Session 1 : Course Objectives and Structure
MERGERS AND ACQUISITIONS
Presented by Prof. (Dr.) Manish Popli
Evaluation Criteria and Weightage
1
Evaluation Criteria and Weightage
•
Class participation
:
25%
•
Quiz
:
30%
• 2 Best Quizzes (out of #3). No Make-up Quizzes!!
•
End Term examination
:
45%
2
Class Participation!
•
Academic Associate: Ms. Nidhi
•
For Class Participation:
– Lot of cold calls, warm calls J
– Objective Evaluation
3
Class Representative
•
Appointment of CR
• Section A : Prakhar Jain
• Section B: Anurag Anil Bhikane
4
Lets begin the Journey J
5
Mergers and Acquisitions
•
Why are we studying this?
•
What is the volume of M&A transactions worldwide?
•
What is the success rate of M&A deals?
6
Some data points(1)
7
Some data points(2)
•
https://imaa-institute.org/mergers-and-acquisitions-statistics/
8
India
Source: https://www.pwc.in/assets/pdfs/publications/2018/deals-in-india.pdf
9
Course Objectives
•
Why M&A?
– M&A versus other choices we may have!!
•
Motives of M&As
– As a vehicle of Corporate Strategy
What is corporate strategy ?
– As a vehicle of Business Strategy
– As a vehicle of competitive dynamics
•
To discuss due-diligence, and anti-takeover defense mechanisms.
10
Corporate Strategy
•
What is corporate Strategy?
– It is the ‘Scope’ of the firm
– Which Products?
– Which Markets?
– Which part of the Value Chain?
11
Course Objectives
•
To critically examine different types of deal structures
•
To look at post-merger integration issues
•
Additionally, to provide an overview of the legal, regulatory environment and its
importance to the success of M&As.
12
A Highly Multidisciplinary Subject
•
Why so interdisciplinary?
• Strategic issues
• Economic issues
• Accounting and Financial issues
• HR/Cultural issues
• Behavioral issues
• Legal/Regulatory issues
13
Historical Activity of Mergers and Acquisitions
14
Neoclassical Hypothesis
•
Neoclassical Hypothesis of M&A wave?
– Example:
https://www.ft.com/content/2f1358ec-f9f0-11e6-bd4e-68d53499ed71
•
Can cascading effect in M&A waves happen?
– ‘Shocks’ drive M&A waves within industries, increased M&A activity within an
industry cascades to other industries
•
Examples?
– Indian telecom tower Industry
15
•
Neobehavioral hypothesis of M&A waves?
16
Thanks
17
Session 2: Ally or Acquire
Course Name: MERGERS AND ACQUISITIONS
Presented by Prof. (Dr.) Manish Popli
Once upon a time…
•
There was a cake and bakery shop called ‘BigCakes’
•
They
• Bought eggs and flour
• Converted it into cake batter
• Baked the batter into cakes in the oven
• Sold directly to the customers
•
Slowly, the profits grew
1
What to do with the excess cash?
2
Some Options…
•
Accumulate more cash?
•
Distribute part/all to the owner?
•
Expand the business?
3
Growth strategies?
4
Growth Strategies
•
Organic Growth Strategies
• Organic strategies refer to the internal growth
strategies i.e. growing on its own:
– Increasing output/sales
– For e.g. Replication of the current
assets/capabilities in new geography etc.
•
Inorganic Growth Strategies
• Inorganic growth strategies refer to external
growth by takeovers, mergers and acquisitions or
partner (alliances/JVs)
5
How to Choose between Organic and Inorganic routes?
6
Organic vs. Inorganic Growth
•
Switching cost
•
Growth in Customer base
•
Customer acquisition cost
• Low switching cost
• Low customer
acquisition cost
• High growth customer
base
ORGANIC GROWTH
• High switching cost
• High customer
acquisition cost
• Low growth customer
base
INORGANIC GROWTH
7
Organic vs. Inorganic Growth
• Longer time frame to
grow
FAVOURS ORGANIC
GROWTH
• More uncertainty
allowed
• Time frame to Grow* ?
• Shorter time frame to
grow
• Uncertainty allowed ?
• Less uncertainty allowed
FAVOURS INORGANIC
GROWTH
*: Type of Markets (based on time-frame to Grow?)
•
•
•
Fast Moving Markets
Slow moving Markets
Examples?
8
Organic vs. Inorganic Growth
• Limited input resources
FAVOURS INORGANIC
GROWTH
• Need to acquire new
technology
• Few resources
constraints
FAVOURS ORGANIC
GROWTH
• Have own technology
9
Organic vs. Inorganic Growth
•
Industry Life Cycle
10
Let’s study an example!
