Due Diligence and Mattel

Mergers & Acquisitions

One of the more fascinating and complex part of corporate news and maneuvering is when companies engage in mergers and acquisitions as a means to further their growth, development and diversification. This report shall look at two companies in particular, those being Mattel and Texas Instruments. After conducting a thorough literature review, questions about both firms will be posed and answered. While there is more than one way to launch a takeover or acquisition bid for a firm, there are some ways and methods that are better than others.

Mattel Case Study

Now that the literature relative to mergers and acquisitions has been properly sampled and queried, it should now be ascertained what the answers are to the questions described in the introduction, with Mattel being the first firm addressed. Mattel has proven themselves to be concerned with branching out and modernizing their product mix and feel due to the changing technologies, tastes and trends of the market. Indeed, Mattel has made a mint off of Barbie and other toys over the years. However, as proven by the demise of firms like Blockbuster and others, standing pat and not evolving with the time in terms of product type and product mix can be the death of a company over the long-term. As such, it should be no surprise that Mattel is branching out in terms of making use of more modern products and marketing such as iPads and video games, just to name two things. Rather than rely on reputation and history, Mattel is interested in products that are constantly being buzzed and spoken about in the marketing and other spheres. Mattel is interested in diversifying in that way to keep their brand name and market share where it is, or better (Brown, 2013). Per the advice of Chang et al., they would be wise to pull advisers that previously worked for the firms that they are interested in acquiring so as to make sure that the firm in question would be as complementary as would be desired by Mattel (Chang, Shekhar, Tam & Yao, 2016). If it is not reasonable or even possible to get any sort of first-hand information about the firm to be acquired, the analysis and perspective of investment bankers and stock analysts can be a good source. They, like Mattel, are looking from the outside in. However, those investment bankers do that sort of thing for a living and they probably have a penchant for spotting red flags and positive signs when it comes to whether a firm is good acquisition material or is otherwise financially sound (Haushalter & Lowry, 2010). The acquisition being complementary is important because the idea is to expand shareholder wealth. If the acquisition would excessively space out and segment the strengths of Mattel, there is a good chance that the opposite would occur (Alexandridis, Petmezas & Travlos, 2010). A word of caution, however, that many firms including Mattel should take heed of is that there is always going to be some modicum of uncertainty and unknown when it comes to acquisitions. Even with all of the due diligence that is done, there are always going to be things that are not discovered, or at least discovered quickly, during the acquisition process. Further, market volatility can wreak havoc even if everything else is seemingly in line.

When it comes to maximizing and upholding shareholder wealth as juxtaposed against mergers and acquisitions, a very important part of the calculation with the same is to execute transactions, mergers and acquisitions at the right time. There is such a thing as waiting too long and not "pouncing" when the opportunity is there. However, there are also times where waiting just a little longer can make a huge difference. Mattel is big enough and powerful enough to pick their spots. They can get what they need and want out of an acquired firm but they need not pay more when a little bit of timing can save them millions, if not billions, of dollars (Tarsalewska, 2014). If the surrounding market is in bad shape and this in any way includes things like bank runs and other financial instability (like during the Great Recession in 2007-2009), Mattel should probably keep things conservative and cautionary, even if they have the resources to do otherwise (He & Manuela, 2016). Further, Mattel is big enough that they often don't have to worry about doing mergers or having to otherwise absorb a firm that is remotely as large as they are. Indeed, Mattel snapping up other firms is more about expanding market share and strategic advantage than it is about taking out the largest competitors (Degryse, Masschelein & Mitchell, 2010). That being said, Mattel would be wise to keep in mind that competition is both domestic and international and there are firms across the ocean that have much lower labor and other costs, even if it is for dubious and unethical reasons. Even when Mattel itself operates internationally, they have to abide by the concepts and rules of corporate social responsibility and ethics as defined by the West and their home markets in general (Brealey, Cooper & Kaplanis, 2009). Simple compliance with the law is something that lawyers and other compliance experts can help Mattel traverse when the time comes. However, the burden just begins there . . . it does not stop there by any means (Bris & Cabolis, 2008).

