We recently ran a series on capital allocation, and the post called “M&A fallacies” relates to this issue.

Change a few words and some of the 10 points can be used to consider share buybacks as well.

Second, Dealbook today highlighted an interesting story on Jeffrey Kaplan, who for 24 years was involved with M&A – including some of the largest deals such as HCA (the $33 bi LBO, not the recent IPO). The Deal Magazine interviews Mr. Kaplan and it’s an interesting inside view on M&A, private equity, even debt markets.

First, we know by covering the company that Laureate, as the Brazilian CEO Luis López says in the article, really does focus on assets of higher quality than those currently operated or sought out by most of the Brazilian listed players in the field. We’ve even visited some of those colleges run by Mr. López at a time when the Mexican and Chilean operations were the company’s largest and best. In fact, when Mr. López started running the Brazilian operations, we saw it as a telling sign of Brazil’s importance to the group.

That fact combined with the company’s declared spend amount and mandate could make acquisition prices soar, even though the company focuses on assets that may not be on the local players’ sights. Think of Laureate’s growth-by-M&A focus as a tide that could lift all ships. What’s more, the tide must already be pretty high given that listed Brazilian players have been raising capital and expanding their war chests with the very specific mandate of delivering growth by acquisitions…

The point? Paraphrasing that famous question: “At what price growth?”

Back to Nielsen/ VNU: the controlling group is surveying the markets for an IPO valuing the company’s EV in the $17 to $21 billion range, compared to the $10 bi LBO in 2006. That said, the company is set to earn a respectful $1.6Bi in Ebitda in 2010 (in this case not that many fixed assets, but we’d still prefer to see the free cash flow figures). The debt is $8.6Bi and the annual interest is approx. $500 million, but at least some of the proceeds would likely go towards reducing this debt.

There was also an interesting (but misguided) issue raised about Buffett’s stance in this deal versus Berkshire’s bid for Burlington – see inside.

Kraft’s management was in a bit of a quandary last month. Because its original offer to buy Cadbury involved issuing stock representing more than 20% of its shares outstanding, the company needed shareholder approval to close the deal as per NYSE’s rule 312.03(c). Warren Buffett, Kraft’s largest shareholder, didn’t like the idea and said that Kraft’s stock was an expensive currency to use at that time. In a very public way, he declared a “no” vote on the issuance and recommended that other shareholders do the same. Given Buffett’s reputation, this was a very credible threat.

To steer away from him, Kraft needed desperately to raise enough cash to be able to cut the share issuance below the 20% threshold, thus avoiding the need for a shareholder vote. That’s where Nestlé came in. Over a weekend the company switched from being a competing bidder for Cadbury, to “helping out” Kraft by acquiring the company’s frozen pizza business. It’s reasonable to suppose that it got a good deal. Not only does it know the ins-and-outs of the food business, but it had the money on hand to act quickly – especially after the sale of Alcon to Novartis. Buffett’s commentary that the pizza sale was badly structured fiscally for Kraft only adds to the impression that the Kraft-Cadbury deal was a “marriage done at gun point”, rushed due to competition or perceived competition for Cadbury, where “minor details” were ignored in view of the bigger objective.

Check out our Q4 2009 report for our take on M&A in the “Merge!” section – this could very well be one example of the “shotgun wedding” we mentioned there.

LINKS:

Does Buffett’s vote on Kraft mean that Berkshire is fully valued? – Bloomberg, Jan. 11th 2010 – If Kraft’s shares are “very expensive currency” and Berkshire is using BRK stock in its bid for Burlington Northern, does it mean that Buffett thinks Berkshire shares are even better valued than Kraft’s? Not necessarily is the obvious answer. Buffett has always said that to pay for an acquisition with shares he must be getting more than what he’s giving away. He is therefore implying that this is happening in his bid for Burlington, while from the press release linked above it’s clear that he thinks that this is not the case in Kraft’s bid for Cadbury. Each deal must be analyzed separately.

LEX on Kraft/ Cadbury – Financial Times, Jan. 19th 2010 – LEX columns are a significant part of the FT.com’s value proposition and we highly recommend ponying up the cash for it. There’s a short video we couldn’t embed here and links to other LEX pieces on the subject.

Buffett’s Lost Vote – NYT’s DealBook blog, Jan. 21st 2010 – For an explanation in layman’s terms of the NYSE rule that would require shareholder approval for Kraft’s original bid for Cadbury.