1. Introduction Mergers and acquisitions (M&A) and
corporate restructuring are a big part of the corporate finance
world. Every day, Wall Street investment bankers arrange M&A
transactions, which bring separate companies together to form
larger ones. When they're not creating big companies from smaller
ones, they are doing the reverse by breaking up companies through
spin-offs, carve-outs or tracking stocks. Not surprisingly, these
actions often make the news. Deals can be worth hundreds of
millions, or even billions, of dollars. They can dictate the
fortunes of the companies involved for years to come. Broader Scope
of Leveraged buyout The Main Idea One plus one makes three: this
equation is the special alchemy of a merger or an acquisition. The
key principle behind buying a company is to create shareholder
value over and above that of the sum of the two companies. Two
companies together are more valuable than two separate companies -
at least, that's the reasoning behind M&A. Synergy Synergy is
the magic force that allows for enhanced cost efficiencies of the
new business. Synergy takes the form of revenue enhancement and
cost savings. By merging, the companies hope to benefit from the
following: Staff reductions As every employee knows, mergers tend
to mean job losses. Consider all the money saved from reducing the
number of staff members from accounting, marketing and other
departments. Job cuts will also include the former CEO, who
typically leaves with a compensation package. Economies of scale
Whether it's purchasing stationery or a new corporate IT system, a
bigger company placing the orders can save more on costs. Mergers
also translate into improved purchasing power to buy equipment or
office supplies - when placing larger orders, companies have a
greater ability to negotiate prices with their suppliers. Acquiring
new technology To stay competitive, companies need to stay on top
of technological developments and their business applications. By
buying a smaller company with unique technologies, a large company
can maintain or develop a competitive edge. Improved market reach
and industry visibility Companies buy companies to reach new
markets and grow revenues and earnings. A merge may expand two
companies' marketing and distribution, giving them new sales
opportunities. A merger can also improve a company's standing in
the investment community: bigger firms often have an easier time
raising capital than smaller ones.
2. Varieties of Mergers Here are a few types, distinguished by
the relationship between the two companies that are merging:
Horizontal merger Two companies that are in direct competition and
share the same product lines and markets. Vertical merger A
customer and company or a supplier and company. Think of a cone
supplier merging with an ice cream maker. Market-extension merger
Two companies that sell the same products in different markets.
Product-extension merger Two companies selling different but
related products in the same market. Conglomeration Two companies
that have no common business areas. Leveraged Buyouts LBO is the
generic term for the use of leverage to buy out a company. The
buyer can be the current management, the employees or a private
equity firm known as outsiders. Some leveraged buyouts occur in
companies experiencing hard times and potentially facing
bankruptcy. Common buy out Scenarios Positive and Negative Effects
Leveraged buyouts can have positive and negative effects, depending
on which side of the deal you are on. There are many scenarios
driving a buyout, but four examples are the repackaging plan, the
split-up, the portfolio plan and the savior plan will be discussed
by us. The Repackaging Plan The repackaging plan usually involves a
private equity company using leveraged loans from the outside to
take a currently public company private by buying all of its
outstanding stock. The buying firm's goal is to repackage the
company and return it to the marketplace in an initial public
offering (IPO). The acquiring firm holds the company for a few
years to avoid the watchful eyes of shareholders. This allows the
acquiring company to repackage the company behind closed doors,
making adjustments here and there and dressing it up. Once the
acquired company is dressed up, it is offered back to the market as
an IPO. Those who stand to benefit from a deal like this are the
original shareholders (if the offer price is greater than the
market price), the company's employees (if the deal saves the
company from failure), and the private equity firm that generates
fees from the
3. day the buyout process starts and holds a portion of the
stock until it goes public again. Unfortunately, if no major
changes are made to the company, it's a zero-sum game and the new
shareholders get the same financials the old company had. The
Split-Up The underlying premise in this plan is that the company,
as it stands, is worth more when broken up or with its parts valued
separately. This is fairly common with conglomerates that have
acquired various businesses in relatively unrelated industries over