11
Organic vs. Inorganic
•
Acquisition of Lafarge’s Assets
• By Whom?
• https://economictimes.indiatimes.com/industry/indl-goods/svs/cement/lafarge-to-sellindia-assets-to-nirma-for-1-4-billion/articleshow/53149329.cms
• Why Nirma went for acquisition route?
• http://www.livemint.com/Companies/fQb3CCuICeTHgyvlCN0vJL/Wave-of-cementMAs-seen-ahead.html
12
Growth Strategies
Growth Strategies
Organic Route
Inorganic Route
Mergers and Acquisitions
Acquisitions of
Stock
Horizontal
Acquisition of
Assets
Vertical
Alliances
Mergers
Conglomerate
13
Ally or Acquire?
14
Decision between Acquisition & Alliance (1)
1. Types of Synergies
Factor
Strategy
Modular/ Sequential
Reciprocal
Alliances
Acquisitions
2. Nature of Resources
(Relative value of soft to hard resources)
Low/Medium
High
Acquisitions
Alliances
3. Extent of Redundant resources
Medium
High
Alliances
Acquisitions
Low/Medium
High
Acquisitions
Alliances
4. Degree of market uncertainty
5. Level of Competition
(Degree of competition for resources)
Medium
High
Alliances
Acquisitions
Source: When to Ally and When to Acquire, Harvard Business Review
15
Thanks J
16
Session 3,4 and 5
Course Name: MERGERS AND ACQUISITIONS
Presented by Prof. (Dr.) Manish Popli
Ally or Acquire?
1
Examples from the Reading
2
Decision between Acquisition & Alliance (4)
•
Coca-Cola and Procter & Gamble announced in February 2001 that they would create a $4
billion joint venture that would control 40-plus brands and employ more than 10,000
people.
• Coke would transfer Minute Maid, Five Alive, Fruitopia, Cappy, Kapo, Sonfil, and Qoo brands,
among others, to the new company
• P&G would contribute two beverage brands. Sunny Delight and Punica, and Pringles chips.
What do you think about this?
On this announcement, Coke’s share dropped by 6%. Investors wondered why Coke wants to part
with 50% of the profit in a fast-growing segment and why not simply acquire them.
The alliance was terminated in July-2001. Probably the companies also realised this.
Source: When to Ally and When to Acquire, Harvard Business Review
3
Decision between Acquisition & Alliance (5)
•
Intel Paid $ 1.6 billion in cash in October 1999 to buy the $131 million DSP
Communications, which manufactures chips for wireless handsets.
•
What would have happened?
•
Although the acquisition allowed Intel to break into the wireless communications market, its stock
price fell by 11% over three days after the deal was made.
•
Investors were concerned :
– 40% premium that Intel paid for DSP's shares.
– People tend to leave high-tech firms when bigger companies absorb them, and
technologies get obsolete quickly.
– Postacquisition trauma.
•
Sure enough, Intel lost most of DSP's key people and its biggest wireless customer, Kyocera,
when it absorbed the start-up.
Source: When to Ally and When to Acquire, Harvard Business Review
4
Decision between Acquisition & Alliance (6)
Result:
– Intel had to writeoff $600 million of goodwill by 2003.
•
Should the company have tested the airwaves by initially entering into an alliance with
DSP?
Source: When to Ally and When to Acquire, Harvard Business Review
5
Decision between Acquisition & Alliance (2)
Environmental characteristics
Strategic uncertainty
Dispersion of knowledge
Convergence of technologies
Transactional characteristics
Specificity of transaction-related
investment
Behavioral uncertainty
Relative favorability of acquisitions
and alliances
Persistence of economic synergies
Appropriability Regime
Firm Characteristics
Source: Werner H. Hoffmann and Wulf Schaper-Rinkel (2001), Acquire or Ally? -A Strategy Framework for Deciding Between Acquisition
and Cooperation Management International Review
6
Costs of contracting?
•
What are the implicit costs of contracts?
– Supplier search cost
– Contract development cost
Transaction
costs/Contractual
Hazards
– Monitoring and enforcement cost
7
Costs of Buying?
•
Common instances of contractual Hazards!
(I) renege upon its agreements or fail to live up to its commitments
(II) Partner behave in opportunistic manner and create ‘hold-up’ situation for its
partner
8
Fundamental reasons of Contractual Hazards
•
What are hold-up problems?
• Consider a contract research agreement between a small biotechnology firm and a
traditional large pharmaceutical company. It requires the pharmaceutical firm to make
milestone payments to its partner following fulfillment of agreed-upon R&D objectives.