When it comes to the alternatives to acquisition that Mattel can explore, the basic options are organic growth and inorganic growth, with acquisitions obviously being the latter. When it comes to organic growth, there are sub-options such as keeping with the ground-based strategy of yesteryear or instead expanding their market to include online sales on their own website as well as others like Amazon. In the end, the latter is really not an option as online sales juggernauts like Amazon have problem that firms, even market leaders like Mattel, are extremely unwise not to take full advantage of online markets because even previously dominant ground-based retailers like Wal-Mart and Best Buy are starting to feel the pinch from online sales giants. Even with that, there are real barriers to entering the toy industry. This is largely because industry giants and leaders like Mattel have the size and power to dominate shelf space and this tends to keep out smaller startup firms and regional competitors in the same realm. Their size allowed them to charge lower prices while also protecting their margins. As far as how firms like Mattel can and should protect themselves via due diligence, they need to use the precepts explored in the literature review including having advisors that used to work for firms to be acquired or at least know the toy industry, make sure that they are dealing with firms to be acquired that are being fair and transparent and taking into account the international and other implications of a merger. Mattel is obviously a giant amongst men in their part of industry. Firms that are fearful or even inviting of Mattel's acquisition may or may not be as open and honest about their operations. For that reason, they may be less than transparent or honest about what is really going on within their firm (Gompers, Kaplan & Mukharlyamov, 2016).

Even with the proverbial landmines that Mattel faces when doing acquisitions and even with the dishonesty that sometimes manifests, Mattel still has to be mindful of the "eat or be eaten" mentality. Indeed, even firms that were once the unquestioned leaders of their part of industry, such as McDonald's and Wal-Mart, are now being threatened by competitors and upstarts like Five Guys, Panera and Amazon. As such, Mattel simply cannot stand pat and just assume that their girth and size will save them. Just as the internet is chipping away at Wal-Mart, so too will happen to Mattel if they are complacent, assuming it is not happening already. Mattel must find a way to adapt to the new market realities lest they be overtaken by other firms, including firms that are not toymakers (Gorton, Kahl & Rosen, 2009). As such, Mattel needs to be sure to be the company that is consuming and growing their share of the market rather than just hoping that no one catches up with them. There are ways for mergers to go south but most of them can be avoided with the proper homework and caution (Duchin & Schmidt, 2013; Devos, Kadapakkam & Krishnamurthy, 2008). One example of a way a deal can be very good versus very bad is the capital structure that is used to do the deal. Mattel is in a position where they can use cash or cash equivalents much more easily than other firms. They should probably use that to their advantage because using debt to excessively can be problematic. At the same time, debt can indeed be used in a way that helps grow the firm for minimal cost. As with most things, a balance is a good thing but using one's financial muscle is going to be the best way in most instances whereas using too much debt can lead to both short- and long-term problems (Golubov, Petmezas & Travlos, 2015).

Texas Instruments

As for the Texas Instruments situation, perhaps the best firm they should go after is the one that offers a competitive advantage without spreading out the scope, depth and breadth of what they do already. Given that Texas Instruments makes things like calculators and the like, the best firm to acquire would probably be Microchip Technology, especially if the chips of that firm would be advantageous for Texas Instruments to absorb and use. Just as with the Mattel acquisition question, Texas Instruments would be wise to try and get some people that were former advisers or that are experts in regards to Microchip Technology. This is true because Texas would want to make sure that the fit and overlap between the companies is beneficial and synergistic rather than inhibiting (Chang, Shekhar, Tam & Yao, 2016). After all, the goal of what is sometimes a treacherous path, that being the process of mergers and acquisitions in general, is the expansion of shareholder wealth, market share and so forth (Alexandridis, Petmezas & Travlos, 2010).

