Answer any TEN QUESTIONS.
All questions carry equal marks.
Answer any question in maximum 20 lines.
1. Discuss briefly the motives behind acquisition of businesses and companies by existing companies and describe briefly the types of acquisitions that they make to satisfy the specific motives.
2 What is due diligence? Explain important steps in it.
3. What are the provisions of Income tax Act regarding income from business and profession? Examine their relevance when a company is acquiring another company.
4. Explain the provisions of accounting standard AS-14.
5. ABC Limited acquired PQR Limited for a consideration of Rs.40,00,000 to be satisfied in the form of fully paid equity shares of Rs.10 each. The balance sheets of the two companies on 31st March 2006, the date of acquisition were as follows:
Table not included
You are required to pass the necessary journal entries in the books of the transferee company and prepare the balance sheet, when amalgamation is by way of purchase. The development rebate reserve and Export profit reserve are to be maintained in the books of the transferee to claim the accompanying benefits.
6. A company’s present revenues are one million dollars. An analyst made the following estimates regarding the future performance.
Sales growth: 20 percent for the next five years and zero from then on.
Operating cost: 82% of the sales revenue.
Taxes: 38% of the operating income.
Incremental working capital requirements: 8% of the annual revenues in the years where revenue growth is there..
Incremental investment in plant and machinery; 2% of the annual revenues in the years where revenue growth is there.
Calculate the free cash generated by the company in the future years.
7. What is strategy? According to Michael Porter, what are the steps in strategy formulation? How do acquisitions support Michael Porter’s conception of strategy?
8. Give a brief account of steps involved in initiating and completing a merger in India.
9. Describe the important points in SEBI Guidelines regarding takeover in India.
10. Explain the important steps to be taken up by a company to successfully integrate an acquired unit with its operations.
11. Describe briefly various theories put forward in the area of acquisitions and mergers.
12. Explain any two empirical studies that were done in the area of acquisitions and mergers.
13. Discuss the reasons why companies divest some divisions and discuss any one empirical study on the performance of companies and that divested the divisions and companies that acquired the divisions.
14. ABC Limited acquired PQR Limited for a consideration of Rs.30,00,000 to be satisfied in the form of 2,00,000 fully paid equity shares of Rs.10 each. The balance sheets of the two companies on 31st March 2006, the date of acquisition were as follows:
Table not included
You are required to pass the necessary journal entries in the books of the transferee company and prepare the balance sheet, when amalgamation is by way of merger
Tuesday, August 5, 2008
Sunday, August 3, 2008
Mergers and Acquisitions Course Plan - 2008
Topics/chapters to be covered
Prescribed Text: Fred Weston/Mitchell/Mulherin
Ch.1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on takeovers will be discussed.
Ch.3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch.4 Deal Structuring: Some Indian legal issues may be discussed
Ch.5. Strategic Issues
Ch.6. Theories of Mergers and Tender Offers
Ch.7. The Timing of Merger Activity
Ch.8. Empirical Tests of M&A Performance
Ch.9. Alternative Approaches of Valuation
Ch.10. Increasing the value of the Organization
Ch.11. Corporate Restructuring and Divestitures
Ch.12. Empirical tests of Corporate Restructuring and Divestitures
Ch.16. Going private and Leveraged buyouts
Ch.17. International Takeovers and Restructuring
Ch.22. Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Prescribed Text: Fred Weston/Mitchell/Mulherin
Ch.1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on takeovers will be discussed.
Ch.3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch.4 Deal Structuring: Some Indian legal issues may be discussed
Ch.5. Strategic Issues
Ch.6. Theories of Mergers and Tender Offers
Ch.7. The Timing of Merger Activity
Ch.8. Empirical Tests of M&A Performance
Ch.9. Alternative Approaches of Valuation
Ch.10. Increasing the value of the Organization
Ch.11. Corporate Restructuring and Divestitures
Ch.12. Empirical tests of Corporate Restructuring and Divestitures
Ch.16. Going private and Leveraged buyouts
Ch.17. International Takeovers and Restructuring
Ch.22. Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Sunday, June 29, 2008
Timing of Merger Activity
Mergers and Macroeconomy
Statistical relationships
Nelson (1959, 1966) Studies
Nelson R.L., Merger movements in American Industry, 1895-1956, Princeton, NJ; Princeton University Press, 1959
Nelson R.L., 1966, Business Cycle Factors in the Choice Between Internal and External Growth,” The Corporate Mergers, W.W. Alberts and J.E.Segall, eds. Chicago; University of Chicago Press, 1966.
1959 study
For the period 1897-1954 period, there were 14 cycles in general business activity and 12 merger cycles.
A definite timing relationship to the reference cycle turning points was found in 11 of 12 merger cycles.
The two reference expansions 1911-13, 1921-23 for which there was no corresponding merger expansion were either of short duration or of moderate amplitude. The reference cycle contraction of 1953-54 had no corresponding merger contraction and was one of the mildest contractions in the six-decade period.
The peaks of merger cycle usually preceded the peaks of the reference cycle.
Hoewver, th time sequence for troughs was less consistent than for peaks. Nelson (1959. p.112) suggests that this irregular time sequence of merger activity indicates ‘ that economic forces in a depression are likely to be diffuse and weak, compelling no great uniformity in the response of merger activity
Study of relation between merger activity nad other economic series revealed that merger activity was closely related to stock trading, stock prices and business incorporations.
The peak in merger activity wsa reached one month earlier than stock prices, but its trough lagged the trough in stock prices by three months.
Analysis based on detrended series showed that mergers were more positively correlated to stock pirce changes than to changes in industrial production in periods of high merger activity.
Mergers were more positively correlated to industrial production in periods of low merger activity.
In a follow-up study, Nelson(1966) found that merger activity for the 1919-1961 period peaked on average five months before the peak in stock prices, whereas peaks in plant construction contracts and equipment orders were almost coincident with those in stock prices. Nelson's interpretation for this result was that external growth through mergers was selected by firms early in a stock price rise and before they undertook internal investments. One of the reasons offered by Nelson is that the phenomenon reflects the immediacy with which mergers start to produce revenues and profits. Internal investments may involve a protracted waiting period.
In the same study it was found that a peak in merger activity on an average, came 19 months following the trough in the reference cycle or at about the two thirds point in a reference cycle expansion lasting about 29 months.
Melicher, Ledolter, and D’Antonio (1983 Study) on the relationship between merger activity and macroeconomic variables – Industrial activity, Business failures, Stock prices, and Interest rates
Melicher, Ledolter, and D’Antonio, “A Time Series Analysis of Aggregate Merger Activity,” The Review of Economics and Statistics, 65, August 1983, pp. 423-430.
