Monday, December 21, 2015

Bidding Battle for Pep Boys

In an upset Icahn Enterprises LP's offer of $16.50 in cash topped Bridgestones Corp's $15.50 standing offer to purchase Pep Boys. With 800 locations in 35 states they create natural advantages for Fireestone's 2000 store chain and Icahn's AutoPlus parts chain. Of course Pep Boys stocks shot up $1.09 to $16.85 on the news.

Who wins?

Pep Boys current stockholders are going to be the clear winners in any bidding war. An analysis of target companies found that target markets receive abnormal returns 2 months prior to the announcement, during the announcement and even after the announcement (Soongswang, 2009). Pep Boys is showing consistency with this analysis.

The winning bidder is likely to capitalize on their large distribution network in a way that will complement existing supply lines.  Sometimes companies that work in a battery of stock owned companies enhance each others positions while at other times the operations are integrated as quickly as possible into more successful lines.

Selling tires and selling parts enhance the overall operational output creating greater efficiencies and outlets.  Bridgestone might seek to integrate the two companies while Ican Enterprises could seek to find an investment outlet that fits well with their existing business holdings. In both cases, once bought Pep Boys will need to make some changes to justify the higher cost figures.

Soongswang, A. (2009). Market reactions tender offers: an analysis of target companies. IUP Journal of Applied Finance, 15 (8).

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