Mergers & Acquisitions


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Introduction to M&A activity and the most important drivers.

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  • Mergers & Acquisitions

    1. 1. Mergers & Acquisitions Prof. dr. Ruud Pruijm RA
    2. 2. An Introduction
    3. 3. What is all about? <ul><li>“ The buying, selling and combining of different companies to grow rapidly without having to create another business entity.” </li></ul>
    4. 4. Varieties of takeovers <ul><li>A takeover refers to the transfer of control of the firm from one group of shareholders (i.e. the “bidder”) to another </li></ul><ul><li>Takeovers occur by acquisition, proxy contest, or going private </li></ul><ul><li>Proxy contests occur when a group of shareholders attempts to gain controlling seats on the board of directors by voting in new directors. </li></ul><ul><li>In going private transactions all the share of a public firm are purchased by a small group of investors. The shares are delisted from stock exchanges. </li></ul>
    5. 5. Basic forms <ul><li>Merger </li></ul><ul><ul><li>Absorption of one firm by another, and it acquires all of the assets and liabilities of the acquired firm </li></ul></ul><ul><ul><li>Acquired firm ceases to exist </li></ul></ul><ul><li>Acquisition </li></ul><ul><ul><li>Of stock: buying stock in a public offer </li></ul></ul><ul><ul><li>Of assets: buying all the assets in an offer </li></ul></ul>
    6. 6. Motives <ul><li>Revenue enhancement </li></ul><ul><ul><li>E.g. better distribution network, better product mix, filling in the missing pieces </li></ul></ul><ul><li>Cost reduction </li></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><ul><li>Vertical integration: easier coordination </li></ul></ul><ul><li>Inefficient management </li></ul>
    7. 7. Takeovers <ul><li>Strategic </li></ul><ul><ul><li>The bidder is a company </li></ul></ul><ul><ul><ul><li>Akzo Nobel bid on ICI </li></ul></ul></ul><ul><ul><ul><li>Takeover of Scottish & Newcastle by Heineken and Carlsberg </li></ul></ul></ul><ul><li>Financial </li></ul><ul><ul><li>The bidder is private equity </li></ul></ul><ul><ul><ul><li>Stork by Candover </li></ul></ul></ul><ul><ul><ul><li>VNU by KKR, Carlyle en Alpinvest </li></ul></ul></ul><ul><ul><li>Trigger: activist hedge funds and private equity </li></ul></ul>
    8. 8. M&A Funding <ul><li>Hedge funds </li></ul><ul><ul><li>9,000 funds managing over $1.2 trillion in assets in 2006 </li></ul></ul><ul><li>Private Equity </li></ul><ul><ul><li>25% of deals, average deal size $800 million </li></ul></ul><ul><ul><li>Mega funds: Top 5 - $115 billion </li></ul></ul>
    9. 9. Companies at Risk? <ul><li>Chronic underperformers </li></ul><ul><li>Perception of “missed opportunities’ </li></ul><ul><li>Lower market capitalization relative to peers </li></ul><ul><li>Substantial cash balances </li></ul>
    10. 10. Leverage is important Give me a place to stand and a lever long enough and I will move the world. Archimedes
    11. 11. Example: Buying a house <ul><li>Price: $200.000 </li></ul><ul><li>Cash: payment $20.000 </li></ul><ul><li>Mortgage: $180.000 </li></ul><ul><li>Leveraged investment </li></ul><ul><li>Gearing factor 10 </li></ul>
    12. 12. Power of Leverage <ul><li>Why borrow capital (debt) to fund a buyout transaction? </li></ul>$25 (profit) / $30 (invested amount) = 83% $25 (profit) / $100 (invested amount) = 25% Simple Return Calc: $25 million $25 million Profit: $125 million $125 million Selling Price (1 year later): $30 million (30%) $100 million Equity $s Invested: $100 million $100 million Purchase Price Today: LBO Cash Purchase Transaction Structure:
    13. 13. Carlyle Capital <ul><li>Mortgage backed securities: $ 21,7 billion </li></ul><ul><li>Equity: $ 670 million </li></ul><ul><li>Leverage: 32 </li></ul>
    14. 14. Risk of leverage <ul><li>Small drop in value of asset may wipe out entire deposit </li></ul><ul><li>Risk: negative equity, owing the bank more than the current value of the asset </li></ul>
