EBSM&Acan.ppt

(1)

EBS Mergers &

Acquisitions

10 June 2005

(2)

1. Introduction

•

Mergers and acquisitions represent a

major source of organizational change.



Organizations that can identify the need for

change, design the changes required and

implement these changes more effectively

and efficiently than others are more likely to

survive and prosper.



Those that cannot adapt to change are likely

to perish.

•

Deregulation, globalization and

information technology are removing

(3)

Strategic Focus Wheel

• Strategic planning – selecting _{Strategic planning – selecting}

the most appropriate option.

the most appropriate option. • Making strategies work – _{Making strategies work –}

connecting the plan to

critical day-to-day activities.

critical day-to-day activities. • Project management of _{Project management of}

change – ensures

completeness and control

over the realization of the

chosen strategy.

• Strategic risk management – _{Strategic risk management –}

identification, monitoring and

management, both as a

control and as an input to

(4)

Definitions

•

A merger or acquisition in a company

sense is the combination of two or more

companies into one new company.

 In a merger, there is usually a process of In a merger, there is usually a process of

negotiation involved between the companies negotiation involved between the companies prior to the combination taking place.

prior to the combination taking place.

 In an acquisition, there is not necessarily a In an acquisition, there is not necessarily a

negotiation. The acquired company may or negotiation. The acquired company may or may not continue to exist as a separate

may not continue to exist as a separate entity, depending on the intentions of the entity, depending on the intentions of the buyer.

buyer.

(5)

Rationales

• Strategic_Strategic: Achieves a set : Achieves a set of strategic objectives

of strategic objectives

(including defense)

• Speculative_Speculative: acquired : acquired company is a commodity

company is a commodity

• Management_Management failurefailure: by : by the time strategic

the time strategic

variance is detected, it

is sometimes too late to

correct it by itself

• Financial_Financial necessitynecessity: : lost shareholder

lost shareholder

confidence

• Political_Political: what is : what is

encouraged and what

is prohibited

Rationales

consist of the higher-level

(6)

Drivers

•

Drivers

are mid-level specific (often

operational) influences that justify the

merger.

 Requirement for specialist skills or resourcesRequirement for specialist skills or resources  National and international stock marketsNational and international stock markets

 Globalization: geographic separation is Globalization: geographic separation is

becoming less of an obstacle to managing as a

single entity

 National and international consolidationNational and international consolidation

 Diversification: although this typically benefits Diversification: although this typically benefits management at the expense of shareholders

(7)

Drivers

•

Continued…



Industry and sector pressures



Capacity reduction



Vertical integration



Increased management effectiveness

and efficiency



Acquisition of new market or customer

base

(8)

Vertical Integration

•

Vertical integration is the merger with

suppliers (backward) or retailers (forward).

 Combined processesCombined processes

 Reduced risk and/ or enhanced risk Reduced risk and/ or enhanced risk management

management

 Configuration (i.e., data flow) managementConfiguration (i.e., data flow) management  Quality managementQuality management

 Reduced negotiation, although perhaps at the Reduced negotiation, although perhaps at the expense of decreased leverage

expense of decreased leverage

 Proprietary and intellectual property Proprietary and intellectual property protection

protection

 ““Individualization”: controlling aspects of an Individualization”: controlling aspects of an operation to protect quality and image

(9)

Horizontal Integration,

Conglomeration

•

Horizontal integration occurs where

two companies engaged in essentially

the same product or service merge to

improve their combined value.

•

Conglomeration mergers occur where

the merging companies continue to

operate in different sectors and

industries (no integration).

(10)

Merger Lifecycle Phases

• Inception (initiation)_{Inception (initiation)}

• Feasibility: finances and logistics are _{Feasibility: finances and logistics are}

considered, followed (sometimes) by a

commitment to proceed

• Pre-merger negotiations: on structure and _{Pre-merger negotiations: on structure and}

format of combined organization

format of combined organization • Contract formulation_{Contract formulation}

• The Deal_{The Deal}: sets out the rights and obligations of : sets out the rights and obligations of the parties

the parties

• Implementation: in-house (usually) teams _{Implementation: in-house (usually) teams}

establish new staffing, systems and processes

(11)

The Players

•

The early stages tend to be dominated by the

strategic planners (or equivalent), who are

responsible for initiating the merger and for

making a strategic evaluation of the decision.

