Merger Evaluation Framework for Stakeholders


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A Non Financially driven framework for stakeholders to evaluate the impact and benefits of a proposed merger. Includes detailed scoring model and illustration of use by looking at proposed merger of Applied Materials and Tokyo Electron

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Merger Evaluation Framework for Stakeholders

  1. 1. Framework for Stakeholder Evaluation of Technology Mergers The proposed merger between Applied Materials and Tokyo Electron provides a case study for illustrating how stakeholders can review the benefits and alternatives to technology mergers Bill Kohnen October 2013
  2. 2. Summary • Merger activity while stable is likely to grow in the technology sector • Stakeholders can the suggested format to review the impact of a merger • A detailed Framework, Rating System and Guidline based on score is presented • For illustration the recently announced proposed merger of Applied materials (AMAT) and Tokyo Electron (TEL) is used to demonstration application of the framewirk. Bill Kohnen October 2013
  3. 3. Overview • In the first half of 2013 there the value of worldwide merger activity was nearly a trillion dollars • The building blocks for further growth of merger activities remain in place • Lots of deals are being talked about but decision makers remain cautious • Merger activity in the technology arena is expected to become more active as part of the constraint may have been traditional cyclical business concerns. Bill Kohnen October 2013 As activity in the technology sector eventually picks up it is useful for stakeholders to have a framework for consideration of the benefits of a proposed merger
  4. 4. Framework • This is NOT a deep dive financial model that requires a rocket science mathematical financial understanding • This would NOT be best used by an “agnostic” viewer as the framework does requires some experience (objective and subjective) within the scope of the proposed merger • It is not definitive and is meant to lead to further discussion by stakeholders Bill Kohnen October 2013 The recently proposed merger of Applied Materials and Tokyo Electron makes for a real time case study on how the framework could be used and is just done for illustrative purposes.
  5. 5. Framework for Stakeholder Evaluation of a Technology Merger • Companies • Customers • Employees • Local Communities • National Interests • Impact on Technology/Innovation • Consumer Prices • Industry Implications • Alternatives to Mergers Bill Kohnen October 2013
  6. 6. Bill Kohnen October 2013 Category 1 2 3 4 5 Companies Both companies stable and profitable Stable but cyclical challenges to operations and R&D Both companies realtively stable but potential growth One company facing severe short term financial challenge Both companies verge of ceasing operations Customers Support and Service gets worse Support for some areas degrades Support remains same Support from one of merging parties improves Service and Support dramatically improve Employees Immediate loss of jobs both sides Significant loss for one side and shifting of jobs to new areas No Impact as a result of merger Opportnities for growth for exisitng employees Company will add positions in current and new locations worldwide Local Communities Current communities will lose jobs immediately with big economic impact Immediate job loss but mitigated by other industries and growth Benefit primarily to one side with minor loss to other communities No impact on present communities Growth and benfits to present and future sites National Interests Immediate Loss of Critical technology and talent Eventual loss of National capabilty No impact Short term benefit primarily for one side Enhance National Technology and Skills long term Technology/Innovation Merged company will gain proprietary control Innovations and R&D for industry Merged company will have "de facto" control over innovation Merged company shares with preferred customers or through expensive licensng Current innovations availible to broader range of customers Leads to open Innovation for current and future tecnology Consumer Prices Direct Immediate higher prices to consumers Creates differentiated premium pricing where before there was none Impact felt and absorbed in supply chain before consumer No Impact Costs are reduced Industry Implications Harm all but one of merging companies Good only for merging companies Limited improvement 80% of industry benefits weaker players do not Industry Improved "all ships rise" Alternatives to Mergers Continue operations as is Solve current issues via public private consortia Privatization if a public company/ Alternative funding/Joint venture Government intervention No Alternatives Score Details of Rankings
