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M&A versus autonomous growth strategies

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Presentation on theme: "M&A versus autonomous growth strategies"— Presentation transcript:

1 M&A versus autonomous growth strategies

2 Harry de Roo Executive Member of the Managing Board and Chief Financial Risk Officer Rabobank International

3 Rob Wismans Head Control Subsidiaries & Wholesale Rabobank Netherlands

4 M&A versus Autonomous Growth
Harry de Roo Rob Wismans November 2007

5 Agenda Rabobank at a glance M&A versus autonomous growth
Role of finance

6 Rabobank at a glance 1898 1960 1978 2005 Balance Sheet: € 2 bln
AllFinanz banking in the Netherlands and first steps abroad Retail banking in NL Co-operative farmer banks 1898 1960 1978 2005 Balance Sheet: € 2 bln € 34 bln € 475 bln

7 Rabobank at a glance Cooperative bank
All-Finanz leader in domestic market Predominant focus on Dutch Market Global food & agri bank (€ bn) 2007-I 2006 2006-I Total Assets 591.7 556.5 521.5 Group Equity 29.7 29.4 26.7 Net profit 1.4 2.3 1.2 Efficiency Ratio 68.1% 68.5% 66.7% 2007-1 2006 Long term objective Tier-I ratio 10.2% 10.7% 10% Return on equity 10.3% 9.4% Net profit growth 13.7% 12.6% 12% Triple-A ratings since Standard & Poor’s AAA 1981 Moody’s Investor Service Aaa 1981 DBRS AAA 2001 Measured by its core capital, the organisation is one of the top twenty world’s largest financial institutions. Besides Rabobank is the world’s safest private bank. Efficiency Ratio = cost/income ratio I ABN Amro 73.0% 74.9% Rabobank 66.7% 68.5% 68.1% ING % 63.6% SNS % 62.6% Fortis % 61.2% Although the Rabo efficiency ratio is relative high because of thin margins rather than because of high costs, we are working on reducing the costs by: Upscaling the local banks SEE ALSO SLIDE 12 Rationalising the operations of local banks after mergers, Project 2010. Optimizing the division of tasks between local banks and Rabobank Nederland RATING: see also Q&A pages. Investor Relations

8 Local cooperatives basis of Rabobank
9 million clients 1.7 million members 183 local cooperative Rabobanks 1,193 domestic branches ownership and cross-Guarantee Rabobank Nederland division: Rabobank International Number of local banks decreased from 248 in January 2005, 188 in Jnauary 2006 to 183 in June 2007. Number of branches decreased from 1249 in Jaunuary 2005 and 1214 in January 2006 to 1193 in June 2007 SEE ALSO slide 12 specialised subsidiaries insurance, asset management, real estate, leasing, mortgages, banking, private banking

9 Subsidiaries service their own client base and customers of local Rabobanks
leasing asset management & investment real estate financing & development insurance mortgage brokerage Rabo DLL = a global privider of high-quality leasing and trade financing products, vendor lease and commercial finance products In 2007-I, DLL net profit was Euro 109 (+27%) and its lease portfolio to EUR 20 (+7%) Robeco = asset management & retail funds. Assets managed Eur 148 bn (including Roparco) Alex = online security brokerage, aum 4.9 bn Schretlen = the asset management specialist for high-net-worth individuals and mid-size institutional investor, AUM Eur 8.4 bn Sarasin = one of Switzerland’s leading private banking institutions, about Eur 51 bn. Real estate : Total loan portfolio Eur 11.3 bn Rabo Bouwfonds = real estate development and asset management FGH bank provides financing to real estate project developers, as well as to institutional and private real estate investors Eureko = European Bank-Insurance Group, owns Achmea, Interpolis in the Netherlands, Friends First from Ireland, Interamerican from Greece, Union from Slowakia (97%) and Império from France. Obvion = a joint venture between Rabobank Group and the ABP pension fund, targets independent brokers in the mortgage market. For more information see Q&A (38% stake)