They used FTC quarterly merger data for 1947 through 1977.
Each times series was transformed into white noise ( that is, uncorrelated random variables or residuals from univariate time series models).
From these prewhitened series correlations were determined to find out lead and lag structures.
Among their findings are:
1. An increase in stock prices followed in a quarter by an increase in merger activity. Since merger negotiations begin on average about two quarters before consummation, merger negotiations may precede stock price movements by about one quarter.
2. Mergers respond inversely to prior changes in bond yields, although this relationship is weaker than the case of mergers and stock prices. Further an increase in bond yields decreases stock prices in the same period. An increase in stock prices leads to an increase in bond yields in the following period.
3. Changes in merger activity and changes in stock prices both lead changes in industrial production.
4. Merger activity precedes business failures by one quarter and the relationship is negative.
Linkages between mergers and macroeconomy have also been studied by Becketti (1986)
Becketti, S., “corporate Mergers and the Business Cycle,” Economic Review, Federal Reserve Bank of Kansas City, May 1986, pp. 13-26
Golbe and White (1987) is another study that examined determinants of merger activity.
Golbe, Devra L., and Lawrence J White, “A time series analysis of mergers and acquisitions in the U S Economy,” mimeo, Presented at the NBER Conference on Mergers and Acquisitions , February 1987.
Statistical relationships
Nelson (1959, 1966) Studies
Nelson R.L., Merger movements in American Industry, 1895-1956, Princeton, NJ; Princeton University Press, 1959
Nelson R.L., 1966, Business Cycle Factors in the Choice Between Internal and External Growth,” The Corporate Mergers, W.W. Alberts and J.E.Segall, eds. Chicago; University of Chicago Press, 1966.
1959 study
For the period 1897-1954 period, there were 14 cycles in general business activity and 12 merger cycles.
A definite timing relationship to the reference cycle turning points was found in 11 of 12 merger cycles.
The two reference expansions 1911-13, 1921-23 for which there was no corresponding merger expansion were either of short duration or of moderate amplitude. The reference cycle contraction of 1953-54 had no corresponding merger contraction and was one of the mildest contractions in the six-decade period.
The peaks of merger cycle usually preceded the peaks of the reference cycle.
Hoewver, th time sequence for troughs was less consistent than for peaks. Nelson (1959. p.112) suggests that this irregular time sequence of merger activity indicates ‘ that economic forces in a depression are likely to be diffuse and weak, compelling no great uniformity in the response of merger activity
Study of relation between merger activity nad other economic series revealed that merger activity was closely related to stock trading, stock prices and business incorporations.
The peak in merger activity wsa reached one month earlier than stock prices, but its trough lagged the trough in stock prices by three months.
Analysis based on detrended series showed that mergers were more positively correlated to stock pirce changes than to changes in industrial production in periods of high merger activity.
Mergers were more positively correlated to industrial production in periods of low merger activity.
In a follow-up study, Nelson(1966) found that merger activity for the 1919-1961 period peaked on average five months before the peak in stock prices, whereas peaks in plant construction contracts and equipment orders were almost coincident with those in stock prices. Nelson's interpretation for this result was that external growth through mergers was selected by firms early in a stock price rise and before they undertook internal investments. One of the reasons offered by Nelson is that the phenomenon reflects the immediacy with which mergers start to produce revenues and profits. Internal investments may involve a protracted waiting period.
In the same study it was found that a peak in merger activity on an average, came 19 months following the trough in the reference cycle or at about the two thirds point in a reference cycle expansion lasting about 29 months.
Melicher, Ledolter, and D’Antonio (1983 Study) on the relationship between merger activity and macroeconomic variables – Industrial activity, Business failures, Stock prices, and Interest rates
Melicher, Ledolter, and D’Antonio, “A Time Series Analysis of Aggregate Merger Activity,” The Review of Economics and Statistics, 65, August 1983, pp. 423-430.
They used FTC quarterly merger data for 1947 through 1977.
Each times series was transformed into white noise ( that is, uncorrelated random variables or residuals from univariate time series models).
From these prewhitened series correlations were determined to find out lead and lag structures.
Among their findings are:
1. An increase in stock prices followed in a quarter by an increase in merger activity. Since merger negotiations begin on average about two quarters before consummation, merger negotiations may precede stock price movements by about one quarter.
2. Mergers respond inversely to prior changes in bond yields, although this relationship is weaker than the case of mergers and stock prices. Further an increase in bond yields decreases stock prices in the same period. An increase in stock prices leads to an increase in bond yields in the following period.
3. Changes in merger activity and changes in stock prices both lead changes in industrial production.
4. Merger activity precedes business failures by one quarter and the relationship is negative.
Linkages between mergers and macroeconomy have also been studied by Becketti (1986)
Becketti, S., “corporate Mergers and the Business Cycle,” Economic Review, Federal Reserve Bank of Kansas City, May 1986, pp. 13-26
Golbe and White (1987) is another study that examined determinants of merger activity.
Golbe, Devra L., and Lawrence J White, “A time series analysis of mergers and acquisitions in the U S Economy,” mimeo, Presented at the NBER Conference on Mergers and Acquisitions , February 1987.
Wednesday, June 18, 2008
Implementing the Growth Strategy
An article to be referred to
Growth Through Acquisitions: A Fresh Look. By: Anslinger, Patricia L.; Copeland, Thomas E..
Harvard Business Review,
Jan/Feb96, Vol. 74 Issue 1, p126-135, 10p, 1 graph, 2bw;
Growth Through Acquisitions: A Fresh Look. By: Anslinger, Patricia L.; Copeland, Thomas E..
Harvard Business Review,
Jan/Feb96, Vol. 74 Issue 1, p126-135, 10p, 1 graph, 2bw;
Acquisitions - Agency and Resource perspectives
The agency theory perspective is very popular in explaining why firms engage in ineffective M&A. The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from the increase in firm size in that these firms are less likely to fail and executive pay is often linked to firm size. Bank managers have an incentive to improve their employment stability through acquisition since governments are reluctant to close large troubled banks because the failure of a large bank would create severe problems throughout the banking system.
From the resource-based perspective, the firm is composed of a bundle of tangible and intangible resources. Resources do not create value statically or independently and their value comes from their interactions with other resources (Gupta and Roos, 2001). If complementary resources are not under its ownership control, the firm has difficulty in realizing the true potential of its resources. Consequently, the firm has an incentive to merge or acquire other firms that own complementary resources. Hagedoorn and Dysters (2002) suggest that M&A can be one of the alternatives that firms have to exploit external sources of innovative competencies to protect their core businesses. Firms can also pursue non-synergistic acquisitions to grow dramatically and maintain sustained returns at the same time. The resource-based scholars tend to emphasize how a firm that has heterogeneous scarce, valuable and inimitable resources can lead to sustainable competitive advantage (Barney, 1991).
