merger and acquisition thesis

Impact of Merger & Acquisitions (M&As) on Innovation outputs

MIPLC Master Thesis Series (2017/18)

82 Pages Posted: 9 Jul 2019

Raghu Reddy

Meissner Bolte | Patent- und Rechtsanwaltskanzlei

Date Written: September 12, 2018

This thesis examines the impact of merger and acquisition (M&A) on innovation outputs. The focus is on two questions, a. evaluation of pre-acquisition characteristics of intangible asset capability (patent portfolio’s) of target and acquiring companies and b. post-acquisition impact of M&As on the innovation outputs. Metal Oxide Chemical Vapour Deposition (MOCVD) technology, which is one of the primary drivers of semiconductor industry is selected for investigating the M&A trend over past two decades. A summary of the interrelationship between innovation outputs and M&A trends is deduced based on a detailed literature review and this is compared with the patent portfolio changes with time by employing quantitative research of patent data in MOCVD capital equipment domain.

Keywords: M&A, Mergers and Acquisition, Intangible Asset, Innovation output

Suggested Citation: Suggested Citation

Raghu Reddy (Contact Author)

Meissner bolte | patent- und rechtsanwaltskanzlei ( email ).

Widenmayerstraße 47 Munich, Bavaria 80538 Germany 017636678951 (Phone)

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Li, Lu. "The impact of pre-merger disclosure and acquisition experience on mergers and acquisitions." Thesis, Durham University, 2018. http://etheses.dur.ac.uk/12902/.

Engelhardt, Jens. "Performance Measurement of Acquisitions and Acquisition Series." St. Gallen, 2006. http://www.biblio.unisg.ch/org/biblio/edoc.nsf/wwwDisplayIdentifier/02606911002/$FILE/02606911002.pdf.

Li, Xi. "Mergers and acquisitions : takeover efficiency, social connection and acquisition performance." Thesis, Durham University, 2018. http://etheses.dur.ac.uk/12460/.

Bi, Xiao Gang. "Stock market driven acquisitions : evidence fro UK mergers and acquisition market." Thesis, University of Exeter, 2008. http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.479414.

Lai, Shaojie. "Two Essays on Mergers and Acquisitions." Kent State University / OhioLINK, 2018. http://rave.ohiolink.edu/etdc/view?acc_num=kent1522771083410377.

SOARES, FABIO MAIA. "MERGERS AND ACQUISITION: MODELING THE PROCESS ANALYSIS." PONTIFÍCIA UNIVERSIDADE CATÓLICA DO RIO DE JANEIRO, 2005. http://www.maxwell.vrac.puc-rio.br/Busca_etds.php?strSecao=resultado&nrSeq=7341@1.

Fung, Kam-yiu Tommy. "Mergers & acquisitions : management issues and strategic implications in it organization : case study of acquisition of Midland Bank by Hongkong Bank /." Hong Kong : University of Hong Kong, 1996. http://sunzi.lib.hku.hk/hkuto/record.jsp?B17956778.

Säisä, Johan, and Daniela Ragnås. "The Infrastructure for Cultural Adoption: An Investigation in the Field of Mergers and Acquisitions." Thesis, KTH, Industriell ekonomi och organisation (Inst.), 2013. http://urn.kb.se/resolve?urn=urn:nbn:se:kth:diva-123807.

Eliasson, Sofie. "Synergies in Mergers and Acquisitions : A Qualitative Study of Technical Trading Companies." Thesis, Internationella Handelshögskolan, Högskolan i Jönköping, IHH, Företagsekonomi, 2011. http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-17881.

Zhu, Jing. "Impact of mergers and acquisition on supply chain performance." Thesis, McGill University, 2012. http://digitool.Library.McGill.CA:80/R/?func=dbin-jump-full&object_id=107642.

Simonova, Olga. "Brand Portfolio Strategy for Mergers and Acquisitions." Master's thesis, Vysoká škola ekonomická v Praze, 2014. http://www.nusl.cz/ntk/nusl-194156.

