Mergers & Acquisitions 2013 V blank

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M&A part one

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Mergers & Acquisitions 2013 V blank

  1. 1. Christian Maupetit 1 MERGERS & ACQUISITIONS Christian Maupetit, PhD
  2. 2. Christian Maupetit 2 M&As - Definition According to encyclopedia Britannica, a merger is a corporate combination of two or more independent business corporations into a single enterprise, usually the absorption of one or more firms by a dominant one.
  3. 3. Christian Maupetit 3 M&As - Definition A merger may be accomplished by one firm purchasing the other's assets with cash or its securities or by purchasing the other's shares or stock or by issuing its stock to the other firm's stockholders in exchange for their shares in the acquired firm. [Y/N?]
  4. 4. Christian Maupetit 4 Mergers & Acquisitions Merger activity in Europe and in the United States hit a new record in 2007 According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006 Europe $1 781 million United states $ 1 570 million Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion [Trend 2011 ?]
  5. 5. Christian Maupetit 5 Mergers & Acquisitions Merger activity in Europe and in the United States hit a new record in 2007 According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006 Europe $1 781 million United states $ 1 570 million Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion [Trend 2010 ?]
  6. 6. Christian Maupetit 6 Mergers & Acquisitions Merger activity in Europe and in the United States hit a new record in 2007 According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006 Europe $1 781 million United states $ 1 570 million Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion [Trend 2010 ?]
  7. 7. Christian Maupetit 7 Mergers & Acquisitions Merger activity in Europe and in the United States hit a new record in 2007 According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006 Europe $1 781 million United states $ 1 570 million Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion [Trend 2010 ?]
  8. 8. Christian Maupetit 8 Mergers & Acquisitions Merger activity in Europe and in the United States hit a new record in 2007 According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006 Europe $1 781 million United states $ 1 570 million Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion [Trend 2010 ?]
  9. 9. Christian Maupetit 9 M&A structures 1. Merger combination 2. Merger absorption 3. Merger with transfer of assets
  10. 10. Christian Maupetit 10 M&A structure Merger combination Firm A Firm C Firm B
  11. 11. Christian Maupetit 11 M&A structure Merger absorption Firm A Firm B Firm B
  12. 12. Christian Maupetit 12 M&A structure Merger with transfer of assets Firm A Firm A Firm B Firm B
  13. 13. Christian Maupetit 13 key principle & concept The key principle is to create shareholder value over and above the sum of the two companies. But share holder value may have several definitions. Based on the expected return concept, shareholder value is the value that a shareholder is able to obtain from his investment in a company. This is made up of capital gains, dividend payments, and other payouts that a firm might make to a shareholder.
  14. 14. Christian Maupetit 14 Strategies Depending upon the definition, merger rationale varies and might lead to non-convergent long term strategies.
  15. 15. Christian Maupetit 15 Limits of mergers USA Mergers for monopolistic purposes are among the unfair practices. The Sherman Antitrust Act , (1890) legislation was first enacted by the United States Congress to curb concentrations of power that interfere with trade and reduce economic competition. The Clayton Antitrust Act (1914), supplement the Sherman Antitrust Act of 1890.
  16. 16. Christian Maupetit 16 Limits of mergers In Europe, antitrust legislation receives attention. The Commission of the European Union in Brussels (European Commission Competition DG / Antitrust Registry) regularly passes upon cases involving practices of companies trading in the Common Market. Its decisions are based upon Articles 85 and 86 of the Treaty of Rome (1957), which deal with rules of fair competition
  17. 17. Christian Maupetit 17 Examples of rejected merger projects Period Companies Sector of activity 1996 Saint-Gobain/Waecker Silicium/Carbon 1996 Blokker/ToysR Us Toys 1998 Deutsche Telekom/BetaResearch Digital pay TV equipment 1998 Bertelsman/Kirch/Premiere Digital pay TV net work 1999 Airtour/First Choice Tour operator, leisure 2000 Volvo/Scania Trucks 2000 MCI World Com/Sprint Internet infrastructure 2001 SCA/Metsa tissue Paper 2001 GE/Honeywell Aeronautic industry 2001 Schneinder/Legrand Electric equipment 2001 Tetra Laval/Sidel Conditioning Table 20 source: Enjeux les Echos (2001)
  18. 18. Christian Maupetit 18 Rationale behind the mergers Overcapacity Geographical roll-up Product/Market extension R&D Industry convergence Strategic objectives The “acquiring” company with excess capacity will eliminate capacity, gain market share and create more efficient operation. A successful company expands geographically. Acquisitions extend a company product line or its international coverage. Acquisitions are used instead of in-house R&D to build a market position quickly. Company bets that a new industry is emerging and tries to establish a position by taking resources from existing industries whose boundaries are eroding. [Examples]
  19. 19. Christian Maupetit 19 Type of mergers Mergers are of several different types: Vertical mergers Horizontal mergers Conglomerates
  20. 20. Christian Maupetit 20 Type of mergers Sector A Sector B Sector C Sector D HorizontalVertical Conglomerate
  21. 21. Christian Maupetit 21 Type of mergers 1) Horizontal mergers When two companies merge within the same sector of activity, the merger is qualified as an horizontal merger. Usually both companies are at the same stage in the production cycle. Both firms produce the same commodity or service for the same market or similar markets. EX1
  22. 22. Christian Maupetit 22 Type of mergers 2) Vertical mergers When two companies merge is in the same sector of industry but at another stage in the production cycle the merger is qualified as a vertical merger. The firm acquires either a supplier or a customer. EX2
  23. 23. Christian Maupetit 23 Type of mergers 3) Conglomerate merger A conglomerate is a large company that consists of companies, subsidiary divisions of diversified activities. A conglomerate merger is a merger involving two or more companies that are in unrelated businesses. EX3
  24. 24. Christian Maupetit 24 Reasons for merging The reasons for mergers are various. Economies of scale: This refers to the fact that the combined company can reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.
