4.3. Strategy MC13: M&A Path

Question 1

Mergers and Acquisitions (M&A)

Answer 1

Mergers and Acquisitions involve the combination of two (or more) organizations.

Merger = the combination of two previously separate organizations in order to form a new company

Acquisition = is achieved by purchasing a majority of shares in a target company

Question 2

Hostile acquisitions

Answer 2

= where the target’s management recommends refusing the acquirer’s offer

e.g. Kraft’s acquisition of Cadbury

Question 3

Friendly acquisitions

Answer 3

= where the target’s management recommends accepting the acquirer’s deal

e.g. Marriott’s acquisition of Starwood

Question 4

Main types of M&A(4):

Answer 4

• Horizontal acquisition = horizontal mergers = involve gaining market share through consolidation. Both companies should be operating in the same space, providing more or less the same products and services.
• Vertical acquisition = an acquisition between 2 companies that operate at different stages of the supply chain. E.g. a manufacturer might acquire a supplier or distributor. The goal of a vertical merger is often to improve efficiency and reduce costs by streamlining the supply chain.
• Conglomerate acquisition = an acquisition between two companies that operate in unrelated industries. The goal of a conglomerate merger is often to diversify the acquiring company’s business and reduce risk.
• Asset acquisition = a type of M&A, where the acquiring company purchases specific assets of the target company (such as a particular product line or intellectual property), rather than acquiring the entire company.

Question 5

Motives for M&A
strategic
financial
manegerial

Answer 5

Strategic:
-Extension(geography, products, markets)
-Consolidation (increase sale efficiency/market powe)
-Capabilities(enhancing techn know-how)

Financial:
-Financial efficiency (merge of company with cash rich with high debt)
-Tax efficiency(reducingcombined tax burden)
-Asset stripping or unbundling (selling off bits of acquired company to maximise asset values)

Manegerial:
personal ambitions (finance, media attention)
Bandwagon effect(after other makes first move, shareholder critics, fear of becoming target of hostile bid)

Question 6

M&A can support growth strategy in various ways

Answer 6

• Accelerate growth
• Increase market share
• Diversify business
• Create synergies
• Access to new technology

Question 7

Pros & Cons of M&As

Answer 7

Pros:
* Can enhance speed of strategy delivery
* Can keep ahead of competition & prevent them from acquiring the target
* Can give “instant” access to new geographies and/or customers
* Synergies can increase efficiency & reduce costs

Cons:
* All or nothing commitment – no way back
* Large upfront investment
* Potential culture clash
* Negative synergies can arise, due to overlapping customer bases, etc.
* Management time sink

Question 8

Top reasons why M&A deals fail

Answer 8

• Mistakes during deal process
• Misvaluation, including synergies
• Negotiation errors
• Mistakes related to management and integration process
• Unclear strategy and objectives
• Unclear governance and decision-making structures
• Poor cultural fit
• Poor integration process
• Lack of trust amongst parties
• Lack of commitment amongst management

Question 9

Life cycle of an M&A deal
Name the steps:

Answer 9

1. Acquisition Strategy: (Lack of strategy leads to hazardous side effects on M&A projects!)
   - What problems are you trying to solve with this growth path?
   o Gain access to new technology or resources and capabilities
   o Acquire talent or new expertise
   o Increase or protect market share
   o Achieve economies of scale and synergies
   o Access new markets
   o Diversify the business
   o Acquire new product or service
   - Key missing elements frequently leading to failure:
   o Human Resources: insufficient resources allocated to the M&A deal
   o Financial goals: synergies are overstated
   o Risk tolerance
   o Timeframe: the deal could take longer than expected
2. Acquisition Criteria:
   - Determine key criteria for identifying potential target companies
   o Size
   o Geographic location
   o Revenue and earnings growth
   o Customer base
   o Unique assets: technology, expertise, talents
   o Financing constraints
   o Assets or shares
   o Complete VS partial acquisition
3. Searching for Target
   - 3 main criteria apply:
   o Willingness to sell (to us): is the owner willing to sell their business? Are we the only ones interested?
   o Strategic fit: does the target firm strengthen or complement the acquiring firm’s strategy? (N.B. potential synergy is often over-estimated, as negative synergies are often neglected)
   o Organizational fit: is there a match between the management practices, cultural practices and staff characteristics of the target firm and the acquiring firm?
4. Acquisition Planning:
   - The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is
5. Valuing & Evaluating:
   - Acquirer asks target company to provide substantial information that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target
6. Negotiation:
   - After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer. Once the initial offer has been presented, the two companies can negotiate terms in more detail
7. Due Diligence:
   - DD is an exhaustive process that begins when the offer has been accepted; DD aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations
8. Purchase & Sales Contract:
   - Assuming due diligence is completed with no major problems or concerns arising, the next step is executing a final contract for sale; the parties make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase
9. Financing:
   - The acquirer will have explored financing options for the deal earlier in the process, but the details of financing typically come together after the purchase and sale agreement has been signed
10. Integration of the acquisition:
    - 2 key criteria are important for structural integration:
    o The extent of strategic interdependence – the need for transfer or sharing of capabilities and/or resources
    o The need for organizational autonomy – sometimes the distinctiveness of the acquired company can be an advantage, but sometimes it is problematic

Question 10

Post acquisition integration matrix

Answer 10

zie figure 11.3 op pagina 37