Owen, Sian. "An empirical investigation of recent acquisition activity in the UK." Thesis, Brunel University, 1997. http://bura.brunel.ac.uk/handle/2438/5324.

Hulthén, Andreas, and Kim Selguson. "Mergers and acquisitions : The road to success." Thesis, Linköping University, Department of Management and Economics, 2003. http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-2039.

Background: The most common reason to mergers and acquisitions is to generate synergies. Synergies emerge when two collaborating companies show a better result together than they would have done separately. Even though mergers and acquisitions have taken place since the beginning of the 17th century many of them still fail to succeed. There are many reasons why. Despite the fact that the reasons of failure have been known for a long time, new waves of mergers and acquisitions still appear.

Purpose: The purpose of the thesis is to contribute with knowledge about what should be given priority, in the merger and acquisition process, to generate synergies and thereby create shareholder value. This is achieved by investigating mergers and acquisitions in Sweden during the period 1996-2001.

Method: The thesis includes both quantitative and qualitative research. The quantitative research is calculations made to decide each company’s performances compared to index and the qualitative research is interviews made with representatives from the companies.

Result: There are no superior methods that can guarantee success, however there are certain aspects that always should be given priority. According our research those are among others: thorough due diligence, creating a committee of integration in order to keep focus on core business.

Öberg, Christina. "The Importance of Customers in Mergers and Acquisitions." Doctoral thesis, Linköpings universitet, Industriell marknadsföring och industriell ekonomi, 2008. http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-11933.

Gonçalves, Raquel Filipa de Jesus. "Acquisition of Carrefour-Portugal by Sonae Distribuição." Master's thesis, NSBE - UNL, 2009. http://hdl.handle.net/10362/9640.

Pham, Hong Y., and Karol Duda. "Human and Culture integration in Mergers & Acquisitions : A study of Andersen acquisition by KPMG in Vietnam." Thesis, Mälardalen University, School of Sustainable Development of Society and Technology, 2009. http://urn.kb.se/resolve?urn=urn:nbn:se:mdh:diva-6458.

Date             29 May 2009Program        International Business and Entrepreneurship (IB&E)Course          Master Thesis (EFO705).Authors         Karol Duda, 851010 – T317                    Hong Y Pham, 841117 - T153Tutor             Love BörjessonTitle              Human and Culture integration in Mergers & Acquisitions: A study of Andersen acquisition by KPMG in Vietnam.Research problem: What did KPMG Vietnam do to integrate organizational culture and human resource of Andersen during and after its acquisition in 2002?Purpose         The aim of this research was to focus on culture and human resource dimensions by investigating the case KPMG acquired Andersen in Vietnam in 2002.Method          The conducted methodological stance in this report is interpretive research. The qualitative method has also been utilized. This research has mostly based on primary data in which semi-structured interviews and questionnaires were implemented to collect empirical data related to Andersen Vietnam acquisition. Secondary data from books, journals, websites etc has also been gathered.Conclusion     Although KPMG did not employ every tool suggested by researchers, it was proven to perform fair or good in culture integration dimension

Andersson, Maria, and de la Rosa Maja Karlsson. "Realizing synergies in mergers and acquisitions : A case study of WM-data’s acquisition of Atos Origin Nordic." Thesis, Uppsala University, Department of Business Studies, 2006. http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-9026.