10 Six strategic priorities
“continuity through durable growth” 1 2 3 Affiliated Institutions 4 “Nearby bank” of the future The top of the market International Growth Renewed elaboration of “nearby” in order to retain our distribution position Differentiated service concepts with own cost structures Improved cost allocation Growth of our market share in the top of the market Both among retail and business customers Focus on urban area Optimum utilisation of the combined strength within the Rabobank Group Realisation of synergy potential Growth in both international retail and wholesale Primary focus on markets in which we can capitalise on our knowledge of Food & Agri and/or triple-A rating Clear focus and prioritisation Co-operative, high-quality and sustainability-focused organisation 5 Healthy profitability 6

11 Leading Food & Agri Bank
Rabobank’s international ambition is to become the global Food & Agri bank International growth is necessary SME/top 200 demand international services Safeguarding the continuity of the co-operative – there are only limited opportunities for growth in the Netherlands Raising funding/capital on international markets For the development of innovative, high-quality products and processes To play a meaningful role in the European consolidation process In order to remain attractive as an employer InternationalGrowth Our co-operative character and our knowledge of Food & Agri are distinctive and provide an attractive platform for growth Preference for foreign markets that have a strong agricultural sector Rabobank’s strength is shown in its best light in these markets The competition is less developed in many countries Leading Food & Agri Bank

12 M&A versus autonomous growth
"Some 60% of all takeovers in the U.S. and the UK are struggling to return their cost of capital later on …" McKinsey & Co. "57% of all merged companies turn into industry laggards for the three years following the deal" Mercer Management Consulting "Only one third of all M&As led to the intended performance improvements, the remaining two thirds either struggled or failed completely…" Booz, Allen & Hamilton

13 Portfolio management, growth strategy
Set baseline Frame opportunities Search, select, execute Growth strategy M&A Process Industry landscaping/ consolidation Segments Acquisition search Target assess- ment Financial evaluation Negotia- tion/bid support Post- merger integra- tion Channels/ geos Portfolio assessment Strategy ? Core New Emerging Value Products/ categories Carve out Vision/capabilities

14 Rabobank: Autonomous growth / Greenfield:
Continuous growth in existing business and geographical coverage Recent greenfield activities: 2004/ International Direct Banking: Belgium, Ireland, New Zealand, Australia Farmer Financing, Brasil Rabo Mobiel Bizner FREO, DLL

15 Good reasons for acquisitive strategy
Accelerate growth Overcome entry barriers Access to technology, quality staff Building a new business model Synergy potential Vertical/horizontal integration

16 Rabobank: Recent Acquisitions / Divestments
2004 FGH Bank 2006 Athlon Car leasing, DLL 2006 Bouwfonds, Rabobank 2006 Altajo (JV with AA) 2007 ZAH.nl, Rabobank 2007 Sarasin, Rabobank (28% in 2002) 2007 SAM, Robeco 2007 Transtrend, Robeco (50% in 2002) Divestments: 2005 Stroeve 2005 Rabo Travel agents 2005 Gilde Inv. Mgmt 2007 Alex 2007 Kobalt Acquisitions in international retail banking 2002 VIB, California, USA 2002 ACC, Ireland 2003 LendLease, USA 2003 AgServices, USA 2004 BGZ, Poland (35% in 2004, now 45%) 2006 Haga,Hagakita, Indonesia 2006 CBCC, California, USA 2007 HNS, Chile 2007 Mid-State Bank & Trust, California, USA

17 Preconditions for successful M&A
Strategy resulting in well defined acquisition criteria Early definition of valuation Well run process, with clear defined roles Never forget the human/cultural factor in the process Realize value through effective Post Merger Implementation

18 Reasons for failure Lack of SR management commitment
Failure to make tough decisions Not addressing cultural differences Failure to resource and prioritize the many issues that need to be dealt with at once Company is too inward looking, forgetting the customer Poorly planned integration process/moved too slow Over-emphasis on cost cutting, under-emphasis on change management (e.g., retention and motivation)

19 M&A process and the role of finance
Orientation First decision moment Initial meetings / investigation Letter of intent Investment proposal Second decision moment Due diligence Drafting SPA Final decision / signing Fulfill CPs Closing PMI

20 Orientation, investigation, investment proposal, DD
Strategy - Greenfield / M&A assessment Strategic fit Evaluation previous M&A Market Competition Benchmark M&A transactions Internal embedding Position in organization Legal/fiscal aspects Governance Defining success factors ROI (valuation, CoE, growth/synergy assumptions) Risk profile

