Drexel LeBow College of Business
FIN 640 – Mergers and Acquisitions
Case Study: Martin Marietta – Vulcan Merger
This case study examines the proposed merger of Vulcan Materials and Martin Marietta both providers of construction aggregates. A stock-for-stock merger had the potential of making the company a global leader in construction materials, but was marred by disagreements over executive succession, location of new headquarters and the stock exchange proposed by Martin Marietta. Furthermore, as negotiations deteriorated Martin Marietta attempted a hostile takeover of Vulcan and also tried to get its directors appointed to Vulcan’s board. However, a court ruling determined that Martin Marietta was in breach of its NDA by using numbers determined from its merger valuation to determine the latest bid. In addition to this the court placed an injunction that prevented Martin Marietta from participating in the upcoming board elections. While the merger was unsuccessful, we use this case to study the market reaction to the merger announcement, valuation of the offer and the associated abnormal returns. We conclude with our interpretation of the proposed merger. Martin Marietta –Vulcan Merger
The Great Recession was the initial impetus for Martin Marietta to seek out an acquisition of Vulcan. The leadership of Martin Marietta first approached Vulcan in halfway through 2009 after struggling to grow organically due to the slow economic recovery. Additionally the aggregates industry depended heavily on government infrastructure projects with very uncertain scopes and timing. The leadership of Martin Marietta believed that a merger with Vulcan would create a strong global leader in the aggregate industry better able to withstand a sluggish economy and uncertain government spending. They felt that combining the assets, leadership, and knowledge would dramatically increase cash flows and create synergies. The synergies would be from increased operating efficiencies and by consolidating duplicate functions. Additionally increasing market share and combining mineral reserves would give Martin Marietta more pricing power leading to increased profit. When asked about the potential merger, Ward Nye, Martin Marietta’s President and CEO, said "At the end of the day, you feel like there's $2 billion there," and that "This is too much shareholder value ... to walk away from in good faith." Merger Announcement & Market Reaction
Martin Marietta announced bid on Dec. 12, 2011. “Shares of Birmingham, Alabama based Vulcan jumped $5.32, or 16%, to $38.87 in heavy late afternoon trading, after peaking at $45 shortly after the news broke. Since the market reaction post announcement, it can be deduced there were no leakages or rumors associated with the merger.
Figure 1: Stock price reaction to bid announcement
We then proceeded to calculate the abnormal stock returns from the announcement and since Vulcan formally rejected the bid on 12/22/2011 the time period from 12/09/2011 through 12/22/2011 used. Vulcan’s return for that period = 16.90%
Martin Marietta’s return for that period = 3.30%
S&P 500 Index return for that period = -0.09% (S&P 500 index return to represent market return). Therefore:
Abnormal stock return for Vulcan = 16.90% - (-0.09%) =16.99% Abnormal stock return for Martin Marietta= 3.30% - (-0.09%) = 3.39% We can see from figure 1 above that on the date of the announcement of the bid, the stock price for both companies increased with Vulcan increasing more than 15%. Furthermore, both abnormal return and the stock price changes during this period point towards efficient markets where the market quickly reacted to the information and had an impact (in this case positive) on the two companies’ stock price (especially for the target company) in very short time. In addition to...
Please join StudyMode to read the full document