M&A Reasons - PDF

THE REASONS TO DO M&A Sessions 5-6 Rachele Anconetani Why companies pursue M&A transactions? (max 2 words) ⓘ Start presenting to display the poll results on this slide. DISCLAIMER Slides with the indication “Food for Thoughts” are not mandatory for the exam. ...

THE REASONS TO DO M&A Sessions 5-6 Rachele Anconetani Why companies pursue M&A transactions? (max 2 words) ⓘ Start presenting to display the poll results on this slide. DISCLAIMER Slides with the indication “Food for Thoughts” are not mandatory for the exam.  1 The Reasons to do M&A 1 Ferrero - Nestlé CASE 1 Ferrero - Nestlé Reasons Increase market share. Expand portfolio product Geographical expansion 2 Google - Youtube CASE 2 Google - Youtube Reasons Defensive acquisition Acquire a new technology 3 Fiat - Chrysler CASE 3 Fiat - Chrysler Reasons Buy underperforming companies 4 PepsiCo - Quaker CASE 4 PepsiCo - Quaker Reasons Market power Synergies Expand product portfolio (Gatorade) 5 Google – Motorola Mobility CASE 5 Google – Motorola Mobility Reasons Tax consideration 6 Elon Musk vs Twitter CASE 6 Elon Musk vs Twitter Reasons Ego/Hubris 7 Amazon - Wholefood CASE 7 Amazon - Wholefood Reasons Diversification THE REASONS TO DO M&A Framework 1 Reason 1: Strategic Realignment 2 Reason 2: Reaping Synergies 3 Reason 3: Financial Consideration 4 Reason 4: Tax Consideration 5 Reason 5: Ego/Hubris 6 Reason 6: Diversification THE REASONS TO DO M&A Reason 1: Strategic Realignment Why? 1 Reason 1: Strategic Realignment Deregulation. Common in: ex 2 highly regulated businesses. Reason 2: Reaping Synergies “Let’s find weaker, undervalued companies and gobble them up like a large bear!” 3 Reason 3: Financial Consideration Technological innovation and defensive acquisition. 4 Common in: tech/high-growth Reason 4: Tax Consideration industries “this other company is about to kill our business! Let’s aquire them. We can’t 5 Reason 5: Ego/Hubris let the competition get their hands on them!” Market Expansion/Power. 6 Reason 6: Diversification Common in: mature business. “we are not growing much organically – let’s buy market share and come closer to being #1 or #2 player in the industry”  [Food for Thoughts] THE REASONS TO DO M&A Reason 1: Strategic Realignment (Digitalization)  [Food for Thoughts] THE REASONS TO DO M&A Reason 1: Strategic Realignment (ESG) THE REASONS TO DO M&A Reason 2: Reaping Synergies Why? 1 Reason 1: Strategic Realignment Operating synergies. 2 Reason 2: Reaping Synergies Economies of scale Economies of scope 3 Reason 3: Financial Consideration Acquisition of complementary technical assets and skills Cross-selling 4 Reason 4: Tax Consideration Financial synergies Risk reduction 5 Reason 5: Ego/Hubris 6 Reason 6: Diversification THE REASONS TO DO M&A Reason 2: Reaping Synergies Transaction Synergies value Premia Value Created % Target Value % Target Value [Synergies – Premia] ≈ 45%-70% - ≈ 15% = ≈ 30%-55% ≈ 35%-55% - ≈ 10% = ≈ 25%-45% ≈ 70%-90% - ≈ 50% = ≈ 20%-40% ≈ 35%-45% - ≈ 20% = ≈ 15%-25% ≈ 60%-90% - ≈ 55% = ≈ 5%-35% ≈ 70%-105% - ≈ 60% = ≈ 10%-45% THE REASONS TO DO M&A Reason 3: Financial Consideration Why? 1 Reason 1: Strategic Realignment Acquirer believes the 2 target is undervalued. Reason 2: Reaping Synergies Booming stock market. 3 Reason 3: Financial Consideration Falling interest rates. 4 Reason 4: Tax Consideration 5 Reason 5: Ego/Hubris 6 Reason 6: Diversification THE REASONS TO DO M&A Reason 3: Financial Consideration Acquirer believes the target is undervalued. Booming stock market. Falling interest rates. THE REASONS TO DO M&A Reason 4: Tax Consideration Why? 1 Reason 1: Strategic Realignment Accumulated losses and 2 tax credits. Reason 2: Reaping Synergies Tax-free status. 