many years. The buyer is an outsider and may use aggressive
tactics. If successful, the company is dismantled after it is
bought out and the parts are sold off to the highest bidder. This
method is the most feared by employees and management as they know
their jobs are just numbers on a page in this situation. These
deals usually involve massive layoffs as part of the restructuring
process. There will ultimately be two sides of the story, but the
thought that any company could be taken out like this should
inspire all levels of management to keep their companies as healthy
as possible. The Portfolio Plan The portfolio plan has the
potential to benefit all participants, including the buyer, the
management and the employees. In a competitive marketplace, a
company may use leverage to acquire one of its competitors (or any
company where it could achieve synergies from the acquisition). The
plan is risky: the company needs to make sure the return on its
invested capital exceeds its cost to acquire, or the plan can
backfire. If successful, all parties can benefit: the shareholders
may receive a good price on their stock, current management can be
retained and the company may prosper in its new, larger form. The
Savior Plan The savior plan is often drawn up with good intentions,
but frequently arrives too late. This scenario typically involves a
plan involving management and employees to borrow money to save a
failing company. The term "employee owned" often comes to mind
after one of these deals goes through. While the concept is
commendable, if the same management and tactics stay in place, the
likelihood of success is low. On the other hand, if the company
turns around after the buyout, everyone benefits. History Tracing
back to history, merger and acquisitions have evolved in five
stages and each of these are discussed here. As seen from past
experience mergers and acquisitions are triggered by economic
factors. The macroeconomic environment, which includes the growth
in GDP, interest rates and monetary policies. First Wave Mergers
The first wave mergers commenced from 1897 to 1904. During this
phase merger occurred between companies, which enjoyed monopoly
over their lines of production like railroads, electricity etc. the
first wave mergers that occurred during the aforesaid time period
were mostly horizontal mergers that took place between heavy
manufacturing industries.
4. End of 1st Wave Merger Majority of the mergers that were
conceived during the 1st phase ended in failure since they could
not achieve the desired efficiency. The failure was fuelled by the
slowdown of the economy in 1903 followed by the stock market crash
of 1904. The legal framework was not supportive either. The Supreme
Court passed the mandate that the anticompetitive mergers could be
halted using the Sherman Act. Second Wave Mergers The second wave
mergers that took place from 1916 to 1929 focused on the mergers
between oligopolies, rather than monopolies as in the previous
phase. The economic boom that followed the post World War I gave
rise to these mergers. Technological developments like the
development of railroads and transportation by motor vehicles
provided the necessary infrastructure for such mergers or
acquisitions to take place. The government policy encouraged firms
to work in unison. This policy was implemented in the 1920s. The
2nd wave mergers that took place were mainly horizontal or
conglomerate in nature. Te industries that went for merger during
this phase were producers of primary metals, food products,
petroleum products, transportation equipments and chemicals. The
investments banks played a pivotal role in facilitating the mergers
and acquisitions. End of 2nd Wave Mergers The 2nd wave mergers
ended with the stock market crash in 1929 and the great depression.
The tax relief that was provided inspired mergers in the 1940s.
Third Wave Mergers The mergers that took place during this period
(1965-69) were mainly conglomerate mergers. Mergers were inspired
by high stock prices, interest rates and strict enforcement of
antitrust laws. The bidder firms in the 3rd wave merger were
smaller than the Target Firm. Mergers were financed from equities;
the investment banks no longer played an important role. End of the
3rd Wave Merger The 3rd wave merger ended with the plan of the
Attorney General to split conglomerates in 1968. It was also due to
the poor performance of the conglomerates. Some mergers in the
1970s have set precedence. The most prominent ones were the
INCO-ESB merger; United Technologies and OTIS Elevator Merger are
the merger between Colt Industries and Garlock Industries. Fourth
Wave Merger The 4th wave merger that started from 1981 and ended by
1989 was characterized by acquisition targets that wren much larger
in size as compared to the 3rd wave mergers. Mergers took place
between the oil and gas industries, pharmaceutical industries,
banking and airline industries. Foreign takeovers became common
with most of them being
5. hostile takeovers. The 4th Wave mergers ended with anti
takeover laws, Financial Institutions Reform and the Gulf War.
