Analysis of Mergers and Acquisitions
Schneider and Square D
Roisin Byrne
John Pagazani
Tara Trussell
Electric Equipment Industry
• Two sources of revenue - new construction and
maintenance of existing equipment.
• Demand follows economic conditions
• Industry Trends in 1990
– Globalization of product standards has led to
international expansion
– Industry concentration of manufacturing and research
capabilities due to increasing costs of development
and production and globalization
– Average rate of growth for US firms is 7%
2
Schneider Background
• One of the largest industrial groups in
France
• 1981 – restructuring program to divest
loss-making businesses to simplify
operational structure and focus on two
core businesses:
– Electrical equipment manufacturing for power distribution
and automation of industrial complexes
– Electrical building contracting
3
Schneider Background
•
Third restructuring stage
–
–
•
•
•
Geographical diversification (based on emerging industry
trends)
Two major acquisitions in 1989
1. 15% of DAVY, leading British engineering company
2. Controlling interest in Federal Pioneer, the leading
Canadian electrical equipment manufacturer.
1990 Sales – 51 billion francs
85,000 world wide employees
Schneider ranked second or third in most
segments of the global electrical equipment
industry
4
Square D Background
• Major supplier of electrical equipment, services
and systems in the U.S.
• Owns and operates 18 manufacturing plants in
11 foreign countries
– Concentrated in electrical distribution and industrial
control
• Strength is network of independent electrical
distributors (wholesalers) which market its
products.
– Relationship building
5
Square D Background
• Profitable for last 59 years
• Change in top management in 1980’s
• Revitalization Plan
– Consolidation
– Reorganized into three externally focused sectors
(industrial control, electrical distribution, international
markets)
– Resources were realigned to strengthen core businesses
• 1990 Sales - $1.7 billion U.S.
– 71% electrical distribution segment
– 29% industrial control segment
6
Strategic Fit & Synergy Sources
•
•
•
•
Rationalizing R&D, technology sharing
Access to larger distribution channels
Rationalizing manufacturing capabilities
Expanding Square D’s product lines by
incorporating products from Schneider’s
subsidiaries
7
Strategic Fit
Pros
• Allow access into US
market for Schneider and
European market for
Square D
• Unlock synergies through
industry concentration
(lower expenses, boost
revenues)
• Globalization: Leadership
in both US and Europe
under one set of IEC
standards
Cons
• Leaning toward a hostile
takeover situation;
unfriendly
• Price will be bid up due to
Square D’s resistance
• Merging of two very
different cultures will be
necessary to unlock
synergies, but will prove
difficult
8
Square D – Accounting Analysis
• The accounting analysis of Square D did
not yield any apparent distortions or cause
for concern
• All major accounting policies and
treatments were reasonable for the
industry
9
Square D – Financial Analysis
10
Square D – Financial Analysis
Cont’d
Lazard's Assumptions
Sales Growth
The 7% is roughly the avg. growth rate over the last cycle (86-90) and is
consistent with growth for US firms in general
EBIT/Sales
15-16% is quite high relative to current 12.9%, however it takes the company
back to roughly the same level as 1987. It is higher than the 14.6% avg. for last 6
yrs. Suggests that 14-15% is more appropriate.
11-13% compares favourably with existing rate of 12.9% and 12% for last two
Net working capital/sales (excl. Cash)*
years. However, note that this WC figure includes cash and short-term debt
which we consider to be net debt in our analysis.
Depreciation exp./sales and
CAPEX/Sales
Capital expenditures are assumed to be 5% of sales and depreciation 4% (4.3%
after 1997). This has the impact of steadily reducing capital needed to run
business relative to sales since it treats depreciation and CAPEX separately
rather than as a package.
