Merger Integration
TEAM MEMBERS
Engagement Manager
Nalin Singla
Consultants
Aaron Byrne
Senior Consultant
Erin Engels
Senior Consultant
Eriko Ito
Senior Consultant
Andy Schultz
Consultant
Carissa Holler
Library Information Services
Faculty Advisor
Dr. Anju Seth
2
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
3
PROJECT BACKGROUND & APPROACH
Project Background
OSBI Project Goals
• BearingPoint had created a whitepaper
entitled “Unleashing your company’s
unrealized value: Transformation through
business integration”.
• Update & analyze the value tool for
additional industries
•Telecommunications
•Software
• The whitepaper was validated by the
OSBI team as a part of the previous
project to create a tool which measured
the unrealized values of companies during
M&A activities
• Perform analysis related to unrealized
value of proposed merger synergies
• Two industries were analyzed
•Banking
•Electronics
• Provide a competitive analysis of the premerger, transaction support & post-merger
integration services
• Define and estimate market size for premerger and post-merger services
• Identify significant trends in U.S. and
global M&A
4
PROJECT BACKGROUND & APPROACH
Analyze unrealized value of proposed mergers
Identified
3rd & 4th
industry
Identified
value drivers
from S-4
reports
Updated
tool for
3rd & 4th
industry
Identified
reasons for
proposed
mergers
Identified
areas of
synergy
Identified
reasons for
failed
mergers
Conduct competitive analysis of merger services market
Analyzed
merger
services
market
Analyzed
pre/post
merger
market
Data
Gathering
Conducted
competitive analysis
of key consulting
firms providing M&A
services
Analyzed
M&A
market
trends
Analysis &
Evaluation
Consistent client interaction & input
This diagram represents the process flows for the project. The
remainder of this report will expound upon the arrows
highlighted on this slide.
5
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
6
UPDATED TOOL OVERVIEW
The structure of the “Value Predictability Tool” developed by the OSBI team
1
2
3
4
5
Whitepaper
on
Unrealized
value1
Industry Selection
Value Drivers
Tool Architecture
Companies
who lost
value due to
M&A Activity
Financial
Data avail
Generic
Drivers
80%
Company
specific data
Industry
Beta
Market
Cap.
Industry
Drivers
20%
Industry
average
Weighted Average
1.
2.
3.
4.
5.
compare
M&A
activity
Ranked
BearingPoint created a whitepaper entitled “Unleashing Your Company’s Unrealized Value: Transformation
Through Business Integration”
Electronics and Banking industries were selected as analysis targets based upon an industry evaluation and
selection model: 22 industries were ranked on the basis of M&A activity, industry beta, market cap. & availability of
company’s financial data
Companies were evaluated with respect to generic and company-specific value drivers for two industries (Banking &
Electronics). Each of the industry specific driers are mapped to accounting ratios.
The tool analyzes changes in the financial performance of a company for a period of eight (8) years with the changes
in financial performance of the overall industry for the same period
The tool identifies companies who lost value due to M&A activity and provides a positive/negative score for each
company which tells how a company compared to the industry average
Note: “Industry selection”, “Value drivers” & “Tool architecture” slides are attached in the appendix
7
UPDATED TOOL OVERVIEW – Industry Selection
Industries for further analysis were identified based on their ranking across three different
scenarios. The four industries selected ranked highest in at least two of the three scenarios
Industry Name
Scenario 1
Scenario 2
Scenario 3
1. Electronics
2. Banking
3. Software
4. Telecommunications
Top 4 Industries
Industries not
considered
NOTE: Retail/Wholesale was
number one in ranking, but
was not used because of the
diversity of the industry and
value drivers
8
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
9
REASONS FOR PROPOSED MERGERS - Electronics
“Consolidation of product offerings” & “Gaining technical expertise in a particular area”
are the top reasons for mergers in the electronics industry
Driver List
Times
Cited
Complementary Products (Consolidate Product Offering)
29
Expertise in Area (Technical Know-How)
24
Capture Market Segment
20
Distribution Channels (Network)
18
Tax Benefits (Taxation)
17
Product List (Breadth of Service Offerings & Solutions)
15
R&D Capabilities (Complements Technical Spending)
9
Customer Relations (Combat Growing Competition)
8
Economies of Scale
7
7
Financial Resources
7
7
Resources (Threshold Size to Compete with Large Players)
6
6
Increased Size Increases Bargaining Power
6
6
Others
6
6
29
24
20
18
17
15
9
8
Future Trend
“Complementary products” &
“R&D capabilities” would be
the major drivers for M&A
activity in the electronics
industry
Sources: Value Predictability Tool and Mergant Online
10
REASONS FOR PROPOSED MERGERS - Banking
“Financial risk and superior performance to shareholders”
& “Financial strength in assets & revenues” are the top
reasons for mergers in the banking industry
Driver List
Times
Cited
Future Trend
“Market reach”, “Greater distribution
network” & “Gaining competitive position”
would be the major drivers for M&A activity
in the banking industry
Financial Risk and Superior Performance to
Shareholders
25
Financial Strength in Assets & Revenue
24
Broader Product Line
21
Bigger Management and Economies of Scale
20
20
Good Financial Performance
20
20
Opportunity to Expand into Domestic/International Market
19
Greater Competitive Position
18
Greater Distribution Network
17
17
Similar Vision and Customer Service/Marketing Approach
17
17
Specialized Service Expansion
16
Market Share
15
Marketing Advantages
13
Others
18
25
24
21
19
18
16
15
13
18
Sources: Value Predictability Tool and Mergent Online
11
REASONS FOR PROPOSED MERGERS – Software & Telecom
Software
Driver List
Alliances/Partnerships w/ Complementary
Product Manufacturers
Future Trend - Banking
Times
cited
“Complement product range”, “Expansion into other
industries” and “Market share” would be the major
drivers of M&A activity in the software industry
17
17
Growth Areas -- Financial Sector,
Banking/Insurance; Wireless, BPO
9
Market Share
8
8
Others
8
8
9
Future Trend - Telecom
Telecommunication
Driver List
Times
Cited
Geographic Reach -- Market Size, Customer
Base
10
Services -- Wireless, Voice, Data
9
Bundled Technology
6
Others
15
“Geographic Reach”, “Service range” &
“Bundled technology” would be the major drivers
of M&A activity in the telecommunications industry
10
9
6
15
Sources: Value Predictability Tool and Mergent Online
12
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
13
AVERAGE VALUE OF PROPOSED SYNERGIES
The losses of the bidders exceed the gains of targets from 1998 through 2001 by
$134 billion
Billion $
-4
10
+24
-240
-10
-30
-50
-70
-90
-110
-130
Aggregate dollar return to acquiring firm shareholders
Aggregate difference between acquiring & target firm shareholder value
-150
1980
1990
1998
2001
In 1998-2001 a small number of firms accounted for huge “aggregate dollar losses”, which means that
without these announcements, the wealth of acquiring shareholders would have increased
Note: The report analyzed data from 1980 – 2001 but results provided only for 1997-2001 to maintain consistency in overall analysis of the whole project
Source: Wealth destruction on a massive scale? By Moeller, Schlingemann, Stulz – August 2003
14
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
15
COMPANIES WITH UNREALIZED VALUE - Electronics
100%
4%
90%
20%
80%
Thirty-one percent (31%) of
electronics companies that
underwent M&A activities
underperformed based on value
predictability tool analysis.
Underperforming
Companies that Underwent
M&A Activities
(# of M&A Activities, 1997-2000)
Cirrus Logic (1)
Gateway (1)
70%
24%
Maxtor (1)
60%
Realized Value
Companies
50%
that
underwent
40%
M&A
Activities
30%
Underperform ing
31%
53%
Silicon Graphics (1)
Western Digital (1)
Andrew Corporation (2)
Imation (2)
69%
Atmel Corporation (4)
20%
Natl. Semiconductor (6)
10%
NCR (8)
0%
3COM (10)
Electronics
No M&A Activities and Underperforming
No M&A Activities and Realized Value
M&A Activities and Underperforming
M&A Activities and Realized Value
Hewlett-Packard (10)
80% of companies in electronics
industry underwent M&A activities
between 1997 and 2000.