Because firms like Microchip Technology are publicly traded, they are by law required to disclose and reveal certain aspects and statistics about their operations. This information can be used by Mattel as well as hired analysts and experts at investment banks to truly fetter out what looks good, what is more concerning and what needs more investigation and due diligence (Haushalter & Lowry, 2010). Even under the best or circumstances, the fullest due diligence that is possible is sometimes not enough to spot problems and issues as they truly exist. This can happen because the acquired firm is not on top of things or it could be because it is being actively concealed and kept hidden (Bhagwat, Dam & Harford, 2016). Beyond that, firms that are not publicly traded and thus are required to have at least some level of transparency may be even less forthcoming and honest about their intentions, what they have done, what is going on and so on. This should be kept in mind when dealing any firm that has a different standard of ethics or laws that must be complied with and/or of norms that are often upheld (Gompers, Kaplan & Mukharlyamov, 2016). Something else to consider is timing. Even if it comes to be known that the acquisition of a firm like Microchip is the best option for Texas Instruments, there is the issue of timing and when to actually do the deal, so to speak. For example, if the market price for Microchip is at its recent apex, that will just mean that Texas Instruments will pay more than they have to, in all likelihood. That does not mean that it would be the wrong deal. However, it would mean that it is at the wrong time. In other words, Texas Instruments should bide their time and wait for the right point in time so as to get what they want and at a good price (Tarsalewska, 2014).

Regardless of what firm Texas Instruments chooses to try and acquire and merge with, there are a few considerations that must be at the fore no matter what. First, there is the size of the firm that is to be acquired and whether it would be a merger or an acquisition. If the net size of the firms is large enough, then discussions of fair competition and antitrust come into the fray. After all, if two small credit unions in a single country try to merge, the implications involved are not all that large and regulators probably would not bat an eyelash. However, if Wells Fargo and Chase Bank tried to merge, there would be an uproar, and rightly so. The banking market, in the United States as well as anywhere else that either or both banks operate, would be changed irrevocably. After all, AT&T in the United States was broken up in the past for a reason. That is probably not an issue with Texas Instruments, but it could become an issue and the oversight of government is always a concern on some level (Degryse, Masschelein & Mitchell, 2010). Even so, Texas Instruments cannot avoid doing acquisitions for this reason as they will be overtaken by more aggressive competitors if they stand pat (Gorton, Karl & Rosen, 2009). There is a proper balance to be struck between not being too aggressive and being too slow to act. The right actions and ones that come with the proper due diligence is the way to go (Duchin & Schmidt, 2013; Devos, Kadapakkam & Krishnamurthy, 2008).

Since Texas Instruments in its current form operates both domestically in the United States as well as in other countries around the world, there are some other dimensions and issues that they must keep in mind. Whether the issue be taxes, investment or other things, the movement of money and other resources around the world is something that Texas Instruments needs to be very careful about. Even if the company, for example, is hesitant to repatriate funds from overseas so as to avoid paying taxes on that sum, they would also want to be sure not to be too cash-poor within their home operations. Regardless, what they do or do not do with their funds greatly influences the dynamics and traits of the markets that they operate in and the acquisition of a firm like Microchip technologies would complicate things even further, to say the least (Brealey, Cooper & Kaplanis, 2009). Given that complexity and fluidity, it would be important for Texas Instruments to consult with international tax and other compliance professionals to make sure that they know the implications and likely outcomes of each move that they would make, for better or worse (Bris & Cabolis, 2008).

As for what valuation method to use, it is apparent that many of the methods that exist have technology companies and their value firmly in mind. However, there are some methods that stand apart more than others. The two methods that stand out would be the discounted cash flow (DCF) method and risk adjusted Net Present Value (NPV). DCF stands out because it takes into account the value of future operations and projects. Risk adjusted NPV takes present value and risk into account. In the end, risk-adjusted NPV is probably the better move. Yahoo Charts holds the value of Microchip Technology to be about 18.72 billion as of May 5th, 2017. The value for the firm is gained from the formula below: