mergers & acq
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MERGERS AND ACQUISITIONS AS A BUSINESSSTRATEGY IN SOUTH-EAST ASIA
By Nicholas R. H. Bloy
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Kindly direct all questions/enquiries to:
The Boston Consulting GroupLevel 27, Menara IMC, 8 Jalan Sultan Ismail
50250 Kuala LumpurTel: 603 - 238 5770 Fax: 603 - 238 5784
INTRODUCTION TO SPEAKER
Nicholas R. H. BloyPartner
The Boston Consulting Group
Mr. Bloy, who founded the practice of The Boston Consulting group in South-East Asia in 1990, is Head ofBCGs Asia (non-Japan) Marketing Committee, Head of BCGs Asia (non-Japan) Energy and Utilities practice andHead of BCGs Kuala Lumpur office. He started in consulting in 1987 and has worked in Boston, London,Munich, Sydney, Hong Kong and Kuala Lumpur. Mr. Bloy is also a visiting lecturer at the London School ofEconomies. Since the beginning of the 90s Nick has spent significant time in Malaysia advising privateMalaysian conglomerates, state-owned entities and multinational companies on issues of direction andperformance.
He has worked on a broad range of strategic issues in Europe, the United States, Latin America and Asia. Thiswork has covered industry sectors such as oil & gas, consumer goods, cement, energy, utilities, engineering,media, airline, steel, construction materials, financial services, printing, food & drinks and telecommunications.Project assignments have included areas of process reengineering, strategy development, portfoliorestructuring, diversification strategy, mergers and acquisitions, new product development, organisationaleffectiveness, value-based management and privatisation.
Prior to going the business school, Mr. Bloy worked with Citicorp.
Mr. Bloy obtained an MBA with Deans List Honours from INSEAD and a BA with Honours in French Language
and Literature from University College of London.
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M&A ACTIVITY - A HUGE AND GROWING PHENOMENONHowever, Asia Lags
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176155154182
229
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$Bn $Bn
Global M&A deal volume has grown at 28% p.a. since 1992 (1)
CAGR = 27.6% CAGR = 7.9% CAGR = 9.2%
(1) Fortune magazineSource: Securities Data Corp; Asia Inc.
SEA
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TRANSACTION SIZE IS INCREASING DRAMATICALLY
2326
34 36
22
42
33
80
30
60
14.3
BellAtlantic/Nynex
KKR/RJR
Nabisco
UBS/SBC
Sandoz/Ciba
NatiousBank/ Bank
America
Worldcom/MCI
Travelers/Citicorp
Banc One/First
Chicago
Mitsui/TaiyoKafe
MitsubishiBank/BOT
Glaxo/Wellcome
Financial Services
Telecoms
Pharmaceuticals
Others
Late1980s 1995 1996 1997
Source: Asian Wall Street Journal; securities Data company; BCG analysis
1 Q 1998
Deal Value (US $bn)
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ONLY FOUR INDUSTRIES ACCOUNT FOR~55% OF TRANSACTION VALUE
Cross-Border
Domestic(estimates)
Top 100 Deals From 1995 to 1997(1)
FinancialServices
Pharmaceuticals Telecom Defence/Aerospace
Other
(1) Top 100 deals annually, cumulative total from 1995 to 1997; estimates for domestic deals based on split of Top 10 deals 1990-96Source: Securities Data Corp; BCG estimates and analysis
Deal Value(US $bn)
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HOWEVER, ASIAN MIX MORE SKEWED TO FINANCIAL SERVICES
Cross-Border
Domestic
Top 50 Asian M&A Deals(1)
FinancialServices
Telecom Transportation Other
(1) Top 50 deals annually, cumulative total from 1996 and 1997Source: Asia, Inc.; BCG analysis
Deal Value(US $bn)
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DIFFERENT TYPES OF DEAL AND VALUE LOGIC
Acquirer/Acquire RelationshipOverlapping businesses
Complementary businesses Geographic expansion Product line extension
New customer segments Different part of value
chain Transfer of capabilities to
different business
Source of Value
Cost reductionProcess enhancementThroughputimprovement
Revenue growthAsset growthProcess enhancement
InternationalExamples
Boeing/ McDonnelDouglas
Glaxo/Wellcome
Salomon/SmithBarney
HansonTrust/Numerous