Motorola (12)
Lucent (35)
Source: Value Predictability Tool
16
COMPANIES WITH UNREALIZED VALUE - Banking
100%
90%
80%
Forty-one percent (41%) of capital markets and banking
companies that underwent M&A activities underperformed
based on value predictability tool analysis.
14%
7%
Realized Value
70%
Companies
60%
that
50%
underwent
M&A
40%
Activities
Underperform ing
33%
Underperforming Companies that Underwent
M&A Activities
41%
Bank of America (1)
30%
20%
(# of M & A Activities, 1997-2000)
59%
Cendant (1)
47%
10%
0%
Banking
No M&A Activities and Underperforming
No M&A Activities and Realized Value
M&A Activities and Underperforming
M&A Activities and Realized Value
80% of
companies in
banking
industry
underwent
M&A activities
between 1997
and 2000.
Bank One (4)
(now J.P.
Morgan Chase & Co. JPM)
Astoria (2)
Morgan Stanley (4)
CIT Group (2)
Assoc. Banc Corp (5)
KeyCorp (2)
Compass Bancshares (12)
Peoples Bank (2)
Zions Corporation (17)
PNC (2)
Bank of New York (19)
Suntrust (2)
Regions Financial (20)
Huntington (3)
1st Tennessee Natl. (3)
American Express (4)
(now First Horizon, FHN)
Source: Value Predictability Tool
17
COMPANIES WITH UNREALIZED VALUE – Software & Telecom
100% of companies on value predictability tool analysis
underwent M&A activity between 1997-2000
Underperforming Companies that
Underwent M&A Activities
(# of M & A Activities, 1997-2000)
Software
National Instruments Corp. (1)
9
Reynolds & Reynolds Co.(1)
Software
21 software companies underwent M&A
activities between 1997 and 2000.
12
(43%)
BMC Software Inc. (5)
Parametric Technology Corp. (7)
Novell Inc. (10)
BEA Systems Inc. (12)
(57%)
Intuit Inc. (14)
Realized Value
Cadence Design Systems Inc. (20)
Underperform ing
Computer Assoc Intl Inc. (29)
Underperforming Companies that
Underwent M&A Activities
Telecommunication
•
•
1 company performed lower than the industry avg.
3 companies did not realize significant value
(almost same as the industry average)
Telecom
17 companies underwent M&A activities between
1997 and 2000
(# of M & A Activities, 1997-2000)
US Cellular Telephone Corp. (1)
Qwest Communications Intl Inc. (5)
Nextel Communications Inc. (16)
AT&T Corp. (34)
Source: Value Predictability Tool
18
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
19
AREAS OF SYNERGY – Reverse Engineering of the Tool
Current tool
M&A
Activities
Reason
Cited
Generic
Driver
Scoring
1.
Match relevant companies to industry specific
drivers.
2.
Pick the Composite Score and the Industry
Specific Drivers Score, and calculate the
correlation. (“CORREL” excel function)
4.
If there are less than five relevant companies
cited in each driver, neglected the correlation
Sorted as “Strong Impact ” if the correlation is
more than 0.5, “Weak Impact” if it is between 0.2 and 0,2, and “Adverse Impact” if it is less
than -0.5
M&A
Activities
Reason
Cited
Industry
Driver
Scoring
Composite
Scoring
LOGIC USED
3.
Reverse engineering
Industry
Driver
Scoring
Correlation
Measurement
-1
-0.5
Strong
negative
correlation
-0.2
0.2
Weak
correlation
(indifferent)
0.5
1
Strong
positive
correlation
20
AREAS OF SYNERGY – Electronics
“Resources” and “Economies of Scale” are highly correlated with the firm’s
overall performance
Correlation
strong negative correlation
-1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4
Resources (Threshold Size to
compete with large players)
6
6
Economies of scale
6
0.81
16
Electronics Value Drivers
0.65
24
12
0.56
20
Distribution Channels (Network)
6
Customer Relations (Combat
growing competition)
6
0.47
18
0.44
8
7
Tax Benefits (Taxation)
0.26
17
5
17
-0.01
29
6
6
-0.05
10
-0.08
15
*Financial Resources 0.75 (4 firms), Alternative Non-M&A activities that
improve competitive position 0.93 (3 firms), To generate cash to pursue
further acquisition strategy N/A (1 firm), Workforce N/A (1 firm), Brand
Equity/Loyalty N/A (1 firm)
Though fewer firms stated,
“Resources” and
“Economies of Scale” have a
large impact on the firm’s
overall performance.
High number of firms
stated, “Expertise in Area”
and “Capture Market
Segment,” has relatively
high impact on the firms
overall performance.
Most companies stated
“Complementary products,”
as a reason for merger but it
actually doesn’t correlate
with a firms overall
performance.
0.02
9
Complementary products
(Consolidate Product Offering)
Product list (Breadth of Service
Offerings & solutions)
strong positive correlation
0.5 0.6 0.7 0.8 0.9
1
7
Capture Market Segment
Increased size Would help
increase the bargaining power
0.4
0.85
Expertise in area (Technical
Know How)
R&D capabilities (Complements
Technical Spending)
weak correlation
0 0.1 0.2 0.3
-0.3 -0.2 -0.1
Number of companies stated
Number of times stated
Correlation
“R&D capabilities,” “Big Size
& Bargaining Power,” and
“Product List” don’t impact
the overall performance.
21
AREAS OF SYNERGY – Banking
“Share Strength” and “Marketing Advantage” have the highest correlation
Correlation
strong negative correlation
-1
Share Strength
-0.9 -0.8 -0.7 -0.6 -0.5
weak correlation
-0.4 -0.3 -0.2 -0.1
0
0.1
0.2
strong positive correlation
0.3
0.6
0.7
0.8
0.75
15
15
0.64
17
17
Greater distribution network
0.62
21
21
Broader product line
Financial Risk and superior
performance to shareholders
16
16
Similar Vision and customer
service/marketing approach
0.33
0.2
17
17
Opportunity to expand into
domestic/international market
0.19
19
19
0.16
Good financial performances
20
20
0.16
Bigger Management and Good
economies of scale
20
20
0.14
18
18
Gaining Competitive Position
1
0.33
24
25
Specialized Service Expansion
0.9
0.99
13
13
Market share
Financial Strength in Assets,
Revenue
0.5
5
5
Marketing advantages
Attractiveness to its future
employees
0.4
“Share Strength,” “Marketing
Advantages,” “Market Share,” and
“Grater Distribution Network” are
highly correlated to the firm’s
overall performance. However,
fewer firms stated “Share
Strength” and “Marketing
Advantages” as their reason for
M&A.
0.02
Although more firms stated
“Opportunity to Expand into
Domestic/International Market,”
“Good financial
performances,” ”Bigger
Management and Economies of
Scale,” “Gaining Competitive
Position,” and “”Financial Strength
in Assets, Revenue” as their reason
for M&A, these factors are not
correlated to the firm’s overall
performance.
-0.15
5
5
-0.2
25
24
*Ownership rights (merger percentage) 0.91 (4 firms), Capital availability 0.53 (4 firms)
Number of companies stated
Number of times stated
Correlation
22
AREAS OF SYNERGY – Software & Telecom
“Growth Areas (Software)” and “Geographic Reach (Telecom) ” have the significant
impact on firms’ composite scores.
Software
Growth areas: IT services to
financial sector, banking and
insurance; Wireless, BPO
Correlation
strong negative correlation
-1
-0.9 -0.8 -0.7 -0.6 -0.5
weak correlation
-0.4 -0.3 -0.2 -0.1
0
0.1
0.2
strong positive correlation
0.3
0.4
0.5
0.6
0.7
0.8
7
0.86
9
7
Market share
1
0.9
0.76
8
Alliances/Partnerships w/
complementary product mfgs.
-0.36
17
13
Even though stated by many
firms, “Alliances/ Partnerships with Complementary
Product Mfgs” has a slightly
negative effect.
