Ride-sharing company Uber announced that it will begin testing the world’s first autonomous taxi-fleet in the next few months in Pittsburgh. The fleet is part of a partnership between Uber and Swedish carmaker Volvo that will see the companies jointly invest $300m to develop a self-driving vehicle, the Volvo XC90 SUV. This is just the latest in a series of announcements regarding autonomous vehicles made this year by automakers. General Motors Co. invested $500M earlier this year in Uber’s rival, Lyft Inc., and is also developing an autonomous electric taxi fleet. Fiat and Google are working together to build 100 self-driving Chrysler minivans. BMW has formed a joint partnership with Intel and sensor-maker Mobileye to develop a fully driverless vehicle by 2021. Nissan and NASA are partnering up to develop autonomous driving systems for applications in both cars and planetary rovers. Ford has acquired several machine learning, laser sensing, and vision procession startups in order to introduce a fully self-driving car to the market in 2021.
- Brainstorm the challenges, financial or otherwise, facing automakers in achieving widespread adoption of self-driving cars.
- If you were Uber, how would you set the price of a ride in an automated taxi? (The announced pilot program in Pittsburgh will be free for passengers.)
[Additional reading:A fork in the road for driverless cars (FT)]
Macy’s to Close 100 Stores as E-Rivals and Discounting Hit Legacy Retailers (NYT)
Macy’s Fix for Department Store Woes: Fewer Stores (WSJ)
Why Macy’s Plan to Close 100 Stores Is Brilliant (Motley Fool)
After six successive quarters of declining overall sales, Macy’s, the country’s largest department store, announced it was closing 100 outlets in 2017 (15% of its 675 department stores), on the basis that these stores were worth more as real estate than retail outlets. By closing these stores, Macy’s expects to lose up to $1 billion in sales, but hopes to offset this through cost cutting and concentrating financial power and talent on its remaining best performing locations. It also plans to reinvest the capital freed up from these closures into upgrading its merchandise, adding sales staff, and improving its logistics and back-office technology. These store closings are just the latest in a wave of closures by legacy retailers who are struggling to adjust to swiftly changing consumer spending patterns and compete against online options such as Amazon and off-price retailers such as TJ Maxx and Marshalls. Along with Macy’s, struggling retailers such as Kohl’s, JC Penney, Office Depot, Sports Authority, and Wal-Mart have all announced hundreds of closures this year.
- Brainstorm the strategic risks to Macy’s from having a smaller retail footprint nationwide. Hint: What will happen to the $1B in sales that Macy’s is losing out on?
- Macy’s large department stores have traditionally served as “anchors” at malls. Categorize the impacts, both positive and negative, that these store closings will have on other tenants in these malls, as well as the malls themselves.
[Additional reading: Here’s what Macy’s has to do with the stores it isn’t closing (Chicago Tribune)]
Wal-Mart’s Deal for Jet.com Said to Hinge on Keeping Its Founder (Bloomberg)
Buying Jet.com Could Help Walmart Become A Real Threat To Amazon (Forbes)
Wal-Mart in talks to buy online retailer Jet.com: report (Reuters)
The world’s largest retailer is in talks with Jet.com to acquire the one-year old e-commerce start-up. Wal-mart has been attempting to boost its online sales for the past several years; it opened an analytics arm, @Wal-martLabs, in Silicon Valley to analyze consumer spending behavior and spent $3B in purchasing 15 smaller tech ventures for their software and talent. These efforts have allowed Wal-mart to post $14B in e-commerce sales. However, in comparison to Wal-mart’s overall sales of $300B and online retail leader Amazon’s $83B, Wal-mart still has much ground to cover. The acquisition of Jet.com and its proprietary “gain sharing” technology—which, among other features, encourages shoppers to buy more products by showing them the optimal basket size for minimal shipping fees—could help Wal-mart leverage its vast distribution and warehouse network to finally break into the e-commerce field.
- With a price tag believed to be ~$3B, some analysts worry that Wal-mart may be over-valuing a young start-up like Jet.com, which has yet to build a significant customer base. What factors should Wal-mart consider in valuing Jet.com?