The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from increases in firm size in that these firms are less likely to fail.
Barney, J.B. (1991), "Firm resources and sustained competitive advantage", Journal of Management, Vol. 17 pp.99-120.
Barney, J.B., Zajac, E.J. (1994), "Competitive organisational behaviour: Toward an organisationally-based theory of competitive advantage", Strategic Management Journal, Vol. 15 pp.5-9.
Gupta, O., Roos, G. (2001), "Mergers and acquisitions through an intellectual capital perspective", Journal of Intellectual Capital, Vol. 2 No.3, pp.297-309.
Hagedoorn, J., Dysters, G. (2002), "External sources of innovative capabilities: the preference for strategic alliances or mergers and acquisitions", Journal of Management Studies, Vol. 39 No.2, pp.167-88.
From the resource-based perspective, the firm is composed of a bundle of tangible and intangible resources. Resources do not create value statically or independently and their value comes from their interactions with other resources (Gupta and Roos, 2001). If complementary resources are not under its ownership control, the firm has difficulty in realizing the true potential of its resources. Consequently, the firm has an incentive to merge or acquire other firms that own complementary resources. Hagedoorn and Dysters (2002) suggest that M&A can be one of the alternatives that firms have to exploit external sources of innovative competencies to protect their core businesses. Firms can also pursue non-synergistic acquisitions to grow dramatically and maintain sustained returns at the same time. The resource-based scholars tend to emphasize how a firm that has heterogeneous scarce, valuable and inimitable resources can lead to sustainable competitive advantage (Barney, 1991).
The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from increases in firm size in that these firms are less likely to fail.
Barney, J.B. (1991), "Firm resources and sustained competitive advantage", Journal of Management, Vol. 17 pp.99-120.
Barney, J.B., Zajac, E.J. (1994), "Competitive organisational behaviour: Toward an organisationally-based theory of competitive advantage", Strategic Management Journal, Vol. 15 pp.5-9.
Gupta, O., Roos, G. (2001), "Mergers and acquisitions through an intellectual capital perspective", Journal of Intellectual Capital, Vol. 2 No.3, pp.297-309.
Hagedoorn, J., Dysters, G. (2002), "External sources of innovative capabilities: the preference for strategic alliances or mergers and acquisitions", Journal of Management Studies, Vol. 39 No.2, pp.167-88.
Sunday, June 15, 2008
Mergers and Acquisitions Course - 2008
Topics/chapters to be covered from Fred Weston/Mitchell/Mulherin
Ch. 1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on take overs will be discussed.
Ch. 3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch. 4 Deal Structuring: Some Indian legal issues may he discussed
Ch 5. strategic Issues
Ch 6. Theories of Merges and Tender offers
Ch. 7. The Timing of Merger Activity
Ch. 8 Empirical Tests of M&A Performance
Ch. 9 Alternative Approaches of valuation
Ch. 10 Increasing the value of the organization
Ch. 11 Coproate Restructuring and divestitures
Ch. 12 empirical tests of Corporate Restructuring and Diverstitutes
Ch. 16 Going private and leveraged buyouts
Ch. 17 International Takeovers and Restructuring
Ch.22 Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Ch. 1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on take overs will be discussed.
Ch. 3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch. 4 Deal Structuring: Some Indian legal issues may he discussed
Ch 5. strategic Issues
Ch 6. Theories of Merges and Tender offers
Ch. 7. The Timing of Merger Activity
Ch. 8 Empirical Tests of M&A Performance
Ch. 9 Alternative Approaches of valuation
Ch. 10 Increasing the value of the organization
Ch. 11 Coproate Restructuring and divestitures
Ch. 12 empirical tests of Corporate Restructuring and Diverstitutes
Ch. 16 Going private and leveraged buyouts
Ch. 17 International Takeovers and Restructuring
Ch.22 Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Monday, June 9, 2008
Acquisition and Strategic Planning - 1
Strategic Planning for Growth
According to Boston Consulting Group, of all the factors contributing to the fundamental value of a business, by far the most important is profitable growth. They estimate that it is responsible for between two-thirds and three-fourths of a company's TSR over the long term.
To support companies in planning for profitable growth, BCG helps companies determine the precise role that growth should play in their corporate strategies, identify the most promising growth opportunities, and set the appropriate balance between organic growth and growth by acquisition.
http://www.bcg.com/impact_expertise/practice_area.jsp?practice=38
What actually is (successful) growth?
What is growth? We can measure corporate growth with statistics about
· Revenue
· Profits
· Number of staff
· Number of subsidiaries.
There are several strategic options, how organizations can grow:
· Internal growth (e.g. entry in new markets, launch of new products)
· Mergers and acquisitions
· Joint ventures
· Leveraging (licensing, development of a network of franchise partners).
Successful growth fulfils the following criteria:
A growing organization should always generate value. Successful growth can be measured by the criteria of sustainability, profitability and shareholder value generation.
· Growth does not necessary generate shareholder value.
· Successful corporate growth needs focus on and leadership in some core businesses.
· Success of failure in growth is not a matter of industry or size of the organization. It is, however, a matter of managerial decisions.
That sounds simple, but it is not. According to a study of Bain & Company, only a one out of seven organization manages to grow successfully.
Barriers to Growth
Barriers to successful corporate growth are complex. The main reason is a lack of a growth strategy – or failure to implement one. A poll from ADL and Fortune revealed that only about 25% of all respondents finally realized their intended strategies.
This allows two conclusions:
· Parts of the management have deficits, which prevent realization of the strategy. These deficits may base in communication or the inability to translate the overall vision and strategy into smaller steps and projects for particular divisions.
· In some companies, the whole planning process is little more than rubbish, since they fail to analyze their environment correctly and hence to develop appropriate projections and scenarios.
Moreover, there may be barriers to growth on operational levels:
· Lack of financial means or insufficient access to outside capital
· Lack of qualified staff / expertise
· Lack of preparation to take risks
· Lack of willingness and ability to change (“we always did it that way”)
· The “this is not invented here”-syndrome – the lack of willingness to take on external knowledge
Preconditions for Growth
The most important thing an organization should have is a strong core business. Such a core business has the following characteristics:
· It is a unique, profitable combination of strategic assets (e.g. equipment, intellectual property rights), skills and abilities (e.g. expert knowledge of workforce), products/services, and relations to external environment.
