2. INDEX
Mergers and acquisitions
Definition
Pro and Cons
Types and why
Transaction characteristics
How to do it: Steps and Documents
Summary
The Air France-KLM Story
3. MERGERS
Company
A
Company
B
Company
C
The term «MERGER» is used to define an
economic deal to merge two already
existing companies into a new one, with a
mutual decision. It implies the transfer of
the properties to the new one.
Also, the owners of the existing firm
maintain their position and the resources of
the merging firms are collected for the
benefit of the new entity.
4. There are 4 main types of merger:
Conglomerate
Market extension
Product extension
Horizontal merger
Vertical merger
TYPES OF MERGER
5. TYPES OF MERGER:
1. CONGLOMERATE
It refers to a merger between firms involved in completely
unrelated business activities.
Why?
1. It is useful for diversification into other industries meaning also
a reduction of risks.
2. It allows the exploitation of synergies and as a consequence the
elimination of redundant activities by consolidating certain
departments.
3. It is used if a firm has an excess of cash but at the same time it
has not enough opportunities in which to invest this cash for
grow in the same industry.
6. It takes place between two companies dealing with the same
products branch but in separate markets.
Why?
1. To make sure that the merging company can get easily access to
a bigger market.
2. To ensure a large slice of clients.
TYPES OF MERGER:
2. MARKET EXTENSION
7. It occurs between two business organizations dealing with products
that are related to each other and serve the same market.
Why?
1. It allows the merging companies to group together their
products and getting access to a bigger set of customers.
2. It ensures higher earnings.
TYPES OF MERGER:
3. PRODUCT EXTENSION
8. It occurs between companies belonging to the same industry and
operating in the same space. They are often competitors that offer
the same good or service. It is present mostly in industries with few
firms and implies higher profits for the merging companies.
Why?
1. It eliminates competition. This will help the company to increase
its market share, revenues and profit.
2. It permits economies of scope because it is cheaper for two firms
to mix their output rather than create it separately.
3. It offers economies of scale due to the increase in size and so
lower costs because of higher production.
4. It encourage cost efficiency because some redundant and
wasteful activities are removed from operations.
TYPES OF MERGER:
4. HORIZONTAL MERGER
9. TYPES OF MERGER:
5. VERTICAL MERGER
It takes place between two companies the produce different goods or
service for one specific finished product, it occurs when firms operating
at different levels within an industry’s supply chain, merge operations.
The logic behind is to increase synergies created by merging firms that
would be more efficient.
Why?
1. To secure supply essential goods and avoid disruption.
2. To restrict supply to competitors.
3. It allows to gain higher market share, revenues and profits.
4. It offers cost saving and higher margin of profit due to the removal
of manufacture’s share.
10. MERGERS: PRO
Creating value
Synergy
Growth
Increasing market power
Acquiring unique capabilities or resources
Unlocking hidden values
Others
Overcome adverse government policy
Technology transfer
Product diversification
11. MERGERS: CONS
Higher prices
For the reduction of competition
Less chioice (for customers)
Job losses
Especially if it is and aggressive takeover
Diseconomies of scale
After a merger the firm may lack control and may struggle to
motivate workers
12. Company
X
Company
Y
Company
X
An acquisition is a corporate action where
a firm buy another firm with the aim of
using a core competencies and take control
over its assets and management.
It is often made as part of a company's
growth strategy.
An acquisition can be:
Friendly
Hostile
ACQUISITIONS
13. We can classify acquisition according to:
Type of acquirer
Aim of the of deal
Geographical characterization of the deal
TYPES OF ACQUISITIONS
14. Private company, with private ownership VS State-owned firm, a
legal entity that undertakes commercial activities on behalf of the
state.
Industrial firms vs Services firms.
Private Equity, composed of funds and investors that directly invest
in private companies, or that engage in buyouts of public companies,
resulting in the delisting of public equity. Institutional and retail
investors provide the capital for private equity, and the capital can be
utilized to fund new technology, make acquisitions, expand working
capital, and to bolster and solidify a balance sheet.