Fifth Wave Merger The 5th Wave Merger (1992-2000) was inspired by
globalization, stock market boom and deregulation. The 5th Wave
Merger took place mainly in the banking and telecommunications
industries. They were mostly equity financed rather than debt
financed. The mergers were driven long term rather than short term
profit motives. The 5th Wave Merger ended with the burst in the
stock market bubble. Hence we may conclude that the evolution of
mergers and acquisitions has been long drawn. Many economic factors
have contributed its development. There are several other factors
that have impeded their growth. As long as economic units of
production exist mergers and acquisitions would continue for an
ever-expanding economy. History in Pakistan Pakistan and M&A
M&A activity has grown in Pakistan in the recent years. The
Competition (Merger Control) Regulations 2007 (the regulations)
regulate the mergers and acquisitions in Pakistan. Horizontal Year
Acquirer Acquired Merger or Acquisition 2008 NIB Bank ltd. PICIC
Merger 2007 ABN AMRO Bank Ltd. Prime Bank Ltd. Acquisition 2007
LINK dot net WOL/DANCOM Acquisition 2007 Standard Charted Bank
(Pak) Union Bank Ltd. Acquisition 2005 Itislat PTCL Acquisition
Conglomerated Year Acquirer Acquired Merger or Acquisition 2007 Pak
Suzuki Motor Company Suzuki Motorcycle Acquisition 2008 Fatima
Group/Arif Group Pakarab Fertilizer Acquisition 2005 Ibrahim Group
Alfalah Bank Ltd. Acquisition Vertical 2008 Dalda Foods Wazir Ali
Industries Acquisition In Pakistan, banks have chosen to acquire /
merge with other banks in order to comply with the statutory
requirement of raising their paid up capital to at-least Rs.6
billion by the end of 2009. Although, some of the banks have
tackled the requirement of capital adequacy by increasing their
paid up capital, however M&A has become a
6. business reality in the country. This has involved merger of
investments banks with their mainstream banks as well as
acquisition of smaller banks by the larger banks. The privatization
policy of the government has resulted in acquisitions of ABL, UBL
and PTCL. Ratio Analysis Ratio Analysis of RBS 2004 2005 2006 2007
(000) (000) (000) (000) Assets 588,122 776,827 871,432 1,840,830 -
- - - Equity 33,905 35,435 40,227 53,038 - - - - Debt 39,242
126,077 147,219 310,095 - - - - Current Assets 536,117 720,743
812,468 1,654,533 - - - - Current Liabilities 474,541 646,324
727,094 1,575,089 - - - - Fixed Assets 52,005 56,084 58,964 186,318
- - - - C.A- Inventory 4,409,915 4,783,035 5,674,074 4,005,769 - -
- - No. of Shares 92,135 120,744 131,438 157,303 - - - -
Sales(Interest Income) 16,632 21,331 24,688 32,252 COGS 6,505,262
10,572,634 11,212,111 14,531,477 - - - - G.Profit(int. income-
int.exp) 9,071 9,918 10,596 12,069 - - - - Net Income 5,289 5,558
6,497 7,788 - - - - Total Liability 554,217 741,392 831,205
1,787,791 Years 2004 2005 2006 2007
7. Liquidity Ratio Current Ratio 1.13 1.12 1.12 1.05 Debt Ratio
Debt to Equity 115.74% 355.80% 365.97% 584.67% Debt Ratio 94.24%
95.44% 95.38% 97.12% Common Equity Ratio 5.76% 4.56% 4.62% 2.88%
C.L to Equity 14.00 18.24 18.07 29.70 Profitability Ratio Net
