Contingent Payment Sales - Example in Finance

Example in Finance

• General Mills Acquisition Case:

Origin of the Transaction Seeking to build growth momentum, General Mills studied areas of potential growth and value creation in the spring of 1998. This had generated some smaller acquisitions and a general receptivity to acquisition proposals by the firm. In early 2000, the firm’s financial advisers suggested that Diageo might be interested in selling Pillsbury, in an effort to focus Diageo on its beverage business, and that Pillsbury would complement General Mills’ existing businesses. In March 2000, Diageo’s chief operating officer contacted General Mills’ chairman and CEO to explore a possible sale of Pillsbury. General Mills submitted its proposed deal terms to Diageo in June 2000—the total proposed payment was $10.0 billion. Diageo submitted an asking price of $10.5 billion. The two sides would budge no further, and it looked as if the negotiations would founder. General Mills did not want to issue more than one-third of its post-transaction shares to Diageo, and believed that its shares were undervalued in the stock market. Diageo believed it was necessary to value General Mills’ shares at the current trading prices. In an effort to bridge the difference in positions, the two firms agreed upon including in the terms of the deal a contingent payment on the first anniversary of the transaction that would depend on General Mills’ share price. James Lawrence, chief financial officer of General Mills, said, “We genuinely believe this is a way in which they could have their cake and we could eat it, too. There’s no question in my mind that, absent this instrument, we wouldn’t have been able to reach this deal.” David Van Benschoten, General Mills’ treasurer, added that the contingent payment was another example of the “development of the use of in the past 20 years as finance has come to first understand, and work with, the constructs of optionality.”