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The recent announcement that Unilever's
food business was going to combine with
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McCormick's sent investors selling off
both stocks. Traditionally, mergers in the food industry
may look good on paper, but not always
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play out well when you're looking at the
final numbers. However, this one may very well work out.
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And it's an interesting reason why. To explain it, we're joined
by Emilie Feldman, who's
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Professor of Management
here at the Wharton School. Emilie, great to talk to you again.
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And I guess let's start out by looking at
why you think this may work out. And it's this concept of an RMT.
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Can you explain it? Yeah, thanks Dan.
I'm happy to. So maybe a definition would be helpful,
because these are fairly rare.
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So, what is a reverse Morris Trust? These are corporate transactions
that combine a
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spinoff and a merger
within the same transaction. So you have a parent company that spins
off one of its business units and
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immediately merges that unit with some
other entity. So in this case, we have
Unilever spinning off its food
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business and immediately
merging that with McCormick. So that's the RMT structure.
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And there's a whole bunch of tax stuff
that's important. And we can talk about some of that if you
like.
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But what's unique about these transactions
is basically the discipline that the
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structure imposes on the companies that
are involved. Because on the spinoff side, what we have
is really a company that is parting ways
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with a unit that might not be a great fit
within its portfolio. So thinking about getting rid of something
that doesn't necessarily make sense.
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But then the ability to
combine that via a merger with some other company is
really the unique feature of this.
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Because normally in a spinoff, we would not
see the benefit of synergies, for example.
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And there are various tax rules,
like I mentioned, that tie into this. But the fact that companies have to be
very careful to meet these rules and abide
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by them can impart some discipline into
which partners are chosen and how the ownership split is divided
basically between the unit that's
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being spun off and the
company that it's merging with. Okay, so you talk about the tax component
of this.
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What specifically is it within the rules
that when you're doing an RMT actually
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ends up being a benefit from a tax
perspective? Yeah, definitely. So what happens is that in general, corporate
spinoffs can be tax-free transactions.
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And there are a set of rules that companies
have to abide by for that to be the case.
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One of those rules is that no entity can
acquire the unit that's being spun off
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within two years after the completion of
the transaction. And if you think about it, you can see
why.
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Because basically, you'd be kind of
engineering a tax-free sale at that point.
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Because if the spinoff is tax-free,
but you're not taxing, someone is immediately acquiring it. Then you
basically engineered a tax-free sale.
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So what is clever about
an RMT is that nobody's acquiring the entity
that's being spun off.
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The entity that's being spun off
is actually— has to be, from a tax perspective, the majority
owner in the merged company.
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So in other words,
nobody bought the spunoff unit, but it bought
something else, right?
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And so as a result,
that's really the tax rule that is kind of
the key feature of this.
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And so you end up with that
merged company that has the spunoff entity owning more
than 50% of that combined entity.
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And the company that it merged with, or
acquired, owning less than 50% of that entity.
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And so my thought on this, right,
is that this really imparts a lot of discipline, right, into the choice
of merger partner, because
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it has to be the right size,
it has to be the right fit. You can't have some
unwieldy structure, right, where
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that ownership split is
not going to be met exactly. And there has to be a
willingness on the part
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of the target company
to participate as well. So it's two sides. So when you're talking about a company
like Unilever, who obviously has so many
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different products, and they're looking to
basically move on from their food
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business, and they match it up with a food
company. This would seemingly be one
of those instances when you're
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just looking at the entities
involved, that it would work. But that isn't always the case,
correct?
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Correct. Yeah. And I think— so what
kind of struck me about this is that no one— no one
thinks about it this way.
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But what is mayonnaise, right? Mayonnaise is a spice, right? It's a flavor. And what is McCormick's identity?
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It's flavor, right? So I think that that idea of kind of fit,
that idea of strategic logic, right?
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We're not merging with some
company that has a whole bunch of different
operations in this other area.
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And we'll figure out what to do
with it later, right? There's a really kind of
close and tailored attention to
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kind of getting the right
partner in this type of situation. And I think this McCormick transaction
really exemplifies that perfectly.
