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Merger & Acquisition FET & KGT Merger Case Study

Merger & Acquisition FET & KGT Merger Case Study. Far EasTone Telecommunications President Jan Nilsson. May 6 th , 2004. by. What is M&A. Merger Combination of two or more corporations. Acquisition One company taking control of another by purchasing

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Merger & Acquisition FET & KGT Merger Case Study

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  1. Merger & AcquisitionFET & KGT Merger Case Study Far EasTone Telecommunications President Jan Nilsson May 6th, 2004

  2. by What is M&A • Merger Combination of two or more corporations. • Acquisition One company taking control of another by purchasing a majority or all of the target company's outstanding shares.

  3. Significant M&A’s Worldwide • Citigroup – In 1998, Citibank's US$70 billion merger with Travelers Group, which established the world's largest financial-services firm, was the biggest in history until the AOL-Time-Warner deal • Dec. 14, 2000. FCC approved American-on-Line to acquire Time Warner with US$111B, the largest volume of transaction in the history, to create the world’s largest media company • Feb. 17, 2004, Cingular Wireless to buy AT&T Wireless for US$41 billion in cash (the largest all-cash deal in history) • Jan. 14, 2004, J.P. Morgan Chase & Co. took over of Bank One for US$58 billion in stock  make the 3rd largest transaction of the record

  4. M&A Milestones in Taiwan • In June 1999, UMC’s (聯華電子) 5-in-1 merger unveiled Taiwan’s soaring M&A activities afterward by consolidating five of its joint ventures at a time – United Semiconductor Corporation (USC), United Integrated Circuits Corporation (UICC), United Silicon Incorporated (USIC) and UTEK Semiconductor Corporation (UTEK) 聯誠,聯嘉,聯瑞及合泰 • Advanced Semiconductor Engineering Inc. (ASE日月光) acquired Motorola’s IC package & testing (封裝測試) facilities in Taiwan and Korea in Jul. 1999 • The merger of Yuan-Da and Core Pacific Security (元大與京華) back in Jul 2000 was the prelude of the recent consolidations in financial banking sector in Taiwan • Aug. 2002, Cathay Financial Holding (國泰金融控股公司) acquired United World Chinese Commercial Bank (世華聯合商業銀行) for NT$115M to become the largest financial holding company in Taiwan who will service the half of total population in Taiwan • Chinatrust Financial Holding(中國信託金控) acquired Grand Commercial Bank(萬通銀行) in Jul. 2003 with NT$19.6B transaction to become the private-owned bank with the largest assets

  5. Different Stages in M&A

  6. Why Merger & Acquisition

  7. A E d Whom to Buy Horizontal Merger Vertical Merger Closely related or the same product/service Suppler & customer relationship Concentric Merger Conglomerate Merger Identical or highly similar with one includes the other Fill in the missing piece of a big corporate A B

  8. How Buyer always wants to buy low, but seller wants to sell high! • Usually, a merger intermediaries are involved in the process of M&A for both buyer side and seller side. These intermediaries are called financial advisors, who are experts in merger and acquisition • Set up initial contacts to match up potential buyer or seller • If there is a match, a Letter of Intent (LOI) or Memorandum of Understanding (MOU) will be signed to agree to proceed with Due Diligence process and exchanging information; usually a off-site data room will be set-up • Kick-off the Due Diligence Process with a Management Presentation of both seller and buyer sides • Proceed with Due Diligence process and fine tune valuation model • Negotiation, negotiation, and negotiation

  9. Due Diligence Process Due Diligence: The process by which persons conduct inquiries for the purposes of timely, sufficient and accurate disclosure of all material statements/information or documents which may influence the outcome of the transaction. • Major areas that should be covered: • Corporate records • Financial and tax information • Indebtedness • Employment and labor matters • Real property • Personal property • Trademark & Intellectual property • Agreements • Supplier and customer information • Compliance with law and information • Any other documents which are pertinent to the functioning of the business.

  10. How Much to Pay External Factors: • Customer loyalty / market • Change in the industry • Cost of loss to competitors • ……….etc. Maximum Price Evaluate Bid below valuation & negotiate Internal Factors: • Understand financials • Valuation Range • Synergies • ……….etc.

  11. Enterprise Value Where are the values resided in? Present Value Future Value

  12. Valuation Method How are they valued? Historical Data Future Trends Public Market Valuation Cost Method Discounted Cash Flow Past Now Future • Others • Market Value Added (MVA) also known as Economic Value Added (EVA): It captures the added value of invested capital year-by-year. MVA should be thought of as capturing value growth, and DCF as capturing income growth. • Deal Structure has also the effects to the valuation – cash only, stock only, or a mix of cash and stock There is no best valuation method for all cases; it all depends.

