THE MERGERS AND ACQUISITION
MARKET. AN OVERVIEW.
INTRODUCTION TO COMPANY’S VALUE AND VALUATION
TECHNIQUES.
DCF AND COMPARABLES
Lesson 10
Corporate Finance
10th
Castellanza,
November, 2010
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Internal Growth vs. External Growth
Internal growth
investments plants, equipments
investments technologies
investments human resources
External growth
acquisitions
mergers
alliances
joint ventures
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External Growth
ACQUISITION: one company taking over controlling interests in
another company
MERGER: combination of two or more companies into one
PURCHASE: the amount paid over and above the acquired
company’s book value is carried on the books of the purchaser
A
B
CONSOLIDATION: a new company is formed to acquire the
net assets of the combining companies
A
B
C
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External Growth (cont’d)
MERGER
 horizontal: takes place between two firms in the same line of
business
 vertical: involves companies at different stages of production
 conglomerate: involves companies in unrelated lines of
business
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External vs Internal Growth (benefits and costs)
some benefits
 timing
 control over expenses
 control over results
some costs
 difficult to maintain the equilibrium (and performance)
within the company
 human resources
 different cultures
 an acquisition is never tailored
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External Growth: characteristics
 High failure risk
 Difficulties in evaluating a company
 Difficulties in obtaining guarantees
 Synergies
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Some Reasons to Merge
 economies of scale
 economies of vertical integration
 surplus of funds
 complementary resources
 tax shields
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Some Reasons to Acquire
 entrepreneur’s ambition
 to increase market share
 to enter in a new market, in a new industry
 to obtain a royalty, know-how, trade mark
 to eliminate a competitor
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Keys to Succeed
Only by gaining a clear understanding of what and where value can
be obtained from a deal, can companies hope to avoid ‘bad’ deals
and be in a position to work out how this value extraction will be
achieved.
Hard keys
 synergy evaluation: in terms of revenue benefits, indirect and
overhead cost reductions, direct operational cost reductions
 integration project planning
 due diligence
Soft keys
 resolving cultural issues
 selecting the management team
 communications
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Something you won’t find in books
 Whatever you’ll do in your life needs negotiations and you
need to know how to negotiate
 Although negotiation courses are getting more and more in the
way, you have to keep in mind:
 some common mistakes to avoid
 rational framework
 methods to simplify complex negotiations
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Something you won’t find in books
 First of all you have to succed in getting a rational thinking in
negotiation
 Negotiating rationally means:
 Making the best decisions maximize your interests
 Knowing how to reach the best agreement vs. just any agreement
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Something you won’t find in books
 Sometime pervasive decision-making biases blind CEOs’
strategy and prevent them from getting as much as they can
 Examples:
 Irrationally escalating your commitment to an initial course of action, even
when it is no longer the most beneficial choice
 Assuming your gain must come at the expense of the other party and
missing opportunities for trade-offs
 Anchoring your judgments upon irrelevant information
 Being overly affected by the way information is presented to you
 Failing to consider you can learn by focusing on the other side perspective
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Common Mistakes in Negotiation
 Irrational escalation of commitment
 To eliminate irrational escalation you must understand the psychological
factors (perception and judgment) that feed it
 Do not assume your interests directly conflict with those of
the other party
 The best negotiations end in a resolution that satisfies all parties
 Anchoring and adjustment
 To proceed both sides must adjust their positions throught the negotiation
arriving at either agreement or impasse
 Initial positions may act as anchors and affect each side’s perception of
what outcomes are possible
 Framing negotiations
 The way the options available in a negotiation are presented can strongly
affect a manager’s willingness to reach an agreement
 Weigh up “status quo” and expectations
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Common Mistakes in Negotiation
 Availability of information
 Pay attention to all the facts and avoid to ignore certain
 Identify and use truly reliable, not just available, information
 Distinguish what’s emotionally familiar to you from what’s reliable and
relevant
 Overconfidence and Negotiator Behaviour
 Overconfidence may lead managers to think that their judgments are
correct and wrongly estimate a neutral party’s opinion
 Overconfidence may inhibit a variety of possible and acceptable
settlements
 Consider the suggestions of qualified advisers is a way to temper
overconfidence
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Rational Framework for Negotiation
How should managers make decisions in a world where many
people don’t always behave rationally?
 Most critical components of a rational negotiation process
are:
 Evaluation of each party’s alternatives to a negotiated agreement,
interest and priorities (i.e. potential consequences, reservation price,
requirements)
 Understand the integrative components of negotiation (i.e. positions,
priorities, preferences, deficiency)
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Rational Framework for Negotiation
 To succed in structuring a rational framework you should:
 Assess what you will do if you don’t reach agreement with your current
negotiation opponent
 Assess what your current negotiation opponent will do if they don’t reach
an agreement with you
 Assess the true issues in the negotiation
 Assess how important each topic is to you
 Assess how important topic is to your opponent
 Assess the bargaining zone
 Assess where the trade-offs exist
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Rational Framework for Negotiation
 In a negotiation maybe the most important thing is to
identify and evaluate trade-offs
 Strategies about:
 how to collect information
 how to cope with different perceptions among parties
 how to go beyond simple trade-offs
are very important to succeed in finding out the right balance
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Rational Framework for Negotiation
 Some strategies for finding trade-offs are:

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Build trust and share information
Ask lots of questions
Give away some information
Make multiple offers simultaneously
Search for post-settlememnt settlements
Use differences of expectations to create mutually beneficial perceived
trade-offs
Use differences of risk preferences to create mutually beneficial
perceived trade-offs
Use different time preferences to create mutually beneficial trade-offs
Consider adding issues to the negotiation to increase the potential for
making mutually beneficial trade-offs
Consider whether there is some way to reduce costs to the other party of
allowing you to get what you want and vice versa
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Simplifyng Complex Negotiations
 Experience vs expertise
 Two main factors distinguish experience from expertise:
 The ability of an expert to adapt skills to get good outcomes
 The ability to transmit or transfer these skills
 A primary way to improve performance in a negotiation is the
developement of expertise by combining experience with the
ability to think rationally
 Thus, understanding the demands of a particular problem and
thinking rationally improve your ability to analyze and
restructure a proposed negotiation
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Simplifyng Complex Negotiations
 Negotiating rationally requires to understand the impact of
fairness and emotional consideration that profoundly affect
bargaining
 Multiparty negotiation:
 More complexity due to:
 Richness of the interpersonal networks
 Multiple individual preferences
 More interests involved
 Look more carefully for integrative opportunities, be aware of barriers
and be sensitive to the impact of decision rules on the quality of group
outcomes
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Simplifyng Complex Negotiations
 Negotiating through third parties:
 Consider their goals, interests and likely behaviour in order to develop
effective strategies
 Active participant in the negotiation process
 Vested interests in particular outcomes
 Know managers or disputants, their incentives, constituency demands and
goals
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So…
 Audit your own decision processes
 Consider the decision processes of your opponent
 Make your best assessment of reservation prices, interest
and the comparative importance of issues
 View the negotiation process as an opportunity to collect
and update your information
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So…
Negotiation is not a science……
is an art!!!!!!!!!!!!!