What happened
Shares of Europe's Unilever (UL 1.58%) rose as much as 10% on Jan. 19, a day after the stock opened 10% lower. That steep price decline and the rise today are both related to the same issue -- except the consumer goods and food-maker's direction on the issue changed. Investors were clearly pleased with management's updated point of view.
So what
You can't talk about the price increase today without first talking about the price decline yesterday. Basically, news leaked that Unilever was looking to buy GlaxoSmithKline's (GSK 2.11%) consumer-healthcare business, which sells over-the-counter products like Advil, Sensodyne, and TheraFlu. The offer price was rumored to be around $68 billion, which many industry watchers considered expensive.
That offer was rebuffed by GlaxoSmithKline, but the fear among investors appeared to be that Unilever would up the bid. An increased offer would likely have been a financial stretch for Unilever. Thus, the stock fell.
Image source: Getty Images.
In theory, Unilever moving into the consumer-healthcare space isn't a bad plan. That area of the market is generally growing more quickly than many of the product areas in which Unilever operates today. And if it were combined with sales from the company's existing assets, it could lead to faster growth over the long term. Procter & Gamble basically did a similar thing a few years ago.
The problem for Unilever was the price tag. Wall Street was clearly displeased, notably worried that the offer price would keep going higher.
Unilever, however, appears to have heard investors loud and clear, announcing today that it won't up its offer. That, presumably, ends the effort to buy assets from GlaxoSmithKline. Investors were pleased with this update and bid the shares higher again.
Now what
It's nice to see that Unilever's management team was able to read the not-so-subtle tea leaves here and quickly changed direction. That said, the broader desire to expand into higher growth areas while moving out of slower growth ones is something that investors should keep an eye on. Although a deal with GlaxoSmithKline might be dead, that doesn't mean Unilever won't find something else to buy.
