mergers & acquisitions - amazon simple storage service · 2/24/1995 · –economies of...

Mergers &

Acquisitions

Introduction

Introductory topics

• What is M&A?

• Theories about M&A

• The six merger waves

• Incidence of M&A

• Who wins, who loses

• The importance of Culture

• The process

Mergers & Acquisitions

What is M&A?


What is M&A? - terminology

• The term M&A is widely used to mean much more than combination of two firms or the takeover of one by another.

• It also encompasses many types of restructuring.

• In practice the term is loosely used covering a very wide range of transactions

• We will largely restrict ourselves to a more narrow view based on:

– ‘Merger’ – consolidation or combination of one firm with another

– ‘Acquisition’ – purchase of one entity’s equity by another


Terminology

• Other transactions that might be encompassed within the phrase

‘Mergers & Acquisitions’

– Leveraged buyout (LBO)

– Management buyout (MBO)

– Spin-off

– Carve-out

– Initial public offering (IPO)

– Private Equity deals


Terminology

• The following transactions would not normally be part of ‘Mergers &

Acquisitions’

– Entering into joint ventures

– Selling off a minority interest in a business

– Making major share placements

– Internal restructurings to relieve financial distress

– Major asset restructurings

– Restructuring of debt


Types of M&A

• Types of merger & acquisition

– Horizontal

– Vertical

– Conglomerate • Investment companies

• Financial conglomerates

• Managerial conglomerates

• Concentric (diversified) companies


Types of M&A (an alternate)

• Another way of classifying M&A transactions

Business Corporate Conglomerate

strategy strategy or Financial

Same Combining Opportunistic

business businesses or Unrelated


Theories about M&A


The arguments For and Against

• FOR :

– A free market for corporate control promotes efficiency and creates wealth.

• Specific gains: – Greater efficiency of resource allocation

– Improved pricing

• AGAINST :

– M&A reduces competition and is therefore bad for consumers

– Takeovers benefit managers, not investors. • Reasons:

– Market myopia

– Management hubris

• EVIDENCE :

– M&A has been a significant economic phenomenon for over a century

– Overall shareholders gain • Target shareholder’s win

• Bidder’s shareholders don’t lose


The growth imperative

• Growth (not just in size but in profitability) has been, and remains, a major objective of business globally

• The avenues of growth available to the firm are organic (internal) or by acquisition (external)

• M&A is the avenue for external growth

• Its advantages are often seen as:

– Faster

– May be cheaper

– May avoid start-up mistakes in new activities

• Its disadvantages may include:

– May be more expensive

– May not get what you expect

– May be divisive


Motivations for merger or acquisition

• Taking advantage of economies of scale

• Improving management of target or acquirer

• Combining complementary resources

• Capturing tax benefits

• Providing low cost finance to a financially constrained target

• Creating value through restructuring and break-ups

• Penetrating new geographies

• Increasing product market rents


Economic change forces driving M&A (Weston, Mitchell & Mulherin view)

• Technological change

• Efficiency of operations

– Economies of scale

– Economies of scope

– Combining complementary activities

• Globalisation and freer trade

• Changes in industry organization

• New industries

• Deregulation and new regulation

• Favourable economic and financial conditions

• Negative trends in some economies and industries

• Widening inequalities in wealth and income

• Relatively high equity values in the 1990s


Reasons for acquisitions

• ‘Valid’ reasons

– Economies of scale

– Economies of vertical integration

– Economies of horizontal integration

– Eliminating inefficiences

– Unused tax shields

– Use of surplus funds

– Providing complementary resources

• ‘Doubtful’ reasons

– Diversification (removes investors choice)

– Bootstrapping (raising EPS)

– Lower financing costs (lower interest rate offset by debt cross guarantee)


The six merger waves


The 1st merger wave (1895-1904)

• Characterised by horizontal mergers

• Began at the end of the mid 1890s depression

• A period of economic buoyancy

• Often referred to as the period of “merger for monopoly”

