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International Business Project on INTERNATIONAL MERGERS
Submitted ByKoshank Garg(10DM-079) Kshitiz Jain(10DM-081) Shashank Tiwari(10HR-033) Parag De(10HR-049) Joyjeet Banerjee(10IB-034) Koshalendra Goud(10IB-038)
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We would like to thank our mentor Ms.RatnaVadra for her guidance and support throughout the course of this study. This project would not have been possible without her unflinching support.
Regards, Koshank Garg(10DM-079) Kshitiz Jain(10DM-081) Shashank Tiwari(10HR-033) Parag De(10HR-049) Joyjeet Banerjee(10IB-034) Koshalendra Goud(10IB-038)
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Topic Objective- The major objective of this study is to understand the meaning of the term mergers and the trends shown by international market in terms of mergers. We have also tried to understand the various steps involved in mergers and tried to understand the success factors of a merger through case studies of Adidas and Reebok and Time Warner-AOL.
Methodology- We have studied the effects of various strategies in mergers and what are the established steps that should be followed by a companies in order to successfully form a merged entity.
Result- According to our research the number of mergers has been going up around the world and a major reason for it has been the consolidation the companies are seeking after the global economic turndown. Also, we have been able to identify the requisite steps of a merger.
Recommendations- Mergers and Acquisitions can be successful only if the right preparation before and after the merger is done. They have a high ratio of failures therefore; companies need to match their competencies before merging into a single entity.
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Merger refers to an amalgamation or the combination of two or more commercial companies. It can also be defined as the combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Since 1983, there have been over 2500 M&As annually in the United States alone. The number of M&As among European firms has risen from 117 in 1983 to 440 in 1988. Moreover, the number of M&As among firms from different countries has risen dramatically. For instance, American firms were involved (as acquirers and acquired firms) in just over 400 transactions in 1986 and about 600 in 1988. This in large part is due to the rising number of acquisitions of U.S. firms by non-U.S. firms. Even the Japanese have become more active in M&As. In 1988 the Japanese engineered 315 M&As compared to only 44 in 1984. Moreover, the continuing evolution of the European Economic Community, privatization efforts in Eastern Europe and other parts of the world, and consolidation of many U.S. domestic industries such as airlines, banking and pharmaceuticals create even further opportunities for future acquisitions. According to the quarterly deals data, the total value of outbound (overseas) deals by Indian companies grew to over $12 billion in the March 2010 quarter from a measly $52 million seen in the same period last year. The number of deals also increased to 45 from 15 over the year.2010 was a very strong year for mergers and acquisitions in the China. Statistics provided by Thomson Reuters show that over 3000 M&A transactions involving Chinese enterprises with a combined US$131.1 billion were reported in 2010. In spite of all the M&A activity, one fact remains clear--most M&As have not lived up to the financial expectations of those managers transacting them. Research, both in the U.S. and other countries, consistently demonstrates that, on average, M&As do not improve either the stock market or financial performance of buying companies (Schweiger, Csiszar& Napier, in press).
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STEPS OF A MERGER
According to Deloitte Consultancy the steps to complete a successful merger can be broken into 5 parts: 1) 2) 3) 4) 5) Target screening Due diligence Transaction Execution Merger integration Post-Merger considerations
STEP 1: Target Screening
1) 2) 3) 4)
Define Merger criteria upfront. Create a pool of target candidates. Focus on the ones that match your strategic objectives. Both quantitative and qualitative factors can be explicitly considered in the target screening process to assess the fit. 5) Many potential value killers are identified much before significant organizational resources are deployed to unproductive deals or transactions.
STEP 2: Due Diligence
1) Understanding the target firm.
- Gather internal Information such as documents, interviews and on-site inspection. - Gather External Information such as from employees, customers, consultants, government officials.
2) Understanding the risk and financial aspects attached to the deal.
Problems Related to Due Diligence:
1) External data is not available for small privately held firms 2) In case of cross border mergers the buying firm must understand differences in political, economic, legal and cultural issues 3) For the human resource function in particular, cross border mergers require in depth understanding of different pension, benefits, and labor laws; work conditions; employment security laws; the role of unions and workers councils
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1) Regulatory hurdles- This refers to the regulatory environment which might be different in different countries. More so it is very important for the merging companies to understand any legal hurdles which may derail the whole merging process. 2) Shareholder approval- It is very important that the shareholders of both the companies decide quickly on the terms of the merger, failing which might lead to a stand-off between the two companies and waste precious time and money. 3) Competing firms- Any merger is not void of competition usually and one or more terms might compete to merge with another company. Such a situation leads to escalation of costs and delay in the overall merging process. In order to avoid to such a situation, the companies should move quickly to close the deal. 4) To overcome all of this right financial, tax, accounting and legal planning is required.
