Mergers Detailed

8/7/2019 Mergers Detailed

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STRATEGIC MANAGEMENT OF MERGERSPresented & Modified by-

CA. Shrenik Chhabra

M.Com, ACA


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AGENDA

A. STRATEGIC MANAGEMENT

B. STEPS OF STRATEGIC MANAGEMENT

OF M&A

C. SOME DECISION STRATEGIES OF1. ACQUIRER

2. TARGET

3. CASE : ARCELOR MITTAL MERGER

D. FAILURE OF M& A1. MAJOR FACTORS

2. REASONS FOR FAILURE AT DIFFERENT STAGE

3. CASE : DAIMLER CHRYSLER MERGER


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Strategic management is an ongoing process that evaluates andcontrols the business and the industries in which the company is

involved; assesses its competitors and sets goals and strategies to meet

all existing and potential competitors; and then reassesses each

strategy annually or quarterly [i.e. regularly] to determine how it has

been implemented and whether it has succeeded or needs replacement

by a new strategy to meet changed circumstances, new technology, new

competitors, a new economic environment., or a new social, financial, or

political environment. (Lamb, 1984:ix)

Strategic management is the art and science of formulating,

implementing and evaluating cross-functional decisions that will enablean organization to achieve its objectives. Strategic management,

therefore, combines the activities of the various functional areas of a

business to achieve organizational objectives.

A. Strategic management


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Strategic management in case

of mergers will cover the

various things management

should consider during the

merger process.

It will also cover what all things

should the management do toget maximum out of the

mergers


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B. STRATEGIC MANAGEMENT OF

MERGERS

1. Integration process

2. Due Diligence

3. Organizational dynamics created by M&A

4. Organizing, involving coordinating task force

5. Honest communication

6. Retaining key people

7. Structure and staffing decision

8. Merger measurement

9. Cultural integration10. Human capital Integration and HR functions

11. Merger repair

12. Recommendation for success


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1.INTEGRATION

i. Motives

ii. Threats

iii. Impact of mergers

iv. Steps in Mergers

v. Stages of Mergers


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I. MERGER MOTIVES

Growth and diversification

Synergy

Fund raising

Increased managerial skill/technology

Tax consideration

Increased ownership liquidity

Defense against takeovers


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II. THREATS OF MERGERS..

Monopolizing of industry

Cost cutting through Lay-offs

Poor synergy realization

Induces complexity, duplication of people,processes and technology

There are various aspects which if not managedcarefully during a merger can become majorpitfalls, for example, issues of managing

Intellectual Property, human resourcesencompassing cultural diversity andperspectives, technology platforms, supply chainmanagement, product/service delivery channels,etc.


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III. IMPACT OF MERGERSANDACQUISITIONS

1. On workers or employee:

- layoffs

2. On top level management:

- clash of egos

- variation in culture3. On shareholders:

a) of acquiring firm-most affected, they are harmed by the same degree to which

target firm shareholders benefitted

b) of target firm-benefitted the most

-acquiring company usually pays a little excess than it what

should


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IV. STEPS IN M&A

1. Pre Merger

1. Assessment/Due Diligence

2. Negotiation

2. Merger1. Decision

2. Implementation

3. Post merger

1. Integration

Each stage is very critical from the point of

view of a merger.


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V. STAGES OF MERGER

1. Pre-merger stage: Both firms gather

information about the uncertain synergy gains of

merging. Information can be shared or kept

private.

2. Merger Stage: Managers of both firms decide

unilaterally (and sequentially) whether to merge.

Only when both firms agree to merge there is a

post-merger stage.

3. Post-Merger Stage: The two units of the new

firm decide unilaterally and simultaneously

whether to do an integration effort.


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2.DUE DILIGENCE

Literally means persistent application to ones work.

Detailed investigation process by an investor for the target

company business.

