00:00:00
The recent announcement that Unilever's
food business was going to combine with
00:00:04
McCormick's sent investors selling off
both stocks.
00:00:09
Traditionally, mergers in the food industry
may look good on paper, but not always
00:00:16
play out well when you're looking at the
final numbers.
00:00:18
However, this one may very well work out.
00:00:22
And it's an interesting reason why.
00:00:24
To explain it, we're joined
by Emilie Feldman, who's
00:00:27
Professor of Management
here at the Wharton School.
00:00:30
Emilie, great to talk to you again.
00:00:32
And I guess let's start out by looking at
why you think this may work out.
00:00:37
And it's this concept of an RMT.
00:00:40
Can you explain it?
00:00:42
Yeah, thanks Dan.
I'm happy to.
00:00:44
So maybe a definition would be helpful,
because these are fairly rare.
00:00:48
So, what is a reverse Morris Trust?
00:00:50
These are corporate transactions
that combine a
00:00:53
spinoff and a merger
within the same transaction.
00:00:57
So you have a parent company that spins
off one of its business units and
00:01:01
immediately merges that unit with some
other entity.
00:01:05
So in this case, we have
Unilever spinning off its food
00:01:08
business and immediately
merging that with McCormick.
00:01:10
So that's the RMT structure.
00:01:12
And there's a whole bunch of tax stuff
that's important.
00:01:15
And we can talk about some of that if you
like.
00:01:18
But what's unique about these transactions
is basically the discipline that the
00:01:24
structure imposes on the companies that
are involved.
00:01:27
Because on the spinoff side, what we have
is really a company that is parting ways
00:01:33
with a unit that might not be a great fit
within its portfolio.
00:01:36
So thinking about getting rid of something
that doesn't necessarily make sense.
00:01:41
But then the ability to
combine that via a merger with
00:01:45
some other company is
really the unique feature of this.
00:01:49
Because normally in a spinoff, we would not
see the benefit of synergies, for example.
00:01:54
And there are various tax rules,
like I mentioned, that tie into this.
00:01:59
But the fact that companies have to be
very careful to meet these rules and abide
00:02:05
by them can impart some discipline into
which partners are chosen and how the
00:02:10
ownership split is divided
basically between the unit that's
00:02:14
being spun off and the
company that it's merging with.
00:02:16
Okay, so you talk about the tax component
of this.
00:02:18
What specifically is it within the rules
that when you're doing an RMT actually
00:02:24
ends up being a benefit from a tax
perspective?
00:02:27
Yeah, definitely.
00:02:28
So what happens is that in general, corporate
spinoffs can be tax-free transactions.
00:02:34
And there are a set of rules that companies
have to abide by for that to be the case.
00:02:39
One of those rules is that no entity can
acquire the unit that's being spun off
00:02:46
within two years after the completion of
the transaction.
00:02:49
And if you think about it, you can see
why.
00:02:50
Because basically, you'd be kind of
engineering a tax-free sale at that point.
00:02:55
Because if the spinoff is tax-free,
but you're not taxing, someone is
00:02:58
immediately acquiring it. Then you
basically engineered a tax-free sale.
00:03:02
So what is clever about
an RMT is that nobody's
00:03:06
acquiring the entity
that's being spun off.
00:03:09
The entity that's being spun off
is actually— has to be, from a tax
00:03:13
perspective, the majority
owner in the merged company.
00:03:16
So in other words,
nobody bought the spunoff
00:03:18
unit, but it bought
something else, right?
00:03:20
And so as a result,
that's really the tax
00:03:23
rule that is kind of
the key feature of this.
00:03:25
And so you end up with that
merged company that has the
00:03:29
spunoff entity owning more
than 50% of that combined entity.
00:03:33
And the company that it merged with, or
acquired, owning less than 50% of that entity.
00:03:39
And so my thought on this, right,
is that this really imparts a lot of
00:03:44
discipline, right, into the choice
of merger partner, because
00:03:47
it has to be the right size,
it has to be the right fit.
00:03:50
You can't have some
unwieldy structure, right, where
00:03:53
that ownership split is
not going to be met exactly.
00:03:56
And there has to be a
willingness on the part
00:03:58
of the target company
to participate as well.
00:04:00
So it's two sides.
00:04:01
So when you're talking about a company
like Unilever, who obviously has so many
00:04:05
different products, and they're looking to
basically move on from their food
00:04:09
business, and they match it up with a food
company.
00:04:14
This would seemingly be one
of those instances when you're
00:04:16
just looking at the entities
involved, that it would work.
00:04:20
But that isn't always the case,
correct?
00:04:23
Correct. Yeah.
00:04:24
And I think— so what
kind of struck me about
00:04:26
this is that no one— no one
thinks about it this way.
00:04:28
But what is mayonnaise, right?
00:04:30
Mayonnaise is a spice, right?
00:04:32
It's a flavor.
00:04:33
And what is McCormick's identity?
00:04:35
It's flavor, right?
00:04:36
So I think that that idea of kind of fit,
that idea of strategic logic, right?
00:04:41
We're not merging with some
company that has a whole
00:04:45
bunch of different
operations in this other area.
00:04:47
And we'll figure out what to do
with it later, right?
00:04:49
There's a really kind of
close and tailored attention to
00:04:53
kind of getting the right
partner in this type of situation.
