strategies for mergers and acquisitions - … for mergers and acquisitions sydney finkelstein tuck...
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Strategies for Mergers and AcquisitionsStrategies for Mergers and Acquisitions
Sydney FinkelsteinSydney FinkelsteinTuck School of Business at DartmouthTuck School of Business at Dartmouth
Telephone: (603) 646Telephone: (603) 646--28642864Fax: (603) 646Fax: (603) 646--13081308
[email protected]@dartmouth.edusyd ey. e s e @d ou .edusyd ey. e s e @d ou .eduwww.tuck.dartmouth.edu/thinkagainwww.tuck.dartmouth.edu/thinkagain
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Net Merger and Acquisition Deals 1963-2007
12,000
2 000
4,000
6,000
8,000
10,000
Num
ber
of D
eals
0
2,000
1963
1965
1967
196 9
197 1
1973
1975
1977
1979
1981
1983
1985
198 7
198 9
199 1
199 3
199 5
199 7
199 9
200 1
200 3
2 005
2 007
Year
N
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Inflation-Adjustment Dollar Value of M&As (Year 2007 Billions of Dollars)
400
600
800
1000
1200
1400
1600
0
200
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Year
A GoodA Good--Looking Merger Doesn’t Guarantee Great ResultsLooking Merger Doesn’t Guarantee Great Results
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Stock price of acquirers from 1997Stock price of acquirers from 1997--99 trailed S&P 500 by 14 percentage 99 trailed S&P 500 by 14 percentage points, peer group by 4 points, after deals were announcedpoints, peer group by 4 points, after deals were announced
--Salomon Smith BarneySalomon Smith Barney
Over ten years only 23% of mergers recover the costs incurred in the dealOver ten years only 23% of mergers recover the costs incurred in the deal
ARE M&As PROFITABLE?
Over ten years, only 23% of mergers recover the costs incurred in the deal.Over ten years, only 23% of mergers recover the costs incurred in the deal.--McKinsey & Co.McKinsey & Co.
For M & As completed between 1994For M & As completed between 1994--97, average acquirer’s stock was 97, average acquirer’s stock was 3.7% lower than its industry peer group one year after the deal.3.7% lower than its industry peer group one year after the deal.
--PricewaterhouseCoopers LLPPricewaterhouseCoopers LLP
In a study of 700 big deals between 1996In a study of 700 big deals between 1996--98, 83% of M&As did not boost 98, 83% of M&As did not boost shareholder value and 53% actually reduced shareholder valueshareholder value and 53% actually reduced shareholder valueshareholder value, and 53% actually reduced shareholder value.shareholder value, and 53% actually reduced shareholder value.--KPMG InternationalKPMG International
PSIPSI
P x S x IP x S x I
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VALUE CAPTUREVALUE CAPTURE
One time shift in valueOne time shift in valueTransactionTransaction--basedbased
VALUE CREATIONVALUE CREATION
LongLong--termtermBased on Managerial actionsBased on Managerial actions
CENTERS OF VALUE CREATIONCENTERS OF VALUE CREATION
CORPORATE
HQ
BUSINESS BUSINESSBUSINESS
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BUSINESS
2
BUSINESS
3
BUSINESS
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The Concept of “Parenting Advantage”The Concept of “Parenting Advantage”
DefinitionDefinition
•• The ability to create more value than any The ability to create more value than any other parent could for the same set of other parent could for the same set of businesses.businesses.TestsTests
•• Aggregate > IndependentAggregate > Independent•• Aggregate > RivalsAggregate > Rivals
Sources of Parenting AdvantageSources of Parenting Advantage
•• Value Creation InsightsValue Creation Insights•• Distinctive Parenting CharacteristicsDistinctive Parenting Characteristics•• Heartland BusinessesHeartland Businesses
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Value Creation OpportunitiesValue Creation Opportunities
RevenueRevenue
CostCost
Syne
rgie
sSy
nerg
ies
SimilarSimilar Complementary Complementary RelationshipRelationship
CostCost
Value Creation OpportunitiesValue Creation Opportunities
Market powerCritical massService bigger customersT k t tit
Full product lineBundlingCross-sellingO h
CostCost
RevenueRevenue
Syne
rgie
sSy
nerg
ies Take out a competitor
Lower risk improves CoCPrestige attracts talent
Economies of scaleLower overhead
One-stop shopReputationDistribution for productsLearning opportunities
Lower overheadLower risk improves CoC
SimilarSimilar Complementary Complementary RelationshipRelationship
CostCostBetter capacity utilization Financial discipline
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How Eaton beats the odds: The Pricing ChallengeHow Eaton beats the odds: The Pricing Challenge
Eaton’s SolutionEaton’s Solution Specific ActionsSpecific Actions
Discount sales synergies significantlyDiscount sales synergies significantly –– hardhard
Disciplined Disciplined Pricing ProcessPricing Process
Discount sales synergies significantlyDiscount sales synergies significantly –– hard hard to predict, easy to overestimateto predict, easy to overestimate
Thoroughly execute cost synergies Thoroughly execute cost synergies ––substantiated through due diligencesubstantiated through due diligence
Corporate Development & Planning Corporate Development & Planning ––reinforces objectivity, “balances” an enthusiastic reinforces objectivity, “balances” an enthusiastic operating teamoperating team
BuyBuy--in & accountability from deal champion in & accountability from deal champion –– a senior person from relevant Group signs off a senior person from relevant Group signs off on the numbers, and accepts the challenge of on the numbers, and accepts the challenge of meeting them (linked to compensation)meeting them (linked to compensation)
Price is what you pay Price is what you pay ––value is what you keep & createvalue is what you keep & create
P iP i V lV lPricePrice ValueValueSeller expectation driven, Seller expectation driven, but ultimately market but ultimately market basedbasedNegotiated exchange of Negotiated exchange of valuevalue
The BThe B--School toolsSchool toolsIn depth understanding In depth understanding of value driversof value driversThorough due diligence, Thorough due diligence, leading to a conservativeleading to a conservative
Affected by one side’s Affected by one side’s position of strength position of strength ––find the winfind the win--win to avoid win to avoid the winner’s cursethe winner’s curse
leading to a conservative leading to a conservative and realistic valuationand realistic valuation
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Lessons from QuakerLessons from Quaker--SnappleSnapple
• History counts!“We virtually built Gatorade from scratch. We had double-digit growthand an 80% market share despite Coke and Pepsi. People used to say about Coke and Pepsi ‘they will bury you’ but we survived Theyabout Coke and Pepsi – ‘they will bury you’ – but we survived. Theycouldn’t beat us, so they bought us.”