  13. When • Within the agreed time period defined in LOI or MOU (time can be extended with the approvals from both parties), transaction value, deal structure, legal requirement, and timeline need to be finalized. • Definitive Merger Agreement (or Sales & Purchase Agreement): • Transaction – price, deal structure, merger effective date, shareholders’ right • Representation and Warranties – disclose all obligations and ensure all entitlement • Covenant – all other agreements and precedent conditions • Termination and Indemnification – break-away conditions and penalties

  14. The Easy Part is Just Done A merger really starts during the integration phase!! • Transition is usually started way before the so-called “integration” takes place • Step-by-step integration and thorough plans are always preferable; but in reality, parallel run (or even reverse procedure) and fine-tune-while-implantation Source: “Managing the M&A Process”, Statumen, Mar. 2002

  15. Combination & Integration • Communication, communication, communication • Undisrupted Operations, Services, and Quality • Integration • Sales and Marketing • Backend support operations and processes – procurement and logistics • System – IT and accounting systems • Organization • Culture • It is all about PEOPLE ! • It is not completed yet! • Post-merger performance tracking • Synergy delivery

  16. Merger Case Statistics In 2003, Asia accounted for 40% of total M&A globally, which was a dramatically jumps from less than 30% in 2002 Taiwan’s completed merger cases over the year Source: Fair Trade Commission, Executive Yuan, ROC

  17. Merger announced No expected synergy Company renamed to change perception No Guarantee of Success for Every Merger Case • In average, three out of four mergers fail to achieve their desired financial and strategic goals • AOL-Time Warner deal: • Indigestion: One or both companies fail to successfully incorporate their business models, goals, or cultures into an integrated whole. • The promised payoffs never materialize • Stock price has plunged ever since the merger

  18. Creating Taiwan’s Largest Mobile Services Company in the Private Sector

  19. Merger Agreement signed FET&KGT signed LOI Negotiation failed due to price & deal structure Jan. 02, 2004 Merger effective date – first closing date KGT had the 1st tender offer FET & KGT Merger Completed LOI period Extended Persistent efforts of both parties to close the gap before the LOI signed Oct. 7, 2003 FET & KGT signed merger agreement Agreed the extension of LOI to complete the process A 2-phases bidding process – non-binding & binding with selected operators Apr. 29, 2004 Completed all legal processes and requirements Submit bid based on valuation drew from KGT’s Information Memorandum The effective date of merger – transaction mdae FET & KGT Merger Chronology Intricate & ever-changing development in FET&KGT M&A deal led to a dramatic outcome of the biggest consolidation in Taiwan Telecom

  20. FET and KGT Merger Creating the Largest Mobile Operator in the Private Sector in Taiwan Creating the Largest Mobile Services Distribution Channel in Taiwan Establishing Alliance with World-Class Mobile Operator NTT DoCoMo Simplifying the Competitive Landscape in Taiwan Creating the Largest Network Capacity in Taiwan

  21. Financial Terms • FET and KGT agreed to combine their operations through a two-stage transaction. Post transaction, KGT shareholders will receive 0.46332 FET share plus NT$6.72 in cash for each KGT share. • In total, KGT shareholders will receive approximately 806.6mm FET shares and approximately NT$11,698mm in cash • The implied equity valuation of KGT is NT$29.6 bn and enterprise value is NT$44.9 bn1 • The valuation represents 5.3x EV/2003 estimated EBITDA multiple Structure and Other Terms • The transaction will be effected through the following two steps. • Step 1: Merger between Yuan Ho (FET’s fully owned subsidiary) and KGT • Step 2: Full share exchange between Yuan Ho and FET • The EXPECTED timing of closing is March 2004  actual completed in April 29, 2004 • FET and KGT agreed to form a coordination committee to oversee the integration process 1 KGT total shares outstanding = 1,740,842,496 as of transaction date FET and KGT Merger Transaction Overview

  22. Merger Structure and Process • Merger between Yuan Ho and KGT • Shareholder Meeting expected in Nov 2003 • Major regulatory approvals obtained by Closing of Step 1 • Expected closing – Jan 1, 2004 Step 1 Step 2 Yuan Ho Shares FET FET KGT Shareholders FET Shares 100% Cash Consideration + Yuan Ho Shares Yuan Ho KGT Yuan Ho (KGT Assets) KGT Shares • Share exchange between FET and Yuan Ho shareholders • Shareholders Meeting expected in Feb 2004 • Expected closing – April 29, 2004 The two-step process would ensure an optimal transaction structure from the execution regulatory, and business perspectives. Coordination Committee will be established to oversee the integration process