STEP 4: Merger Consideration This is the most important step of a merger. Capturing value of deal is a balancing act that requires close attention to management, employees, customers and shareholders. Executing the merger takes months, sometimes years to function as one. Therefore, it is very important that the management of the two merging companies have a plan in place to merge the two entities without glitches. They should also be ready with a contingency plan in case of any unforeseen problems.
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There are four levels of risks that Deloitte has entailed as Post Merger Risks1) Synergy Risk- This refers to the risk of non-alignment of the various competencies and goals of the organisations. 2) Structural Risks- It refers to the risk of non-alignment of the structures or the working styles of the two merging companies. 3) People Risks- It refers to the risk of non-alignment of the people or employees of the two companies due to the difference in working style or due to cultural difference between the countries of origin of the businesses. 4) Project Risks- It refers to the mismatch in levels of effectiveness of HR avaialbe to the merged company due to different set of expectations before and after the merger.
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KEY TO SUCCESSFUL MERGERS
Three major factors are critical to success in any merger: 1) First, a transaction must be undertaken for strategic reasons (as opposed to solely financial or tax reasons) such as to improve or develop competitive capabilities (e.g., lower costs through economies of scale or better technology, enhanced differentiation through better product design), to expand products, customers served, or geographic presence. More specifically, M&As must be viewed as means to achieve strategic outcomes rather than ends in themselves. In fact, they should be considered as just two such means, much like internal development, joint ventures, and strategic alliances. When M&As are driven solely by opportunism (i.e., "a good deal") or the desire to "do a deal," rather than sound strategic reasons, they are less likely to succeed. 2) Second, the final purchase price of a merger or an acquisition typically reflects both the inherent value of a target business and its value to the buying or merging firm (i.e., combination value). The latter value is greater because of strategic benefits that a buying or merging firm anticipates it can obtain after a change in ownership. However, when the purchase price exceeds either the inherent or combination value (due to overestimation or poor negotiations), M&As are also less likely to succeed.
3) Finally, the value of M&As will ultimately be determined by the extent to which they can be effectively implemented. In spite of a "reasonable" purchase price and sound strategic reasons, M&As are less likely to succeed if the merging organizations are not effectively combined after the closing of a deal; i.e., strategic benefits are realized in practice. There are many examples of M&As that looked good prior to the closing of a deal, only to have failed after the deal because the challenges and difficulties of implementation were underestimated. Based on the three factors, it is clear that top managers face many challenges in effectively transacting and implementing M&As. First and foremost, is the challenge of knowing what is being bought and both its inherent and combination values. Second, is the challenge of implementing M&As to capture value. Each of these two challenges is discussed below.
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CASE STUDY1: ADIDAS AND REEBOK MERGER
ABSTRACT: The case discusses the proposed merger of Reebok International Limited with Adidas-Salomon AG. It describes the recent trends and studies the ongoing merger in the sporting goods industry. The case presents the rationale behind the decision to merge.Finally, the case ends with a debate on whether the merger would be successful. INTRODUCTION: On August 03, 2005, Adidas-Salomon AG (Adidas), Germany's largest sporting goods maker announced acquisition of the US-based Reebok International Limited (Reebok) for $3.8 billion. The share prices of both the companies recorded an increase on the day of the announcement of the deal. The share price of Adidas increased by 7.4% from 147.52 on August 02, 2005 to 158.45 on August 03, 2005 on the Frankfurt stock exchange, while Reebok's share price at the New York Stock Exchange rose to $57.14 on August 03, 2005, an increase of 30% over the August 02, 2005 share price of $43.95. The deal would result in the union of two cutthroat competitors through a "friendly takeover". Adidas and Reebok claimed that the merger was decided upon because of the realization that their individual (company) goals would be best accomplished by joining instead of competing. Nike International Inc. (Nike) was the common competitor for both Reebok and Adidas. SYNERGIES:Both the companies claimed that their missions were complementary. As Fireman remarked, "Adidas is a perfect partner for Reebok. Reebok's mission is to enroll global youth inclining towards the music-and-lifestyle image that it promotes through sports, music and technology. This complements Adidas's mission to be the leading sports brand in the world, with a focus on performance and international presence". In short we can say that following were the synergies between the two companies: 1) Both the companies had a reputation of using cutting-edge technologies to produce innovative products. 2) Both had eminent brand ambassadors from the sports and entertainment worlds. 3) Both companies had a mission to become the leading brand in the world and provide high performance and quality to costumers.