3 Reason 3: Financial Consideration 4 Reason 4: Tax Consideration 5 Reason 5: Ego/Hubris 6 Reason 6: Diversification THE REASONS TO DO M&A Reason 4: Tax Consideration Acquirers of firms with accumulated losses and tax credits may use them to offset future profits generated by the combined firms. However, the taxable nature of the transaction often plays a more critical role in determining whether a merger takes place than any tax benefits accruing to the acquirer. The seller may view the tax-free status of the transaction as a prerequisite for the deal to take place. An adequately structured transaction can allow the target shareholders to defer any capital gain until the acquirer’s stock received in exchange for their shares is sold. THE REASONS TO DO M&A Reason 5: Ego/Hubris Why? 1 Reason 1: Strategic Realignment CEOs with successful 2 acquisition track records Reason 2: Reaping Synergies may pay more than the target is worth due to overconfidence. 3 Reason 3: Financial Consideration 4 Reason 4: Tax Consideration 5 Reason 5: Ego/Hubris 6 Reason 6: Diversification THE REASONS TO DO M&A Reason 6: Diversification Why? 1 Reason 1: Strategic Realignment Buying firms beyond a 2 company’s current lines of Reason 2: Reaping Synergies business is called diversification. Diversification may create 3 Reason 3: Financial Consideration financial synergy that reduces the cost of capital. 4 Reason 4: Tax Consideration 5 Reason 5: Ego/Hubris 6 Reason 6: Diversification THE REASONS TO DO M&A Reason 6: Diversification IBM acquired web-based human resource software maker Kenexa to move its existing software business into the fiercely competitive but fast-growing market for delivering business applications via the web. Johnson & Johnson’s $16 billion acquisition of Conglomerate (example – General Electric – Pfizer’s consumer healthcare products line (i.e., pre spin-off announcement) Listerine, Nicorette). The firm assumed additional risk by selling new products lines, but into markets with which it had significant prior experience: J&J in retail healthcare markets. THE REASONS TO DO M&A Reason 6: Diversification Diversification might pay if: There is high relatedness in terms of industry focus between the target and the buyer Promotes knowledge transfer across divisions Creates critical mass for facing the competition Exploits better transparency and monitoring through internal capital markets Managers are properly motivated and rewarded There is prevailing evidence that the U-shaped curve best fits reality. Over a certain degree of diversification there is a significant increase in the associated costs: Information-processing constraints: difficulties in monitoring the simultaneous performance of businesses; Internal politics: conflicts between various business units; Incentive problem: increasing difficulties of setting remuneration schemes. Lack of responsiveness: difficult time to the market of the controlled businesses due to the slower decisional process. THE REASONS TO DO M&A Reason 6: Diversification THE REASONS TO DO M&A Reason 6: Diversification – is it always a winning strategy?  4 Wrapping Up  Please download and install the Slido app on all computers you use How is called the restructuring activity where the parent company ceases to exist and there is a creation of a new legal entity? ⓘ Start presenting to display the poll results on this slide. WRAPPING UP Correct option: Split-up (see session 4 – key definitions in M&A)  Please download and install the Slido app on all computers you use Which is the scenario that may verify during a proxy fight between shareholders? ⓘ Start presenting to display the poll results on this slide. WRAPPING UP Correct option: Buyer/Shareholder seeks to persuade shareholders to use their votes to install new management. (see session 4 – key definitions in M&A)