Influence decisions like direction of investment, choosing of

investment partner, disclosures etc

Persons involved : professional advisors,

financial/legal/operational professionals

Areas of due diligence :

1. Financial Due Diligence

2. Legal Due Diligence

3. Operational Due Diligence


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2.1.1 FINANCIAL DUE DILIGENCE

Examining the target companys historical,

current and prospective operating results, can be

worked out from following sources

1. Audited financial statements.2. Unaudited financial information

3. Financial information with stock exchanges

and regulators regulation(SEBI)

4. Tax returns5. Cash Flow Statements


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2.1.2 LEGAL DUE DILIGENCE

Involves the practices of addressing certain fundamentallegal issues which include good compliance practices as perthe Companys Act, SEBI Act, Income Tax Act and othercorporate legislations. Can be done from following sources:

1. Memorandum of Association

2. Target companys Prospectus

3. Documents filled with Registrar of companies

4. Tax returns and compliance service

5. Environmental law Compliance

6. Lending agreements , Covenants and borrowingpowers

7. Compliance with any special industry legislation

8. Labor agreements ,compensations

9. Pending litigation


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2.1.3 OPERATIONAL DUE DILIGENCE

Includes investigating the targets IPRs, its

productions, its sales and marketing effort, its

HR and other operational issues. They can be

taken by analyzing information from:

1. Newspaper and magazines reports ABOUT

THE TARGET

2. Information with trade association

chambers and regulatory bodies

3. Company journal, brochure & websites

4. Inputs from market, market experts,

suppliers & customers

5. Interviewing the employees, ex-employer etc


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2.2 CONDUCTING DUE DILIGENCE

There are 2 ways of conducting Due Diligence :

1. Data room method : large amount of data is presented

to interested party to study it

2. Questionnaire method: a questionnaire is put to

target company and on the basis further one to one

negotiations are done


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2.3 CONTENTS OF DUE DILIGENCE

REPORT

1. Corporate documents of the Company and

Subsidiary

2. Issue of Shares

3. Material Contracts and Agreements4. Litigation

5. Employees and related inormation

6. Immovable property

7. Taxation

8. Insurance and liability

9. Joint venture and collaboration agreement

10. Government regulations-


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3.1 ORGANIZATIONAL DYNAMICS

CREATED BY M&A

1. Aggressive financial targets

2. Short timeliness

3. Culture clashes

4. Politics and positions5. Restructuring & re-engineering

6. Communication issues

7. Employee motivation

8. Question about where to downsize

9. Retention of key personnel


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CONCEPTS OF CHANGE MANAGEMENT

Define clear leadership goals

Extensive communication

Tough decisions

Focus on customers

Manage resistance at every level


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5. COMMUNICATION MODEL FOR

MERGERS

Effective communication is made a priority

All messages linked to strategic objective of the

integration effort

Honest communication Proactive emphasis than reactive one

Messages should be consistent and repeated

Mechanism for two way feedback


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6.RETAINING KEY PEOPLE

Identify key people

Understand what motivates them

Why people stay- job content, level of

responsibility , company culture, salary Why people leave- low growth potential

Lack of challenge, lack of autonomy, work

environment issues, salary issues etc.


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7.STRUCTURE AND STAFFING

DECISIONS

Always a difficult one, politically and emotionally

charged, so some general principles to follow:

1. Begin with due decision analysis of HR

2. Act quick- the sooner, the better3. Communicate openly about staffing

decisions

4. Train hiring managers on steps of

responsible selection procedure5. Catch and correct mistakes

6. Start development and team building

process asap


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8.MERGER MEASUREMENT

Keeping a track of whether moving in right

direction on realizing the goals of deal

Identify the potential hot spots before they flare

OOC! Ensuring a smooth flow of information

Involving more people in integration process

Sending message about the new companys

culture Integration measures, operational

measures, process & cultural measures and

financial measures


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8.1 MEASUREMENT ..

Integration measure: whether the overall

integration approach is accomplishing its mission

of leading organisations through change?

Operational measures: tracking any potentialmerger related impact on day-to-day business-

sales, safety, consumers


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8.1 MEASUREMENT..

Process and culture measures: are the

business and management processes being

effectively redesigned and implemented?

Financial measures :Are we achieving the dealsynergies? eg classroom training, emailed

synergy kit.

Integration measured through:

1. Automated feedback channel- emails, confidential toll-

free hotlines and bulletin boards on a website

2. Targeted telephone surveys


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9 CULTURAL INTEGRATION

Most integration initiatives fall short of reaching their

goals during implementation stage and follow-up.

Organization culture comprises of : rules and policies, goals

and measures , rewards and recognition, staffing &

selection, Training & development, Ceremonies and event,Leadership behavior, communication, physical

environment .

