Download - M&a Lessons- Sanjay Bakshi
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16 lessons i learnt
about M&A
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Lesson # 1:
Most acquisitions will fail to
beat aaa bond yield
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Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm ...
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“The sad fact is that most major
acquisitions display an egregious
imbalance: They are a bonanza
for the shareholders of theacquiree
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“they increase the income and
status of the acquirer's
management; and they are a
honey pot for the investmentbankers and other professionals
on both sides
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“But, alas, they usually reduce the
wealth of the acquirer's
shareholders, often to a
substantial extent. That happensbecause the acquirer typically gives
up more intrinsic value than it
receives.”
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For this amount today, RBS
could buy:
Citibank $22.5bn,
Morgan Stanley $10.5bn,
Goldman Sachs $21.0bn,Merrill Lynch $12.3bn,
Deutsche Bank $13.0bn and
Barclays $12.7bn,
And still have $8bnchange !
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Lesson # 2:
Don’t forget diseconomies of
scale
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Lesson # 3:
be wary of people with “grand
visions”
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No corporate planningdepartment actively
looking for acquisitions
reliance on serendipity
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“We have no view of the future that dictates what business or industries wewill enter. Indeed, we think it's usually
poison for a corporate giant'sshareholders if it embarks upon new ventures pursuant to some grand vision.
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“We prefer instead to focus on the economic characteristics of businesses that we wish to ownand the personal characteristics of managers withwhom we wish to associate - and then hope we
get lucky in finding the two in combination.”
SERENDIPITY
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“Even so, we do have a few advantages, perhapsthe greatest being that we don't have a strategic
plan. Thus we feel no need to proceed in anordained direction (a course leading almost
invariably to silly purchase prices) but can instead simply decide what makes sense for our owners.
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“In doing that, we always mentally compare any move we are contemplating with dozens of other opportunities open to us, including the purchase
of small pieces of the best businesses in theworld via the stock market.
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“Our practice of making this comparison of acquisitions against passive investments is adiscipline that managers focused simply on
expansion seldom use.”
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Lesson # 4:
low price can offset
advantages of control
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“The Competitive nature ofM&A activity almost
guarantees the payment of afull - frequently more thanfull - price when 100% of a
company changes hands.
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“But, less than 100% of thesame company can frequentlytrade in the stock market at
deep discounts to prices they
would command in negotiatedtransactions involving theentire business.
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Why?
In the auction-like natureof the stock market, prices
are set by individuals andgroups of individuals whoare frequently irrational,
resulting in irrational
prices
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“Our favorite acquisition is thenegotiated transaction that
allows us to purchase 100% of
such a business at a fair price.
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“But we are almost as happywhen the stock market offersus the chance to buy a modestpercentage of an outstanding
business at a pro-rata pricewell below what it would taketo buy 100%.
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“Advantage of buying non-controlling blocks atbargain prices, often
counterbalances thedisadvantage, if any, fromthe lack of control.”
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Lesson # 5:
great businesses rarely make
great acquisitions
there are exceptions
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More often than not,buying poor performers
with plenty of room for
improvement is a betterstrategy
Restructuring Potential
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Lesson # 6:
don’t get over-impressed by
high replacement cost
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http://en.wikipedia.org/wiki/Tobin's_q
Tobin’s Q
Is it worth replacing?
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Lesson # 7:
be extremely wary of open bid
auctions
Envy + DSRS + Authority + Dopamine + Incentive-caused
bias + Overconfidence + Social Proof + Low Contrast =
Winners’ Curse
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Buffett Does not engage inbidding contests.
“The smarter side to take in a biddingwar is often the losing side.”
Knows when to walk away from a deal
Usage of time fuse on bids
breakup fee
co-relation with stock marketshutdown
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Lesson # 8:
acquiring to diversify is
generally a bad idea.
there are exceptions e.g. when
you get deals that others
won’t
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Buffett on
Scott-Fetzer
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Berkshire purchased Scott Fetzer at thebeginning of 1986. At the time, the company
was a collection of 22 businesses
Acquisition cost: $315.2 million for Scott
Fetzer, against book value of $172.6 million.
“The $142.6 million premium we handed over
indicated our belief that the company's
intrinsic value was close to double its book
value.”
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What’s Causing This???
