Mergers & Acquisitions II Successes, Drawbacks, Restructuring & Trends Compiled and Presented By: Alex Kent, Simon Giddings, Aaron Brigatti

Friday, 1 December 2000Mergers & Acquisitions II2 Key Areas Covered: 1. Defence tactics Why are firms susceptible to take-over? Implications to Shareholders 2. Success & Failures Are shareholders the winners? 3. Corporate Restructuring 4. Trends & Susceptible Areas

Friday, 1 December 2000Mergers & Acquisitions II3 1. Defence Tactics: Their Successes and Implications

Friday, 1 December 2000Mergers & Acquisitions II4 Defence Tactics Various terminology Why are firms susceptible to take-over? Pre-bid defences Implications to Shareholder

Friday, 1 December 2000Mergers & Acquisitions II5 Various Terminology White Knight Yellow Knight Gray Knight Black Knight Sandbag Macaroni Defence Poison Pill People Pill Sleeping Beauty Pac-Man Shark Repellent Greenmail

Friday, 1 December 2000Mergers & Acquisitions II6 White Knight What does it mean? A company that makes a friendly takeover offer for control of a target company which is being faced with a hostile takeover from a separate party. The Knight in shining armour comes to the rescue!

Friday, 1 December 2000Mergers & Acquisitions II7 Yellow Knight What does it mean? Used to describe the situation where a company making a takeover attempt ends up discussing a merger with the target company.

Friday, 1 December 2000Mergers & Acquisitions II8 Gray Knight What does it mean? A second, unsolicited bidder in a corporate takeover who enters in order to take advantage of any problems between the first bidder and the target company. Think of a Gray Knight as a vulture, circling and waiting to clean up whatever mess is left.

Friday, 1 December 2000Mergers & Acquisitions II9 Black Knight What does it mean? A company which makes a hostile takeover offer on a target company. The bad guy...if it's your company being targeted.

Friday, 1 December 2000Mergers & Acquisitions II10 Sandbag What does it mean? A tactic used by management to stall with a company that is showing interest in taking them over. The company stalls in hopes that another more favourable company will take them over.

Friday, 1 December 2000Mergers & Acquisitions II11 Macaroni Defence What does it mean? An approach taken by a company that does not want to be taken over. The company issues a large number of bonds with the condition they must be redeemed at a high price if the company is taken over. Why is it called Macaroni Defence? Because if a company is in danger, the redemption price of the bonds expands like Macaroni in a pot!

Friday, 1 December 2000Mergers & Acquisitions II12 Poison Pill What does it mean? A strategy used by corporations to discourage the hostile takeover by another company by making it's stock less attractive to the acquirer. This is similar to the macaroni defence except it uses equity rather than bonds.

Friday, 1 December 2000Mergers & Acquisitions II13 People Pill What does it mean? A defensive strategy to ward off a hostile takeover. Management threatens that, in the event of a takeover the entire management team will resign. This is a version of the poison pill defence.

Friday, 1 December 2000Mergers & Acquisitions II14 Sleeping Beauty What does it mean? A company that is prime for takeover and which has not been approached by an acquirer. Reasons for being a sleeping beauty are that it has large cash reserves, undervalued real estate, or otherwise huge potential.

Friday, 1 December 2000Mergers & Acquisitions II15 Pac-Man What does it mean? A form of defence used in a hostile takeover situation. The takeover target turns around and tries to takeover the company that has made a hostile bid for it. Just think all those years of Atari might just pay off someday.

Friday, 1 December 2000Mergers & Acquisitions II16 Shark Repellent What does it mean? Any number of measures taken by a corporation to discourage an unwanted takeover attempt. Examples of shark repellent include Golden Parachute contracts with executives, a defensive merger with another company, a super-majority provision, etc.

Friday, 1 December 2000Mergers & Acquisitions II17 Greenmail What does it mean? A situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover. A very dirty, but effective practice.

Friday, 1 December 2000Mergers & Acquisitions II18 Which Companies are Susceptible? All Public Limited Companies at risk No restrictions in transfer of shares More Vulnerability = More Risk of Takeover Shareholders dissatisfied with company Undercapitalised Inadequacies of Management

Friday, 1 December 2000Mergers & Acquisitions II19 Implications to Shareholders A "raider" bids for shares of the target firm Dealing *direct* with the firms shareholders. Some instances, paid a premium of % of their shares!! Share of the raiders gains from the acquisitions.

Friday, 1 December 2000Mergers & Acquisitions II20 Pre-bid Defences - Internal Internal Defences Improve efficiency & Reduce costs Improve Strategy: Restructuring, divestment... Change Ownership Structure Change Management Structure Use Organisational Constituencies

Friday, 1 December 2000Mergers & Acquisitions II21 Pre-bid Defences - External External Defences Cultivate Shareholders & Investors Publicise company strategy Improve image Make strategic defence investments Monitor share register for unusual purchases

Friday, 1 December 2000Mergers & Acquisitions II22 Post-offer Defences First Response & Pre-emption Letter Defence Document Profit Report / Forecast Promise of higher Dividends Asset Revaluation Share Support Campaign Regulatory Appeal...

