Mergers & Acquisitions: The Process

1. Mergers & Acquisitions:The Process Prof. Ian Giddy New York University

2. The Acquisition Process Application: The “Stop and Shop” Deal • Motivation for Takeover: Market Value vs. "Realizable Value" • Hostile vs. Friendly Takeover vs Management Buy Out • Restructuring of Debt and Equity Structure • Leveraging and De-Leveraging • Debt Covenants vs. Equity Control • Use of High-Yield Bonds, Bank Debt, Private Placements and Bridge Loan • Pricing and Placing the Securities • Subsequent Refinancing

3. M&A Advisory Services:1. Role of the Seller's Advisor • Develop list of buyers • Analyze how different buyers would evaluate company • Determine value of the company and advise seller on probable selling price range • Prepare descriptive materials showing strong points • Contact buyers • Control information process • Control bidding process • Advise on the structure of the transaction to give value to both sides • Ensure all nonfinancial terms are settled early • Smooth postagreement documentation

4. M&A Advisory Services:2. Role of Buyer's Advisor • Thoroughly review target & subs • Advise on probable price range • Advise on target's receptiveness • Evaluate target's options and anticipate actions • Devise tactics • Consider rival buyers • Recommend financial structure and plan financing • Advise on initial approach and follow-up • Function as liason • Advise on the changing tactical situation • Arrange the purchase of shares through a tender offer • Help arrange long term financing and asset sales

5. Case Study: Citigroup Questions: • How would evaluate the probabilty that there will be positive net economic value out of the combination of Citicorp and Travelers? • Where will the value come from? • How long should it take for the value to be realized? • What factors could destroy value?

6. Value Based Management Improve strategic and operational decision making Widen scope of VBM to cover all organizational processes Focus on key drivers of corporate value Utilize the Economic Profit and Discounted Cash Flow valuation techniques Focus business planning around value creation Develop value oriented targets and performance measurement Restructure compensation system with an emphasis on creating shareholder value Evaluate strategic investment decisions in terms of their impact on value Communicate value of corporate plans to investors and analysts A Creative Mindset An Integrative Process

7. Analytic Framework For Diagnosing Market Performance 1. Review market performance • Determine returns to shareholders compared with other investments 2. Analyze comparative corporate performance • Develop initial picture of company performance that underlies market performance 3. Understand corporate cash flow • Identify where the corporation has been generating and investing cash and the return this investment is generating 4. Synthesize market views • Identify assumptions that form basis for current market value

8. Impact Of Value Based Management On Performance, Examples Business Retail Household goods Insurance Banks Change in Behaviour • Shifted from broad national growth program to focus on building regional scale before expanding • Repositioned product portfolio to emphasize products most likely to create value • Chose growth versus harvest strategy, even though five-year return on equity very similar Impact • 30-40% potential value increase • 25% potential value increase • 124% potential value increase

9. Impact Of Value Based Management On Performance, Examples Business Oil Production Change in Behaviour • Used new planning and control process to help drive major change program; dramatic improvement in corporate-business dialogue Impact • Multimillion dollar reduction in planning function through streamlining • Acquisition that likely would not have otherwise happenned • Exposed nonperforming managers

10. Impact Of Value Based Management On Performance, Examples Business Telecommunications Change in Behaviour • Generated ideas for value creation • New service • Premium pricing • Around 40% of planned development projects in one business unit discontinued • Sales force expansion plans completely revised after discovering how much value expansion can destroy Impact • 240% potential value increase in one unit • 246% potential value increase in one unit • n/a • n/a

11. Framework For PostAcquisition Integration: Steps 1 and 2 1. Clarify purpose/set expectations • Establish a transition mechanism • Manage expectations of acquired management • Reach agreement on top organizational issues • Plan and schedule first postacquisition actions 2. Communicate, control, and plan integration • Reassure key constituencies • Agree on a “get-acquainted” stage • Take the necessary control actions • Plan integration process

12. Framework For PostAcquisition Integration: Steps 3 and 4 3. Develop strategy/basic structure • Organize fact-finding task forces • Establish and test initial working hypothesis • Build a fact-based understanding of the comparative business systems and market positions of the companies • Identify opportunities for growth and enhancement of competitive advantage • Rank priorities 4. Refine organization/strategy • review initial strategy, including test of anticipated operating synergies • Review organizational similarities and differences • Implement strategic and organizational change

14. www.stern.nyu.edu

15. www.giddy.org