MalaysianExamples
RHB/Sime
Finance
Companies
Commerce/MBf
Renong/ Cima
Geographies Customers Product lines
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EXAMPLES FROM THE BANKING INDUSTRY
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Other Sources(1)
BANK MERGERS REDUCE COSTS BY AVERAGE OF 15%
(1) First Manhattan; Chemical - MHT experience, BCG analysis(2) NIE: Non Interest Expense
3.5
4.5
12.0
8.0
2.0
3.5
1.0
1.0
1.5
15.0
Other
HR
Sales-Mktg
Central
Opns
ITDevelopmentandOperations
Branch
Network/CustomerService
Year 1Month 6
Year 2Month 12
Year 3Month 18
Year 4Month 24
SlowFast
Cost Savings(% of combined NIE)(2)
Cost Savings(% of combined NIE)(2)
5.5
5.3
3.5
1.6
10.0
5.0
1.2
0.5
17.5
Treasury
Year 1 Year 2 Year 3
Trust
Corporate
Retail
Operationsand Systems
Other
SupportAreas
BCG Experience
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Slope = 89%
10
100
1,000
1,000 10,000 100,000 1,000,000
MORTGAGE SERVICING SHOWS SCALE BENEFITS
Direct Cost/LoanServiced ($US)
Number OfLoans Serviced
Note: Log scaleSource: Inside Mortgage Finance; BCG analysis
Mortgage Servicing
(Unit Cost Per Loan)
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THERE ARE SIGNIFICANT SCALE EFFECTS IN CASH HANDLING
Cash Handling Scale
(FTE Cost Per Cash Volume)
Source: BCG client experience
Annual VolumeOf Cash Centre
(Log Scale)
FTEs Per BnCounted
(Log Scale)
Slope = 81%
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IT DATA CENTRES SHOW SCALE EFFECTData Processing Example : USA Example of MVS(1) Environment
Unit Cost(US$K/MIPS)
Data Centre Size(MIPS)
(1) MVS: IBM Operating System for Mainframes, typical Legacy SystemSource: BCG experience
10
100
1000
1 10 100 100020
Slope = 89%
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IT IS CHEAPER PER ACCOUNT TO PROMOTE LARGER BRANDS
Note: Log scaleSource: Mori; MEAL; BCG analysis
Brand Advertising(Index, UK Retail Banks, 1995)Index of brandadspend percurrent accountcustomer
Index of number ofcurrent accounts
Slope = 65%
1
10
100
0.1 1 10
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COST SAVINGS POTENTIAL VARIES BYTYPE OF COST AND MERGER PROXIMITY
Estimated Non-Interest Expense Savings
Type of Mergers
Out-of-MarketContiguousIn-MarketArea of the Bank
5%
15%
40%
15%
15%
10%
15%
10%
25%
50%
20%
40%
25%
25%
20%
30%
55%
25%
60%
30%
35%
Branches
Operations
Systems
Trust
Indirect Overhead
Other
Weighted Average
Source: Bottom Line Banking; First Manhattan Consulting Group
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26 vulturesin 1982
12 turkeys(stock prices~15% lower
than their peergroup)
8 dead ducks(stock prices~25% lower
than their peergroup)
6 eagles(stock priceshigher thantheir peer
group)
9 stagnantbanks
12 banks wereacquired
5 superregionals
WHAT HAPPENED TO THE VULTURES OF 1982?The 26 Most Acquisitive Of The Top 250 US Banks Of 1982
Source: BAI
1982 - 1984
1982 - 1989
1982 - 1989
Annu al asset growth 7.5% - 28% 9.5%
1982 - 1989
Tota l stock pr ice growth 24% - 236% 205%
Top 250 banks
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IN THE SHORT RUN, VALUE TRANSFERREDTO THE TARGET SHAREHOLDERS
Cumulative Abnormal Returns*(%, 1982-1987)
*Cumulative daily market returns (capital gains and dividends) in excess of the total market return (Wilshire Index -1982-87; NYSE Composite Index - 1995)Source: SNL Securities (19 Megamergers >$500m deal value); Journal of Financial Services Research 10/89; BCG analysis
15 daysbefore
4 daysbefore
2 daysbefore
1 daybefore(15)
(10)
(5)
0
5
10
15
Day ofannounce-
mentTarget
Acquirer
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OVER THE LONG RUN, SOME OF THE LOST VALUE IS CLAWED BACK
Cumulative Stock PricePerformance*- Major US Mergers**
(%, 1991-96)
*Annual stock appreciation versus SNL Bank Index appreciationExcess ReturnT = { [Stock priceT - Stock PriceT-1] X100/Stock PriceT-1} - { [SNLT - SNLT-1] X100/SNLT-1}**Bank America - Continental, BoA-SecPac, Chem-MHC, Chem-Chase, Comerica-Manuf National, First Chicago-NBD, FirstUnion-First Fidelity, Fleet-BoNE, Keycorp-Society, NCNB-C&S-Sovran, Society-Ameritrust, Wells-First InterstateSource: SNL Securities; BCG analysis