The focus of this thesis is the determinants for synergy realization in a merger or an acquisition. The objective is to describe the actions taken by our case company and relate these to the most important factors in realizing synergies in the new entity. We have chosen to study WM-data; a company widely experienced with merger and acquisition events, which during the last two years have conducted two lager acquisitions with subsequent integrations. Our focus has been last year’s acquisition of Atos Origin Nordic. The data about the event was gathered through interviews with key individuals involved in the acquisition and integration, through a questionnaire distributed amongst a group of employees and through studying published and internal documents covering the event. The model that is used relates combination potential, organizational integration, employee resistance and previous experience to synergy realization. The combination potential is affected by the strategic similarities and complementarities found in the combining companies, both which was found in our case company. Organizational integration is best conducted with a co-competence approach, i.e. a high level of integration through a fast and positive process. Also in this area our case company acted in a way that facilitates synergy realization. High employee resistance can reduce the potential for synergy realization. Actions in the areas of communication, culture and career can reduce resistance. Even if our case company used many of the techniques recommended, some employees still had a negative attitude towards the acquisition. Even more emphasis could have been put on communication about the event and forthcoming career implications. Experience of previous mergers and acquisitions activities can facilitate synergy realization if the combination is taking place in a similar industry setting. Our case company successfully recycled a lot of knowledge from a prior acquisition event, conducted by the Finnish subsidiary. In whole, the case study in this thesis represents a good example of how a company could act to realize synergies in a merger or acquisition. So far, most cost synergies relate to the combination of similar operations. Surprisingly, reducing costs through lay-offs was the primary method to achieve the expected savings. However, this event is still in an early phase, we expect more synergies from the combination to be realized in the future. Key words: mergers and acquisitions, case study, synergy realization, combination potential, organizational integration, employee resistance, M&A experience.

Glazar-Stavnicky, Monika. "Organizational and Systems Factors Leading to Systems Integration Success after Merger and Acquisition." Cleveland State University / OhioLINK, 2016. http://rave.ohiolink.edu/etdc/view?acc_num=csu1472689356.

Maloney, Brendan. "Mergers and Acquisitions: : Their impact on technological performance." Thesis, University of Kalmar, Baltic Business School, 2006. http://urn.kb.se/resolve?urn=urn:nbn:se:hik:diva-121.

This Thesis examines the impact of mergers and acquisitions (M&As) on the subsequent technological performance of the related firms. The investigated firms are selected according to their strategic choice which consists in seeing M&As as a shortcut for acquiring technological assets and capabilities and therefore the subsequent technological performance. The relatedness issue as well as the resource-based view of the firm are theoretical hints, which effectiveness on technological performance is discussed. A more managerial approach using case studies is also used in order to demonstrate a new organisational form of cooperation, derived from strategic alliances and M&As. With the help of the Renault-Nissan Alliance it is argued that this hybrid form presents many capacities for developing a successful integration process, and subsequently enhancing technological performance.

Hrouda, Jiří. "Leveraged acquisition finance." Master's thesis, Vysoká škola ekonomická v Praze, 2010. http://www.nusl.cz/ntk/nusl-74068.

Lyckhult, Maria, and Sabina Olsson. "Fight Global Assimilation! Cultural Clashes in Cross-National Mergers and Acquisitions." Thesis, Jönköping University, JIBS, EMM (Entrepreneurship, Marketing, Management), 2006. http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-452.

Cross-national merger and acquisition (M&A) activity is common and is argued to be a strategic tool for the growth of multinational corporations. Yet, M&A activity has a high failure rate which theorists have explained being due to cultural clashes. Previous research has explained these clashes being due to cultural distance. Other studies have focused on the extent to which the firms are culturally integrated and its relation to cultural clashes. In this study we investigate the relation between cultural distance and the extent to which the firms are culturally integrated as we believe that this relation in turn influences how cultural clashes are perceived by managers.

As the human side of M&A has become of great interest within research we stress the importance of understanding what happens with managers in the organization during the post-acquisition process. The purpose of this thesis is therefore to investigate the managers’ perception of cultural clashes, in relation to the perceived extent of cultural integration and perceived cultural distance, in cross-national mergers and acquisitions.

In order to achieve an in-depth understanding of a series of cross-national M&As and to answer the purpose of this thesis, a qualitative case study design was used. Semistandardized interviews were made with ten managers from a Swedish firm that has gone through a series of cross-national M&As involving Swiss, French and German managements.