•

External consultants are primarily involved in

setting up the contract and related aspects.

•

The post-deal work is largely dominated by

the implementation team.

 Early involvement tends to benefit in making Early involvement tends to benefit in making

realistic assessments of time, effort and synergy,

although this cost is thrown away if the deal is not

finalized.

(12)

Measuring Success

•

There is a tendency for the shares of

a target company to inflate. In terms

of short-term gain by the acquirer,

most mergers and acquisitions fail.

•

Long-term performance can depend

on a wide range of variables. Usually

the form of payment (cash, shares or

both) and the effectiveness of the

implementation are key determinants.

(13)

Scenarios for Failure

•

Inability to agree terms

•

Overestimation of the target value

•

Target too large relative to acquirer

•

Failure to realize identified potential synergies

•

External change

•

Inability to implement change

•

Shortcomings in implementation and

integration

•

Failure to achieve technological fit

•

Conflicting cultures

(14)

Merger Waves

• Five major waves since late 19_{Five major waves since late 19}thth century:_century:

 Railroad WaveRailroad Wave (1895 – 1905): completion of the (1895 – 1905): completion of the

transcontinental railway allowed companies to go

“national”

 Automobile WaveAutomobile Wave (1918 – 1930): Consumers are (1918 – 1930): Consumers are

vendors are better able to meet.

 Conglomeration WaveConglomeration Wave (1955- 1970): Legislative (1955- 1970): Legislative

impediments to horizontal and vertical growth

resulted in unrelated diversification.

 Mega-Merger WaveMega-Merger Wave (1980 – 1990): Deregulation and (1980 – 1990): Deregulation and

relaxation of merger-control legislation.

 Globalization WaveGlobalization Wave (1994 - ): Characterized by low (1994 - ): Characterized by low

interest rates, long supplies and capacity, mature

industry, growth of computers and communications

technology.

(15)

2. Strategic Focus

•

…

should be on the competencies that are

central to the achievement of the Company’s

strategic objectives.

 If the current and desired positions are known, it is If the current and desired positions are known, it is

generally possible to plot a course between these

positions, along which the Company must progress.

(Sometimes they drift from this course.)

 Competencies will change as the Company grows Competencies will change as the Company grows

and evolves, or as its competitors, customers and

markets change.

 Where there is a deficiency, the organization has Where there is a deficiency, the organization has

two choices: internal development of the necessary

characteristics or obtaining these externally.

(16)

Why merge or acquire?

• Companies merge with or acquire other _{Companies merge with or acquire other}

companies in order to improve their own

competitive advantage.

 Merger rationale may be: (1) economies of scale, (2) Merger rationale may be: (1) economies of scale, (2)

combining indirectly related assets, or (3) unrelated

diversification.

 Ideally, the acquired assets should complement those Ideally, the acquired assets should complement those

of the acquiring company.

• A merger or acquisition may be relevant to:_{A merger or acquisition may be relevant to:}

 Corporate strategy: the selection of the businesses in Corporate strategy: the selection of the businesses in

which the Company should be active.

 Business strategy: how to compete in the selected Business strategy: how to compete in the selected

area

(17)

Misconceptions

•

Mergers are standard practice.

 There is often a lack of experience, especially in There is often a lack of experience, especially in

implementation and integration. This is often true

even in companies who have merged, as they tend

to focus on individuals rather than formalizing the

knowledge acquired in the transaction.

•

Acquisitions are easy.

 It is often easier to acquire a company than to It is often easier to acquire a company than to

merge with it, since it avoids some of the

technological and cultural integration issues.

technological and cultural integration issues.  The effort can be resisted by regulators The effort can be resisted by regulators

(especially when the deal is large), shareholders,

competitors and the staff/ management of the

target.

