TheAcquisition of Willamette Industries by Weyerhaeuser Company

TheAcquisition of Willamette IndustriesbyWeyerhaeuser Company

Introduction

Weyerhaeuser Company, during the year 2000, tabled a proposal to acquire WillametteIndustries, both being large integrated timber companies. The offer presented, which was at $48 per share resulting in a total value of $5.3 billion, was turned down as it was said not to reflect the firm’s actual value. A second bid of $50 per share, which was considered a hostile takeover, was also turned down, leading to a final offer of $55 per share, which they claimed was the final price. Unfortunately, this offer was also declined, forcing Weyerhaeuser Company to go back to the drawing board and decide on a proposal that both companies could agree on as they considered this acquisition to be outstanding.

Background

Willamette Industries

The company, established in the year 1906 in Dallas, contains 105 manufacturing facilities across the globe. It produces a combined 19% of paper, 2% of lumber production,22% of medium density fiberboard, 24% of laminated beam production, and approximately 11% of laminated veneerfor the entire United States.The company’s timber comes from its 1.7 million acres of timberland across the United States and through private timber sales. Since the company utilizes a lot of energy, approximately 61% of this energy is generated through recycling pulping liquors and igniting waste products.Willamette is responsible for over 14,975 workers, and it manufactures chemical wood pulp, which is issued throughout the world. The company also constructs single-family houses that are later sold.

WeyerhaeuserCompany

This company, established in the year 1900, operates in around 17 countries and contains 47,244 employees. The company has four segments, including timberlands, wood products, pulp, paper and packaging, and Real estate.Weyerhaeuser, in America,owns 5.9 million acres of land and 5 million acres of leased land while in Canada,renewable plus long-termlicenses for 31.6 million acres of landto supply it with an estimated 588 million cunits of timber. The company specializes in the production and sale of hardwood and treated lumber, engineered wood, composite panels together with plywood and veneer.

Key Issues

The critical issues that are related to the financial strategy of this acquisition include; depending on synergies for valuation of Willamette Industries as this would not paint an accurate picture of whether the transactions made would add to earning upon competition and as a result raising the question on if the synergies put forward for Willamette are logical. The next issue was on the precise valuation of Willametteso that Weyerhaeuserknows whether, at the price of $55 per share, the deal is perfect or should the price be raised. The final issue was whether Weyerhaeuser could increase the bid relying on a discounted cash flow model through the use of discount rates between 12% to 15%.

Recommendations

On the issue of whether the synergies put forward for Willamette are logical, it is evident that they are logical since according to (Bender, 2001), realistic synergies lead to increased sales by the company and as a result, increasing the profits margin, the amount of capital and fixed assets needed are also subject to a decrease, and finally, the interval through which the firm has a competitive advantage is increased two-fold. All of these factors are conveyed in the synergies put forward on Willamette, thus making it realistic i.e., logical. On the next issue of the precise valuation of Willamette, based on the market value approach calculations, the valuation of Willamette was approximately $6.1 billion. This meant that that the deal was to be worth at least $56 per share for it to reflect the actual value of the firm and its future growthprospective. Weyerhaeuser, therefore, had to raise their price to meet the requirements of Willamette. An important fact to note is that Weyerhaeuser considered their final price of $55 per share as an accretive deal as it would have led to gradual firm growth. On the last issue of Weyerhaeuser increasing the bid relying on discounted cash flows, a journal article by (Vlaovic-Begovic et al., 2013) claimed that this requires the creation of a lot of assumptions. These assumptions include the approximation of future cash flows which, when chosen either too high or too low, may affect the company to a great extent, and also, the discount rates are assumed(Vlaovic-Begovic et al., 2013). This thus meant that Weyerhaeuser could not increase the bid relying on discounted cashflows as the risk of loss would have been too high.

References

Bender, R. (2001). Strategic issues in acquisitions. Icaew.com. Retrieved 18 June 2020, from https://www.icaew.com/-/media/corporate/archive/files/technical/corporate-finance/mergers-and-aquisitions/strategic-issues-in-acquisitions-mq10.ashx?la=en.

Vlaovic-Begovic, S., Momcilovic, M., & Jovin, S. (2013). Advantages and limitations of the discounted cash flow to firm valuation. Skola Biznisa, (1), 38-47. https://doi.org/10.5937/skolbiz1301038v

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