Friday, 1 December 2000Mergers & Acquisitions II23... More Post-offer Defences Litigation Acquisition & Divestment Unions / Workforce Customers / Suppliers Red Herring Advertisements

Friday, 1 December 2000Mergers & Acquisitions II24 Costs Of Defence

Friday, 1 December 2000Mergers & Acquisitions II25 2. Success and Failures of Merger & Take-Over Activities

Friday, 1 December 2000Mergers & Acquisitions II26 Success & Drawbacks Technological Issues Cultural Issues Freeserve – T-Online or Wanadoo National Differences Synergies Achieved Are All Mergers Successful?

Friday, 1 December 2000Mergers & Acquisitions II27 Technological Issues Technology issues: One challenge could be integrating two or more converging businesses' front-office technology - the IT systems seen by customers or used to interact with them

Friday, 1 December 2000Mergers & Acquisitions II28 Cultural Issues Cultural issues: These are the other main problem faced when bringing two or more companies together. Many apparently logical mergers have fallen through late on because of "cultural differences".

Friday, 1 December 2000Mergers & Acquisitions II29 Freeserve - Failures For example, cultural differences were cited last week as one reason why T-Online of Germany did not buy Freeserve, the UK internet service, from Dixons, the electrical goods retailer.

Friday, 1 December 2000Mergers & Acquisitions II30 Freeserve: Share Price

Friday, 1 December 2000Mergers & Acquisitions II31 National Differences Further levels of cultural complication are added when there is an international element to the merger Often the case with deals that have been driven by convergence. National differences have often thwarted successful mergers in the old economy So why should things be any different in the brave new economy

Friday, 1 December 2000Mergers & Acquisitions II32 Are All Mergers Successful? NO!!!! But why? In 1993, a study was carried out to determine if UK mergers are generally successful. It turned out that 54% of the mergers examined were not financially successful! So what went wrong…

Friday, 1 December 2000Mergers & Acquisitions II33 Causes Of Failure. Management Attitudes – 85%

Friday, 1 December 2000Mergers & Acquisitions II34 Causes Of Failure.. Lack Of Post-Acquisition Integration Planning – 80%

Friday, 1 December 2000Mergers & Acquisitions II35 Causes Of Failure … Lack of Knowledge by the Bidder of the Target and its Industry – 45%

Friday, 1 December 2000Mergers & Acquisitions II36 Causes Of Failure.… Poor Management & Management Practices In The Target – 45%

Friday, 1 December 2000Mergers & Acquisitions II37 Causes Of Failure..… Little or no experience of the bidder management in acquiring other firms – 30%

Friday, 1 December 2000Mergers & Acquisitions II38 Have We Learnt Anything? The same study was carried out in 1973, with pretty much the same results. In 20 years, social trends have not altered the fact that on average just over half of all UK mergers fail. Have we learnt anything at all?

Friday, 1 December 2000Mergers & Acquisitions II39 Well Yes! Why? Number Of Mergers Are Down! Knowledge about the failure of mergers could be responsible for the huge drop in annual mergers since the 1980s.

Friday, 1 December 2000Mergers & Acquisitions II40 Well Yes! Why? A greater professionalism among corporate management leading to fewer cheap targets. Share prices were low in the 80s, leading to many cheap targets. Questions have been raised to the importance of large, diversified companies.

Friday, 1 December 2000Mergers & Acquisitions II41 How can a company increase the odds? A well-formulated vision A pre-merger process that targets companies with the right capabilities A post-merger process that seeks to capture well-defined sources of value

Friday, 1 December 2000Mergers & Acquisitions II42 3. Corporate Restructuring After Mergers/ Take-Overs

Friday, 1 December 2000Mergers & Acquisitions II43 Corporate Restructuring What actually happens after a merger or take-over? What happens to: The Head Office Divestments Managers Employees Failures Case Study – Psion v Teklogik

Friday, 1 December 2000Mergers & Acquisitions II44 The Head Office It is very unlikely to have two head offices Natural conclusion: One must go! This can often lead to massive job losses in that location If some of the targets management are lucky, then they might be offered Golden Parachutes.