• However, in the course of undertaking research for the pharmaceutical firm, the
smaller firm may need to make investments in equipment, chemicals, and training,
much of which may be specific to the particular project and have limited value in other
uses.
9
Fundamental reasons of Contractual Hazards
•
What are hold-up problems?
– This creates a possibility that the larger firm will behave opportunistically and
delay or decrease the milestone payments. The smaller firm, forced to choose
between receiving some payment and recovering no value at all from its
dedicated investments, may have no option but to comply in order to avoid
a lengthy legal resolution.
• What is it called?
– Asset specificity
– A transaction-specific investment is one that is necessary to support a
particular transaction but is not readily re-deployable or useful to any other
transaction.
10
Fundamental reasons of Contractual Hazards
•
Types of Asset-specificity?
–
–
–
–
–
Physical asset specificity?
Site specificity?
Temporal specificity?
Brand specificity?
Human resource specificity?
11
Recent examples
•
http://economictimes.indiatimes.com/industry/cons-products/food/whydelhiites-have-to-wander-and-wait-for-mcdonalds-mealnow/articleshow/59360373.cms
•
https://economictimes.indiatimes.com/industry/services/hotels-/restaurants/vikram-bakshi-is-finally-out-and-mcdonalds-india-is-lovinit/articleshow/69309704.cms
•
https://timesofindia.indiatimes.com/business/india-business/govt-to-amendlaws-to-enforce-contracts-better/articleshow/61500938.cms
•
https://economictimes.indiatimes.com/news/economy/policy/niti-aayog-setsup-task-forces-for-achieving-policy-certainty-in-contractenforcement/articleshow/81633693.cms
•
Doing business in India
12
Alliances
13
Strategic Alliances (1/2)
•
•
•
What is a Strategic Alliance ?
• A long term inter-firm cooperative agreement:
– To use their resources (mostly, complementary!) over a given economic space
and time.
– To attain mutually defined goals
– To Share benefits and managerial control over the assigned tasks
Any examples?
Kinds of Alliances?
–
–
–
–
Joint Ventures
Equity Investments
Cooperatives
R&D Consortia
14
Strategic Alliances (2/2)
•
Joint Ventures:
– Two or more firms create a jointly owned legal organization that serves a limited
purpose for its parents
•
Equity Investments:
– A majority or minority equity holding by one firm through a direct stock purchase
in another firm
•
Cooperative:
– A coalition of small enterprises that combine, coordinate and manage their
collective resources
•
R&D Consortia:
– Inter- Firm agreements for R&D collaboration, typically formed in fast changing
technological fields.
– For e.g. Industry- Academia Participation for exploitation of knowledge
(Mazagon Docks)
15
Challenges in Alliance Management
16
Opportunism
•
Opportunism is an act of behavior to to seek its own unilateral gains at the
substantial expense of another party and/or the joint venture entity by breaching
the contract or agreement
•
Opportunism manifests in
– Withholding/ distorting information
– Withdrawing Commitments
– Shirking Obligations
17
Other Reasons
•
Compounded by interparty differences
–
–
–
–
–
•
in strategic objective,
corporate culture, and
managerial style, and
by interparty asymmetries
in bargaining power, equity ownership, and parent control, helps explain why
opportunism occurs.
Managers rarely write a complete contract for a long-term cooperative relationship
because bounded rational parties cannot recognize all contingencies nor realize the
need to specify all dimensions of contractual performance.
18
Some remedies
19
Challenges in Alliance/JV Management
Challenges
Strategic Realignment
• Misalignment happens due to conflicting
motives
• Own goals, Stakeholder pressure
Remedies
Develop a VC quality Business Plan
• Financial Targets
• Capex
• Commitment of Resources/Personnel
• How to manage setbacks?
Governance
• Create Clear Protocol for decision
• Shared control unlike M&A where there is
making.
unilateral decisions making
20
Challenges in Alliance/JV Management
Economic Interdependence
• Linkage of alliance with parent forms for
financial, capital and managerial
resources
• Specify the services which parents would
provide and establish transfer pricing
mechanism
Organization
• Make a strong team
• Dependent/Independent/Interdependent
• Create a Value proposition for JV
employees
21
Mergers and Acquisitions (M&A)
22
Definitions: Forms of M&A (1)
•
Acquisition of stock :
– refers to purchase of a firm’s voting stock in exchange for cash, shares, or
other securities;
•
Acquisition of assets:
– refers to a method of acquisition where a firm can acquire another firm by
buying all or some of its assets.
– Examples?
– Pharmaceuticals firms acquire –plants, certain brands. Similarly capital intensive
industries such cement, hospitality would acquire certain assets
– Power/Steel and other similar companies acquire coal mines etc.
