Acquisitions happen all the time in the corporate world. Sometimes, a public company buys a private company outright. Other times, a public company absorbs another public company and pays their shareholders for their stock. Even startups acquire smaller, scrappier startups to make a mega-startup. Regardless of the scenario, the purpose of merging with or acquiring another company is to create one mega-company with bigger sales, a larger market share, and more product offerings — barring government approval and/or regulation.
Sometimes, acquisitions make no sense. For instance, Salesforce, which doesn’t sell any consumer-facing products whatsoever, almost bought Twitter, a consumer-facing product. The sheer idea of the company buying Twitter drove Salesforce’s stock down, as investors thought it would be a bad buy since both companies couldn’t be more different.
Most times, however, acquisitions make sense. AT&T, for instance, bought DirecTV (and are trying to buy Time Warner). This allowed them to further expand their media offerings and become more than just a communications company, since the wireless, landline, and internet market is fairly competitive.
Reckitt Benckiser, a British consumer goods company, recently set to acquire Mead Johnson Nutrition, a popular baby formula company. While this acquisition makes sense for the company’s brand portfolio, it also directly conflicts with another product they sell: Durex condoms.
Reckitt Benckiser is set to acquire Mead Johnson Nutrition for $16.6 billion.
The acquisition will have to pass government regulation first and isn’t guaranteed. Once it goes through, however, it will give Reckitt Benckiser added revenue from markets like China while marketing the popular Enfamil baby formula brand.
Reckitt Benckiser also makes Durex condoms.
One of the explicit uses for Durex prophylactics is to avoid unwanted pregnancies. Thus, most people using Durex products are not in the market for products like, say, baby formula. Investors semi-jokingly see Reckitt Benckiser’s purchase of Mead Johnson as a hedge, or an investment that could work in their favor in case another one does not. (To further explain/kill the joke, if a purchaser of Durex condoms does not use them properly, they would definitely be purchasing Enfamil baby formula.)
RB shareholders responded positively to the acquisition news.
The stock, which trades under $RB on the London Stock Exchange, closed .91% higher at the end of the trading day. While $16.6 billion is a lot of money to cough up, the company will certainly make it back and then some in a short while by selling more products to more people in different locations.
Companies often offer products or services that conflict with their other offerings. For instance, Philip Morris, one of the biggest tobacco companies in the world, also produces anti-smoking commercials and offers smoking cessation resources on a dedicated website. While they do this for legal and public relations reasons, companies try to include diverse product offerings all the time for the sake of expanding revenue streams and hitting all possible markets. In the case of Reckitt Benckiser and their Durex brand, this acquisition is just a tad funnier than most.