(18)

Misconceptions, 2

• Targets tend to oppose._{Targets tend to oppose.}

 The very pursuit tends to drive up the target’s share The very pursuit tends to drive up the target’s share

price, making a sale attractive to shareholders.

 The deal may allow growth.The deal may allow growth.

 The deal might allow the target to fend off a hostile The deal might allow the target to fend off a hostile

takeover (in favor of a ‘white knight’).

• Targets, once acquired, are easily absorbed._{Targets, once acquired, are easily absorbed.}

 Merger can be opposed.Merger can be opposed.  Talent can take flight.Talent can take flight.

 Redundancies are not so easily eliminated.Redundancies are not so easily eliminated.  It may never happen.It may never happen.

• Mergers are more easily integrated than _{Mergers are more easily integrated than}

acquisitions.

(19)

Misconceptions, 3

•

It is easy to assess financial value.

 Some companies are, in essence, portfolios of Some companies are, in essence, portfolios of

intangible, risky assets and liabilities.

•

Divested companies will be bought by

other companies.

 If the operation was divested because it was a If the operation was divested because it was a

poor performer, its prospects may be different

that if the divestiture merely improved the

strategic focus for the parent (not a core

asset).

 The divested company could go it alone.The divested company could go it alone.  The company may be acquired with the The company may be acquired with the

intention of resale, and thus stay intact.

(20)

Strategic Assumptions

• If the target’s core activities are related to those _{If the target’s core activities are related to those}

of the acquirer, the strengthened core increases

likelihood of success. But,

 Potential synergies are frequently over-estimated._{Potential synergies are frequently over-estimated.}  Similarity may be superficial (are there real Similarity may be superficial (are there real

redundancies and portfolio effects?)

• If the core activities are _{If the core activities are}notnot related to those of related to those of the acquirer, the merger or acquisition

the acquirer, the merger or acquisition

distributes market risk. But,

 Shareholders can do this more effectively on their own.Shareholders can do this more effectively on their own.  This tends to benefit management more than This tends to benefit management more than

shareholders.

(21)

Strategic Assumptions, 2

•

A company using funds generated by

mature activities to acquire companies

operating under growth conditions

increases the prospect of long-term

revenues. But,

 Only if those companies generate sufficient Only if those companies generate sufficient return.

return.

 Otherwise, the best thing to do with the cash Otherwise, the best thing to do with the cash may be to dividend it to shareholders.

(22)

Financial Considerations

•

Acquisitions require cash or access

to financial capital.



Prudent strategists are always careful

about the critical financial ratios.



Capital or other barriers may make

acquisition infeasible, and merger the

only viable alternative.

(23)

Strategic Alliance

•

An alternative – the strategic alliance –

often amounts to a “trial marriage”.



Long-term relationship



Significant interdependency



Joint control across a range of areas



Continued contributions by the parents

•

However,



The participants retain their separate

identities



The resources shared may or may not

include core competencies.

(24)

Alliance: The Resource

View

•

The Company’s core competencies are

usually based on its unique resources:



Finance – unique structure may have cost

implications



Technology and other intellectual

property



People – unique skills



Production – capacity, access to supplies



Management – organization and systems

(25)

Alliance: The Risk View

•

The Organization



More cheaply and quickly implemented

than a merger.



Contract could contemplate dissolution at

the end of some period.

•

The Partner



Alliance resources might be appropriated.

•

The Outcome

(26)

Alliance: Strategic Fit

•

As with mergers, good strategic fit should

allow companies to use their respective

strengths and overcome weaknesses.

 These benefits do not just occur – they have to These benefits do not just occur – they have to be engineered.

be engineered.

•

Key fits are in:

 R&D – joint willingness to accept and R&D – joint willingness to accept and implement the findings of research

implement the findings of research

 Implementation – each taking a long-term viewImplementation – each taking a long-term view  Establishment – mature companies have a Establishment – mature companies have a

basic choice between defending traditional

markets or being the aggressor in new ones.

(27)

Unrelated Diversification

•

Focused companies concentrate on one

sector or industry. Diversified companies

have assets across different sectors and

industries (conglomeration).

•

Obvious targets are companies with

undervalued assets or in financial difficulty.