21 Role of finance: M&A process
External advisors / experts (IB, Legal, HR, Tax, Trans. Services) Strategy - Greenfield / M&A assessment Strategic fit Evaluation previous M&A Market Competition Benchmark M&A transactions Internal embedding Position in organization Legal/fiscal aspects Governance Defining success factors ROI (valuation, CoE, growth/synergy assumptions) Risk profile Legal Compliance Finance Business Part of deal team, challenging the assumptions and providing expertise Advisory function to the Executive Board; countervailing power to Business Tax HR

22 Role of finance: Post Merger Integration
Realisation of acquisition goals (immediate action or gradual process) Monitoring and acting upon SPA reps and warranties Evaluation acquisition / acquisition process Performance measurement Essential role for finance

23 Does Rabo beat ‘M&A failure’ statistics ?
We do…..but why? Apart from the earlier mentioned aspects : Non aggressive M&A approach Rabo as AAA Co-operative attractive partner No stock market pressure Balance in governance Constructive/critical role from finance allowed by SR management !

24 Kees Luijben Executive Vice President Global Finance & Control Organon

25 Conference for Financial Executives 12 December 2007
Organon Conference for Financial Executives 12 December 2007

26 Organon 2002 - 2007 Strong internal growth in the 90’s
USA, new innovative products (R&D output) Increase strategic presence in the USA Strategy of mix of internal growth with external partnerships Move parts of Head Office to the USA in 2002 Prepare for IPO (Organon BioSciences) Partial float planned for early 2007 Strategy continued internal growth, partnerships and selected acquisitions Acquisition by Schering-Plough Announced 12 March; Completed 19 November

27 Organon 2002 - 2007 Original role Finance
Challenger, business partner (alignment with strategic objectives) Safeguard sound financials; compliance Develop people and promote learning organization Deal with changing environment and requirements Provide strong and inspirational leadership Re-define Finance’s value proposition Rework Finance Mission and Strategy Excellence in Finance (model)

28 Bernard Bos Senior Project Manager Acquisitions and Divestments Shell E&P

29 M&A versus Autonomous Growth Strategies
Bernard Bos Senior Project Manager Acquisitions & Divestments Shell International Exploration and Production 12 December, 2007

30 Shell – World Wide Presence in all Business Segments of the Energy Value Chain

31 Strategy on Track CONTEXT GROWTH ENERGY DEMAND
Cash generation + reinvestment Environment + sustainability Competition STRATEGY MORE UPSTREAM, PROFITABLE DOWNSTREAM Portfolio choices Unconventionals + renewables Downstream includes Chemicals PRIORITIES DELIVERY + GROWTH Top quartile performance Project excellence Technology + people

32 Industry consolidation continues in 2006-2007
Burlington $36 bln                    $29 bln Western $23 bln $6 bln $10 bln IPO Udmurtneftegas $3 bln Ichthus acqu. $1 bln

33 Despite high market valuation and oil prices…
Despite high market valuation and oil prices…. (re-based to January 2003) 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 500 100 200 300 400 500 Combined Market Cap of Selected Small Caps Combined Market Cap of MM07 Mid Combined Market Cap of Mid Caps Caps 400 US$ 590 US$ 590 Combined Market Cap of Large Caps Combined Market Cap of Large Caps bln bln Brent Brent % % 300 US$ 1500 US$ 1500 bln bln US$ 78 US$ 78 /bbl /bbl 200 US$ 31 US$ 31 /bbl /bbl 100 Monopoly Cluedo Rome Mastermind 06 Mastermind 07 Jan 03 Jan 03 Sep 07 Sep 07 Mid-Caps have outperformed the Oil Price and the Large Caps. Break Even prices for Mid Caps have typically moved to the $60/bbl+ range Large Caps: ExxonMobil, Shell, BP, Chevron, Total, Conoco; Mid Caps: 19 companies

