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Rock, paper, scissors

26 January 2015 By Kevin Allison

Delivering on the promise of a $16 billion U.S. paper merger may require some precision folding. Stockholders in packaging giants Rock-Tenn and MeadWestvaco will share their combined company evenly, with a roughly balanced board. Investors are already inking in $300 million of promised annual savings, pushing up the stocks of both companies. But mergers that look equal can still provoke business and cultural upheaval.

The deal seems finely tuned to avoid suggesting a takeover. Stockholders in $7.5 billion Virginia-based MeadWestvaco will trade their shares for 50.1 percent of an as-yet unnamed new company. Investors in $8.8 billion Rock-Tenn will get the rest.

Steve Voorhees, Rock-Tenn’s chief executive, will run the combined group, with MeadWestvaco boss John Luke serving as non-executive chairman. Rock-Tenn will also hold two more board seats than its smaller rival, an arrangement that should counter-balance MeadWestvaco shareholders’ slightly larger economic stake.

The combined firm could be a formidable No. 2 to industry leader International Paper. Management says it expects to wring out some $300 million in annual savings over three years through better procurement, more efficient use of mills and the like. After taxes, that’s worth about $2.1 billion in present value – the same amount the combined market cap of the two companies increased by after investors heard about the deal. Rock-Tenn shares rose 10 percent and MeadWestvaco stock 18 percent in early trading on Monday.

The increases fit a recent trend of investors giving transactions a favorable reception. But they also obscure challenges ahead. In 2011, for example, Rock-Tenn’s $3.5 billion purchase of containerboard maker Smurfit-Stone stumbled initially over a “cultural difference,” according to Morningstar. Voorhees, who was promoted from chief operating officer to CEO in 2013, eventually got the combined businesses on track. The MeadWestvaco merger is, though, a far bigger project.

The Rock-Tenn CEO says it makes a difference that Monday’s deal is a merger rather than a takeover. But shareholders should be skeptical.

Recent transactions like advertising agency Omnicom’s failed merger with rival Publicis and Glencore’s acquisition of mining giant Xstrata show that power struggles and politicking can be fierce – even in so-called mergers of equals. In deals where one party has the upper hand, the rules can be a lot clearer.


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