DealBook: How Disruptive Technology 1s Spurring Tobacco Merger Talks

Photo Credit Harry Campbell

Disruptive technology can spur takeovers as companies race to bulk up and acquire innovators in the fear that their business could go out of date.

But who would have imagined that this phenomenon would happen in the 400-year old cigarette industry?

The second and third largest cigarette companies in the United States, Reynolds American and Lorillard have confirmed that they are in talks to combine. The merger would result in the cigarette industry in the United States being dominated by two players – the new combined company and Altria, the maker of Marlboro cigarettes. The three companies currently have roughly 90 percent of the $90 billion to $100 billion United States tobacco market, with the Altria Group taking roughly half the market.

A final move of consolidation in this industry was perhaps inevitable because of declining sales in the still highly profitable American cigarette market. Both Reynolds and Altria have already spun off their international operations and so expansion abroad for more opportunities does not seem feasible. Left with few expansion opportunities, it is no surprise that the companies would seek to combine to reap further profits through cost savings.

But the companies could have tried to combine years ago. So why now?

It may very well be that disruptive technology known as e-cigarettes.

The e-cigarette market is growing at phenomenal rates and could surpass $2 billion this year according to some reports.

And as was the case during the dot-com boom, when many made wild forecasts of potential Internet users and revenue, people are already predicting that sales from e-cigarettes will surpass regular old, unhealthy cigarettes. Well, at least by 2047, according to one analysis by Bloomberg Industries.

By 2047, many of us could also be underwater because of global warming, assuming we are alive. Or not.
In other words e-cigarettes have momentum but we do not know if they will actually succeed. They may very well be a fad.

Still, fear of this technology is rumbling through the industry. But unlike, say, the taxi industry and Uber, Big Tobacco is well-coordinated and has deep pockets.
Lorillard has already acquired Blu Ecigs, the largest American seller of e-cigarettes with a 40 percent market share. Reynolds has also released its own e-cigarette, but is viewed by the industry to be behind in this market.

An acquisition of Lorillard thus catapults Reynolds ahead of Altria in the e-cigarette category. It would also add the controversial menthol cigarettes of Lorillard to Reynolds stable of offerings.

Reynolds and Lorillard would have to sell some brands in connection with the deal in order to satisfy antitrust regulators. This is where Imperial Tobacco comes in. Imperial Tobacco will take advantage of Reynolds and Lorillard's hunger to merge to obtain a significant presence in the United States at a likely good price.
One way to view this deal is that it is all about dealing with a declining industry. But this transaction is also about fear. Fear that new technology will end your old business.

This is where the e-cigarette comes in. Reynolds and Lorillard would now be the front-runner in this new technology. They will also benefit from the unrestricted advertising that can be done for e-cigarettes. Advertising that may subliminally also provide a boost for cigarettes themselves.

A giant tobacco merger in that respect is not that much different than acquisitions like Facebook's $16 billion deal for WhatsApp or Google's $3.2 billion deal for Nest Labs. Large premiums are being paid in fear of the next big technology and the destruction it might bring. That technological destruction may not come to pass, but then again it might.

The merger of Lorillard and Reynolds shows no industry is safe from technology's transformative effects — and the uncertainty that generates.

Welcome to the 21st century, cigarettes.

source : http://rss.nytimes.com/c/34625/f/640316/s/3c6a16db/sc/5/l/0Ldealbook0Bnytimes0N0C20A140C0A70C110Chow0Edisruptive0Etechnology0Eis0Espurring0Etobacco0Emerger0Etalks0C0Dpartner0Frss0Gemc0Frss/story01.htm