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Mergers & Acquisitions II

Mergers & Acquisitions II. Successes, Drawbacks, Restructuring & Trends. Compiled and Presented By: Alex Kent, Simon Giddings, Aaron Brigatti. Key Areas Covered:. Defence tactics Why are firms susceptible to take-over? Implications to Shareholders Success & Failures

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Mergers & Acquisitions II

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  1. Mergers & Acquisitions II Successes, Drawbacks, Restructuring & Trends Compiled and Presented By: Alex Kent, Simon Giddings, Aaron Brigatti

  2. Key Areas Covered: • Defence tactics • Why are firms susceptible to take-over? • Implications to Shareholders • Success & Failures • Are shareholders the winners? • Corporate Restructuring • Trends & Susceptible Areas Mergers & Acquisitions II

  3. 1. Defence Tactics: Their Successes and Implications Mergers & Acquisitions II

  4. Defence Tactics • Various terminology • Why are firms susceptible to take-over? • Pre-bid defences • Implications to Shareholder Mergers & Acquisitions II

  5. White Knight Yellow Knight Gray Knight Black Knight Sandbag Macaroni Defence Poison Pill People Pill Sleeping Beauty Pac-Man Shark Repellent Greenmail Various Terminology Mergers & Acquisitions II

  6. White Knight • What does it mean? • A company that makes a friendly takeover offer for control of a target company which is being faced with a hostile takeover from a separate party. • The Knight in shining armour comes to the rescue! Mergers & Acquisitions II

  7. Yellow Knight • What does it mean? • Used to describe the situation where a company making a takeover attempt ends up discussing a merger with the target company. Mergers & Acquisitions II

  8. Gray Knight • What does it mean? • A second, unsolicited bidder in a corporate takeover who enters in order to take advantage of any problems between the first bidder and the target company. • Think of a Gray Knight as a vulture, circling and waiting to clean up whatever mess is left. Mergers & Acquisitions II

  9. Black Knight • What does it mean? • A company which makes a hostile takeover offer on a target company. • The bad guy...if it's your company being targeted. Mergers & Acquisitions II

  10. Sandbag • What does it mean? • A tactic used by management to stall with a company that is showing interest in taking them over. • The company stalls in hopes that another more favourable company will take them over. Mergers & Acquisitions II

  11. Macaroni Defence • What does it mean? • An approach taken by a company that does not want to be taken over. The company issues a large number of bonds with the condition they must be redeemed at a high price if the company is taken over. • Why is it called Macaroni Defence? Because if a company is in danger, the redemption price of the bonds expands like Macaroni in a pot! Mergers & Acquisitions II

  12. Poison Pill • What does it mean? • A strategy used by corporations to discourage the hostile takeover by another company by making it's stock less attractive to the acquirer. • This is similar to the macaroni defence except it uses equity rather than bonds. Mergers & Acquisitions II

  13. People Pill • What does it mean? • A defensive strategy to ward off a hostile takeover. Management threatens that, in the event of a takeover the entire management team will resign. • This is a version of the poison pill defence. Mergers & Acquisitions II

  14. Sleeping Beauty • What does it mean? • A company that is prime for takeover and which has not been approached by an acquirer. • Reasons for being a sleeping beauty are that it has large cash reserves, undervalued real estate, or otherwise huge potential. Mergers & Acquisitions II

  15. Pac-Man • What does it mean? • A form of defence used in a hostile takeover situation. The takeover target turns around and tries to takeover the company that has made a hostile bid for it. • Just think all those years of Atari might just pay off someday. Mergers & Acquisitions II

  16. Shark Repellent • What does it mean? • Any number of measures taken by a corporation to discourage an unwanted takeover attempt. • Examples of shark repellent include Golden Parachute contracts with executives, a defensive merger with another company, a super-majority provision, etc. Mergers & Acquisitions II

  17. Greenmail • What does it mean? • A situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover. • A very dirty, but effective practice. Mergers & Acquisitions II

  18. Which Companies are Susceptible? • All Public Limited Companies at risk • No restrictions in transfer of shares • More Vulnerability = More Risk of Takeover • Shareholders dissatisfied with company • Undercapitalised • Inadequacies of Management Mergers & Acquisitions II

  19. http://www.mergers-acq.co.uk Implications to Shareholders • A "raider" bids for shares of the target firm • Dealing *direct* with the firm’s shareholders. • Some instances, paid a premium of 30-50% of their shares!! • Share of the raider’s “gains” from the acquisitions. Mergers & Acquisitions II

  20. Pre-bid Defences - Internal • Internal Defences • Improve efficiency & Reduce costs • Improve Strategy: Restructuring, divestment ... • Change Ownership Structure • Change Management Structure • Use Organisational Constituencies Mergers & Acquisitions II

  21. Pre-bid Defences - External • External Defences • Cultivate Shareholders & Investors • Publicise company strategy • Improve image • Make strategic defence investments • Monitor share register for unusual purchases Mergers & Acquisitions II

  22. Post-offer Defences • First Response & Pre-emption Letter • Defence Document • Profit Report / Forecast • Promise of higher Dividends • Asset Revaluation • Share Support Campaign • Regulatory Appeal . . . Mergers & Acquisitions II