  23. FET and KGT MergerTransaction Overview Pro Forma Ownership Structure Pro Forma Financials (NT Dollars in Millions 2003 1H 2003E Revenue FET NT$ 17,722.2 36,755.6 KGT 11,605.5 23,626.5 Pro Forma Revenue NT$ 29,327.7 60,382.1 EBITDA FET NT$ 7,398.0 15,413.6 KGT 4,219.7 8,418.0 Pro Forma EBITDA NT$ 11,617.7 23,831.6 EBITDA Margin FET 41.7% 41.9% KGT 36.4% 35.6% Pro Forma EBITDA 39.6% 39.5% 23% 77% Source: Company Financials. KGT 2003 estimated full year results represents annualized Jan-Aug management accounts

  24. Strengthened Competitive Positioning Pre-Merger Market Share by Revenue1 Post-Merger Market Share by Revenue1 Distant #3 & #4 Solid #2 The merged company will become one of the three leading mobile service operators in Taiwan. Source: Ministry of Transportation & Communication • Based on six months revenue ended Dec. 2003

  25. Revenue Synergies Network and Capex Synergies Synergies Operating Cost Synergies Significant Synergies The combined entity is expected to reap cash flow synergies of NT$ 3-5 bn over the next two years in comparison with the sum of the original projected cash flow for the two companies

  26. Enhanced Product Range and Distribution • Combined entity will offer separate brands to target different segments • The wider product offerings range can be tailored towards meeting specific customer needs in various market segments • 460 sales outlets combined, constitutes 37% of the total market Broadened product offerings to fulfill customer needs Hala 900 哈啦900型 Hala 560 哈啦560型 EasyTalk 輕鬆打

  27. Smooth Integration Process in Progress Establishing a Joint Integration Steering Committee Integration of Backend Operation + Optimization of Equipment and Infrastructure Roll Out of a Coordinated Marketing Plan + Distribution Strategy Re-focus on Future Applications and Increasing ARPU Oct 2003 Jan 2004 March 2004 Clear Roadmap for Smooth Integration

  28. Integration Execution Major milestone / Key date Merger agreement signed Shareholder meeting approved NEW KGT merger back to FET Shareholder meeting approved merger Management Coordination Team New Management Team 10/14 MCT formed Organization & location Organization ready Relocate to Nei-Hu HQs Propose NewCo 7 division structure ex-KGT employees joined new co Business Plans & Budgeting Process Board approve consolidated business plan & budget Release Jan. results concur w/ excited market respond Legal Process FTC approved OTC approved DGT approved First closing date Merger completed Marketing event with full-scale joint operations Sales & Marketing Re-mapping PoP Coordinated marketing plans Bill payment handled by both stores Two-way roaming 3G friendly user trial Integrated logistics & procurement Network & Technology One-way inter-network roaming Integrated network ops flows Centralize NOC center Oct’03 Nov Dec Jan’04 Feb Mar Apr

  29. Realizing SynergyDirect Controlled Channel and Growing GA Increasing Point of Presence Promising Post-paid Gross Adds Direct-controlled channels facilitate mobile data introduction and ensure quality services Source: Company source Source: Company source FET + KGT successfully acquired 39% GA of total market and 80% of the market’s high rate plan for the first 2 months of 2004

  30. Provide seamless cross-network coverage in both voice and data services with the largest capacity in Taiwan • Complementary traffic distribution between north and south • Improve service quality through optimized network resources • Turn on national roaming • Redeploy BTS for capacity enhancement • Share selected network elements (i.e.. SMSC, MMSC, USSD, IN, etc) • Integrate to a common core network and/or switch site, data network, and transmission network Realizing SynergySeamless Cross-network Increasing Network Traffic & Complementary Traffic Distribution Monthly Total MOU per Region – Ericsson Network Monthly Total MOU per Region – Nokia/Lucent Network

  31. Realizing SynergyPromising 2004 Q1 Financials Q1 2004 YoY Growth Q1 2003 Item Unit: NT$ Million Q1 2004 Service Revenue: Solid # 2 approaching #1 Source: Company source

  32. i-mode on FET network FET 2004 Big Bang Offer Middle Rate Plan for cross-net Open 2 way roaming for capacity efficiency • Strengthen Distribution Channels via: • Cross-selling products in FET & KGT outlets • Full function service capability FET Town & Mobile Promotion Van More to come within days…..

