Net Merger and Acquisition Deals

Transcription

1 Strategies for Mergers and Acquisitions Sydney Finkelstein Tuck School of Business at Dartmouth Telephone: (603) Fax: (603) e s e.edu 1

2 Net Merger and Acquisition Deals ,000 Number of Deals 10,000 8,000 6,000 4, , Year 2

3 Inflation-Adjustment Dollar Value of M&As (Year 2007 Billions of Dollars) Year A Good-Looking Merger Doesn t Guarantee Great Results 3

4 ARE M&As PROFITABLE? Stock price of acquirers from trailed S&P 500 by 14 percentage points, peer group by 4 points, after deals were announced -Salomon Smith Barney Over ten years, only 23% of mergers recover the costs incurred in the deal. -McKinsey & Co. For M & As completed between , 97, average acquirer s stock was 3.7% lower than its industry peer group one year after the deal. -PricewaterhouseCoopers LLP In a study of 700 big deals between , 98, 83% of M&As did not boost shareholder value, and 53% actually reduced shareholder value. -KPMG International PSI P x S x I 4

5 VALUE CAPTURE One time shift in value Transaction-based VALUE CREATION Long-term Based on Managerial actions CENTERS OF VALUE CREATION CORPORATE HQ BUSINESS 1 BUSINESS 4 BUSINESS BUSINESS 2 3 5

6 The Concept of Parenting Advantage Definition The ability to create more value than any other parent could for the same set of businesses. Tests Aggregate > Independent Aggregate > Rivals Sources of Parenting Advantage Value Creation Insights Distinctive Parenting Characteristics Heartland Businesses 6

7 Value Creation Opportunities Revenue Synergies Cost Similar Relationship Complementary Value Creation Opportunities Synergies Revenue Cost Market power Critical mass Service bigger customers Take out a competitor Lower risk improves CoC Prestige attracts talent Economies of scale Lower overhead Better capacity utilization Full product line Bundling Cross-selling One-stop shop Reputation Distribution for products Learning opportunities Lower overhead Lower risk improves CoC Financial discipline Similar Relationship Complementary 7

8 How Eaton beats the odds: The Pricing Challenge Eaton s Solution Specific Actions Discount sales synergies significantly to predict, easy to overestimate hard Disciplined Pricing Process Thoroughly execute cost synergies substantiated through due diligence Corporate Development & Planning reinforces objectivity, balances an enthusiastic operating team Buy-in & accountability from deal champion a senior person from relevant Group signs off on the numbers, and accepts the challenge of meeting them (linked to compensation) Price is what you pay value is what you keep & create Pi Price Seller expectation driven, but ultimately market based Negotiated exchange of value Affected by one side s position of strength find the win-win to avoid the winner s curse Vl Value The B-School tools In depth understanding of value drivers Thorough due diligence, leading to a conservative and realistic valuation 8

9 Lessons from Quaker-Snapple History counts! We virtually built Gatorade from scratch. We had double-digit growth and an 80% market share despite Coke and Pepsi. People used to say about Coke and Pepsi they will bury you but we survived. They couldn t beat us, so they bought us. Beware of negative transfer Snapple Image drink Quirky marketing of cult drink Entrepreneurial distributors Gatorade Fluid replacement product Classic marketing Warehouse system Problems in due diligence [Quaker] just didn t know our business. Don t lose tacit knowledge I was the Executive Vice President in charge of nothing Lessons from Sony Pictures Entertainment History counts! Betamax redux! Cultural differences hurt Sony Buying software Japan Sony! Columbia Pictures Finding a Sugar Daddy Hollywood Big talk big money Don t pay too much Foreign buyers phobia 9

10 Lessons from Citi Travelers History counts! Sandy builds empires, and wanted to do it again But, strategy of cross-selling traditionally not successful One stop shopping Customers must prefer convenience to price and privacy Top companies tend to be category killers more than department stores Culture clash between investment/commercial, insurance/banking, etc. The hype factor The short, and unhappy, life of Co-CEOs STAND-ALONE ALONE INFLUENCE 10

11 LINKAGE INFLUENCE 11

12 CENTRALIZED FUNCTIONS AND SERVICES VALUE CREATION STATEMENT Value Creation (present value) XX Less: Cost of realizing synergies Premium paid Transaction costs XX XX XX Net Value Creation After Acquisition XX Extraordinary Items Reduction in vulnerability to other competitors XX Opportunity cost of buying rather than making XX Present value of expected change in value of assets over time XX XX Bottom Line XX 12

13 The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do... a too high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments. Warren Buffett, Chairman, Berkshire Hathaway Critical First Steps First payroll Bill Walsh Football Strategy Integration teams and champions SWAT team or person Find the gems and keep them! Communication 13

14 Date What Happens Announcement date (Day -60) Acquired company CEO announces acquisition to her employees. Welcome to the team coffee mugs distributed to employees of acquired company. List of contact names from Cisco, with phone numbers and , distributed to employees (often includes Cisco top management contact coordinates as well). Detailed comparison of benefits package from Cisco and acquired company distributed to employees. Cisco integration people on acquired company premises to answer questions Day -40 Outsourcing arrangements, if necessary, in place Plan for sales force integration in place Day -30 Job assignments for acquired company employees in place Closing date (Day 0) New employee IDs and business cards distributed Day 7 Computer system switchover to Cisco 14

15 Seven Important Lessons on Value Creation in Mergers 1. All mergers are different. 2. Develop a merger scorecard. 3. Don t let deal breakers disrupt integration. 4. All synergies are not created equally. 5. Don t forget about transferring tribal knowledge across companies. 6. Mergers can create critical stakeholder vulnerabilities. 7. People want to be part of a winning organization. Final Integration Takeaways: Set Yourself Up to Win If you lose here, forget about it! Integration depends on strategy No substitute for early agreement on strategic rationale Make sure to have integration talent on hand and ready Details are the foundation of solid planning 15

16 Final Integration Takeaways: Keys to Effective Execution Integration is specialized change management Dedicate adequate resources to change programs But do not allow change programs to dull sensitivity to customer needs Frequent recalibration, with meeting of entire team Communicate, communicate, communicate Capture integration learning Think SYD Speed Yncentives Driven by champion 16