TYPES OF ACQUISITIONS:
1. TYPE OF ACQUIRER
15. The deal could have 2 different aims:
Financial aim, when the acquirer is a specialized fund which buys the
firms just for having a profit margin by selling it after a very short
period of time. The value of the purchases company is the critical key to
maximize the profit.
Strategic aim, when the acquirer is an industrial or services firm.
There are four main categories of strategic aims:
• Wide portfolio diversification
• Proximity of the portfolio
• Backward/Forward integration
• Consolidation of the competitive position
TYPES OF ACQUISITIONS:
2. AIM OF THE DEAL
16. Nowadays, the acquisition between developed and developing countries
(BRIC) are increased. We can identify 3 different transactions:
1. Firms of developed countries acquire firms of developing
countries. They are looking for new opportunities related to the
dimension and market growth rate in developing area.
2. The acquirer is from a developing country whereas the acquired is
from a developed country. The former could take advantage from
the advanced technologies and high knowledge, but also from the
strong brands reputation in the portfolio.
3. Both the acquired and the target come from developing countries.
The operations are often cross border but almost always within a
specified geographical macro area (Asia, East Europe, South
America).
TYPES OF ACQUISITIONS:
3. GEOGRAPHICAL CHARACTERIZATION OF
THE DEAL
17. ACQUISITIONS: PRO
Creating value
Speed and efficiency
Market power
New resources and competencies
Financial gain
Others
Reduced entry barriers
Technology transfer
18. ACQUISITIONS: CONS
Financial fallout
Higher-than-anticipated price of acquisition
Lost of key management personnel and key customers
Fewer synergies than projected
Hefty costs
The cost of acquisition (situations of hostile takeover bids)
Integration issues
Unrelated diversification
Distraction from operations
Too many challenges too much of the managerial focus is diverted
away from internal development and daily operations
19. TRANSACTION CHARACTERISTICS
FORM OF THE TRANSACTION
Asset purchase
The acquirer buys assets of the target firm, paying the firm directly.
It may not need shareholder approval
It mostly deal with purchasing only a part of the company, so the
acquirer avoids assumption of liabilities.
Stock purchase
The acquirer provides cash, stock, or combination of cash and stock
in exchange for the stock of the target firm.
It needs shareholder approval (the process is longer)
It mostly deal with purchasing the entire company, so the acquirer
assumes target’s liabilities.
20. TRANSACTION CHARACTERISTICS
FRIEND OR FOE?
Friendly acquisition: The offer is made through the target’s board of
directors.
Hostile acquisition: The target management is not willing to sell
Bear Hug: Informal offer directly to target shareholders.
Tender offer: Formal offer made directly to target shareholders.
Proxy Fight: Acquiring party solicits proxies (votes); when it has
sufficient proxies, it has representatives elected to the target
company BoD.
Approach
target
management
Enter into
merger
discussions
Perform due
diligence
Enter into a
definitive
merger
agreement
Shareholders
and
regulators
approvement
21. HOW TO DO IT: STEPS
Fist of all a preliminary analysis is needed.
It is important to run a deep strategic business analysis, made of:
Industry analysis:
Products, competitors and key success factors
Business strategy analysis:
Description of strategic goals, operational capabilities and
performance of the business
SWOT analysis:
Internal and external factors that affect the company’s business
strategy
22. HOW TO DO IT: STEPS
PLANNING
STAGE
• Signing the letter of intent
• Appoint of advisors
• Dealing the timetable
• Expert report on the consistency of the share exchange ratio
RESOLUTION
STAGE
• The BoD calls an extraordinary shareholders’ meeting
• The extraordinary shareholders’ meeting has to pass a resolution on
the merger
• Any opposition by creditors/bondholders must be carried out within 60
days of the resolution
IMPLEMENTATION
• Enrolment of the deed in the Company Register
23. HOW TO DO IT: DOCUMENTATION
Letter of intent
Generally does not bind the parties to commit to a transaction
Due diligence
Investigation of the firm
Definitive agreement
A contract that focus on 5 key types of terms:
Conditions to be satisfied
Representations and warranties
Termination rights
Provisions
Covenants which govern the conduct of the parties
24. DIFFERENCES
MERGER ACQUISITION
It keeps name and brand It can’t keep name and brand
Mutual benefits for both the firms
involved
In case of default there is risk for
the acquired company
Firm’s individual culture remain
strong
Loss of individual characteristics
No changes in employees’ behaviour Possible negative consequence on
employees
Each pre-owner remains owner Responsibilities are not equally
distributed between firms
It is a mutual decision It can be friendly or hostile
It is time consuming and expensive It’s faster and easier
Dilution of ownership No dilution of ownership
The payout consist in equity of the
new firm
The payout consist in cash or other
payment
25. KLM AND AIR FRANCE MERGER
KLM Royal Dutch Airline was founded in 1919.