- Compare brick and mortar retail versus e-commerce; which product types (ie. consumer electronics, furniture, groceries) will likely move toward e-commerce or some hybrid of the two?
Extra reading: Perspectives on retail and consumer goods (McKinsey)
The path to AB InBev acquiring SABMiller, a $104 billion deal that would form the largest brewing company with 30% global market share, has been fraught with conflict, from Brexit turmoil to shareholder revolt. Budweiser-owned AB InBev is one of many firms which had to re-evaluate its offerings due the Leave vote: the drop in the price of sterling has forced AB InBev to increase its all cash-offer to £45 per share from £44 for the UK-based SABMiller. While this may have placated the SABMiller’s board, many analysts believe that the offer still undervalues the company. Smaller shareholders like Aberdeen Asset Management, which has a ~1% stake in SABMiller, have publicly rejected the revised deal. AB InBev is now hoping that the approval of the larger shareholders, which are likely to greatly profit from the alternative cash-and-share offer from AB, will override the minority and close the deal.
- The cash-and-share offer gives a lower cash offering, but stocks in the new company which can be cashed out in 5 years. Why might smaller shareholders not be attracted to such an offer relative to larger shareholders?
- What other non-financial hurdles will AB InBev have to overcome with this mega-acquisition?
- What other firms or industries have suffered from a fall in sterling? Which would have benefited?
In one of the largest ever acquisitions in e-commerce history, consumer packaged goods (CPG) giant Unilever announced last week it had acquired Dollar Shave Club (DSC), a startup which offers an online razor subscription service, for $1 billion. DSC’s business model, which combines direct sales of grooming products to customers for as little as $1 a month with clever online marketing, has resulted in it capturing 5% of total sales and 15% of total volume in the US shaving market. The dominant brand in this space has been Gillette, owned by Unilever’s largest CPG rival, Proctor & Gamble. However, Gillette’s lead in the market has eroded from 71 percent in 2010 to 59 percent last year, primarily in the face of increasing competition from online competitors like DSC and Harry’s, another razor subscription service.
- Big firms are either acquiring or backing smaller rivals with innovative products or business models in several different sectors of the consumer industry. Such approaches are common, and fairly successful, in the pharmaceutical industry, where big players effectively outsource R&D to smaller independent ventures, and acquire the successful products. Compare and contrast the risks facing larger players in the pharma and CPG industries attempting these acquisitions.
Additional reading: Invasion of the bottle snatchers: The Economist
Makers of Humira and Enbrel Using New Drug Patents to Delay Generic Versions (NYT)
Amgen Moves Closer to Selling Competitor for AbbVie’s Humira (Bloomberg)
With Biosimilars, Big Pharma Fights Itself (Bloomberg)
Amgen has just gained unanimous approval from the FDA to begin trials of its generic version of the biologic Humira, threatening the $14 billion in annual sales it generates for AbbVie Inc. (Humira represents 60% of AbbVie’s total revenue). Due to the complicated nature of developing and defining the active ingredients of biologics, AbbVie and other biologics-producing companies hoped they would be insulated from competition. However, given the high price tags of many biologics, insurance companies hope that generic-versions of biologics—biosimilars—will bring serious cost savings and competitors hope for a serious cut in the biologics revenue streams.
- What barriers may biosimilars face in terms of adoption rate? How could they mitigate resistance to switching from a biologic to a biosimilar in the short- and long-term?
- Who are the most likely players in the biosimilars field—small biotech companies and/or large pharmaceutical companies? Consider the general goals and capabilities these two types of companies have in terms of research, production, distribution, and revenues
Snack Giant Mondelez Makes $23 Billion Takeover Bid for Hershey (WSJ)
Trust Holds the Key to Whether a Bid for Hershey Succeeds This Time (NYT)
Hershey Board Rejects $23 Billion Takeover Bid From Mondelez (Bloomberg)
Mondelez International Inc. made a $23 billion bid for Hershey Co. in an effort to create the world’s largest candy maker. The bid, which was at a 10 percent premium to Hershey’s closing stock price, was rejected by Hershey’s board, which believes it can be more successful continuing as an independent company or fetch a substantially higher price. A Mondelez+Hershey company would have controlled 18 percent of the world confectionary market. Mondelez (known for its Oreo cookies and Cadbury chocolate bars) was spun-off from Kraft Foods in 2012 and is the world’s second-largest confectionary company, though it has very little business in the US. Pennsylvania-based Hershey is an American candy icon, famous for its namesake Kisses and Reese’s peanut butter cups. 80% of its sales comes from North America, making it the current 5th largest confectionary company in the world.