  33. Reach Us or We Will Reach You www.fetnet.net FET Town, Karaoke Dorm, & 400+ Stores Mobile Promotion Car & FET Segway

  34. Effective date of merger FET & KGT Merger announced Sound Performance in Stock PriceFET’s Stock Price 46% growth in less than 6 months

  35. Anywhere, anytime, communications enriching the lives of people

  36. Q & A For Further Information: Email Websites Investor Relations IR@fareastone.com.tw Public Relations PR@fareastone.com.tw http://www.fareastone.com.tw http://www.fetnet.net

  37. Thank You

  38. Forms of Merger & Acquisition

  39. Merger Benefits • Strengthens Competitive Positioning in the Taiwan Mobile Market • Creates Significant Synergies in Capex, Opex and Revenues • Enhances Product Range and Distribution • Establishes Strategic Relationship with DoCoMo • A Fair Transaction that Creates Long-Term Shareholder Value

  40. Significant SynergiesRevenue Enhancement and Leading Data/3G Services • Enhanced distribution network and coordination of marketing & sales, customer databases • Complete range of product offerings (e.g. new data and multi-media services) • Cross-selling at jointly-run retail outlets • Continue to lead in the high ARPU mobile data market • Enlarged combined customer base FET KGT Super i-Style • GPRS • SMS • Intelligence Commerce Br@vo • Mobile Multimedia Service (MMS) i-mode • e-Commerce • Games • eMails Data and 3G • Dual offering structure that provides maximum opportunity to capture mobile data sector • Enhanced resources of combined entity will enable the merged company to capture leadership position in 3G services

  41. Significant Synergies Network and Capex Synergies • Combined spectrum: 22.5Mhz in 900 & 1800 Mhz and 35Mhz in 3G • Significant immediate savings in capex in the next two years • Consolidate cell-sites to ensure quality and efficient network coverage • Improved service quality through optimized network resources Network IT • Turn on national roaming • Redeploy BTS for coverage extension • Shared selected service network (i.e.. SMSC, MMSC, USSD, IN, etc) • Integrated to a common core network and/or switch site, data network, and transmission network • Cell-specific handover around coverage holes of either network • Economies of scale in IT operation and systems • Shared Services • Elimination of duplicated S/W • Leveraging negotiation power in R&M • Opportunity to build disaster recovery at lower cost

  42. Significant Synergies Operating Cost Synergies • Economies of Scale and Scope • Jointly source handsets and network equipments to gain leverage over vendors • Increased Market Power • Improved repair and maintenance costing through better contracting terms • Increased bargaining power of content and service providers • Complementary Resources • Back office consolidation including customer service and call center • Joint distribution and retailing with co-branded shops • Reduction in interconnect costs between customers of the combined operations • More Effective Sales and Marketing • Enhanced Information System and Customer Database

  43. Strengthens Competitive Positioning in the Taiwan Mobile Market Establishes Strategic Relationship with DoCoMo Creates Significant Synergies in Capex, Opex and Revenues A Fair Transaction that Creates Long-Term Shareholder Value Enhances Product Range and Distribution A Well Planned Integration Process Investment Highlights

  44. The Combination Stage • This stage is characterized by an increase in the environmental uncertainty. Several concerns are related to the structure, the culture of the company. Each organization involved creates a planning team that has to look for options for integrating the two partners. Human resource professional should help team to schedule meeting and should play a facilitator role. Together with the planning team, human resource professional should set up standard related to: • - The evaluation of employee skills • - The selection processes of employees of the companies involved. • - The comparison of compensation parity parameters between two organizations involved. • - The integration of employment policies of both companies in order to have one union contract for the whole new company.

  45. Culture in a Merger/acquisition environment • The culture of a merger/acquisition should reflect the beliefs, values, and expectation that are share by the organizational members.life. While two companies are in the combination process, the integration of the two cultures are important to the success of the new company. According to Buono & Bowditch, there are four levels of culture types integration. • Cultural pluralism: This approach of culture occurs when the two companies involved do their activities independently. The two companies belong to the same corporate that goal is to spread its risk. • Cultural Blending: This type of culture has a purpose to unify the two distinct organizational cultures. These types of culture are related to two companies that have equal power in a merger environment. • Cultural takeover: This case is usually related to an acquisition environment. The culture of the acquiring firm culture replaces that of the acquired organization. • Cultural resistance: This approach occurs when there is a conflict between the culture of the two organization partners. In this case, it is important to anticipate this eventuality of conflict. • In general, it is important to find out differences and similarities between the two partners in a merger/acquisition environment. This understanding may help the manager to face the cultural resistance.

  46. Culture Compatibility

  47. Fair Trade Act of 1992, Article 6, Paragraph 1 • where an enterprise and another enterprise are merged into one; • where an enterprise holds or acquires the shares or capital contributions of another enterprise to an extent of more than one-third of the total voting shares or total capital of such other enterprise; • where an enterprise is assigned by or leases from another enterprise the whole or the major part of the business or properties of such other enterprise; • where an enterprise operates jointly with another enterprise on a regular basis or is entrusted by another enterprise to operate the latter's business; or • where an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise. Source: Fair Trade Commission, Executive Yuan, ROC

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