Castellanza, 10 th November, 2010

1. THE MERGERS AND ACQUISITION MARKET. AN OVERVIEW.INTRODUCTION TO COMPANY’S VALUE AND VALUATION TECHNIQUES.DCF AND COMPARABLES Lesson 10 Corporate Finance Castellanza, 10th November, 2010

2. Internal Growth vs. External Growth Internal growth investments plants, equipments investments technologies investments human resources External growthacquisitions mergers alliances joint ventures

3. External Growth ACQUISITION: one company taking over controlling interests in another company MERGER: combination of two or more companies into one PURCHASE: the amount paid over and above the acquired company’s book value is carried on the books of the purchaser A B CONSOLIDATION: a new company is formed to acquire the net assets of the combining companies A B C

4. External Growth (cont’d) MERGER • horizontal: takes place between two firms in the same line of business • vertical: involves companies at different stages of production • conglomerate: involves companies in unrelated lines of business

5. External vs Internal Growth (benefits and costs) some benefits • timing • control over expenses • control over results some costs • difficult to maintain the equilibrium (and performance) within the company • human resources • different cultures • an acquisition is never tailored

6. External Growth: characteristics • High failure risk • Difficulties in evaluating a company • Difficulties in obtaining guarantees • Synergies

7. Some Reasons to Merge • economies of scale • economies of vertical integration • surplus of funds • complementary resources • tax shields

8. Some Reasons to Acquire • entrepreneur’s ambition • to increase market share • to enter in a new market, in a new industry • to obtain a royalty, know-how, trade mark • to eliminate a competitor

9. Keys to Succeed • Only by gaining a clear understanding of what and where value can be obtained from a deal, can companies hope to avoid ‘bad’ deals and be in a position to work out how this value extraction will be achieved. • Hard keys • synergy evaluation: in terms of revenue benefits, indirect and overhead cost reductions, direct operational cost reductions • integration project planning • due diligence • Soft keys • resolving cultural issues • selecting the management team • communications

10. Whatever you’ll do in your life needs negotiations and you need to know how to negotiate • Although negotiation courses are getting more and more in the way, you have to keep in mind: • some common mistakes to avoid • rational framework • methods to simplify complex negotiations Something you won’t find in books

11. First ofallyouhavetosucced in getting a rationalthinking in negotiation • Negotiatingrationallymeans: • Making the best decisionsmaximizeyourinterests • Knowinghowtoreach the best agreement vs. just any agreement Something you won’t find in books

12. Sometime pervasive decision-making biases blind CEOs’ strategy and prevent them from getting as much as they can • Examples: • Irrationally escalating your commitment to an initial course of action, even when it is no longer the most beneficial choice • Assuming your gain must come at the expense of the other party and missing opportunities for trade-offs • Anchoring your judgments upon irrelevant information • Being overly affected by the way information is presented to you • Failing to consider you can learn by focusing on the other side perspective Something you won’t find in books

13. Irrational escalation ofcommitment • To eliminate irrational escalation youmustunderstand the psychologicalfactors (perception and judgment) thatfeedit • Do not assume yourinterestsdirectlyconflictwiththoseof the other party • The best negotiations end in a resolutionthatsatisfiesallparties • Anchoring and adjustment • Toproceedbothsidesmustadjusttheirpositionsthrought the negotiationarriving at either agreement or impasse • Initialpositionsmayactasanchors and affecteach side’s perceptionofwhatoutcomes are possible • Framingnegotiations • The way the optionsavailable in a negotiation are presented can stronglyaffect a manager’s willingnesstoreachan agreement • Weigh up “status quo” and expectations Common Mistakes in Negotiation

14. Availabilityof information • Payattentiontoall the facts and avoidtoignorecertain • Identify and usetrulyreliable, not just available, information • Distinguishwhat’s emotionallyfamiliartoyoufromwhat’s reliable and relevant • Overconfidence and NegotiatorBehaviour • Overconfidencemayleadmanagerstothinkthattheirjudgments are correct and wrongly estimate a neutral party’s opinion • Overconfidencemayinhibit a varietyofpossible and acceptablesettlements • Consider the suggestionsofqualifiedadvisersis a way totemperoverconfidence Common Mistakes in Negotiation

15. Howshouldmanagersmakedecisions in a world wheremany people don’t alwaysbehaverationally? • Mostcriticalcomponentsof a rationalnegotiationprocess are: • Evaluationofeach party’s alternativesto a negotiated agreement, interest and priorities(i.e. potentialconsequences, reservation price, requirements) • Understand the integrative componentsofnegotiation (i.e. positions, priorities, preferences, deficiency) Rational Framework for Negotiation

16. To succed in structuring a rational framework you should: • Assess what you will do if you don’t reach agreement with your current negotiation opponent • Assess what your current negotiation opponent will do if they don’t reach an agreement with you • Assess the true issues in the negotiation • Assess how important each topic is to you • Assess how important topic is to your opponent • Assess the bargaining zone • Assess where the trade-offs exist Rational Framework for Negotiation

17. In a negotiationmaybe the mostimportantthingistoidentify and evaluatetrade-offs • Strategiesabout: • howtocollect information • howtocopewithdifferentperceptionsamongparties • howto go beyondsimpletrade-offs are veryimportanttosucceed in finding out the right balance Rational Framework for Negotiation

18. Some strategies for finding trade-offs are: • Build trust and share information • Ask lots of questions • Give away some information • Make multiple offers simultaneously • Search for post-settlememnt settlements • Use differences of expectations to create mutually beneficial perceived trade-offs • Use differences of risk preferences to create mutually beneficial perceived trade-offs • Use different time preferences to create mutually beneficial trade-offs • Consider adding issues to the negotiation to increase the potential for making mutually beneficial trade-offs • Consider whether there is some way to reduce costs to the other party of allowing you to get what you want and vice versa Rational Framework for Negotiation

19. Experience vs expertise • Twomainfactorsdistinguishexperiencefrom expertise: • The abilityofan expert toadaptskillstogetgoodoutcomes • The abilitytotransmit or transfer theseskills • A primary way toimprove performance in a negotiationis the developementof expertise bycombiningexperiencewith the abilitytothinkrationally • Thus, understanding the demandsof a particularproblem and thinkingrationallyimproveyourabilitytoanalyze and restructure a proposednegotiation Simplifyng Complex Negotiations

20. Negotiatingrationallyrequirestounderstand the impact offairness and emotionalconsiderationthatprofoundlyaffectbargaining • Multipartynegotiation: • More complexity due to: • Richnessof the interpersonal networks • Multiple individualpreferences • More interestsinvolved • Look more carefullyfor integrative opportunities, beawareofbarriers and be sensitive to the impact ofdecisionrules on the qualityofgroupoutcomes Simplifyng Complex Negotiations

21. Negotiating through third parties: • Consider their goals, interests and likely behaviour in order to develop effective strategies • Active participant in the negotiation process • Vested interests in particular outcomes • Know managers or disputants, their incentives, constituency demands and goals Simplifyng Complex Negotiations

22. Audit your own decision processes Consider the decision processes of your opponent Make your best assessment of reservation prices, interest and the comparative importance of issues View the negotiation process as an opportunity to collect and update your information So…

23. Negotiation is not a science…… is an art!!!!!!!!!!!!! So…