This streamed revision presentation examines the problems of takeovers and mergers including difficulties integrating businesses successfully

1. The problems of takeovers and
mergers including difficulties
integrating businesses successfully

2. Key points
• Every takeover or merger involves
some kind of integration
• But degree of integration will vary
depending on factors such as:
– Need for cost synergies
– Compatibility of corporate cultures
– Size, timing, nature of the deal

3. Key terms
• Merger integration: the process of bringing
together the functional areas of buyer & target
business (e.g. organisational structure, systems,
operations, marketing, people, merging
cultures)
• Dis-synergy: costs or lost revenues that arise as
a result of the transaction (e.g. lost customers)
• Cross-border: buyer and seller based in
different countries (although both may be
multinationals)

4. Key theories & concepts
• Corporate culture: the “way that things
are done”; often different, even
amongst firms in the same market.
• Stakeholders: different people and
groups who have an interest in the
effect of the M&A transaction (e.g.
customers, employees, local
community).

5. Overview of the takeover process
Target Identification
& Choice
Valuation & Offer
Due Diligence &
Completion
Post-acquisition
Integration

6. Characteristics of a badly-managed
takeover
• Limited due diligence
• Price to high
• Over-estimate of potential for synergies
• Lack of, or too simplistic, integration
plan
• Indecision once the takeover is
complete
• Poor communication with key
stakeholders

7. Target choice
• Key issues to consider:
• How does the target fit with the
corporate strategy
• How well will the target organisation
and culture fit?
• What is the potential for synergies?

8. Target choice – the ideal target?
Potential for
Strategic fit Cultural fit
value creation
• Consistent with • Similarity of • Revenue
corporate cultures synergies
objective • Few significant • Cost synergies
• Complements barriers (e.g. • Target price is
the strategy language) reasonable
• Top • Integration is
management can achievable /
work together realistic

9. Complications for public companies
• The existing share price indicates the
market value of the firm
• However, takeover usually requires a
substantial bid premium
• Bid premium typically 30-40% more than
share price prior to bid announcement
• Regulation of bid via Takeover Panel
rules adds complexity & cost

10. Target valuation
Valuation has to strike a balance
Interests of buyer Interests of target
shareholders shareholders
Don’t pay too Get the best
much! price!

11. But acquisitions usually fail
It is widely accepted
that over 50-70% of
takeovers destroy
shareholder value

12. The danger of over-valuation
• The easiest way to
destroy shareholder
value is to over-pay
• Extra danger of
over-paying is trying
to cut costs too
quickly to justify
price paid

13. Paying too much - The Winner’s Curse

14. Example of the Winner’s Curse - RBS
• In 2007, RBS was part of a
consortium that bid £49bn as
it competed to buy ABN-Amro
• RBS clearly overpaid for the
takeover
• The subsequent effect on RBS's
capital reserves led to the
forced nationalisation of RBS
in 2008 to avoid a collapse of
the UK banking system

15. Checking what you are buying: due diligence
Financial
Commercial
Legal

16. Another possible problem: friendly or
hostile takeover?
Hostile Friendly
Target Board Target Board
Rejects Offer Accepts / Supports Offer

17. Friendly takeovers
Buyer Target Board Shareholders
Legal
approaches negotiates & of both firms
completion of
target Board agrees price / approve the
takeover
with offer terms deal
The vast majority of takeovers are friendly

18. Hostile takeovers
Target
Buyer Buyer makes
shareholders
approaches Target Board offer direct to
decide
target Board rejects offer target
whether to
with offer shareholders
accept
Hostile takeovers are unusual, often bitterly
contested and costly

19. Some common problems with hostile
takeovers
• Senior management in the target often
leave en masse = loss of experience &
expertise
• Resentment amongst target
stakeholders (local community,
employees)
• Increased risk that the buyer pays too
much for the takeover

20. Taking over a close competitor
• Usually horizontal integration
• Should be plenty of overlap, which creates
potential for cost synergies
– Distribution channels
– Suppliers (increased buying power)
• Also much potential for conflict
– Competing brands: which ones to retain & support?
– One firm will inevitably be favoured; effect on
employees on the other side?
• Competitors will seize on disruption and
uncertainty

