Mergers and Acquisitions Types of M&A M&A Strategies M&A players M&A financing M&A Procedure

1. Mergers and Acquisitions Types of M&A M&A Strategies M&A players M&A financing M&A Procedure M&A Regulations M&A failures

2. Types of M&A • Vertical Integration • Horizontal Integration • Conglomeric Integration • Congeneric Integration • MBO / LMBO • Cross Border M&As • more and more frequent in an evolving global market quest for economies of scale to service a wide clientbase

3. M&A Strategies • Motives: Survival -“to be or not to be” • Expansion - quicker process than by organic means • Economies of scale - cost savings • New business - development of alternative axes • Opportunity - available target • Obligation - avoid market downsizing

4. Vertical Integration • Upward Integration or 2. Downward Integration • Characteristics: 1. purchase of player in supply chain - processing • 2. purchase of player in the distribution chain • Mergers very rarely occur in this type of integration • Reason: 1. cheaper supplies • e.g. : mining company buys a copper mine - Rio Tinto • 2. increased sales volume • e.g.bank buys another to distribute banking services - HSBC

5. Horizontal Integration • Characteristics: probably the most frequent merger type • Reasons: 1.increased domestic market share • e.g. Telecoms company buys mobile phone server • - France Telecom-Orange • 2.entry into new markets • e.g. Paper manufacturer buys another paper manufacturer - Wiggins Teape- Arjomari • 3.cheaper R&D • e.g. Pharmaceutical company merges with another • pharmaceutical company - Glaxo-SKB • 4.cheaper resources and pricing (greater volumes) • e.g. DIY company buys another DIY company • - Kingfisher – B&Q - Bricorama

6. Conglomeric Integration • Characteristics:by definition must be an acquisition • Reasons: 1.diversification of business interest to • expand into totally new areas • e.g. one company buys another company • - PPR group • 2. identify with a concept and not a single • business • e.g. a company perceives its role to be in a global • sector - Ladbroke (entertainment sector) • 3. save the company • e.g. a company needs to develop into another sector to guarantee against loss of earnings in a traditional business field • -Telecoms takeover of VOIP companies

7. Congeneric Integration • Characteristics: can be either by merger or by acquisition • BUTmore often by acquisition • more frequently in the services sector • Reasons: 1. to increase customer base • e.g. One company takes over another company to help it extend its corporate customer base - BNP - Paribas • 2. to increase service offer • e.g. One company takes over another company to help it to extend its service base - NTL - Virgin Mobile • 3.New Market creation • e.g. One company takes over another company to help it innovate products - AOL - Time Warner • 4. Investment Portfolio Spread • e.g. Private Equity Firms

8. MBO • Management Buy-out • An acquisition made by the Management of the • company where: • members of management sell-off their personal assets • to obtain a percentage of their own business bought by themselves

9. LMBO • Leveraged Management Buy-out • An acquisition made by the Management of • the company where: • members of management mortgage their personal assets • to obtain a loan to purchase their own Company

10. M&A Players • Apart from corporate interest in takeovers there is also • interest from: • Family Investment Trusts • e.g. acquisition of Manchester United by American Family • Individuals • e.g. acquisition of Chelsea Football Club by Abramovitch • Private Equity Groups • These are groups that invest funds for private investors • Investment Banks • Very active in advising both sides of the merger or acquisition

11. Investment Banks • Different roles:1. Search for appropriate takeover target • 2. Advising on price levels: • i. the target • ii. the purchaser • 3. Advising on payment means: • i. the target • ii. the purchaser • 4. Advising target on defence strategy • 5. Preparing the financial arrangements • 6. Notifying the Authorities • Dangersmay well exist if the same Investment bank advises both sides. This does happen.

12. M&A financing • Types:1. cash - part cash , - all cash • 2. shares- part shares , all shares • 3.part shares - part cash • 4. new issue of equity • (preferentially rights issue) • 5. part new equity issue part cash • 6. bank loan (partial or full) • 7. bond issue (partial or full)

13. M&A financing • Observations: • all cash can happen when a company has ready cash to spend as a result of a divestment • all shares involves a share swap after evaluation of each company's worth. Probable in a merger • all cash and all share are the cheapest in terms of financial costs • new issue of shares is not popular with existing shareholders because of dividend dilution, unless rights issue only • Bank loans are certainly the most expensive form due to interest payments • Bond issue. This also pays interest so is expensive • The larger the amount of the takeover the larger the chances of • combining the financial sources: cash – shares - new issue • Interest payments are a regular charge whereas dividend is not

14. M&A Procedure • evaluation the target company - case of takeover) • evaluation of both companies - case of merger • announcement of bid. (made known to target company) • acceptance or refusal of bid by management • if accepted notification of bid to shareholder • if refused possible new bid • execution of due diligence • financial arrangement • payment - case of: exchange of shares, loans, cash • issue - case of: new issue, bonds

15. M&A Regulations • 2 main regulations governing M&As • Notice of intention • one company purchasing shares in another company is obliged by • law to make public what it intends to do with the company once the threshold of a certain percentage of shares is attained. Trend is more and more towards Stakeholdings. • Monopolies Commission's (OFT) ruling • i. that a company's enhanced position through merger • or acquisition must not endanger the rest of the sector. • ii. that a company must, therefore, divest some of its assets • in order to restore fair competition to the industry • Companies must submit their applications to the Commission

16. M&A Failures • Reasons: refusal of bid (Pepsicola - Danone) • higher bid (BNP - Paribas) • intervention of Monopolies Commission (Schneider - Legrand) • incompatibility of systems (Carlton - Granada) • too costly to implement (HP - Texas Instruments) • nomination of CEO (Glaxo – SKB) • no clear strategy (J.P. Morgan - Chase)

17. M&A Failures • Reasons: management ability to: • i. managea larger enterprise • ii. manage a different culture • iii.manage change • iv. manage new systems • v. manage a new busines • case of private Equity groups

18. M&A Failures • Defences against Hostile bid • “White Knight” • Buy-back of share • Purchase of another company • Preferred bidder • “Poisoned Pill” • increased debt • spin-off of assets • issue of share • purchase of another company • conglomeric integration • 60% of M&As fail

19. “Psychology” of M&As • 1. at the bidding: • i. shareholders aware of market value will only accept a bid at a higher price (premium). • ii. Market reaction is always “bullish” to a bid for shares. • 2. following the deal: • i. concern about radical changes in company policy • ii. employees and management concerned for their jobs • iii. shareholders concern for value added • iv. industry concerned about increased competition