Mergers and Acquisitions

Types of M&A

M&A Strategies

M&A players

M&A financing

M&A Procedure

M&A Regulations

M&A failures

Types of M&A

Vertical Integration

Horizontal Integration

Conglomeric Integration

Congeneric Integration

MBO / LMBO

Cross Border M&Asmore and more frequent in an evolving global market quest for

economies of scale to service a wide clientbase

M&A Strategies

Motives: Survival - “to be or not to be”

Expansion - quicker process than by organic means

Economies of scale - cost savings

New business - development of alternative axes

Opportunity - available target

Obligation - avoid market downsizing

Vertical Integration

1. Upward Integration or 2. Downward Integration

Characteristics: 1. purchase of player in supply chain - processing

2. purchase of player in the distribution chain

Mergers very rarely occur in this type of integration

Reason: 1. cheaper suppliese.g. : mining company buys a copper mine - Rio Tinto

2. increased sales volume

e.g.bank buys another to distribute banking services - HSBC

Horizontal Integration

Characteristics: probably the most frequent merger type

Reasons: 1. increased domestic market share e.g. Telecoms company buys mobile phone server

- France Telecom-Orange

2. entry into new markets e.g. Paper manufacturer buys another paper

manufacturer - Wiggins Teape- Arjomari

3. cheaper R&D e.g. Pharmaceutical company merges with another

pharmaceutical company - Glaxo-SKB

4. cheaper resources and pricing (greater volumes) e.g. DIY company buys another DIY company

- Kingfisher – B&Q - Bricorama

Conglomeric IntegrationCharacteristics: by definition must be an acquisition

Reasons: 1. diversification of business interest to expand into totally new areas

e.g. one company buys another company - PPR group

2. identify with a concept and not a single business

e.g. a company perceives its role to be in a global sector - Ladbroke (entertainment sector)

3. save the company e.g. a company needs to develop into another sector to

guarantee against loss of earnings in a traditional business field

-Telecoms takeover of VOIP companies

Congeneric Integration

Characteristics: can be either by merger or by acquisition BUT more often by acquisition

more frequently in the services sector

Reasons: 1. to increase customer base e.g. One company takes over another company to help it

extend its corporate customer base - BNP - Paribas

2. to increase service offer e.g. One company takes over another company to help it

to extend its service base - NTL - Virgin Mobile

3. New Market creation e.g. One company takes over another company to help it

innovate products - AOL - Time Warner

4. Investment Portfolio Spread e.g. Private Equity Firms

MBO

Management Buy-out

An acquisition made by the Management of the

company where:

• members of management sell-off their personal assets

• to obtain a percentage of their own business bought by themselves

LMBO

Leveraged Management Buy-out

An acquisition made by the Management of

the company where:

• members of management mortgage their personal assets

• to obtain a loan to purchase their own Company

M&A Players

Apart from corporate interest in takeovers there is alsointerest from:

• Family Investment Trusts e.g. acquisition of Manchester United by American Family

• Individuals e.g. acquisition of Chelsea Football Club by Abramovitch

• Private Equity Groups These are groups that invest funds for private investors • Investment Banks • Very active in advising both sides of the merger or acquisition

Investment Banks

Different roles: 1. Search for appropriate takeover target

2. Advising on price levels: i. the target

ii. the purchaser

3. Advising on payment means: i. the target

ii. the purchaser

4. Advising target on defence strategy

5. Preparing the financial arrangements

6. Notifying the Authorities

Dangers may well exist if the same Investment bank advises both sides. This does happen.

M&A financing

Types: 1. cash - part cash , - all cash

2. shares - part shares , all shares

3. part shares - part cash

4. new issue of equity (preferentially rights issue)

5. part new equity issue part cash 6. bank loan (partial or full)

7. bond issue (partial or full)

M&A financingObservations:

- all cash can happen when a company has ready cash to spend as a result of a divestment

- all shares involves a share swap after evaluation of each company's worth. Probable in a merger all cash and all share are the cheapest in terms of financial costs

- new issue of shares is not popular with existing shareholders because of dividend dilution, unless rights issue only

- Bank loans are certainly the most expensive form due to interest payments

- Bond issue. This also pays interest so is expensive

The larger the amount of the takeover the larger the chances of combining the financial sources: cash – shares - new issue

Interest payments are a regular charge whereas dividend is not

M&A Procedure

• evaluation the target company - case of takeover)

• evaluation of both companies - case of merger

• announcement of bid. (made known to target company)

• acceptance or refusal of bid by management if accepted notification of bid to shareholder if refused possible new bid

• execution of due diligence

• financial arrangement

• payment - case of: exchange of shares, loans, cash

• issue - case of: new issue, bonds

M&A Regulations

2 main regulations governing M&As

Notice of intention one company purchasing shares in another company is obliged by law to make public what it intends to do with the company once the

threshold of a certain percentage of shares is attained. Trend is more and more towards Stakeholdings.

Monopolies Commission's (OFT) ruling

i. that a company's enhanced position through merger or acquisition must not endanger the rest of the sector.

ii. that a company must, therefore, divest some of its assets in order to restore fair competition to the industry

Companies must submit their applications to the Commission

M&A Failures

Reasons: refusal of bid (Pepsicola - Danone)

higher bid (BNP - Paribas)

intervention of Monopolies Commission (Schneider - Legrand)

incompatibility of systems (Carlton - Granada)

too costly to implement (HP - Texas Instruments)

nomination of CEO (Glaxo – SKB)

no clear strategy (J.P. Morgan - Chase)

M&A Failures

Reasons: management ability to:

i. manage a larger enterprise

ii. manage a different culture

iii. manage change

iv. manage new systems

v. manage a new busines

case of private Equity groups

M&A Failures

Defences against Hostile bid

“White Knight”

Buy-back of share

Purchase of another company

Preferred bidder

“Poisoned Pill”

increased debt

spin-off of assets

issue of share

purchase of another company

conglomeric integration

60% of M&As fail

“Psychology” of M&As

1. at the bidding: i. shareholders aware of market value will only

accept a bid at a higher price (premium). ii. Market reaction is always “bullish” to a bid

for shares.

2. following the deal: i. concern about radical changes in company

policy ii. employees and management concerned for

their jobs iii. shareholders concern for value added iv. industry concerned about increased

competition