M&As EBS Chris Maupetit

Christian Maupetit

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MERGERS & ACQUISITIONS

Christian Maupetit, PhD

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M&As - Definition

According to encyclopedia Britannica, a merger is a corporate combination of two or more independent business corporations into a single enterprise, usually the absorption of one or more firms by a dominant one.

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M&As - Definition

A merger may be accomplished by one firm purchasing the other's assets with cash or its securities or by purchasing the other's shares or stock or by issuing its stock to the other firm's stockholders in exchange for their shares in the acquired firm.

[Y/N?]

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Mergers & Acquisitions

Merger activity in Europe and in the United States hit a new record in 2007

According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006

Europe $1 781 million

United states $ 1 570 million

Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion

[Trend 2011 ?]

Christian Maupetit

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Mergers & Acquisitions

Merger activity in Europe and in the United States hit a new record in 2007

According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006

Europe $1 781 million

United states $ 1 570 million

Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion

[Trend 2010 ?]

Christian Maupetit

6

Mergers & Acquisitions

Merger activity in Europe and in the United States hit a new record in 2007

According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006

Europe $1 781 million

United states $ 1 570 million

Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion

[Trend 2010 ?]

Christian Maupetit

7

Mergers & Acquisitions

Merger activity in Europe and in the United States hit a new record in 2007

According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006

Europe $1 781 million

United states $ 1 570 million

Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion

[Trend 2010 ?]

Christian Maupetit

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Mergers & Acquisitions

Merger activity in Europe and in the United States hit a new record in 2007

According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006

Europe $1 781 million

United states $ 1 570 million

Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion

[Trend 2010 ?]

Christian Maupetit

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M&A structures

Merger combination

Merger absorption

Merger with transfer of assets

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M&A structure

Merger combination

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M&A structure

Merger absorption

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M&A structure

Merger with transfer of assets

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key principle & concept

The key principle is to create shareholder value over and above the sum of the two companies. But share holder value may have several definitions.

Based on the expected return concept, shareholder value is the value that a shareholder is able to obtain from his investment in a company.

This is made up of capital gains, dividend payments, and other payouts that a firm might make to a shareholder.

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Strategies

Depending upon the definition, merger rationale varies and might lead to non-convergent long term strategies.

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Limits of mergers

USAMergers for monopolistic purposes are among the unfair practices. The Sherman Antitrust Act , (1890) legislation was first enacted by the United States Congress to curb concentrations of power that interfere with trade and reduce economic competition. The Clayton Antitrust Act (1914), supplement the Sherman Antitrust Act of 1890.

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Limits of mergers

In Europe, antitrust legislation receives attention.The Commission of the European Union in Brussels (European CommissionCompetition DG / Antitrust Registry) regularly passes upon cases involving practices of companies trading in the Common Market. Its decisions are based upon Articles 85 and 86 of the Treaty of Rome (1957), which deal with rules of fair competition

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Examples of rejected merger projects

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Rationale behind the mergers

[Examples]

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Type of mergers

Mergers are of several different types:

Vertical mergersHorizontal mergersConglomerates

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Type of mergers

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Type of mergers

1) Horizontal mergers

When two companies merge within the same sector of activity, the merger is qualified as an horizontal merger. Usually both companies are at the same stage in the production cycle. Both firms produce the same commodity or service for the same market or similar markets.

EX1

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Type of mergers

2) Vertical mergers

When two companies merge is in the same sector of industry but at another stage in the production cycle the merger is qualified as a vertical merger. The firm acquires either a supplier or a customer.

EX2

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Type of mergers

3) Conglomerate merger

A conglomerate is a large company that consists of companies, subsidiary divisions of diversified activities.A conglomerate merger is a merger involving two or more companies that are in unrelated businesses.

EX3

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Reasons for merging

The reasons for mergers are various.Economies of scale:

This refers to the fact that the combined company can reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.

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Reasons for merging

The reasons for mergers are various.Revenue:

Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and increasing its power (by capturing increased market share) to set prices.

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Reasons for merging

Cross Selling:

For example, a bank buying an insurance company could sell its banking products to the insurance's customers, while the insurance company can sign up the bank's customers for insurance services.

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Reasons for merging

Synergy (expected synergy):

Better use of complementary resources.

Diversification:

Hedge a company against a downturn in an individual industry.

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Merger of equals

The concept of a merger of equals is open to arguments.

In reality very few mergers of equals exist.

DaimlerChrysler started as a merger of equals in an industry where the two companies analyses revealed themselves to have staggering overcapacity.

