have been commenced in the past few days.
On Friday, Oracle announced an unsolicited, all-cash bid for rival PeopleSoft, which just days earlier, indicated it would be acquiring smaller ERP vendor J.D. Edwards for $1.7 billion. The proposed Oracle offer for PeopleSoft, which was not exactly warmly received by PeopleSoft CEO Craig Conway, tips the scale at a little over $5 billion.
On Monday, several more deals were announced.
Management at ConAgra Foods Inc. said it was selling its chicken processing business to Pilgrim's Pride Corp. Under the terms of the deal, which was valued at close to $600 million, ConAgra will receive $100 million in cash, $235 million in Pilgrim's Pride common stock, and $255 million in subordinated notes (payable by Pilgrim's Pride to ConAgra.)
ConAgra, which is based in Omaha, will take an aftertax charge of 14 cents per share in the fourth quarter, on a pretax charge of $112 million relating to lowering the book value of its chicken processing assets.
The sale appears to be part of the company's move out of the commodity food business. In announcing the deal, ConAgra management said it wanted to focus on the company's wide array of national brands, including Butterball, Chef Boyardee, and Hebrew National.
Conversely, the transaction will make Pilgrim's Pride the number two processor of chicken in the U.S., trailing only Tyson Foods. Pilgrim will take over 16 plants and 15 distribution centers from ConAgra. Those facilities currently employee 16,000 workers.
Management at Pilgrim's Pride -- which, incidentally, is named after Chairman Lonnie Pilgrim -- expects the transaction to be finalized the summer. The company claims it back out of the deal if its average stock price falls below $5.35 during the waiting period preceding the closing of the deal. As of the market close on Friday, shares of Pilgrim's Pride were trading at $8.95
Off the farm, defense contractor General Dynamics reported it had agreed to purchase homeland security company Veridian Corp. The Falls Church, Va.-based General Dynamics will pay $35 in cash for each Veridian share and assume Veridian's $270 million in debt.
Veridian, based in Arlington, Virginia, makes chemical, biological and nuclear detection systems. The deal, valued at about $1.2 billion, pushed the stock price of Veridian sky-high yesterday. Shares of the tech specialist closed at $34.48, up a full $7.13 for the day. The share price of General Dynamics was slightly down for the day.
Pensions Cutting Into Capital Spending
Based on the results of a survey conducted by SEI Investments, it appears that mid-size companies are struggling mightily with under-funded pension plans.
According to the survey of 151 companies (with average pension assets of $181 million), nearly a quarter of the respondents said they are already cutting back on capital expenditures because of rising pension obligations. Another 11 percent expect their spending to be effected by pension plan problems.
Another quarter of the respondents said they're concerned that under-funding of their corporate pension plans will put them at a competitive disadvantage.
Even more worrisome: 58 percent of the surveyed companies indicated that their pension plans had lowered their companies' profitability. Other financial consequences of pension funding woes include cash-flow problems, reduced share price, and reduced dividends.
"The scope of the damage to mid-sized companies is sobering," said Jim Morris, senior vice president at SEI. "Without the ready access to capital markets enjoyed by bigger corporations, these companies face tougher choices when facing pension funding pressures."
Indeed, half of the surveyed companies are adjusting their pension plan investment strategies, while 44 percent are increasing contributions. Further, 27 percent are considering closing their plans and/or converting their traditional defined benefit plans to less-onerous defined contribution plans.
It's not clear whether these moves will solve the problem, however. In fact, 83 percent of the respondents said they're still looking for a way to manage their pension plan funding problems.
They're no shortage of consultants out there offering up suggestions, either. Nine out of ten of the plan sponsors say they employ more than one advisor for help with their pension plans.
What's more, one-quarter of the respondents said they use six or more pension advisors.
Short Takes
- Richard Bogan, who has served as CFO at R.J. Reynolds Tobacoo Holdings Inc for less than one year, is leaving the company "to pursue other business interests." RJR Tobacco, the number two maker of cigarettes in the U.S., wasted no time in filling the void, naming Dianne Neal as the company's new CFO. The hiring of Neal, who's been with RJR since 1988, should tell you something about the role of the CFO at a tobacco company. Neal has served as the company's vice president of investor relations since 1999, and often speaks during company conference calls. She's also held several financial positions at the company, including controller. Bogan joined R.J. Reynolds Tobacco in July after a twenty-year run at rival Philip Morris. In April, RJR lowered profit estimates for the year because of steep discounting and sales declines. The company is best known for its Camel, Winston, and Salem brands of cigarettes. It's headquartered in -- where else -- Winston-Salem, N.C.
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