*Operating costs - salaries are big costs (Solution: Open source alternatives, outsourcing, etc.) -0.37 (3 firms), R&D
spending (for product based companies) -0.84 (3 firms), Penetration of Emerging/Expanding International Markets
(particularly China) N/A (2 firms)
Telecommunication
Correlation
strong negative correlation
-1
-0.9 -0.8 -0.7 -0.6 -0.5
Geographic Reach --market size,
customer base
7
Services--wireless, voice, data
7
Bundled technology
Though fewer firms stated,
“Growth Areas” and “Market
Share” have high correlation
with the firms’ overall
performance.
weak correlation
-0.4 -0.3 -0.2 -0.1
6
6
0.1
0.2
strong positive correlation
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.77
10
9
0
-0.01
“Geographic Reach” is
highly correlated with the
overall performance.
“Services” and “Bundled
Technology” are indifferent.
-0.03
*Wi-Fi Capabilities & Alliances -0.28 (3 firms), Customer service --call center operations N/A (2 firms), Equipment
manufacturers' performance (ie Motorola) N/A (2 firms), R&D Spending for future network capabilities N/A (2 firms),
Technology-based subsidiary performance (IP/R&D)--indicator of underlying value N/A (1 firms), Mobile Game sector value
within phones N/A (1 firms), Multimedia messaging N/A (1 firms), Venture Backed startups N/A (0 firms)
Number of companies stated
Number of times stated
Correlation
23
R&D capabilities (Complements Technical Spending)
Customer Relations (Combat growing competition)
Drivers
# of times cited 29 24 20 18 17 15 9
8
7
6
6
Attractiveness to its future employees
Others
25 24 21 20 20 19 18 17 17 16 15 13 5
5
8
Market share
Others
17 9
8
8
10 9
Bundled technology
Others
Software
Services--wireless, voice, data
Banking
Geographic Reach --market size, customer base
Growth areas
Alliances/Partnerships w/ complementary product mfgs.
Marketing advantages
Market share
Specialized Service Expansion
Similar Vision and customer service/marketing approach
Greater distribution network
Electronics
Gaining Competitive Position
Opportunity to expand into domestic/international market
Good financial performances
Bigger Management and Good economies of scale
Broader product line
Financial Strength in Assets, Revenue
Share Strength
9
Financial Risk and superior performance to shareholders
Others
Increased size Would help increase the bargaining power
Financial Resources
7
Resources (Threshold Size to compete with large players)
Economies of scale
Product list (Breadth of Service Offerings & solutions)
Tax Benefits (Taxation)
Distribution Channels (Network)
Capture Market Segment
Expertise in area (Technical Know How)
Complementary products (Consolidate Product Offering)
AREAS OF SYNERGY - Key Success Factors and Opportunities
Drivers with strong future trends and high correlations are key success factors for industries
Telecom
6 15
future trend
correlation
24
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
25
REASONS FOR FAILED MERGERS – Numerical data
Longer days to complete, large transaction value, and more competition are major
reasons for M&A losses.
Deal Characteristics 1998-2001
Large loss
Loss/Gain (billion)
Other
-397
157
Transaction value (TV, million)
9,586
268
TV/ Assets (market)
0.198
0.157
TV/ Equity (market)
0.267
0.296
Days to completion
125.8
67.0
Cash in payment (%)
22.6
56.9
Equity in payment (%)
71.6
35.2
Pure cash deal (%)
10.3
41.1
Pure equity deal (%)
51.7
25.8
Tender-offer (%)
12.6
3.0
Hostile deal (%)
1.1
0.1
Same industry (%)
41.4
31.6
Private target (%)
14.9
51.7
Public target (%)
75.9
20.9
Subsidiary target (%)
9.2
27.4
Competed deal (%)
8.0
0.7
0.117
0.151
Liquidity index
Out of 4,136 acquisition announcements, 87 are
responsible for 43.4% of the loss. (comparison
between +1day and -2day of announcement)
Large loss deals have a large transaction
value, but there is nothing noticeable when
it is normalized by firm market value.
Days to completion is longer in large loss
deals
Equity payment is used more often with
large loss deals
Acquisitions of public firms are more likely
to be large loss
More competition could explain the large
loss deals
Source: Sara B. Moeller, "Wealth destruction on a massive scale? “
26
REASONS FOR FAILED MERGERS – Conceptual Data
Types of Failed Mergers







Serial acquirers, high valuation firms
Firms with large capitalization, low managerial share
ownership, or large holdings of cash
Equity is used for payment
Conglomerate acquisitions
Acquisitions opposed by target management
Acquisitions of public firms
Acquisitions by firms with low leverage
Cost and Environment



Management - Indirect “Soft” Costs

Management

Decreased profitability
 Changes in productivity
 Loss of market share
 Management's strategy is not sustainable
 Differential levels of managerial skills and
compensation differentials
 A lack of internal growth opportunities
 Management’s discretion caused from the high
valuations of the firms was used for destroying
shareholder wealth.
Overpays for the target firm
Transaction costs (e.g. finding target, negotiating
terms, writing contracts, swapping goods) overwhelm
the gains from a deal
Run out of profitable acquisition opportunities






Lack of external focus on the customer, competition,
and the marketplace
Low staff motivation and morale
Loss of key executives-nearly half within three years
Loss of key staff-many long-serving high performers
and informal leaders
Brand confusion-loss of brand focus
Decreased customer service levels and satisfaction
Impediments to information transfer
Sources: Sara B. Moeller, "Wealth destruction on a massive scale?”/
“Mergers, Acquisitions, and Organizational Effectiveness” iPlanet/
“Market Failures” HBS 700127 - 2004
27
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
28
MARKET OVERVIEW - Market Definition
MARKET SUPPLY = M&A
TRANSACTIONS
•
Supply can be estimated, but
remains unpredictable in the
M&A market.
•
Supply is driven by the need
for growth through acquisition,
and/or consolidation within an
industry
•
Within a given M&A
transaction supply is defined
by two phases
Pre-merger Market
Post-merger Market
Demand for ServicesACQUIRER
NEW ENTITY
Demand for Services
Demand for Services TARGET
MARKET DEMAND =
NEED FOR SERVICES
•
Demand for services is
plentiful, but within a highly
competitive environment
JOINT VENTURE / PRE-MERGER
OPPORTUNITIES
IT
MANAGEMENT CONSULTING FIRMS
INVESTMENT BANKS
FULLFILL PRE-MERGER SERVICE DEMAND
FILL POST-MERGER SERVICE DEMAND
SUSTAINED RELATIONSHIPS
OPPORTUNITIES FOR FUTURE SERVICES
Total market size is equal in the pre and post-merger markets, assuming unsuccessful mergers are discounted. The current market size for
consulting firms is further refined by the number of merging and merged entities that use consulting services in the pre and post-merger market
respectively. However, the current market size does not reflect future market size. Demand for services can, and should, be stimulated by
consultants who educate their clients about the tangible benefits of consulting involvement
29
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
30
PRE-MERGER MARKET
Strategy Consulting firms are becoming increasingly more involved in pre-merger activities. There are two options for BearingPoint; become more
strategy focused, or form alliance with Investment Bank.
Total Fees
Market for Pre-M&A Consulting Services:
Revenue
$4,000.00
10,000
$3,000.00
8,000
$2,500.00
$2,000.00
6,000
$1,500.00
4,000
$1,000.00
2003 M&A Transactions Data
2,000
$500.00
Total market = 5,212 * 100% * 1M = $5,212M
$0.00
0
1994
1995
1996
1997
1998
1999
2000
Top M&A Investment Banks – 2003 Disclosed Values
Advisor
Morgan Stanley
Goldman, Sachs
Citigroup
Credit Suisse First Boston
UBS
Merrill Lynch
Deutsche Bank
J.P. Morgan
Lehman Brothers
Rohatyn Associates
Fees ($mil)
$117.5
84.9
74.5
49.8
49.0
36
34.7
31.5
30.6
28.0
Deals
($ in millions)
Total market = 3,935 * 100% * 1M = $3,935M
12,000
$3,500.00
(Market Size = Total Transactions * % Used * Fee)
30 yr. mean M&A Transactions Data
Deals
# of Deals
11
10
8
8
3
5
5
6
6
1
Advisor
HSBC Holdings
Allen & Co.
