Synergy in Mergers & Acquisitions Theory and Practice in Central Europe October 24 2002 CESP, VŠE...
-
Upload
jewel-gowing -
Category
Documents
-
view
217 -
download
1
Transcript of Synergy in Mergers & Acquisitions Theory and Practice in Central Europe October 24 2002 CESP, VŠE...
SynergySynergyinin
Mergers Mergers & Acquisitions& Acquisitions
Theory and Practice in Central EuropeTheory and Practice in Central Europe
October 24 2002October 24 2002
CESP, VCESP, VŠE in PragueŠE in Prague
Marek JINDRA, M.A.
October 24 2002 Synergy in Mergers & Acquisitions
2
Content OverviewContent Overview
MM&As as an Economic Phenomenon&As as an Economic Phenomenon Reasons and Impetus of M&AsReasons and Impetus of M&As Synergy – a Quest for Holy GrailSynergy – a Quest for Holy Grail Synergy DriversSynergy Drivers Value Estimation in M&A Decision Value Estimation in M&A Decision
Making – technical issuesMaking – technical issues Central European M&As – a case studyCentral European M&As – a case study
October 24 2002 Synergy in Mergers & Acquisitions
3
Mergers & Acquisitions as an Mergers & Acquisitions as an Economic PhenomenonEconomic Phenomenon
Trillion dollar businessTrillion dollar business Rapid increase Rapid increase inin volume volume Multinational dimensionMultinational dimension A way how to expand A way how to expand
rapidlyrapidly
Monopoly
Value Destruction
More Qs than answers
0
500
1000
1500
2000
2500
3000
3500
1998 1999 2000
Source: Marketing Magazine, July 2000
Figure 1 - M&A activity in the USA and rest of the world ($ bn.)
Rest of the world
USA
October 24 2002 Synergy in Mergers & Acquisitions
4
Mergers & Acquisitions as an Mergers & Acquisitions as an Economic Phenomenon – cont’dEconomic Phenomenon – cont’d
Empirical evidence on MEmpirical evidence on M&A over last decades:&A over last decades:The majority of the studies report that there has beenThe majority of the studies report that there has been a a significant significant
proportion of M&A failures over last five decades since the proportion of M&A failures over last five decades since the waves of mergers (MAE grounds) startedwaves of mergers (MAE grounds) started
Actual success rate varies but ballpark figure could be ca. 50%Actual success rate varies but ballpark figure could be ca. 50%
HHoweverowever, s, some studies are very alarming:ome studies are very alarming:
1) Millman and Grey show that 1) Millman and Grey show that “…83% of mergers produce no “…83% of mergers produce no benefit whatsoever to shareholders”benefit whatsoever to shareholders”
2) Sirower finds 2) Sirower finds 60-70% of acquisitions failing to produce 60-70% of acquisitions failing to produce positive returns.positive returns.
October 24 2002 Synergy in Mergers & Acquisitions
5
Mergers & Acquisitions as an Mergers & Acquisitions as an Economic Phenomenon – cont’dEconomic Phenomenon – cont’d
Change in character of M&As over time:Change in character of M&As over time:
1)1) From cost-saving to revenue-increasingFrom cost-saving to revenue-increasing
2)2) Increasing average $ value per transactionIncreasing average $ value per transactionwhole whole 1980s – 35,000 TA @ total $3 trillion1980s – 35,000 TA @ total $3 trillion
2000 – 20,000 TA @ total $3,3 trillion2000 – 20,000 TA @ total $3,3 trillion
3)3) From domestic to cross-border M&As in 1990sFrom domestic to cross-border M&As in 1990s
4)4) Mean of payment changes in waves according to Mean of payment changes in waves according to MAE conditionsMAE conditions
October 24 2002 Synergy in Mergers & Acquisitions
6
Reasons and Impetus of M&AsReasons and Impetus of M&As
- A strategic way how to expand the business A strategic way how to expand the business and create a value for shareholdersand create a value for shareholders
- A way for management how to extend its A way for management how to extend its influenceinfluence,, thus compensation – „empire thus compensation – „empire building“ (Transaction Theory - Williamson)building“ (Transaction Theory - Williamson)
October 24 2002 Synergy in Mergers & Acquisitions
7
Reasons and Impetus of M&As Reasons and Impetus of M&As – cont’d– cont’d
Theoretical explanations for M&A activity outcomes:Theoretical explanations for M&A activity outcomes:1)1) Synergy Theory – expects Synergy Theory – expects that that there is really “something out there is really “something out
there” which enables the merged entity to create shareholders there” which enables the merged entity to create shareholders valuevalue
2)2) Managerialism Theory – claims that these combinations are Managerialism Theory – claims that these combinations are driven by empire building not by shareholders wealth objectivedriven by empire building not by shareholders wealth objective
3)3) Managerial Hubris – while following the SWO managers make Managerial Hubris – while following the SWO managers make unconscious mistakes being overconfident about unconscious mistakes being overconfident about transportability of their successfulnesstransportability of their successfulness
4)4) COMParable AcQuisitions – legal issue; shareholders of target COMParable AcQuisitions – legal issue; shareholders of target are protected by the law, while acquirer’s shareholders are notare protected by the law, while acquirer’s shareholders are not
October 24 2002 Synergy in Mergers & Acquisitions
8
Synergy – a Quest for Holy GrailSynergy – a Quest for Holy Grail
WHAT IS IT?WHAT IS IT?