Profit Margin 31.8% 26.1% 26.3% 24.1% Gross Profit Margin 54.5%
46.5% 42.9% 37.4% Return on Asset 0.9% 0.7% 0.7% 0.4% Return on
Equity 15.6% 15.7% 16.2% 14.7% EPS - - 0.54 0.64 Activity Ratio
Asset Turnover 0.03 0.03 0.03 0.02 Fixed Asset Turnover 3.13 2.63
2.39 5.78 Solvency Ratio Net Total Solvency Income Deprecation
liabilities Ratio 2004 5289.00 1674.00 554217.00 1.26% 2005 5558.00
1825.00 741392.00 1.00% 2006 6497.00 1678.00 831205.00 0.98% 2007
7788.00 1932.00 1787791.00 0.54% 2008 (38344.00) 3154.00 2342773.00
-1.50%
8. Circumstances/Reasons for Acquisition of ABN Amro ABN AMRO
had come to a crossroads in the beginning of 2007. The bank had
still not come close to its own target of having an ROE that would
put it among the top 5 of its peer group, a target that the CEO had
set upon his appointment in 2000. From 2000 until 2006, ABN AMRO's
stock price stagnated. Financial results in 2006 added to concerns
about the bank's future. Operating expenses increased at a greater
rate than operating revenue, and the efficiency ratio deteriorated
further to 69.9%. Non-performing loans increased considerably year
on year by 192%. Net profits were only boosted by sustained asset
sales. ABN AMRO Financial Data Financial Data Years 2002 2003 2004
2005 2006 Sales net of interest 18.280mn 18.793mn 19.793mn 23.215mn
27.641mn EBITDA 4.719mn 5.848mn 6.104mn 6.705mn 6.360mn Net Result
Share of the group 2.267mn 3.161mn 4.109mn 4.443mn 4.780mn Staff
105,000 105,439 105,918 98,080 135,378 On February 2007, the call
came from the TCI hedge fund which asked the Chairman of the
Supervisory Board to actively investigate a merger, acquisition or
breakup of ABN AMRO, stating that the current stock price didn't
reflect the true value of the underlying assets. TCI asked the
chairman to put their request on the agenda of the annual
shareholders' meeting of April 2007. Events accelerated when on
March 20 the British bank Barclays and ABN AMRO both confirmed they
were in exclusive talks about a possible merger. On March 28, ABN
AMRO published the agenda for the shareholders' meeting of 2007.
However, in April, another British bank, the Royal Bank of Scotland
(RBS) contacted ABN AMRO to propose a deal in which a consortium of
banks, including RBS, Belgium's Fortis, and Spain's Banco Santander
would jointly bid for ABN AMRO and thereafter break up the
different divisions of the company between them. According to the
proposed deal, RBS would take over ABN's Chicago operations,
LaSalle, and ABN's wholesale operations while Banco Santander would
take the Brazilian and Italian operations and Fortis, the Dutch
operations. On April 23 ABN AMRO and Barclays announced the
proposed acquisition of ABN AMRO by Barclays. The deal was valued
at 67 billion. Part of the deal was the sale of LaSalle Bank to
Bank of America for 21 billion. After that the RBS-led consortium
brought out their indicative offer, worth 72 billion, if ABN AMRO
would abandon its sale of LaSalle Bank to Bank of America. During
the shareholders' meeting the next day, a majority of about 68% of
the shareholders voted in favor of the breakup as requested by TCI.
