Key Takeaways

The goal of financial management is the creation of shareholder value Growth is an essential pre-requisite for prethe creation of shareholder value Growth can be achieved in two ways:
Organic Inorganic
1

Key Takeaways
In many industries, organic growth is too slow and hence is not a feasible option acquisition Inorganic growth through an acquisition-drive growth strategy is the preferred route for many companies Corporate restructuring strategies can also create shareholder value and are an alternative to an acquisition-driven growth strategy
2

Key Takeaways
There are three types of M&A:
Horizontal Vertical Conglomerate

Horizontal and vertical M&A have a much higher success rate than conglomerate ones

Key Takeaways
The benefits that arise from a combination of two firms are referred to as synergies. In other words, the combined firm is worth more than the value of the separate firms Synergy can be of two kinds:
 Operating Synergy  Financial Synergy

Key Takeaways
The M&A Process involves the following stages:
 Setting of strategic objectives  Search and screening  Strategic evaluation  Financial evaluation  Negotiation  Agreement  Integration
5

Key Takeaways
Target valuation is an important step in determining the offer price for a target rm and in structuring and negotiating the deal The main valuation method is the discounted cash flow analysis approach Using the appropriate discount rate is very important It is important to identify the potential sources of value creation in an acquisition
6

Key Takeaways
The acquiring companys management must carefully evaluate the pros and cons of an friendly offer versus a hostile takeover strategy Hostile takeover tactics comprise of:
 Tender offers  Bear hugs Proxy fights

Antitakeover defenses are of two types:

 Preventive Active
7

Key Takeaways
Successful integration is critically important for success in M&A The acquisition integration process may be undermined by a variety of pitfalls, thereby destroying the acquisitions value creation potential For successful integration, the appointment of the following is essential:
 Integration Steering Committee  Integration Manager  Integration Team

In addition, the following are essential components of the integration process

 Post-Acquisition Audit  Post-Acquisition Analysis
8

Key Takeaways
CEOs in the United States are very highly paid However, the highest paid CEOs are not necessarily the greatest wealth creators There is a positive correlation between firm size and compensation Some CEOs try to prepare their company for sale so that they can enrich themselves in the process

Acquisitions Strategy and Value Creation

Growth in share price is the most appropriate metric for evaluating the effectiveness of a companys growth strategy A growth strategy will increase the share price if the aggregated future benefits of implementing the strategy exceed the aggregated future costs of implementation
10

Acquisitions Strategy and Value Creation

Why do more than half of the acquisitions fail to create shareholder value? There are six major reasons

11

Acquisitions Strategy and Value Creation

Earlier, we talked about the fact that many companies pursue an acquisition-driven growth strategy. The key question in this regard is: Do acquisitions increase shareholder value? Unfortunately, about half of them fail to deliver the expected results In many cases, announcement of an acquisition causes the share price of the acquiring company to fall
12

Acquisitions That Do Not Fit the Firms Capabilities

Several empirical studies have shown that conglomerate acquisitions involving unrelated businesses are viewed most negatively by the market while acquisitions involving related businesses are viewed positively Hence, is corporate diversification a good strategy?
13

Overestimation of the Synergy from Acquisitions

Frequently managers overestimate the synergistic gains from acquisitions Many companies expect that acquisitions will lead to growth through the creation of market power However, research shows that efforts to enhance market position have not resulted in value creation
14

Overestimating the Value of Cost Reductions

Cost reductions are often cited as the main reason for M&A However, research shows that 40 percent of mergers fail to capture the expected cost savings In many cases, management, under pressure to show results, starts cutting costs at inappropriate places or cuts costs excessively, which actually worsens the problem
15

Underestimation of the Difficulty and Costs of Extracting Value

Both revenue growth and cost reduction require planning and effective implementation Implementation issues (loss of key personnel, delays in communication, poor due diligence) are the main reason for the failure of acquisitions Hence, extracting value even from acquisitions with clearly identified sources of value is a challenge
16