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INTEGRATION ISSUES: Adidas said the companies would grow as a combined entity but would retain separate management. The companies also ruled out any workforce reductions. The new entity would continue to have separate headquarters and their individual sales forces. The companies would also keep most of the distribution centers independent and would have separate advertising programs for their brands. Hainer said, "The brands will be kept separate because each brand has a lot of value and it would be stupid to bring them together. The companies would continue selling products under respective brand names and labels." Adidas declared that the deal would involve investment in both Adidas and Reebok. These investments would guide the companies towards effective consolidation. In short following were the integration issues for the two companies: 1) The companies grew as a combined entity but retained separate management. 2) The new entity continued to have separate headquarters and their individual sales forces. 3) The companies also kept most of the distribution centers independent and had separate advertising programs for their brands. 4) Adidas was perceived to have good quality products that offered comfort. While, Reebok was perceived as a 'cool' brand. Therefore, there was a lack of synergy. 5) To unite Adidas s German culture of control, engineering, and production and Reebok s U.S. marketing- driven culture.
RESULTS: 1) Adidas increased its sales from US$9.5 billion in 2006 to 10.8 billion in 2007 2) Reebok s sales dipped from $3.8 billion in 2006 to $3.3 billion in 2007 3) Adidas got access to Reebok s low cost manufacturing and raw material assets all over the globe 4) Backlog percentage increased at Adidas by 17% while at Reebok it fell by 20% 5) In the short run Adidas seems to have benefited from the merger while Reebok seems to be struggling
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CASE STUDY1: AOL AND TIME WARNER MERGER
EXECUTIVE SUMMARY: The merger of AOL and Time Warner has been judged to be a merger between two companies in fear. AOL feared that its business model needed continual adaptation to a changing internet and wanted to ensure broadband access. AOL needed to continue its growth by acquisition strategy in order to justify its high market capitalization. Time Warner feared that its out-dated network of traditional media outlets (television broadcasting, publishing, movies, magazines, and newspapers) needed a facelift. Time Warner believed that for it to remain competitive it needed an immediate injection into the internet. But mergers out of fear are rarely successful. The valuation that analysts predicted (above $90 per share) never persisted as the two companies have not been able to fully integrate. AOL and Time Warner have not been able to formulate a strategy which can help the combined company move forward, the managers have failed to win the support of all divisions, and the dynamics and technologies of the internet have changed and have left AOL behind.
MARKET SITUATION PRIOR TO THE MERGER: In 2000 it was believed that future media growth motor would be the from the new media sector. Traditional and new mediachannels were rapidly converging into common media platforms. The industry believed that companies operating in one media channel only, either the traditional or the new media could not play a significant role in the future or, even worse, would vanish. Successful companies will harness the Internet s nearly infinite customer reach and provide high-quality media contents, such as entertainment and information to its worldwide customers. The companies merged in January 2000, before the bursting of the over-valuations of internet companies. Therefore, from a standpoint of Time Warner at that time, the high expectations to regain growth momentum from a leading Internet player such as AOL seemed justified. Supernormal growth period growth rates were in hindsight over inflated, but followed the subscription growth of AOL and other online players. The later
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downward spiral of AOL Time Warner s development reflects the loss in confidence of the market in the Internet and is somewhat symbolic for the burst of the Internet bubble. There was a steady increase in stock prices of AOL until 1999. It was only interrupted by a brief phase of decline in 1996, which coincides with the purchase of Turner Broadcasting Systems. In 1999, however, it began to remain steadily fluctuating around a mean value of about $60. This may indicate that the competitive advantage of AOL was not sustainable anymore and may indicate the financial translation of the rationale behind the merger.
