Mergers & Acquisitions: The Process

Prof. Ian GiddyNew York University

Mergers & Acquisitions:The Process

Copyright ©1999 Ian H. Giddy M&A 2

The Acquisition Process

Application: The “Stop and Shop” Deal Motivation for Takeover: Market Value vs. "Realizable

Value" Hostile vs. Friendly Takeover vs Management Buy Out Restructuring of Debt and Equity Structure Leveraging and De-Leveraging Debt Covenants vs. Equity Control Use of High-Yield Bonds, Bank Debt, Private

Placements and Bridge Loan Pricing and Placing the Securities Subsequent Refinancing


M&A Advisory Services:1. Role of the Seller's Advisor

Develop list of buyers Analyze how different buyers would evaluate company Determine value of the company and advise seller on

probable selling price range Prepare descriptive materials showing strong points Contact buyers Control information process Control bidding process Advise on the structure of the transaction to give value to

both sides Ensure all nonfinancial terms are settled early Smooth postagreement documentation


M&A Advisory Services:2. Role of Buyer's Advisor

Thoroughly review target & subs Advise on probable price range Advise on target's receptiveness Evaluate target's options and anticipate actions Devise tactics Consider rival buyers Recommend financial structure and plan financing Advise on initial approach and follow-up Function as liason Advise on the changing tactical situation Arrange the purchase of shares through a tender offer Help arrange long term financing and asset sales


Case Study: Citigroup

Questions: How would evaluate the probabilty that there

will be positive net economic value out of the combination of Citicorp and Travelers?

Where will the value come from? How long should it take for the value to be

realized? What factors could destroy value?


Value Based Management

An Integrative Process

Focus business planning around value creation

Develop value oriented targets and performance measurement

Restructure compensation system with an emphasis on creating shareholder value

Evaluate strategic investment decisions in terms of their impact on value

Communicate value of corporate plans to investors and analysts

A CreativeMindset

Improve strategic and operational decision making

Widen scope of VBM to cover all organizational processes

Focus on key drivers of corporate value

Utilize the Economic Profit and Discounted Cash Flow valuation techniques


Analytic Framework For Diagnosing Market Performance

1. Review market performance Determine returns to shareholders compared with other

investments

2. Analyze comparative corporate performance Develop initial picture of company performance that underlies

market performance

3. Understand corporate cash flow Identify where the corporation has been generating and

investing cash and the return this investment is generating

4. Synthesize market views Identify assumptions that form basis for current market value


Impact Of Value Based Management On Performance, Examples

Business

Retail Householdgoods

Insurance

Banks

Change in Behaviour

Shifted from broad national growth program to focus on building regional scale before expanding

Repositioned product portfolio to emphasize products most likely to create value

Chose growth versus harvest strategy, even though five-year return on equity very similar

Impact 30-40% potential

value increase

25% potential value increase

124% potential value increase



Business

Oil Production

Change in Behaviour

Used new planning and control process to help drive major change program; dramatic improvement in corporate-business dialogue

Impact

Multimillion dollar reduction in planning function through streamlining

Acquisition that likely would not have otherwise happenned

Exposed nonperforming managers



Business

Telecommunications

Change in Behaviour Generated ideas for

value creation New service

Premium pricing

Around 40% of planned development projects in one business unit discontinued

Sales force expansion plans completely revised after discovering how much value expansion can destroy

Impact

240% potential value increase in one unit

246% potential value increase in one unit

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Framework For PostAcquisition Integration: Steps 1 and 2

1. Clarify purpose/set expectations

Establish a transition mechanism Manage expectations of acquired management Reach agreement on top organizational issues Plan and schedule first postacquisition actions

2. Communicate, control, and plan integration Reassure key constituencies Agree on a “get-acquainted” stage Take the necessary control actions Plan integration process


Framework For PostAcquisition Integration: Steps 3 and 4

3. Develop strategy/basic structure Organize fact-finding task forces Establish and test initial working hypothesis Build a fact-based understanding of the comparative

business systems and market positions of the companies Identify opportunities for growth and enhancement of

competitive advantage Rank priorities

4. Refine organization/strategy review initial strategy, including test of anticipated

operating synergies Review organizational similarities and differences Implement strategic and organizational change

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Mergers & Acquisitions: The Process