American Greetings to Buy Gibson Greetings for About $163 Million

American Greetings expects the acquisition to generate revenues of about $225 million and an annual cost savings of at least $50 million.
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The world's second-largest greeting card maker,

American Greetings

(AM) - Get Report

, said Wednesday that it has agreed to buy

Gibson Greetings

(GIBG)

, the No. 3 company, for about $163 million.

American will pay $10.25 a share in cash for Gibson. That sum is almost double the price of Gibson's stock, which closed Tuesday at 5 1/2. The acquisition will be completed as soon as possible, subject to regulatory matters. American Greetings will keep the Gibson brand name.

Gibson's shares surged 65% Wednesday, rising 3 19/32 to 9 3/32 in late morning trading. American Greetings also rose, gaining 13/16 to 25 7/8.

American Greetings closed up 3/4 to 25 13/16 while Gibson finished up 3 7/16 to 8 7/8.

"The offer by American Greetings represents the best opportunity for Gibson to enhance shareholder value," said Frank O'Connell, chairman and chief executive of Gibson Greetings, in a statement.

Although the deal will create a greetings card giant, the combined company will still rank no. 2 in the industry after

Hallmark Cards

.

This was not American Greetings' first bid for Gibson. Back in 1996, Gibson rejected an $18-per-share offer from American and hired new management in an attempt to prove it could stay independent. "But since then, management has not done enough and underestimated how difficult conditions in the industry had become," said Eric Bosshard, an analyst at

Midwest Research

.

Those conditions include the advent of the on-line greeting card, which is taking market share from conventional retailers. E-greeting card companies such as

Blue Mountain Arts

now control 10% of the market. Last week,

Excite@Home

(ATHM) - Get Report

agreed to pay up to $1 billion to acquire

Bluemountain.com

.

Gibson has experienced other problems, including several earnings shortfalls over the last few quarters that have caused the company's shares to nosedive 50% in the last year. It also has a weakened competitive position because of the loss of major accounts like

Wal-Mart

(WMT) - Get Report

and

Kroger

(KR) - Get Report

. "They haven't been very innovative or cost competitive," said Jeffrey Stein of

McDonald Investments

. Stein rated Gibson an underweight and his firm has done no underwriting for the company. He rates American Greetings a hold and his company has participated in underwriting for the company.

Bosshard, for one, expected the acquisition. "The management and board realized it couldn't make it work," he said. "This is a move they had to make for shareholders." His rating on both companies is neutral. Midwest Research does not engage in underwriting activity.

For its part, "American Greetings now has the opportunity to grow through acquisition in an environment where organic growth is difficult because of competition in the industry," Bosshard said.

American Greetings expects the acquisition to generate revenues of about $225 million and an annual cost savings of at least $50 million. Bosshard considers the latter figure "a little aggressive," but acknowledges that the deal will lead to considerable savings.

Stein finds the number reasonable, saying the new company will derive much of its savings from shipping from outsource production to in-house production, as well as shutting down Gibson's headquarters, combining benefit plans and having better purchasing on raw materials.