BoostingCorporate Performance       throughMergers & Acquisitions       Errol Danziger   Danziger Capital Partners LLP    ...
This Presentation Reviews Three           Topics…   • What is corporate performance, and     how is it measured?   • How c...
What Is Corporate Performance? In a nutshell - • Firm profitability • Operating efficiency • Manufacturing or service prod...
Performance Analysis    is a Process that …• Evaluates the firm’s progress  towards achieving goals and  objectives set by...
Whose Performance Matters? One or more, or all, of : • The company • The CEO • The senior management • The operating manag...
When is Performance Evaluated?Daily, by banks examining yesterday’s performance and calculating tomorrow’s value at riskMo...
How is Performance Measured?• On an absolute basis, as where a  automobile manufacturer measures the  number of units prod...
Approaches to Measuring         Performance   Accounting measuresShare price     Market value measures                  Ec...
Accounting Measures of           Performance     Sales margins  - operating costs= Operating income                      O...
Market Value Measures of            Performance• Return on equity =         ratio of net income : equity• Return on assets...
Economic Value Added®•   Net income after deducting the return demanded by investors.•   EVA =    = residual income =    =...
Share PriceEvery change in share price reflects –Firm-specific news – a new product,  CEO appointment, change in  corporat...
Cost of Capital“A company that generates a       return on capital      that is less than        cost of capital   is dest...
Reasons for     Poor Corporate Performance• Inefficient management of existing assets• Under-investment in new opportuniti...
How can Performance be           Boosted?• Increase cash flow from assets in  place• Increase expected growth• Lengthen pe...
Increasing Cash Flow from           Assets in Place• Redeploy existing assets to more  profitable uses• Improve operating ...
Increase Expected Growth• Make new investments in new  projects and firms• Use existing assets more  efficiently by changi...
Lengthen the Period of         High Growth• Lengthen the initial high growth  period in which firm growth  outperforms com...
Reducing the cost of financing• Make products or services less  discretionary, by converting them into  “must haves”• Redu...
Improve Management of    Non-operating Assets• Cash and marketable securities  reduced by dividend payments and  share buy...
Mergers and Acquisitions can    Boost PerformanceBecause -• Shareholders like to invest in  acquisitive companies• Analyst...
Acquisitions boost performance           through … • Finding bargains that have been   undervalued by the market • Financi...
Operating synergy achieved          through …• Economies of scale gained through  combining two businesses and reducing  c...
Financial synergy achieved         through …• Cash slack providing flexibility to  pursue new projects• Debt capacity enab...
Restructuring the target, where     success depends on …• Poor performance attributable to  incumbent or past management• ...
Achieving performance targets in              M&A•   Size and quality•   Cost savings versus growth•   Acquisition for con...
Based on a presentation delivered at the Performance and ManagementConference 2011: Delivering Efficiency and High Perform...
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Boosting Corporate Performance Through Mergers and Acquisitions

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Analysis of corporate peformance, how performance is achieved, diagnosing poor performance, and how peformance is boosted by mergers and acquisitions

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Boosting Corporate Performance Through Mergers and Acquisitions