• Largely heavy manufacturing industry

• Ended with recession and stock market crash in 1903,1904

• Majority of mergers failed

• Gave rise to major anti-trust legislation in the US


The 1st merger wave

• The essential elements

– Growth possibilities

• Internal expansion

• Acquisition

– Hostile

» Public

» Private


The 2nd merger wave (1916–1929)

• Characterised as vertical mergers

• Debate on its period –1915-1929 or 1925-1929

• Post world war economic boom, recession in 1923 and then

boom until 1929 stock market crash. The 1925-1929 period

much greater activity level

• A period of great technological change (rail, road transport,

radio)

• Sometimes referred to as the period of “merger for oligopoly”

• Emergence of large public utility companies

• Investment banks active in financing deals

• Led to greater anti-trust regulation – the Clayton Act

• The great depression following the stock market crashed ended

the wave.


The 3rd merger wave (1963-1970)

• Long hiatus during WWII due to the war effort followed by post war re-organisation of the economy

• Known as the “conglomerate period”

• Diversification into different industries was ‘all the rage’

• Largely equity financed (rather than debt through investment banks)

• Characterised by high profile ‘visionary’ CEOs

• Booming economy

• Tough anti-trust enforcement on horizontal mergers

• Financial shenanigans – the PE ‘game’ - bootstrapping

• Reasons for ending

– Market saw through the shenanigans

– Conglomerates performed poorly

– New tougher legislation - Williams Act


The 3rd merger wave




• Acquisition

– Hostile

» Public

» Private


The 4th merger wave (1981-89)

• The period of the megamerger

• Much bigger and more prominent targets than before

• Tended to be bigger individual deals

• More hostile takeovers (the rise of the corporate raider)

• Return to use of more debt – junk bonds

• More transactions involving ‘going private’

• Very broad based across most industries

• M&A took off in Europe due to the coming of the Common Market (EU)

• Ended with the collapse of the junk bond market

• Coincided with Malcolm Milken’s indictment, Drexel Bankruptcy, the Gulf War


The 5th merger wave (1992-2000)

• Often referred to as the era of strategic restructuring

• Many of the top 10 deals of all time took place in this period

• The era of the mega-deal

• Huge global groups created based on a belief that size matters [Chrysler & Daimler Benz] [Exxon & Mobil] [Boeing & McDonnell Douglas] [Vodafone & Mannesmann]

• Deal value increased more than 10 fold in 10 years to top $3 trillion in 2000

• Mostly stock (share) deals

• Ended with the bursting of the millennium bubble, the tech wreck, and the corporate scandals (Enron et al)





• Acquisition – Hostile

» Public

» Private

The 5th merger wave


The 6th merger wave (2003- 2008)

• Global value dropped to just over a trillion by 2002 but started to

pick up again in 2003

• Increasing globalisation still a major factor

• Governments in many countries (e.g. France, Italy, Russia)

looking for ‘national champions’

• Driven by availability of low interest financing

• Also by the rise of Private Equity leading to large increase in

management led LBOs

6th merger wave



The six waves




• Acquisition

– Hostile

» Public

» Private

The 7th merger wave..……??


The incidence of M&A


History of M&A activity

• M&A has a history as an important part of economic activity

stretching back over 100 years

• The US numbers dominate the early years (because this was

where it was happening; much less common elsewhere until the

last 20 to 30 years)

• From these stats we can clearly see two things:

– M&A appears to have been growing exponentially

– M&A has appeared in ‘waves’ over the long term

• Statistics are generally presented using two measures:

– Number of deals (shows breadth)

– Value of deals (shows depth)


