Finance: What are the economics of a good merger? (2.0)

What are the economics of a good merger? The economics of a good merger need to show how profits and benefits will outweigh costs. A good merger will expand market share and extend reach, realize economies of scale, reduce redundancies, widen margins, reduce costs and positively benefit shareholders.

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Transcript

00:20

such that in theory at least the sum of the

00:22

one plus thie Other one will be more than two

00:25

And there are a few perspectives that outlined the strategy

00:28

behind a good merger Let's start with market share or

00:30

market leadership to home coffee roaster making companies combine each

00:36

owned about twenty percent of the market before the merger

00:38

And together we'll now together Yeah together they own forty

00:42

percent instead of rivalrous lee competing against each other for

00:46

shelf space and marketing keywords on google in suppliers of

00:50

boilers Now the two companies air now the undeniable leader

00:54

and that vaunted position gets them a bunch of quote

00:57

freebies unquote freebies free They're free and they're not competing

01:02

against each other anymore They're a team like they don't

01:05

undercut each other on price right So immediately they could

01:08

raise prices Yeah so think super friends in this and

01:11

how good the coffee must be at the hall of

01:13

justice So what are these freebies they get just by

01:16

being big Aii the market leader in revenues and our

01:19

units sold Well what do they get for being the

01:22

big kid on the block Well one freebie is that

01:24

whenever a journalist writes a story about a coffee roaster

01:27

for home use often in the starbucks haters gazette that

01:31

journalist almost has to get a quote from mega brew

01:34

inc You know or that journalist story really isn't validated

01:37

It would be like writing a story on internet search

01:40

and not getting a quote from google So lots of

01:42

free press comes their way like you know free marketing

01:45

and as part of the process in being vey brand

01:47

While the company likely raises the ceiling on pricing Before

01:51

the merger one product was six hundred ninety nine ninety

01:53

five and the other was maybe six hundred forty nine

01:56

ninety five and claimed we do what there's does for

02:00

five pounds of raw coffee les or something like that

02:03

Yeah we didn't write this loving but now instead of

02:05

competing against each other on price or why not just

02:08

raze overall prices of everything to seven hundred forty nine

02:12

ninety five Who's going to stop Yeah you're the market

02:14

leader the big dog So now with the exact same

02:17

cost structure the company has fifty to one hundred bucks

02:20

more per unit in a pretty much immediate profit And

02:23

if before the unit profit was something like seventy eighty

02:25

ninety hundred bucks while profits just gone up dramatically So

02:29

that's the story on the revenues side What about on

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the expensive side Well a couple of biggie stand out

02:34

immediately Kwan is the cost of supplies like if combined

02:39

they were each ordering one hundred thousand five hundred fifty

02:41

degree blowing many easy bake oven units and paying the

02:44

maker of those units one hundred fifteen dollars a unit

02:47

now under the scale of an order of two hundred

02:50

thousand units Well taken likely get a price break of

02:53

ten maybe twenty bucks a unit and those savings happen

02:56

all the way down the whole building Materials from the

02:58

power cord to the glass shields to the plastic form

03:01

factors to the little rotating spinny wheel thing that has

03:05

the beings going round and round So in a set

03:08

of unit costs of say two hundred fifty bucks a

03:10

unit for the hardware A new home coffee roaster might

03:12

under the combined company's cost them more like two hundred

03:16

bucks Then there's the cost of shelf space or distribution

03:19

Or if you want to think about it kind of

03:21

marketing When the two twenty percenters were competing against each

03:24

other well they'd negotiate for the prime shelf space at

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upscale coffee bars gourmet kitchen retailers and amazon for that

03:31

physical or virtual shelf space Right And they'd negotiate on

03:35

how much of their revenues they were willing to give

03:37

up in order to get that premiere shelf space Well

03:39

that was with the two of them living in a

03:41

world where switching from one brand to the other was

03:44

pushed there about equal But now there's only one dominant

03:47

brand and it's the one everyone who roasts at home

03:49

wants So instead of giving up fifty percent of revenues

03:52

for distribution well now they only have to give up

03:55

forty percent So think about the cascade effect here The

03:58

average retail price used to be say six hundred eighty

04:01

bucks a unit How'd we get that number And we

04:03

what kind of an average of that Six forty nine

04:05

six ninety nine Numbers so on that 6:80 the company

04:08

kept in half or three hundred forty and that three

04:11

forty was enough to cover their costs but not leave

04:13

a whole lot of cash left over By the time

04:15

everything i'ii operating cost marketing lawyers insurance rent lawyers was

04:20

done and paid for But now average retail prices have

04:23

gone to seven hundred fifty dollars And instead of keeping

04:26

half the combined company now keep sixty percent of the

04:29

retail price or four hundred fifty bucks Huge swing here

04:33

That's an incremental keep or take or profit set of

04:36

one hundred ten dollars in the form of higher prices

04:38

and splits and then another fifty bucks in cost savings

04:41

per unit for an incremental total contribution of another hundred

04:45

sixty dollars a unit And in a world where each

04:47

unit contributed maybe forty bucks in the past this is

04:50

a massive game for shareholders of mega brew and just

04:53

like their commercial says But wait there's more In addition

04:57

to these units savings and values added the company should

05:00

they need it can probably get debt cheaper All else

05:03

being equal as a market leader They in theory at

05:05

least carry less risk They certainly have more have to

05:08

be able to borrow money And a bigger scale in

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a borrowing of say twenty five million dollars would mean

05:13

less to them is a combined company than would a

05:15

borrow of twenty five million work if each company were

05:18

separate and still competing against each other and the same

05:21

scale benefits happened for duplicate jobs were taken likely fire

05:24

a third or more of their workforce and negotiate for

05:27

better per square foot prices from their landlords and better

05:30

insurance and better lawyer rates And so on Well it

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all adds up to make this merger a you know 00:05:36.102 --> [endTime] special kind of blend