The company should

1. recruit and promote service oriented candidates,

2. train the workforce in techniques of service3. Set goals that are based on service

4. Reward an recognize people for higher level of service


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10 HUMAN CAPITAL

INTEGRATION & HR FUNCTIONS

HR contribute strategically to enterprise wide

integration between manufacturing, finance,

R&D and marketing and sales

Support business group transition activities likestaffing& selection etc

Integrate new organisation and process


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11 MERGER REPAIR

You closed the deal over 2 years ago, but

organisation is still not operating as one

company. Merger repair refers to post deal

integration.


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YOU NEED A MERGER REPAIR

WHEN..

1. Service is suffering

2. Customers are confused and defecting

3. Performance targets have not been achieved

4. Stock prices falling5. Key integration activities are behind

schedule

6. Analysts comments

7. The organisation cannot handle additionalacquisition

8. Key executives and employees are leavingand many more.


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12.KEY TO M&ASUCCESS

Conduct due diligence analyses in financial and human

capital related areas

Determine require/desired degree of integration

Speedy(not reckless) decisions

Gain the support and commitment from senior managers

Clearly defined approach of integration

Select highly respectable and capable integration leader

Dedicated capable people for the integration core team and

task force Use best practices

Set measurable goals and objectives

Continuous communication and feed back


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C. DECISIONS STRATEGIES

1. For Acquirer :

a) If negotiations go successful- move on withimplementation step for friendly merger.

b) But if negotiations are not successful- Hostiletakeovers, Tender offers, Dawn Raid

2. For Target :

a) If happy with the deal , accept the offer OR

b) Negotiate the terms of Deal or

c) If the target finds the valuation to be very lowor if there is some unconscionable flaw in thedeal then they may reject the deal ,thendangers of hostile takeover arise.


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TACTICS OF ACQUIRER

1. Hostile TakeoverThis is an unfriendlytakeover attempt by acompany or raider that is

strongly resisted by themanagement and theboard of directors of thetarget firm. These types oftakeovers are usually badnews, affecting employee

morale at the targetedfirm, which can quicklyturn to animosity againstthe acquiring firm


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TACTICS OF ACQUIRER

Tender offer :An offer topurchase some or all ofshareholders' shares in acorporation. The priceoffered is usually at a

premium to the marketprice. Tender offers may befriendly or unfriendly.Securities and ExchangeCommission laws requireany corporation or

individual acquiring 5% ofa company to discloseinformation to the SEC,the target company andthe exchange


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TAKEOVER DEFENSES BY

TARGET CO.1. Golden Parachute

This measure discourages an unwanted takeover by offering lucrative benefits

to the current top executives, who may lose their job if their company is taken

over by another firm. Benefits written into the executives contracts include

items such as stock options, bonuses, liberal severance pay and so on. Golden

parachutes can be worth millions of dollars and can cost the acquiring firm a

lot of money and therefore act as a strong deterrent to proceeding with their

takeover bid.

2. Shark Repellent :Any one of a number of measures taken by a company to

fend off an unwanted or hostile takeover attempt. In many cases, a company

will make special amendments to its charter or bylaws that become active

only when a takeover attempt is announced or presented to shareholders with

the goal of making the takeover less attractive or profitable to the acquisitivefirm.


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3. Leveraged recapitalization : Payment of large debt

financed dividend. This strategy increases the firms financial

leverage, thereby deterring takeover attempt.

4. Macaroni Defence

This is a tactic by which the target company issues a large

number of bonds that come with the guarantee that they will be

redeemed at a higher price if the company is taken over. Why is

it called macaroni defense? Because if a company is in danger,the redemption price of the bonds expands, kind of like

macaroni in a pot! This is a highly useful tactic, but the target

company must be careful it doesn't issue so much debt that it

cannot make the interest payments.

5. People Pill : Here, management threatens that in the event of

a takeover, the management team will resign at the same time

en masse. This is especially useful if they are a good

management team; losing them could seriously harm the

company and make the bidder think twice


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7. Poison Pill

With this strategy, the target company aims at making its own stock less attractive to

the acquirer. There are two types of poison pills. The 'flip-in' poison pill allows existingshareholders (except the bidding company) to buy more shares at a discount.. The

goal of the flip-in poison pill is to dilute the shares held by the bidder and make the

takeover bid more difficult and expensive.

