[Gameplay] Petz + Cobasi

An analysis of the merger announcement between the giants of the pet world.

Petz and Cobasi announced a merger deal today. This presents a great opportunity to test the simplicity of our framework by translating this negotiation as easily as a move in a board game. Let's go:

Thesis

Increased Market Power

This is the thesis we use to describe the merging of direct competitors, when the goal is to remove a target from the market to dominate it more easily. In this case, even though it's a merger, we are still talking about two competitors who were directly clashing, a battle costly for both. The merger eliminates competition between them and positions the resulting company in a privileged spot to challenge the third place, Petlove.

Synergies

We list two synergy cards:

Cost Reductions

The companies likely have several operational and back-office overlaps. It will probably make sense to close stores in areas where they are very close and consolidate processes and teams, reducing costs. Thus, we can expect reductions in the core business (sales operation) and in auxiliary functions.

Increased Sales Power

Part of the announcement mentions cross-selling of own-brand products. This represents a product x channel crossover opportunity that can increase revenue for both without much effort, simply through the merging of these assets.

Dis-synergies

It would be almost irresponsible to list some types of dis-synergies without a deep knowledge of the companies and people involved, but looking superficially and from the outside, I can predict:

Operational Overlap

As they are direct competitors, there is likely a lot of overlap. In many cases, these are difficult to eliminate and simply the resulting company will continue to live with them, at least for a good while.

A common example tends to be information systems. Uprooting legacy systems is costly and slow.

Others?

There are likely other dis-synergies. The deal was classified as a merger and with an apparently significant effort for shareholders to equally share the resulting company. This suggests some influence of egos and conflicting intentions that could cause problems, but I am entering the realm of speculation so I will stop here.

Will CADE approve?

The Brazilian Administrative Council for Economic Defense is the regulatory body that defends free competition. Therefore, the realization of a deal like this is subject to CADE's approval. Will it approve?

My bet is that it will. Together, Cobasi and Petz are accumulating about 16% of the market, which is quite fragmented. The consolidation harms small businesses, but it does not constitute anything close to a monopoly.

Global Evaluation

The union of direct competitors is not one of my favorite theses because the merging tends to be a very polluted process, with great potential for friction and synergies. But the "market" loves it, especially when we are talking about billion-revenue players.

Certainly, Petlove will face a much heavier competitor, but at the same time distracted with a complex post-acquisition integration over the next few months. As it is the darling of venture capital investors, it might be the time to strike and, ironically, gain market-share. Let's see what happens!