  25. 25. Christian Maupetit 25 Reasons for merging The reasons for mergers are various. Revenue: Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and increasing its power (by capturing increased market share) to set prices.
  26. 26. Christian Maupetit 26 Reasons for merging Cross Selling: For example, a bank buying an insurance company could sell its banking products to the insurance's customers, while the insurance company can sign up the bank's customers for insurance services.
  27. 27. Christian Maupetit 27 Reasons for merging Synergy (expected synergy): Better use of complementary resources. Diversification: Hedge a company against a downturn in an individual industry.
  28. 28. Christian Maupetit 28 Merger of equals The concept of a merger of equals is open to arguments. In reality very few mergers of equals exist. DaimlerChrysler started as a merger of equals in an industry where the two companies’ analyses revealed themselves to have staggering overcapacity.
  29. 29. Christian Maupetit 29 Merger of equals A study conducted by Monin illustrates the merger of equals concept. The author reports that a business combination positioned as a merger of equals has the objective to reinforce equality and equity which are the two dominant standards of distributive justice.
  30. 30. Christian Maupetit 30 Merger of equals Equality has 3 key functions: The first function is to legitimate the merger decision/process for internal and external stakeholders, the second one is to suggest/propose an equal contribution by both partners the third one is a mean to avoid deciding who will lead for the newly created entity.
  31. 31. Christian Maupetit 31 Merger of equals Equality is a powerful principle to legitimate M&As. Inside the company, equality is used to solve dysfunctions linked to the integration process, such as name of the new entity, positions of the key executives, sharing of roles and responsibilities, and resource allocation.
  32. 32. Christian Maupetit 32 Merger of equals A merger of equals also suggests that the leadership will be equally shared and will not generate conflicts among the top executives. The mergers of Daimler Chrysler and AOL Time Warner were announced to the public as mergers of equals.
  33. 33. Christian Maupetit 33 Cost of capital,Economic Value Added and M&As Studies of Mergers and Acquisitions in the 90's and early 2000s found that 60 percent of the mergers failed to earn returns greater than the cost of capital. (2010?) The cost of capital is the sum of the cost of equity plus the cost of debt. The weighted average of the cost of equity and the cost of debt are determined by the relative proportions of equity and debt in a firm's capital structure. (Example 1)
  34. 34. Christian Maupetit 34 Cost of capital In other words this is the minimum required return on an investment. Cost of capital is also used as a key component to compute Economic Value Added. EVA concept has been developed by Stern & Stewart. The assumption is that companies that earn higher returns than financing costs increase shareholder value.
  35. 35. Christian Maupetit 35 Cost of capital The relationship between EVA and merger performance is difficult to establish. One of the reasons is because it is difficult to isolate purely financial determinants.
  36. 36. Christian Maupetit 36 Part two Analyzing the economic contribution to Mergers and Acquisitions has been covered by many academic researchers and professional analysts. They all hope that in the future, merger research will move beyond the basic issue of measuring and assigning gains and losses to tackle the fundamental question of how mergers create or destroy value.
  37. 37. Christian Maupetit 37 Major Mergers & Acquisitions since 1990 United States and Europe Merger Year Deal Financing ExxonMobil Exxon and Mobil Oil 1998 $77 billion Stock: 100%, AOL Time Warner America Online and Time Warner 2000 $166 billion Stock: 100%, Citigroup Citicorp and Travelers Group 1999 $73 billion Stock: 100%, J.P. Morgan Chase, Bank One 2004 $59 billion Stock: 100%, Procter & Gamble Gillette 2005 $54 billion Stock: 100% MCI WorldCom MCI Communications; with WorldCom 1997 $44 billion Stock: 100%, HP Compaq Hewlett-Packard; with Compaq 2002 $25 billion Stock: Kmart Sears, Roebuck 2004 $11 billion 55% stock, 45% cash Vodafone Mannesmann 2000 $130 billion Stock: 100%, Vivendi Universal Vivendi and Seagram 2000 $32 billion Stock: 100%, DaimlerChrysler Daimler Benz and Chrysler 1998 $37 billion Stock: 100%, BP Amoco 2000 $110 billion AF-KLM Air France and KLM 2004 Stock: Aventis Aventis Sanofi 2004 €55 billion 60% stock, 40% cash Arcelor Usinor, Arbed & Aceralia 2002 Stock:100%
  38. 38. Christian Maupetit 38 Financing M&As As shown in the table, the vast majority of the deals are financed using stock. 100% of the M&As transactions (United States and Western Europe) above $70 billion are financed using stock.