Popular definition: 1 + 1 = 3Popular definition: 1 + 1 = 3
Roundabout definition: If am I willing to pay Roundabout definition: If am I willing to pay 6 for the business market-valued at 5 there 6 for the business market-valued at 5 there has to be the Synergy justifying thathas to be the Synergy justifying that
More technical definition: Synergy is ability More technical definition: Synergy is ability of merged company to generate higher of merged company to generate higher shareholders wealth thashareholders wealth thann the standalone the standalone entitiesentities
October 24 2002 Synergy in Mergers & Acquisitions
9
Synergy – a Quest for Holy GrailSynergy – a Quest for Holy Grail
WHAT IS IT?WHAT IS IT? – cont – cont’d’dMathematically: Synergy =Mathematically: Synergy =
N
tN
Nt
tbefore grr
FCF
r
FCFPV
1
1
)()1()1(-
)()1()1(1
1
N
tN
Nt
tafter grr
FCF
r
FCFPV
Economically:Economically: Ability to further limit competitors’ ability to contest their or Ability to further limit competitors’ ability to contest their or
the targets’ current input markets, processes, or output the targets’ current input markets, processes, or output markets, and/ormarkets, and/or
Ability to open markets and/or Ability to open markets and/or encroach encroach on their competitors’ on their competitors’ markets where these competitors cannot respond.markets where these competitors cannot respond.
October 24 2002 Synergy in Mergers & Acquisitions
10
Synergy – a Quest for Holy GrailSynergy – a Quest for Holy Grail
SIROWER:“Suppose you are running at 3 mph, but are required SIROWER:“Suppose you are running at 3 mph, but are required to run 4 mph next year and 5 mph the year after. Synergy would to run 4 mph next year and 5 mph the year after. Synergy would mean running even harder than this expectation while mean running even harder than this expectation while competitors supply a head wind. Paying a premium for synergy – competitors supply a head wind. Paying a premium for synergy – that is, for the right to run harder – is like putting on a heavy that is, for the right to run harder – is like putting on a heavy pack. Meanwhile, the more you delay running harder, the higher pack. Meanwhile, the more you delay running harder, the higher the incline is set. This is the acquisition game.”the incline is set. This is the acquisition game.”
Not understanding the essentials may be described as Not understanding the essentials may be described as (Stern):(Stern):
““Paying unjustified premiums is tantamount to making charitable Paying unjustified premiums is tantamount to making charitable contributions to random passers-by, never to be recouped by the contributions to random passers-by, never to be recouped by the buying company no matter how long the acquisition is held.”buying company no matter how long the acquisition is held.”
October 24 2002 Synergy in Mergers & Acquisitions
11
Synergy – a Quest for Holy GrailSynergy – a Quest for Holy Grail
Lessons from history:Lessons from history:
• Quaker Oats bought Quaker Oats bought in 1994 in 1994 Snapple for $ 1,7 bn.Snapple for $ 1,7 bn.
$ 500 mil. lost on announcement, $ 100 mil. a year later$ 500 mil. lost on announcement, $ 100 mil. a year later
Snapple was spun off 2 years later at 20% of priceSnapple was spun off 2 years later at 20% of price
• Anheuser-BuschAnheuser-Busch bought in 1982 bought in 1982 Campbell-TaggartCampbell-Taggart at $ 560 mil at $ 560 mil
closed down after 13y of struggling for survivalclosed down after 13y of struggling for survival
• IBM IBM boughtbought Lotus Lotus for $ 3,2 bn. (more than 100% premium)for $ 3,2 bn. (more than 100% premium)
probably never to be recoupedprobably never to be recouped
October 24 2002 Synergy in Mergers & Acquisitions
12
Drivers of SynergyDrivers of SynergyINITIAL FACTORS INTERNAL FACTORS
SYNERGY
Strategy
Operations
Contested
vs.
