strategic alliances acquisitions psu mgmt 510

1. 8/30/2011 1 Strategic Alliances & Acquisitions PSU MGMT 510 Dave Garten daveoutside@alum.mit.edu

2. 8/30/2011 Dave Garten PSU MGMT 510 2

3. 8/30/2011 Dave Garten PSU MGMT 510 3 M&A - Tough Game to Win Research: M&A on average destroys value 70% of deals did not create value and 50% actually destroyed value; Bain Study 1986 � 2001 64% of M&A destroyed value short term (+/- 5 days); 56% destroyed value long term (to 2 yrs); BCG Study 1985 � 2000 Acquiring firms experience a wealth loss of 10% over five years following merger completion; Journal of Finance 61% of deals destroyed value; Business Week Study (1995 � 2001)

4. 8/30/2011 Dave Garten PSU MGMT 510 4 M&A - Increasing the Odds

5. 8/30/2011 Dave Garten PSU MGMT 510 5 Deal-making Risk Mitigation Strategy & clear value drivers Maintain alternatives Detailed due diligence of target Negotiation strategies Deal structure Integration strategy

6. 8/30/2011 Dave Garten PSU MGMT 510 6 Control Premiums

7. 8/30/2011 Dave Garten PSU MGMT 510 7 Control Premiums

8. 8/30/2011 Dave Garten PSU MGMT 510 8 Control Premiums Why does the seller require it? Seller requires purchase price in excess of current valuation to forego future opportunities. How does the acquirer justify it? Value reflects that target is better managed Better financing Higher returns on projects (and divesting) Return of unused cash

9. 8/30/2011 Dave Garten PSU MGMT 510 9 M&A Finance 101

10. 8/30/2011 Dave Garten PSU MGMT 510 10 M&A Finance 101

11. 8/30/2011 Dave Garten PSU MGMT 510 11 Valuation Methodologies

12. 8/30/2011 Dave Garten PSU MGMT 510 12 Discounted Cash Flow Company Operating Income Net Income Free Cash Flow Available

13. 8/30/2011 Dave Garten PSU MGMT 510 13 DCF Applied

14. 8/30/2011 Dave Garten PSU MGMT 510 14 Terminal (Continuing) Value

15. 8/30/2011 Dave Garten PSU MGMT 510 15 Synergies

16. 8/30/2011 Dave Garten PSU MGMT 510 16 Synergies

17. 8/30/2011 Dave Garten PSU MGMT 510 17 Valuation Commentary Simplify Assume base business = market cap Premium ~ synergy value If premium paid < synergy value => + ROI If premium paid > synergy value => - ROI Not so simple Inefficiencies exist Information, management (�agency� problems) Synergies hard to value Uncertainty, risk, integration, soft vs. hard

18. 8/30/2011 Dave Garten PSU MGMT 510 18 M&A Finance 101 - Examples PeopleSoft --- Premium Paid ~ $4B Largest synergy (value driver)=cost redundancy ($660M/yr) Terminal value method: DCF = $660M/(.1) = $6.6B Assumptions: Terminal value, K = 10%, g =0%, 10 year declining method. What are the other value drivers?

19. 8/30/2011 Dave Garten PSU MGMT 510 19 M&A Finance 101 - Examples ARM buys Artisoft Price = 494 Goodwill ~ 60%

20. 8/30/2011 Dave Garten PSU MGMT 510 20 Accounting for Transaction Cash $50M A/R $15 Inventory $20 PP&E $40 Total Assets $125M A/P $15 LT Debt $30 Stk Holder Equity $80 Liabilities & SE $125M Cash $0 A/R $20 Inventory $25 PP&E $55 Goodwill $25 Total Assets $125M A/P $20 LT Debt $30 Stk Holder Equity $75 Liabilities & SE $125M

21. 8/30/2011 Dave Garten PSU MGMT 510 21 M&A Finance 101

22. 8/30/2011 Dave Garten PSU MGMT 510 22 Value Creation Goal of a Deal? ? Value Creation Value of Strategy or Initiative Less Cost to Implement & Sustain ------------------------------------------ Value Creation General methods to create value with a deal: Hidden gem Good negotiator Create unique value drivers (synergy) via strategy Value drivers (synergy) must be identified Top line and/or bottom line Unique for the companies involved