Beruflich Dokumente
Kultur Dokumente
Merger activity Changes forces and other M&A catalysts Alternative strategies for growth Theories related to M&A Empirical tests of M&A General acquisition programs & processes Sound strategies for M&As 2002 Sales of Hershey
17 .2
Acquisition Decision
Strategic Implications Economic Implications Accounting Implications Ultimate Management Decision
Capital Investment Marketing Integration Production Etc., Etc., Etc.
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Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Total Dollar Value Paid ($ Billion) $ 11.8 20.0 21.9 34.2 43.5 44.3 82.6 53.8 73.1 122.2 179.8 173.1 163.7 246.9 221.1 108.2 71.2 96.7 176.4 226.7 356.0 495.0 657.1 1,191.9 1,425.9
Number Total 2,297 2,276 2,224 2,106 2,128 1,889 2,395 2,346 2,533 2,543 3,011 3,336 2,032 2,258 2,366 2,074 1,877 2,574 2,663 2,997 3,510 5,848 7,800 7,809 9,278
Percent Change 60.2% 3.0% 45.9% 17.5% -6.6% 70.4% -38.6% 30.7% 61.1% 42.8% -5.8% -7.9% 45.8% -13.7% -52.9% -36.4% 32.8% 78.3% 25.8% 53.9% 36.5% 30.6% 79.4% 17.9% -9.0% -48.5% -38.1% 12.2% 45.0% 31.0%
2000 1,325.7 9,566 2001 699.4 8,290 2002 440.7 7,303 2003 504.6 7,983 2004 750.7 9,783 2005 1,011.0 10,332 Source: Mergerstat Review .
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Table 17.2
647 $ 914 $ 1,664 $ 829 $ 647 $ 599 $ 649 $ 1,062 1,374 1,423 1,782 1,156 625 522 857 981 $ 2,020 $ 2,337 $ 3,445 $ 1,985 $ 1,272 $ 1,121 $ 1,506 $ 2,043 68.0% 60.9% 51.7% 58.2% 49.1% 46.5% 56.9% 48.0%
In non-US mergers, a U.S. company is neither a buyer nor target. U.S. mergers include those in which a U.S. firm is either a buyer or a target. Source: SDC data in Mergers & Acquisitions , 2006 Almanac, February 2006.
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Rank 1 2 3 4 5 6 7 8 9 10
Buyer Pfizer Inc.. America Online Inc. Exxon Corp. SBC Communications Inc. Vodafone Group pic - UK Bell Atlantic Corp. Pfizer Inc. Procter & Gamble Co. JPMorgan Chase & Co. Inc. British Petroleum Co. plc - UK
Price Offered Seller ($ Millions) Warner-Lambert Co. $116,705.4 Time Warner Inc. 101,002.5 Mobil Corp. 81,429.8 Ameritech Corp. 75,233.5 Air Touch Communications Inc. 62,768.0 GTE Corp. 60,489.9 Pharmacia Corp. 58,293.8 Gillette Co. 57,920.3 Bank One Corp 57,614.9 Amoco Corp. 56,482.0
Year Announced 1999 2000 1998 1998 1999 1998 2002 2005 2004 1998
Source: Mergerstat
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Strategic Financial Management: Applications of Corporate Finance Samuel C. Weaver and J. Fred Weston
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Decision reflects two main forces (neoclassical theory of microeconomics) Timing of merger activity (merger waves) explained by macroeconomic forces
Levels of economic activity (GDP) Stock Price movements Financing conditions Managers want to enhance the long run value of the firm by making positive Net Present Value Investments Change forces may require a firm to make adjustments Multiple activities seek to enhance capabilities Adjustments to shocks Enhancing Capabilities
Value Enhancement
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1.
2.
3. 4.
5. 6.