Friday, 1 December 2000Mergers & Acquisitions II45 Divestments Why would a merged company want to sell of a part of itself? A desire to concentrate on its core activities A need to raise cash Cutting away the bad wood

Friday, 1 December 2000Mergers & Acquisitions II46 Managers Predator Managers New opportunities to enhance companys competitive advantage, operational efficiency and financial performance Increased job security/enumeration Target Managers Uncertain futures New bosses, new culture Loss of power, status and freedom to innovate Possible Redundancies

Friday, 1 December 2000Mergers & Acquisitions II47 Employees Usually redundancies at the redundant head office UK Employment law gives some protection to employees in the context of takeovers If the target business is purchased, then employees may receive protection under The Transfer of Undertaking regulation

Friday, 1 December 2000Mergers & Acquisitions II48 Failures Not always good for predator management. Especially if they mess things up! In the mergers boom in the 1980s, some of the more frequent predators were themselves becoming the prey or forcing themselves into receivership. Others that fail can be heavily divested or put under administration by the lenders.

Friday, 1 December 2000Mergers & Acquisitions II49 Case Study: Psion v Teklogix Main Points: Friendly takeover Psion were looking to break into new areas They realised that their range of modems were in decline Needed to do something quickly since their shares were at an all time low

Friday, 1 December 2000Mergers & Acquisitions II50 About Psion Plc World-leaders in mobile computing and communications Established in 1980 Earns revenues in excess of £159m and is valued on the London Stock Exchange at more than £2.5bn

Friday, 1 December 2000Mergers & Acquisitions II51 About Teklogix Provide communications solutions to industrial users, based on local area network (LAN) technology and wide area network (WAN) technology In the year ended March 31 st 2000, they took in a revenue of $209m

Friday, 1 December 2000Mergers & Acquisitions II52 12 th July 2000 The Boards from both Psion and Teklogix publicly announce that the Psion will acquire Teklogix Teklogix accepted £242m, of which £100m should be paid in cash This was 41% above the closing price of Teklogix shares on July 11, 2000

Friday, 1 December 2000Mergers & Acquisitions II53 20 th September 2000 Psion completes the acquisition of Teklogix So, What Next? Will Psion make an enormous profit? Will the directors of Teklogix be shot in their former Board room like unwanted pigeons? Does Psion admit to any teething problems?

Friday, 1 December 2000Mergers & Acquisitions II54 18 th October 2000 PROFIT WARNING! FT reported that Psion would be lucky to break even this year FT blame thin margins (4%) and the fact that Psion can not compete with Giants such as Nokia FT argue that Psions prospects all hinge on merging Teklogix with Symbion technology

Friday, 1 December 2000Mergers & Acquisitions II55 Psion: Share Price

Friday, 1 December 2000Mergers & Acquisitions II56 Conclusion … Psion spent a lot of money But they needed to move away from the laptop accessory market, which they knew was declining rapidly In the short-term, this merger has not benefited the shareholder. In the long-term who knows! But the Financial Times predicted that this merger actually saved Psion.

Friday, 1 December 2000Mergers & Acquisitions II57 4. Recent Trends and Susceptible Areas

Friday, 1 December 2000Mergers & Acquisitions II58 Trends & Susceptible Areas Enthusiasm For Merging Britain v US Makeover at Software Companies Going Ballistic! Sectors/Areas at Risk

Friday, 1 December 2000Mergers & Acquisitions II59 Enthusiasm For Merging Increasing concern at its impact on shareholder value. The enthusiasm for merging, acquiring and disposing has enabled Britain to cut quite a dash on the international stage.

Friday, 1 December 2000Mergers & Acquisitions II60 Britain v US Britains companies are now the worlds biggest overseas investors. US companies have been pushed into second place for the first time since 1988.

Friday, 1 December 2000Mergers & Acquisitions II61 Makeover at Software Companies Post-Y2K Throes of a makeover! The 4 Rs: Restructuring Re-engineering Revival Repositioning

Friday, 1 December 2000Mergers & Acquisitions II62 Going Ballistic! Pace and size of merger and acquisition deals proceed seemingly unchecked. In 1999, the worldwide value of merger and acquisition deals exceeded $2.3 trillion (U.S. dollars) Top 2 and 3 of the 6 largest M&A deals of all time!

Friday, 1 December 2000Mergers & Acquisitions II63 Areas/Sectors At Risk Communications – More Alliances?.dotcoms – Some cover the IT Sector, but the majority on AIM Some levels of retail – Sainsbury/M&S? Trend will continue Larger mergers but less of them! Refer to handout – Calendar of Past Events (Table 1)

Friday, 1 December 2000Mergers & Acquisitions II64 Missed anything? Visit our View on-line presentation Links to other resources Feedback form & more! Refer to our handout Refer to our own Q&A Ask any questions NOW!

Friday, 1 December 2000Mergers & Acquisitions II65 Possible Q&As? Why do companies merge in the first place? Whats the real difference between mergers and acquisitions? What happens if mergers or acquisitions arent successful?

Friday, 1 December 2000Mergers & Acquisitions II66 Many Thanks for Listening! We hope you enjoyed our presentation. Please take this opportunity to ask any questions which you may have.