23
Definitions: Forms of M&A (2)
•
A merger refers to the absorption of one firm by another, i.e. the acquiring
firm retains its name and its identity, and it acquires all of the assets and
liabilities of the acquired firm.
24
Definitions: Forms of M&A (3)
•
Forms of M&As:
• Acquisitions can take a variety of forms. They can be either mergers or consolidation
and acquisition of assets or equity.
• Horizontal?
– Any examples?
– Saudi International Petrochemical- Sahara Petrochemical; Tata Steel –Corus; Emami
- Zandu, Jet-Sahara, Kingfisher- Air Deccan
• Vertical ?
– Firms go for vertical integration of natural resources
– Firms acquire/merge to venture into different parts of the value chain
– Any Examples?
• Conglomerate:
25
Growth Vectors in Diversification
New Products
Customers
Product Related
Unrelated
Technology
Technology
Same Type
Horizontal Diversification
Firm its own customer
Vertical integration
Marketing & Technology Thread
Marketing thread
Similar Type
1*
2*
New Type
Concentric diversification
Technology thread
Source: Ansoff I.H. (1985) .”Corporate Strategy”, Penguin
3*
Diversification
Conglomerate
26
So, Let’s come back to our story of ‘BigCake’ shop?
27
Once upon a time…
•
There was a cake and bakery shop called ‘BigCakes’
•
They
• Bought eggs and flour
• Converted it into cake batter
• Baked the batter into cakes in the oven
• Sold directly to the customers
•
Slowly, the profits grew
28
What to do with the excess cash?
29
Some Options…
•
Accumulate more cash?
•
Distribute part/all to the owner?
•
Expand the business?
30
Another cake shop…
•
‘Smallcakes’
• Is open to selling the business
• Smaller in size
• Uses slightly different set of ingredients and baking equipment
• Located in different neighborhood with different set of clientele
31
Buy and Hold
BigCakes Buys and Holds SmallCakes
Strategy: BigCakes + SmallCakes
=
Profit:
x
+
y
=
BigCakes + SmallCakes
x+y
Cost
Revenue
•
•
•
BigCakes
SmallCakes
32
Buy and ‘Copy Paste’ (1)
•
Can make sense if
• SmallCakes is loss making
• Customers spend the same amount, and their tastes do not differ much
•
A Win-Win game
• Value is created for both the firms as well as for the society
•
‘Geographic Roll-up’ M&As
• Target firm may welcome acquirer’s resources and competencies
33
Buy and ‘Copy Paste’ (2)
Revenue
BigCakes buys and copy pastes its model to SmallCakes
Strategy: BigCakes +
SmallCakes
=
2 times BigCakes
Profit:
x
+
(-y)
=
2(x)
Cost
Cost
Revenue
•
•
•
Example: Mittal’s acquisition of distressed steel making units worldwide
34
Buy and Close
•
Assumes BigCakes has sufficient production capacity
•
Acquirer can close less competitive facilities, eliminate less effective
managers, and rationalize administrative processes
•
‘The Overcapacity M&A’
• Eliminate excess capacity, gain market share
35
Buy and Close
BigCakes Buys and Closes Down Nearby SmallCakes
Strategy: BigCakes +
SmallCakes
=
Profit:
x
+
(-y)
=
BigCakes
x+z
Cost
Revenue
•
•
•
36
Let’s look at Other Motivations for M&As
37
Motives of M&A
Operational Synergy
Financial Synergies
Managerial Synergies Bidder’s management team may have superior
planning/monitoring abilities
39
Economies of Scale
•
May exist in production, marketing (more clouts with
Agencies), selling, distribution, storage, after sales
service, R&D etc.
•
Significant barrier to entry
40
Economy of Learning
•
Learning economies exist when a firm’s unit
costs of production decline as its cumulative
production volume increases because of
– Adoption of best practices
– Avoidance of past mistakes
– More efficient scheduling
41
Economies of Scope
•
More appropriate explanations for mergers of multi- product
firms
– Exist when total cost of producing and selling several
product by a multi-product firm is less than the sum of these
costs incurred by single product firms
•
Use of Umbrella brands, Use of common distribution
channels
– Examples?
– Umbrella brands:?
•
Extent of Scope economies depends on what the products
are sharing
– Common technology- Common R&D, Common supply chain
– Common Consumer Groups
– Managerial Capabilities
42
Vertical Integration
•
A vertical merger transforms the relationship between a firm
and its supplier from a market mediated to a hierarchical
relationship
•
Helps reduce cost of inputs(In some situations)
•
When does it makes sense?