· It distinguishes the organization from its competitors.
· It enables the organization to serve a particular market segment with a perceived value added.
· It may be a single line of business or a combination of several divisions.
· It is the long-lasting major source of growth and value generation.
· It does not necessary contribute the largest proportion of revenues, but it does contribute the largest proportion of profits (A-product)
These characteristics of a core business reveal which further preconditions are needed in order to achieve growth:
· Development and implementation of a (growth)strategy
· Sound financial basis
· Ownership or development of two to three profitable core businesses
· Market leadership with these core businesses (even if it is in a narrow niche market)
· Management focus on these core businesses
· Continuous monitoring of external environment, early realization of and reactions to changes in the market
· Avoidance of unnecessary diversification into unknown businesses
The last point needs some explanation. Diversification into new businesses is not wrong in itself. Changes in the external environment may force the organization to explore new products in new markets. Management should however avoid looking for better prospects in unknown territory (here: business) only because they are not successful in their traditional fields.
The general message for corporate growth is:
Start with the exploitation of your existing competitive advantages.
http://www.themanager.org/Strategy/ManagingGrowthII.htm
According to Boston Consulting Group, of all the factors contributing to the fundamental value of a business, by far the most important is profitable growth. They estimate that it is responsible for between two-thirds and three-fourths of a company's TSR over the long term.
To support companies in planning for profitable growth, BCG helps companies determine the precise role that growth should play in their corporate strategies, identify the most promising growth opportunities, and set the appropriate balance between organic growth and growth by acquisition.
http://www.bcg.com/impact_expertise/practice_area.jsp?practice=38
What actually is (successful) growth?
What is growth? We can measure corporate growth with statistics about
· Revenue
· Profits
· Number of staff
· Number of subsidiaries.
There are several strategic options, how organizations can grow:
· Internal growth (e.g. entry in new markets, launch of new products)
· Mergers and acquisitions
· Joint ventures
· Leveraging (licensing, development of a network of franchise partners).
Successful growth fulfils the following criteria:
A growing organization should always generate value. Successful growth can be measured by the criteria of sustainability, profitability and shareholder value generation.
· Growth does not necessary generate shareholder value.
· Successful corporate growth needs focus on and leadership in some core businesses.
· Success of failure in growth is not a matter of industry or size of the organization. It is, however, a matter of managerial decisions.
That sounds simple, but it is not. According to a study of Bain & Company, only a one out of seven organization manages to grow successfully.
Barriers to Growth
Barriers to successful corporate growth are complex. The main reason is a lack of a growth strategy – or failure to implement one. A poll from ADL and Fortune revealed that only about 25% of all respondents finally realized their intended strategies.
This allows two conclusions:
· Parts of the management have deficits, which prevent realization of the strategy. These deficits may base in communication or the inability to translate the overall vision and strategy into smaller steps and projects for particular divisions.
· In some companies, the whole planning process is little more than rubbish, since they fail to analyze their environment correctly and hence to develop appropriate projections and scenarios.
Moreover, there may be barriers to growth on operational levels:
· Lack of financial means or insufficient access to outside capital
· Lack of qualified staff / expertise
· Lack of preparation to take risks
· Lack of willingness and ability to change (“we always did it that way”)
· The “this is not invented here”-syndrome – the lack of willingness to take on external knowledge
Preconditions for Growth
The most important thing an organization should have is a strong core business. Such a core business has the following characteristics:
· It is a unique, profitable combination of strategic assets (e.g. equipment, intellectual property rights), skills and abilities (e.g. expert knowledge of workforce), products/services, and relations to external environment.
· It distinguishes the organization from its competitors.
· It enables the organization to serve a particular market segment with a perceived value added.
· It may be a single line of business or a combination of several divisions.
· It is the long-lasting major source of growth and value generation.
· It does not necessary contribute the largest proportion of revenues, but it does contribute the largest proportion of profits (A-product)
These characteristics of a core business reveal which further preconditions are needed in order to achieve growth:
· Development and implementation of a (growth)strategy
· Sound financial basis
· Ownership or development of two to three profitable core businesses
· Market leadership with these core businesses (even if it is in a narrow niche market)
· Management focus on these core businesses
· Continuous monitoring of external environment, early realization of and reactions to changes in the market
· Avoidance of unnecessary diversification into unknown businesses
The last point needs some explanation. Diversification into new businesses is not wrong in itself. Changes in the external environment may force the organization to explore new products in new markets. Management should however avoid looking for better prospects in unknown territory (here: business) only because they are not successful in their traditional fields.
The general message for corporate growth is:
Start with the exploitation of your existing competitive advantages.
http://www.themanager.org/Strategy/ManagingGrowthII.htm
Acquisition and Strategic Planning - 2
Growth Strategy Implementation
Alternatives and their advantages and disadvantages
Build (organic growth)
Adv:
Control
Dis:
Capital/expense requirements
Speed
Partner
Alternatives possible
- Marketing/distribution alliance
- Joint venture
- License
- Franchise
Adv:
Limited capital and expense requirment
Dis:
lack of or limited control
Potential for diverging objectives
Potential for creating a competitor
Minorty Stakes in other companies
Adv.
Limited capital and expense requirment
dis:
High risk of failure
lack of control
Acquire
Adv.
Speed
Control
Dis:
Capital expense requirements
Potential earnings dilution
Swap assets
Adv:
Limited use of cash
No earnings dilution
Limits tax liability if assets base does not change
Dis:
Finding willing parties
Reaching agreement onf assets to be exchanged
According to standard theory, the decision ot choose among alternative options should be made based upon the discounting of the cash flow stream to the firm resulting from each option.
The final selection may depend on such nonquantifiable factors as the senior manager's risk profile, patience and ego.
Alternatives and their advantages and disadvantages
Build (organic growth)
Adv:
Control
Dis:
Capital/expense requirements
Speed
Partner
Alternatives possible
- Marketing/distribution alliance
- Joint venture
- License
- Franchise
Adv:
Limited capital and expense requirment
Dis:
lack of or limited control
Potential for diverging objectives
Potential for creating a competitor
Minorty Stakes in other companies
Adv.
Limited capital and expense requirment
dis:
High risk of failure
lack of control
Acquire
Adv.
Speed
Control
Dis:
Capital expense requirements
Potential earnings dilution
Swap assets
Adv:
Limited use of cash
No earnings dilution
Limits tax liability if assets base does not change
Dis:
Finding willing parties
Reaching agreement onf assets to be exchanged
According to standard theory, the decision ot choose among alternative options should be made based upon the discounting of the cash flow stream to the firm resulting from each option.