• Beware of negative transferSnapple Gatorade“Image” drink “Fluid replacement product”Quirky marketing of cult drink Classic marketingEntrepreneurial distributors 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 EntertainmentLessons from Sony Pictures Entertainment
• History counts!Betamax redux!
• Cultural differences hurtSony Columbia PicturesBuying software Finding a Sugar DaddyJapan HollywoodSony! Big talk – big moneySony! Big talk big money
• Don’t pay too much• Foreign buyers phobia
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Lessons from Citi TravelersLessons from Citi Travelers
• History counts!Sandy builds empires, and wanted to do it againBut, strategy of cross-selling traditionally not successful
• One stop shoppingCustomers must prefer convenience to price and privacyTop companies tend to be category killers more than
department stores Culture clash between investment/commercialCulture clash between investment/commercial,
insurance/banking, etc.• The “hype” factor• The short, and unhappy, life of Co-CEOs
STANDSTAND--ALONE INFLUENCEALONE INFLUENCE
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CENTRALIZED FUNCTIONS AND SERVICESCENTRALIZED FUNCTIONS AND SERVICES
Value Creation (present value)Value Creation (present value) XXXX
VALUE CREATION STATEMENTVALUE CREATION STATEMENT
Less:Less: Cost of realizing synergiesCost of realizing synergies XXXXPremium paidPremium paid XXXXTransaction costsTransaction costs XXXX
Extraordinary ItemsReduction in vulnerability to other competitors XX
Net Value Creation After Acquisition XX
Opportunity cost of buying rather than making XXPresent value of expected change in value of assets over time XX XX
Bottom Line XX
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“The market, like the Lord, helps those who help “The market, like the Lord, helps those who help themselves But unlike the Lord the market does notthemselves But unlike the Lord the market does notthemselves. But unlike the Lord, the market does not themselves. But unlike the Lord, the market does not forgive those who know not what they do ... a too high forgive those who know not what they do ... a too high purchase price for the stock of an excellent company purchase price for the stock of an excellent company can undo the effects of a subsequent decade of can undo the effects of a subsequent decade of favorable business developments.”favorable business developments.”
——Warren Buffett, Chairman, Berkshire HathawayWarren Buffett, Chairman, Berkshire Hathaway
Critical First StepsCritical First Steps
First payrollFirst payrollFirst payrollFirst payrollBill Walsh Football StrategyBill Walsh Football StrategyIntegration teams and championsIntegration teams and championsSWAT team or personSWAT team or personFind the gems and keep them!Find the gems and keep them!Find the gems and keep them!Find the gems and keep them!CommunicationCommunication
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Date What Happens Announcement date (Day -60) Acquired company CEO announces acquisition to ( y ) q p y q
her employees. “Welcome to the team” coffee mugs distributed to
employees of acquired company. List of contact names from Cisco, with phone
numbers and email, 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 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
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Seven Important Lessons on Value Seven Important Lessons on Value Creation in MergersCreation in Mergers1.1. All mergers are different.All mergers are different.2.2. Develop a merger scorecard.Develop a merger scorecard.3.3. Don’t let “deal breakers” disrupt integration.Don’t let “deal breakers” disrupt integration.4.4. All synergies are not created equally.All synergies are not created equally.5.5. Don’t forget about transferring “tribal Don’t forget about transferring “tribal
knowledge” across companies.knowledge” across companies.g pg p6.6. Mergers can create critical stakeholder Mergers can create critical stakeholder
vulnerabilities.vulnerabilities.7.7. People want to be part of a winning organization.People want to be part of a winning organization.
Final Integration Takeaways: Set Yourself Up to Win
♦ If you lose here forget about it!♦ 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 planningp g
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Final Integration Takeaways: Keys to Effective Execution
♦ Integration is specialized change management♦ Dedicate adequate resources to change programs♦ 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