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Vulcan mind meld

12 December 2011 By Robert Cyran

A rumble in the rock garden may presage more hostile M&A. That’s one way to read the unsolicited $4.6 billion offer that Martin Marietta Materials made for larger rival Vulcan Materials. The all-stock deal won’t succeed without some more fill. But the lesson is clear: if profits can’t be mined from the ground, they can still be found by cutting costs.

Aggregating the two makes financial sense – the companies had been circling each other for nearly a decade. The question of who gets to run the ship appears, unsurprisingly, to have kept a deal from taking place. Not anymore. Martin is making the most of its more efficient operation to put the deal to Vulcan’s shareholders.

Though it’s almost a third smaller by market value than its quarry, Martin sports higher profit margins and more revenue per employee, and its stock has outperformed its rival’s. So promises to cut up to $250 million in costs annually are credible. Those savings are worth around $1.5 billion to shareholders today. The premium on offer comes to just a third of that – leaving ample space to pay more without crushing its investors.

That gives Vulcan ammo to fight off this initial offer. Investors have already bounced the stock above the bid’s value. Initial proposals in hostile deals rarely win acceptance, and this one isn’t a knockout. But the logic of the deal, and its potential savings, should enable some melding between the two boards – with a bit of nudge from arbitrageurs.

When executives’ optimism about the economy is highest and businesses pull in cash faster than they can deploy it, empires are built. Those conditions certainly don’t describe the slumbering market for construction materials. But the prolonged downturn – and the cheaper market valuations that result – has inspired Martin to try and force a cost cutting exercise on its rival. Chances are that message won’t be lost across other industries.


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