 Sometimes a capital injection is all that is Sometimes a capital injection is all that is

required to generate sustainable growth.

•

Conglomerates are difficult to manage, as

they often lack the diversity of skills or the

(28)

Divestiture and

De-merger

merger

•

When an acquisition does not fulfill

the purpose for which it was

acquired, it might be divested or

de-merged.

merged.



Sell it (intact)



Spin it off

(29)

The Ideal Merger?

• Six characteristics appear to drive a good _{Six characteristics appear to drive a good}

merger: merger:

 Thorough investigation of the target prior to Thorough investigation of the target prior to

commitment

 Core business activities of target should be _{Core business activities of target should be}

compatible with or even complement those of the

acquirer

 Friendly (rather than hostile)Friendly (rather than hostile)

 No large-scale increase in debtNo large-scale increase in debt

 Acquirer and target should be accustomed to changeAcquirer and target should be accustomed to change

 Both should have a commitment to research, _{Both should have a commitment to research,}

development and innovation

(30)

Greatest probability of

success

• Offer increased _{Offer increased}

shareholder value

• Increase shareholder _{Increase shareholder}

confidence

• Are implemented _{Are implemented}

quickly and effectively.

• Are strategically _{Are strategically}

focused

• Improve product _{Improve product}

quality

• Improve customer _{Improve customer}

service and reliability

• Improve employee _{Improve employee}

motivation and

commitment

• Improve _Improve

competitiveness in

industry or sector

• Improve _Improve

competitiveness in the

economy as a whole

• Take advantage of _{Take advantage of}

(31)

Regulators

•

Regulatory scrutiny is particularly likely

when the merging companies might affect

the price of goods and services in a market.

•

There is some effort being made to

coordinate these reviews, especially between

the EU and the US, there are still issues of:

 Scope – EU threshold is higherScope – EU threshold is higher

 Coordination – EU must consider member statesCoordination – EU must consider member states  Definition of the marketDefinition of the market

 Differing philosophies on concentration – EU is Differing philosophies on concentration – EU is

more focused on resulting concentration than on

pre-merger market shares

(32)

Strategic Focus

•

…

is the concentration of attention

around the core competencies of an

organization.



Companies can make acquisitions that

complement and strengthen that

competency.



The potential acquirer should consider

the degree of relatedness offered by the

potential target.

(33)

Strategic Focus, 2

•

Stage 1: Identify an achievable and

strategically-correct focus area (four C’s) –

akin to SWOT

 Conduct an analysis of the existing organizationConduct an analysis of the existing organization  Consider existing and likely future environmentConsider existing and likely future environment  Carry out a diagnostic evaluation of problem Carry out a diagnostic evaluation of problem

areas

 Clarify core competencies and purpose of the Clarify core competencies and purpose of the

organization

•

Stage 2: Strategic Planning

 Establishment of long-term objectives and the Establishment of long-term objectives and the

strategies required to achieve them

(34)

Strategic Focus, 3

•

Stage 3: Strategic Change

 The organization must embark on a strategic The organization must embark on a strategic

change campaign (SCC).

 This is accomplished with elements 2 and 3 of the This is accomplished with elements 2 and 3 of the

Strategic Focus Wheel: making strategies work

(connecting the strategic plans to the day-to-day

activities essential for implementation) and project

management.

 This should be regarded as a cascade function, This should be regarded as a cascade function,

i.e., broken down into smaller components so that:

• Specific control is available at each levelSpecific control is available at each level

• The operatives that execute the change, who are not The operatives that execute the change, who are not likely interested in the big picture, can understand the

likely interested in the big picture, can understand the

need for change and how it will be carried out.

(35)

A Project

•

…

has five characteristics:

 Specific start and finish timesSpecific start and finish times

 Concerned with operations not core to the Concerned with operations not core to the business

business

 Cost limits or objectivesCost limits or objectives

 Relatively short compared to the lifecycle of Relatively short compared to the lifecycle of the company

the company

 Are relatively complexAre relatively complex

•

There will be measures (milestones, time,

cost) for measuring progress.

•

Outsourcing or divestitures may also be

projects.