The six waves




• Acquisition

– Hostile

» Public

» Private


The history of US M&A activity




• Acquisition

– Hostile

» Public

» Private


Value of US deals




• Acquisition

– Hostile

» Public

» Private


Value of US deals relative to GNP




• Acquisition

– Hostile

» Public

» Private


Europe’s rise




• Acquisition

– Hostile

» Public

» Private

Global activity since 1985

North America 1985-2016

Europe 1995-2016

South America 1995-2016

Southeast Asia 1995-2016

Malaysia 1995 - 2015

Australia 1991-2015

China 1993-2016

Middle East & North Africa 1991 - 2016

Calendar 2014 deals by region

Source: Dealogic Global M&A Review/ Full Year 2014

Calendar 2014 deal value by industry

Source: Dealogic Global M&A Review/ Full Year 2014

The biggest deals of all-time

2001

2000

2014

2014

2008

2000

2007

1999

2005

2002

2004

2000

2000

Who wins and who loses? – post-merger performance

The conventional wisdom

The conventional wisdom about the success of M&A tends to come in two forms:

– The ‘ journalistic’ response to the large body of academic research – “only about 20% of mergers succeed’’

– The ‘average overview’ - that “target shareholders win and acquiring shareholders don’t lose”

Are these views justified?

The answer is probably ‘yes and no’ or ‘it depends’

There are two elements to the problem: – The assertions are a generalized overview from all mergers studied making

no allowance for the particular situation in an individual merger i.e. ‘all mergers are the same’

– What is meant by ‘success’?

Does M&A add or destroy value?

Despite slow down in M&A activity, investors’ reaction to deal announcements on average

continues to be very positive

Good

indicator

?

But beware generalisations …….. value revisited

Business Unit #3

There are only two sources of value in putting businesses together

in the same corporate portfolio

Corporate

Business Unit #1

SYNERGIES AND OPERATING

EFFICIENCIES

• Increased Revenue

• Lower Operating costs

• Reduced Capital intensity

Business Unit #2 Business Unit #4 Business Unit #5

PARENTING ADVANTAGE(S)

• Corporate centre skills / resources

• Taxation / valuation differences

… when done well, significant shareholder value can be created

through an acquisition program

0

2

4

6

8

10

12

14

Jun-

92

Jun-

93

Jun-

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Jun-

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Jun-

96

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

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Jun-

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Jun-

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Jun-

06

Index

24 Feb 1995

$US51m partnership to build

Thailand’s first ammonium nitrate

plant

Oct 1993

Acquisition of Dalgety

Farmers pastoral

business for $78m

1992

Partial take-

over of

Bunnings Ltd

(45% equity)

Wesfarmers

Wesfarmers Total Shareholder Returns

(FY1993 – 2007) CAGR %

(FY1993 -

07)

Sept 1994

Completed take-over of

Bunnings Ltd;

Interest now 99.29%

Feb 1998

Acquisition of Key

Transport Services

Dec 2000

Acquired 50% in the

Australian Railroad Group

May 2000

Acquisition of

Curragh coal

mine

Feb 2001

Acquisition of IAMA

Limited

October 2003

Acquisition of Edward

Lumley’s Australian

and New Zealand

insurance group

19

August 2003

Sale of Landmark

farm services to

AWB

End 2001

Acquisition of Atkins

Carlyle and Protector

Safety Operations

June 2001

Acquisition of

Howard

Smith Ltd

February 2006

Divested 50% of

Australian Railroad

Group

ASX 100 9

July 2004

Sale of Sotico

jarrah assets to

Gunns Limited

Note: As at April 2007

Source : Datastream

Dec 2006

Acquired Crombie

Lockwood

Apr 2007

Launches $20b

bid for Coles

group

However, creating value in transactions can be difficult

for buyers

0

20

40

60

80

100

Acquisition value creation status for

the acquirer (2002-03 deals in 2005)*

Percent

Note: *KPMG survey talked to 101 companies in August & September 2005 who had conducted deals worth more than US$100M between 2002

and 2003. Does not include private equity deals

Source : Australian Financial Review, KPMG, Bradley, Desai and Kim, Journal of Financial Economics, 21.1 (1988)

Enhanced

(31%)

Neutral

43%

Reduced

26%

“… 93 per cent of companies believed their deal would enhance shareholder value when they initiated it,

but only 31 per cent of deals actually did so …” KPMG, “The Morning After”, 2006

On average, the market expects a typical M&A deal to create

incremental value of 4%...

