VMA: Introduction VishwajeetRana
Course Content • Introduction to Mergers and Acquisitions; an overview and the process • Drivers and myths of M&A • Financial analysis of M&A • Securities markets approaches to valuation of M&A • Technical issues in M&A • A Comparative analysis of M&A • Financing in M&A • Tactics and negotiations in M&A • Post acquisition issues in M&A; creating value through synergies • The arguments against M&A 2
Topics flow • Introduction, M&A Drivers and A-D Analysis • Trading & Transaction Comp Valuation • DCF Valuation • M&A Process • Harvard Case Study and Client Presentation 3
VMA: Application of learnt skills • Mergers and Acquisitions • Sales and trading • Investment banking • Finance and business entrepreneurship • Corporate finance • Valuation consulting • Transaction advisory • Financial analysis • Equity research • Hedge funds • Private equity & Venture capital • Corporate banking 4
Reading Core Reading • Marren, Joseph H.; Mergers & Acquisitions: A Valuation Handbook, Business One Irwin, Homewood, Ill. • Gaughan, Patrick A.; Mergers, Acquisitions, and Corporate Restructurings, John Wiley & Sons; 4thE Recommended Reading: Books: • Bruner, Robert; Applied Mergers and Acquisitions (Wiley Finance) • Miller, Edwin L.; Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide • Tim Koller, Marc Goedhart and David Wessels. Valuation: Measuring and Managing the Value of Companies, 4th Edition • Rosenbaum, Joshua and Pearl, Joshua; Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions (Wiley Finance) • Sudarsanam, Sudi ; Creating Value from Mergers and Acquisitions: The Challenges 5
Module Assessment – 1 (Course work) Scenario: You work for a leading UK based mid-market M&A advisory firm and you have just signed an engagement letter with a client to represent them in finding a suitable buyer for their business. You need to identify an UK based company as your client and prepare a CIM, similar to the provided indicative format. The Investment memo should not be longer than 3,500 words excluding appendices. You are welcome to put excel based financial numbers to support your analysis as a part of appendix. 6
Module Assessment – 1 (Course work) Deliverables Due on Tuesday of • Seller and 3 potential Acquirers pitch Week 2 • VMA financial models Week 7 • Client presentation Week 9 • Confidential Information Memo Week 10 The final presentation must be sent to me by 12.00 Noon one day prior of the presentation day. There will not be any change after this version. 7
The pass mark is 50% of total marks and 40% is minimum threshold for each assessment. Course work assessment criteria 8
The pass mark is 50% of total marks and 40% is minimum threshold for each assessment. The pass mark is 50% of total marks and 40% is minimum threshold for each assessment. Course work: Indicative format • Business overview • Industry overview • Operations • Technology • Marketing • Capital structure of the company • Management structure of the company • Regulatory/Legal/Tax disclosure • Valuation Summary (Application of Trading/Transaction/DCF/A-D Analysis) • Investment rationale • Proposal to potential investor 9
The pass mark is 50% of total marks and 40% is minimum threshold for each assessment. The pass mark is 50% of total marks and 40% is minimum threshold for each assessment. Module Assessment The pass mark is 50% of total marks and 40% is minimum threshold for each assessment. 10
Client Presentation You will make an executive presentation to the client on your analysis and recommendations. The presentation will be conducted in last class of the term and each student will be given 30 minutes (10 minutes presentation and 20 minutes Q&A with fellow analysts) to present his/her analysis. Included in the presentation is a requirement to demonstrate that you have critically analyzed and evaluated the various options for the client to sell his/her business. 11
Reference reading • Harvard Business Review • Wall Street Journal • Financial Times • www.mergerstat.com • www.bondsonline.com • http://www.advfn.com • http://www.mergermarket.com • http://uk.reuters.com • http://www.google.co.uk/finance 12
Investment Banking Career VishwajeetRana
Disclaimer This presentation is intended for sharing the informal and public information only and can not be taken as a professional advise from the presenter or his present or past commercial and non commercial organization association. You are advised to contact professional career advisor or respective legal advisor before taking any action for your precious goals.
This premium industry is for everybody (FO-MO-BO) • Deal Makers • Business Strategy • Economists • Information Technology • Event Management • Social/Corporate • Finance/Accounting • Operations • Quantitative Nerds
Global Asset Mgt/ Research • Managing Money/investments/real assets • Research opinion
Stop Bugging! Show us the Money Source: www.careers-in-finance.com (Year 2010)
Extracurricular Matters No compromise with Ethics and Confidentiality, Sorry!!!
Show me the money! • 2 to 4 % of the transaction size. • Retention amount
What should you do? • Polish your resume • Show to your friends, family, teachers… • Internship and Associate programs • List on reputed job sites • Apply directly to companies • Alumni, conferences, teachers, anyone you know • Practice, practice and practice…
A typical M&A interview • Telephonic call with business head or HR • In-person meeting with Team members • Final round interview or Social invitation • An offer • Negotiation • Tough questions in interview does not mean disqualified. • Caution: Do not bring up $ unless asked, show maturity, attitude, ethical and integrity. PLEASE be presentable!
A typical day for an Analyst/Associate • Power point pitches • Excel financial modeling • Confidential Information Memorandum (Depends!) • Participate in the meetings
Your ROI - Global Education • Think about after 10 Years at work • Student life makes the best life long friends • Global business need innovation in applications not in technology • Polished, Social, thoughts from other side etc..
