Presentation on theme: "From the desk of Adeel Durvesh LECTURE 11 FINANCIAL REORGANIZATION MERGERS & ACQUISITIONS."— Presentation transcript:
From the desk of Adeel Durvesh LECTURE 11 FINANCIAL REORGANIZATION MERGERS & ACQUISITIONS
MERGERS & ACQUISITIONS Mergers and acquisitions occur when two or more organizations join together all or part of their operations. The difference between them relate mainly to: --The relative size of individual companies in the business combination --Ownership of the combined business --Management control of the combined business
MERGERS In its broad definition, a merger can refer to any takeover of one company by another, when the businesses of each company are brought together as one In narrow terms merger exists when: --Neither party is portrayed as the acquirer or the acquired --Both parties participate in establishing the management structure of the combined business
--Both companies are sufficiently similar in size that one does not dominate the other when combined --All or most of the consideration involves a share swap rather than a cash payment, etc. Example ? MERGERS
ACQUISITIONS An acquisition or takeover, occurs when one company acquires from another company either --A controlling interest in the company’s stocks, or --A business operation and its assets An acquisition is the straightforward purchase of a “target” company Example ?
EVOLUTION OF MERGERS AND ACQUISITIONS First Merger Movement (1893 to 1904) Horizontal mergers took place in steel, oil, telephone and tobacco Second Merger Movement (1920s) Vertical mergers associated with the development of the radio and the automobile. It enabled manufacturers to control distribution channels more effectively
Third Merger Movement (1960s) Most of the companies were aerospace or natural resources. Also food industries diversified drastically which moved away them from their core competencies Fourth Merger Movement (1980s) Any company that was not performing up to its potential could be taken over Fifth Merger Movement (1993 onwards) It has been characterized by strategic megamergers
STRATEGIES FOR GROWTH BY MERGERS & ACQUISITIONS A M&A strategy for growth can seek to develop products and markets in any of four ways: --By market penetration, including cross-border acquisitions --By horizontal diversification --By vertical integration --By conglomerate diversification
By Market Penetration, including cross-border acquisitions Market penetration means developing new and larger markets for a company’s existing products Pursued within markets that are becoming more international or global esp cross-border M&A Example Quebecor Printing, Canada’s largest printer, acquired printing businesses in France and the UK in the mid-1990s, as part of a pan-European expansion strategy
Horizontal Diversification Mergers that take place between two firms in the same line of business are known as horizontal mergers The company expects to use its existing resources including distribution channels, marketing skills or management skills etc., to improve the performance of acquired companies Example A tobacco company might take over a food producer and use common distribution channels such as the acquisition of Kraft and General Foods by Philip Morris, the tobacco company
Vertical Integration Vertical integration is the combination of a company’s business with the business of a supplier or a customer. There are two types of vertical integration i.e. backward integration and forward integration Example --A gas supply company might takeover or merge with its own supplier, a gas exploration and development company --A holiday tour operator might acquire a chain of travel agents
Conglomerate Diversification Conglomerates are the group of companies that operate in widely diverse industries Low investment risk for shareholders Example In 1980’s Kmart acquired Furr’s Cafetarias, Bishop’s Restaurant, Walden Book Company, Payless Drug Stores Northwest, Makro Wholesale Club, etc..
Develop shared vision and objectives Build business and personal relationships Due diligence Regulatory clearance Price and terms New appointments Redundancy announcements Restructuring Divestment Fine tuning Further restructuring Job transfers Cultural integration COURTSHIPEVALUATION/ NEGOTIATION IMMEDIATE TRANSITION TRANSITION Pre-mergerPost-merger Identify new leadership Design integration and process Next management tier and key employees Detailed integration plan Business as usual STAGES OF MERGER AVERAGE TIMELINE 4 months 4 months – 1 year 3 – 6 months 6 months – 2 years
MOTIVES OF MERGERS AND ACQUISITIONS Michael Porter said: “There is a tremendous allure to mergers and acquisitions. It’s the big play, the dramatic gesture. With the stroke of a pen, you can add billions to size, get a front page story and create excitement in the market” Economies of Scale When two or more companies combine, the larger volume of operations of the merged entity results in various economies of scale such as better utilization of combined production capacities, distribution channels, R&D facilities, etc.