THE MERGER: This merger was a deal that created the world's largest media and online services company. The new firm had a market capitalization of $350 billion. AOL bought Time Warner for $182 billion. The new company was 55 percent owned by AOL and 45 percent owned by Time Warner. The aim of the merger was to create an entity that served the purpose of both companies and ensured long term growth. AOL feared that its business model needed continual adaptation to a changing internet and wanted to ensure broadband access. AOL needed to continue its growth by acquisition strategy in order to justify its high market capitalization. While, Time Warner feared that its outdated network of traditional media outlets (television broadcasting, publishing, movies, magazines, and newspapers) needed a facelift.
SYNERGIES: When AOL and Time Warner announced their merger in 2000 they had a clear vision of their synergies. AOL believed that the combined companies had the means to be uniquely positioned in order to bring interactive media into customers everyday lives and tofurther penetrate this market. The merger will combine Time Warner's vast array of world-class media, entertainment and news brands and it s technologically advanced broadband delivery systems with America Online's extensive Internet franchises, technology and infrastructure, including the world's premier consumer online brands, the largest community in cyberspace, and unmatched e-commerce capabilities. AOL Time Warner's unparalleled resources of creative and journalistic talent, technology assets and expertise, and management
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experience will enable the new company to dramatically enhance consumers' access to the broadest selection of high-quality content and interactive services. By merging the world's leading Internet and media companies, AOL Time Warner will be uniquely positioned to speed the development of the interactive medium and the growth of all its businesses. The new company will provide an important new broadband distribution platform for America Online's interactive services and drive subscriber growth through cross marketing with Time Warner's pre-eminent brands.AOL at that time was believed to have the necessary experience to help Time Warner transform their divisions to the digital channels. Additionally Time Warner was believed to help AOL build next generation broadband. Together with Time Warner, AOL believed theycould build a set of brands customers trusted in. Additionally, AOL Time Warner thought of building up facilities beyond just personal computers but also involving wireless devices, television, phones or PDAs. With the help of Time Warner AOL thought it could deliver any kind of content at any time to any place (AOL Anywhere). As most likely synergies of the merger the board of AOLregarded cost reductions and opportunities of growth. Revenue opportunities were seen in areas such as advertising, growth opportunities were seen in increased numbers of cross-promotion and marketing for Time Warner s content through the channels of AOL. Efficiency increases were seen in marketing across different platform and distribution systems, cost synergies were likely toarise due to shared business functions (i.e. R&D and cost efficiencies because of launching interactive extensions of Time Warner Brands). Time Warner, in general, believed that through the integration of traditional and new media and communication and business technology the new company would be uniquely positioned in order to have a strong basis and take full advantage of the digital revolution. From Time Warner s view this strategic advantage emerged from multiple brands, vast array of content, extensive infrastructure and strong distribution capabilities and that therefore the value of AOL Time Warner combined will be higher than the value of the single companies. Time Warner regarded AOL s extensive Internet infrastructure as a new distribution medium for itsbrands and content. Also Time Warner believed its broadband system was an ideal distribution platform for AOL s interactive services. Furthermore, AOL s e-commerce system was regarded to be an opportunity to promote Time Warner s music labels. Linking Time Warner s established brands with AOL s interactive services promised opportunities for subscriber growth. Finally, the Time
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Warnerboard thought that through the merger the international position of the brand would be strengthened as well as the benefit for consumers increase.
PROPOSED VALUATION: The hype surrounding the AOL and Time Warner merger was fueled by and in turn helped to refuel the growing internet bubble. Wall Street analysts, internet gurus, and media moguls all hoped that this newly formed company would successfully integrate traditional forms of media with the new. A valuation of these two companies was complicated and unprecedented. This was the largest corporatemerger to date and no one knew for certain what types of synergies and growth rates would be possible for the two companies. Under the assumptions of a 25% supernormal growth rate and a 5% terminal period growth rate the valuation of the company was over $93 per share. While these growth rates were reasonable in the context of the environment of the late1990s their sustainability was never questioned. Many questions remained unanswered. Could AOL continue to grow subscriptions and advertising revenues? Could AOL take advantage of Time Warner s extensive cable network (if so what would this cost and howlong before it materialized)? Could two large behemoths merge together? Was it AOL saving Time Warner or vice versa? The sensitivity tables attempts to answer some of these questions with technical analysis and try to judge their impact upon the share price of the newly formed firm. It is clear that the growth assumed in 2000 never occurred. A more realistic supernormal growth rate for the two companies would have judged their synergies to deliver 5-7% growth for the short term.
