Amazon Target Merger
Should Amazon acquire Target Inc?
The purpose of this project is to help you apply and synthesize the knowledge and skills you comprehensively learned in corporate finance. The project can help reach several of our course objectives, such as critical thinking and communication, but also help to build your research abilities, analytical, and time management skills.
Students are required to propose a deal based on a hypothetical or an actual on-going merger and acquisition (M&A) deal in any industry. You are NOT allowed to use a historical deal. Using a historical deal for this project would result in ZERO point for this assignment.
Using the report from your previous courses taken is NOT allowed and would result in ZERO point for this assignment.
Please pretend you are the research group of the acquirer trying to show your Board of Directors why the target is (or not) a good deal.
Don’t state the proposal as a third party tone (this is a common mistake).
Section 1: Introduction
In this section, you state the story of picking up this deal. For example, you have been in the automobile industry for over 20 years. You are very familiar with the strength and weakness of the industry as well as most major automobile companies. You are curious to know if acquiring company B would add value to company A.
Remember: this is the attention-getting part. Section 1 is about 250 to 350 words.
Section 2: Qualitative argument about the deal
This section is the part to state non-financial incentive to initiate the deal. You also need to include a description of the financial plan: cash offer or stock offer. This will affect your subsequent valuation of the merger. You might want to consider using a strategy model you learned from marketing/management class. I had students use SWOT analysis to provide qualitative reasons from a firm-level perspective.
Section 2 is about 600 to 800 words.
Section 3: Quantitative analysis to initiate the deal
This section is the part to provide a valuation of the merger. In other words, why and how the deal could (or not) add value to the company. This the most difficult and most important part of this proposal.
Section 3 is about 1000 to 1400 words.
Things to consider when making the analysis
- You will be assessed the appropriateness of model selection from what we learned in the course. To name a few: DCF, Relative valuation (using the comparables), APV, FTE, WACC, and more. You are expected to choose the most appropriate model(s) to complete your analysis.
- You might also need to apply investment rules and other advanced analysis methods in your proposal. To name a few: NPV, sensitivity analysis, real option analysis.
- Your valuation will heavily rely on your assumptions. Be sure to discuss them at the beginning of this part. Don’t make your assumptions magically appear in your valuation.
- Be sure to provide the mathematical formulas and calculation steps for solving the problems. You can include charts, figures, and other necessary tools as an appendix to support your argument.
You are encouraged to use some trade journals and academic journals to support your understanding of the concept and process of the analysis. But be sure not to copy their ideas if you happen to analyze the same pair of companies in the publication.
Section 4: Conclusion
This is the section to synthesize what you discussed previously, especially in section 2 and 3, to make a clear recommendation to our proposal: should XX acquire YY?
Section 4 is about 350 to 500 words.
- Times New Rome font, size 12, 1-inch margin, double-spaced
- Cover page: Please include a cover page that has your name on it
- Citations: In-text citation and reference list are required.
APA style is preferred.
The in-text citation is expected when quoting or paraphrasing from the case.
Length of the Proposal
The goal is around 2200-3000 words total (about 4 to 6 pages, single-spaced)
The cover page and reference list page are not counted in the total words
You can alter the words as needed in each section. For example, you might have 600 words in section 2 but have 1400 words in section 3.
The Amazon and Target Inc. Merger
Mergers and acquisitions persist as a driving influence behind the global economy. Corporations striving to increase profits, power growth, and expand shareholder value are continuously watching for merger opportunities. Despite the flood of mega-mergers and acquisitions measured in the billions of dollars that dominate news headlines these days, we still face the fact that many mergers and acquisitions fail to deliver what was vowed to investors while others yield rewarding outcomes. This case study will examine a potential merger between Amazon and Target Inc. to understand why it should occur.
