Castellanza,10th November, 2010

THE MERGERS AND ACQUISITION MARKET. AN OVERVIEW.

INTRODUCTION TO COMPANY’S VALUE AND VALUATION TECHNIQUES.DCF AND COMPARABLES

Corporate Finance

Lesson 10

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Internal Growth vs. External Growth

Internal growth investments plants,

equipments

investments technologies

investments human

resources

External growth acquisitions

mergers

alliances

joint ventures

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ACQUISITION: one company taking over controlling interests in

another company

MERGER: combination of two or more companies into one

PURCHASE: the amount paid over and above the acquired

company’s book value is carried on the books of the

purchaser

A B

CONSOLIDATION: a new company is formed to acquire the net

assets of the combining companies

A B

C

External Growth

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MERGER

horizontal: takes place between two firms in the same line of business

vertical: involves companies at different stages of production

conglomerate: involves companies in unrelated lines of business

External Growth (cont’d)

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External vs Internal Growth (benefits and costs)

some benefits

timing

control over expenses

control over results

some costs

difficult to maintain the equilibrium (and

performance) within the company

human resources

different cultures

an acquisition is never tailored

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External Growth: characteristics

High failure risk

Difficulties in evaluating a company

Difficulties in obtaining guarantees

Synergies

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Some Reasons to Merge

economies of scale

economies of vertical integration

surplus of funds

complementary resources

tax shields

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Some Reasons to Acquire

entrepreneur’s ambition

to increase market share

to enter in a new market, in a new industry

to obtain a royalty, know-how, trade mark

to eliminate a competitor

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Keys to Succeed

Only by gaining a clear understanding of what and where value can be obtained from a deal, can companies hope to avoid ‘bad’ deals and be in a position to work out how this value extraction will be achieved.

Hard keys synergy evaluation: in terms of revenue benefits,

indirect and overhead cost reductions, direct operational cost reductions

integration project planning due diligence

Soft keys resolving cultural issues selecting the management team communications

Something you won’t find in books

Whatever you’ll do in your life needs negotiations and you need to know how to negotiate

Although negotiation courses are getting more and more in the way, you have to keep in mind:

some common mistakes to avoid rational framework methods to simplify complex negotiations

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Something you won’t find in books

First of all you have to succed in getting a rational thinking in negotiation

Negotiating rationally means:

Making the best decisions maximize your interests Knowing how to reach the best agreement vs. just any

agreement

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Something you won’t find in books

Sometime pervasive decision-making biases blind CEOs’ strategy and prevent them from getting as much as they can

Examples: Irrationally escalating your commitment to an initial course of action,

even when it is no longer the most beneficial choice Assuming your gain must come at the expense of the other party

and missing opportunities for trade-offs Anchoring your judgments upon irrelevant information Being overly affected by the way information is presented to you Failing to consider you can learn by focusing on the other side

perspective

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Common Mistakes in Negotiation

Irrational escalation of commitment To eliminate irrational escalation you must understand the

psychological factors (perception and judgment) that feed it

Do not assume your interests directly conflict with those of the other party

The best negotiations end in a resolution that satisfies all parties

Anchoring and adjustment To proceed both sides must adjust their positions throught the

negotiation arriving at either agreement or impasse Initial positions may act as anchors and affect each side’s perception

of what outcomes are possible

Framing negotiations The way the options available in a negotiation are presented can

strongly affect a manager’s willingness to reach an agreement Weigh up “status quo” and expectations

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Common Mistakes in Negotiation

Availability of information Pay attention to all the facts and avoid to ignore certain Identify and use truly reliable, not just available, information Distinguish what’s emotionally familiar to you from what’s reliable

and relevant

Overconfidence and Negotiator Behaviour Overconfidence may lead managers to think that their judgments are

correct and wrongly estimate a neutral party’s opinion Overconfidence may inhibit a variety of possible and acceptable

settlements Consider the suggestions of qualified advisers is a way to temper

overconfidence

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Rational Framework for Negotiation

How should managers make decisions in a world where many people don’t always behave rationally?

Most critical components of a rational negotiation process are:

Evaluation of each party’s alternatives to a negotiated agreement, interest and priorities (i.e. potential consequences, reservation price, requirements)

Understand the integrative components of negotiation (i.e. positions, priorities, preferences, deficiency)

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Rational Framework for Negotiation

To succed in structuring a rational framework you should:

Assess what you will do if you don’t reach agreement with your current negotiation opponent

Assess what your current negotiation opponent will do if they don’t reach an agreement with you

Assess the true issues in the negotiation Assess how important each topic is to you Assess how important topic is to your opponent Assess the bargaining zone Assess where the trade-offs exist

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Rational Framework for Negotiation

In a negotiation maybe the most important thing is to identify and evaluate trade-offs

Strategies about: how to collect information how to cope with different perceptions among parties how to go beyond simple trade-offs

are very important to succeed in finding out the right balance

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Rational Framework for Negotiation

Some strategies for finding trade-offs are: Build trust and share information Ask lots of questions Give away some information Make multiple offers simultaneously Search for post-settlememnt settlements Use differences of expectations to create mutually beneficial

perceived trade-offs Use differences of risk preferences to create mutually beneficial

perceived trade-offs Use different time preferences to create mutually beneficial trade-

offs Consider adding issues to the negotiation to increase the potential

for making mutually beneficial trade-offs Consider whether there is some way to reduce costs to the other

party of allowing you to get what you want and vice versa

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Simplifyng Complex Negotiations

Experience vs expertise

Two main factors distinguish experience from expertise: The ability of an expert to adapt skills to get good outcomes The ability to transmit or transfer these skills

A primary way to improve performance in a negotiation is the developement of expertise by combining experience with the ability to think rationally

Thus, understanding the demands of a particular problem and thinking rationally improve your ability to analyze and restructure a proposed negotiation

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Simplifyng Complex Negotiations

Negotiating rationally requires to understand the impact of fairness and emotional consideration that profoundly affect bargaining

Multiparty negotiation: More complexity due to:

Richness of the interpersonal networks Multiple individual preferences More interests involved

Look more carefully for integrative opportunities, be aware of barriers and be sensitive to the impact of decision rules on the quality of group outcomes

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Simplifyng Complex Negotiations

Negotiating through third parties: Consider their goals, interests and likely behaviour in order to

develop effective strategies Active participant in the negotiation process Vested interests in particular outcomes Know managers or disputants, their incentives, constituency

demands and goals

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So…

Audit your own decision processes

Consider the decision processes of your opponent

Make your best assessment of reservation prices, interest and the comparative importance of issues

View the negotiation process as an opportunity to collect and update your information

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So…

Negotiation is not a science……

is an art!!!!!!!!!!!!!

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