Keefe Bruyette & Woods
Bear, Stearns
Sandler O’Neil
Banc of America
Stephens
Dresdner Leinwort Wasserstein
Rothschild
Brown, Gibbons, Lang
Fees ($mil)
28.0
27.9
17.6
16.7
16.2
16.1
9.4
7.4
6.6
5.4
Source: M&A Almanac, Feb 2004 Vol. 39 No. 2
Source: M&A: The Dealmaker’s Journal, March 2004 Vol. 39 No.3
# of Deals
1
2
8
9
7
5
1
1
1
1
2001
2002
2003
Fees for investment banks in
the pre-merger market have
trended downward in the
recent past as a result of
increased competition. Deal
activity began to pick up in
2003 and momentum has
carried into 2004.
Target firms for alliances
should be selected based on
deal activity
31
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
32
POST-MERGER MARKET
Levels of Market - Demand Side
The potential market for overall M&A integration consulting ~$2,164M
Total market
100%
Market for M&A Services: Revenue
Population
Percentage
(Market Size = Total Transactions * % Used * Fee)
30 yr. mean M&A Transactions Data
Total market = 3,935 * 100% * 1M = $3,935M
Potential market = 3,935 * 55% * 1M = $2,164M
Available market:
Specific functional integration = 3,935* 37% * 1M = $1,456M
Overall integration needs= 3,935 * 18% * 1M = $708M
80
60
Potential market
40
2003 M&A Transactions Data
Total market = 5,212 * 100% * 1M = $5,212M
Potential market = 5,212 * 55% * 1M = $2,867M
Available market:
Specific functional integration = 5,212 * 37% * 1M = $1,930M
Overall integration needs= 5,212 * 18% * 1M = $938M
Specific Functional Integration
20
Overall Integration Needs
Penetrated market ?
0
Accenture/EIU Survey: Did your company use a PMI consultant?
Yes – Overall integration needs
Yes –Specific functional integration (IT)
No
Market for M&A Services Definitions
18%
37%
Total market
-
Total M&A Deals
Potential market
-
Overall percentage of market
utilizing PMI services
Available market
-
Specific functional integration market
Overall integration market
45%
Methodology: Market size was estimated using the number of transactions multiplied
by the percentage of firms using specific and overall M&A integration services
multiplied by an estimated transaction fee of $1M. Percentage used was determined
by an Accenture EIU survey.
Penetrated market
-
Customers that rely on BearingPoint
for M&A Services
Source: M&A Almanac, Feb 2004 Vol. 39 No. 2
Source: M&A: Post-merger integration: An Accenture survey conducted by the Economist Intelligence Unit, Jun 23, 2004
33
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
34
COMPETITIVE ANALYSIS - Competitive Market Positioning
The management consulting industry can be defined in multiple ways. Defining it according to service offering breadth and
product vs. consultant led not only examines market placement, but also business strategy focus
Perceptual Map Key
Quadrant 2
Quadrant 1
Broad Service Broad Service
Offering
Offering
Standard
Solution
Tailored
Solution
Deloitte
Quadrant
2
Quadrant
1
Accenture
Broad
PRTM
IBM
BearingPoint
Narrow Service Narrow Service
Offering
Offering
Booz Allen
Standard
Solution
Tailored
Solution
Quadrant 3
Quadrant 4
BearingPoint’s present position in the management
consulting industry offers opportunities to attract
clients, seeking holistic solutions, away from
traditionally focused strategy consulting firms
Breadth of
Service Offering
Quadrant
4
Quadrant
3
McKinsey
CSC
BAIN
HP
AT Kearney BCG
Quadrant 4 firms primarily focus on pre-merger
service offerings
Quadrant 1 firms attempt to achieve balance in M&A
service offerings
Roland Berger
Standard
Solution
Offering
Narrow
Tailored
Solution
Competitors offering significant services within M&A
Methodology: Researched overall number of services offered by firm, as well as number of consultants within each firm. Consultant
number was normalized by overall firm size and used as a metric to measure a firms emphasis on tailored solutions
35
COMPETITIVE ANALYSIS
– SWOT: Broad Service Offerings / Tailored Solution
Industry diversification across services including M&A will be essential in maximizing profit potential
Weakness
Opportunities
• Gov’t ties
• Multidisciplinary
nature
Deloitte
• Known in
national &
global markets
• Strong tech
capabilities
PRTM
• Strong culture
Not sought to provide in-depth expertise
• Massive man
power
Broadly focused
• Capabilities
designed to
generate
revenue and
reduce costs
• Depth of
experience
Accenture
• Too reliant on
certain
industries
Ability to provide holistic solution
BearingPoint
• Utilize
capabilities to
expand into
additional
industries
capturing
market share
Threats
• High
competition in
saturated
industries
Attractiveness of substantial revenues is encouraging
traditional strategy-focused consulting firms to expand
offerings and seek acquisitions providing complementary
services
Strengths
Large market reach provides opportunities for growth in
strategy consulting engagements
Quadrant 1
BearingPoint’s ability to become a major player in M&A hinges on its ability to offer
clients strong strategic as well practical solutions & implementation
36
COMPETITIVE ANALYSIS
Quadrant 4
Strengths
• EDS merger
AT Kearney
– SWOT: Narrow Service Offerings / Tailored Solution
• Foundation in
tech sectors
High Brand
Equity
top-level
engagements
Global Reach
Booz Allen Hamilton
• Cross sector
work
• Govt.
consulting
• Clients
outperform
market 3:1
Bain & Company
Mostly
privatized
allowing for
sustainability of
competitive
advantages
Weakness
Narrowly focused
Inability to proved
complete solution
Inability to generate
revenues comparable to
broad service providers
Opportunities
Threats
Opportunity to expand
services, capturing
greater market share
Threat of broader
providers seeking to obtain
more “Strategy” work
Reputation creates
extensive
opportunities for joint
venture relationships
Specificity of services
leading to loss of clients
seeking one-stop solutions
• Small-Med.