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The Math Behind Swap Ratios
3 key factors:
A.Prospects
B.Mix of Operating and Non operating assets
C.capital structure
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Lesson # 10:
Don’t ask a barber if you needa haircut
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Lesson # 11:
Price is what you pay (now)
value is what you get (later)
Or
Beware of “Synergy Trap”
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Net valueadded =
Total Value
Received -Total Value
Paid
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ValueReceived =
Stand alone
value +synergy
value
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Value paid =target’s pre-
acquisition
market value+ control
premium
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nva= synergy
value -
controlpremium
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“Synergy: a term widelyused in business to
explain an acquisition
that otherwise makes nosense.”
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Ways to Create value
for buyers
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1. Find cheap targets
and buy them for a
song
unrealistic
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2. ensure synergy exceedscontrol premium
control premium is a fact
synergy is an estimate
enter social psychology
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3. buy relative value
Pay for anacquisition using a
relatively over-
priced currency
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Using/Misusing Stock
as a Currency
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4. Expropriate minoritystockholders
Overpay for acquiring a
partial stake and thenexpropriate value from
minority shareholders and
creditors of the target
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Lesson # 12:
be wary of “serial acquirers”
who use stock as currency
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The Story of Able, Baker, and Charlie
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Lesson # 13:
don’t forget dilution
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“In a trade, what you are giving
is just as important as what you
are getting. This remains true
even when the final tally on
what is being given is delayed.
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“Subsequent sales of common stock or
convertible issues, either to complete
the financing for a deal or to restore
balance sheet strength, must be fully
counted in evaluating the fundamental
mathematics of the original acquisition.
(If corporate pregnancy is going to be
the consequence of corporate mating,
the time to face that fact is before the
moment of ecstasy.)”
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Lesson # 14:
there is no such person as an
“independent valuer”
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Lesson # 15:
remember cash flow
shenanigans using m&a
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Cash Flow Shenanigan # 3
Inflating Operating Cash Flow Using
Acquisitions or Disposals
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Cash Flow Shenanigan # 3
Inflating Operating Cash Flow Using
Acquisitions or Disposals
Purchase price is recorded as investing outflow,
while acquired cash flows are recorded as
operating cash inflow
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¥85 million split into ¥45 sale proceeds and ¥40
million as “advance on future revenue”
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Lesson # 16:
accounting goodwill is not the
same as economic goodwill
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cases in M&A
Case on Gesco
Carol Loomis on AOL-Time Warner Merger
Carol Loomis on Carly Fiorina, Sandy Weill,
and others
Warren Buffett on M&A
Ajay Piramal on M&A
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Case on Ajay Piramal
Piramal Enterprises, atextile company,
founded in 1933.
1984: acquired Gujarat
Glass.
1988: Acquired
Nicholas Laboratories
Name changed to
Nicholas Piramal India
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Case on Ajay Piramal
1991: Merged GujaratGlass into Nicholas
Piramal
1993: Acquired Roche
Products
1995: Acquired Sumitra
Pharmaceutical
1997: Acquired
Boehringer Mannhiem
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Case on Ajay Piramal
1998: Merger ofNicholas Piramal,
Roche Products &
Boehringer Mannhiem
2002: Acquired Rhone-poulenc
2004: Spun off Gujarat
Glass
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Rs 5,400 invested in 1998
has become approximately
Rs 11 lacs
Return of 28% p.a.
Sensex Return: 17%
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Ajay Piramal on
M&A
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Building Global Critical Care business
J 2005 PHL
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January 2005, PHL
acquired the
Inhalation
Anaesthetics business
of Rhodia for Rs 58
cr.
revenues of Rs 71 cr
in FY06.
So the acquisitionprice was 0.8 times
sales.
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“With this
acquisition, we have
become a dominant
global player in
Halothane and have
gained a significant
entry in the
Isoflurane market,
besides gainingaccess to the
business marketing
and distribution
network in over 90
countries.”- Ajay
Piramal, Fy06letter to
shareholders
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“We
successfullyshifted
production of
Inhalation
Anesthetic
products from
Rhodia UK
facilities to our
plant at Digwal,
Hyderabad.”- FY
07 letter
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March 2009:
Acquired Minrad
and Rx Elite
Minrad was
acquired for $40
mil and RxElite
for $7 mil.
Stockholders of
Minrad were
bought out at
just $0.12 per
share.
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March 2009:
Acquired Minrad
and Rx Elite
Minrad was
acquired for $40
mil and RxElite
for $7 mil.
Stockholders of
Minrad were
bought out at
just $0.12 per
share.
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2009: Acquired
Heamaccel Brandfor $ 12 mil
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These three
acquisitions cost
a total of $59
mil
(approximately
Rs 271 cr.)
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April 2010:
Acquired Bharat
Serum’s
Anesthetic
Product
Business