• On upstream side:
– More control over quality and delivery of inputs is needed
– Leakage of private information to suppliers/ possibly to rivals is
to be avoided
– Suppliers are too few
– Contract enforcement costs are to be avoided.
• On downstream side:
– When brand premium is significant and you want to avoid
freeriding by distributors on your reputation
43
Financial Synergies
•
Increased debt capacity
• Smoothening of cash-flow (Uncorrelated cash flows)
•
Ability to use cash
• Valuation does not measure Idle cash
•
Reduced Beta
• More diversification, hence lower risk
•
Carried forward loses/Tax credits (sometimes!)
44
Elements of Profit and Loss Statement
•
Where Synergies Can Impact?
•
•
•
•
•
•
Volume
COGS
Sales, distribution and marketing expenses
Interest (Cost of Capital)
Tax
Etc.
45
Motives of M&A
Motives
Diversification
• Product/Market
matrix
Position the firm in high-growth products or markets
Strategic Realignment
Post a Shock:
Acquire to adapt more rapidly to environmental changes than
could be achieved if developed internally
•
•
•
•
Technological
Change
Regulatory Change
Political Change
Any other trigger
46
Motives of M&A
Motives
Overcapacity M&As
To remove excess capacity
47
Motives of M&A
Seeking Strategic
Assets
Acquire assets and capabilities to plug in resource –gaps
(Example: Salient in cross-border M&As of emerging market
firms such as BRICS)
M&A as R&D /
Innovation
Build a market position quickly, without in-house R&D
48
Motives of M&A
Motives
Mismanagement ?
Market for Corporate Control
Replace managers not acting in the best interest of the owners.
Valuation theory ?
Markets overvaluation of the acquirer’s stock.
OR
Acquire assets more cheaply when the equity of existing
companies is less than the cost of buying or building the assets.
49
Motives of M&A
Motives
Managerial hubris ?
Unrealistic belief by acquiring firm managers that they can
manage assets of the target firms better
Managerialism ?
Increase the ‘size’ of the company to increase their power, clout,
pay and perks etc.
50
Motives and Synergies
HIGH
Overcapacity
Product/Market
Consolidation
Transformation/
Convergence
Highest synergy
potential given
significant overlap
across most areas
Industry
Consolidation
Relative
size of
Target Co
vs acquiring
company
Geographic
Expansion
Compatibilityled roll-up
Roll-Up
LOW
Small
product
tuck-ins
Corporate led
white space
acquisition
New
Business
model
Limited geographic
overlap can limit in
country cost
opportunities, but
revenue synergies
are likely
Deal rationale
more about
Strategic fit than
synergy
opportunity
IP Acquisition
Product/ Market
Acquisition
Need to expand Current Capabilities
Strategic-Growth
Bet
HIGH
51
Another Classification of Synergies?
52
Cost synergies vs. Revenue Synergies
53
A Map of Synergies
S
E
M E
TI A M
FR
NG
LO
RT
O
H
Functions
duplicated H
IG
H
Operating activities
shared
PR
OB
A
Facilities
shared
Existing products sold through new
channels
New products sold
through new channels
BIL
ITY
OF
S
UC
CE
SS
LOW
54
So, in summary, why M&A?
55
So, why M&A ?
•
As a Vehicle to support Corporate Strategy
• Filling Strategic holes that can not be filled as efficiently as in a organic growth
• Good companies generally use combination of acquisitions and organic growth to
pursue strategy.
• If done right, this route has tremendous value potential!!
56
Summary : M&A rationale
•
STRATEGIC
– Buying growth
– Geographical Expansion/Product Market expansion
– Removing excess Competition
– Innovation
– Adding capabilities
– Innovation/R&D
•
COST AND REVENUE SYNERGIES
•
OTHER REASONS
– Diversification
– Size
– Management Control
– Defending against competition
– Tax benefits
57
Why are announcement return of acquirers, in general, negative?
Why are
are announcement
announcement return
return of
of targets,
targets, in
in general,
general, positive?
positive?
Why
58
SVA = Synergies-premia
Is the above equation complete?
Dis-synergies?
Integration costs?
59
Dis-synergy: Often Forgotten!
•
Revenue Dis-Synergy
• Disruption/Loss of Focus
• Business Model Change
•
One Time Costs/Integration costs
• Severances
• Relocations
• Investment Banker’s costs
60
Real value of a Deal!
61
Real Value of a Deal
In horizontal
deals
Integration
cost
Degree of
overpaying
(Premium)
Net
Benefit
Captured
Synergy
Company integration benefits
Industry consolidation benefits
62
Thanks J
63