1. Combined change in market capitalisation of acquirer and target (adjusted for market movement) from 2 days before

announcement to 2 days after; sample of almost 1,000 large global M&A deals between listed companies

Source: Dobbs et.al. (2007), “Are companies getting better at M&A?”, McKinsey Quarterly; Dealogic; Datastream

Average value added by acquisitions

-15.00%

-5.00%

5.00%

15.00%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

On average, most of the value created by an M&A deal is captured

by the target’s shareholders though the deal premium (long-term

average 25+%)

1. Offer price versus target’s share price one week before announcement

Source: Dobbs et.al. (2007), “Are companies getting better at M&A?”, McKinsey Quarterly; Dealogic; Datastream

Average deal premium paid to targets

0%

10%

20%

30%

40%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Companies can minimise the risk of transactions “going wrong”

by adhering to some fundamental principles

Wrong reasons

- Lack of valid rationale

- Emotion, not logic

Wrong information

- Poor understanding of underlying industry economics

- Poor knowledge of candidate’s business

Wrong price

- Failure to perform valuation properly

- Auction atmosphere / deal momentum

Wrong implementation

- No post-acquisition plan

- Failure to integrate rapidly

- Destruction of value when key employees leave

- Failure to realise synergies

Objectivity

Analytical rigour and integrity

Strategic rationale

Robust valuation

Fact-based deal

negotiation

Integration

planning&

implementation

Reasons transactions fail Fundamental principles

Is there an industry advantage?

Cash or Equity?

Results overall

• Conclusions:

M&A does pay on average (net economic gain)

Clearly pays for target shareholders

Most studies with both sets of shareholders combined show

value is created overall

Two thirds of studies show value gained or at least preserved

from acquirer shareholders

In totality would seem that “the average, benchmark adjusted

return to corporate investment is close to zero, as we would

expect in any form of corporate investment in competitive

markets.”

The role of culture in M&A


Culture – the forgotten key to M&A success

• “Culture is the pattern of norms, values, beliefs, and attitudes that

influence individual and group behaviour within the organization”

Source: Afolabi Imoukhuede, MCS Consulting Limited

• In other words ‘The way we do things’.

• Each organisation has its own culture.

• It is difficult to integrate different corporate cultures


The cultural map

High Networked Communal

Sociability

Low Fragmented Mercenary

Low High

Solidarity


Organisational cultures

• C


Acculturation – a target’s view

How much do members of the acquired firm

value preservation of their own culture?

VERY MUCH NOT AT ALL

VERY Integration Assimilation

Perception of ATTRACTIVE

attractiveness

of the acquirer NOT AT ALL

ATTRACTIVE Separation Deculturation


Elements of a CDD model

The twelve domains:

* Intended direction and results * Supervisory practices

* Key measures * Work practices

* Key business drivers * Technology utilisation

* Leadership/management practices * Physical environment

* Organisational practices * Perceptions & expectations

* Infrastructure * Cultural indicators & artefacts


The culture plan - Accenture’s five steps

• Pre-acquisition screening.

• Comprehensive, post-announcement cultural assessment.

• Identification of conflicts, risks, opportunities and costs.

• Design and implementation of post-merger integration

action plan.

• Post-merger monitoring and validation of findings.


The M & A Process


Stages of the M&A process




• Acquisition

– Hostile

» Public

» Private


A Cross-Enterprise view




• Acquisition

– Hostile

» Public

» Private


Process considerations




• Acquisition

– Hostile

» Public

» Private


Elements of the process

• The merger or acquisition decision

• Strategy

• Search for targets

• Regulatory considerations

• Deal structuring

• Valuation

• Identifying synergies

• Tactics and defences

• Due diligence

• Small business acquisitions

• Financing

• Post merger integration

• Divestments

These are the topics we will study.

Right reasons Right price Right information Right

implementation

Strategy Valuation Due diligence Integration

The keys to success - the four fundamentals

mergers & acquisitions - amazon simple storage service · 2/24/1995 · –economies of...

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