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“3G Buy American Food Icon Heinz” Case
Thermo fisher paid $76 per share, for each outstanding share of life tech.
Maximum offer price Thermo Fisher could have made without ceding all the synergy value to life Tech shareholder is $76 per share according to the terms of the deal. This included all unvested and vested outstanding stock options. Actual purchase price consisted equity consideration of $13.6 billion plus the assumption of the $2.2 billion as the outstanding debt of the life Tech. offer price at which NPV becomes negative represents maximum Life Tech offer price because at this point, Life Tech would be paying the price almost at which the asset is worth, this is the break-even state at this point.
Thermo Fisher designs capital structure for financing deal which retains investment grade credit rating. This has potential significant impact on the capital structure. The impact between capital structure and credit rating persists significantly. Targeting debt to total capital and the interest coverage ratio consistent to industry average makes Thermo Fisher investment grade to be near down grade to the speculative grade issue less debt so as to avoid extra cost which may result from downgrade. Changes from investment grade to speculative grade are incrementally important as it is consistent to the trade off theory.
Earnings per share (EPS) would be downgraded (very low) in the first year. This is because Thermo Fisher’s rating is downgraded due to its aggressive stance toward asset acquisitions, dividends and share repurchases. Within the first year, we expect Thermo fisher to continue with this activities moving forward. In this lieu, Thermo Fisher would drastically increase its leverage as a result from the vast transaction as the company will use its vast cash flow to repay debt.
If synergy was not realized as quickly and as anticipated, shareholders would have been impatient as they would be demotivated to invest with the firm.
The impaired integration case Thermo Fisher’s earning per share to decreases, in this dimension the NPV decreases and becomes negative, this would mean that, the present value of the future return is less than the initial cost.
The difference between the base case model and the impaired integration model is that, the firm rate and acquisition under base case model upgrades continually unlike model output from the impaired integration case.