34 Recent Shell M&A transactions (since 2005)
Shell Canada minority French refineries Basell Skarv Sakhalin/ Gazprom Blackrock Turcas JV Tupras JV Choren US pipelines Iogen Showa Shell InterGen China bitumen & lubricants California refineries South Texas swap Pacific Islands Divestments Crux Here is an overview of the main deals we’ve done in the past 2 years. You can see that the geographical spread is quite wide. In business terms the strategy of more upstream profitable downstream has translated in most cases into Selected Upstream acquisitions especially focused on the oil sands in Canada, and in the downstream divestments of less profitable or more peripheral assets. Where we have done acquisitions it has been in the Far East as part of a general strategy in the Downstream to shift the portfolio from West to East. The biggest deal of all here is the unification of Royal Dutch with Shell Transport to create Royal Dutch Shell plc – really an internal restructuring - but that didn’t stop the banks involved using it as a $100 bln of league table points. Latin American & Carribean marketing divestments RD/ST&T Unification Shell Technology Ventures Fund 1 Approximately $30 bln in transactions since 2005

35 2007 – M&A versus organic growth
CUMULATIVE DIVESTMENT PROCEEDS ($BLN) CAPITAL SPENDING ($BLN) Organic growth: $ bn A&D: $ 16 bn

36 Shell – M&A versus Organic Growth – considerations..
PROS CONS Cheaper way to grow (?) More control operator technical standards Sometimes only way to get access Risk exposure single project country risk / fiscal terms technology / costs Exposed to capex increase Not enough to realize growth ambitions Inherent risk diversification Faster to realize strategy Immediate production - benefit when oil prices go up less exposed to capex inflation Often fully price Synergy realization Limited opportunities for value uplift, apart from oil price M&A ACTIVITY e.g. US$ 6.5 bln acquisition in 2002 e.g Sakhalin JV (> inv.US$ 20 bln) Shell needs both M&A and organic growth to realize its strategy

37 Finance in M&A ROYAL DUTCH SHELL PLC BOARD
CHIEF EXECUTIVE & CHIEF FINANCE OFFICERS EXECUTIVE COMMITTEE BUSINESSES Corporate Strategy & Business Development Business VP – Acquisitions & Divestments Project Teams FUNCTIONS Corporate finance M&A Group Corporate Investor Relations Group Commercial Finance Advisors Idem for Legal, Tax, IR, EA, HSSE TARGETS COMPANIES & BUYERS

38 M&A Strategy PORTFOLIO SHIFT New legacy assets Growth markets East
INDUSTRY LANDSCAPE SHELL STRATEGY Higher prices & costs PORTFOLIO SHIFT New legacy assets Growth markets East New competitors ENERGY CHALLENGE TECHNOLOGY Unconventionals + exploration Cleaner fuels, CO2 solutions Complex projects Managing risk Sustained investment Standardization Competitive returns

39 Back-up

40 Major growth hubs and key progress
Source: Sri-Roadshow-London

41 Oil Sector M&A Transaction Valuations

42 Role of the CFO in Shell CHIEF EXECUTIVE OFFICER &
BUSINESSES Executive Directors (Member of the Executive Committee) CORPORATE STRATEGY & BUSINESS DEVELOPMENT Director Strategy & Business Development CHIEF EXECUTIVE OFFICER & CHIEF FINANCE OFFICER BUSINESSES EVP – Finance INVESTOR RELATIONS EVP – IR

43 Acquisitions & Divestments in Shell
PEOPLE 75+ PROFESSIONAL STAFF AD Project Managers AD Finance Advisors AD Legal Counsel AD Tax Advisors AD Implementation Managers AT CORPORATE LEVEL AT DEVISIONAL LEVEL IN FINANCE ADVISORY GROUP SYSTEMS & PROCESSES Worldwide standardized Virtual teams Top-league MBA training courses All capabilities in-house available Use of major investment banks and legal firms PRO-ACTIVE SELECTION & SCREENING TOP-DOWN & BOTTOM-UP APPROACH GENERALLY, NO OPPORTUNISTIC DEALS TYPE OF PROJECTS Corporate acquisitions Asset transactions Portfolio divestments Swaps Listed and private IN ALL DIVISIONS AND IN ALL PARTS OF THE LIFE CYCLE FROM A COUPLE OF $ 100 MLN TO $ 10 BLN +

44 Drivers to do A&D Portfolio optimization Size Scale Location
Change of local investment climate Position in life cycle of industry Natural owner of asset / business and parenting advantage Growth Access Organic growth can’t deliver the strategic objectives Size of existing business and opportunity to grow Fit with strategy and competitive capabilities Future profit zones in (dynamic and changing) value chain Fit with current business philosophy and competitive capabilities – e.g. technology Change in industry and markets