(36)

Aligning Focus with

Performance

•

The entire process from supply to delivery

is often called the value chain (closely

related to the supply chain).

 Mergers and acquisitions can rectify Mergers and acquisitions can rectify

deficiencies in the existing chain or produce

new elements required for a revised chain.

 In terms of performance measures mapped to In terms of performance measures mapped to strategic objectives, would the proposed

strategic objectives, would the proposed

merger or acquisition:

• Speed up or make achievement easier?_{Speed up or make achievement easier?}

• Cause improvements and by how much? _{Cause improvements and by how much?}

(37)

The Value Chain

•

Strategic planning is inherently concerned

with the

value chain

of the organization.

 The value chain itself has a structure and fit The value chain itself has a structure and fit with the organization, and

with the organization, and vice versavice versa..

•

A key to successful merger or acquisition

is the degree of

strategic fit

that can be

achieved.

 The degree of difference bears on the effort The degree of difference bears on the effort and cost to get achieve an adequate outcome.

and cost to get achieve an adequate outcome.

 Mergers tend to be more amicable, as the Mergers tend to be more amicable, as the

terms are negotiated and have the support of

shareholders (= one less obstacle).

(38)

Dynamic Value Chain

The Organization The Organization Procurem Procurem ent ent HR

HR _Technolo_Technolo

gy gy Infrastruct Infrastruct ure ure Inbound Inbound Logistics

Logistics OperationOperation

s s Outbound Outbound Logistics Logistics Marketin Marketin g and g and Sales Sales Service Service Suppliers

Suppliers CustomersCustomers

(39)

Customer / Supplier

Relationships

•

These began to change as producers were

able to use the internet to source from a wide

range of potential suppliers and were able to

plan supplies on a strategic basis.

 This allowed companies to outsource, reduce This allowed companies to outsource, reduce

supply costs and reduce the time required to bring

products to market.

 Companies were driven to a more collaborative Companies were driven to a more collaborative

approach with customers, integrating across

organizational boundaries with each other:

automatic stock replenishment or vendor-managed

inventory.

 These relationships assist production efficiency by These relationships assist production efficiency by

more accurately forecasting demand.

(40)

Balanced Scorecard

•

Kaplan and Norton focus on four aspects

of performance:



Financial perspectives: profitability, future

growth and the degree of risk involved



Customer perspectives: differentiation,

customer satisfaction



Internal business processes perspectives:

each process has strategic priorities



Learning and growth perspectives:

developing and maintaining a culture of

change and innovation

(41)

Characteristics Mapping

•

The acquirer or both merging entities

must evaluate the degree of fit in the

proposed conjunction.



This determines the degree of restructuring

required,



how likely it is to achieve this, and



the likely timescales and costs.

•

The key is whether the necessary degree

of strategic fit can be achieved within

time, cost and performance parameters

(42)

Characteristics Mapping,

2

• The method breaks down the acquirer and target _{The method breaks down the acquirer and target}

into a number of key functions, then considers a

number of fit drivers along the opposite axis.

Characteris Characteris tic tic Acquir Acquir er er Target

(43)

Change and Strategic

Drift

•

Internal and external changes may

impact upon the strategy

implementation process.



Objectives may not be correct in terms of

what the Company actually requires to

achieve their defined strategic outcomes.



Objectives could become obsolete.



Assessments of the current or desired

positions could be incorrect.



There may be divergences in

implementation.

(44)

Change and Strategic

Drift, 2

•

The longer the integration takes to

complete, the greater the likelihood

of an unexpected impact on the

integration process.



In reality, things start to change as soon

as the strategy or course has been

calculated.

(45)

Old Plan, New Plan

•

Most strategic planning uses a three-

Most strategic planning uses a

three-step process:

step process:



Identify the desired ends



Develop ways to achieve these ends



Assemble and commit the necessary means

•

Under conditions of turbulence (rapid

and unexpected change), it may be

more appropriate for the organization

to use a reverse logic approach (means,

(46)

Mid-course Corrections

 Strategic realignment (new strategy)Strategic realignment (new strategy)  Objective definitionObjective definition

 Corrective / tactical responseCorrective / tactical response  Corrective impetusCorrective impetus

• There is necessarily a time element in altering _{There is necessarily a time element in altering}

course toward new strategic objectives

 Resource consumptionResource consumption

• Throw-away costs_{Throw-away costs}

 Consumer attitudeConsumer attitude

…

may not be possible if there has been

some significant intervening event.

