Mergers & Acquisitions
Corporate Strategy Mergers & Acquisitions Dr. Sebastian Spaeth <[email protected]> Matthias Stuermer<[email protected]>
1
Where we left off
‣ Organizational Structure
Definition
Dimensions: Specialization, Standardization, Formalization, Centralization, Configuration, Flexibility
‣ Organigrams ‣ Forms of organizational Structure
U-Form, M-Form (cooperative, competitive), H-Form, X-Form, Matrix organization
Matrix organization: Advantages, disadvantages
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
2
Overview
‣ Definition: Merger, Acquisition, Buyout ‣ Getting a picture of global M&A ‣ Reasons for... ‣ Sucess rates ‣ Failure reasons
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
3
What the expert says... ‣ “There is a ‘gin rummy school of management’... you pick up a few businesses here, discard a few there. The sad fact is that most acquisitions display an egregious imbalance - they are a bonanza for the shareholders of the acquiree; they increase the income and the status of the acquirer’s management; and they are a honey pot for the investment bankers and the other professionals on both sides. But alas, they usually reduce the wealth of the acquirer’s shareholders, often to a substantial amount.” -Warren Buffet, Chairman,Berkshire Hathaway. Sebastian Spaeth | Strategic Management & Innovation | [email protected]
4
Definition Mergers & Acquisition ‣ An ‘acquisition’ normally involves the purchase of another firm’s assets and liabilities, with the acquired firm continuing to exist as a legally owned subsidiary of the acquirer. ‘Takeover’ is often used for hostile acquisitions.
‣ A ‘merger’ of equals on the other hand is a combination of two firms where a new corporate entity is created by exchanging the shares of both companies for shares in the new company.
‣ Most M&As, however, are simple acquisitions since only around three percent of all deals can be classified as real mergers between equals (Buckley & Ghauri, 2002).
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
5
Buyouts ‣ Buyout is defined as the purchase of a company or a controlling interest of a corporation's shares or product line or some business.
‣ A leveraged buyout is accomplished with borrowed money or by issuing more stock.
‣ Management buyout when managers purchase controlling interest from existing shareholders. Sebastian Spaeth | Strategic Management & Innovation | [email protected]
6
Types of Mergers src: Federal Trade Commission (FTC)
‣ Horizontal mergers: two companies in the same industry ‣ Vertical mergers: along the value chain of a good/service ‣ Product-extension: access to complementary products ‣ Market-extension: access to complementary markets ‣ Conglomerate mergers: different industries
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
7
Global M&A ‣ First 6 months of 2007: $2.7 trillion ‣ 465 deals worth over $1 billion each. ‣ Avg size: $298m, 58% higher than ‣ ‣ ‣ ‣
‣
2006 Number of hostile bids (407) was almost four times greater. American comp. targets of more than $1 trillion-worth of deals Emerging markets were targets of $370 bil., or 13% of the world total. The banks advising on M&A transactions were pleased: they earned $11 billion in advisory revenues in the first half of 2007 2008 15% less deals in US and 30% in Europe
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
8
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
9
Reasons for M&A
‣ Do they differ from Growth & Internationalization reasons? How?
NPV (A + B) > NPV (A) + NPV (B)
NPV := Net Present Value Sebastian Spaeth | Strategic Management & Innovation | [email protected]
10
7 Motivations for M&A ‣ Monopoly Theory: Gaining market power. ‣ Efficiency Theory: Operating synergies, financial synergies and ‣ ‣ ‣ ‣ ‣
management synergies. Valuation Theory: Bidder managers have better information about the target's financial performance than the stock market. Empire Building Theory: Planned and executed by managers who maximize their own utility instead of their shareholders value. Process Theory: Mangers have only limited information and base decisions on imperfect information. Raider Theory: Managers creating wealth transfers from the stockholders of the companies they bid for. Disturbance Theory: Merger waves are caused by economic disturbances.
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
11
Merger as
Merger benefits Wealth transfers from customers
Monopoly Theory
rational
bidders
Net gains through synergies
Efficiency Theory
Net gains through private information
Valuation Theory
Wealth transfer from targets shareholders
Raider Theory
choice
Merger benefits managers
Empire Building Theory
Merger as process outcome
Process Theory
Merger as macroeconomic phenomena
Disturbance Theory
(src: Trautwein, 1990, 284; Straub 2007) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
12
Chinese M&A
“Beijing wants Chinese firms to gain access to foreign technologies, raw materials and skills. In September the government established China Investment Corp (CIC) with $200 billion of the country's $1.4 trillion in foreign reserves, mostly to make purchases abroad.”