MergedEntity
Acquiring
Entity
2 Years Prior 1 Year Prior Announce-ment Year
1 Year Post 2 Years Post 3 Years Post0
20
40
60
80
100
120
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0.7
0.8
0.9
1
1.1
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60
THE EUROPEAN EXPERIENCE IS EVEN MORE MARKED(1)
(Index, Base = 1 at 12 Months Prior To Announcement)
Note: Data not available for all mergers for whole period (-12-60)(1) Performance relative to relevant bank index for Banco: Central-Banco de Vizcaya, Banci di Roma - Banco di Spirito, ING, ABN-AMRO,
Lloyds - TSB, Den Danske - Hadlesbank - ProvensbankenSource: Various European Stock Exchanges; Tradeline
Announcementmonth
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MOST MAJOR ACQUIROR STOCK PRICES DROPRELATIVE TO THEIR NON-ACQUIRING PEERS
After1 year
After2 years
After3 years
After4 years
After5 years
After6 years
010
20
30
40
50
60
70
80
90
100Stock price ofacquirors: relativeto peer average (%)(peer average =100)
Source: BAI
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HALF OF ALL ACQUISITIONS ARE CONSIDEREDUNSUCCESSFUL
Tracking Study on US Acquisition Performance
272 Acquisitions
52%
48%
Success
Failure
Source: Harvard Business School; BCG analysis
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WHY DO ACQUISITIONS FAIL?
BCG Global Survey Warren Buffet Self-Assessment
The thrill of the chase blinded pursuers
to the consequences of the catch
Warren Buffet,
Berkshire Hathway Annual Report
Top 10 Reasons For Merger/AcquisitionFailure
Post-merger integrationpoorly planned and executed
78%
64%
55%
54%
30%
28%
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MALAYSIAN CONTEXT
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LOW M&A ACTIVITY IN MALAYSIA GIVEN ABSENCE OFWILLING BUYERS AND WILLING SELLERS
Inflated asset value Too expensive to buy Few constraints onfunding growth
No need to sell
High liquidity/low cost of capital Equity markets
- stock market cap + 35% (1992-1996) Commercial debt
- loan growth + 54% CAGR (1992-1996) Real cost of capital (at 50:50)
- 7.5%
Littlegrowth
from M&A
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BECAUSE HISTORIC MARKET VALUES HAVE BEEN HIGH, LITTLETRANSACTION ACTIVITY HAS BEEN OBSERVED
1997 M&A Deal values as % of GDP
1.3
5.5
12.5
0
2
4
6
8
10
12
14
US Europe Asia
Value/Ton of Industrial Commodity Product
0
100
200
300
400
500
600
700
1992 1993 1994 1995 1996
MarketValue
DCFValue
GreenfieldCost
%Example from Client work
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Liquidity has dried up . . .
UNDERLYING M&A DYNAMICS HAVE REVERSED IN MALAYSIA
0
100
200
300
400
500
600
700
800
900
1990
1991
1992
1993
1994
1995
1996
1997
1998
StockMarket
Cap
LoanGrowth
MarketValue
DCFValue
GreenfieldCost
RM (billion)
0100
200
300
400
500
600
700
800
900
1992
1993
1994
1995
1996
1997
1998
Value/Ton of Industrial Commodity Product
Example from Client work
. . . Leading to a realignment of values
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DIFFERENT MIX OF TRANSITIONS IN MALAYSIA DEPENDINGON COMMERCIAL SECTOR AND NATURE OF OWNERSHIP
Domestic Cross-BorderTransactions
Telecoms
Cement/Steel/OtherIndustrial Commodities
Property
ConglomerateBreak ups
FinancialServices
Timber
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ORGANISATIONAL PORTFOLIO AND OPTIONS
Value
MarketPosition
Build
Business Unit Strategy Products Customers Delivery systems Capabilities Organisation Processes Etc
Merchant Banks, Accountants, Lawyers
Strategy Consultants and/or Merchant Banks
Strategy Consultants
PerformanceImprovement
Plan
Acquisition Search /Prioritisation
Strategic Due Diligence
Valuation
Negotiation
Post-mergerintegration
AcquirerSearch
Accounting / LegalDue Diligence
TransactionMechanisms
Acquire
Divest
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CAVEAT EMPTOR
Extraordinary opportunities for cash-rich companies . . .
. . . but
M&A is a subset amongst a firms strategy options M&A is risky
M&A requires professional advice
- strategy consultants
- merchant banks
- lawyers
- accountants