Bank of America absorbed LaSalle effective October 1, 2007. On July
23 Barclays raised its offer for ABN AMRO to 67.5bn, after securing
investments from the governments of China and Singapore, but it was
still short of the RBS consortium's offer. Barclay's revised bid
was worth 35.73 a share 4.3% more
9. than its previous offer. The offer, which included 37% cash,
remained below the 38.40- a-share offer made the week before by the
RFS consortium. Their revised offer didn't include an offer for La
Salle bank, since ABN AMRO could proceed with the sale of that
subsidiary to Bank of America. RBS would now settle for ABN's
investment-banking division and its Asian Network. On July 30 ABN
AMRO withdrew its support for Barclays offer which was lower than
the offer from the group led by RBS. While the Barclays offer
matched ABN AMROs strategic vision, the board couldnt recommend it
from a financial point of view. The US$98.3bn bid from RBS, Fortis
and Banco Santander was 9.8% higher than Barclays offer. Barclays
Bank withdrew its bid for ABN AMRO in October, clearing the way for
the RBS-led consortium's bid to go through On October 9, the RFS
consortium led by Royal Bank of Scotland, bidding for control of
ABN AMRO, formally declared victory after shareholders,
representing 86% of the ABN AMROs shares, accepted the RFS groups
72bn offer. Sources of Financing used for Acquisition of ABN Amro
Forecasts for Acquisition RBS believed that this transaction would
provide enhanced growth prospects and attractive financial returns.
As a result of the transaction, RBS expected to deliver cost
savings amounting to 1,237 million and net revenue benefits
amounting to 481 million, by the end of 2010. The internal rate of
return on the acquisition of the ABN AMRO Businesses was 15.5%
post-tax, well above the Groups hurdle rate of 12% post-tax. The
acquisition was expected to deliver a after tax return on
investment of 13.2% in 2010, and to increase Group adjusted
earnings per share by 2.0% in 2009 and by 7.0`% in 2010 (which
actually turned out to be negative 1.69). The acquisition of ABN
AMRO gave RBS the ability to accelerate their existing strategies
and growth outside the UK, particularly in rapidly expanding
markets and increasing customer franchises. The integration would
create synergies which were expected to total 2.3 billion, compared
with the original estimate of 1.7 billion. Sources of Financing The
offer, given by RBS Group of 71 billion included 37% cash, which
would give 38.40-a-share to ABN share holders. RBS would acquire
the investment banking business, commercial clients, the Asian
units and any thing that was left of the LaSalle Bank (which was
sold to Bank of America for 23billion) for a consideration of 27
billion. This was financed by Tier 1 capital. RBSs Tier 1 capital
ratio at 31 December 2007 was 7.3% and our total capital ratio
11.2%, which decreased considerably as compared to Tier 1 ratio
7.5% and Total capital ratio 11.5% of 2006. At the time of the bid
for ABN AMRO RBS indicated their intention to rebuild their capital
ratios. RBS thought that the improved financial returns
10. expected from the acquisition would help to accelerate
rehabilitation of the Groups capital ratio. Santander acquired the
Italian and Brazilian units of ABN for a consideration of 20
billion (Santander sold the Italian units to the Italian bank,
Monte Dei Paschi Di Siena, for 9 billion). Fortis acquired the
Dutch divisions by paying 24 billion. The bank tapped shareholders
for 13.4 billion (issued right shares) to pay for its 24 billion
portion. This financing of 38-a-share offer, which included 35.60
in cash, to finance the purchase Fortis issued right shares,
available to the existing shareholders at a discount, 15 per share.
However, by June 2008, Fortis announced that an international
financial crisis was coming and that it needed to fortify its
capital by raising an additional 8.3 billion. An extra 200 million
shares were issued at 10. Critical Analysis RBS had debt equity
ratio of 365.97% in 2006 which was higher then industry average of
276.03%. In 2007 and 2008 the ratio increases to 584.67% and
1733.24% respectively. Due to this high Debt equity ratio RBS
financed the acquisition with equity.
11. References Journals The Economist Financial Times Wall
Street Journal Yahoo Finance Investment Dealers Digest Websites
www.wikipedia.com www.investopedia.com www.reutors.com Annual
Reports of RBS 2006, 2007, 2008 www.rbs.com Annual Reports of ABN
AMRO 2006, 2007 Books Corporate Finance by Ross, Westersfield
Principles of Corporate Finance by Brealey, Myers Fundamental of
Financial Management by Eugene F Brighum, Houston