Uncontested
Acquisition Premium
System Integration
Strategic Relatedness
Managerial Risk Taking
Relative Size
Method of
Payment
Control and Culture
Time
October 24 2002 Synergy in Mergers & Acquisitions
13
Strategic relatednessStrategic relatedness
Acquisition
unrelated - strategic
cross-sector
relatedhorizontal
vertical
complementary
competitive
October 24 2002 Synergy in Mergers & Acquisitions
14
Strategic relatedness Strategic relatedness – cont’d– cont’d Cross-selling
Customer-based Geographically-based
? ?
same territory different territory
distinct groups of customers similar groups of customers => cross-sector acquisition => horizontal-complementary acquisition
X for horizontal-competitive: same territory, same group of customers
A A BB
Customers of A-company
Customers of B-company
Area operated by A-company
Area operated by B-company
October 24 2002 Synergy in Mergers & Acquisitions
15
Strategic relatedness Strategic relatedness – cont’d– cont’d
• Loral corporation & LockheedMartin
(McDonnelDouglas switched to Raytheon)
• Chevron & Texaco
• First Union Corp. & Money Store subsidiary
• Conseco & Green Tree Financial Corp.
• First Union Corp.& Wheat First
October 24 2002 Synergy in Mergers & Acquisitions
16
Mergers vs. Tender offers Mergers vs. Tender offers and Contested vs. Uncontested dealsand Contested vs. Uncontested deals
• mergers vs. tender offer
• contested vs. uncontested
• white knights phenomenon
• compared to friendly and hostile bidders resp.
• benefits payoff scheme is even more skewed to target’s shareholders
• WK lose significantly more than subsequent hostile bidders
October 24 2002 Synergy in Mergers & Acquisitions
17
Method of paymentMethod of payment
Cash vs. stocks
• asymmetric information and market’s rational reaction
stock-financed transactions punished
• waves of stock purchases, related to the MAE situation and market’s mood
• stock purchase looks to be something “free” BUT on well-working markets it is NOT
October 24 2002 Synergy in Mergers & Acquisitions
18
Relative sizeRelative size
• how to measure it? MV, turnover, employees,…
=> directly comparable only horizontal M&A
• empirical evidence proves to be right only for massive differences in size
• no strong support for difference in sizes to be significant
DEFENSIVE MERGERS
October 24 2002 Synergy in Mergers & Acquisitions
19
Internal FactorsInternal Factors
• Strategy
• Operations
• System Integration
• Control and Culture
October 24 2002 Synergy in Mergers & Acquisitions
20
StrategyStrategy
• Vision
AT&T’s vision for the NCR acquisition “to link people, organizations and their information in a seamless global computer network”
Viacom’s vision for CBS acquisition “to become premier globally
branded content provider” are a few examples.
But customers do not have to get it:
Sears & Dean Witter Reynold/Coldwell bankers: „to deliver to customers all financial services, ranging from insurance, credit and real estate to financial instruments such as equities and commercial papers at Sears Centers under one roof with sport equipment, home appliances, flowers, car rentals and others“
October 24 2002 Synergy in Mergers & Acquisitions
21
StrategyStrategy – cont’d – cont’d
Two kinds of strategic synergy
• Materializes without a changes in actual operations or in the manner of doing business (financial benefits, increased pricing power on both input and output side or benefits from cross-border acquisitions)
• Synergy POTENTIAL
There are NO purely strategic reasons, NO „perfect fit“
Harry Tempest from ABN AMRO says: “We have a rule on the Executive Committee: When someone says ‘Strategic’, the rest of us say ‘too expensive’”
Defensive mergers
October 24 2002 Synergy in Mergers & Acquisitions
22
Operational ImplementationOperational Implementation
- detailed planning is necessary
- two ways:
Cost-saving („hard synergy“)
redundancies – admin, production, logistics, …
Revenue-enhancement („soft synergy“)
cross selling,
strength-strength & strength-weakness matching
October 24 2002 Synergy in Mergers & Acquisitions
23
System integrationSystem integration
can be a very significant limiting factor of many well-planned acquisitions
Examples:
Burroughs and Sperry – Unisys – 90% down
Chemical Bank and Manufacturers Hanover – 2y
Special issue – Pricing system
ensure that the pricing system is CONSISTENT
October 24 2002 Synergy in Mergers & Acquisitions
24
Control & cultureControl & cultureHave become increasingly the most CRITICAL SUCCESS
FACTOR in recent transactions
difficult to define and control:
“shared set of norms (both formal and informal), values, beliefs and expectations” or
as “an interconnected composite of values, work rituals and leadership”
Too aggressive culture integration doomed acquisition of Montgomery securities by Nations Bank Corp. in 1997. Less than a year and half later Montgomery securities founder Thomas Weisel left, taking 100 of his best investment bankers with him.