MOTIVES OF MERGERS AND ACQUISITIONS Synergy If company A merges with company B the value of merged entity called AB is expected to be greater than sum of the independent values of A and B V (AB) > V (A) + V (B) Where: V (AB) = Value of the merged entity V (A) = Independent value of Company A V (B) = Independent value of Company B --Sales synergy: Common distribution channels, sales administration, advertising sales promotion and warehousing --Operating synergy: Better utilization of facilities and personnel, and bulk- order purchasing to reduce material cost. --Investment synergy: Joint use of plant and equipment, joint search and development efforts, and having common raw materials inventories --Management synergy: Top management of one of the companies uses their relevant experience and skills to resolve the problems of the other company
MOTIVES OF MERGERS AND ACQUISITIONS Growth and Diversification Tax Benefit Globalization Avoid unhealthy competition Higher Debt Capacity
VALUATION AND PRICING Companies typically use three methods to value a company: MARKET MULTIPLE ANALYSIS --Market value of stocks of comparable, publicly traded companies in an industry as a multiple of such companies' earnings and revenues. Those values are then adjusted to account for the size, liquidity and performance differences between target company and those companies. Difficulty with this analysis is in selecting "comparable" companies and accurately adjusting target company’s value to reflect the differences between target company and such companies.
VALUATION AND PRICING COMPARABLE TRANSACTIONS --Compare the amount paid in acquisitions for other companies in target company’s industry DISCOUNTED CASH FLOWS --Determining target company's value by assigning a value in today's rupee to the cash flow to be generated by acquirer’s future operations.i.e. Present values of future cash flows
MAJOR CHALLENGES TO M&A SOME STATISTICS REGARDING M&As A Merger Management Consulting global survey reveals that only 37% of deals made in the mid 1980s worth $500 million or more outperformed their industry average in shareholder values in the following three years. In 1990s this figure rose to 52% Cambridge University’s Judge examined 77 large takeovers by British companies between 1990 and 1996. In the two years after the deal, shares in the acquiring companies under-performed by an average of 18%
MAJOR CHALLENGES TO M&A Consultancy’s KPMG 2001 global survey reports that 70% of the combinations studied failed to add value Large deals are more likely to fail. The Mercer Management reveals that only one-quarter of deals valued more than 30% or more of the acquirer’s annual revenue succeeded in outperforming their industry average Following are the challenges of M&As: Poor strategy --Strategic approach of M&As should be clear at first to have a positive result of the synergized entities --When expected synergies do not occur, and the acquired company has a disappointing performance, the cost of the acquisition can be excessive which can damage the financial performance of the group
MAJOR CHALLENGES TO M&A Due Diligence --The purpose of a due diligence exercise is to confirm or revise the assumptions on which the takeover has been based CHECKLIST OF DUE DILIGENCE Profit forecasts and cash forecasts The assumptions on which figures in the forecast are based Prospects of synergy, economies from pooling resources after the takeover Actual existence of major customer sales contracts The existence and the condition of assets, their value and their legal ownership
MAJOR CHALLENGES TO M&A The target company’s liabilities and potential liabilities Confirmation that the target company is a going concern, and is operating normally Confirmation that management and information systems are in place and continue to function properly Investigation of any recent changes in the target company’s financial structure or cash holdings Investigation into the current state of the target company’s research and development operations Environmental audits
MAJOR CHALLENGES TO M&A Implementation --The firm must have implemented all aspects of efficient operations before it can effectively combine organizations --Companies should pursue only mergers that further their corporate strategy: strengthening weaknesses, filling gaps, developing new growth opportunities, and extending capabilities --Poor communication distresses employees so the company should maintain ongoing communication that clearly addresses the concerns of employees
Poor Performance --Lack of concentration on the core business --Watson Wyatt Study confirms the dip in the performance which revealed a drop of 50% in the surveyed companies’ productivity in the first five months of a merger or acquisition MAJOR CHALLENGES TO M&A
Resistance to change --Merger studies reveal that employees need emotional support and practical skills in managing change -- People can resist change by clinging to old behavior and work practices --. At worst, employee resistance leads to people leaving the new business MAJOR CHALLENGES TO M&A
Cultural Incompatibility --When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored --A study of 319 European cross-border deals suggested a success rate of only 57% MAJOR CHALLENGES TO M&A
DEMERGERS & DISINVESTMENTS A disinvestment involves a company selling off some of its businesses A demerger, by contrast, is the splitting of one company into two separate independent companies Company A Company B Demerger Company A retains its stock market listing New company stock market listing obtained for the shares. Shares issued wholly or mainly to shareholders of Company A
DEMERGERS & DISINVESTMENTS A modern corporations reveals that 33% to 50% of acquisitions are later divested A successful business should grow with a set direction To concentrate on core business activities selling divisions has been a common feature of corporate strategy in recent years Example Unilever has planned to limit their brands to 400 rather than 1600 due to the change of it’s mission statement