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M&A part one
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M&As EBS Chris Maupetit
Christian Maupetit
1
MERGERS & ACQUISITIONS
Christian Maupetit, PhD
Christian Maupetit
2
M&As - Definition
According to encyclopedia Britannica, a merger is a corporate combination of two or more independent business corporations into a single enterprise, usually the absorption of one or more firms by a dominant one.
Christian Maupetit
3
M&As - Definition
A merger may be accomplished by one firm purchasing the other's assets with cash or its securities or by purchasing the other's shares or stock or by issuing its stock to the other firm's stockholders in exchange for their shares in the acquired firm.
[Y/N?]
Christian Maupetit
4
Mergers & Acquisitions
Merger activity in Europe and in the United States hit a new record in 2007
According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006
Europe $1 781 million
United states $ 1 570 million
Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion
[Trend 2011 ?]
Christian Maupetit
5
Mergers & Acquisitions
Merger activity in Europe and in the United States hit a new record in 2007
According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006
Europe $1 781 million
United states $ 1 570 million
Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion
[Trend 2010 ?]
Christian Maupetit
6
Mergers & Acquisitions
Merger activity in Europe and in the United States hit a new record in 2007
According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006
Europe $1 781 million
United states $ 1 570 million
Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion
[Trend 2010 ?]
Christian Maupetit
7
Mergers & Acquisitions
Merger activity in Europe and in the United States hit a new record in 2007
According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006
Europe $1 781 million
United states $ 1 570 million
Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion
[Trend 2010 ?]
Christian Maupetit
8
Mergers & Acquisitions
Merger activity in Europe and in the United States hit a new record in 2007
According to Thomson Financial, M&As represented $ 4 380 million (3.3 trillions euros) in 2007,an increase of 21% compared to 2006
Europe $1 781 million
United states $ 1 570 million
Global United States M&A activity fell 35 percent (2008) in the year to date to $1.579 trillion
[Trend 2010 ?]
Christian Maupetit
9
M&A structures
Merger combination
Merger absorption
Merger with transfer of assets
Christian Maupetit
10
M&A structure
Merger combination
Christian Maupetit
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M&A structure
Merger absorption
Christian Maupetit
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M&A structure
Merger with transfer of assets
Christian Maupetit
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key principle & concept
The key principle is to create shareholder value over and above the sum of the two companies. But share holder value may have several definitions.
Based on the expected return concept, shareholder value is the value that a shareholder is able to obtain from his investment in a company.
This is made up of capital gains, dividend payments, and other payouts that a firm might make to a shareholder.
Christian Maupetit
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Strategies
Depending upon the definition, merger rationale varies and might lead to non-convergent long term strategies.
Christian Maupetit
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Limits of mergers
USAMergers for monopolistic purposes are among the unfair practices. The Sherman Antitrust Act , (1890) legislation was first enacted by the United States Congress to curb concentrations of power that interfere with trade and reduce economic competition. The Clayton Antitrust Act (1914), supplement the Sherman Antitrust Act of 1890.
Christian Maupetit
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Limits of mergers
In Europe, antitrust legislation receives attention.The Commission of the European Union in Brussels (European CommissionCompetition DG / Antitrust Registry) regularly passes upon cases involving practices of companies trading in the Common Market. Its decisions are based upon Articles 85 and 86 of the Treaty of Rome (1957), which deal with rules of fair competition
Christian Maupetit
17
Examples of rejected merger projects
Christian Maupetit
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Rationale behind the mergers
[Examples]
Christian Maupetit
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Type of mergers
Mergers are of several different types:
Vertical mergersHorizontal mergersConglomerates
Christian Maupetit
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Type of mergers
Christian Maupetit
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Type of mergers
1) Horizontal mergers
When two companies merge within the same sector of activity, the merger is qualified as an horizontal merger. Usually both companies are at the same stage in the production cycle. Both firms produce the same commodity or service for the same market or similar markets.
EX1
Christian Maupetit
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Type of mergers
2) Vertical mergers
When two companies merge is in the same sector of industry but at another stage in the production cycle the merger is qualified as a vertical merger. The firm acquires either a supplier or a customer.
EX2
Christian Maupetit
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Type of mergers
3) Conglomerate merger
A conglomerate is a large company that consists of companies, subsidiary divisions of diversified activities.A conglomerate merger is a merger involving two or more companies that are in unrelated businesses.
EX3
Christian Maupetit
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Reasons for merging
The reasons for mergers are various.Economies of scale:
This refers to the fact that the combined company can reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.
Christian Maupetit
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Reasons for merging
The reasons for mergers are various.Revenue:
Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and increasing its power (by capturing increased market share) to set prices.
Christian Maupetit
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Reasons for merging
Cross Selling:
For example, a bank buying an insurance company could sell its banking products to the insurance's customers, while the insurance company can sign up the bank's customers for insurance services.
Christian Maupetit
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Reasons for merging
Synergy (expected synergy):
Better use of complementary resources.
Diversification:
Hedge a company against a downturn in an individual industry.
Christian Maupetit
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Merger of equals
The concept of a merger of equals is open to arguments.
In reality very few mergers of equals exist.
DaimlerChrysler started as a merger of equals in an industry where the two companies analyses revealed themselves to have staggering overcapacity.
