Capital Budgeting

CASE #4: ANALYZING AMAZON’S ACQUISITION OF WHOLE FOODS: WAS IT VALUE ENHANCING?

Amazon announced the acquisition of Whole Foods on June 16th, 2017. You are asked to determine, based on publicly available (external) data, whether or not this was likely a value enhancing acquisition for the shareholders of Amazon.

Specific tasks:

1. Estimate the premium offered. Given the average premium offered is 25% to 30% of the target’s pre-acquisition market value, what does the premium offered by Amazon suggests regarding the likelihood that this was a value enhancing acquisition?

2. Examine the value relevant characteristics of Amazon’s acquisition of Whole Foods (see slide 19, entitled “Characteristics of Value Enhancing Acquisitions” in the class notes for Section V). Based on the three characteristics that have the strongest correlation with value enhancing deals, would the market expect this acquisition to be value enhancing or value destroying? Are the other factors helpful in determining whether or not this acquisition is value enhancing. On net, what does the value relevant characteristics of this M&A event suggest regarding the likelihood it is value enhancing?

3. Analyze the market’s reaction. More specifically, measure Amazon’s five-day abnormal return, to the June 16th, 2017 announcement of the acquisition. What does the market’s reaction suggest?

4. Analyze Amazon’s operating performance both prior to the event (2015 and 2016) and after the event (2018 and 2019). You should examine Amzaon’s operating performance using peer-adjusted operating margin (= Amazon’s OM – Peer Average OM) and peer-adjusted operating return on assets (= Amazon’s OROA – Peer Average OROA). For peer averages use Alibaba Group Holdings and Walmart, Inc. as peer firms. What is the implication of your results regarding the value creation/destruction aspect of this acquisition?

5. Analyze Amazon’s stock return performance for the two-year period starting two days prior to the acquisition announcement date. You should examine the Amazon’s stock return performance using both peer firms (focus on peer firms’ average returns) and the S&P 500 as benchmarks when measuring Amazon’s abnormal post-acquisition returns. What is the implication of your results regarding the value creation/destruction aspect of this acquisition?

Suggested data sources: Morningstar.com for financial statements and finance.yahoo.com for historic stock prices.

I am expecting you to provide a well written two or three page (double spaced, font size 12 and reasonable margins) report describing your analysis of whether or not this acquisition was likely to be value enhancing for Amazon’s shareholders. Your report should include an introduction, briefly describing the acquisition and what will be analyzed in your report. The body of the paper should contain one paragraph for each task, briefly describing the process, the results, and the implication of your results. Finally, a concluding paragraph that summarizes/synthesizes the key findings and provides your opinion based on these key findings whether or not this acquisition was value enhancing or value destroying for Amazon’s shareholders.

Small revision:
It turns out that Walmart’s financial statements available from Morningstar.com are from 2016-2020 and we need their financials from 2015-2019 to be able to use Walmart as a peer firm to analyze Amazon’s abnormal operating performance. So, for the operating performance analysis and for the long-term stock returns analysis, you should only use Alibaba as a peer firm. You do not need to include Walmart as a peer firm in any of the analyses for this case, just use Alibaba for all of the peer analyses.