MERGERS & ACQUISITIONS

CHAPTER 6

THE POST-CLOSING INTEGRATION

 Main content

 The role of integration in M&A

 The process of integration
 Integration accounting
The decision of integration

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 The decision of integration
Financial buyer Strategic buyer
• buy a business for eventual resale • want to make a profit by managing the acquired
• tend not to integrate the acquired business into business for an extended period, either as a
another entity. separate subsidiary in a holding company or by
• monitor the effectiveness of current management merging it into another business.
and intervene only if there is a significant and
sustained deviation between actual and projected
performance
 The role of integration in M&A

Roles

Realizing The Impact of Acquisition-

Projected Employee Related Customer
Financial Returns Turnover Attrition
 Realizing Projected Financial Returns
• The amount of cash the acquirer will have to generate to recover the
premium will increase the longer it takes to integrate the target
company.
Suppose current market value of a firm is $100m. An acquirer is willing to pay a $25m
premium for this firm over its current share price. the cost of capital is 10%.
If integration is completed by the end of the first year, the acquirer will have to earn
$27.5 million by the end of the first year to recover the premium plus its cost of capital
($25 + ($25 x 0.1)).
If integration is not completed until the end of the second year, the acquirer will have
to earn an incremental cash flow of $30.25 million ($27.5 + ($27.5 x 0.1)), and so on.
 The Impact of Employee Turnover
• Turnover among management and key employees after a corporate
takeover normally increase.

• If experienced managers are removed and replaced with new managers:

 34% failure rate for inside successor
 55% failure rate for outside successor

• The loss of any significant number of employees can be very costly  incur new
recruitment and training costs

• reduce the morale and productivity of those who remain.

 Acquisition-Related Customer Attrition
• A newly merged company will experience a loss of another 5% - 10%
of its existing customers as a direct result of a merger.
• Many companies lose revenue momentum as they concentrate on
realizing expected cost synergies.
Rapid integration may result in more immediate
realization of synergies, but it also contributes to
employee and customer attrition
The process of integration
 Effects of Price and Payment Method
• The more confidence in the realization of synergies,
• the greater the chance that the acquiring firm will pay cash and
• the more the target company shareholders will prefer stock.
• The greater the use of stock in a deal,
• the greater the burden of the risks borne by the target shareholders and
• the greater the potential benefits accrue to the target shareholders.
• The greater the confidence of the acquiring firm managers in
estimating the value of the target, the more likely the acquiring firm is
to offer cash.

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 Examples
• Cash offers
• InBev’s acquisition of the remaining 50% interest in Grupo Modelo (2012)

• Stock offers
• Office Depot and Office Max (2013, in process)

• Stock and cash offers

• Kraft’s acquisition of Cadbury (2010)
• ICE acquisition of NYSE Euronext (2012)
Integration accounting
VAS 11 - Business combination

Purchase method
 CHAPTER SUMMARY

 The role of integration in M&A

 The process of integration
 Integration accounting