(src: economist.com) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
13
Japanese M&A: Restructuring companies ‣ “Conglomerates may have hundreds of subsidiaries in unrelated industries; they are a traditional place to park loyal executives once they reach 60 to give them a few extra years of work. Much of the intra-group M&A activity consists of companies bundling together disparate subsidiaries in the same industry in order to manage them better or sell them off. In this way, Japanese companies are using M&A as part of a broader corporate restructuring, says Steven Thomas of UBS, an investment bank.”
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
14
M&A as a strategic move: Oracle and SAP
‣ Oracle first tried to move beyond databases and other “infrastructure” software (which together produce twothirds of its revenues) and break into enterprise applications with its own programes. When this failed, it decided to lead consolidation of the software industry and “surround” SAP with acquisitions, in the words of Larry Ellison, its chief executive. Since 2003 Oracle has bought more than 30 firms for about $25 billion in total. BEA does not sell applications, but it will help Oracle win new customers. (The Economist, Oct 18th, 2007) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
15
M&A for complementary products: Ebay’s purchase of Skype ‣ “Skype will provide eBay with communication platform as a complementary product.”
‣ $2.6 billion with up to 1.5bn more if Skype met certain targets ‣ Skype had 7mio USD turnover in 2004 ‣ “This week eBay said that it would take a $1.4 billion charge in relation to the purchase. The bigger part, a so-called impairment write-down, represents eBay's loss on its ill-fated investment.” (The Economist, Oct 4th, 2007) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
16
Steps of an M&A
(src: adapted, Galpin & Herndon, Thompson & Martin, 2005)
1.Formulate
Focus or Diversify
Strengths to build on and use to create synergies
Opportunities
Matching Resources and Opportunities
2.prospect (locate, investigate)
Search process
Looking behind the figures
Evaluation: shared resources, transfer of skills, econ. of scale/scope
3.Negotiate & acquire 4.Integrate:
people, culture, structures, systems & procedures Sebastian Spaeth | Strategic Management & Innovation | [email protected]
17
Information available (before and after) (src: Thompson & Martin, 2005)
‣ Organigram ‣ Data on salaries ‣ Information on top mgmt ‣ Products ‣ Plants ‣ Corp. identity, img, reputation
‣ Past records, esp. financial
‣ Inner philosophy & culture ‣ Quality of staff in decision roles
‣ Salary and ‣ Decision processes ‣ Interrelationships, power bases, hidden conflicts, org. politics
‣ Individually pursued objectives
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
18
Success rates of M&As
‣ Studies show that about two thirds of all M&As fail on average (anywhere from 50 percent to 80, depending on the measure) ‣
(e.g. Allen, 1999; Hudson & Barnfield, 2001; OECD, 2001; Schuler & Jackson, 2001; Slowinski, 2002).