Underestimation of the Difficulties of Post-Acquisition Integration

The closer in size the acquirer and the target are, the more critical post-acquisition integration issues tend to be Since integration is a key value driver (synergies created and costs reduced through integration), the integration work needs to start at the planning stage An integration team needs to be in place even before the deal is consummated The changes resulting from the acquisition need to be communicated constantly to employees, investors, and customers Companies that are not used to doing acquisitions systematically underestimate the importance of the above issues 17

Overpayment
Even in acquisitions that truly create value, the acquirer may not reap any of the benefits if it overpays for the acquisition The Winners Curse syndrome

18

Some Caveats
Dont confuse the objective Have a clear growth strategy Identify value drivers Have a clear understanding of the costs of integrating the target Conduct due diligence Know when to walk away
19

Dont Confuse the Objective

Most companies say that they wish to maximize shareholder value However, when it comes to decision making, they use metrics that are not necessarily congruent with shareholder value Companies often focus myopically on increasing current EPS without considering the acquisitions effect on future EPS A similar confusion of objective occurs when companies use diversification as a 20 motive for acquisitions

Dont Confuse the Objective

Companies ignore the fact that it is much easier for investors to diversify on their own The third confusion of objective occurs when companies use lowered borrowing costs as the motive for acquisitions Evaluating acquisitions from the perspective of shareholder value creation will allow you to avoid many of the pitfalls in acquisitions
21

Have a Clear Growth Strategy

It is vitally important to first define your growth strategy clearly
 Product extensions  Product market extensions  Geographic roll-ups  Elimination of overcapacity in the industry  Knowledge acquisition (R&D)  Industry Convergence

Then, ensure that the target company fits that strategy 22

Identify Value Drivers

When evaluating the target, it is important to identify the value drivers of this specific acquisition clearly. How does the combination of a specific acquirer and a specific target create value? What are the sources of increase in revenue and decrease in costs? Are there specific targets for growth and cost reductions, and exactly how does the acquiring company plan to achieve them? 23

Value Drivers
Elimination of overcapacity in the industry Introduction of new products Creating new distribution in open areas Creating new markets Bringing desired manufacturing capabilities Providing desired R&D capabilities Providing economies of scale Specify targets for each value driver and evaluate the acquisition based on the targets 24

Understand Integration Issues

Integration of human resources Integration of physical resources The integration of human resources is the bigger challenge

25

Issues in Integration of Human Resources

Is the targets corporate culture compatible with ours? Will the cultures of the two companies allow information to flow easily? If not, can we manage the differences? Are the corporate governance and management styles of both companies similar? Are both companies at the same stage of the business life cycle? Are values and principles of both companies 26 the same or similar?

People Issues
Have we identified the key employees at the target (value creators) and taken steps to retain them? Is the general morale of target firm employees positive? Does the target firm seek to create valuable and challenging work for its employees? Do target firms HR practices (promotions, reward systems) motivate employees?
27

Production, Operations, and Marketing Issues

Are the target firms production capabilities compatible with ours? Is the target firms IT system compatible with ours? Is the target firms distribution network complementary to ours? Is the target firms sales force complementary to ours?
 Can the target firms capabilities in these areas be leveraged to reduce costs?
28

Legal Due Diligence

Are there pending legal liabilities at the target firm? Are there any regulatory or tax issues that could threaten future returns? Are there any contractual obligations to stakeholders such as suppliers, partners, and employees? Has the possibility of the seller or seller employees setting up a competing business been considered? Does the target firm conduct business in any new international markets?
If so, have all legal and operational issues in those countries been considered?
29

Know When to Walk Away

Do not get emotional and get carried away especially when they are competing offers Key your eye on the ball Build disciplining mechanisms into the acquisition process Such mechanisms can include a price ceiling Alternatively, hold the executive making the deal responsible for delivering a threshold rate of return When the price gets too high, walk away and dont look back!
30

Conclusion
The goal of financial management is to create value for the shareholders Mergers and Acquisition are an important means of value creation The pace of M&A activity is going to increase in the years to come as companies strive to grow and prosper in an extremely competitive and complex business environment Knowledge of M&A is vital for all managers This course was designed to give you a comprehensive overview of this fascinating area 31

THANK YOU
My sincere thanks to all of you for making this course an enjoyable and enriching experience Although the course has come to an end, I hope that our association will continue for many years to come I wish you all great success in all your future endeavors
32