The final selection may depend on such nonquantifiable factors as the senior manager's risk profile, patience and ego.
Developing the Acquisition Plan - 1
An acquisition plan is required if the firm decides that an acquisition is needed to implement the firm's business strategy.
The plan delineates key management objectives for the takeover, resource constraints and appropriate strategies for implementing the proposed transaction.
the acquisition plan provides appropriate guidance to those charged with successfully completing the transaction by providing critical inputs into all subsequent phases of the acquisition process.
the acquisition plan defines the criteria, such as size, profitability, industry, and growth rate used to select potential acquisition candidates.
The plan specifies the roles and responsibilities of team members, including outside consultants, and sets the team budget. It indicates management's preference for the form of payment.
The plan delineates key management objectives for the takeover, resource constraints and appropriate strategies for implementing the proposed transaction.
the acquisition plan provides appropriate guidance to those charged with successfully completing the transaction by providing critical inputs into all subsequent phases of the acquisition process.
the acquisition plan defines the criteria, such as size, profitability, industry, and growth rate used to select potential acquisition candidates.
The plan specifies the roles and responsibilities of team members, including outside consultants, and sets the team budget. It indicates management's preference for the form of payment.
Search for Acquisition Candidates - 1
To start the search for acquisition candidates, the search team or the manager must have preset primary screening or selection criteria. At the initial stage the criteria can be a small number. They include the industry, size of transaction,some valuation criteria like P/E, or P/B multiples.
The search team may go through various databases and director services like Dun and Bradstreet, Standard and Poors, Thomas' Register and Million Dollar Directory to identify potential targets.
The search team can contact firm's law, banking and accounting firms.
Investment banks, M&A brokers and leveraged buyout firms are fertise sources of candidates. But they may require an advisory or finder's fee.
Some firms do advertise its interest in acquiring a particular type of firm in various businss dailies and periodicals.
The search team may go through various databases and director services like Dun and Bradstreet, Standard and Poors, Thomas' Register and Million Dollar Directory to identify potential targets.
The search team can contact firm's law, banking and accounting firms.
Investment banks, M&A brokers and leveraged buyout firms are fertise sources of candidates. But they may require an advisory or finder's fee.
Some firms do advertise its interest in acquiring a particular type of firm in various businss dailies and periodicals.
Making an Initial Offer to the Target - 1
A common first step in a transaction is to negotiate a bilateral confidentiality agreement and letter of intent.
The acquirer has an incentive to avoid signing a letter of intent. But the target company or an interested seller is often unwilling to proceed without a written offer.
Letter of intent
The letter of intent lays out the principla areas of agreement between the two parties.
The letter of intent formally stipulates the reason for the agreement, major terms and conditions, the responsibilities of both parties while the agreement is in force, a reasonable expiration date, and how fees associated with the transaction weill be paid.
Major terms and conditions include a brief outline of the proposed structure of the transaction.
The proposed purchase price may be expressed as a specific dollar figure, as a range, or as a multiple of some measure of value. The letter of intent also specifies the types of data to be exchanged and the duration and extent of the initial due diligence
The acquirer has an incentive to avoid signing a letter of intent. But the target company or an interested seller is often unwilling to proceed without a written offer.
Letter of intent
The letter of intent lays out the principla areas of agreement between the two parties.
The letter of intent formally stipulates the reason for the agreement, major terms and conditions, the responsibilities of both parties while the agreement is in force, a reasonable expiration date, and how fees associated with the transaction weill be paid.
Major terms and conditions include a brief outline of the proposed structure of the transaction.
The proposed purchase price may be expressed as a specific dollar figure, as a range, or as a multiple of some measure of value. The letter of intent also specifies the types of data to be exchanged and the duration and extent of the initial due diligence
Due Diligence - 1
Buyer due diligence is the process of validating assumptions underlying valuation.
The primary objectives are to identify and to confirm "sources of value" and to mitigate real or potential liability by looking for fatal flaws that reduce value.
Due diligence involves three primary reviews.
1. A strategic/operational/marketing due diligence conducted by senior operatons and marketing managers.
2. A financial due diligence conducted by financial and accounting personnel to ascertain the value of assets and liabilities that are being acquired.
3. A legal due diligence to ensure that there are no hidden legal liabilities to any outside party.
A rigorous due diligence is done based on comprehensive checklists.
The strategic and operational review has focus on th seller's management team, operations as well as marketing and sales strategies. An assessment of customer's viewpoint regarding the company's products and people is an essential component of this review.
The financial review examines the accuracy, timeliness, and completeness of thes seller's financial statements.
Legal due diligence concentrates on corporate records, management and employee issues, material contracts and obligations of the seller, litigations and claims.
The primary objectives are to identify and to confirm "sources of value" and to mitigate real or potential liability by looking for fatal flaws that reduce value.
Due diligence involves three primary reviews.
1. A strategic/operational/marketing due diligence conducted by senior operatons and marketing managers.
2. A financial due diligence conducted by financial and accounting personnel to ascertain the value of assets and liabilities that are being acquired.
3. A legal due diligence to ensure that there are no hidden legal liabilities to any outside party.
A rigorous due diligence is done based on comprehensive checklists.
The strategic and operational review has focus on th seller's management team, operations as well as marketing and sales strategies. An assessment of customer's viewpoint regarding the company's products and people is an essential component of this review.
The financial review examines the accuracy, timeliness, and completeness of thes seller's financial statements.
Legal due diligence concentrates on corporate records, management and employee issues, material contracts and obligations of the seller, litigations and claims.
Integration - 1
the major activities in integration can be described in the following sequence.
Premerger planning
Addressing communication issues
Defining the new organization
Developing staffing plans
Functinal and departmental integration
Building a new corporate culture
Premerger planning
By doing premerger integration planning, the buyer will have an opportunity to insert into agreement the apprpriate representations and warranties as well as conditions that facilitate postmerger integration process. The planning process creates a blueprint for a post merger integration organization that will be assembled immediately after the closing.
Part of the integration planning exercise is carried as a part of the due diligence exercise. One responsibility of the due diligence team is to identify ways in which assets, processes and other resources can be combined in order to realize cost savings, productivity improvements, or other perceived synergies. Valuation of the target involves estimating the rate at which the expected synergies may be realised. This step needs that how and over what time period the integration will be implemented has to be thought of as a plan to give numerical estimates of magnitude and timing of the cash flows of the combined companies
Premerger planning
Addressing communication issues
Defining the new organization
Developing staffing plans
Functinal and departmental integration
Building a new corporate culture
Premerger planning
By doing premerger integration planning, the buyer will have an opportunity to insert into agreement the apprpriate representations and warranties as well as conditions that facilitate postmerger integration process. The planning process creates a blueprint for a post merger integration organization that will be assembled immediately after the closing.