Acceleration of the pace of technological change The reduction of costs of communication and transportation Internationalization of markets The expansion of the forms, sources, and intensity of competition Emerging new industries The increase of regulation in some industries and deregulation in others
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Overriding the change forces are technological change Nations have also adopted international agreements that have resulted in freer trade Impact of economic forces in merger activities
Technological change affects optimal firm size, inducing restructuring Deregulation influences ease of entry in an industry and the scope Changing input costs provide impetus for merger activities
17 .1 0
Change Forces
1. Technology change
Industries
Broadcasting, Entertainment Internet Packaging & Containers Computers Apparels, Textiles Metals & Mining Financial Services Chemical Food Processing Automobile Staffing services Rental equipment Pharmaceuticals Coal, uranium, geothermal Integrated petroleum Oilfield services Air transport Broadcasting, Entertainment Truck & Transport Leasing Pharmaceuticals Petroleum producing Telecommunications Tire & Rubber Retailing Defense Packaging & Containers Tire & Rubber Wireless Pharmaceuticals Toiletries & Cosmetics Integrated steel Facility services Electrical contracting
2. Globalization
3. Commoditization 4. Low growth 5. Chronic excess capacity (consolidation) 6. Fragmentation (rollups) 7. Large capital investment subject to high risks 8. Price volatility
9. Deregulation
Synergy of positive net present value investments NVI = VBT (VB + VT)
where: NVI = Net value increase VB = Value of Bidder alone VT = Value of Target alone VBT = Value of firms combined
17 .1 2
Economies of Scale Economies of Scope Extending Technological Capabilities Industry Consolidation Strategies Industry Roll-ups New Capabilities and Managerial Skills First Mover Advantages Customer Relationships Globalization
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17 .1 4
Impact Economies of scale that increase productivity or decrease costs. Lower transaction costs or tax gains Reduced competition Total
Source: Merger Motives and Target Valuation: A Survey of Evidence from CFOs, Mukherjee, Tarun K., Halili Kiymaz, and H. Kent Baker, Journal of Applied Finance, Fall/Winter 2004, Volume 14, Number 2, pp. 7-24.
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17 .1 6
1. Internal projects Investment expansions developed within the firm. 2. Mergers Any transaction that forms one economic unit from two or more previous units. The equity or ownership stock of the target is acquired. All of the liabilities of ownership carry over to the acquiring firm. 3. Joint ventures A combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration 4. Alliances More informal inter-business relations 5. Licensing Developing proprietary technology for rent to others 6. Minority investments A small fraction, usually less than 5%, of the equity of the target is acquired. This gives the acquiring firm increased knowledge of the activities of the relatively new area represented by the investment. 7. Share Repurchase An announcement of a repurchase of the firms own shares generally in the open market.
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Separate business entity Limited in scope and duration Objectives achieved through joint venture
Opportunity to share risks Reduce Investment costs Enjoy benefits of economies of scale, critical mass Allow firms the opportunity to gain and share knowledge
Advantageous in international setting Serve as interim step before a firm buys a segment of another firm
Gives selling firm opportunity to demonstrate knowledge Determine a price which was uncertain before the join venture Minimizes employee turnover Avoids impairment of supplier and distribution networks
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Combine assets without violating acquisition regulations of local governments Used to circumvent international trade barriers
Less formal than joint ventures May involve multiple partners where mutual trust is required Speed of change in relationship may be rapid Advantages: Characteristics
No new entity or formal contract
Provide flexibility because of informality Provide firms with access to new markets and technologies with relatively small investments Difficult to predict the way relationship will evolve Initial understandings may have to focus on adaptability to change rather than future success
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17 .2 0
Benefits Learn new areas Combine best practices Increase demand for products Add capabilities Add products Add markets Speed Costs known Avoid antitrust Clarity
Internal L L L L L L L L H H
Merger H H M H H H H M L M
JV H M M H M M M H H L
Alliance H M L M L M M M H L
Licensing H L L L L H H L H H
Investment H M H M L L M H M M
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17 .2 2
Winners Curse
When there are many bidders, a wide range of bids is likely to result The winning bidder will be the highest bidder and will typically pay in excess of the expected value. Thus, the winner is cursed. Excessive self confidence of the bidders A factor that causes the winners curse phenomenon to occur The competition of other bidders could cause the winning bidder to pay too much
Hubris
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Theory of Mergers
Shleifer and Vishny
Theory based on overvaluation of bidders and undervaluation of targets Financial markets are inefficient, but bidders and targets have perfect information
Roll
Financial markets are efficient, but bidders are irrational (winners curse)
Neo-classical theory
M&As exist to help firms adjust to change or extend their capabilities Firms are rewarded when the merger makes economic sense and punished if not
17 .2 4
Agency problems arise because managers are only a fraction of the ownership of the firms Compensation arrangements and market for managers may mitigate the agency problem
Compensation is tied to good performance The importance of a good reputation for managers May work less vigorously Consume more perquisites
It is important for managers to bond their promise to pay out future cash flows
This is more effective than any divided policy
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Before their merger announcement, each of the two individual companies was $333 billion (January 10, 2000) By August 1, 2003 their combined market value was $70 billion The AOL segment performed poorly following the merger because its business model had become obsolete
Faced similar situation to that of AOL following the collapse of internet advertising in 2000 Yahoos stock had fallen from $215 to $9 by September 2001 Yahoo brought in Terry Semel to become CEO who revitalized Yahoo! and brought its stock back over $37
Yahoo! used a combination of methods AOL sought a big merger to address its difficulties a. Revitalizing advertising with new approaches b. Migrating services it had provided for free to enhanced pay services c. Acquisitions in Key Areas
17 .2 7
Acquisition Scorecard
17 .2 8
Success or Failure?