The findings show that managers’ perception of cultural clashes differs depending on to what extent two firms are culturally integrated and in relation to the cultural distance between the two firms. No matter if high or low cultural distance managers perceive few cul-tural clashes if the extent to which the firms are integrated is low. If the cultural integration, on the other hand, is high and the cultural distance is high, the cultural clashes are perceived as many. Our findings indicate that cultural clashes are perceived differently depend-ing on how they affect the managerial role and the organizational behaviour. We refer to these clashes as implicit agreements and explicit statements. Clashes in implicit agreements are evolved from behaviour deeply rooted in national culture and corporate culture. These clashes have minor effects on the managerial role and the organizational behaviour. Never-theless, managers need to be aware of the differences and adapt to the preferred behaviour when interacting with the acquiring firm’s management. Explicit statements, on the other hand, affect the managerial role and organizational behaviour and lead to cultural clashes that conduce to frustration, lack of motivation and inefficiency. These clashes are more ap-parent when the extent of culturally integration is high. Therefore, the acquiring firm should not attempt to assimilate its target company in cross-national M&As.

Nene, Siphamandla Ebehardt. "The impact of mergers and acquisitions on unemployment in South Africa." Diss., University of Pretoria, 2012. http://hdl.handle.net/2263/23723.

王鳳馨 and Fung-hing Wong. "An HR perspective on mergers & acquisition: an AT & T case study." Thesis, The University of Hong Kong (Pokfulam, Hong Kong), 1996. http://hub.hku.hk/bib/B31267749.

Wong, Fung-hing. "An HR perspective on mergers & acquisition : an AT & T case study /." Hong Kong : University of Hong Kong, 1996. http://sunzi.lib.hku.hk/hkuto/record.jsp?B18003035.

Liu, Chaoyun. "The Compatibility of National Culture in International Mergers and Acquisitions." ScholarWorks@UNO, 2012. http://scholarworks.uno.edu/honors_theses/27.

Ren, Lijuan S. M. Massachusetts Institute of Technology. "The role of product management in the success of mergers and acquisitions : analyzing Eaton's 2008 Phoenixtec Power Company Ltd. acquisition." Thesis, Massachusetts Institute of Technology, 2013. http://hdl.handle.net/1721.1/80689.

Evran, Mehmet. "The influence of acquisition experience and post-acquisition strategies on the performance of emerging market acquirers : empirical evidence from Turkey." Thesis, Queen Mary, University of London, 2014. http://qmro.qmul.ac.uk/xmlui/handle/123456789/8039.

Masopustová, Tereza. "Analýza fúzí a akvizic v českém finančním prostoru a vyhodnocení jejich efektů." Master's thesis, Vysoká škola ekonomická v Praze, 2011. http://www.nusl.cz/ntk/nusl-116403.

Antypas, Nikoloas. "Essays on mergers and acquisitions : acquisition target prediction, CEO deal experience on deal performance, and value creation on a massive scale." Thesis, University of Reading, 2016. http://centaur.reading.ac.uk/68937/.

Pasiouras, Fotios. "Development of bank acquisition targets prediction models." Thesis, Coventry University, 2005. http://curve.coventry.ac.uk/open/items/ecf1b00d-da92-9bd2-5b02-fa4fab8afb0c/1.

Fong, Dominic. "The role of the psychological contract in affecting employee behaviour under the influence of merger and acquisition: a study of local regional managers in Hong Kong." Thesis, Curtin University, 2009. http://hdl.handle.net/20.500.11937/793.

Shabrova, Elena, and Bolaños Juan Manuel Figueroa. "Corporate Governance and Turnaround: Lessons for International Acquisitions of Distressed Firms : The case of Krenholm, Estonian textile manufacturer." Thesis, Linköpings universitet, Företagsekonomi, 2012. http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-89936.

Kachlík, Brian. "Empirická analýza rysů akvírovaných podniků." Master's thesis, Vysoká škola ekonomická v Praze, 2013. http://www.nusl.cz/ntk/nusl-192925.

Fredriksson, Jens, and Ulrik Weidman. "Understanding how to handle the acquisition process : a case study of ITAB Shop Concept AB." Thesis, Internationella Handelshögskolan, Högskolan i Jönköping, IHH, Företagsekonomi, 2014. http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-23884.

