Mergers & Acquisitions. Introduction

Transcription

1 Mergers & Acquisitions Introduction

2 Introductory topics What is M&A? Theories about M&A The six merger waves Incidence of M&A Who wins, who loses The importance of Culture The process

3 What is M&A?

4 What is M&A? - terminology The term M&A is widely used to mean much more than combination of two firms or the takeover of one by another. It also encompasses many types of restructuring. In practice the term is loosely used covering a very wide range of transactions We will largely restrict ourselves to a more narrow view based on: Merger consolidation or combination of one firm with another Acquisition purchase of one entity s equity by another

5 Terminology Other transactions that might be encompassed within the phrase Leveraged buyout (LBO) Management buyout (MBO) Spin-off Carve-out Initial public offering (IPO) Private Equity deals

6 Terminology The following transactions would not normally be part of Mergers & Acquisitions Entering into joint ventures Selling off a minority interest in a business Making major share placements Internal restructurings to relieve financial distress Major asset restructurings Restructuring of debt

7 Types of M&A Types of merger & acquisition Horizontal Vertical Conglomerate Investment companies Financial conglomerates Managerial conglomerates Concentric (diversified) companies

8 Types of M&A (an alternate) Another way of classifying M&A transactions Business Corporate Conglomerate strategy strategy or Financial Same Combining Opportunistic business businesses or Unrelated

9 Theories about M&A

10 The arguments For and Against FOR : A free market for corporate control promotes efficiency and creates wealth. Specific gains: Greater efficiency of resource allocation Improved pricing AGAINST : M&A reduces competition and is therefore bad for consumers Takeovers benefit managers, not investors. Reasons: Market myopia Management hubris EVIDENCE : M&A has been a significant economic phenomenon for over a century Overall shareholders gain Target shareholder s win Bidder s shareholders don t lose

11 The growth imperative Growth (not just in size but in profitability) has been, and remains, a major objective of business globally The avenues of growth available to the firm are organic (internal) or by acquisition (external) M&A is the avenue for external growth Its advantages are often seen as: Faster May be cheaper May avoid start-up mistakes in new activities Its disadvantages may include: May be more expensive May not get what you expect May be divisive

12 Motivations for merger or acquisition Taking advantage of economies of scale Improving management of target or acquirer Combining complementary resources Capturing tax benefits Providing low cost finance to a financially constrained target Creating value through restructuring and break-ups Penetrating new geographies Increasing product market rents

13 Economic change forces driving M&A (Weston, Mitchell & Mulherin view) Technological change Efficiency of operations Economies of scale Economies of scope Combining complementary activities Globalisation and freer trade Changes in industry organization New industries Deregulation and new regulation Favourable economic and financial conditions Negative trends in some economies and industries Widening inequalities in wealth and income Relatively high equity values in the 1990s

14 Reasons for acquisitions Valid reasons Economies of scale Economies of vertical integration Economies of horizontal integration Eliminating inefficiences Unused tax shields Use of surplus funds Providing complementary resources Doubtful reasons Diversification (removes investors choice) Bootstrapping (raising EPS) Lower financing costs (lower interest rate offset by debt cross guarantee)

15 The six merger waves

16 The 1st merger wave ( ) Characterised by horizontal mergers Began at the end of the mid 1890s depression A period of economic buoyancy Often referred to as the period of merger for monopoly Largely heavy manufacturing industry Ended with recession and stock market crash in 1903,1904 Majority of mergers failed Gave rise to major anti-trust legislation in the US

17 The 1 st merger wave The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

18 The 2 nd merger wave ( ) Characterised as vertical mergers Debate on its period or Post world war economic boom, recession in 1923 and then boom until 1929 stock market crash. The period much greater activity level A period of great technological change (rail, road transport, radio) Sometimes referred to as the period of merger for oligopoly Emergence of large public utility companies Investment banks active in financing deals Led to greater anti-trust regulation the Clayton Act The great depression following the stock market crashed ended the wave.