The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a

discounted price in the event of a merger. If investors fail to take part in the poison pill

by purchasing stock at the discounted price, the outstanding shares will not be dilutedenough to ward off a takeover.

An extreme version of the poison pill is the "suicide pill" whereby the takeover-target

company may take action that may lead to its ultimate destruction.

8. Sandbag

With this tactic the target company stalls with the hope that another, more favorablecompany (like a white knight) will make a takeover attempt. If management

sandbags too long, however, they may be getting distracted from their responsibilities

of running the company.


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9. White Knight

This is a company (the good guy) that gallops in to make

a friendly takeover offer to a target company that is facinga hostile takeover from another party (a black knight).

The white knight offers the target firm a way out with a

friendly takeover.

10. Scorched Earth Policy :An anti-takeover strategy that

a firm undertakes by liquidating its valuable and desiredassets and assuming liabilities in an effort to make the

proposed takeover unattractive to the acquiring firm.


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CASE ARCELOR-MITTAL MERGER

In January 2006, Mittal Steel launched a $22.7

billion offer to Arcelors shareholders. The deal

was split between Mittal Shares (75 percent)

and cash (25 percent). Under the offer, Arcelor

shareholders would have received 4 Mittal

Steel shares and 35 euros for every 5 Arcelorshares they held.

The steel industry is highly fragmented, the

top 5 manufacturers in the steel industry

account for less than 25 percent of the

market (to put that in perspective, thecorresponding figure for the automotive

industry is 73 percent). LN Mittal believes

that the consolidation will end with three of

four major companies dominating the

industry around 2010.


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THE CONTROVERSY??

Arcelor Management: The management believed that Arcelor itselfwould have been doing the acquisitions and not the other way around.The management was extremely hostile to Mittal Steels bid from thebeginning. Arcelor repeatedly played the patriotic card in order forshareholders to reject the bid. Guy Dolle the CEO of Arcelordismissed Mittal Steel as a company of Indians and unworthy oftaking over a European company. (all this despite the fact that most

industry analysts and investment banks pointing out that the dealwas in Arcelors best interests)

The French government (despite not being a shareholder) was againstthe deal because of worries over its 28000 Arcelor employees. Despiterepeated assurances from Mittal that the deal would not lead tolayoffs the government of France was never convinced. The

government of Luxembourg (a stakeholder) was against the deal aswell for a variety of reasons. The European Union approved of theMittal-Arcelor deal.


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THE STANCE OF THE INDIAN

GOVERNMENT

Most Indians were of the opinion that the dealwas not getting pushed through because ofLakshmi Mittals Indian nationality. The Indiangovernment raised the issue at several forums

especially through commerce minister KamalNath. It was also alleged that India hadthreatened not to ratify a taxation accord withLuxembourg due to the latters opposition to thedeal.

The irony is that LN Mittal himself felt thatthere was no case ofracism here as Mittal Steelwas a European company and NOT an Indianone.


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AND THE OUTCOME WAS

The deal was finally clinched when the

shareholders of Arcelor agreed to Mittal Steels

offer ending the transaction that had dragged on

for months.

Mittal had to however considerably sweeten the

initial offer. Under severe pressure to

counteract the Arcelor- Severstal merger, Mittal

had to raise its valuation of Arcelor to $32.9

billion. The Mittal family holds 43 percent of thecombined group. The combined company holds 10

percent of the global market for steel. The

consolidation phase is well and truly underway .


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WORKOUT INFERENCE ON.

1. Strategy adopted by Arcelor

2. Strategy adopted by Mittal.


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SOME TERMS

Tender offer

Poison pill

Dawn raid Saturday night special

Golden parachute Greenmail

Macaroni defense

People pill

Sand bag

white knight

Hostile takeover

Antitrust


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FAILURE OF MERGER &

ACQUISITION

Mergers and Acquisitions (M&As) have become the dominant mode of growth for

organizations seeking a competitive advantage in an increasingly complex and

global business economy. Every merger, acquisition, or strategic alliance

promises to create value from some kind of synergy, yet statistics show that the

benefits that look so good on paper often do not materialize. Unfortunately, manymergers and acquisitions fail to meet their objectives, which are typically to

accelerate growth, cut costs, increase market share or take advantage of other

synergies.