Thought of the day • Do not give up on USA, financially! But do not miss life time opportunity in BRIC countries AND keep an eye on Colombia, Egypt, Indonesia, South Africa, Turkey and Vietnam.
Risk always has Positive ROI Thank You!
Title Mergers & Acquisitions VMA
Motives and Determinants of Mergers 1. Growth 2. Synergy - economics of scale 3. Diversification 4. Improved management 5. Hubris hypothesis 6. Vertical integration benefits 7. Financial synergy 8. Horizontal mergers and pursuit of monopoly power 9. Tax benefits
Types of Acquisitions • Complementary fit: Acquisition that helps to compensate for some weakness of the acquiring firm • Example: The acquiring company has strong manufacturing but weak marketing or sales. The target may have strong marketing and sales but poor quality control in manufacturing. • Supplementary fit: Target reinforces strength of the acquiring firm • Target is similar to acquirer • Steel company buying another steel company
Other Types of Acquisitions • Conglomerate: acquisitions of companies outside of their other lines of business Examples: Gulf & Western acquiring Paramount Pictures IT&T acquiring Sheraton Hotels • Congeneric Mergers: • Congeneric means: allied in nature or action • Involves related enterprises but not producers of the sameproduct (horizontal) or firms in a producer-supplier relationship Example: American Express acquisition of Shearson Hamil
Growth • Company may not be able to grow fast enough by internalexpansion • Internal expansion usually takes more time than acquisition • Critical issue: Premium paid for this speed - price of target • Does the price of quicker development exceed the price paid for internal development by too much to justify difference • Use project evaluation techniques (i.e., NPV or IRR) • Falling stock prices - In periods of falling stock prices thecosts of acquiring assets through purchase of whole companiesmay justify the acquisition
Growth Through Acquisitions • For many companies M&A is a key part of their growth strategy • Johnson & Johnson: medical device maker and pharmaceutical company • Did 50 acquisitions between 1995–2005 • In 2005 it tried to do its largest deal - $22 billion acquisition of Guidant
Largest Global Pharmaceutical Companies : By Market Capitalization Source: Yahoo Finance
Examples of Failed Growth • Quaker Oats Acquisition of Snapple • In 1994 Quaker Oats paid $1.7 billion for Snapple • In 1997 Quaker Oats sold off Snapple to Triaic Companies for $300 million • Quaker Oats overestimated the growth potential of Snapple • Snapple was already relatively mature and its growth was limited • Quaker Oats main business was mature and it was looking for growth opportunities
Example of Unchecked Growth: WorldCom • WorldCom was built by Bernie Ebbers from a small, Mississippi telecom reseller–LDDS– founded in 1983 • He acquired many companies from the 1980s to 1990 to become one of the largest telecom companies in world
WorldCom Deals • 1993: Merged with Resurgens Comm. and Metromedia Comm. • 1994: Acquired IDB Comm. – had 200 operating agreements in foreign countries • 1995: Acquired WilTel – had large fiber optic network
WorldCom Deals (cont.) • 1996 – Acquired MFS Comm.- $14 billion deal • MFS had local networks in Europe • Acquired Brooks Fiber, Compuserve from H&R Block
WorldCom’s Biggest Deal • September 1998 – merged with MCI • $37 to $40 billion deal • WorldCom now became a leading telecom company • 2000 – WorldCom tried to merge with Sprint in $155 billion deal • Justice Department rejected this deal on antitrust grounds
WorldCom Debt • WorldCom took on high debt partly to finance deals • 2002 Total debt rose to $30 billion • 2002 Interest payments - $170 million • 2003 Interest scheduled - $1.7 billion • 2004 Interest scheduled - $2.6 billion
WorldCom and Industry Analysts • WorldCom generated $107 million in fees for Salomon Smith Barney (SSB) • Jack Grubman, its telecom analyst, issued very strong positive recommendations • “Cheapest S&P large cap growth stock at the time” (October 1998) • “The must own large cap growth company at the time” (February 1999) • “Single best idea in telecom”
Grubman and the Board (cont.) • More of Grubman’s quotes: “Any investor who did not take advantage of current prices to buy every share of WorldCom should seriously think about another vocation.”
Grubman Postscript • In 2003 Grubman paid a substantial fine and was permanently barred from the securities industry for issuing allegedly false analyst reports (although not on WorldCom)
WorldCom Postscript • February 15, 2005: Verizon acquired MCI (formerly WorldCom) for $6.8 billion • MCI just came out of bankruptcy • September 1998: WorldCom paid $37 billion for MCI • In 2005 the combined company sold for $6.8 billion
What Happened to Bernie Ebbers? • He was tried for $11 billion corporate accounting fraud • In July 2005 he was sentenced to 25 years in prison
Growth and R&D Development • Pfizer used its 1998 acquisition of Warner Lambert to acquire the leading selling drug in the world – Lipitor - $11 billion annual sales • This helped Pfizer to become leading pharmaceutical company in the world
Scale and Scope Economics • Economies of Scale – Declining per unit costs as output rises • May only last within certain range of output • Example: Harper & Row acquiring South Western Publishing • Economies of Scope – Being able to offer wider range of services or products to same customers • Example: Commercial bank with major retail network acquiring a bank with strong trust department