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Merger of equals

A study conducted by Monin illustrates the merger of equals concept.

The author reports that a business combination positioned as a merger of equals has the objective to reinforce equality and equity which are the two dominant standards of distributive justice.

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Merger of equals

Equality has 3 key functions:

The first function is to legitimate the merger decision/process for internal and external stakeholders,

the second one is to suggest/propose an equal contribution by both partners

the third one is a mean to avoid deciding who will lead for the newly created entity.

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Merger of equals

Equality is a powerful principle to legitimate M&As.

Inside the company, equality is used to solve dysfunctions linked to the integration process, such as name of the new entity, positions of the key executives, sharing of roles and responsibilities, and resource allocation.

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Merger of equals

A merger of equals also suggests that the leadership will be equally shared and will not generate conflicts among the top executives.

The mergers of Daimler Chrysler and AOL Time Warner were announced to the public as mergers of equals.

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Cost of capital,Economic Value Added and M&As

Studies of Mergers and Acquisitions in the 90's and early 2000s found that 60 percent of the mergers failed to earn returns greater than the cost of capital.(2010?)

The cost of capital is the sum of the cost of equity plus the cost of debt. The weighted average of the cost of equity and the cost of debt are determined by the relative proportions of equity and debt in a firm's capital structure. (Example 1)

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Cost of capital

In other words this is the minimum required return on an investment.

Cost of capital is also used as a key component to compute Economic Value Added. EVA concept has been developed by Stern & Stewart.

The assumption is that companies that earn higher returns than financing costs increase shareholder value.

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Cost of capital

The relationship between EVA and merger performance is difficult to establish.

One of the reasons is because it is difficult to isolate purely financial determinants.

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Part two

Analyzing the economic contribution to Mergers and Acquisitions has been covered by many academic researchers and professional analysts.

They all hope that in the future, merger research will move beyond the basic issue of measuring and assigning gains and losses to tackle the fundamental question of how mergers create or destroy value.

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Major Mergers & Acquisitions since 1990United States and Europe

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Financing M&As

As shown in the table, the vast majority of the deals are financed using stock.

100% of the M&As transactions (United States and Western Europe) above $70 billion are financed using stock.

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Merger break down (%) over a 30 year period (USA)

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Merger break down (%) over a 30 year period France

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Mergers & Acquisitions in France since 1990

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The Alternative Model

The Sustainable Merger Governance model is based on a set of actions, taking into account exogenous and endogenous data.

Exogenous data could include competition, market capitalization, rules, while endogenous data refers to revenues, management practices, capital/equity structure.

The model is linear, based on time and is composed of three inter-related phases.

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The Alternative Model

The first phase or stage prior to the merger represents the valuation approach

The second phase describes the implementation process via the ad hoc committee

The third stage represents the sustainable post-merger integration

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The Alternative Model

The mapping of the determinants of each company pin points the gaps and the potential areas of risks.

This pre-merger diagram is part of a set of score cards.

The overall objective is to score each area and to get a global scoring

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Determinants

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The determinants

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Mapping

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SMG model

Firm A

Firm B

Phase 1

Phase 2

Phase 3

Merger

Time

New entity

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Structure of the model

Stage one: Pre-merger valuation approach

Stage two:implementation process via the ad hoc committee

Stage three: sustainable post merger integration

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Phase one

The first stage prior to the merger, pictures the two potential merger players. This stage gives an overview of the key characteristics of each entity prior to the merger.

The radar graph highlights the corporate profile and pin points the gaps between the determinants for each company.

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Phase two

The second phase, which occurs after the legal merger, describes the implementation process via the ad hoc committee.

The role of the ad hoc committee is to replace the traditional post merger board with an ad hoc committee, having full authority for the entire range of legal and managerial decisions.

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The committee has two distinct missions

Integration of the post merger phase in accordance with the long term strategy of the new entity

Recruitment of future Directors and CEO.

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Phase three

The second mission of the Ad Hoc committee is to sustain the development of the new company according to the long run corporate strategy.

After a period of partnership and leadership management the Ad Hoc committee transfers the entity to insiders and recruits directors and the CEO.

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remarks:

http://www.imaa-institute.org/statistics-mergers-acquisitions.html#TopMergersAcquisitions_Europe

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Potential listed companies to be selected by students:

Arcelor/MittalDaimler/ChryslerHP/CompaqAir France/KLMEDF/SuezAlcatel/LucentSanofi/AventisRenault Volvo/Nissan (Alliance)EADS-BAE

schema determinants structure methodology

Determinants structure

Objective

Subjective

Organizational Institutional