Mergers & Acquisitions 2013 V blank

Christian Maupetit 1
MERGERS & ACQUISITIONS
Christian Maupetit, PhD

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.

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?]

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 ?]

[Trend 2010 ?]

M&A structures
1. Merger combination
2. Merger absorption
3. Merger with transfer of assets

M&A structure
Merger combination
Firm A
Firm C
Firm B

M&A structure
Merger absorption
Firm A
Firm B Firm B

M&A structure
Merger with transfer of assets
Firm A Firm A
Firm B Firm B

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.

Strategies
Depending upon the
definition, merger rationale varies and
might lead to non-convergent long
term strategies.

Limits of mergers
USA
Mergers 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.

Limits of mergers
In Europe, antitrust legislation receives attention.
The Commission of the European Union in Brussels
(European Commission
Competition 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

Examples of rejected merger projects
Period Companies Sector of activity
1996 Saint-Gobain/Waecker Silicium/Carbon
1996 Blokker/ToysR Us Toys
1998 Deutsche Telekom/BetaResearch Digital pay TV
equipment
1998 Bertelsman/Kirch/Premiere Digital pay TV net work
1999 Airtour/First Choice Tour operator, leisure
2000 Volvo/Scania Trucks
2000 MCI World Com/Sprint Internet infrastructure
2001 SCA/Metsa tissue Paper
2001 GE/Honeywell Aeronautic industry
2001 Schneinder/Legrand Electric equipment
2001 Tetra Laval/Sidel Conditioning
Table 20 source: Enjeux les Echos (2001)

Rationale behind the mergers
Overcapacity Geographical
roll-up
Product/Market
extension
R&D Industry
convergence
Strategic
objectives
The “acquiring”
company with
excess capacity
will eliminate
capacity, gain
market share and
create more
efficient operation.
A successful
company expands
geographically.
Acquisitions extend
a company product
line or its
international
coverage.
Acquisitions are
used instead of
in-house R&D to
build a market
position quickly.
Company bets
that a new
industry is
emerging and
tries to establish a
position by taking
resources from
existing industries
whose boundaries
are eroding.
[Examples]

Type of mergers
Mergers are of several different types:
Vertical mergers
Horizontal mergers
Conglomerates

Type of mergers
Sector A Sector B Sector C Sector D
HorizontalVertical
Conglomerate

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

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

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

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.

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.

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.

Reasons for merging
Synergy (expected synergy):
Better use of complementary resources.
Diversification:
Hedge a company against a downturn in an individual
industry.

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.

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.

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.

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.

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.

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)

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.

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.

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.

Major Mergers & Acquisitions since 1990
United States and Europe
Merger Year Deal Financing
ExxonMobil Exxon and Mobil Oil 1998 $77 billion Stock: 100%,
AOL Time Warner America Online and Time Warner 2000 $166 billion Stock: 100%,
Citigroup Citicorp and Travelers Group 1999 $73 billion Stock: 100%,
J.P. Morgan Chase, Bank One 2004 $59 billion Stock: 100%,
Procter & Gamble Gillette 2005 $54 billion Stock: 100%
MCI WorldCom MCI Communications; with
WorldCom
1997 $44 billion Stock: 100%,
HP Compaq Hewlett-Packard; with Compaq 2002 $25 billion Stock:
Kmart Sears, Roebuck 2004 $11 billion 55% stock, 45%
cash
Vodafone Mannesmann 2000 $130 billion Stock: 100%,
Vivendi Universal Vivendi and Seagram 2000 $32 billion Stock: 100%,
DaimlerChrysler Daimler Benz and Chrysler 1998 $37 billion Stock: 100%,
BP Amoco 2000 $110 billion
AF-KLM Air France and KLM 2004 Stock:
Aventis Aventis Sanofi 2004 €55 billion 60% stock, 40%
cash
Arcelor Usinor, Arbed & Aceralia 2002 Stock:100%

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.

Merger break down (%) over a 30 year period (USA)
Type of merger 1948-1955 1956-1963 1964-1971 1971-1979
Horizontal 39 18.7 12 15
Vertical 12.7 20 6.6 8.3
Conglomerate 10.1 17.7 34.8 45.5
Product line extension 36.1 36.9 38.9 28.2
Market extension 2.1 6.7 7.7 3
Total 100 % 100 % 100 % 100 %

Merger break down (%) over a 30 year period France
Type of merger 1966-1972 1973-1985 1986-1990
Horizontal 49% 44% 69%
Vertical 24% 25% 19%
Conglomerate 27% 31% 12%

Mergers & Acquisitions in France since 1990
Period number of mergers Euro value
1990 1759 47533
1991 1605 38250
1992 1191 36375
1993 979 27190
1994 997 45598
1995 1221 36932
1996 1243 85677
1997 1356 96463
1998 1251 127578
1999 1302 285200
2000 1319 344641

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.

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

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

Determinants
Determinant type type
Profitability organizational objective
Operating income organizational objective
Wealth creation organizational objective
Revenues organizational objective
Market capitalization organizational objective
Debt ratio organizational objective
Net income organizational objective
Expertise organizational subjective
Managing practices institutional subjective
BOD meetings institutional objective
BOD valuation institutional subjective
Directors background institutional subjective
Employees involvement institutional subjective
CEO power institutional subjective
Capital structure organizational objective

The determinants

Mapping
Determinants Company A, Company B
0
20
40
60
80
100
Dt 1
Dt 2
Dt 3
Dt 4
Dt 5
Dt 6
Dt 7
Dt 8
Dt 9
Dt 10

SMG model
Firm A
Firm B
Phase 1 Phase 2 Phase 3
Merger
Time
New entity

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

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.

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.

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.

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.

remarks:
http://www.imaa-institute.org/statistics-mergers-acquisitions.html#TopMergersAcquisitions_Europe

Potential listed companies to be selected by students:
• Arcelor/Mittal
• Daimler/Chrysler
• HP/Compaq
• Air France/KLM
• EDF/Suez
• Alcatel/Lucent
• Sanofi/Aventis
• Renault Volvo/Nissan (Alliance)
• EADS-BAE

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