Part of the integration planning exercise is carried as a part of the due diligence exercise. One responsibility of the due diligence team is to identify ways in which assets, processes and other resources can be combined in order to realize cost savings, productivity improvements, or other perceived synergies. Valuation of the target involves estimating the rate at which the expected synergies may be realised. This step needs that how and over what time period the integration will be implemented has to be thought of as a plan to give numerical estimates of magnitude and timing of the cash flows of the combined companies
Wednesday, May 14, 2008
Clean Team for Merger Integration
A Clean (Team) Start On Merger Integration
The Clean Team: An Emerging Tool For M&A Success
By: John Koob Mercer Human Resource Consulting, Atlanta, GA
WorldatWork Journal - Vol. 15, No. 3, Pgs. 24-31
New tool for speedier integration. With M&A activity on the upswing, dealmakers are under increasing pressure to integrate the two companies as quickly and smoothly as possible. Good integration planning can spell the difference between a merger's success or failure.
To address the integration issues likely to arise after a merger, progressive companies field a clean team. (The name, explains HR consultant John Koob, comes from the computer and health sciences label for a designated work environment that is sealed off to prevent contamination.) The members collect, review, and assess confidential data after regulatory filing and before deal closing, a downtime that can span several months.
Unlike the due diligence process, which focuses mainly on the acquiror gathering financial information, the clean team is a collaborative effort focused on integration planning. Teams generally contain current or former employees and third-party experts such as accountants, consultants, or actuaries.
How to clean up dirty problems. Identifying key issues that are likely to emerge and recommending possible courses of action, clean teams give dealmakers a jump on stumbling blocks (e.g., differences in corporate culture or incompatible compensation and benefit plans) that often thwart or slow down successful integration. Doing so can shorten the time and enhance the quality of integration planning, while avoiding the problems associated with delayed rationalization of compensation and retirement plans.
The team's contribution to the new organization can translate into savings of several hundred million dollars, the author notes.
Two large industry leaders used a clean team when they formed a joint venture in 2004, creating the world's second largest producer of a particular product. They contracted with a consulting team to evaluate and analyze the venture's HR aspects. To avoid violating blackout and antitrust regulations, the independent consultants gathered information from the employees of the respective companies but did not disclose one company's information to the other. By implementing the resulting recommendations, the joint venture had decisions in place soon after its official launch, covering benefits, retirement plan design, a new payroll system, and an early retirement program. Other clean teams have identified cultural differences between companies, determined how those differences would affect the integration process, and made plans to accommodate them.
Guidelines for setting up a team.
The author provides guidelines for establishing and operating a successful clean team. For example, have the team leaders report directly to a steering committee of HR and other executive leaders from both entities. Follow clear, structured guidelines that conform with antitrust legislation. Keep sensitive information confidential; provide reports in an aggregated, anonymous format; restrict access to key information to certain personnel; provide complete documentation; and maintain all data and documents from both parties in distinct libraries. Restrict the target's personnel from seeing confidential information about the acquiror's operations or business.
The Clean Team: An Emerging Tool For M&A Success
By: John Koob Mercer Human Resource Consulting, Atlanta, GA
WorldatWork Journal - Vol. 15, No. 3, Pgs. 24-31
New tool for speedier integration. With M&A activity on the upswing, dealmakers are under increasing pressure to integrate the two companies as quickly and smoothly as possible. Good integration planning can spell the difference between a merger's success or failure.
To address the integration issues likely to arise after a merger, progressive companies field a clean team. (The name, explains HR consultant John Koob, comes from the computer and health sciences label for a designated work environment that is sealed off to prevent contamination.) The members collect, review, and assess confidential data after regulatory filing and before deal closing, a downtime that can span several months.
Unlike the due diligence process, which focuses mainly on the acquiror gathering financial information, the clean team is a collaborative effort focused on integration planning. Teams generally contain current or former employees and third-party experts such as accountants, consultants, or actuaries.
How to clean up dirty problems. Identifying key issues that are likely to emerge and recommending possible courses of action, clean teams give dealmakers a jump on stumbling blocks (e.g., differences in corporate culture or incompatible compensation and benefit plans) that often thwart or slow down successful integration. Doing so can shorten the time and enhance the quality of integration planning, while avoiding the problems associated with delayed rationalization of compensation and retirement plans.
The team's contribution to the new organization can translate into savings of several hundred million dollars, the author notes.
Two large industry leaders used a clean team when they formed a joint venture in 2004, creating the world's second largest producer of a particular product. They contracted with a consulting team to evaluate and analyze the venture's HR aspects. To avoid violating blackout and antitrust regulations, the independent consultants gathered information from the employees of the respective companies but did not disclose one company's information to the other. By implementing the resulting recommendations, the joint venture had decisions in place soon after its official launch, covering benefits, retirement plan design, a new payroll system, and an early retirement program. Other clean teams have identified cultural differences between companies, determined how those differences would affect the integration process, and made plans to accommodate them.
Guidelines for setting up a team.
The author provides guidelines for establishing and operating a successful clean team. For example, have the team leaders report directly to a steering committee of HR and other executive leaders from both entities. Follow clear, structured guidelines that conform with antitrust legislation. Keep sensitive information confidential; provide reports in an aggregated, anonymous format; restrict access to key information to certain personnel; provide complete documentation; and maintain all data and documents from both parties in distinct libraries. Restrict the target's personnel from seeing confidential information about the acquiror's operations or business.