11
Square D Financial Analysis
1988
Sales Growth
NOPAT/Sales
EBIT/Sales
(NOPAT/Sales)/(EBIT/Sales)
Net working capital/sales (incl. Cash)
Net working capital/sales (excl. Cash)*
Depreciation exp./sales
Capital expenditures/sales
0.083
0.131
0.630
0.128
0.082
0.030
0.048
1989
0.067
0.076
0.120
0.630
0.121
0.080
0.031
0.050
DUPONT ANALYSIS
Net profit margin (net inc./sales)
Asset turnover (sales/assets)
Financial leverage (assets/SE)
ROE (NI/SE)
0.073
1.702
1.384
0.173
0.063
1.975
1.455
0.182
1988
Sales Growth
NOPAT/Sales
EBIT/Sales
(NOPAT/Sales)/(EBIT/Sales)
Net working capital/sales (excl. Cash)*
Depreciation exp./sales
Capital expenditures/sales
0.083
0.131
0.630
0.082
0.030
0.048
1989
0.067
0.076
0.120
0.630
0.080
0.031
0.050
DUPONT ANALYSIS
Net profit margin (net inc./sales)
Asset turnover (sales/assets)
Financial leverage (assets/SE)
ROE (NI/SE)
0.073
1.702
1.384
0.173
0.063
1.975
1.455
0.182
1990
0.034
0.081
0.129
0.630
0.236
0.087
0.036
0.057
1991
0.035
0.098
0.155
0.632
0.120
0.079
0.040
0.050
Lazard's Assumptions
1992
1993
1994
0.070
0.070
0.070
0.098
0.098
0.098
0.155
0.155
0.155
0.632
0.632
0.632
0.120
0.120
0.120
0.079
0.079
0.079
0.040
0.040
0.040
0.050
0.050
0.050
0.070
1.962
1.396
0.192
0.077
1.724
1.408
0.186
0.077
1.724
1.408
0.186
1990
0.034
0.081
0.129
0.630
0.087
0.036
0.057
1991
0.040
0.080
0.130
0.615
0.083
0.032
0.052
0.070
1.962
1.396
0.192
0.060
1.850
1.408
0.157
0.077
1.724
1.408
0.186
0.077
1.724
1.408
0.186
Our "Realistic" Assumptions
1992
1993
1994
0.070
0.070
0.070
0.080
0.080
0.080
0.130
0.130
0.130
0.615
0.615
0.615
0.083
0.083
0.083
0.032
0.032
0.032
0.052
0.052
0.052
0.060
1.850
1.408
0.157
0.060
1.850
1.408
0.157
0.060
1.850
1.408
0.157
1995
0.070
0.098
0.155
0.632
0.120
0.079
0.040
0.050
0.077
1.724
1.408
0.186
1995
0.070
0.080
0.130
0.615
0.083
0.032
0.052
0.060
1.850
1.408
0.157
Square D – Financial Analysis
Cont’d
Implications of Lazard’s Assumptions
Historical
Sales
Beg. LT assets
+ CapEx (5% of sales)
- Depreciation (% of sales)
= Ending LT assets
Cash
Forecasted WC in spreadsheet
WC (WC + Cash)
LT assets
Total Assets
EBIT
Projected
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
$1,497.77
$1,598.69
757.73
$1,653.32
698.10
757.73
682.02
698.10
$1,711.19
698.10
85.56
68.45
715.21
$1,830.97
715.21
91.55
73.24
733.52
$1,959.14
733.52
97.96
78.37
753.11
$2,096.28
753.11
104.81
83.85
774.08
$2,243.01
774.08
112.15
89.72
796.51
$2,400.03
796.51
120.00
96.00
820.51
$2,568.03
820.51
128.40
110.43
838.48
69.64
66.35
244.93
122.42
127.41
144.57
62.60
142.71
205.31
66.98
152.70
219.69
71.67
163.39
235.06
76.69
174.83
251.52
82.06
187.07
269.13
87.80
200.16
287.96
93.95
214.18
308.12
WC/Sales
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
213.18
715.21
857.93
265.23
733.52
886.23
283.80
753.11
916.51
303.67
774.08
948.91
324.92
796.51
983.58
347.67
820.51
1,020.67
372.00
838.48
1,052.66
398.04
2.39
38.0%
2.50
39.7%
2.60
41.4%
2.71
43.1%
2.82
44.9%
2.93
46.7%
3.06
48.5%
196.47
192.40
Implied Sales / LT asset
Implied EBIT / Beg. Assets
13
Square D – Valuation Assumptions
Pre Merger
• Discounted Abnormal Earnings Method
– Group’s assumptions
• Optimistic, realistic, pessimistic
– Using Lazard’s assumptions
• Discounted Cash Flow Method
– Group’s assumptions
• Optimistic, realistic, pessimistic
– Using Lazard’s assumptions
14
Square D – Valuation Assumptions
Pre Merger
Lazard’s Assumptions
• Sales growth: 3.5% in 1991 and 7% long term.