21. Key problems with takeovers
• High costs involved (including disruption to business)
• Paying too much for the takeover (over-valuation)
• Clash of cultures – makes it hard to communicate
• Lost customers – potentially lower revenues (dis-
synergy)
• Resistance from target employees and management,
which slows potentially necessary change
• High failure rate – 70%+ destroy shareholder value
• Management distraction – their attention is away
from the core, existing business – which then suffers

22. The importance of integration
“ In the heyday of M&A, whilst the
champagne glasses clinked, you would
often see an ashen-faced figure in the
“
corner – the operations director, whose
job it was to make it work”

23. Post-takeover integration
The hardest part of a
takeover is making
the deal work once it
is completed

24. Ways to avoid integration problems
• Detailed due diligence – focused on the likely areas of
risk (e.g. IT systems, impact on customers etc.)
• Careful integration planning – a detailed action plan
based on pre-takeover due diligence.
• Act quickly: the first 100 days are often considered
vital for the overall success of the takeover or merger.
• Clear communication about the objectives of the
transaction and the honesty about the implications
for key stakeholders (particularly employees).
• Respect the culture of the target business

25. Some examples of integration (+ & -)
Takeover / merger Integration Experience / Issues
Kraft / Cadbury Most senior Cadbury managers have left; but little effect on operations or
sales
Daimler / Chrysler Disastrous clash of corporate cultures – eventually split up in 2007
Tata / JLR Excellent example of well-planned takeover & sensitive long-term
integration plan
RBS / ABN-Amro Very poor quality due diligence & absence of realistic integration plan
Santander / Abbey Textbook example of how to integrate takeovers – focusing on IT systems
News Corp / Entrepreneurial online culture fails to thrive in a bureaucratic, corporate
Myspace culture
Coca-Cola / Need for integration reduced by allowing target to continue operating
Innocent independently
Orange UK / T- Difficult integration due to many overlaps in systems, operations and
Mobile UK management

26. “Hard” and “Soft” parts to takeover
integration
Hard Soft
• IT and other systems • Organisational structure
integration • Management
• Distribution appointments
(conflicts, extension) • Communication
• Elimination of duplicated • Handling different
activities and costs cultures
• Transfer of contracts
• Financial reporting and
responsibilities

27. Integration success will “depend on”…
• The speed of the deal: takeovers that are negotiated over a
longer period may have fewer integration issues as both
sides build better understanding
• Friendly or hostile: has there been a battle for control?
Hostile takeovers often result in greater resentment
amongst stakeholders in the acquired business.
• Experience of the acquiring firm: management with a track
record of negotiating and integrating takeovers less likely to
experience problems
• The type of takeover: e.g. a private equity transaction
involves relatively little integration – the deal is really about
financial motives
• The genuine differences or contrasts in corporate culture

28. Acquisitions and change
• An acquisition poses significant
challenges for management
• Employees
– E.g. Uncertainty about acquirer intentions &
strategy (cost savings, rationalisation)
• Customers
– E.g. continued relationship; impact on quality
• Management (of acquired business)
– E.g. duplicated roles, new hierarchy

29. Why acquisitions fail
• Price paid for acquisition was too high (over-estimate
of synergies)
• Lack of decisive change management in the early
stages
• The takeover was mishandled
• Cultural incompatibility
• Poor communication
• Loss of key personnel & customers post acquisition
• The creation of a lumbering giant that is soon
outpaced by smaller rivals

30. Evaluation opportunities
• How similar are the two businesses concerned
in the takeover or merger?
– E.g. is integration complicated by lots of duplication
between the two operations?
• How important are the achievement of
synergies to making the transaction a success?
– E.g. if significant cost synergies need to be achieved in
order to justify the price paid for the business, then the
integration may need to be more substantial. High job
losses & resulting uncertainty may increase resistance to
change & integration.

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Mergers Blog for more resources