Sized client base
• Strong culture
BCG
• Known as a
solution
innovator
• Strong culture
McKinsey
Market Leaders are not invincible, but they recognize the need to protect
industry position and are active in doing so
• Considered
most powerful
• Serves more
than 2/3 of
Fortune 1000
37
COMPETITIVE ANALYSIS – Attempt to Quantify Firm Success
Multi-Variable Linear Regression Analysis
An attempt was made to identify and quantify industry key success factors through
public sources of information and a multiple-variable linear regression analysis
Dependent variable:
sales/employee
Independent variables:
years established
# of industries served
# of services available
brand equity
Results were both economically & statistically inconclusive
38
Accenture
ATKearney
Booz Allen Hamilton
Bain & Company
Boston Consulting Group
Bearing Point
Deloitte
McKinsey
PRTM
Roland Berger
Industries served by BearingPoint
Transaction Value (in Billions)
25
14
13
10
19
13
15
12
9
11
9
9
18
13
15
12
10
9
$131,946.9
Banking & Finance
$83,881.8
Leisure & Entertainment
$71,766.4
Communications
Computer Software, Supplies & SVC's $26,953.1
$23,205.2
Drugs, Medical Supplies & Equipment
$20,091.6
Retail
$16,648.3
Oil & Gas
$14,914.8
Broadcasting
$13,053.3
Chemicals, Paints & Coatings
$9,746.0
Health Services
$9,419.3
Wholesale & Distribution
$8,419.4
Insurance
$7,453.3
Mining & Minerals
$6,706.4
Real Estate
$6,410.9
Paper
$6,000.9
Electrical Equipment
$5,820.3
Electronics
$5,744.2
Industrial & Farm Equipment & Machinery
$4,838.1
Energy Services
$4,321.1
Beverages
Construction Mining & Oil Equip & Mach. $3,890.7
$3,046.6
Transportation
$2,593.4
Household Goods
$2,591.3
Fabricated Metal Products
$2,304.0
Timber & Forest Products
$1,734.9
Apparel
$1,731.9
Furniture
$1,346.5
Toys & Recreational Products
$1,134.3
Aerospace, Aircraft & Defense
$881.9
Automotive Products & Accessories
$523.8
Toiletries & Cosmetics
$496.8
Autos & Trucks
$447.1
Building Products
Industry offerings Aligned w/ Bearing Point
Industries Listed from highest
to lowest Deal Value
Number of Industries Served
COMPETITIVE ANALYSIS – Competitive Industry Comparison (M&A)
Industries served by competitors
Industries not served by BearingPoint
22
Although the industries BearingPoint is focusing on cultivating for M&A service business are highly active in
deal volume, they are also highly competitive and saturated markets
39
Accenture
ATKearney
Booz Allen Hamilton
Bain & Company
Boston Consulting Group
Bearing Point
Deloitte
McKinsey
PRTM
Roland Berger
Industries served by BearingPoint
Transaction Value (in Billions)
25
14
13
10
19
13
15
12
9
11
9
9
18
13
15
12
10
9
$131,946.9
Banking & Finance
$83,881.8
Leisure & Entertainment
$71,766.4
Communications
Computer Software, Supplies & SVC's $26,953.1
$23,205.2
Drugs, Medical Supplies & Equipment
$20,091.6
Retail
$16,648.3
Oil & Gas
$14,914.8
Broadcasting
$13,053.3
Chemicals, Paints & Coatings
$9,746.0
Health Services
$9,419.3
Wholesale & Distribution
$8,419.4
Insurance
$7,453.3
Mining & Minerals
$6,706.4
Real Estate
$6,410.9
Paper
$6,000.9
Electrical Equipment
$5,820.3
Electronics
$5,744.2
Industrial & Farm Equipment & Machinery
$4,838.1
Energy Services
$4,321.1
Beverages
Construction Mining & Oil Equip & Mach. $3,890.7
$3,046.6
Transportation
$2,593.4
Household Goods
$2,591.3
Fabricated Metal Products
$2,304.0
Timber & Forest Products
$1,734.9
Apparel
$1,731.9
Furniture
$1,346.5
Toys & Recreational Products
$1,134.3
Aerospace, Aircraft & Defense
$881.9
Automotive Products & Accessories
$523.8
Toiletries & Cosmetics
$496.8
Autos & Trucks
$447.1
Building Products
Industry offerings Aligned w/ Bearing Point
Industries Listed from highest
to lowest Deal Value
Number of Industries Served
COMPETITIVE ANALYSIS – Competitive Industry Comparison (M&A)
Industries served by competitors
Industries not served by BearingPoint
22
Several industries heavily active in mergers and acquisitions are underserved. Furthermore some of these
industries are areas where BearingPoint has competency
40
COMPETITIVE ANALYSIS
–
Competitive Service Offerings (M&A)
M&A Service Offerings as a Percentage of Overall Service Offerings
The following identified firms have made merger and acquisition services a primary portion of their
overall service offering and will be BearingPoint’s primary competition within the M&A service market
2% < M&A
Offering
5% < M&A 11% >M&A
Offering
Offering
1% > M&A
Offering
1% < M&A
Offering
80%
82%
100%
90%
80%
70%
70%
60%
83%
93%
81%
86%
96%
50%
95%
96%
40%
30%
20%
30%
10%
17%
7%
0%
Accenture
AT
Kearney
14%
4%
Booz Allen
Hamilton
Bain &
Boston
Company Consulting
Group
20%
19%
Bearing
Point
4%
Deloitte
18%
5%
McKinsey
PRTM
Roland
Berger
Services Unrelated to M&A
M&A Services
41
Premerger Services
50% 50%
80% 100% 80%
6
8
1
Roland
Berger
6
PRTM
5
McKinsey
8
Deloitte
3
BCG
5
Bain &
Company
Bearing
Point
Value Creation
Accenture
4
Value Preservation
Value Realization
Competitive Service Offerings (M&A)
Booz Allen
Number of Competing
Services
–
AT Kearney
COMPETITIVE ANALYSIS
67% 33% 100% 70%
Strategy Articulation / Growth
Shareholder Value
Financial Due Diligence
Operational Due Diligence
Cultural Assessment
Pricing Analysis & Allocation
Valuation of Intangibles
Post Merger
50% 50% 20%
20% 33%
67%
30% 100%
Project Management Planning
Realizing Merger Synergies
Strategy Change
Integration & Alignment
Organizational Design
Change Management
Work Force Transition
Communication Plan
Cultural Alignment
Employee Retention
Compensation/ Benefit Alignment
Additionally firms that target M&A services as primary business focus share multiple service offerings
with BearingPoint. Recognizing which services competitors are offering as well as if they focus on pre
or post-merger services will allow BearingPoint to tailor its service offerings more effectively
42
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
43
TRENDS – U.S. Mergers & Acquisitions
Speed of Completion
Most Active M&A Industries
Deal closing is taking much longer post 9/11, with increased due diligence – John
Nidecker, “The Trends of M&A” NVST. 14 Jan 2002
By Dollar Value - 2003
Industry
Investment & Commodity Firms
Business Services
Credit Institutions
Food
Utilities
Real Estate
Oil & Gas
Radio & TV Stations
Commercial Banks
Transportation & Shipping
Value ($bil)
$27.7
27.1
26.0
23.5
22.9
22.3
21.4
21.2
18.2
16.4
% of Total
5.5%
5.4
5.2
4.7
4.6
4.4
4.3
4.2
3.6
3.3
“In terms of the speed of completing a deal, tier-1 advisors were found to be more
efficient in terms of the amount of time required to complete deals, other things
equal.”
- Hunter & Jagtiani, “An analysis of advisor choice, fees, and effort in mergers and acquisitions.”
Advisor Switching Costs
“The more intense the prior banking relationship between the acquirer and
the bank, the more likely it is that the bank will be chosen to advise the
acquiring firm in a merger. This is because the acquirer extracts implicit or
explicit commitments regarding access to bank loans in the future postmerger period.”
-Julapa Jagtiani, Stavros Peristiani & Anthony Saunders. “The Role of Bank Advisors in
Mergers and Acquisitions’
Investment Bank Consolidation
“The new phenomenon is that there are more and more deals with multiple
advisors…” Downward forces on fees in the recent past “will ultimately
force investment banks to think the unthinkable: merge with
themselves.”
Most Active M&A Industries
By Number of Deals - 2003
Industry
Business Services
Software
Investment & Commodity Firms
Insurance
Real Estate
Electronic & Electrical Equip
Measuring, Med. & Photo. Equip.
Drugs
Oil & Gas
Durable Goods Wholesaling
No. of deals
999
457
226
221
198
194
185
169
169
155
% of Total
16.7%
7.6
3.8
3.7
3.3
3.2
3.1
2.8
2.8
2.6
-Raghavan, Anita. “Deals and Deal Makers: Artful Deal Advisers Look Beyond Quantity.” The
Wall Street Journal. 11 Dec. 2003.
Prospects of M&A Activity
Survey of 1,301 Executives around the Globe:
45% Describe as good or excellent
46% Describe as fair
8% Describe as poor
Source: M&A: The Dealmaker’s Journal, March 2004 Vol. 39 No.3
Survey done by Thomson Financialz
44
TRENDS – Global Mergers & Acquisitions
Firms within the us have begun to look abroad for acquisitions in order to gain a global presence.
Contrarily foreign firm interest in acquiring U.S. companies has trended downward sine 2002.
Countries Attracting U.S. Buyers - 2003
Countries Most Active in U.S Acquisition - 2003
Advisor
Canada
United Kingdom
Japan
Germany
France
Australia
Switzerland
Sweden
Spain
Netherlands
# of Deals
170
118
44
32
28
20
20
16
12
12
Advisor
United Kingdom
Canada
Germany
Australia
Japan
France
China
India
Netherlands
Italy
Value ($bil)
$7.6
4.0
0.9
10.2
1.3
8.6
5.8
0.3
0.1
0.1
300
1200
250
1000
600
100
400
50
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
0
2004
No. of Deals
Value ($bil)
No. of Deals
No. of Deals
150
2000
180
1800
160
1600
140
1400
200
800
200
Value ($bil)
$21.1
4.2
11.6
2.4
10.7
3.0
1.0
0.3
2.2
1.7
U.S. Acquisitions Overseas (1994-2003)
Foreign Acquisitions of U.S Companies (1994-2003)
1400
# of Deals
151
122
92
45
43
38
34
28
28
27
120
1200
100
No. of Deals
80
Value ($bil)
1000
800
60
600
400
40
200
20
0
1992
1994
1996
1998
2000
2002
0
2004
45
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
46
RECOMMENDATIONS

Identify means to become more active in pre-merger consulting
– Joint ventures / alliances w/ investment banking firms realizing high
deal volume
– Utilize “holistic solution approach” to attract customers early in the
M&A process



Look to under-served industries as opportunities for growth in
M&A revenue potential
Recognize industries served and services offered by competition
in order to match BearingPoint capabilities with market needs
Increase transparency related to service offerings available within
BearingPoint for M&A
– M&A service website under SPT
47
QUESTIONS?