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
19
Success factors ‣ Burgman (1983) 600 US acquisitions:
The higher the premium to acquire, the less likely to be successful
Prospects of success depend on the acquirer having a functional appreciation of the business
Success depends on ability to retain key managers
Large acquisitions were often more successful as the sheer size required a thorough appraisal beforehand
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
20
Reasons for failure ‣ (Rather) seldom Pre-merger:
formulating goals
locating the right company
prospecting and inspecting the target company (Due Diligence)
negotiating on price and conditions
‣ Frequently failing to integrate post-merger:
Understanding of business
Governance structure
Leadership
Culture assimilation
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
21
Failure to integrate ‣ Social Network Analysis can reveal lack of integration
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
22
References ‣ Burgman, R. J. A strategic explanation of corporate acquisition success Purdue University, 1983 (quoted in quoted in: Mc Lean R.J. April 1985 How to make acqisitions work, Chief Executive)
‣ Thompson, J. & Martin, F. Strategic Management: Awareness and Change Thomson Learning, 2005
‣ Harford, J. What drives merger waves? Journal of Financial Economics, 2005, 77, 529-560
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
23
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
24
1
Where we left off
‣ Organizational Structure
Definition
Dimensions: Specialization, Standardization, Formalization, Centralization, Configuration, Flexibility
‣ Organigrams ‣ Forms of organizational Structure
U-Form, M-Form (cooperative, competitive), H-Form, X-Form, Matrix organization
Matrix organization: Advantages, disadvantages
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
2
Overview
‣ Definition: Merger, Acquisition, Buyout ‣ Getting a picture of global M&A ‣ Reasons for... ‣ Sucess rates ‣ Failure reasons
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
3
What the expert says... ‣ “There is a ‘gin rummy school of management’... you pick up a few businesses here, discard a few there. The sad fact is that most acquisitions display an egregious imbalance - they are a bonanza for the shareholders of the acquiree; they increase the income and the status of the acquirer’s management; and they are a honey pot for the investment bankers and the other professionals on both sides. But alas, they usually reduce the wealth of the acquirer’s shareholders, often to a substantial amount.” -Warren Buffet, Chairman,Berkshire Hathaway. Sebastian Spaeth | Strategic Management & Innovation | [email protected]
4
Definition Mergers & Acquisition ‣ An ‘acquisition’ normally involves the purchase of another firm’s assets and liabilities, with the acquired firm continuing to exist as a legally owned subsidiary of the acquirer. ‘Takeover’ is often used for hostile acquisitions.
‣ A ‘merger’ of equals on the other hand is a combination of two firms where a new corporate entity is created by exchanging the shares of both companies for shares in the new company.
‣ Most M&As, however, are simple acquisitions since only around three percent of all deals can be classified as real mergers between equals (Buckley & Ghauri, 2002).
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
5
Buyouts ‣ Buyout is defined as the purchase of a company or a controlling interest of a corporation's shares or product line or some business.
‣ A leveraged buyout is accomplished with borrowed money or by issuing more stock.
‣ Management buyout when managers purchase controlling interest from existing shareholders. Sebastian Spaeth | Strategic Management & Innovation | [email protected]
6
Types of Mergers src: Federal Trade Commission (FTC)
‣ Horizontal mergers: two companies in the same industry ‣ Vertical mergers: along the value chain of a good/service ‣ Product-extension: access to complementary products ‣ Market-extension: access to complementary markets ‣ Conglomerate mergers: different industries
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
7
Global M&A ‣ First 6 months of 2007: $2.7 trillion ‣ 465 deals worth over $1 billion each. ‣ Avg size: $298m, 58% higher than ‣ ‣ ‣ ‣
‣
2006 Number of hostile bids (407) was almost four times greater. American comp. targets of more than $1 trillion-worth of deals Emerging markets were targets of $370 bil., or 13% of the world total. The banks advising on M&A transactions were pleased: they earned $11 billion in advisory revenues in the first half of 2007 2008 15% less deals in US and 30% in Europe
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
8
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
9
Reasons for M&A
‣ Do they differ from Growth & Internationalization reasons? How?
NPV (A + B) > NPV (A) + NPV (B)
NPV := Net Present Value Sebastian Spaeth | Strategic Management & Innovation | [email protected]
10
7 Motivations for M&A ‣ Monopoly Theory: Gaining market power. ‣ Efficiency Theory: Operating synergies, financial synergies and ‣ ‣ ‣ ‣ ‣
management synergies. Valuation Theory: Bidder managers have better information about the target's financial performance than the stock market. Empire Building Theory: Planned and executed by managers who maximize their own utility instead of their shareholders value. Process Theory: Mangers have only limited information and base decisions on imperfect information. Raider Theory: Managers creating wealth transfers from the stockholders of the companies they bid for. Disturbance Theory: Merger waves are caused by economic disturbances.
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
11
Merger as
Merger benefits Wealth transfers from customers
Monopoly Theory
rational
bidders
Net gains through synergies
Efficiency Theory
Net gains through private information
Valuation Theory
Wealth transfer from targets shareholders
Raider Theory
choice
Merger benefits managers
Empire Building Theory
Merger as process outcome
Process Theory
Merger as macroeconomic phenomena
Disturbance Theory
(src: Trautwein, 1990, 284; Straub 2007) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
12
Chinese M&A
“Beijing wants Chinese firms to gain access to foreign technologies, raw materials and skills. In September the government established China Investment Corp (CIC) with $200 billion of the country's $1.4 trillion in foreign reserves, mostly to make purchases abroad.”