19 The 3 rd merger wave ( ) Long hiatus during WWII due to the war effort followed by post war re-organisation of the economy Known as the conglomerate period Diversification into different industries was all the rage Largely equity financed (rather than debt through investment banks) Characterised by high profile visionary CEOs Booming economy Tough anti-trust enforcement on horizontal mergers Financial shenanigans the PE game - bootstrapping Reasons for ending Market saw through the shenanigans Conglomerates performed poorly New tougher legislation - Williams Act

20 The 3 rd merger wave The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

21 The 4 th merger wave ( ) The period of the megamerger Much bigger and more prominent targets than before Tended to be bigger individual deals More hostile takeovers (the rise of the corporate raider) Return to use of more debt junk bonds More transactions involving going private Very broad based across most industries M&A took off in Europe due to the coming of the Common Market (EU) Ended with the collapse of the junk bond market Coincided with Malcolm Milken s indictment, Drexel Bankruptcy, the Gulf War

22 The 5 th merger wave ( ) Often referred to as the era of strategic restructuring Many of the top 10 deals of all time took place in this period The era of the mega-deal Huge global groups created based on a belief that size matters [Chrysler & Daimler Benz] [Exxon & Mobil] [Boeing & McDonnell Douglas] [Vodafone & Mannesmann] Deal value increased more than 10 fold in 10 years to top $3 trillion in 2000 Mostly stock (share) deals Ended with the bursting of the millennium bubble, the tech wreck, and the corporate scandals (Enron et al)

23 The 5 th merger wave The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

24 The 6 th merger wave ( ) Global value dropped to just over a trillion by 2002 but started to pick up again in 2003 Increasing globalisation still a major factor Governments in many countries (e.g. France, Italy, Russia) looking for national champions Driven by availability of low interest financing Also by the rise of Private Equity leading to large increase in management led LBOs

25 6 th merger wave

26 The six waves The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

27 The 7 th merger wave..??

28 The incidence of M&A

29 History of M&A activity M&A has a history as an important part of economic activity stretching back over 100 years The US numbers dominate the early years (because this was where it was happening; much less common elsewhere until the last 20 to 30 years) From these stats we can clearly see two things: M&A appears to have been growing exponentially M&A has appeared in waves over the long term Statistics are generally presented using two measures: Number of deals (shows breadth) Value of deals (shows depth)

30 The six waves The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

31 The history of US M&A activity The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

32 Value of US deals The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

33 Value of US deals relative to GNP The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

34 Europe s rise The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

35 Global activity since 1985

36 North America

37 Europe

38 South America

39 Southeast Asia

40 Malaysia

41 Australia

42 China

43 Middle East & North Africa

44 Calendar 2014 deals by region Source: Dealogic Global M&A Review/ Full Year 2014

45 Calendar 2014 deal value by industry Source: Dealogic Global M&A Review/ Full Year 2014

46 The biggest deals of all-time

47 Who wins and who loses? post-merger performance

48 The conventional wisdom The conventional wisdom about the success of M&A tends to come in two forms: The journalistic response to the large body of academic research only about 20% of mergers succeed The average overview - that target shareholders win and acquiring shareholders don t lose Are these views justified? The answer is probably yes and no or it depends There are two elements to the problem: The assertions are a generalized overview from all mergers studied making no allowance for the particular situation in an individual merger i.e. all mergers are the same What is meant by success?

49 Does M&A add or destroy value?

50 Despite slow down in M&A activity, investors reaction to deal announcements on average continues to be very positive Good indicator?

51 But beware generalisations.. value revisited

52 There are only two sources of value in putting businesses together in the same corporate portfolio PARENTING ADVANTAGE(S) Corporate centre skills / resources Taxation / valuation differences Corporate Business Unit # 1 Business Unit # 2 Business Unit # 3 Business Unit # 4 Business Unit # 5 SYNERGIES AND OPERATING EFFICIENCIES Increased Revenue Lower Operating costs Reduced Capital intensity

53 when done well, significant shareholder value can be created through an acquisition program 14 Wesfarmers Total Shareholder Returns (FY ) Apr 2007 Launches $20b bid for Coles Dec 2006 group Acquired Crombie Lockwood Wesfarmers CAGR % (FY ) Index Partial takeover of Bunnings Ltd (45% equity) Oct 1993 Acquisition of Dalgety Farmers pastoral business for $78m Sept 1994 Completed take-over of Bunnings Ltd; Interest now 99.29% Feb 1998 Acquisition of Key Transport Services 24 Feb 1995 $US51m partnership to build Thailand s first ammonium nitrate plant Feb 2001 Acquisition of IAMA Limited May 2000 Acquisition of Curragh coal mine End 2001 Acquisition of Atkins Carlyle and Protector Safety Operations June 2001 Acquisition of Howard Smith Ltd August 2003 Sale of Landmark farm services to AWB Dec 2000 Acquired 50% in the Australian Railroad Group July 2004 Sale of Sotico jarrah assets to Gunns Limited October 2003 Acquisition of Edward Lumley s Australian and New Zealand insurance group February 2006 Divested 50% of Australian Railroad Group ASX Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Note: As at April 2007 Source : Datastream