- What strategic advantage could Mondelez be seeking by targeting Hershey? Rising cocoa prices and a marked consumer shift towards healthier snacks have affected both the profitability and growth potential of the chocolate business. Nonetheless, the US is still the world’s largest consumer of chocolate.
- Hershey has a non-traditional ownership structure. A charitable trust set up by the company’s founder controls 81 percent of Hershey’s voting shares. Any deal to acquire Hershey will not succeed without the trust’s approval. The trust, whose mandate is to maintain the Hershey legacy and its connection to the local community of Hershey, PA, requires non-financial incentives to agree to this deal. Brainstorm some such incentives.
Gilead has just gained the approval of its combo therapy drug Epclusa, which treats the hepatitis C virus (HCV). Gilead has dominated the hepatitis C market since its introduction of Solvadi, the first curative therapy of HCV, although has recently faced pressure from cheaper treatments from Bristol-Meyers Squibb and Merck. Gilead hopes to recoup some of its lost market share with Epclusa, which is the first therapy able to treat all six genotypes of HCV. Analysts were surprised, though, when Gilead priced Epclusa far below expectations at $75K for a 12-week treatment, which is $20K-10K cheaper than its other drugs on the market (although still more expensive than its competitors).
- What are potential factors in and outside of pharma that led to Gilead’s decision to sell Epclusa more cheaply?
- What are the possible benefits of Gilead’s pricing strategy with Epclusa? What are the possible risks?
- Consider the necessary steps required to diagnose and treat a patient with HCV. Why might a doctor prescribe a pan-genotypic cure like Epclusa that is more expensive over a therapy which is cheaper but only treats one or two genotypes of HCV?
Tesla Motors, maker of the Model S electric car, announced earlier this week that it had offered to acquire SolarCity, the largest US residential solar company, in an all-stock deal valued at $2.8 billion. Both Tesla and SolarCity are headed by Elon Musk, who is also the largest shareholder in each company. Merging the two companies would create the first vertically-integrated electric energy production, storage, and transport company. However, the proposed deal has not been received favorably in the stock market – by the end of this past week, while SolarCity’s stock price had barely changed, Tesla’s own stock had dropped enough to reduce its market valuation by $4 billion to $26 billion.
- Mr. Musk has stated the primary driver behind this acquisition to be “achieving a tight integration of the products.” Tesla is an automobile manufacturer, while SolarCity installs solar panels for residential customers. Where can these companies find product integration?
- Both Tesla and SolarCity operate in high-growth, but capital-intensive industries. The two companies spent about $5 billion on various projects last year, most of which was through debt. What are some risks facing these companies if obtaining such financing becomes difficult in the future?
Microsoft announced early last week that it would acquire LinkedIn in a $26.2 billion all-cash deal. This acquisition, Microsoft’s largest ever , is also the largest technology deal of 2016, and the 3rd largest tech deal in history. Microsoft and LinkedIn operate very different businesses: Microsoft specializes in software tools, while LinkedIn is the largest business-oriented social networking site. However, they have similar customer bases – both cater primarily to professionals and enterprises. Microsoft’s willingness to pay a significant premium for LinkedIn has been widely interpreted as strong evidence of a shift in its focus from traditional PC software to enterprise services.
- Microsoft believes LinkedIn will enhance the utility of its enterprise, Microsoft Dynamics CRM (customer relations management) business. Most CRM solutions require sales staff to keep customer information such as employment and contact history updated in order to be fully effective. What utility can Microsoft’s clients derive by integrating LinkedIn’s data into Dynamics?
[Additional listening: exponent.fm podcast exploring this acquisition]
[Additional reading: Why Microsoft, With $100 Billion, Wants a Loan for LinkedIn (Bloomberg)]