Lessons in Corporate Finance

CHAPTER 18 Mergers and Acquisitions: Strategic Issues (The Dollar Stores)

In this and the next three chapters, we will use the acquisition of Family Dollar by Dollar Tree to evaluate a merger. Mergers are a type of investment and, as such, have the same three major elements as all investments have:

1. Strategic
2. Valuation
3. Execution¹

The primary difference between a merger and an internal investment (e.g., a plant the firm decides to build) lies in the execution. If a firm decides to build a plant, the plant can’t decide not to be built. In the case of a merger, the target firm often opposes the acquisition both in court and through a series of financial maneuvers.

As we’ve stated several times before, when doing an investment, the strategy piece should come first. However, as this is a finance book, in previous chapters we started with and focused on the valuation. Over the next four chapters, we will do the pieces in the proper order: first strategy, then valuation, and finally the execution (which is often the most interesting part). We will spend one chapter each on strategy and execution and two on valuation. All four chapters will deal with the particularly interesting, and at times contentious, recent acquisition of Family Dollar by Dollar Tree, both retailers of low-cost consumer products.

The Three Main Competitors

The concept of a “dollar store,” where everything in the store sells for $1.00,² was created in 1955 by J.L. and Cal Turner (father and son). Their concept ...