Article List on Integration
Article by accenture team
http://www.accenture.com/NR/rdonlyres/0BB9A876-CE12-4E91-872F-3FFD72F6E27E/0/postmerger_a4.pdf
Six sigma driven integration process
http://www.effectivemanagement.com/ASSETS/CF996DA97AA3475BA5DF1BA901C5E534/240302_postmerg.pdf
Tower Perrin article
http://www.towersperrin.com/tp/getwebcachedoc?webc=TILL/USA/2000/200009/2002050106.pdf
Article on Intelligent Clean Room concept of Accenture
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/2880260307.html
Post merger IT integration - Cap Gemini Case Study
http://www.de.capgemini.com/m/de/cs/ss_Post-Merger_Integration.pdf
Cultural challenges - Transatlantic mergers
http://www.kultur-und-management.com/artikel1.pdf
IT integration blueprint
http://common.ziffdavisinternet.com/download/0/1575/0116_whiteboard_print.pdf
Very interesting paper that discusses research of various consultants on mergers with pure scientific studies
http://www.ftc.gov/be/rt/businesreviewpaper.pdf
100-day plan - presentation
http://www.case-study.ru/files/6.pdf
Two merger integtation imperatives
http://www.atkearney.com/shared_res/pdf/strat_and_leadership_S.pdf
DNA of Effective post merger integration
http://www.promethee.asso.fr/Globa%20RWelborn.pdf
http://www.accenture.com/NR/rdonlyres/0BB9A876-CE12-4E91-872F-3FFD72F6E27E/0/postmerger_a4.pdf
Six sigma driven integration process
http://www.effectivemanagement.com/ASSETS/CF996DA97AA3475BA5DF1BA901C5E534/240302_postmerg.pdf
Tower Perrin article
http://www.towersperrin.com/tp/getwebcachedoc?webc=TILL/USA/2000/200009/2002050106.pdf
Article on Intelligent Clean Room concept of Accenture
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/2880260307.html
Post merger IT integration - Cap Gemini Case Study
http://www.de.capgemini.com/m/de/cs/ss_Post-Merger_Integration.pdf
Cultural challenges - Transatlantic mergers
http://www.kultur-und-management.com/artikel1.pdf
IT integration blueprint
http://common.ziffdavisinternet.com/download/0/1575/0116_whiteboard_print.pdf
Very interesting paper that discusses research of various consultants on mergers with pure scientific studies
http://www.ftc.gov/be/rt/businesreviewpaper.pdf
100-day plan - presentation
http://www.case-study.ru/files/6.pdf
Two merger integtation imperatives
http://www.atkearney.com/shared_res/pdf/strat_and_leadership_S.pdf
DNA of Effective post merger integration
http://www.promethee.asso.fr/Globa%20RWelborn.pdf
Integration - I
The key to driving long-term stakeholder value is efficient, strategic and well-paced integration.
Avoid the common pitfalls of post-merger integration
Customer retention and the alignment of organizational responsibilities are important issues.
The key to a profitable merger hinges on the successful integration of two organizations, each with its own culture, processes and operating structures. All of these disparate elements simply cannot be consolidated overnight.
Long before the deal goes through, they should start developing a detailed action plan — one that recognizes that much of the real work begins only after the deal closes.
Develop an effective plan for the integration process
A smooth integration depends on identifying, prioritizing and measuring synergies early in the process. The integration planning should start well before the transaction closes. For instance, in addition to addressing financial, legal and operating issues, due diligence should be used to prepare for integration by examining issues such as cultural fit and shared organizational values.
Companies eager to hit the ground running on Day 1 will want to develop an integration plan that encompasses the following:
Establishing a project management office to provide guidance and tools, and to drive the integration process
Assigning a dedicated team, backed by executive support, to manage the integration program
Creating a tracking mechanism to measure how well they are capturing identified synergies
Planning for workforce integration and creating a retention strategy for key personnel
Implementing a communications plan to respond to concerns and provide quick answers to questions regarding people's ongoing roles and responsibilities
Addressing customer and supplier retention issues
Establishing a plan for addressing potential cultural differences
Developing a tactical plan for the first 100 days of the new entity's operations
By devising a comprehensive integration plan at the outset, and by implementing its various elements at a managed pace, companies can enhance their chances of structuring M&A deals that deliver long-term shareholder value.
http://www.deloitte.com/dtt/article/0,1002,cid%253D148623,00.html?theme=maen
Avoid the common pitfalls of post-merger integration
Customer retention and the alignment of organizational responsibilities are important issues.
The key to a profitable merger hinges on the successful integration of two organizations, each with its own culture, processes and operating structures. All of these disparate elements simply cannot be consolidated overnight.
Long before the deal goes through, they should start developing a detailed action plan — one that recognizes that much of the real work begins only after the deal closes.
Develop an effective plan for the integration process
A smooth integration depends on identifying, prioritizing and measuring synergies early in the process. The integration planning should start well before the transaction closes. For instance, in addition to addressing financial, legal and operating issues, due diligence should be used to prepare for integration by examining issues such as cultural fit and shared organizational values.
Companies eager to hit the ground running on Day 1 will want to develop an integration plan that encompasses the following:
Establishing a project management office to provide guidance and tools, and to drive the integration process
Assigning a dedicated team, backed by executive support, to manage the integration program
Creating a tracking mechanism to measure how well they are capturing identified synergies
Planning for workforce integration and creating a retention strategy for key personnel
Implementing a communications plan to respond to concerns and provide quick answers to questions regarding people's ongoing roles and responsibilities
Addressing customer and supplier retention issues
Establishing a plan for addressing potential cultural differences
Developing a tactical plan for the first 100 days of the new entity's operations
By devising a comprehensive integration plan at the outset, and by implementing its various elements at a managed pace, companies can enhance their chances of structuring M&A deals that deliver long-term shareholder value.
http://www.deloitte.com/dtt/article/0,1002,cid%253D148623,00.html?theme=maen
Tuesday, May 13, 2008
Due Diligence - Imperatives
For years, due diligence has been viewed as the tedious part of a merger or acquisition. A series of US accounting scandals and the recent pick-up in deal activity has forced investors to take this fact-checking process ever more seriously.
The importance of due diligence was clearly demonstrated in 2004 when the chairman of Smith & Wesson resigned following the disclosure that he spent 15 years in jail in the 1950s and 1960s for the part he played in a series of armed robberies. He apparently had not revealed his past when appointed to his executive post because "nobody asked". When the facts emerged, he departed.
An example from Control Risks Group's due-diligence division demonstrates the pitfalls that a thorough due diligence review can avoid. A major international investor was considering a substantial acquisition in the Czech Republic: the acquisition target had a strong profile and its management appeared to be western-oriented with a strong business plan and good development prospects. However, it was not a publicly-listed company and the information available was limited. In addition, the company's senior management had been associated with a major trading group that had recently been driven into bankruptcy through collusion by its shareholders and management. Control Risks Group conducted detailed due diligence into the target and discovered that the initial capital for the company had been embezzled by the general-director and founder from his previous employer.
Control Risks also uncovered evidence of 'tunnelling' between suppliers and customers controlled by the general-director. The advisory group consequently advised its client on how to structure the transaction to minimise their risks by replacing key personnel and introducing controls into the company as a prerequisite to the investment.
The private-equity firm CVC Capital Partners, was able to negotiate a lower price when it bought Kwik-Fit, the car-servicing business, from Ford in 2002 after accounting irregularities were found during the due-diligence process.
