Copyright © 2012 Pearson Canada Inc. 0 Chapter 12 Mergers and Acquisitions as Vehicles

Copyright © 2012 Pearson Canada Inc. 1

Chapter 12 Mergers and Acquisitions

as Vehicles


LEARNING OBJECTIVES

1. Know the difference between a merger and an acquisition.

2. Know why mergers and acquisitions occur.

3. Explain the role of due diligence when performing a merger or acquisition.

4. Identify the ten main terms considered when structuring a deal and describe why they matter.

5. Explain what an integration manager does.

6. Describe the six major areas to look for leverage when integrating operations of two companies.

7. Discuss the characteristics of acquisitions in different industry contexts.


Introduction - MERGER VS. ACQUISITION

Merger

Acquisition

A

A

B

B

C

A

One company acquires another through stock purchase or exchange

The “merger”of Daimler with Chrysleris considered by many

to have been an acquisitionin disguise

The consolidation or combinationof two or more companies


Introduction

WHY MERGERS AND ACQUISITIONS HAPPEN

• Mergers and acquisitions are motivated by the same reasons that motivate alliances such as joint ventures and contractual arrangements.

• Additional value created by an M&A derived from synergies due to increased revenue and decreased cost that come from combination of the two companies.


Introduction

• M&As allow company to grow the business faster than is possible with organic growth.

• M&As attractive when management unable to negotiate a contract in which benefits exceed costs of the business relationship, management feels need for greater control over operations, and management seeks to control risk exposure.


Introduction

• Personal factors can enter into an M&A decision, such as opportunistic behaviour by top executives.

• Increasing size of company can increase personal compensation and enhance personal power.

• Executive’s employment risk is reduced.


Introduction

Why Mergers and Acquisitions Fail?

1. poor strategic rationale 2. a mismatch of cultures 3. difficulties communicating and leading the organization poorly 4. integration planning and execution 5. paying too much for the target company.


The Merger & Acquisition Process

1. IDENTIFYING CANDIDATES

• The strategic rationale for using M&As informs what is wanted in the potential candidates.

• Setting up criteria on this basis means that the targets will fit the strategy and capabilities of the company.



2. PRELIMINARY TALKS

• The few companies that are identified as attractive candidates are approached and asked about their interest in a merger or an acquisition.

• The talks can initially involve exploratory talks between chief executive officers about their interest in a possible combination.



3. ASSESSING FIT OF THE POTENTIAL CANDIDATE

• Having agreed on the possibility of a merger or acquisition, it is time to assess the fit of the targeted company. This includes external and internal analysis.

• External analysis involves understanding the driving forces in the macro-environment that will affect the industry and the business in terms of its size, growth, and profitability.



• Internal analysis involves learning enough about the other party so that the potential deal can be appropriately valued, the representations and warranties of the other side tested, full disclosure can be made to investors, and post-merger integration can be planned.



4. NEGOTIATING TERMS

• When the two sides are sufficiently in agreement over the general terms of the deal, they may commit their understanding to a term sheet and/or a letter of intent.

• This confirms the growing level of commitment to the deal and guides lawyers who are drafting the definitive agreement.



• Price• Form of Payment• Financing• Timing and Deadlines• Commitments• Control and Governance• Risk Management• Form of the Transaction• Social Issues• Social Welfare and Community Issues



5. DEAL SIGNING THROUGH APPROVAL

• Before the CEOs sign the definitive agreement, a vote by the target’s board of directors and possibly by the buyer’s board as well is required.

• If a vote by the shareholders is required, the target’s board can recommend whether they approve the deal.



6. INTEGRATING THE ACQUISITION

• Ideally, planning for integrating the two companies begins while due diligence is being conducted.

• At this stage, plans will be general and then specified in greater detail when more information is available after the deal is completed.

• Otherwise, the plans will have to be prepared after the deal is completed and this will slow down integration.



• Senior management team looks for areas where integration can lever the performance of the business. There are six areas that have significant potential:

1. Customer Strategy and Branding2. Capabilities3. Corporate Culture4. Business Logic5. Staffing6. Information Technology


Acquisition Capability

• Companies using M&As as a vehicle for growth have developed core capabilities that give them a competitive advantage at this activity.

• These capabilities are associated with an experienced team performing the M&As, a standard methodology for doing M&As, and putting an integration manager in charge of pulling the two companies together after the deal is completed.


Acquisition Capability

• Companies that have performed many integration exercises have learned the value of having an integration manager.

• A special set of skills is required to be an effective integration manager. The person has to have a deep knowledge of the acquiring company, have a flexible managerial style, be comfortable with chaos, be self-confident, be independently responsible, and be emotionally and culturally intelligent.


Acquisitions in Different Industry Contexts - M&As AND INDUSTRY LIFE CYCLE

Introduction

M&As tend to be R&D and product-related

Growth Maturity

M&As tend to be for acquiring products that are proven and gaining acceptance

M&As primarily for dealing with over capacity in the industry


Acquisitions in Different Industry Contexts - M&As IN DYNAMIC CONTEXTS

Technological change

RIM and Open Text both use acquisitions to ensure they maintain their strong competitive positions

Demographic change

Geopolitical change

Trade liberalization

Recognizing the increasing number of languages and culturesimmigrating to Canada, Rogers Communications purchased the multi-cultural channel OMNI 1 in 1986

IBM divested its PC division to a Chinese company as that country emerges

Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA

DeregulationBCE, the parent to Bell Canada, was allowed to operate as a monopoly until 1992 when the CRTC opened the doors to long distance competition for the first time in Canada


M & As and Coevolution

• As with alliances, use of acquisitions in dynamic contexts fits into coevolution model of corporate strategy.

• Coevolution is the orchestration of a web of shifting linkages among evolving businesses.

• Acquisitions can enable a company to absorb the capabilities of their targets to develop specific dynamic capabilities in concert with the best resources and capabilities available on the market.

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Copyright © 2012 Pearson Canada Inc. 0 Chapter 12 Mergers and Acquisitions as Vehicles