Christian Maupetit
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Merger of equals
A study conducted by Monin illustrates the merger of equals concept.
The author reports that a business combination positioned as a merger of equals has the objective to reinforce equality and equity which are the two dominant standards of distributive justice.
Christian Maupetit
30
Merger of equals
Equality has 3 key functions:
The first function is to legitimate the merger decision/process for internal and external stakeholders,
the second one is to suggest/propose an equal contribution by both partners
the third one is a mean to avoid deciding who will lead for the newly created entity.
Christian Maupetit
31
Merger of equals
Equality is a powerful principle to legitimate M&As.
Inside the company, equality is used to solve dysfunctions linked to the integration process, such as name of the new entity, positions of the key executives, sharing of roles and responsibilities, and resource allocation.
Christian Maupetit
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Merger of equals
A merger of equals also suggests that the leadership will be equally shared and will not generate conflicts among the top executives.
The mergers of Daimler Chrysler and AOL Time Warner were announced to the public as mergers of equals.
Christian Maupetit
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Cost of capital,Economic Value Added and M&As
Studies of Mergers and Acquisitions in the 90's and early 2000s found that 60 percent of the mergers failed to earn returns greater than the cost of capital.(2010?)
The cost of capital is the sum of the cost of equity plus the cost of debt. The weighted average of the cost of equity and the cost of debt are determined by the relative proportions of equity and debt in a firm's capital structure. (Example 1)
Christian Maupetit
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Cost of capital
In other words this is the minimum required return on an investment.
Cost of capital is also used as a key component to compute Economic Value Added. EVA concept has been developed by Stern & Stewart.
The assumption is that companies that earn higher returns than financing costs increase shareholder value.
Christian Maupetit
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Cost of capital
The relationship between EVA and merger performance is difficult to establish.
One of the reasons is because it is difficult to isolate purely financial determinants.
Christian Maupetit
36
Part two
Analyzing the economic contribution to Mergers and Acquisitions has been covered by many academic researchers and professional analysts.
They all hope that in the future, merger research will move beyond the basic issue of measuring and assigning gains and losses to tackle the fundamental question of how mergers create or destroy value.
Christian Maupetit
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Major Mergers & Acquisitions since 1990United States and Europe
37
Christian Maupetit
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Financing M&As
As shown in the table, the vast majority of the deals are financed using stock.
100% of the M&As transactions (United States and Western Europe) above $70 billion are financed using stock.
Christian Maupetit
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Merger break down (%) over a 30 year period (USA)
Christian Maupetit
40
Merger break down (%) over a 30 year period France
Christian Maupetit
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Mergers & Acquisitions in France since 1990
Christian Maupetit
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The Alternative Model
The Sustainable Merger Governance model is based on a set of actions, taking into account exogenous and endogenous data.
Exogenous data could include competition, market capitalization, rules, while endogenous data refers to revenues, management practices, capital/equity structure.
The model is linear, based on time and is composed of three inter-related phases.
Christian Maupetit
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The Alternative Model
The first phase or stage prior to the merger represents the valuation approach
The second phase describes the implementation process via the ad hoc committee
The third stage represents the sustainable post-merger integration
Christian Maupetit
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The Alternative Model
The mapping of the determinants of each company pin points the gaps and the potential areas of risks.
This pre-merger diagram is part of a set of score cards.
The overall objective is to score each area and to get a global scoring
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Determinants
Christian Maupetit
46
The determinants
Christian Maupetit
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Mapping
Christian Maupetit
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SMG model
Firm A
Firm B
Phase 1
Phase 2
Phase 3
Merger
Time
New entity
Christian Maupetit
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Structure of the model
Stage one: Pre-merger valuation approach
Stage two:implementation process via the ad hoc committee
Stage three: sustainable post merger integration
Christian Maupetit
50
Phase one
The first stage prior to the merger, pictures the two potential merger players. This stage gives an overview of the key characteristics of each entity prior to the merger.
The radar graph highlights the corporate profile and pin points the gaps between the determinants for each company.
Christian Maupetit
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Phase two
The second phase, which occurs after the legal merger, describes the implementation process via the ad hoc committee.
The role of the ad hoc committee is to replace the traditional post merger board with an ad hoc committee, having full authority for the entire range of legal and managerial decisions.
Christian Maupetit
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The committee has two distinct missions
Integration of the post merger phase in accordance with the long term strategy of the new entity
Recruitment of future Directors and CEO.
Christian Maupetit
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Phase three
The second mission of the Ad Hoc committee is to sustain the development of the new company according to the long run corporate strategy.
After a period of partnership and leadership management the Ad Hoc committee transfers the entity to insiders and recruits directors and the CEO.
Christian Maupetit
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remarks:
http://www.imaa-institute.org/statistics-mergers-acquisitions.html#TopMergersAcquisitions_Europe
Christian Maupetit
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Potential listed companies to be selected by students:
Arcelor/MittalDaimler/ChryslerHP/CompaqAir France/KLMEDF/SuezAlcatel/LucentSanofi/AventisRenault Volvo/Nissan (Alliance)EADS-BAE
schema determinants structure methodology
Determinants structure
Objective
Subjective
Organizational Institutional