Otherwise:

(47)

Drift Monitoring

Internal

• Phased strategic review_{Phased strategic review}

• Analysis of Critical Success _{Analysis of Critical Success}

Factors (CSF)

• Analysis of Key Performance Analysis of Key Performance Indicators (KPI)

Indicators (KPI)

• Analysis of Critical Business _{Analysis of Critical Business}

Activities and Measures

(CBAM)

• Linking basic operational _{Linking basic operational}

and functional unit to

strategy

• Supporting issues (e.g., Supporting issues (e.g., systems alignment, systems alignment, incentives) incentives) External External

• Customer demandCustomer demand

• Competitor behavior_{Competitor behavior}

• Commodity prices Commodity prices (incl. interest and F/

(incl. interest and F/

X)

• Innovation and new _{Innovation and new}

technologies

• Statutory regulationStatutory regulation

• Key Environmental _{Key Environmental}

Indicators (KEI) –

broader economic

focus

(48)

Scenario Planning

•

…

is a method of considering strategic

objectives in the context of possible changes

in the internal environment:

 Best case scenarioBest case scenario  Worst case scenarioWorst case scenario

 Mid-case scenario (most likely)Mid-case scenario (most likely)

•

This requires that you identify the drivers

behind each condition and how changes in

each affect the overall condition.

 These may be weighted according to relative These may be weighted according to relative

importance.

(49)

3. Why Mergers Fail

•

The majority of mergers fail to meet their

original value creation objectives.

 Longer-term projected benefits often dissipate _{Longer-term projected benefits often dissipate}

because of poor implementation and especially

as a result of poor integration.

 Sometimes the underlying rationale is degraded _{Sometimes the underlying rationale is degraded}

during implementation, frequently as a result of

cultural integration issues.

•

A typical measurement is shareholder value.

 The cost of integration leads to steady or The cost of integration leads to steady or

reduced shareholder values in the short term.

 It is a long time before the financial benefits of It is a long time before the financial benefits of

the merger are fully apparent, by which time

other activities also influence the value (merger

effect cannot be isolated).

(50)

Merger Failure Drivers

•

Shareholder

rejection

•

Negotiation failure

•

Regulator block

•

Strategic failure

•

Cultural failure

•

Financial failure

•

Integrative failure

•

Information

technology failure

•

Leadership failure

•

Risk management

failure

•

Globalization issue

(51)

Shareholder Rejection

•

In a merger, the majority of shareholders

in both companies must favor the

arrangement.

•

In an acquisition, a majority of target

shareholders must tender their shares to

the acquirer.

 A sufficient minority – comprising a percentage A sufficient minority – comprising a percentage large enough to prevent the acquirer from

large enough to prevent the acquirer from

calling the remainder – might effectively block

the deal if the acquirer is uninterested in being

(merely) a majority shareholder.

(52)

Negotiation Failure

•

The two companies may be unable to

agree on merger terms and conditions

that are mutually acceptable.

•

During the course of negotiation, an

event – including market reactions to

the proposal – can significantly affect

the value for one or the other.

•

The target’s Board or shareholders may

be hostile to the bid, thus raising the

effective cost of acquisition.

(53)

Regulator Block

•

A regulatory intervention is believed

by some to act as a control – albeit

often a stupid and ineffective one –

to prevent a combined company

from exercising significant influence

over products or pricing.

(54)

Strategic Failure

•

Mergers often fail because they do not

demonstrate sufficient strategic alignment.

 Diversification is the enemy of management Diversification is the enemy of management

focus and control.

 Mergers have a much better chance of being Mergers have a much better chance of being successful if the companies produce related

successful if the companies produce related

products and if the acquired company skills

and other assets complement those of the

acquirer.

