Merger And Acquisition - Reasons for Failure and Counter Measures

MERGERS & ACQUISITIONS Reasons for failures and Corrective measures

Aakash Kulkarni MGBSEP13IBWM001

Chetan Makharia MGBSEP13IBWM008

Frederick Fransjaya MGBSEP13IBWM011

Nitish Pyara Singh MGBSEP13IBWM018

AGENDAIntroductionReason for choosing this topicObjective of this researchLiterature reviewSchematic diagramFramework - Fishbone Expert OpinionsSummaryConclusion

INTRODUCTIONMergers and Acquisitions (M&A) is one of

the major aspects of a company which deals with the Management, Corporate Strategy and Corporate Finance.

A Merger is when 2 companies which are of similar size and revenue decide to join together.

An Acquisition is when one large company acquires a small company for present or future benefits.

REASON FOR CHOOSING THIS TOPIC

FIGURE 1: QUARTERLY ANALYSIS M & A AS PER VALUE AND THE NUMBER OF DEALS

Source: MergerMarket

OBJECTIVES OF THIS RESEARCH

Find reasons for the rise in number of M & A failures.

Identify the “INDEPENDENT” variables and “INTER-DEPENDENT” variables which are causing these failures.

Provide a concise report with IMPLEMENTABLE solutions to help reduce these failures.

WHY M&A ?1. Operational benefits Revenue Enhancement by gaining Pricing power

Cost saving in terms of Advertising, R&D2. Financial benefits Reduction in cost of Financing Risk Reduction through Diversification 3. Strategic Motives Example – Facebook acquiring

Whatsapp

PARAMETERS OF SUCCESS MEASUREMENTEcono

mies of

Scale

Change in Brand Value

Creation of Barriers to Entry

Risk Reduction

Improvement in Manageme

ntCost

Efficiency

Change in Marke

t share

Ease of

getting Raw Materials

Increase in Sales

FAILURE RATES

FIGURE 2: Global TMT Trend: Quarterly

SOURCE: Mergermarket: TMT M&A Trend Report

REASON FOR FAILURES

SCHEMATIC DIAGRAM

FRAMEWORK - FISHBONE

Cause and Effect IdentificationBrainstorming sessionAvoid team’s thinking to fall into

repetitive thoughtsPrioritize to further analysis and

corrective actions

FRAMEWORK - FISHBONE

FINANCE

Example• Google bid to acquire Whatsapp for US $10

Bn but Whatsapp quoted US $19 Bn, thus leading to failure of this deal• Time Warner and AOL merger during the dot

com bubble burst which led to US $99 Bn loss to AOL.

TECHNOLOGY

Example• EBay and Skype in 2005 (and overestimating

possible synergy)

CULTURE

Example• Hewlett Packard and Compaq merger in 2001

that resulted in US $13 billion loss in market value.

REGION

Example• Alcatel (United States) and Lucent (France)

in 2006

CORE VALUES

Example• Sprint and Nextel, clash between the

entrepreneurial

SIZE

Example• Blackberry buyout by Fairfax in 2013 • Holcim and Lafarge merger is likely to be

successful as the size of both the companies is equal and the size of the deal is larger

OTHER FACTORS

Example• Veramark Terminates Merger Agreement with

Varsity Acquisition LLC, Agrees to be Acquired by Hubspoke Holdings, Inc.

• Ebay and Skype in 2005 that predicted the wrong synergy

PROCESS

Example• Microsoft offered to buy Yahoo for 40 billion,

but since the BOD of Yahoo were not able to effectively communicate and deliver in the Pre-Merger meeting this deal collapsed.

FISHBONE DIAGRAM

SUMMARYCulture and Core values play a vital

role in the Pre-Merger and Post-Merger situations.

Valuation of a company and the standards followed play an important role.

Technology, Size and Other reasons can be controlled through careful and preemptive measures.

CONCLUSION - 1Solutions:

◦Investment Banks and Auditing Firms which assist M & A must provide Valuation on a common ground. This also helps remove the communication difference between the companies.

◦Cultural differences can be mitigated by improving the understanding and purpose of the Merger and Post-Merger, HR executives help integrate the 2 companies into one.

CONCLUSION - 2Solutions:

◦Valuation: Before a merger commences, a company must ensure that the amount they are paying for the M & A is not greater than the combined present value of the future Cash flows of the company.

◦Appointing or hiring experienced professionals who help foresee problems which may cause the deal to fail and also this helps the deal to be completed earlier as it’s done in a structured process.

◦“Jumping in earlier has always been higher risk and with higher risk comes greater reward” - Jim Grebey

THANK YOU FOR YOUR TIME