  23. . . . More Post-offer Defences • Litigation • Acquisition & Divestment • Unions / Workforce • Customers / Suppliers • Red Herring • Advertisements Mergers & Acquisitions II

  24. Costs Of Defence Mergers & Acquisitions II

  25. 2. Success and Failures of Merger & Take-Over Activities Mergers & Acquisitions II

  26. Success & Drawbacks • Technological Issues • Cultural Issues • Freeserve – T-Online or Wanadoo • National Differences • Synergies Achieved • Are All Mergers Successful? Mergers & Acquisitions II

  27. Technological Issues • Technology issues: One challenge could be integrating two or more converging businesses' front-office technology - the IT systems seen by customers or used to interact with them Mergers & Acquisitions II

  28. Cultural Issues • Cultural issues: These are the other main problem faced when bringing two or more companies together. Many apparently logical mergers have fallen through late on because of "cultural differences". Mergers & Acquisitions II

  29. Freeserve - Failures • For example, cultural differences were cited last week as one reason why T-Online of Germany did not buy Freeserve, the UK internet service, from Dixons, the electrical goods retailer. Mergers & Acquisitions II

  30. Freeserve: Share Price Mergers & Acquisitions II

  31. National Differences • Further levels of cultural complication are added when there is an international element to the merger • Often the case with deals that have been driven by convergence. • National differences have often thwarted successful mergers in the old economy • So why should things be any different in the brave new economy Mergers & Acquisitions II

  32. Are All Mergers Successful? • NO!!!! • But why? • In 1993, a study was carried out to determine if UK mergers are generally successful. • It turned out that 54% of the mergers examined were not financially successful! • So what went wrong… Mergers & Acquisitions II

  33. Causes Of Failure . • Management Attitudes – 85% Mergers & Acquisitions II

  34. Causes Of Failure .. • Lack Of Post-Acquisition Integration Planning – 80% Mergers & Acquisitions II

  35. Causes Of Failure … • Lack of Knowledge by the Bidder of the Target and its Industry – 45% Mergers & Acquisitions II

  36. Causes Of Failure .… • Poor Management & Management Practices In The Target – 45% Mergers & Acquisitions II

  37. Causes Of Failure ..… • Little or no experience of the bidder management in acquiring other firms – 30% Mergers & Acquisitions II

  38. Have We Learnt Anything? • The same study was carried out in 1973, with pretty much the same results. In 20 years, social trends have not altered the fact that on average just over half of all UK mergers fail. • Have we learnt anything at all? Mergers & Acquisitions II

  39. Well Yes! Why? • Number Of Mergers Are Down! • Knowledge about the failure of mergers could be responsible for the huge drop in annual mergers since the 1980s. Mergers & Acquisitions II

  40. Well Yes! Why? • A greater professionalism among corporate management leading to fewer cheap targets. • Share prices were low in the 80s, leading to many cheap targets. • Questions have been raised to the importance of large, diversified companies. Mergers & Acquisitions II

  41. How can a company increase the odds? • A well-formulated vision • A pre-merger process that targets companies with the right capabilities • A post-merger process that seeks to capture well-defined sources of value Mergers & Acquisitions II

  42. 3. Corporate Restructuring After Mergers/ Take-Overs Mergers & Acquisitions II

  43. Corporate Restructuring • What actually happens after a merger or take-over? • What happens to: • The Head Office • Divestments • Managers • Employees • Failures • Case Study – Psion v Teklogik Mergers & Acquisitions II

  44. The Head Office • It is very unlikely to have two head offices • Natural conclusion: One must go! • This can often lead to massive job losses in that location • If some of the target’s management are lucky, then they might be offered “Golden Parachutes”. Mergers & Acquisitions II

  45. Divestments • Why would a merged company want to sell of a part of itself? • A desire to concentrate on it’s core activities • A need to raise cash • Cutting away the “bad wood” Mergers & Acquisitions II

  46. Managers • Predator Managers • New opportunities to enhance company’s competitive advantage, operational efficiency and financial performance • Increased job security/enumeration • Target Managers • Uncertain futures • New bosses, new culture • Loss of power, status and freedom to innovate • Possible Redundancies Mergers & Acquisitions II

  47. Employees • Usually redundancies at the redundant head office • UK Employment law gives some protection to employees in the context of takeovers • If the target business is purchased, then employees may receive protection under “The Transfer of Undertaking” regulation Mergers & Acquisitions II

  48. Failures • Not always good for predator management. Especially if they mess things up! • In the mergers boom in the 1980s, some of the more frequent predators were themselves becoming the prey or forcing themselves into receivership. • Others that fail can be heavily divested or put under administration by the lenders. Mergers & Acquisitions II

  49. Case Study: Psion v Teklogix • Main Points: • Friendly takeover • Psion were looking to break into new areas • They realised that their range of modems were in decline • Needed to do something quickly since their shares were at an all time low Mergers & Acquisitions II

  50. About Psion Plc • World-leaders in mobile computing and communications • Established in 1980 • Earns revenues in excess of £159m and is valued on the London Stock Exchange at more than £2.5bn Mergers & Acquisitions II

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