  1. 1. BoostingCorporate Performance throughMergers & Acquisitions Errol Danziger Danziger Capital Partners LLP September 2011
  2. 2. This Presentation Reviews Three Topics… • What is corporate performance, and how is it measured? • How can corporate performance be improved? • How can mergers and acquisitions boost performance?
  3. 3. What Is Corporate Performance? In a nutshell - • Firm profitability • Operating efficiency • Manufacturing or service productivity • Shareholder and debtholder returns
  4. 4. Performance Analysis is a Process that …• Evaluates the firm’s progress towards achieving goals and objectives set by management• Compares firm performance with other companies in the firm’s peer group
  5. 5. Whose Performance Matters? One or more, or all, of : • The company • The CEO • The senior management • The operating management • The line management • The operating personnel
  6. 6. When is Performance Evaluated?Daily, by banks examining yesterday’s performance and calculating tomorrow’s value at riskMonthly, by firms that have to repay debt based on a monthly repayment scheduleQuarterly, by listed companies that have to file a quarterly stock exchange trading updateAnnually, by major companies that have to report comprehensive annual results to shareholders
  7. 7. How is Performance Measured?• On an absolute basis, as where a automobile manufacturer measures the number of units produced per day• On a comparative basis, as where one firm’s results are compared with the results of other listed companies in its industry• Against a benchmark that reflects the performance of the broader economy, such as the FTSE 100 or the S&P 500
  8. 8. Approaches to Measuring Performance Accounting measuresShare price Market value measures Economic Value Added Cost of capital
  9. 9. Accounting Measures of Performance Sales margins - operating costs= Operating income Operating income - operating costs - depreciation - provisions = Net income
  10. 10. Market Value Measures of Performance• Return on equity = ratio of net income : equity• Return on assets = ratio of net income : total value of assets• Return on assets = profit margin x asset utilisationRatio of – market value per share : book value per share
  11. 11. Economic Value Added®• Net income after deducting the return demanded by investors.• EVA = = residual income = = income earned – income required = = income earned – cost of capital x investment 40 35 Mallet plc 30 Shareholders’ Funds Movement 1997 - 2010 25 20 SHAREHOLDERS FUNDS 15 10 5 0 1997 2000 2003 2006 2009
  12. 12. Share PriceEvery change in share price reflects –Firm-specific news – a new product, CEO appointment, change in corporate governanceEconomic news – interest rate rise or fall, recession or boomIndustry news – competitor launches competing product
  13. 13. Cost of Capital“A company that generates a return on capital that is less than cost of capital is destroying value.” - Errol Danziger
  14. 14. Reasons for Poor Corporate Performance• Inefficient management of existing assets• Under-investment in new opportunities• Over-investment in ill-advised projects• Strategic neglect of industry trends and opportunities• Inadequate leverage with inferior return on equity• Excessive leverage with increased bankruptcy risk• Financing errors in currency, loan period and loan term matching• Excessive cash retention• Excessive conglomeration
  15. 15. How can Performance be Boosted?• Increase cash flow from assets in place• Increase expected growth• Lengthen period of high growth• Reduce cost of financing• Manage non-operating assets
  16. 16. Increasing Cash Flow from Assets in Place• Redeploy existing assets to more profitable uses• Improve operating efficiency and eliminate wasteful expenditure• Reduce the corporation tax burden• Reduce maintenance of capital equipment• Reduce working capital expenditure on inventory and receivables
  17. 17. Increase Expected Growth• Make new investments in new projects and firms• Use existing assets more efficiently by changing the use of existing assets to more productive applications
  18. 18. Lengthen the Period of High Growth• Lengthen the initial high growth period in which firm growth outperforms competitors and exceeds cost of capital, before the firm becomes a stable growth firm• Strengthen barriers to entry by competitors by making products and services “must have”
  19. 19. Reducing the cost of financing• Make products or services less discretionary, by converting them into “must haves”• Reduce operating leverage by limiting the amount of fixed costs• Change the financing mix by increasing cheaper debt financing and reducing expensive equity financing• Match financing to assets by ensuring that long-term assets are not financed with short-term borrowing
  20. 20. Improve Management of Non-operating Assets• Cash and marketable securities reduced by dividend payments and share buybacks• Holdings in subsidiaries and affiliates rationalised and publicised• Pension fund assets and liabilities balanced to ensure that balance sheet is not harmed
  21. 21. Mergers and Acquisitions can Boost PerformanceBecause -• Shareholders like to invest in acquisitive companies• Analysts like to recommend growth companies• Acquisitions mean quick growth and better financial performance short- term
  22. 22. Acquisitions boost performance through … • Finding bargains that have been undervalued by the market • Financial and operating synergy realised through M&A • Restructuring of targets to make them profitable once more • Merging with successful companies that can improve bidder performance
  23. 23. Operating synergy achieved through …• Economies of scale gained through combining two businesses and reducing combined costs• Pricing power enabling market dominance to increase revenues• Functional strength by combining complementary advantages of parties• Higher growth rate by increased size and product range
  24. 24. Financial synergy achieved through …• Cash slack providing flexibility to pursue new projects• Debt capacity enabling greater leverage across the combined firm• Tax benefits of ability to utilise target’s operating losses
  25. 25. Restructuring the target, where success depends on …• Poor performance attributable to incumbent or past management• Acquisition followed by changed management or new management practices• Target’s market price reflecting target’s status quo situation and not post-merger position
  26. 26. Achieving performance targets in M&A• Size and quality• Cost savings versus growth• Acquisition for consolidation• Synergy valuation• Type of synergy• Mergers boost operating performance• Mergers generate excess returns• Relatedness beats conglomeration• Scaling for size
  27. 27. Based on a presentation delivered at the Performance and ManagementConference 2011: Delivering Efficiency and High Performance, London, 21June 2011Danziger Capital Partners LLP are corporate finance advisers, specialising indebt and equity capital raising, and mergers and acquisitions. Danziger Capital Partners LLP Stirling House 9 Burroughs Gardens London NW4 4AU United Kingdom www.danzigerplc.com

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