48
AGENDA
• Project Background & Approach
• Updated Tool Overview
•
Reasons for Proposed Mergers
•
Average Value of Proposed Mergers
•
Companies With Unrealized Value
•
Areas of Synergy
•
Reasons for Failed Mergers
• Market Overview
• Pre-merger Market
• Post-merger Market
• Competitive Analysis
• Trends
• Recommendations
• Appendices
49
APPENDIX I: DATA SOURCES


Industries and companies based on original Bearing Point breakdown from master Excel file
Sources:
– Securities and Exchange Commission: www.sec.gov
– # of Companies Source: Hoovers Online
– Market cap 2003 Source: www.yahoo.com
– M&A Activity Source: SDC Platinum
– Industry Betas:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
– Average value of proposed mergers / Reasons for failed mergers
Sara B. Moeller, "Wealth destruction on a massive scale? “
50
APPENDIX IIA: DATA ASSUMPTIONS AND TIMELINE
Data incorporated into the unrealized value predictability tool included financial metrics between
1996 and 2003. This 8-year set of data was obtained via BearingPoint contact Humberto
Garcia-Salas and was retrieved from the FactSet database. It was assumed that the data
received reflected actual financial reporting of all companies analyzed. Also, the OSBI team
assumed any missing data points were linked to FactSet downloading or database errors, and
missing data points did not impact scoring, target selection, or other analyses.
Unrealized Value
Predictability
Tool CompanySpecific Data
2000-2003 industry data (# of M & A transactions,
beta, market cap, # of companies) was used to
select target industries. Companies contributing to
recent data are existing companies that completed
M & A in the past and may require consulting for
past or future strategic activities. The number of
2000-2003 M & A transactions for respective
industries parallels the 1997-2000 M & A
transaction distribution.
Industry
Selection Model
Industry-Specific
Data
Data on the number of M & A transactions
undertaken within Electronics and Banking
industries, the reasons for the M & A activities, and
industry drivers were obtained from 1997-2000
SDC Platinum database information and companyrespective S-4 prospectus reports. Analysis of
activities during this timeframe provided ample
data for post-merger financial impact to be
assessed and the unrealized value predictability
tool’s usability to be confirmed.
Unrealized Value
Predictability
Tool M & A
Transaction
Focus
1996
1997
1998
1999
2000
2001
2002
2003
51
APPENDIX IIB: INDUSTRY SELECTION SCENARIO
WEIGHTING

Metric weighting:
– Industry Beta is used to evaluate M&A activity weighting using a logic test
• Decreases the weighting in situations where the industry beta is higher than 1
• Scenario 1: Base weight of 4
• Scenario 2: Base weight of 5
• Scenario 3: Base weight of 6
– Solver used to vary Number of Companies and Market Cap metrics in 3 different
scenarios
• Scenario 1: Number of Companies base = 2.75, Market Cap base = 3.25
• Scenario 2: Number of Companies base = 1.5, Market Cap base = 3.5
• Scenario 3: Number of Companies base = 0.5, Market Cap base = 3.5

In the final analysis, we ignored Retail/Wholesale due to the diversity
52
APPENDIX IIC: INDUSTRY-SPECIFIC VALUE DRIVERS ELECTRONICS
Value Drivers (based on S-4 cited merger reasons)
Measures
Rationale
Product list (Breadth of Service Offerings & solutions)
Asset Turnover
Shows how N/I changes with spending on Assets
Expertise in area (Technical Know How)
Sales Per Employee
Know-how generates more sales and better products
R&D capabilities (Complements Technical Spending)
Asset Turnover
Shows how N/I changes with spending on Assets
Resources (Threshold Size to compete with large players)
Market Value
Shows how you can capture greater market share
Tax Benefits (Taxation)
Total Income Taxes
Measures potential tax breaks
Alternative Non-M&A activities that improve competitive position
Market-to-Book
Value
Measures how market perceives relative to book value
Increased size Would help increase the bargaining power
COGS Ratio
Shows change in COGS relative to increase in net sales
Distribution Channels (Network)
Current Ratio
Shows how cash equivalents changes relative to increase in
spending
To generate cash to pursue further acquisition strategy
Cash Equivalents
Shows potential purchasing power & leverage capabilities
Economies of scale
COGS Ratio
Shows change in COGS relative to increase in net sales
Customer Relations (Combat growing competition)
Change in Net
Sales (as %)
Opportunity to bring in more customers and sales
Financial Resources
Debt-Equity Ratio
Measurement shows leveraged amount & potential further
resources
Workforce (access to experienced technical workforce)
Sales Per Employee
Know-how generates more sales and better products
Complementary products (Consolidate Product Offering)
Asset Turnover
Shows how N/I changes with spending on Assets
Brand Equity/Loyalty
Sales as % of
Industry Sales
Measures your Sales growth relative to industry average
Capture Market Segment
Sales as % of
Industry Sales
Measures your Sales growth relative to industry average
The value drivers for electronics industry were linked to financial measures and
metrics that could be calculated based upon the data received by the OSBI team.
53
APPENDIX IID: INDUSTRY-SPECIFIC VALUE DRIVERS BANKING
Value Drivers (based on S-4 cited merger reasons)
Measures
Rationale
Share Strength
Gain/Loss in Market
Value (as %)
Measures how market/investors perceive merger &
synergies
Broader product line
Efficiency Ratio
Doing more for less; expanding product line should expand
Financial Strength in Assets, Revenue
Leverage Ratio
Need to know if they are operating on debt
Ownership rights (merger percentage)
Efficiency Ratio
Measures how much return in operating income from activity
Financial Risk and superior performance to shareholders
Return on Equity (ROE)
Shows how they get increase in return for investments
Market share
Sales Per Employee
See how sales grow
Gaining Competitive Position
Efficiency Ratio
Does expansion allow the company to become more efficient
Opportunity to expand into domestic/international market
Efficiency Ratio
Does expansion allow the company to become more efficient
Marketing advantages
Sales Per Employee
See how sales grow
Greater distribution network
Change in Net Sales
(as %)
Opportunity to bring in more customers and sales
Bigger Management and Good economies of scale
Efficiency Ratio
Does expansion allow the company to become more efficient
Similar Vision and customer service/marketing approach
Efficiency Ratio
Does expansion allow the company to become more efficient
Good financial performances
Return on Assets (ROA)
Increase inflows compared to expansion
Specialized Service Expansion
Efficiency Ratio
Does expansion allow the company to become more efficient
Capital availability
Leverage Ratio
Assets increase to equity
Attractiveness to its future employees
Gain/Loss in Market
Value (as %)
Increase in market shows company is doing better
The value drivers for banking industry were linked to financial measures and
metrics that could be calculated based upon the data received by the OSBI team.
54
APPENDIX IIE: INDUSTRY-SPECIFIC VALUE DRIVERS SOFTWARE
Value Drivers (based on S-4 cited merger
reasons)
Measures
Rationale
Operating costs - salaries are big costs
(Solution: Open source alternatives, outsourcing, etc.)
SG&A/Net Sales
SG&A is the most important factor in software
R&D spending (for product based companies)
Asset Turnover
Shows how N/I changes with spending on Assets
Penetration of Emerging/Expanding
International Markets (particularly China)
Change in Net Sales
(as %)
Opportunity to bring in more customers and sales
Alliances/Partnerships w/ complementary
product mfgs.
Asset Turnover
Shows how N/I changes with spending on Assets
Market share
Sales as % of Industry
Sales
Measures your Sales growth relative to industry average
Growth areas: IT services to financial sector,
banking and insurance; Wireless, BPO
Sales as % of Industry
Sales
Measures your Sales growth relative to industry average
The value drivers for software industry were linked to financial measures and
metrics that could be calculated based upon the data received by the OSBI team.