Amazon is considered as a leading global online retailer. Most importantly, the company sells goods directly to the consumer. Its products are offered to buyers through its web-based presence. It strategically maintains large amounts of readily available inventory is kept in geographically placed warehouses. Consumers visit Amazon’s website as its products are competitively priced with easy purchasing and shipment mechanisms. Amazon also provides a platform for resellers to move its products, but these products are typically less common and higher priced. This allows Amazon to find a better mechanism to sell slow-moving inventory without damaging profit. Amazon does retain a commission on sales but does not assess a fee to partners to listing products for sale. Amazon also maintains a special subscription-based business, Amazon Prime, to generate additional sales. Users of this specialized model usually pay an annual fee to secure special shipping on certain items and have privileged access to digital music or movies. Amazon also generates revenue from selling its own e-reader, and mobile application purchases offered to subscribers (Amazon, 2017).
Target Inc. Market, Inc. is recognized as the national leader in the food retail sector that specializes in natural and organic foods. It is a “Certified Organic” grocer which separates it from its competitors. Target Inc. presence is limited to the continental United States, however it has a small number of locations in Canada and the United Kingdom. It relies on the reputation for maintaining high quality standards and unique products, both perishable and non-perishable. Furthermore, Target Inc. leverages a low-cost retail model to broaden its customer base and increase its market share lost to large wholesalers such as Costco. Target Inc. primary mission was to establish a larger grocery presence to the natural and organic foods sector. It expanded its business model to include high-end grocery items that reflect high quality and environmentally friendly agricultural practices in single place. Target Inc. offers its high-end products in well-decorated stores, while also providing a higher level of service to the customer (Target Inc., 2018).
Mergers are ultimately driven by the quest for improved earnings, profits, and valuation. This goal manifests itself through the concept of synergy. In the most basic form, synergy is based on the concept that when two companies merge, the combined value and productivity exceeds that of the two separate entities. In doing so, the merger can achieve the following:
- Tangible tax benefits
- Cross-promotional product opportunities
- Increased brand awareness
- Lower operating costs
- Reduced financing costs
- Leveraged buying power with suppliers
If executed correctly, a merger should lead to an increase in growth and profits. In turn, the merger is a more optimal value for shareholders. Provided that investors also believe in the advantages, then the combined market value of the merged companies can be substantially more than the market value of the two separate companies. As a result, this synergy justifies the merger (Galpin, 2011).
Purpose of Amazon and Target Inc. Merger
While the Amazon and Target Inc. merger surprised many investors, especially grocery chain investors, it made sense for Amazon from a business perspective. Amazon spent several months investigating due diligence and integration planning to complete this merger.
Even though $13.7 billion seems like a lot of money, some believe the Target Inc. acquisition still came at an appealing price to Amazon. According to the financial statements found on SEC EDGAR, Target Inc. had annual sales approaching $16 billion. Its stock price was in steep decline and it also had seven straight quarters of negative sales. At the same time, the $13.7 billion acquisition price was still a smaller figure than Target Inc.’ market capitalization just two years prior. Surprisingly, the market capitalization for Target Inc. spiked at $20.5 billion in 2015. From a financial perspective, the market capitalization prior to the purchase was almost 50% lower than its highest value (Naim, 2017).
Target Inc. was known as a supplier of healthy food options, but it was experiencing intensified competition from other stores, including Walmart and Target. The rival stores were in the process of improving their assortment of healthy and organic foods. At the same time, increased competition lowered prices of these food selections (Naim, 2017).
In addition to increased business competition from meal kit providers such as Home Chef and Blue Apron, Amazon also assisted in the decrease in sales with its desire to enter the grocery market. In the months prior to the merger, Target Inc. announced the closing of nine stores. It also had reduced its sales estimate for the remainder of the year (Naim, 2017).
However, despite reduced estimates and declining sales, Target Inc. still maintained strong profit. In fact, its profit margin percentage is higher than several competitors including Amazon. The Target Inc. brand maintained a vigorous customer base.
According to its own website, Amazon had been exploring expanding its business into grocery and food delivery for several years. Additionally, leading up to the merger, Amazon developed enterprises such as AmazonFresh and Prime Pantry. The purchase of Target Inc. was incentivized because it gave Amazon access to more than 460 Target Inc. stores. Amazon had the opportunity to expand on existing enterprises almost immediately (Naim, 2017).
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