Corporate Strategy - Mergers & Acquisitions Dr. Sebastian Spaeth Matthias

Transcription

1 Corporate Strategy - Mergers & Acquisitions Dr. Sebastian Spaeth <sspaeth@ethz.ch> Matthias Stuermer<mstuermer@ethz.ch> 1

2 Where we left off Organizational Structure Definition Dimensions: Specialization, Standardization, Formalization, Centralization, Configuration, Flexibility Organigrams Forms of organizational Structure U-Form, M-Form (cooperative, competitive), H-Form, X-Form, Matrix organization Matrix organization: Advantages, disadvantages 2

3 Overview Definition: Merger, Acquisition, Buyout Getting a picture of global M&A Reasons for... Sucess rates Failure reasons 3

4 What the expert says... There is a gin rummy school of management... you pick up a few businesses here, discard a few there. The sad fact is that most acquisitions display an egregious imbalance - they are a bonanza for the shareholders of the acquiree; they increase the income and the status of the acquirer s management; and they are a honey pot for the investment bankers and the other professionals on both sides. But alas, they usually reduce the wealth of the acquirer s shareholders, often to a substantial amount. -Warren Buffet, Chairman,Berkshire Hathaway. 4

5 Definition Mergers & Acquisition An acquisition normally involves the purchase of another firm s assets and liabilities, with the acquired firm continuing to exist as a legally owned subsidiary of the acquirer. Takeover is often used for hostile acquisitions. A merger of equals on the other hand is a combination of two firms where a new corporate entity is created by exchanging the shares of both companies for shares in the new company. Most M&As, however, are simple acquisitions since only around three percent of all deals can be classified as real mergers between equals (Buckley & Ghauri, 2002). 5

6 Buyouts Buyout is defined as the purchase of a company or a controlling interest of a corporation's shares or product line or some business. A leveraged buyout is accomplished with borrowed money or by issuing more stock. Management buyout when managers purchase controlling interest from existing shareholders. 6

7 Types of Mergers src: Federal Trade Commission (FTC) Horizontal mergers: two companies in the same industry Vertical mergers: along the value chain of a good/service Product-extension: access to complementary products Market-extension: access to complementary markets Conglomerate mergers: different industries 7

8 Global M&A First 6 months of 2007: $2.7 trillion 465 deals worth over $1 billion each. Avg size: $298m, 58% higher than 2006 Number of hostile bids (407) was almost four times greater. American comp. targets of more than $1 trillion-worth of deals Emerging markets were targets of $370 bil., or 13% of the world total. The banks advising on M&A transactions were pleased: they earned $11 billion in advisory revenues in the first half of % less deals in US and 30% in Europe 8

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10 Reasons for M&A Do they differ from Growth & Internationalization reasons? How? NPV (A + B) > NPV (A) + NPV (B) NPV := Net Present Value 10

11 7 Motivations for M&A Monopoly Theory: Gaining market power. Efficiency Theory: Operating synergies, financial synergies and management synergies. Valuation Theory: Bidder managers have better information about the target's financial performance than the stock market. Empire Building Theory: Planned and executed by managers who maximize their own utility instead of their shareholders value. Process Theory: Mangers have only limited information and base decisions on imperfect information. Raider Theory: Managers creating wealth transfers from the stockholders of the companies they bid for. Disturbance Theory: Merger waves are caused by economic disturbances. 11

12 Merger as Merger benefits Wealth transfers from customers Monopoly Theory rational bidders Net gains through synergies Efficiency Theory choice Net gains through private information Valuation Theory Wealth transfer from targets shareholders Raider Theory Merger benefits managers Empire Building Theory Merger as process outcome Process Theory Merger as macroeconomic phenomena Disturbance Theory (src: Trautwein, 1990, 284; Straub 2007) 12

13 Chinese M&A Beijing wants Chinese firms to gain access to foreign technologies, raw materials and skills. In September the government established China Investment Corp (CIC) with $200 billion of the country's $1.4 trillion in foreign reserves, mostly to make purchases abroad. (src: economist.com) 13

14 Japanese M&A: Restructuring companies Conglomerates may have hundreds of subsidiaries in unrelated industries; they are a traditional place to park loyal executives once they reach 60 to give them a few extra years of work. Much of the intra-group M&A activity consists of companies bundling together disparate subsidiaries in the same industry in order to manage them better or sell them off. In this way, Japanese companies are using M&A as part of a broader corporate restructuring, says Steven Thomas of UBS, an investment bank. 14

15 M&A as a strategic move: Oracle and SAP Oracle first tried to move beyond databases and other infrastructure software (which together produce twothirds of its revenues) and break into enterprise applications with its own programes. When this failed, it decided to lead consolidation of the software industry and surround SAP with acquisitions, in the words of Larry Ellison, its chief executive. Since 2003 Oracle has bought more than 30 firms for about $25 billion in total. BEA does not sell applications, but it will help Oracle win new customers. (The Economist, Oct 18th, 2007) 15

16 M&A for complementary products: Ebay s purchase of Skype Skype will provide ebay with communication platform as a complementary product. $2.6 billion with up to 1.5bn more if Skype met certain targets Skype had 7mio USD turnover in 2004 This week ebay said that it would take a $1.4 billion charge in relation to the purchase. The bigger part, a so-called impairment write-down, represents ebay's loss on its ill-fated investment. (The Economist, Oct 4th, 2007) 16

17 Steps of an M&A (src: adapted, Galpin & Herndon, Thompson & Martin, 2005) 1.Formulate Focus or Diversify Strengths to build on and use to create synergies Opportunities Matching Resources and Opportunities 2.prospect (locate, investigate) Search process Looking behind the figures Evaluation: shared resources, transfer of skills, econ. of scale/scope 3.Negotiate & acquire 4.Integrate: people, culture, structures, systems & procedures 17

18 Information available (before and after) (src: Thompson & Martin, 2005) Organigram Data on salaries Information on top mgmt Products Plants Corp. identity, img, reputation Past records, esp. financial Inner philosophy & culture Quality of staff in decision roles Salary and Decision processes Interrelationships, power bases, hidden conflicts, org. politics Individually pursued objectives 18

19 Success rates of M&As Studies show that about two thirds of all M&As fail on average (anywhere from 50 percent to 80, depending on the measure) (e.g. Allen, 1999; Hudson & Barnfield, 2001; OECD, 2001; Schuler & Jackson, 2001; Slowinski, 2002). 19

20 Success factors Burgman (1983) 600 US acquisitions: The higher the premium to acquire, the less likely to be successful Prospects of success depend on the acquirer having a functional appreciation of the business Success depends on ability to retain key managers Large acquisitions were often more successful as the sheer size required a thorough appraisal beforehand 20

21 Reasons for failure (Rather) seldom Pre-merger: formulating goals locating the right company prospecting and inspecting the target company (Due Diligence) negotiating on price and conditions Frequently failing to integrate post-merger: Understanding of business Governance structure Leadership Culture assimilation 21

22 Failure to integrate Social Network Analysis can reveal lack of integration 22

23 References Burgman, R. J. A strategic explanation of corporate acquisition success Purdue University, 1983 (quoted in quoted in: Mc Lean R.J. April 1985 How to make acqisitions work, Chief Executive) Thompson, J. & Martin, F. Strategic Management: Awareness and Change Thomson Learning, 2005 Harford, J. What drives merger waves? Journal of Financial Economics, 2005, 77,

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