55
APPENDIX IIF: INDUSTRY-SPECIFIC VALUE DRIVERS Telecommunications
Value Drivers (based on S-4 cited merger reasons)
Measures
Rationale
Customer service --call center operations
Current Ratio
Shows how cash equivalents changes relative to
increase in spending
Bundled technology
Asset Turnover
Shows how N/I changes with spending on Assets
Services--wireless, voice, data
Asset Turnover
Shows how N/I changes with spending on Assets
Geographic Reach --market size, customer base
Sales as % of
Industry Sales
Measures your Sales growth relative to industry
average
Venture Backed startups
Return on Equity
(ROE)
Shows how they get increase in return for investments
Technology-based subsidiary performance (IP/R&D)-indicator of underlying value
Asset Turnover
Shows how N/I changes with spending on Assets
Equipment manufacturers' performance (ie Motorola)
Sales Growth
Measures your Sales growth relative to industry
average
R&D Spending for future network capabilities
Asset Turnover
Shows how N/I changes with spending on Assets
Mobile Game sector value within phones
Asset Turnover
Shows how N/I changes with spending on Assets
Multimedia messaging
Asset Turnover
Shows how N/I changes with spending on Assets
Wi-Fi Capabilities & Alliances
Asset Turnover
Shows how N/I changes with spending on Assets
The value drivers for telecom industry were linked to financial measures and
metrics that could be calculated based upon the data received by the OSBI team.
56
APPENDIX IIE: VALUE DRIVERS APPROACH
Process for evaluating companies with respect to generic and company-specific value drivers
Generic Drivers
(80% Total Weight)
Fact-Set
data for the
selected
industries
Industry Specific
Drivers
(20% Total
Weight)
Output
Determine generic financial ratios that can
be used across all companies in all the
industries
Gathered merger
data for all the
companies in the
Industry List
Gathered
acquisition/
alliance data for
all companies in
Industry List
Gathered
secondary
research data
Underperformed
Co.
Compare
company specific
data to industry
average
Analyzed
secondary
data and
the S-4
statements
to
determine
the drivers
for each
particular
industry
Identified
appropriate
financial
measures
considering
the
constraints
of
information
held
Map
financial
measures
with each
driver for a
period of
five years
Realized
Value Co.
For all of the companies within the two selected industries, the OSBI
Team evaluated their level of performance against generic and
industry-specific drivers and compared to overall industry performance.
57
APPENDIX IIF: TOOL ARCHITECTURE
COMPANIES
Industry
Specific
Drivers
Industry
Driver
scoring
YES
Composite
Scoring
M&A
Activities
Generic
Drivers
Generic
Driver
scoring
Score less
than industry
average
(< 0)
Unrealized
value
from M&A
YES
Non-M&A
Activities
Generic
Drivers
Generic
Driver
scoring
Score less
than industry
average
(< 0)
Unrealized
value potentially driven
by the four other
hypotheses
Compared to
industry average
58
Appendix III: Industries with greatest merger activities
INDUSTRY NAME
M&A Activity volume
(2000 – 2003)
1
RETAIL/WHOLESALE
23,283
2
ELECTRONICS
2,409
3
SOFTWARE
2,388
4
PROFESSIONAL SERVICES
2,208
5
CAPITAL MARKETS & BANKING
2,202
6
LIFE SCIENCES
1,093
7
REAL ESTATE & HOSPITALITY
1,084
8
TELECOMMUNICATIONS
1,035
9
CONTENT
1,029
10
SERVICE PROVIDERS
938
11
OIL & GAS
852
12
INDUSTRIAL PRODUCTS
814
13
PROVIDERS
775
14
UTILITIES
667
15
PAYOR
493
16
TRANSPORTATION
473
17
NATURAL RESOURCES
468
18
INSURANCE & RISK MANAGEMENT
330
19
CHEMICALS
318
20
CONSUMER PACKAGED GOODS
263
21
AUTOMOTIVE
259
22
CABLE
210
Avg. M&A
activity
$1981
59
Appendix IVA: Electronics: Reasons for proposed Mergers (full
list)
Driver List
Times Cited
Complementary Products (Consolidate Product Offering)
29
Expertise in Area (Technical Know How)
24
Capture Market Segment
20
Distribution Channels (Network)
18
Tax Benefits (Taxation)
17
Product list (Breadth of Service Offerings & solutions)
15
R&D capabilities (Complements Technical Spending)
9
Customer Relations (Combat growing competition)
8
Economies of scale
7
Financial Resources
7
Resources (Threshold Size to compete with large players)
6
Increased size Would help increase the bargaining power
6
To generate cash to pursue further acquisition strategy
2
Workforce (access to experienced technical workforce)
2
Alternative Non-M&A activities that improve competitive position
1
Brand Equity/Loyalty
1
Sources: Value Predictability Tool and Mergent Online
60
Appendix IVB: Banking: Reasons for proposed Mergers (full list)
Driver List
Times Cited
Financial Risk and Superior Performance to Shareholders
25
Financial Strength in Assets, Revenue
24
Broader Product Line
21
Bigger Management and Good Economies of Scale
20
Good Financial Performances
20
Opportunity to expand into domestic/international market
19
Gaining Competitive Position
18
Greater distribution network
17
Similar Vision and customer service/marketing approach
17
Specialized Service Expansion
16
Market share
15
Marketing advantages
13
Share Strength
5
Attractiveness to its future employees
5
Ownership rights (merger percentage)
4
Capital availability
4
Sources: Value Predictability Tool and Mergent Online
61
Appendix IVC: Software: Reasons for proposed Mergers (full
list)
Driver List
Times Cited
Alliances/Partnerships w/ Complementary Product Manufacturing
13
Market Share
7
Growth Areas (IT services to financial sector, banking and insurance;
Wireless, BPO)
7
Operating costs - salaries are big costs (Solution: Open source alternatives, outsourcing, etc.)
3
R&D spending (for product based companies)
3
Penetration of Emerging/Expanding International Markets (particularly China)
2
Sources: Value Predictability Tool and Mergent Online
62
Appendix IVD: Telecommunications: Reasons for proposed
Mergers (full list)
Driver List
Times Cited
Geographic Reach (market size, customer base)
10
Services (wireless, voice, data)
9
Bundled Technology
6
Customer service --call center operations
3
Equipment manufacturers' performance (ie Motorola)
3
R&D Spending for future network capabilities
3
Wi-Fi Capabilities & Alliances
3
Technology-based subsidiary performance (IP/R&D)--indicator of underlying value
1
Mobile Game sector value within phones
1
Multimedia messaging
1
Venture Backed startups
0
Sources: Value Predictability Tool and Mergent Online
63
Appendix VA: Companies with Negative Composite Scores:
Electronics
SILICON GRAPHICS INC
-2.2094872
IMATION CORP
-1.587692261
CIENA CORP
-1.529922962
NATIONAL SEMICONDUCTOR CORP
-1.396769166
MOTOROLA INC
-1.388458967
WESTERN DIGITAL CORP
-1.253487229
MAXTOR CORP
-1.189871788
GATEWAY INC
-1.028358936
NCR CORP
-0.890153766
QUANTUM CORP
-0.740821719
STORAGE TECHNOLOGY CP
-0.678666711
HEWLETT-PACKARD CO
-0.677409053
CIRRUS LOGIC INC
-0.554717898
ACTERNA CORP
-0.547692299
MATSUSHITA ELECTRIC -ADR
-0.433307648
ANDREW CORP
-0.372153878
Source: Value Predictability Tool
64
Appendix VB: Companies with Negative Composite Scores:
Banking
EDWARDS (A G) INC
-2.211359262
GATX CORP
-2.00353837
AMERICAN EXPRESS
-1.662852049
KEYCORP
-1.487328768
HUNTINGTON BANCSHARES
-1.44267416
PNC FINANCIAL SVCS GROUP INC
-1.370769262
BANK OF HAWAII CORP
-1.370648623
PEOPLES BANK BRIDGEPORT CT
-1.041692257
MELLON FINANCIAL CORP
-1.01178205
BANK OF AMERICA CORP
-0.962519884
BANK ONE CORP
-0.953601182
PRICE (T. ROWE) GROUP
-0.93225646
COMERICA INC.