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A global A.T.Kearney study suggests that 58 percent of all mergers, acquisitions,

and other forms of corporate restructuring fail to produce results rather than

create value.

Similarly, a KPMG survey found that "83 percent of mergers were unsuccessful

in producing any business benefits regards shareholder value.

A major McKinsey & Company study found that "61 percent of acquisitionprograms were failures because the acquisition strategies did not earn a sufficient

return (cost of capital) on the funds invested".

Between 55 and 77 percent of all mergers fail to deliver on the financial promise

announced when the merger was initiated.

Even though most mergers and acquisitions are carefully designed, they still

face major challenges. Nearly two-thirds of companies lose market share in the

first quarter after a merger; by the third quarter, the figure is 90 percent. In the first

four to eight months that follow the deal, productivity may be reduced by up to 50

percent.

WHY FAILURES?


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STRATEGIES FOR MANAGING

HUMAN RESOURCE IN M&A

Communication

Common culture

Training anddevelopment

Mutual respect

Individual counseling


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REASONS FOR FAILURE AT DIFFERENT

STAGES OF MERGER(SUMMED UP)

Pre merger

1. Lack of research

2. Incomplete and Inadequate DueDiligence

3. Excessive premium

4. Size Issues5. Striving for Bigness

6. Faulty evaluation

7. Merger between Equals

8. Mergers between Lame Ducks

Merger

1. Lack of Proper Communication

2. Diversification

3. Diverging from Core Activity


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POST MERGER

1. Poor Cultural/organisation Fits

2. Ego Clash

3. Failure of Leadership Role.

4. Poorly Managed Integration

5. Inadequate Attention to People Issues

6. Loss of Identity

CASE D C M


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CASE: DAIMLER CHRYSLER MERGER

FAILURE

In 1926, the merger of two German automobile manufacturers

Benz & Co. and Daimler Motor Company formed Stuttgart-based,German company Daimler-Benz. Its Mercedes cars were arguablythe best example of German quality and engineering.

In 1998, Daimler-Benz and U.S. based Chrysler Corporation, twoleading global car manufacturers, agreed to combine their

businesses in what was perceived to be a 'merger of equals'.Jurgen Schrempp, CEO of Daimler-Benz and Robert Eaton,Chairman and CEO of Chrysler Corporation met to discuss thepossible merger.

The merged entity ranked third (after GM and Ford) in the world

in terms of revenues, market capitalization and earnings, andfifth (after GM, Ford, Toyota and Volkswagen) in the number ofunits (passenger-cars and commercial vehicles combined) sold.

.


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In 1998, co-chairmen and co-CEOs, Schrempp and Eaton led the merged company to

revenues of $155.3 billion and sold 4 million cars and trucks. But in 2000, it suffered

third quarter losses of more than half a billion dollars, and projections of even

higher losses in the fourth quarter and into 2001. In early 2001, the merged

company announced that it would slash 26,000 jobs at its ailing Chrysler division

In May 2006, after a decade of disappointing results, Daimler finally sold

Chrysler to private equity firm Cerberus Capital for 3.74 billion.

The Daimler Chrysler merger proved to be a costly mistake for both the

companies. Daimler was driven to despair, and to a loss, by its merger

with Chrysler. In 2006, the merged group reported a loss of 12 million

euros.

The good results this quarter have come after selling the Chrysler

division in the U.S. and cutting jobs at Mercedes-Benz Cars.

Without Chrysler, Daimler reported profits of 1.7 billion euros (1.3

billion) for the fourth quarter and a net profit of 4 billion euros for the

year (3.8 billion euros in 2006). Sales rose to 99.4 billion euros ($144.98

billion) from 99.2 billion euros, with 2.1 million automobiles sold globally.


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CAN YOU GUESS WHY THE MERGERFAILED ?


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INFERENCES

Analysts felt that though strategically, themerger made good business sense. Butcontrasting cultures and management styleshindered the realization of the synergies.

Daimler-Benz attempted to run Chrysler USA

operations in the same way as it would run itsGerman operations.

Daimler-Benz was characterized by methodicaldecision-making. On the other hand, the US basedChrysler encouraged creativity.

While Chrysler represented American adaptabilityand valued efficiency and equal empowermentDaimler-Benz valued a more traditional respect forhierarchy and centralized decision-making.


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THANK YOU !!