45 Acquisitions & Divestments in Action
ORGANIC GROWTH VERSUS INORGANIC GROWTH Clear understanding and alignment where and when to acquire and divest A&D AS PART OF YOUR CORPORATE STRATEGY & VISION No hobby-horses, testing opportunities against preference target list CORPORATE FIT, FIT WITH BUSINESS AND PARENTING ADVANTAGE Really understand the new business and its drivers and competitive field PRO-ACTIVE SELECTION AND SCREENING Analyze potential targets and make selection which to make deal ready CHECK AND BALANCES Business versus Finance: understand how much the business is worth for your shareholder SYNERGY Be careful about synergistic value POST-ACQUISITION INTEGRATION Plan in advance, start already during the Selection and screening phase RESOURCES Do not underestimate the time and staff resources required to be successful in acquiring and implementing a deal ECONOMICS AND VALUATION Share price plus premium versus valuation of the existing business and growth opportunities

46 Private Equity and Sovereign Wealth Funds
Shell welcomes Private Equity investors to the market In general, they are buyers of relatively smaller divestments by Shell (e.g. Wavin) No competitive force in the industry Sovereign Wealth Funds (from Asia and Major Resource Holders) New and Growing Expected to become active Buyers and, in some cases even Competitors

47 Petro-dollars: fueling global capital markets
The largest Sovereign Wealth Funds in the oil exporting countries: UEA Abu Dhabi Investment Authority $ 500 – 875 bn Kuwait Investment Authority $ 200 bn Saudi Arabia Pension Fund $ 130 – 150 bn Norway $ 300 bn In addition, there are substantial Fx reserves

48 Petro-dollars: fueling global capital markets
35 62 42 7 60 192 127 108 167 238 429 484 133 98 156 240 218 198 169 224 292 359 435 446 132 121 129 184 273 268 308 4 2 8 30 110 151 125 89 91 9 3 49 56 69 81 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 282 301 351 371 411 509 417 503 692 926 1201 1319 Petro-dollars East Asia Western Europe Rest of World Net capital outflows from countries with current-account surpluses in $ billion In 2006, oil-exporting countries became the largest source of net global capital flows in the world Petro-dollar investors – government and private – have between $ 3.4 and $ 3.8 trillion in foreign financial assets By 2012, it will grow to $ 7 $70/b oil price Source of chart: McKinsey

49 New competitive structure
NOC / SOEs Chinese, Russian, Indian, Algerian... Govt. to Govt. leverage Quasi-State Entities Competing in integrated value chain More impact in short term than NOCs The opportunities available to IOCs are those technically or commercially challenging “old”, “new”, “nasty” IOC’s Head-to-head in integrated projects Diminishing differentiation Mid-Caps Utilities Competing in ‘traditional’ parts of the value chain Increasing international focus Backward integration Emerging competition from mid-stream players (e.g. Transneft) Service Providers Value leakage to service providers and suppliers

50 Shell - Technology & Innovation
NON STOP INNOVATION DELIVERING GROWTH SHAPING THE FUTURE LNG Catalysts (XTL) Seismic Imaging Smart wells Tight Gas Deepwater Gas-to-Liquids Oil Sands Arctic Wind, Solar Biofuels, Hydrogen Coal-to-Liquids

51 Shell Canada – deal overview
Deal dimensions Deal rationale Cash US$7.5 Bln (C$45/sh) Unification and consolidation: one company, one strategy, global choices Simplified and rationalised N. American business Increase exposure to unconventionals in OECD: control, integration, technology, and growth 38% premium to pre-offer closing 4% discount to all time high SCAN Shareholders 22% 20 25 30 35 40 45 50 55 C$60 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Sep-06 Nov-06 Jan-07 Mar-07 SCAN Peers + 122% + 93% 20/10: Approach with C$40 (pre-close price $32.60) 24/1: Announcement SCAN Board support for C$45 offer

52 Premiums paid have risen to a level at which shareholder value is virtually impossible to create

53 The CFO is becoming too dominant in the M&A process

54 M&A leads to too much inward-looking due to post merger integration

55 Key to beating the 33% success average of M&A is to make it a repeatable process

56 Buyers from OPEC and BRIC countries disrupt the European M&A market

57


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