Gomes, Mathieu. "Corporate social responsibility and capital markets : evidence from mergers and acquisitions." Thesis, Université Clermont Auvergne‎ (2017-2020), 2017. http://www.theses.fr/2017CLFAD020.

Thom, Marcel. "Deal shaping in merger-and-acquisition negotiations : an exploration of organizational learning /." [S.l. : s.n.], 2003. http://www.gbv.de/dms/zbw/373230435.pdf.

Lang, Michelle R. "Strategies to Foster Employee Engagement Before, During, and After Organizational Mergers." ScholarWorks, 2019. https://scholarworks.waldenu.edu/dissertations/7690.

Vásquez, Davila Gabriela Fernanda, and Orquera Virginia Rosales. "The link between Soft Methods and Mergers and Acquisitions : An exploratory study of the application of soft methods during Company Z acquisition process." Thesis, Umeå universitet, Handelshögskolan vid Umeå universitet (USBE), 2012. http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-52144.

Al-Mwalla, Mona Mamdouh. "The use of financial ratios to predict acquisition targets a study of UK mergers 1980-1986 /." Thesis, Connect to e-thesis, 1992. http://theses.gla.ac.uk/676/.

Carvajal, Moreno Angela Rocio. "Dual Trading and Conflicts of Interest of Stock Exchange Intermediaries : evidence from Mergers and Acquisitions." Thesis, Toulouse 1, 2020. http://www.theses.fr/2020TOU10045.

Minshall, Timothy Herbert Warren. "Japanese innovation strategy and the acquisition of UK information technology firms." Thesis, University of Cambridge, 1997. https://www.repository.cam.ac.uk/handle/1810/269704.

Adel, Nour. "Evaluating and analyzing firms' investment decisions : a study of UK domestic and cross-border acquisitions." Thesis, Brunel University, 2011. http://bura.brunel.ac.uk/handle/2438/5298.

Hoang, Thuy Vu Nga, and Kamolrat Lapumnuaypon. "Critical Success Factors in Merger & Acquisition Projects : A study from the perspectives of advisory firms." Thesis, Umeå University, Umeå School of Business, 2008. http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-1504.

Mergers and acquisitions (M&A) in the corporate world are achieving increasing importance and attention especially in the advent of intense globalization. This is evident from the magnitude and growth of deal values and resultant ‘mega-mergers’ transacted in recent times. As expert advisory are sought in M&A activities to facilitate the undertaking and maximise the value of the transaction, advisory firms begin to play a more significant and at the same time lucrative role in M&A activities, to the extent of determining the outcome of such projects. Being an area of limited research, it is thus valuable to investigate what M&A advisory firms view as critical success factors to the projects they undertake. Consequently, the research question of “What are the critical success factors for merger & acquisition projects in the view of merger & acquisition advisory firms” has been raised. A list of ten critical success factors for M&A projects is firstly identified from an extensive literature review. These factors are (1) Complete and Clear objectives, goals and scope of the project, (2) Client consultation and acceptance, (3) Project manager’s competence and commitment, (4) Project team member’s competence and commitment, (5) Communication and information sharing and exchange, (6) Project plan development, (7) M&A advisory firm’s resource planning, (8) Time management and tight secrecy, (9) Price evaluation and financing scheme, and (10) Risk management.

In an attempt to explore the importance of each factor in the practical context, data have been collected through three research methods. Primarily, the authors conduct a semi-structured interview with six interviewees currently working in three organizations which provide professional services related to M&A projects. Meanwhile, a self-completion questionnaire method is employed, following which a sample of 325 M&A advisory firms based in the U.S. is selected to participate in an online survey. In addition, the authors follow a case study approach based on the three organizations of the six interviewees in order to establish comprehensive knowledge about issues relating to M&A projects.

