Monday, March 21, 2016

Does the Proposed Paint Merger Create Value?

Sherwin-Williams announced that it intends to acquire rival Valspar in a $9.3 dollar deal. What do the markets think of the deal? The stock market price of the target, Valspar, increased by 19.44 points (23.19%) on the news.
The stock market price of the acquirer, Sherwin-Williams, however, fell 14.59 points (5.37%) at the same time.

But because Sherwin-Williams has more shares outstanding, comparisons made from these amounts are not quite right. Multiplying price changes by the number of shares yields an increase in value of $1.538 billion for Valspar and a decrease of $1.345 billion for Sherwin-Williams. On net, shareholder value rose. The markets think assets would be moved to higher valued uses.


  1. The example given regarding the stock market’s reaction to the announcement of the proposed merger is further proof that financial markets are, simply, fickle. Let’s review: on March 18th, when the acquisition was announced, Sherwin-William’s stock price dropped 5.3%, only to recover 64% of the decline within five days. On the other side, Valspar’s share price increased 23.1% on the announcement and increased only another 9 percent within five days. The initial reaction to the acquisition may have been influenced by investor’s doubt that the acquisition would receive the proper government approval or it could have been reacting to the additional debt being taken on by Sherwin-Williams. After further consideration, I think the market is discovering the value that could be created by the merger. For example:
    • Sherwin – Williams is integrated downstream through its Sherwin – William’s Stores. Valspar is marketed through retailers like Home Depot, Lowes, Ace Hardware and others. Sherwin – Williams will be able to market Valspar paints through its own retail division which will help create value by retaining the retailers margin
    • Sherwin – Williams has a larger global footprint than Valspar via its retail locations in Latin America, Europe and Asia. This opens up new markets for Valspar, which also add value to the acquisition
    • Valspar has a strong presence in Coatings that can help Sherwin – Williams achieve one of its own strategic growth initiatives, adding further value
    Additional value should be created through synergies achieved through eliminating redundancies in the Commercial, Administrative and Executive areas. All of this points to the fact that that market has likely underestimated the cost and operating synergies that will be achieved by the acquisition.

  2. I think you should consider standard deviation of the stock price. I think it needs to fall within some range to have some predictive value. Are we to understand that SD was too minor to consider?

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