54 However, creating value in transactions can be difficult for buyers Acquisition value creation status for the acquirer ( deals in 2005)* Reduced 26% Percent Neutral 43% 20 0 Enhanced (31%) 93 per cent of companies believed their deal would enhance shareholder value when they initiated it, but only 31 per cent of deals actually did so KPMG, The Morning After, 2006 Note: *KPMG survey talked to 101 companies in August & September 2005 who had conducted deals worth more than US$100M between 2002 and Does not include private equity deals Source : Australian Financial Review, KPMG, Bradley, Desai and Kim, Journal of Financial Economics, 21.1 (1988)

55 On average, the market expects a typical M&A deal to create incremental value of 4%... Average value added by acquisitions 15.00% 5.00% -5.00% % 1. Combined change in market capitalisation of acquirer and target (adjusted for market movement) from 2 days before announcement to 2 days after; sample of almost 1,000 large global M&A deals between listed companies Source: Dobbs et.al. (2007), Are companies getting better at M&A?, McKinsey Quarterly; Dealogic; Datastream

56 On average, most of the value created by an M&A deal is captured by the target s shareholders though the deal premium (long-term average 25+%) Average deal premium paid to targets 40% 30% 20% 10% 0% Offer price versus target s share price one week before announcement Source: Dobbs et.al. (2007), Are companies getting better at M&A?, McKinsey Quarterly; Dealogic; Datastream

57 Companies can minimise the risk of transactions going wrong by adhering to some fundamental principles Reasons transactions fail Wrong reasons - Lack of valid rationale - Emotion, not logic Wrong information - Poor understanding of underlying industry economics - Poor knowledge of candidate s business Wrong price - Failure to perform valuation properly - Auction atmosphere / deal momentum Wrong implementation - No post-acquisition plan - Failure to integrate rapidly - Destruction of value when key employees leave - Failure to realise synergies Fundamental principles Strategic rationale Objectivity Analytical rigour and integrity Robust valuation Fact-based deal negotiation Integration planning& implementation

58 Is there an industry advantage?

59 Cash or Equity?

60 Results overall Conclusions: M&A does pay on average (net economic gain) Clearly pays for target shareholders Most studies with both sets of shareholders combined show value is created overall Two thirds of studies show value gained or at least preserved from acquirer shareholders In totality would seem that the average, benchmark adjusted return to corporate investment is close to zero, as we would expect in any form of corporate investment in competitive markets.

61 The role of culture in M&A

62 Culture the forgotten key to M&A success Culture is the pattern of norms, values, beliefs, and attitudes that influence individual and group behaviour within the organization Source: Afolabi Imoukhuede, MCS Consulting Limited In other words The way we do things. Each organisation has its own culture. It is difficult to integrate different corporate cultures

63 The cultural map High Networked Communal Sociability Low Fragmented Mercenary Low High Solidarity

64 Organisational cultures C

65 Acculturation a target s view How much do members of the acquired firm value preservation of their own culture? VERY MUCH NOT AT ALL Perception of attractiveness of the acquirer VERY Integration Assimilation ATTRACTIVE NOT AT ALL ATTRACTIVE Separation Deculturation

66 Elements of a CDD model The twelve domains: * Intended direction and results * Supervisory practices * Key measures * Work practices * Key business drivers * Technology utilisation * Leadership/management practices * Physical environment * Organisational practices * Perceptions & expectations * Infrastructure * Cultural indicators & artefacts

67 The culture plan - Accenture s five steps Pre-acquisition screening. Comprehensive, post-announcement cultural assessment. Identification of conflicts, risks, opportunities and costs. Design and implementation of post-merger integration action plan. Post-merger monitoring and validation of findings.

68 The M & A Process

69 Stages of the M&A process The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

70 A Cross-Enterprise view The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

71 Process considerations The essential elements Growth possibilities Internal expansion Acquisition Hostile» Public» Private

72 Elements of the process The merger or acquisition decision Strategy Search for targets Regulatory considerations Deal structuring Valuation Identifying synergies Tactics and defences Due diligence Small business acquisitions Financing Post merger integration Divestments These are the topics we will study.

73 The keys to success - the four fundamentals Right reasons Right price Right information Right implementation Strategy Valuation Due diligence Integration