In response to the research question, the findings strongly indicate that seven out of ten factors in the original list have a positive impact, being the factors listed above as (1), (2), (3), (4), (5), (8), and (9). On the other hand, it revealed the lesser importance of the other three. In addition, three new factors have been discovered from analyzing the data collected, being (i) Having a number of key potential buyers with suitable profile (ii) Right, correct and complete information and data in the data room, and (iii) The quality of the selling company. While as another outcome of this research, further practical insights have been provided regarding the role of M&A advisory firms, the M&A process, common issues faced by M&A projects and the success criteria for M&A projects.

The findings from this research contribute valuable new knowledge to both researchers and practitioners in both project management and M&A fields, while facilitating the achievement of successful M&A projects.

Ewald, Klara, and Philip Wredberg. "Multicultural teams’ post acquisition : Challenges for employees and managers." Thesis, Jönköping University, 2021. http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-53100.

Kajerdt, Johan, and Andreas Rydberg. "Betting on the jockey rather than the horse : a study on the determinants of mergers of SPAC IPOs." Thesis, Uppsala universitet, Företagsekonomiska institutionen, 2021. http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-433975.

Alhenawi, Yasser. "Essay on the Persistence of Corporate Diversification Discount after Merger and Acquisition Transactions and Essay on the Capital Structure Properties of Real Estate Investment Trusts (REITs)." ScholarWorks@UNO, 2010. http://scholarworks.uno.edu/td/107.

Fong, Dominic. "The role of the psychological contract in affecting employee behaviour under the influence of merger and acquisition: a study of local regional managers in Hong Kong." Curtin University of Technology, Graduate School of Business, Curtin Business School, 2009. http://espace.library.curtin.edu.au:80/R/?func=dbin-jump-full&object_id=128355.

Nupponen, Pertti. "Post-acquisition performance : combination, management, and performance measurement in horizontal integration /." [Helsinki] : Helsinki School of Economics and Business Administration, 1995. http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&doc_number=007078756&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA.

Deshmukh, Rani. "Mergers and acquisition – post merger IT integration." Thesis, 2012. http://hdl.handle.net/2152/ETD-UT-2012-05-5303.

Carmelino, José Diogo Leal. "BlackBerry’s acquisition by Samsung : mergers & acquisitions." Master's thesis, 2015. http://hdl.handle.net/10400.14/18789.

Effects of mergers and acquisition on financial performance of Atlas Mara bank, Zambia.

Journal title, journal issn, volume title, description, collections.

Albertsons-Kroger Deal Offers A Potential Premium

• Albertsons' merger with Kroger offers a 48.3% premium, despite regulatory challenges, with a $27.25 all-cash deal if approved.
• Albertsons' strong performance includes a 1.4% same-store sales increase, 28.42% gross margins, and a 2.7% dividend yield.
• The merger's success hinges on divestitures and regulatory approval, aiming to compete with Walmart and Costco.
• Even if the merger fails, Albertsons' solid earnings profile and $600 million breakup fee mitigate downside risks.

Investment Thesis

Albertsons ( NYSE: ACI ) is a US grocery chain that operates 2,269 stores across 20 banner brands including Safeway, Albertsons, Acme, and Shaw's, and 3 private label brands that earn more than $1 billion each.

Same-store sales increased by 1.4% year over year in the quarter ended June 2024, with a minor expansion of gross margins to 28.42%. According to Numerator, Albertsons holds 6.4% of total grocery spending in 2023.

In October 2022, Kroger, which holds 10.1% of grocery spending, agreed to purchase Albertsons for $24.6 billion, adding to Kroger's 35 state 2,750 store footprint. Various state governments and the FTC have come out against the merger, stating that it creates an unfair monopoly on grocery pricing. The status of the case remains up in the air.

We feel that there is still a chance that the merger will go through, despite Albertsons trading at a substantial discount. If the merger does go through, Albertsons shareholders can expect $27.25 in the all-cash deal, a substantial premium of 48.3% to the current stock price. If the merger does not go through, we feel that there is little downside given the short-term prospects for Albertsons are still solid, with a 2.7% dividend yield, a $600 million breakup fee to be collected, and a resilient consumer-staples earnings profile.