(src: economist.com) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
13
Japanese M&A: Restructuring companies ‣ “Conglomerates may have hundreds of subsidiaries in unrelated industries; they are a traditional place to park loyal executives once they reach 60 to give them a few extra years of work. Much of the intra-group M&A activity consists of companies bundling together disparate subsidiaries in the same industry in order to manage them better or sell them off. In this way, Japanese companies are using M&A as part of a broader corporate restructuring, says Steven Thomas of UBS, an investment bank.”
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
14
M&A as a strategic move: Oracle and SAP
‣ Oracle first tried to move beyond databases and other “infrastructure” software (which together produce twothirds of its revenues) and break into enterprise applications with its own programes. When this failed, it decided to lead consolidation of the software industry and “surround” SAP with acquisitions, in the words of Larry Ellison, its chief executive. Since 2003 Oracle has bought more than 30 firms for about $25 billion in total. BEA does not sell applications, but it will help Oracle win new customers. (The Economist, Oct 18th, 2007) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
15
M&A for complementary products: Ebay’s purchase of Skype ‣ “Skype will provide eBay with communication platform as a complementary product.”
‣ $2.6 billion with up to 1.5bn more if Skype met certain targets ‣ Skype had 7mio USD turnover in 2004 ‣ “This week eBay said that it would take a $1.4 billion charge in relation to the purchase. The bigger part, a so-called impairment write-down, represents eBay's loss on its ill-fated investment.” (The Economist, Oct 4th, 2007) Sebastian Spaeth | Strategic Management & Innovation | [email protected]
16
Steps of an M&A
(src: adapted, Galpin & Herndon, Thompson & Martin, 2005)
1.Formulate
Focus or Diversify
Strengths to build on and use to create synergies
Opportunities
Matching Resources and Opportunities
2.prospect (locate, investigate)
Search process
Looking behind the figures
Evaluation: shared resources, transfer of skills, econ. of scale/scope
3.Negotiate & acquire 4.Integrate:
people, culture, structures, systems & procedures Sebastian Spaeth | Strategic Management & Innovation | [email protected]
17
Information available (before and after) (src: Thompson & Martin, 2005)
‣ Organigram ‣ Data on salaries ‣ Information on top mgmt ‣ Products ‣ Plants ‣ Corp. identity, img, reputation
‣ Past records, esp. financial
‣ Inner philosophy & culture ‣ Quality of staff in decision roles
‣ Salary and ‣ Decision processes ‣ Interrelationships, power bases, hidden conflicts, org. politics
‣ Individually pursued objectives
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
18
Success rates of M&As
‣ Studies show that about two thirds of all M&As fail on average (anywhere from 50 percent to 80, depending on the measure) ‣
(e.g. Allen, 1999; Hudson & Barnfield, 2001; OECD, 2001; Schuler & Jackson, 2001; Slowinski, 2002).
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
19
Success factors ‣ Burgman (1983) 600 US acquisitions:
The higher the premium to acquire, the less likely to be successful
Prospects of success depend on the acquirer having a functional appreciation of the business
Success depends on ability to retain key managers
Large acquisitions were often more successful as the sheer size required a thorough appraisal beforehand
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
20
Reasons for failure ‣ (Rather) seldom Pre-merger:
formulating goals
locating the right company
prospecting and inspecting the target company (Due Diligence)
negotiating on price and conditions
‣ Frequently failing to integrate post-merger:
Understanding of business
Governance structure
Leadership
Culture assimilation
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
21
Failure to integrate ‣ Social Network Analysis can reveal lack of integration
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
22
References ‣ Burgman, R. J. A strategic explanation of corporate acquisition success Purdue University, 1983 (quoted in quoted in: Mc Lean R.J. April 1985 How to make acqisitions work, Chief Executive)
‣ Thompson, J. & Martin, F. Strategic Management: Awareness and Change Thomson Learning, 2005
‣ Harford, J. What drives merger waves? Journal of Financial Economics, 2005, 77, 529-560
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
23
Sebastian Spaeth | Strategic Management & Innovation | [email protected]
24