  39. 39. Christian Maupetit 39 Merger break down (%) over a 30 year period (USA) Type of merger 1948-1955 1956-1963 1964-1971 1971-1979 Horizontal 39 18.7 12 15 Vertical 12.7 20 6.6 8.3 Conglomerate 10.1 17.7 34.8 45.5 Product line extension 36.1 36.9 38.9 28.2 Market extension 2.1 6.7 7.7 3 Total 100 % 100 % 100 % 100 %
  40. 40. Christian Maupetit 40 Merger break down (%) over a 30 year period France Type of merger 1966-1972 1973-1985 1986-1990 Horizontal 49% 44% 69% Vertical 24% 25% 19% Conglomerate 27% 31% 12%
  41. 41. Christian Maupetit 41 Mergers & Acquisitions in France since 1990 Period number of mergers Euro value 1990 1759 47533 1991 1605 38250 1992 1191 36375 1993 979 27190 1994 997 45598 1995 1221 36932 1996 1243 85677 1997 1356 96463 1998 1251 127578 1999 1302 285200 2000 1319 344641
  42. 42. Christian Maupetit 42 The Alternative Model The Sustainable Merger Governance model is based on a set of actions, taking into account exogenous and endogenous data. Exogenous data could include competition, market capitalization, rules, while endogenous data refers to revenues, management practices, capital/equity structure. The model is linear, based on time and is composed of three inter-related phases.
  43. 43. Christian Maupetit 43 The Alternative Model The first phase or stage prior to the merger represents the valuation approach The second phase describes the implementation process via the ad hoc committee The third stage represents the sustainable post-merger integration
  44. 44. Christian Maupetit 44 The Alternative Model The mapping of the determinants of each company pin points the gaps and the potential areas of risks. This pre-merger diagram is part of a set of score cards. The overall objective is to score each area and to get a global scoring
  45. 45. Christian Maupetit 45 Determinants Determinant type type Profitability organizational objective Operating income organizational objective Wealth creation organizational objective Revenues organizational objective Market capitalization organizational objective Debt ratio organizational objective Net income organizational objective Expertise organizational subjective Managing practices institutional subjective BOD meetings institutional objective BOD valuation institutional subjective Directors background institutional subjective Employees involvement institutional subjective CEO power institutional subjective Capital structure organizational objective
  46. 46. Christian Maupetit 46 The determinants
  47. 47. Christian Maupetit 47 Mapping Determinants Company A, Company B 0 20 40 60 80 100 Dt 1 Dt 2 Dt 3 Dt 4 Dt 5 Dt 6 Dt 7 Dt 8 Dt 9 Dt 10
  48. 48. Christian Maupetit 48 SMG model Firm A Firm B Phase 1 Phase 2 Phase 3 Merger Time New entity
  49. 49. Christian Maupetit 49 Structure of the model Stage one: Pre-merger valuation approach Stage two: implementation process via the ad hoc committee Stage three: sustainable post merger integration
  50. 50. Christian Maupetit 50 Phase one The first stage prior to the merger, pictures the two potential merger players. This stage gives an overview of the key characteristics of each entity prior to the merger. The radar graph highlights the corporate profile and pin points the gaps between the determinants for each company.
  51. 51. Christian Maupetit 51 Phase two The second phase, which occurs after the legal merger, describes the implementation process via the ad hoc committee. The role of the ad hoc committee is to replace the traditional post merger board with an ad hoc committee, having full authority for the entire range of legal and managerial decisions.
  52. 52. Christian Maupetit 52 The committee has two distinct missions  Integration of the post merger phase in accordance with the long term strategy of the new entity  Recruitment of future Directors and CEO.
  53. 53. Christian Maupetit 53 Phase three The second mission of the Ad Hoc committee is to sustain the development of the new company according to the long run corporate strategy. After a period of partnership and leadership management the Ad Hoc committee transfers the entity to insiders and recruits directors and the CEO.
  54. 54. Christian Maupetit 54 remarks: http://www.imaa-institute.org/statistics-mergers-acquisitions.html#TopMergersAcquisitions_Europe
  55. 55. Christian Maupetit 55 Potential listed companies to be selected by students: • Arcelor/Mittal • Daimler/Chrysler • HP/Compaq • Air France/KLM • EDF/Suez • Alcatel/Lucent • Sanofi/Aventis • Renault Volvo/Nissan (Alliance) • EADS-BAE

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