Problems of Takeovers and Mergers including Integration
The problems of takeovers and mergers including difficultiesintegrating businesses successfully
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
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)
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).
Overview of the takeover processTarget Identification & Choice Valuation & Offer Due Diligence & Completion Post-acquisition Integration
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
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?
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
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
Target valuation Valuation has to strike a balanceInterests of buyer Interests of target shareholders shareholders Don’t pay too Get the best much! price!
But acquisitions usually failIt is widely acceptedthat over 50-70% of takeovers destroy shareholder value
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
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 RBSs capital reserves led to the forced nationalisation of RBS in 2008 to avoid a collapse of the UK banking system
Checking what you are buying: due diligence Financial Commercial Legal
Another possible problem: friendly or hostile takeover? Hostile Friendly Target Board Target Board Rejects Offer Accepts / Supports Offer
Friendly takeovers Buyer Target Board Shareholders Legal approaches negotiates & of both firms completion oftarget Board agrees price / approve the takeover with offer terms deal The vast majority of takeovers are friendly
Hostile takeovers Target Buyer Buyer makes shareholders approaches Target Board offer direct to decidetarget Board rejects offer target whether to with offer shareholders accept Hostile takeovers are unusual, often bitterly contested and costly
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
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
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
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”
Post-takeover integrationThe hardest part of a takeover is makingthe deal work once it is completed
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
Some examples of integration (+ & -)Takeover / merger Integration Experience / IssuesKraft / Cadbury Most senior Cadbury managers have left; but little effect on operations or salesDaimler / Chrysler Disastrous clash of corporate cultures – eventually split up in 2007Tata / JLR Excellent example of well-planned takeover & sensitive long-term integration planRBS / ABN-Amro Very poor quality due diligence & absence of realistic integration planSantander / Abbey Textbook example of how to integrate takeovers – focusing on IT systemsNews Corp / Entrepreneurial online culture fails to thrive in a bureaucratic, corporateMyspace cultureCoca-Cola / Need for integration reduced by allowing target to continue operatingInnocent independentlyOrange UK / T- Difficult integration due to many overlaps in systems, operations andMobile UK management
“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
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
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
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
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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