    15. 15. Shareholder Activism <ul><li>Hedge funds increasingly active shareholders </li></ul><ul><ul><li>Minority position (<5%) in public company </li></ul></ul><ul><ul><li>Sophisticated review of target’s strengths and vulnerabilities </li></ul></ul><ul><ul><li>Publicly advocating for actions that increase value </li></ul></ul>
    16. 16. Recent examples <ul><li>Royal Dutch Shell: reserve scandal, accountability and unification </li></ul><ul><li>VNU: Opposition to purchase of IMS Health </li></ul><ul><li>CSM: Fat balance sheet, new strategy and new CEO </li></ul><ul><li>Euronext: Strategic options and the European Identity </li></ul><ul><li>Stork: Public to private and focus on Aerospace </li></ul><ul><li>ABN Amro: buying 1% and writing a letter tot the board </li></ul>
    17. 17. Actions to increase value <ul><li>Significant share buybacks or an extraordinary dividend </li></ul><ul><li>Sale or spin-off of an underperforming or non-strategic business </li></ul><ul><li>Corporate governance changes ( e.g. , management changes, Board seats) </li></ul><ul><li>Sale of target company to them or the highest bidder </li></ul>
    18. 18. Hedgefunds in the press <ul><li>Barbarians at the gate </li></ul><ul><li>The new Raiders </li></ul><ul><li>Locusts </li></ul><ul><li>Activist shareholders </li></ul><ul><li>Grave-diggers of public corporations </li></ul>
    19. 19. Recent Events
    20. 20. Takeovers last 5 years <ul><li>Worlddirectories 2,5 </li></ul><ul><li>NIB Capital 2,1 </li></ul><ul><li>SBS Broadcasting (SBS6, Net5, Veronica) 1,7 </li></ul><ul><li>Vendex KBB 1,4 </li></ul><ul><li>Kruidvat 1,3 </li></ul><ul><li>Versatel 1,2 </li></ul><ul><li>Kwikfit 1,2 </li></ul><ul><li>CSM Snoepdivisie (Redband, Venco, Sportlife) 0,9 </li></ul><ul><li>PCM (NRC Handelsblad, Volkskrant, Algemeen Dagblad) 0,7 </li></ul><ul><li>Casema (kabelmaatschappij) 0,7 </li></ul><ul><li>Kluwer wetenschappelijke uitgaves 0,6 </li></ul><ul><li>Telefoongids 0,5 </li></ul><ul><li>Ahrend 0,3 </li></ul><ul><li>DSM Bakkerijdivisie 0,3 </li></ul>Source; EVCA, PriceWaterhouseCoopers, 2007.
    21. 21. Shareholders? <ul><li>Short-term objectives </li></ul><ul><li>Focus only on profit </li></ul><ul><li>No regard for other stakeholders </li></ul>
    22. 22. General feeling <ul><li>Shareholders have too much power </li></ul><ul><li>Employees pay the bill </li></ul>
    23. 23. Conclusion <ul><li>M&A activity has a negative perception in the Netherlands </li></ul><ul><li>Fear of exodus of Dutch companies </li></ul><ul><li>Stakeholder value as a concept is losing its dominance </li></ul><ul><li>Shareholders have too much power </li></ul>
    24. 24. CV Prof. Dr. R. A. M. Pruijm CPA is management-consultant, interim-manager and professor emeritus Accounting Information Systems at the Erasmus University Rotterdam. He was recently appointed as part-time lecturer Corporate Governance at the Fontys Professional University. He is a well-known expert in corporate governance, corporate social responsibility, and business ethics. Corporate governance is a generic term that describes the ways in which rights and responsibilities are shared between the various corporate participants, especially the management and the shareholders. Corporate governance is about promoting corporate fairness, transparency and accountability. Corporate social responsibility is about open and transparent business practices, that are based upon ethical values and respect for employees, communities, and the environment, designed to deliver sustainable value to society at large and to shareholders. For over 30 years Professor Pruijm has been speaking to top level business executives and organizations all over the world. He is author of numerous books and articles, and is a regular guest on radio and television. As an independent observer and thought-leader he is frequently consulted by the press, politicians, and business leaders. Office: Kievit 12 -113 5111 HD Baarle Nassau Tel. 013 – 507 03 41 Mobile 06 547 36 391 E-mail: [email_address]