 The very fact of merger often dampens The very fact of merger often dampens

innovation, and may weaken the motivation

and commitment of key individuals in the

acquired company.

(55)

Strategic Failure, 2

•

Original strategic objectives may be:

1.

1. inaccurateinaccurate

2.

2. unachievableunachievable

3.

3. contradictorycontradictory

4.

4. obsolete or superseded by external events.obsolete or superseded by external events.

•

The objectives may be acceptable, but the

implementation planning process may be:

1.

1. incompleteincomplete

2.

2. wrongly structuredwrongly structured

3.

3. based on inaccurate or unreliable assumptionsbased on inaccurate or unreliable assumptions

4.

4. based on assumed resources that are not based on assumed resources that are not

forthcoming

5.

(56)

Strategic Failure, 3

•

Even if strategic objectives are acceptable

and the implementation plans workable

and accurate, problems arise because:

1.

1. priorities changepriorities change

2.

2. some areas cannot be implementedsome areas cannot be implemented

3.

3. resources are withdrawnresources are withdrawn

4.

4. imposed changes render sections of the imposed changes render sections of the implementation impracticable

implementation impracticable

5.

5. cost limits are reached before implementation cost limits are reached before implementation is achieved

is achieved

6.

(57)

Cultural Failure

• The cultural aspects of mergers and acquisitions _{The cultural aspects of mergers and acquisitions}

are very often underestimated when the

implementation process is being both planned and

executed.

• These might be characterized by:_{These might be characterized by:}

 High staff turnover_{High staff turnover}  Loss of key personnelLoss of key personnel

 Increasing employee conflict and stressIncreasing employee conflict and stress

 Decreasing employee motivation, energy and Decreasing employee motivation, energy and

commitment

• Effective communication and strong human _{Effective communication and strong human}

resources control both

resources control both _reduce_reduce the uncertainty for the uncertainty for employees. The difficulty is that HR is just as

employees. The difficulty is that HR is just as

vulnerable to job uncertainty and raiding as any

other function, at precisely the time when the need

for it is greatest.

(58)

Integrative Failure

•

A common problem is the erosion of

senior management interest as the

integration process takes place.

 Status declines once the deal is signed.Status declines once the deal is signed.

 Redundancies, disruption and reorganization Redundancies, disruption and reorganization

start to affect people directly. start to affect people directly.

•

Many are not planned in sufficient detail.

 Integration is often left to in-house, non-Integration is often left to in-house,

(59)

4. Valuation

•

This module is concerned with defining the

financial, rather than strategic, advantage of

merging.

•

Financial markets require managers to make

investment decisions that provide an

expected return at least equal to that

obtainable from comparable investments.

 A merger or acquisition is a complicated form of A merger or acquisition is a complicated form of

capital budgeting.

 The The nnet et aadvantage of dvantage of mmerging (NAM) is the net erging (NAM) is the net

additional value created or destroyed from the

combination.

(60)

Net Advantage of

Merging

•

NAM = V

_AB_AB

– (V

_B_B

+ P

_B_B

) – E – V

_A_A

, where

 VV_A_A and V and V_B_B are the values of firm A and firm B are the values of firm A and firm B

respectively

 PP_B_B is the premium obtained by the target’s is the premium obtained by the target’s

shareholders (a cost to the bidder)

 E is the expenses and costs of associated with the E is the expenses and costs of associated with the

acquisition

•

On average, sellers do considerably better

than buyers when it comes to getting value

from the transaction.

 The The premium for controlpremium for control is typically in the order of is typically in the order of

30% of the pre-announcement share price.

(61)

Determining Cost

•

The

cost

is the amount by which the cash

price exceeds the present value of the

target:

 Cost = Cash price – PV(B)Cost = Cash price – PV(B)

 The text describes the second term as “the The text describes the second term as “the

target firm’s present value as a stand-alone target firm’s present value as a stand-alone entity”. The market price is a poor guide to entity”. The market price is a poor guide to this value, as the former will incorporate a this value, as the former will incorporate a premium.

premium.