7% is
approximately the growth over the last cycle (86-90) & average rate for US
firms.
• EBIT: 15-16% of sales. 15% - 16% is high relative to 12.9%
(current). This is also higher than 6yr average of 14.6%. Ratio should be
between 14% – 15%. Equivalent to NOPAT margin between 9.5% - 10%.
• NWC: 11-13% of sales. Lazard’s NWC/Sales includes cash,
therefore (NWC+$) / Sales. 12% in last 2 yrs using Lazard’s method.
• Capital Expenditure: 5% of sales
• Depreciation Expenses: 4% of sales between 1991 and
1997, 4.3% long term
15
Square D – Valuation Assumptions
Pre Merger
What is Square D worth as a “Stand Alone” company?
Pessimistic
Realistic
Optimistic
Discounted Abnormal Earnings
$38.49
$49.81
$62.94
Discounted Cash Flow
$38.49
$49.81
$62.94
Discounted Abnormal Earnings
$66.68
Discounted Cash Flow
$66.68
16
Square D – Valuation Assumptions
Post Merger
• Discounted Abnormal Earnings Method
– Group’s assumptions
• Optimistic, realistic, pessimistic
– Using Lazard’s assumptions
• Discounted Cash Flow Method
– Group’s assumptions
• Optimistic, realistic, pessimistic
– Using Lazard’s assumptions
17
Square D – Valuation Assumptions
Post Merger
Synergy Estimates
• Savings of $60 million per year in
expenses (after tax)
• $150 million cash generated due to
disposal of Square D’s unrelated assets
18
Square D – Valuation Assumptions
Post Merger
What is Square D worth with merger synergies?
Pessimistic
Realistic
Optimistic
Discounted Abnormal Earnings
$48.98
$70.38
$76.09
Discounted Cash Flow
$48.98
$70.38
$76.09
Discounted Abnormal Earnings
$80.01
Discounted Cash Flow
$80.01
19
Square D – Valuation Summary
Basis for setting price
Valuation Summary
$90.00
$80.00
$70.00
Pre-merger
$60.00
Post-merger
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
Pess.
Real.
Opt.
Scenarios
20
Used for sensitivity
Lazard
Square D Recommended Bid
Based on Realistic Assumptions and PostMerger Valuation on Square D:
• We recommend Schneider bid maximum
$70.38/share for Square D stock
• This is a 93% premium over market value before
takeover activity ($36.50/share October 22, 1990)
• This is a 41% premium over realistic pre-merger
valuation ($49.81/share)
• Market value pre-merger versus valuation premerger tells us stock is undervalued.
21
Schneider and Square D –
What actually happened?
• Feb 18, 1991 – Schneider made unsolicited takeover
offer ($78/share) to Square D’s board; if rejected, would
undertake a hostile takeover; Square D’s stock jumped
to $72.25
• Feb 27, 1991 – Square D’s board unanimously rejected
offer and filed suit alleging that Schneider breached the
confidentiality agreement signed in 1998
• March 4, 1991 – Schneider offered to buy all of Square
D’s outstanding shares of common stock (incl. Common
Share Purchase Rights) for $78/share
22
Schneider and Square D –
What actually happened?
• Mid-March 1991 – Siemens cited as having contact with
Square D
• March 1991 – Square D brought additional suits against
Schneider for violating i) US anti-trust laws; ii) US
banking regulations; iii) Canadian anti-trust laws; and iv)
making false/misleading filings at the SEC
• April 1991 – Square D postponed annual meeting to
June 21. Schneider challenged and got Federal Court to
rule that must take place 40 days after anti-trust ruling
and resolution of alleged confidentiality breach
23
Schneider and Square D –
What actually happened?
• May 10, 1991 – Dept. of Justice dropped the anti-trust
investigation and cleared way for merger
• May 11, 1991 – Square D proposed taking on an
additional $1 billion in debt in a leverage recap
• May 13, 1991 – Schneider raised offer price to
$88/share. The following day, Square D had no other
choice but to accept the deal
24