  7. 7. Ranking of Scores Bill Kohnen October 2013 Score Action 9 to 20 Merger not in Interest of Stakeholders and not likely to go through 20 to 30 Potential but subject to Significant Scrutiny and additional stakeholder support needed. Time and Cost needed by proponets of merger to push the concept. Danger that focus on this further erodes stakeholder concerns in the meantime. 30 to 40 In this case a several issues drive the benfit with others being negative or neutral. This is the common space for proposed merged to be in before a vote or decision 40 to 45 Strong Case for Merger
  8. 8. Companies • Both AMAT and TEL have been around since the 60‟s • • Historically both have solid revenues subject to the cyclical nature of the industry • They are ranked #1AMAT and #3 TEL as semiconductor equipment suppliers • The cyclical nature of the overall semiconductor „ecosystem‟ which follows a 2 to 4 year boom or bust cycle. • If they remained independent both AMAT and TEL should have no problem, with proper management, continuing to manage their business very successfully. Bill Kohnen October 2013 Rank: 2
  9. 9. Customers • Individuals at AMAT are good but their process for service and support has always been challenging for customers and they continue to try to charge ever more money for support. • TEL is generally perceived as slow to respond to urgent requests for delivery and failure analysis and can be selective in which customers it supports. • From a customer standpoint it is hard to see how this would improve support Bill Kohnen October 2013 Rank: 1
  10. 10. Employees • Applied and TEL have already downsized tremendously over the years • AMAT has outsourced many functions (it is said you can go to a meeting in an AMAT site and there are sometimes no AMAT employees • TEL has also outsourced lots of functions (for instance installed base support in SE Asia) • Primary HQ seems to be planned in Asia Bill Kohnen October 2013 Rank: 2
  11. 11. Local Communities • AMAT is notoriously hard on its supply base having driven many companies out of business over the years. Giving it even more leverage will be very difficult on these typically small to medium sized business organizations. • The positions lost (even the outsourced ones) are still generally good paying professional positions. • Both AMAT and TEL are good corporate citizens but a reduced footprint in a community would naturally result in less support. Bill Kohnen October 2013 Rank: 2
  12. 12. National Interest • The increased leverage of the merged company could be harmful to small and medium sized business. • AMAT is currently a US based company and TEL Japan based. The new company will be incorporated in the Netherlands. This will mean that the worlds most powerful semiconductor equipment companies AMAT/TEL and current number 2 ASML are based in the same country. • Technology positions will be lost in the US and Japan • Critical technology and innovations supporting important national interests such as; national defense, medical innovation and alternate energy are further concentrated under the control of the merged organization Bill Kohnen October 2013 Rank: 2
  13. 13. Consumer Prices • Both AMAT and TEL are very opportunistic on pricing and level of support based on market position. • With less competition they can certainly increase prices • It is likely however, price increases will be absorbed in the couple of layers in the supply chain between production equipment and consumers Bill Kohnen October 2013 Rank: 3
  14. 14. Industry Implications • AMAT has not always been viewed as a fair participant in industry organizations while TEL has a generally positive view. That being said both AMAT and TEL have employees on the Board of Directors of industry organizations and contribute money to thee organizations. • In absolute terms TEL and AMAT have thousands of customers and a current installed base approaching 100,000 systems • As a practical matter technology development and sales are focused on a handful of major customers such as Samsung, TSMC, Global Foundries and Intel. o These mega customers are used to dictating terms to AMAT and TEL and are unlikely to want to cede any leverage to a supplier. Bill Kohnen October 2013 Rank: 2
  15. 15. Alternatives to Merger • Ultimately there can be benefit for companies to come together to solve advanced technology problems and share the cost of such efforts. • Public/Private consortia are working very well now on the development of 450mm wafer processing and advanced lithography challenges • Transparent and synergistic efforts of consortia are far more preferable to speed innovation and retain optimum competitiveness for all in an open market. Bill Kohnen October 2013 Rank: 2
  16. 16. Bill Kohnen October 2013 0 1 2 3 4 5 Stakeholder View of Proposed Merger Total Score = 20 Suggesting that there still will be significant stakeholder concerns to overcome
  17. 17. Conclusion • Mergers in and of themselves are neither good or bad • Stakeholders generally have access to a great dal of information available as part of public disclosure as well as personal experience • A non technical framework for reviewing the benefits of technology and other mergers is useful for stakeholders to consolidate and clarify their views Bill Kohnen October 2013