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M&A versus autonomous growth strategies. Harry de Roo Executive Member of the Managing Board and Chief Financial Risk Officer Rabobank International.

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Presentation on theme: "M&A versus autonomous growth strategies. Harry de Roo Executive Member of the Managing Board and Chief Financial Risk Officer Rabobank International."— 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 November 2007 M&A versus Autonomous Growth Harry de Roo Rob Wismans

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

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

7 (€ bn)2007-I I Total Assets Group Equity Net profit Efficiency Ratio68.1%68.5%66.7% Long term objective Tier-I ratio10.2%10.7%10% Return on equity10.3%9.4%10% Net profit growth13.7%12.6%12% Cooperative bank All-Finanz leader in domestic market Predominant focus on Dutch Market Global food & agri bank Triple-A ratings since Standard & Poor’sAAA 1981 Moody’s Investor ServiceAaa 1981 DBRSAAA 2001 Investor Relations Rabobank at a glance

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 division: Rabobank International Rabobank Nederland specialised subsidiaries insurance, asset management, real estate, leasing, mortgages, banking, private banking

9 Subsidiaries service their own client base and customers of local Rabobanks (38% stake) Rabo leasing asset management & investment real estate financing & development insurance mortgage brokerage

10 “continuity through durable growth” Renewed elaboration of “nearby” in order to retain our distribution position Differentiated service concepts with own cost structures Improved cost allocation The top of the market Affiliated Institutions Growth of our market share in the top of the market Both among retail and business customers Focus on urban area International Growth 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 Optimum utilisation of the combined strength within the Rabobank Group Realisation of synergy potential “Nearby bank” of the future Co-operative, high-quality and sustainability-focused organisation Healthy profitability Six strategic priorities

11 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 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 International Growth Leading Food & Agri Bank

12 "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 M&A versus autonomous growth

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

14 Rabobank: Autonomous growth / Greenfield: Continuous growth in existing business and geographical coverage Recent greenfield activities: 2004/2007 International Direct Banking: Belgium, Ireland, New Zealand, Australia 2005 Farmer Financing, Brasil 2006 Rabo Mobiel 2007 Bizner 2007 FREO, DLL

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

16 Rabobank : Recent Acquisitions / Divestments 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 Recent acquisitions: 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

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 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 Finance Business Legal Compliance Tax HR External advisors / experts (IB, Legal, HR, Tax, Trans. Services)

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 ? Apart from the earlier mentioned aspects : We do…..but why? - 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 Organon Conference for Financial Executives 12 December 2007

26 Organon 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 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 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…. (re-based to January 2003) Large Caps: ExxonMobil, Shell, BP, Chevron, Total, Conoco; Mid Caps: 19 companies 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 Mid-Caps have outperformed the Oil Price and the Large Caps. Break Even prices for Mid Caps have typically moved to the $60/bbl+ range % Sep 07 Jan 03 MonopolyCluedoMastermind 06Mastermind 07 Rome US$ 590 bln US$ 78 /bbl US$ 1500 bln US$ 31 /bbl Combined Market Cap of MM07 MidCaps Combined Market Cap of LargeCaps Brent Combined Market Cap of Selected SmallCaps % Sep 07 Jan 03 US$ 590 bln US$ 78 /bbl US$ 1500 bln US$ 31 /bbl Combined Market Cap of Mid Caps Combined Market Cap of Large Caps Brent

34 Recent Shell M&A transactions (since 2005) Sakhalin/ Gazprom Latin American & Carribean marketing divestments InterGen Cru x Showa Shell Blackrock Shell Canada minority California refineries US pipelines Basel l China bitumen & lubricants Iogen Choren South Texas swap RD/ST&T Unification French refinerie s Skar v Shell Technology Ventures Fund 1 Approximately $30 bln in transactions since 2005 Pacific Islands Divestments Turcas JV Tupras JV

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

36 Shell – M&A versus Organic Growth – considerations.. ORGANIC GROWTH 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 INDUSTRY LANDSCAPESHELL STRATEGY Higher prices & costs New competitors Complex projects ENERGY CHALLENGE Managing risk Sustained investment Standardization Competitive returns PORTFOLIO SHIFT New legacy assets Growth markets East TECHNOLOGY Unconventionals + exploration Cleaner fuels, CO2 solutions

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

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 1.ORGANIC GROWTH VERSUS INORGANIC GROWTH Clear understanding and alignment where and when to acquire and divest 2.A&D AS PART OF YOUR CORPORATE STRATEGY & VISION No hobby-horses, testing opportunities against preference target list 3.CORPORATE FIT, FIT WITH BUSINESS AND PARENTING ADVANTAGE Really understand the new business and its drivers and competitive field 4.PRO-ACTIVE SELECTION AND SCREENING Analyze potential targets and make selection which to make deal ready 5.CHECK AND BALANCES Business versus Finance: understand how much the business is worth for your shareholder 6.SYNERGY Be careful about synergistic value 7.POST-ACQUISITION INTEGRATION Plan in advance, start already during the Selection and screening phase 8.RESOURCES 1.Do not underestimate the time and staff resources required to be successful in acquiring and implementing a deal 9.ECONOMICS AND VALUATION 1.Share price plus premium versus valuation of the existing business and growth opportunities

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

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

51 Shell Canada – deal overview Deal rationale Deal dimensions  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 22% Cash US$7.5 Bln (C$45/sh) 38% premium to pre-offer closing 4% discount to all time high SCAN Sharehold ers C$60 Nov-04Jan-05Mar-05May-05Jul-05Sep-05Oct-05Dec-05Feb-06Apr-06Jun-06Aug-06Sep-06Nov-06Jan-07Mar-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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