•

There is a positive

net present value

(62)

Acquiring with Company

Stock

•

The attribution of costs is more difficult when

the acquirer offers shares or a combination.

 A portion of the uplift is reflected in the shares of A portion of the uplift is reflected in the shares of

firm A used to acquire firm B.

 The per-share cost is equal to the value of the The per-share cost is equal to the value of the

combination divided by the (new) number of

outstanding shares.

 Likewise, the cost could be derived by subtracting Likewise, the cost could be derived by subtracting

the stand-alone price of firm B from the portion of

the combination then held by firm B shareholders:

Cost =

Cost = φφPV(AB) – PV(B).PV(AB) – PV(B). The greater the The greater the

proportion of the acquiring firm’s equity being

offered, the greater the cost.

(63)

Rights and Wrongs in

Valuation

•

The correct approach is to estimate the

change in value

of the firms after the

acquisition is made.

 This reduces the valuation task to identifying where This reduces the valuation task to identifying where

future cash flows will change, where costs can be

cut and revenues enhanced.

 It also avoids the difficulties of estimating the value It also avoids the difficulties of estimating the value

of the combined and comprising entities, or the

typical bias in valuing potential benefits.

•

Earnings per share (EPS) growth is sometimes

used as a justification for an acquisition.

 This can, however, mask a deterioration in the This can, however, mask a deterioration in the

quality of the earnings (risk and future prospects).

(64)

Valuation Methods

•

Three approaches:



Comparables: finding firms whose value is

known and using key criteria to produce a

price indication or a range. One may also

value comparable transactions.



Fundamental: estimating future cash

flows and then applying the discounted

cash flow method.



Real options: for contingent outcomes

(65)

Benefit and Valuation

Type

Description

Certai

nty

Valuation

Tactical Tactical synergy synergy

•Reduced operating _{Reduced operating}

expense

•Revenue _Revenue

enhancement from

existing products

High

High DCFDCF

Strategic

Opportunity

•DifferentiationDifferentiation

•SpecializationSpecialization

•Economies of _{Economies of}

scope and scale

Medium

Medium •Risk Adjusted Risk Adjusted Discount

Discount

•Real options_{Real options}

Transformati

on

Paradigm shift

(66)

Discounted Cash Flow

•

The basic model allows for inter-temporal

adjustment between outgoings (costs)

and income (benefits) by discounting

them at their opportunity cost.

•

Four key factors:

 Future cash flow profileFuture cash flow profile

 Cost of capital (should reflect the risk Cost of capital (should reflect the risk

inherent in the business) inherent in the business)

(67)

Computing Free Cash

Flow

Element

$

Gross Sales

A

Less: Cost of Sales

(B)

Operating Profit

C

Less: Other ‘cash’ expenditures

(D)

Cash from continuing operations

E

+/- changes in working capital

W

+/- changes in capital expenditure

X

Less: Taxation

(T)

Free cash flow

(68)

Purchase Price

Purchase of equity

+

Cost of debt assumed

+ Transaction costs

--

Excess cash in target

Net cost of acquisition

(69)

Exit Price

•

The value beyond the forecast period can

be calculated using a pricing model, using

a multiple or valuing a perpetuity.

 The text adds the debt to the multiple. Surely The text adds the debt to the multiple. Surely this value should be subtracted.

this value should be subtracted.

 The value of a no-growth perpetuity is the The value of a no-growth perpetuity is the free cash flow divided by the discount rate:

free cash flow divided by the discount rate:

V

V00 = FCF / r = FCF / r

 As most firms anticipate growth, this is As most firms anticipate growth, this is incorporated:

incorporated:

V

(70)

Cost of Capital

•

…

is not an arbitrary number, but a

hurdle rate

required to compensate

providers of capital for giving up

alternative investments (opportunity

cost).

•

Most firms use a combination of

equity and debt for financing. The

weighted-average cost of capital

(WACC) gives the discount rate for the

business.

(71)

Cost of Equity (k

e

)

•

Using the Capital Asset Pricing Model (CAPM)

k

kee = r = rff + + ββ(r(rMM – r – rff)) where where

r

rf f is the risk-free rate of