Estimated Fair Value

Merger Price: $27.25 all-cash to Albertsons shareholders

Grocers by Dollar Share. Walmart includes Sam's Club. Amazon includes Whole Foods. (Numerator, Chainstoreage)

In accordance with the plan, Albertsons would sell off 413 of its stores (18.2% of them), 8 distribution centers (36% of them), and 2 offices across 17 states. Kroger, for its part, would divest 163 stores. All these divestitures are concentrated in areas like Oregon, in which Albertsons and Kroger's combined entity would make up more than 50% of the estimated local market share. According to ABC News, the combined entity would have a market share of around 13% . This is still a reach to Walmart's top spot, but a substantial move in the right direction.

In our view, this combination would move the needle to allow the combined entity to compete more broadly with Walmart and Costco on price. On "day one" of the merger being approved, the new combined entity would cut prices by a promised $1 billion. In our view this gap will largely come from price equalizing actions, Albertsons grocery prices are 10-12% higher than Kroger .

However, we also believe that this price-cutting strategy could begin to close the grocery spend gap between the new entity and Walmart or Costco. Grocer margins are not high, with the average grocery store earning between 1-3% net income margin .

The first problem is grocery pure players, like Kroger or Albertsons, are generally price takers due to the low-margin and commoditized nature of the business. While there is some room for price movement due to food being price inelastic, the actual scope of higher prices to enhance margins outside of extraordinary events is incredibly limited for grocers .

KR Investor Relations

The next is that Walmart, Amazon, Costco, and others have a distinct ability to eat losses on groceries during high-price periods and continue to offer steep discounting long after it would be uneconomical for a pure-player. A more diverse revenue stream often carries higher margins as companies can make up for incredibly limited grocery margins by selling other things. The only way for Albertsons and Kroger to compete is through scale, which would be accomplished by merging the two entities, or through a large expansion of private-label offerings which both are pursuing independent of the merger.

Antitrust Case

The FTC's case hinges on the idea that there would be unfair competition among supermarkets within the United States . While the FTC does acknowledge that Walmart, Costco, and Amazon compete in the grocery marketplace, they should not be classified as competitors. According to the FTC , under the "Brown Shoe" test supermarkets are considered supermarkets because of their wide selection of groceries, household items, and include services like deli counters, bakeries, and pharmacies which are 'distinctly different' from the models of Costco, Amazon, and Walmart. Thus, the combination of Albertsons and Kroger would lead to unfair pricing power. As previously mentioned, grocers are generally price takers, and the combined entity would cut prices to price equalize between the two brands.

Walmart earns just shy of 60% of its revenue from groceries and has 28.3% of the American grocery spend. Both Costco and Walmart operate a pharmacy, deli counter, and bakery in most of their stores. Though we do feel that the FTC can be met in the middle by Kroger and Albertsons, perhaps growing the number of markets it chooses to divest stores in or choosing another divestiture partner, more favorable than C&S which the FTC believes is not capable of managing the massive 500+ store divestiture .

The last major merger involving Albertsons, the acquisition of Safeway in 2015, was rife with controversy. In a similar agreement, Albertsons spun out several stores in low-competition markets to a separate chain which went bankrupt within 8 months, allowing Albertsons to reacquire them for a discount and maintain its concentration. This left a bad taste in the mouth of the FTC, and state-level regulators.

The opportunity costs of the merger are high. Over the last 2 years, Albertsons has spent $329.4 million in costs . If the merger fails, Albertsons will claw this back with a $600 million cancellation clause. However, Albertsons did state in court proceedings with the FTC that it would be able to continue to operate as normal for 2-4 years but would have to shift its cost structure, which may include exiting markets. While this may have been played up for court, Albertsons has high leverage compared to peers, with 485.5% debt to equity and a coverage ratio of just 4.4x.

Despite the ongoing anti-trust case, we feel that there is still a strong case for the merger to go through, which would provide a substantial premium to investors. In the event it doesn't go through, there is very little downside to owning Albertsons given its 2.7% yield and strong consumer staples earnings profile in our opinion.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ACI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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