With So Much on the Line, With Everyone Doing It, With All of the Scrutiny, With All of the Money, Time, Energy, and Effort,
17 .3 0
* Cumulative abnormal returns represent the stocks daily returns (less the return of the overall
market). These daily abnormal returns are then accumulated or the period of time.
17 .3 1
* Cumulative abnormal returns represent the stocks daily returns (less the return of the overall
market). These daily abnormal returns are then accumulated or the period of time.
17 .3 2
Type I. Efficiency or synergy II. Hubris (winner's curse, overpay) III. Agency problems or mistakes
Source: Berkovitch and Narayanan, 1993.
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Event returns
Stock for stock mergers: target firms gain on average about 15%-20% Cash mergers: abnormal returns to targets 25%-30-40% On average bidders have zero abnormal returns which implies that they earn only their cost of capital. Combined event returns are positivethe combinations are value increasing.
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17 .3 6
17 .3 7
17 .3 8
Valuation Approaches
Valuation of continuing operations Valuation of combined businesses
Synergies
Operational benefits as a result of the combination
Synergies that accrue to the target Synergies that accrue to the buyer
Consideration of alternatives
17 .3 9
Year 1 2006
Year 2 2007
Year 3 2008
Year 4 2009
Year 5 2010
Year 6 2011
Year 7 2012
Year 8 2013
17 .4 0
In order to justify a 40% premium on Hershey, the bidder would have to assume:
Increased sales growth:
Sales Growth Original Revised 2006 5.0% 10.0 2007 5.0% 12.0 2008 4.5% 8.0 2009 4.0% 6.0
Reduced expenses (SG&A) 3% points per year Realize $67.2 million reduction in other expenses of the combined entity.
17 .4 1
Table 17.9
Year 1 2006
Year 2 2007
Year 3 2008
Year 4 2009
Year 5 2010
Year 6 2011
Year 7 2012
Year 8 2013
956.5 $ 1,017.5 $ 1,131.3 $ 1,189.9 $ 1,252.3 $ 1,321.1 $ 1,374.8 $ 1,409.2 18.0% 17.1% 17.6% 17.4% 17.7% 18.1% 18.4% 18.4% $ 25,340.9 $ 750.2 $ 13,490.0
67.2
12.00% 37.00% 56.60% 15.50% 72.10%
67.2
8.00% 37.00% 56.30% 15.30% 71.60%
67.2
6.00% 37.00% 56.00% 15.10% 71.10%
67.2
4.00% 37.00% 55.70% 14.90% 70.60%
67.2
3.00% 37.00% 55.50% 14.70% 70.20%
67.2
2.50% 37.00% 55.20% 14.50% 69.70%
67.2
2.50% 37.00% 55.20% 14.50% 69.70%
17 .4 2
Present Value
($mms)
$ $
Add: Less:
Value of the Operations $ Cash and equivalents Interest bearing debt Value of the Equity $ Shares outstanding Value per share
Valuation Methodology Valuation of publicly traded targets Discounted cash flow (DCF) approach DCF along with market multiples Market multiples only Other Total Valuation of private targets Discounted cash flow approach Industry price-to-earnings approach Industry price-to-book approach Other Total
% 49.3 33.3 12.0 5.4 100.0 48.4 31.3 6.3 14.1 100.0
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Source: Merger Motives and Target Valuation: A Survey of Evidence from CFOs, Mukherjee, Tarun K., Halili Kiymaz, and H. Kent Baker, Journal of Applied Finance, Fall/Winter 2004, Volume 14, Number 2, pp. 7-24.
Strategic Financial Management:
Amortization or expensing
Old approach: Amortized the Goodwill over 40 years (straightline) New approach:
Revalue the business every year If no change in fair value no expense. If the fair value falls below $100mm to say $80mm, then $20mm of asset impairment must be expensed.