-0.804512739
ASSOCIATED BANC CORP
-0.57628417
BANK OF NEW YORK CO INC
-0.570410252
JANUS CAPITAL GROUP INC
-0.556717992
CIT GROUP INC
-0.553129792
FRANKLIN RESOURCES INC
-0.475589722
Source: Value Predictability Tool
65
Appendix VB: Companies with Negative Composite Scores
(Cont): Banking
FIRST TENNESSEE NATL CORP
-0.464410275
ZIONS BANCORPORATION
-0.457205087
J P MORGAN CHASE & CO
-0.443846166
RAYMOND JAMES FINANCIAL CORP
-0.356230766
INSTINET GROUP INC
-0.344820499
FANNIE MAE
-0.329794854
FLEETBOSTON FINANCIAL CORP
-0.287746429
CENDANT CORP
-0.255460292
MORGAN STANLEY
-0.247141182
ASTORIA FINL CORP
-0.233538449
ASTORIA FINL CORP
-0.233538449
CONCORD EFS INC
-0.17241025
REGIONS FINL CORP
-0.113128185
REGIONS FINL CORP
-0.113128185
SUNTRUST BANKS INC
-0.032671109
COMPASS BANCSHARES INC
-0.0250712
HOUSEHOLD INTERNATIONAL INC
-0.012345679
STUDENT LOAN CORP
-0.007589743
Source: Value Predictability Tool
66
Appendix VC: Companies with Negative Composite Scores:
Software
COMPUTER ASSOCIATES INTL INC
-1.700864315
PARAMETRIC TECHNOLOGY CORP
-1.51356411
BMC SOFTWARE INC
-1.431567788
NOVELL INC
-1.23310256
CADENCE DESIGN SYS INC
-1.069992781
BEA SYSTEMS INC
-0.9392308
NATIONAL INSTRUMENTS CORP
-0.414487153
REYNOLDS & REYNOLDS -CL A
-0.373435885
INTUIT INC
-0.303007305
Source: Value Predictability Tool
67
Appendix VD: Companies with Negative Composite Scores:
Telecommunications
AT&T CORP
-0.603128314
NEXTEL COMMUNICATIONS
0.102717966
US CELLULAR CORP
0.105794907
QWEST COMMUNICATION INTL INC
0.113666654
WESTERN WIRELESS CORP -CL A
0.484205127
SPRINT FON GROUP
0.51369226
LEVEL 3 COMMUN INC
0.888256371
Source: Value Predictability Tool
68
Appendix VI: Areas of Synergy
Impact to the
overall
performance
Strong
Electronics
Resources
Economies
of
scale
Expertise in area
•Capture Market
Segment
Indifferent or
adverse
effect
•Complementary
products
•R&D capabilities
•Increased size
and the
bargaining power
•Product list
Banking
Software
Telecom
•Share Strength
Marketing
advantages
Market share
Capture Market
Segment
Growth
Gaining
•Alliances with Services-complementary wireless, voice,
data
product mfgs.
Bundled
technology
competitive
position
Bigger mgmt.
and good
economies of
scale
Attractiveness to
its future
employees
areas
•Market share
Geographic
Reach
69
Appendix VIIA: Areas of Synergy: Electronics
“Resources” and “Economies of scale” have the strong impact to the firm’s overall
performance. “Complementary products” and “R&D capabilities” are indifferent to the
overall performance
# of
firms
stated
Correlation with
Composite score
Resources (Threshold Size to compete with large players)
6
0.85
Economies of scale
6
0.81
Expertise in area (Technical Know How)
16
0.65
Capture Market Segment
12
0.56
Distribution Channels (Network)
6
0.47
Customer Relations (Combat growing competition)
6
0.44
Tax Benefits (Taxation)
7
0.26
R&D capabilities (Complements Technical Spending)
5
0.02
Complementary products (Consolidate Product Offering)
17
-0.01
Increased size Would help increase the bargaining power
6
-0.05
Product list (Breadth of Service Offerings & solutions)
10
-0.08
Drivers
Strong
positive
correlation
Weak
correlation
Financial Resources 0.75 (4 firms), Alternative Non-M&A activities that improve competitive position 0.93 (3 firms)
70
Appendix VIIB: Areas of Synergy: Banking
“Share Strength” and “Marketing Advantages” have the strong impact to firm’s overall
performance. “Gaining Competitive Position” and “Economies of Scale” are indifferent to
the overall performance.
Drivers
# of firms
Correlation
Share Strength
5
0.99
Marketing advantages
13
0.75
Market share
15
0.64
Greater distribution network
17
0.62
Financial Risk and superior performance to shareholders
24
0.33
Broader product line
21
0.33
Specialized Service Expansion
16
0.2
Similar Vision and customer service/marketing approach
17
0.19
Good financial performances
20
0.16
Opportunity to expand into domestic/international market
19
0.16
Bigger Management and Good economies of scale
20
0.14
Gaining Competitive Position
18
0.02
Attractiveness to its future employees
5
-0.15
Financial Strength in Assets, Revenue
25
-0.2
Strong
positive
correlation
Weak
correlation
Ownership rights (merger percentage) 0.91 (4 firms), Capital availability 0.53 (4 firms)
71
Appendix VIIC: Areas of Synergy: Software
“Growth Areas” and “Market Share” has the strong impact to firm’s overall performance.
“Alliance with complementary product mfgs.” has the adverse effect.
Drivers
# of firms
stated
Correlation with
Composite score
Growth areas: IT services to financial sector, banking and insurance;
Wireless, BPO
7
0.86
Market share
7
0.76
Alliances/Partnerships w/ complementary product mfgs.
13
-0.36
Strong
positive
correlation
negative
correlation
Operating costs - salaries are big costs (Solution: Open source alternatives, outsourcing, etc.) -0.37 (3 firms),
R&D spending (for product based companies) -0.84 (3 firms),
Penetration of Emerging/Expanding International Markets (particularly China) N/A (2 firms)
72
Appendix VIID: Areas of Synergy: Telecommunications
“Geographic Reach” has the strong impact to firm’s overall performance. “Services” and
“Bundled technology” are indifferent to the overall performance.
Drivers
# of firms
stated
Correlation with
Composite score
Geographic Reach --market size, customer base
7
0.768438
Services--wireless, voice, data
7
-0.00909
Bundled technology
6
-0.02889
Strong
positive
correlation
Weak
correlation
Wi-Fi Capabilities & Alliances -0.28 (3 firms),
Customer service --call center operations N/A (2 firms),
Equipment manufacturers' performance (ie Motorola) N/A (2 firms)
R&D Spending for future network capabilities N/A (2 firms)
Technology-based subsidiary performance (IP/R&D)--indicator of underlying value N/A (1 firms)
Mobile Game sector value within phones N/A (1 firms)
Multimedia messaging N/A (1 firms)
Venture Backed startups N/A (0 firms)
73
Appendix VIII: Five major areas of Synergy
Operating and managerial synergies
1.
2.
3.
4.
5.
6.
Vertical integration synergies
Economies of scale
Economies of scope
Market power to eliminate a competitor
Improved corporate governance (replacement of
an inefficient management team)
Valuable new knowledge/skills
Competitive synergies
1.
2.
Pre-emption (prevent competitor from acquiring
valuable assets)
Multiple point competition.
Options-based synergies
1.
2.
Synergy in Cross-Border Acquisitions
1.
2.
3.
4.
Financial synergies
5.
1.
2.
Internal capital market
Coinsurance
Value of real options in presence of uncertainty
Growth and learning
6.
Sharing of valuable intangible assets in the
presence of failure of factor or product markets
Market seeking activities and operational
efficiency benefits in the presence of trade
barriers
Financial diversification (Risk reduction from
diversification)
Obtaining undervalued assets in the presence of
capital market imperfections
Tax advantages in the presence of differential tax
regimes
Reduction of agency costs in the presence of
cross-national variations
Sources: Sara B. Moeller, "Wealth destruction on a massive scale?”/ “Mergers, Acquisitions, and
Organizational Effectiveness” iPlanet/ “Market Failures” HBS 700127
74