Topic 3. Integration after M&A deals 1. Why M&As very often lead to market failures? 2. Stages of a successful M&A 3. Value creation as a result of M&A 4. Key issues of companies’ integration 2/10/2018 1
1. Why M&As very often lead to market failures? 2/10/2018 2
Ways of companies’ growth Sources: Moody’s, Mc. Kinsey 2/10/2018 3
Successes and failures of M&A 2/10/2018 4
Causes for unsuccessful deals 1. 2. 3. 4. Overvaluation of the deal’s market potential (the most dangerous expectation: the market would change trend from decrease to growth, the growth would be endless) Overvaluation of synergies Overpricing as a result of trading processes Problems in companies’ integration after closing the deal 2/10/2018 5
A Behavioral View at Overestimation • Managerial Hubris – the managers of the acquiring firms make mistakes in assessing target companies, but their pride prevents them from admitting their mistakes • Overconfidence • Anchoring and framing – the market price often has less to do with the intrinsic value. 2/10/2018 6
«The Death Helix» 2/10/2018 7
The value may be added through the deal if: • The target is adequate and terms of the deal are correct; • The integration process meets the requirements and objectives of a specific situation; • Each stage of the integration is planned and implemented thoroughly. 2/10/2018 8
2. Stages of a successful M&A 2/10/2018 9
Stage 1. Preparation to acquisition • • • It is necessary to keep all the actions in secret for the whole period Before doing steps, it is useful to make an acquiring company’s self-assessment (SWOT-analysis, SBU assessment, media monitoring) It is important to define the most appropriate way for value growth: 1) Studying industrial markets and strengthening the core business; 2) Capitalizing the scale synergy 3) Organizing the technology and professional competencies transfer 2/10/2018 10
Model of industrial markets analysis 2/10/2018 11
Capitalization of scale economies 2/10/2018 12
Stage 2. Selection of targets 1. Defining the selection criteria. 2. Planning the role of investment banks and consultants. 3. Priorities setting 4. Companies studying 2/10/2018 13
Selection criteria 2/10/2018 14
Stage 3. Selected candidates’ valuation • • How to compensate the premium for acquisition; To find real advantages from acquisition and assess them; To develop the company restructuring plan; To use financial engineering (lease-back agreements, trust agreements with royalty, risk hedging etc. ). 2/10/2018 15
Stage 4. Talks 2/10/2018 16
What to clarify in talks • Cost of acquisition for a bidder • Value of target company for its owners and other potential acquirers • Financial potential of owners and probable other acquirers • Strategy and motivation for owners and probable buyers • Mediators, their methods and experience in previous deals • Potential defense actions 2/10/2018 17
Principal talks strategies • Price: low or high? • Information what we want to obtain from managers of the target company • How much information they are ready to transfer in our possession? • Tax releases • Personal work with the board members 2/10/2018 18
Deal conducting 1. First contacts 2. Initial due diligence 3. Signing the memorandum on intentions 4. Final due diligence. 5. Deal announcement. 6. Deal closing. 2/10/2018 19
Problems to solve in integration process • What are the long-term objectives of the joined company and how they correspond with short-term tasks? • Where are sources of value creation in longterm and short-term horizons and how to capture them? • How to raise the organisational effectiveness for a New company? • And, finally, how to implement integration strategy to create value and reach the objectives of the deal? 2/10/2018 20
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3. Creating value in the process of the deal 2/10/2018 22
What to take into account: • Sources of value creation in the industry? • What would be limitations for the joint company (agreements on staff, regulation etc. )? • What common features merging companies have? What are their strengths and weaknesses? How large are differences in corporate culture? • What managerial tools and style prefers the top manager of the new company and what are his personal interests? 2/10/2018 23
3 levels of value creation (1) 2/10/2018 24
3 levels of value creation (2) 2/10/2018 25
Sources of short-term effects (Ist level) • Elimination of doubling and excessive functions and operations through cost decreasing; • Equal pricing policy – source for additional income • Assets audit and selling excessive, nonworking assets • Cross-sales organization 2/10/2018 26
Why Ist level effects are so important • The market expects results and synergies, and these high expectations affect at managers; • Quick results approve merger from the personal’s point of view and give impulse to a company’s development • 15% of synergies are usually being obtained at first 100 days after the deal closing; • Quick short-term results help the sustainability and let managers to pay their attention at strategic prospects 2/10/2018 27
How to gain synergies at the first level • Clear aims at all the levels of hierarchy • Aims should be transferred to tasks for all the employees • The plans of value adding are to be the most important ones • Aims should be well-balanced • Monitoring, control and analysis of changes • Transparency of change policy 2/10/2018 28
Hidden opportunities (level 2) • • • Re-engineering of business processes Implementation of new business models New factors of efficiency Assets combining Impulse of growth capturing 2/10/2018 29
New strategic opportunities (level 3) • Creation and introducing of new technologies • Development and diffusion of new products • Entrance at new markets • Strengthening of competitive advantages 2/10/2018 30
Creation of value at different levels 2/10/2018 31
4. Key issues of companies’ integration 2/10/2018 32
Sequence of actions 2/10/2018 33
Acquirers’ preferences • 43% of potential acquirers claim they want to keep the staff of the target company • 37% want to change top management and chief accountant • 18% intend to renew all the staff Source: www. deloshop. ru 2/10/2018 34
Organizational efficiency • Forming the management team • Developing the adequate structure • Development and nursing the favourable organisational culture • Development the staff competences 2/10/2018 35
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Key decisions • Plan of the merger? • Who will lead? • How to make changes? 2/10/2018 37
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10 «железных правил» (от ТД «Перекресток» ) 1. 2. 3. 4. 5. Сделку следует начинать не с оценки бизнеса, а с выяснения целей акционеров этого бизнеса, определения будущей структуры акционеров, контроля и разработки механизмов выхода из бизнеса. Если покупка не вписывается в стратегию и формат основного бизнеса, от нее стоит отказаться независимо от финансовых условий. Необходимо до переговоров определить «точку отказа» по всем основным пунктам переговоров. При оценке синергии включайте в финансовую модель будущих денежных потоков покупаемой компании только те показатели, которые можно будет точно определить, проконтролировать, учесть и достичь. Кроме того, необходимо реалистично просчитать затраты на интеграцию. Хорошая сделка с плохим партнером - плохая сделка. 2/10/2018 40
10 «железных правил» от ТД «Перекресток» (продолжение) 1. 2. 3. 4. 5. За переговоры и сделку с каждой стороны должны отвечать одни и те же люди. Не стоит экономить время и ресурсы для due diligence и проработки документов сделки. Не нужно объявлять о сделке публично до ее окончания. План интеграции и перехода контроля от одного владельца бизнеса к другому должен быть подготовлен до окончания сделки: после подписания документов каждый менеджер с обеих сторон должен знать, как ему действовать. Не стоит спешить изменять все процессы в приобретаемой компании «под себя» . 2/10/2018 41