00:04:56
And I think this McCormick transaction
really exemplifies that perfectly.
00:05:00
Do you tend to see, then, RMTs occur
00:05:03
more so
in certain industries or within companies
00:05:06
within certain industries rather than
others?
00:05:10
Yeah, so let me contextualize it then.
00:05:11
And then I'll answer your question.
00:05:12
So first of all, as you might
imagine, given the conversation
00:05:15
that we've had so far,
RMTs are exceedingly rare.
00:05:18
Yeah.
00:05:19
So in the study that I'm working on,
which covers the period 1998 to 2023—
00:05:25
these transactions started being used in
1998, by the way.
00:05:28
There have been 50, right?
00:05:30
49 of them from that period, right?
00:05:32
So that's very, very
small if you think about
00:05:34
the volume of M&A
activity over that time period.
00:05:38
So in general, these are rare.
00:05:40
Now to answer your question, yes,
there is industry concentration, right?
00:05:44
And so this is what's kind of unique about
these deals, that we see them in contexts
00:05:49
where synergies, especially from scale,
are going to be valuable, right?
00:05:54
So we see this a lot in IT services.
00:05:57
We see this a lot in telecom and media.
00:05:59
We see it a lot in radio stations,
right?
00:06:01
We see it a lot in oil and gas assets.
00:06:06
And we see it a lot in fast-moving consumer
goods, CPG types of contexts as well.
00:06:11
Because precisely these ideas of kind of
creating synergies, driving the cost
00:06:15
structure down, and really getting those
benefits of scale are the key advantage.
00:06:20
So then with these having been so rare
over the last, I guess, 25 years or so
00:06:26
that you have done this research,
and how they seemingly work well,
00:06:30
is there a possibility, is there an avenue
that we see other companies looking to
00:06:36
make mergers look at this avenue as a
potential way to make a deal work?
00:06:42
I hope so, right?
00:06:43
I mean, I think that's, if anything,
right, I hope this transaction kind of
00:06:47
shines a light on a phenomenon,
on a deal type that is maybe not
00:06:51
particularly well understood or even known
by people, right?
00:06:55
And so I do hope that that's the case.
00:06:58
That being said, right, I think that
there's a very real challenge here,
00:07:03
as I was sort of mentioning, of executing
these deals properly, right?
00:07:06
So you have to have that
ownership split between
00:07:09
the spun off business
and the target company.
00:07:12
The merger partner has to be willing to
participate.
00:07:15
And that's not always the case,
right?
00:07:17
If you think about it, you're basically
going from being an independent,
00:07:20
publicly-traded company as the target, to
them being a minority player in that
00:07:25
combined entity. That might not be
appealing to every company,
00:07:29
every public company that's out there,
especially so because the acquire,
00:07:33
so to speak, is just a division within
some other companies.
00:07:36
So there might even be
an ego thing going on there
00:07:38
in terms of some of that—
some of that dynamic.
00:07:41
So I think that those structural
challenges are very real, right?
00:07:45
Those execution challenges
are very real in terms of
00:07:47
getting those right
merger partners to play.
00:07:50
And so even though I
hope it happens, right, I
00:07:52
think— I think that reality
needs to be acknowledged.
00:07:55
So then what kind of impact then is it,
possibly, that this type of a merger has on
00:08:02
the larger M&A landscape as we move
forward here?
00:08:06
Yeah, that's a good question.
00:08:07
And I think that here, the strategy piece
becomes very important to emphasize, right?
00:08:12
And so, what are
Unilever and McCormick trying
00:08:15
to accomplish from a
strategic perspective, right?
00:08:17
This is, for me at least, all about
economies of scale and cost savings, right?
00:08:22
Because basically we have McCormick with
huge distribution channels, you know,
00:08:27
great assets, and the more
00:08:29
"flavor" types of
products that we can kind of pump into
00:08:32
that, the more we can drive that cost
structure down, right?
00:08:35
And so a bigger company, more scale,
kind of driving those products out to
00:08:41
consumers and shaping that cost structure
is the key advantage.
00:08:45
And so what my research on this topic
shows, we have kind of a neat framework in
00:08:50
this paper that disaggregates the benefits
from scale versus scope, right?
00:08:54
So scale being more of the same, scope
being a greater diversity of products,
00:08:59
and then revenue enhancement versus cost
reduction.
00:09:02
And so what we find actually is that among
the RMTs, the ones that are geared
00:09:07
specifically towards cost reductions from
economies of scale tend to
00:09:12
exhibit the greatest shareholder returns,
right?
00:09:15
The highest shareholder returns.
00:09:16
And so, you know, even if we don't see a
proliferation of RMTs, my hope is that
00:09:21
this research sort of underscores the
importance of the value driver of cost
00:09:27
synergies and economies of scale as the
factor that actually tends to create more
00:09:31
value for companies that are engaging in
M&A.
00:09:34
And that's not specific to RMTs.
00:09:35
That's general to mergers and
acquisitions.
00:09:38
Emilie, thanks for explaining it.
00:09:39
Very interesting, to go over this.
00:09:42
And for those of us that like mayonnaise
every once in a while, it gives us a whole
00:09:46
new landscape to think about where our
mayonnaise is coming from.
00:09:49
Thanks, Dan.
- Thank you.
00:09:51
Emilie Feldman, who is a Professor of
Management here at the Wharton School.