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17 .4 6
Acquisition Process
Hit List Companies that are reviewed on a continuous basis in case the company gets put in play Suitor Courting a company for an extended period of time Sealed bid offer (most common)
Valuation Focused
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Most acquisitions (90%) are of privately held companies, divisions, or brands A Bidder receives an initial contact from sellers investment bank
Initial level of interest Offering document Preliminary non-binding indication of value (6 weeks) Top 3 indication of value bidders move on to Round 2 Plants visits Discussion with management Data room provided for due diligence Final value, binding, sealed bid 4 weeks later
Round 2
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Financials
Generally limited historical data for 2-5 years
17 .4 9
Presentation to Senior Management and the Board of Directors Focus on strategic rationale and financial valuation
Joint presentation Operation managers
Present, review, discuss, and agree to assumptions
Finance
Base case valuation with sensitivity analysis Financing
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17 .5 1
A conceptual framework for sound strategic M&A decisions include a number of principles
1. 2. 3. 4. 5. Successful M&As must take place within the framework of a firms strategic planning processes. M&As encompass the use of multiple methods of adjustments: merger, divest, ally, invest, share repurchases, LBOs. The multiple adjustments are made repeatedly over extended time periods. M&As alone cannot create a strong firm. To achieve higher returns to shareholders than its comparison firms requires an effective organization and strong portfolio of growth opportunities and effective organization. The firm must have strength in markets in which its core capabilities give it a competitive advantage. In each market area the firm must achieve competitive leadership or divest the segment.
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6. 7.
A conceptual framework for sound strategic M&A decisions include a number of principles (continued)
8. The combination of internal programs and M&As are required for continued leadership. 9. The firm must have a group of officers that develop experience in all forms of M&As and continuously react with the top executive. 10.All segments of the firm must recognize its multiple strategies and make contributions to overall results based on boundaryless intersections. 11.Continuous reviews of managers based on their plans, programs, and executions must be conducted by the top executives. 12.Managers who do not execute must be replaced. 13.Executive compensation must be based on performance meaningfully measured. 14.The chairman and/or president needs to interact continuously to provide inspiration and executive development. 15.The system must select and develop managers with dedication, passion, and leadership.
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1. 2. 3. 4. 5. 6. 7. 8. 9.
Diversification destroys value; focus conserves value. Expected synergies are important drivers of value creation. Value acquiring pays; glamour acquiring does not. M&A to build market power (market share) does not pay. Paying with stock is generally costly; while paying with cash is neutral. M&A regulation is costly to investors. Tender offers create value for bidders. When managers have more at stake, more value is created. Initiation of an M&A program creates value for the buyer.
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Source: Does M&A Pay? A Survey of Evidence for the Decision-Maker, Bruner, Robert F., Journal of Applied Finance, Spring/Summer 2002, Volume 12, Number 1, pp. 7-27.
Table 17.12 Why Acquisitions Fail? 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Ineffective integration poorly planned, poorly executed, too slow, too fast Culture clashes No business-economic logic to the deal Businesses unrelated bad fit Did not understand what they bought Internet, high tech Unduly hyped by investment bankers, consulting firms, and/or lawyers Underestimated regulatory delays or prohibitions Hubris of top executives ambition to run a bigger firm and increase salary Top executives want to cash out stock options Suppression of effective business systems of target firms, destroying the basis of their prior success Too much debt future interest payments a burden Too much short term debt repayment before synergies are realized Power struggles or incompatibility in new boardroom Mergers of equals delay requisite decisions Target resistance white knights, scorched earth, antitrust Multiple bidders cause overpayment Hostile takeovers prevent obtaining sufficient information, fail to uncover basic incompatibilities or create resentment and persistent ill will Basic industry problems such as overcapacity (autos, steel, telecoms) Overoptimistic expected synergies Pay too much
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Before Hershey Became an Acquisition Target New Marketing Oriented CEO from Nabisco
Changing Approach to Going to Market Late 2001 Voluntary Work Force Reduction Program (i.e., Early Retirement Package) Plant and Product Rationalizations Leading to Cost Reductions
Established Solely for the Benefit of the Milton Hershey School Endowment Portfolio of $6 Billion
Hershey Foods is 50%-60% Decade Ago Hershey Foods was 80%-90% One of the Top Five School Endowments in the Country, Behind Harvard, Princeton, etc.