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Do you tend to see, then, RMTs occur more so
in certain industries or within companies
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within certain industries rather than
others? Yeah, so let me contextualize it then.
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And then I'll answer your question. So first of all, as you might
imagine, given the conversation
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that we've had so far,
RMTs are exceedingly rare. Yeah. So in the study that I'm working on,
which covers the period 1998 to 2023—
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these transactions started being used in
1998, by the way. There have been 50, right?
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49 of them from that period, right? So that's very, very
small if you think about
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the volume of M&A
activity over that time period. So in general, these are rare.
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Now to answer your question, yes,
there is industry concentration, right? And so this is what's kind of unique about
these deals, that we see them in contexts
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where synergies, especially from scale,
are going to be valuable, right? So we see this a lot in IT services.
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We see this a lot in telecom and media. We see it a lot in radio stations,
right?
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We see it a lot in oil and gas assets. And we see it a lot in fast-moving consumer
goods, CPG types of contexts as well.
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Because precisely these ideas of kind of
creating synergies, driving the cost structure down, and really getting those
benefits of scale are the key advantage.
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So then with these having been so rare
over the last, I guess, 25 years or so that you have done this research,
and how they seemingly work well,
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is there a possibility, is there an avenue
that we see other companies looking to
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make mergers look at this avenue as a
potential way to make a deal work? I hope so, right?
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I mean, I think that's, if anything,
right, I hope this transaction kind of shines a light on a phenomenon,
on a deal type that is maybe not
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particularly well understood or even known
by people, right? And so I do hope that that's the case.
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That being said, right, I think that
there's a very real challenge here, as I was sort of mentioning, of executing
these deals properly, right?
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So you have to have that
ownership split between the spun off business
and the target company.
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The merger partner has to be willing to
participate. And that's not always the case,
right?
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If you think about it, you're basically
going from being an independent, publicly-traded company as the target, to
them being a minority player in that
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combined entity. That might not be
appealing to every company, every public company that's out there,
especially so because the acquire,
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so to speak, is just a division within
some other companies. So there might even be
an ego thing going on there
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in terms of some of that—
some of that dynamic. So I think that those structural
challenges are very real, right?
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Those execution challenges
are very real in terms of getting those right
merger partners to play.
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And so even though I
hope it happens, right, I think— I think that reality
needs to be acknowledged.
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So then what kind of impact then is it,
possibly, that this type of a merger has on
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the larger M&A landscape as we move
forward here? Yeah, that's a good question.
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And I think that here, the strategy piece
becomes very important to emphasize, right?
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And so, what are
Unilever and McCormick trying to accomplish from a
strategic perspective, right?
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This is, for me at least, all about
economies of scale and cost savings, right? Because basically we have McCormick with
huge distribution channels, you know,
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great assets, and the more "flavor" types of
products that we can kind of pump into
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that, the more we can drive that cost
structure down, right? And so a bigger company, more scale,
kind of driving those products out to
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consumers and shaping that cost structure
is the key advantage. And so what my research on this topic
shows, we have kind of a neat framework in
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this paper that disaggregates the benefits
from scale versus scope, right? So scale being more of the same, scope
being a greater diversity of products,
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and then revenue enhancement versus cost
reduction. And so what we find actually is that among
the RMTs, the ones that are geared
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specifically towards cost reductions from
economies of scale tend to exhibit the greatest shareholder returns,
right?
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The highest shareholder returns. And so, you know, even if we don't see a
proliferation of RMTs, my hope is that
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this research sort of underscores the
importance of the value driver of cost synergies and economies of scale as the
factor that actually tends to create more
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value for companies that are engaging in
M&A. And that's not specific to RMTs.
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That's general to mergers and
acquisitions. Emilie, thanks for explaining it.
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Very interesting, to go over this. And for those of us that like mayonnaise
every once in a while, it gives us a whole
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new landscape to think about where our
mayonnaise is coming from. Thanks, Dan.
- Thank you.
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Emilie Feldman, who is a Professor of
Management here at the Wharton School.