October 24 2002 Synergy in Mergers & Acquisitions
25
Control & culture – common mistakesControl & culture – common mistakesManagement withdraw and become distant
Inconsistent messages and behaviour
Communication disconnects from maintaining performance and focuses excessively on persuading employees to feel good
Communication is only top-down process
Talented and the most perspective employees leave as they do not identify themselves with new entity
Referral problem
Leadership appointments – co-CEOs, …
…..
October 24 2002 Synergy in Mergers & Acquisitions
26
Managerial Risk TakingManagerial Risk Taking
• Irrationality in managers’ decision-making when an M&A goes wrong
- managerial hubris
- risk escalation
(asymmetric risk response, gamblers’ behaviour)
• Difficult to empirically prove
- operationalization problem (initial risk set-up, changes)
- other than synergy or hubris hypothesis
October 24 2002 Synergy in Mergers & Acquisitions
27
Value Estimation in M&A Decision Value Estimation in M&A Decision Making – technical issuesMaking – technical issues
• time is crucial and can undermine even well prepared transactions if not considered
• quite often underestimated of not understood
MODEL: for infinity )1(
)1(
11
1
dn
d
r
rrPRPI 11
drrPRPI
October 24 2002 Synergy in Mergers & Acquisitions
28
Value Estimation in M&A Decision Value Estimation in M&A Decision Making – technical issues (cont’d)Making – technical issues (cont’d)
SEE GRAPHS
October 24 2002 Synergy in Mergers & Acquisitions
29
Value Estimation in M&A Decision Value Estimation in M&A Decision Making – technical issues (cont’d)Making – technical issues (cont’d)
PROBABILITY MODEL:
1.f(x) is continuous
2.
3.
4.f(0) > 0
5.f(x) is nonincreasing in x
0
1)( dxxf
0)(lim
xfx
X
xdxeP
RPIXP
0
October 24 2002 Synergy in Mergers & Acquisitions
30
Value Estimation in M&A Decision Value Estimation in M&A Decision Making – technical issues (cont’d)Making – technical issues (cont’d)
SEE GRAPHS
October 24 2002 Synergy in Mergers & Acquisitions
31
Central European M&As Central European M&As – Macroenomic Framework– Macroenomic Framework
• mainly unidirectional
• low competitive markets with comparatively higher growth potential (situation of 1990s)
• economies-wide privatization
• relatively high-skilled labor
• markets for corporate control too small to be effective
• synergies stemming most importantly from bridging the techgap
• BUT environment specific to the MAE conditions
• BUT different work attitude for historical reasons
October 24 2002 Synergy in Mergers & Acquisitions
32
Central European M&As Central European M&As – a Case Study– a Case Study
• two construction companies:
Slovakian acquirer and Czech Target
• horizontal – complementary acquisition
• price paid according to market value (objective x subjective)
• a few years of preceding cooperation
• cultural similarity
• Slovaks grabbed the opportunity
October 24 2002 Synergy in Mergers & Acquisitions
33
Cornerstones of SynergyCornerstones of Synergy
Strategy: financing, revenue enhancement
Operations: joint contracts acquiring, cross-referencing
joint PPE acquiring
Systems: core problem – to support the above pillars
management lines, ICT systems
Culture: enabled by cultural affinity and preceging co-op.
challenge: to make people cooperate also on lower management levels
create a “Code of Joint Working”
October 24 2002 Synergy in Mergers & Acquisitions
34
OutcomesOutcomes As a result of “opportunity acquisition” the change has been managed accidentally (at least in first year), looking for areas where and how to cooperate
“common sense” used in transition management, empirical evidence ignored
no clear controllable targets set
Well working referencing on top level – crucial in the business
ABOVE ALL:
The acquisition is ultimately successful in terms of EAT
October 24 2002 Synergy in Mergers & Acquisitions
35
Questions ?Questions ?
October 24 2002 Synergy in Mergers & Acquisitions
36
Thank you for attentionThank you for attention
Contact:Contact:[email protected]@ey.cz