It is the oldest airline in the world still operating under its original
name and base.
The first flight, from London to Amsterdam was in 1920 and in 1924 a
flight took off to Indonesia inaugurating KLM’s first intercontinental
flight.
125.000 city-pair connections connecting 350 cities in 73 countries on
six continents.
KLM Group has four core activities: passenger transport, cargo
transport, engineering and maintenance and the operation of charters
and low cost/low fare.
26. THE DIFFERENT ALLIANCES
KLM-Northwest alliance in 1991. The aim was: to create a code-share and
increase cooperation. It was often considered the closest alliance around,
having both anti-trust immunity and extensive sharing of revenues and
expenditures on trans-Atlantic flights.
AIR-Union (EuropeAir) in 1958 between KLM, Lufthansa, Air France and
Alitalia (not successfully).
Alcazar in 1994 between SAS, Finnair, Swissair, KLM and Austrian Airlines,
concluded with Lufthansa and SAS close co-operation agreement that
became the European foundation of the future STAR Alliance.
KLM-Alitalia in November 1999 engaged in a partnership that was intended
to create Europe’s largest passenger and cargo airline systems. The
expected synergies among the two airlines were valued at €400 million
involving:
Commercial synergies
Network optimization
Fleet expansion
Commercial costs savings
Cargo
27. KLM AND AIR FRANCE MERGER
The synergies for the company:
Network optimization
Improved organization of passenger and cargo operations
Expanded offering of maintenance services
Cost reductions in purchasing
Sales distribution
For the customers:
Expanded network
Attractive fares
Enhanced service
In 2003 KLM and Air France announced a deal, not an alliance but a merger.
The new entity, which will be the world’s largest airline group by turnover
(19.2 billion euros) and a world leader in its three core businesses:
Passengers, Cargo and Maintenance.
28. FINANCIAL PERFORMANCES AFTER THE
MERGER…
Net income was 3.2 billion Euros
Margin from 2.3% in 2003-4 to 6.7% in 2007-8
Turnover from 7.3% to 13.3%
29. WELCOME TO SKYTEAM
In September 2003, KLM joined.
The alliance offers a broad network for customers to connect via a multi-
hub system to hundreds of cities around the world, increases ease of
ticketing, check-in and baggage handling, allows customers to receive
frequent flyer benefits on all carriers, and makes travel on any of
the airlines a seamless experience.
In 2004, Continental Airlines and Northwest Airlines joined the SkyTeam.
120 new destinations (including 9 new Asian destinations), more than
110 new lounges and more than 5,500 new daily departures.
The SkyTeam hubs include: Amsterdam, The Netherlands; Paris,
France; Cleveland, Guam; Ohio, Houston, Texas, Newark, New Jersey,
Detroit, Michigan, Memphis, Tennessee, Minneapolis/St. Paul, Minnesota,
United States; and Tokyo, Japan.
For branded alliances to take advantage of full cooperation it is
necessary to get anti-trust immunity to coordinate capacities and prices.
In 2008 the Us department of transportation approved transatlantic
antitrust immunity for the SkyTeam members.
30. ALITALIA JOINING
In 2004 Alitalia joined the new Air France-KLM group as a full partner.
However, the company was in a difficult financial situation. The Italian
flag carrier reported €511 million on revenues of 5 billion in 2003 but
also it reported an estimated net loss of €850 million, but posting a
substantial improvement in 2005 with a net loss of €166 million.
The objective was to halt losses to avoid the company’s failure.