Owns 100% of Hershey Entertainment and Resort Corporation Significant (10,000 acres) of Landing Holdings Attorney Generals Office Suggests Diversification
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17 .6 0
Table 1
Net operating profit after tax Depreciation and amortization Change in (NCNIBD*) working capital Change in long-term operating assets and liabilities Capital expenditures Operating cash flow without residual Residual value Total operating cash flow Cost of Capital Present value of 5 years of CF Present value of residual Enterprise value Add: cash Less: debt Equity value Number of shares outstanding (mm) Value per share
352.6
382.4 $
382.4
428.3
461.5
497.2
544.2
573.0
603.2
634.9
$ 16,260.0 5.0%
$ 15,591.7
$ $
2002
2003 7.00%
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Wrigley
$12.5 Billion or $89 Per Share Cash and Equity
17 .6 3
Table 3
0.0% 1.0% 2.0% Additional Margin Improvement 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
0.0% $ 7.41 8.02 8.63 9.23 9.84 10.45 11.06 11.66 12.27 12.88 13.49
1.0% $ 7.78 8.42 9.05 9.68 10.32 10.95 11.58 12.22 12.85 13.48 14.12
2.0% $ 8.17 8.83 9.49 10.15 10.81 11.47 12.13 12.79 13.45 14.11 14.77
3.0% $ 8.57 9.26 9.95 10.63 11.32 12.01 12.70 13.38 14.07 14.76 15.45
4.0% $ 8.98 9.70 10.42 11.13 11.85 12.57 13.28 14.00 14.72 15.43 16.15
Additional Annual Sales Growth for 10 Years 5.0% 6.0% 7.0% 8.0% $ 9.41 $ 9.86 $ 10.32 $ 10.80 10.16 10.64 11.13 11.64 10.91 11.41 11.94 12.48 11.65 12.40 13.14 13.89 14.64 15.38 16.13 16.88 12.19 12.97 13.74 14.52 15.30 16.07 16.85 17.63 12.75 13.55 14.36 15.17 15.98 16.79 17.60 18.41 13.32 14.16 15.00 15.85 16.69 17.53 18.37 19.21
9.0% 11.29 12.16 13.04 13.92 14.79 15.67 16.54 17.42 18.30 19.17 20.05
10.0% 11.80 12.71 13.62 14.53 15.44 16.35 17.27 18.18 19.09 20.00 20.91
11.0% 12.33 13.27 14.22 15.17 16.12 17.06 18.01 18.96 19.91 20.85 21.80
12.0% 12.87 13.86 14.84 15.83 16.81 17.80 18.78 19.77 20.75 21.74 22.72
10.0%
8.0%
$12.5 Billion
6.0%
$10.5 Billion
4.0%
2.0%
0.0% 0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
17 .6 4
Nestle
Significant Cost Cutting $214 Million
Wrigley
Grow The Business Combination of Cost Cutting and Growth
17 .6 5
Nestl's Cost Cutting Negatively Impacts the Community and Other Stakeholders Wrigley
Reject Offer Hershey Is 62% Larger Different Business International Market Issues Wrigley Is Unfamiliar with Managing In A DebtLaden Environment Trust Moves Its Undiversified Position to Wrigley Instead of Hershey Reject Offer
17 .6 6
Valuation Plans Must Continue to Be Fully Integrated With Sound Strategic Vision and Plans Valuation Performance Must be Targeted, Monitored, and Adjusted as Necessary
17 .6 7
17 .6 8
Growth opportunities for firms can be enhanced by multiple internal and external strategies.
Multiple Growth Strategies include M&AS, joint ventures, alliances, partnerships, investments, licensing, and exclusive agreements
It is predictable that a relatively high percentage of acquisitions do not earn their cost of capital Changing industry characteristics require substantial adjustments
Adjustments required by such destabilizing forces are massive and difficult
Large companies impacted by external change factors often require large acquisitions to offset substantial declines in their core business
But combining two large firms involve difficult problems of cultural and organizational integration
17 .6 9
Traditional measures of average long run returns assume independence of events which is not valid Merger activities reflect increasingly competitive pressures
Firms seek to adjust to their changing environments by programs to augment their capabilities and resources Economic forces will continue to result in these forms of external investments Evidence of winners curse, hubris, and misevaluations will be observed in turbulent and changing economic and financial environments
M&As of all types conducted over long time periods effectively related to long range plans based on strong core capabilities can help achieve superior returns to shareholders
17 .7 0