REASONS FOR FAILURE: Viewing back upon the merger several reasons can be found why the merger did not work out as the former managements had hoped it would. One of the main reasons is that AOL basically never was an equal counterpart to Time Warner. At the time of the merger AOL s stocks were overvalued mainly due to the Internet bubble. During the 1990 many upcoming Internet start-ups, the so-called dotcoms were tremendously overvalued and to some extent without ever having made profit worth as much as established blue-chip companies because investors believed in their potential. Indeed only a few companies survived the new economy -era and are now established companies (e.g. Amazon or EBay). Since, however, AOL according to its stock price was
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worth as much as Time Warner at the time of the merger they got the same voting rights and power. There still exists much controversy around Case s profit taking from the sale of his shares. The fact that Case sold a major part of his AOL stock soon after the merger was announced in January 2000 (when the price of the stock was high) and made an estimated profit of $ 160 million evoked suspicion and anger among shareholders. They thought that Case was aware of the fate of the merger and accused him of making money, when the time was right, at the expense of the shareholders. Yet, today AOL is certainly less worth than Time Warner. So, from today s perspective AOL received a too high price for its share or Time Warner paid too much for what it received in return. The stock price of AOL Time Warner fell from its peak of almost 90 US$ in 2001 down to almost 10 US$ in 2003 and right now is just at 13 US$. Also, since AOL turned out to be an unequal partner AOL TimeWarner changed its name back to just Time Warner in the meantime and almost the whole AOL board has been replaced while still many of Time Warner s directors are in charge. Another reason why the merger failed is that in the time after the merger AOL and Time Warner failed to implement their visions and communicate them e.g. marketing Time Warner content through all channels possible. Additionally, they even lacked the ability to recognize new trends in the digital industry. One trend apart from broadband Internet was Internet telephony or Voice over IP (Vo I P ) . AOL Time Warner as the main player in the digital revolution as they defined themselves hardly took notice of this trend and they failed to build a business model for that. Secondly, they were not able to promote their idea of a combined music-platform. Again, it was another company to gain the first mover advantage in this area (Apple with their introduction of the iTunes Music Store). And thirdly, one of the main trends AOL Time Warner missed in the recent years was the importance of highly personalized web services. Examples are MySpace.com, a platform for everyone to express oneself, which was bought by Rupert Murdoch s News Corp. for about $580 million or Snapfish, a service that allows everyone to store pictures online and make them publicly available. AOL Time Warner in contrast believed that delivering serious news and facts was more promising than highly personalized content. A new thread came up for AOL in the recent years. AOL used to be the most important Internet Service Provider in many countries. However, they failed to offer broadband access as soon as possible. So it was the local phone companies to have the first mover advantage. As a consequence of this not only
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lost AOL subscribers to their Internet service but also their portal lost importance leading to a loss in opportunity to promote AOL Time Warner content. As a further consequence income from advertising is decreasing. Furthermore, the CEOs at the time of the merger, Mr. Case and Mr. Levin, still today regard themselves as being the wrong persons for having done the job at that time. In an interview Case states that not only him but also the whole board of directors in each of the companies really believed in the success of his idea; yet he admits that he was the one to blame for the failure since it was his idea. Indeed at that time AOL needed Time Warner s broadband and cable business as a strong partner for further growth. In contrast, the question is whether Time Warner really needed AOL or whether a strategic partnership wouldn t have been the better choice. One major mistake seems to have been in the assumptions about the merger itself. Time Warner was thinking it was they to mainly benefitfrom the merger since they could access AOL s media channels and promote their content through it. AOL in contrast was the party that gained most through the merger because they were able to use Time Warner s broadband cable network and extend theirbroadband business.
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1) www.investopedia.com 2) http://archipelle.com/Business/AOLTimeWarner.pdf 3) http://currents.westlawbusiness.com/Article.aspx?id=af69bc97-aad0-41b5-8229e583588536d1 4) http://trak.in/Tags/Business/mergers-and-acquisitions-in-india-2010/ 5) http://www.businessweek.com/investor/content/dec2009/pi2009127_510045.htm 6) http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/The%20Ad idas%20-%20Reebok%20Merger%20Business%20Strategy.htm 7) http://www.allbusiness.com/buying-exiting-businesses/mergersacquisitions/417441-1.html 8) www.delloite.com
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