The basic purpose of due diligence is to confirm that everything at a company is as it appears to be in public. It is the predators' chance to examine their prey, warts and all. Without such a process, buyers cannot know whether a potential acquisition target is a poisoned chalice.
Typically, during a merger or acquisition process, the bidding company sends teams of advisers into the target company's specially-created 'data room'. A review will usually examine the financial, legal and operational condition of a business.
The length of time it takes depends on the complexity of the target company or the timetable of announcements. Depending on the size and complexity of the deal, costs can run into hundreds of thousands of pounds, but huge sums are spent every year on carrying out due-diligence exercises ahead of mergers or acquisitions.
According to Capcon, the UK's only quoted risk-management and corporate-investigations group, lawyers who study and verify contractual words, and accountants who audit the numbers, generate most of the costs of due diligence while little is spent on looking behind the contracts, profit-and-loss accounts and balance sheets, or on the key individuals and trading relationships.
Issues that are often overlooked include information on whether tenants of properties being acquired can walk away from their leases tomorrow, or under what circumstances a lender can suddenly call in its loans.
Without the answers to some of the key questions like the ones raised above, the company could turn out to be worth a whole lot less than a buyer pays for it.
When it comes to a hostile bid, due diligence becomes even more important as the bidder will only have access to basic public documents. The UK Takeover Panel's code gives a hostile bidder an equal opportunity to receive information that has been handed to a friendly purchaser. Alternatively, a bidder can launch an offer without due diligence but typically offers a lower price because it is 'buying blind' and needs to leave a margin to cover the risk of discovering the unknown.
Private buyers also do intensive due diligence before backing a management buy-out and any purchase of a private company comes without the comfort of reporting obligations that public companies observe.
Management due-diligence process
Focus on the capabilities of potential senior executives and non-executive directors has also intensified. According to Armstrong Craven, a European executive-research and business-information company, growing concerns about changes in corporate governance standards, the need for more transparency, and the recent pick-up in deal activity has led to management due diligence being taken more seriously.
Armstrong says the approach used to be ad-hoc, simply involving investment directors or advisers making a few calls to support their instinct that a management team was backable. Now, however, the management due-diligence process has evolved to become an integral part of the transaction process.
Among other exercises, the process now includes competency-based interviews to assess whether team members have the critical competencies necessary to deliver the aims of the business, psychometric personality profiles and professional referencing.
Cultural due diligence
Over the past few years, cultural due diligence has taken on a new importance. A cultural review can help determine what the target company's ethics are regarding its employees and shareholders and its ties with communities, as well as assessing the emotional and soft issues that a purchase will throw up. These issues can range from how employees are remunerated to whether they are allowed to dress down on Fridays.
Due diligence - Link to integration
Most value destruction in the mergers and acquisitions world is found in failed integration rather than poor deal execution. The process may provide valuable opportunities to get to know company personnel, their state of mind and level of motivation.
http://www.dofonline.co.uk/governance/the-importance-of-due-diligence.html
The importance of due diligence was clearly demonstrated in 2004 when the chairman of Smith & Wesson resigned following the disclosure that he spent 15 years in jail in the 1950s and 1960s for the part he played in a series of armed robberies. He apparently had not revealed his past when appointed to his executive post because "nobody asked". When the facts emerged, he departed.
An example from Control Risks Group's due-diligence division demonstrates the pitfalls that a thorough due diligence review can avoid. A major international investor was considering a substantial acquisition in the Czech Republic: the acquisition target had a strong profile and its management appeared to be western-oriented with a strong business plan and good development prospects. However, it was not a publicly-listed company and the information available was limited. In addition, the company's senior management had been associated with a major trading group that had recently been driven into bankruptcy through collusion by its shareholders and management. Control Risks Group conducted detailed due diligence into the target and discovered that the initial capital for the company had been embezzled by the general-director and founder from his previous employer.
Control Risks also uncovered evidence of 'tunnelling' between suppliers and customers controlled by the general-director. The advisory group consequently advised its client on how to structure the transaction to minimise their risks by replacing key personnel and introducing controls into the company as a prerequisite to the investment.
The private-equity firm CVC Capital Partners, was able to negotiate a lower price when it bought Kwik-Fit, the car-servicing business, from Ford in 2002 after accounting irregularities were found during the due-diligence process.
The basic purpose of due diligence is to confirm that everything at a company is as it appears to be in public. It is the predators' chance to examine their prey, warts and all. Without such a process, buyers cannot know whether a potential acquisition target is a poisoned chalice.
Typically, during a merger or acquisition process, the bidding company sends teams of advisers into the target company's specially-created 'data room'. A review will usually examine the financial, legal and operational condition of a business.
The length of time it takes depends on the complexity of the target company or the timetable of announcements. Depending on the size and complexity of the deal, costs can run into hundreds of thousands of pounds, but huge sums are spent every year on carrying out due-diligence exercises ahead of mergers or acquisitions.
According to Capcon, the UK's only quoted risk-management and corporate-investigations group, lawyers who study and verify contractual words, and accountants who audit the numbers, generate most of the costs of due diligence while little is spent on looking behind the contracts, profit-and-loss accounts and balance sheets, or on the key individuals and trading relationships.
Issues that are often overlooked include information on whether tenants of properties being acquired can walk away from their leases tomorrow, or under what circumstances a lender can suddenly call in its loans.
Without the answers to some of the key questions like the ones raised above, the company could turn out to be worth a whole lot less than a buyer pays for it.
When it comes to a hostile bid, due diligence becomes even more important as the bidder will only have access to basic public documents. The UK Takeover Panel's code gives a hostile bidder an equal opportunity to receive information that has been handed to a friendly purchaser. Alternatively, a bidder can launch an offer without due diligence but typically offers a lower price because it is 'buying blind' and needs to leave a margin to cover the risk of discovering the unknown.
Private buyers also do intensive due diligence before backing a management buy-out and any purchase of a private company comes without the comfort of reporting obligations that public companies observe.
Management due-diligence process
Focus on the capabilities of potential senior executives and non-executive directors has also intensified. According to Armstrong Craven, a European executive-research and business-information company, growing concerns about changes in corporate governance standards, the need for more transparency, and the recent pick-up in deal activity has led to management due diligence being taken more seriously.
Armstrong says the approach used to be ad-hoc, simply involving investment directors or advisers making a few calls to support their instinct that a management team was backable. Now, however, the management due-diligence process has evolved to become an integral part of the transaction process.
Among other exercises, the process now includes competency-based interviews to assess whether team members have the critical competencies necessary to deliver the aims of the business, psychometric personality profiles and professional referencing.
Cultural due diligence
Over the past few years, cultural due diligence has taken on a new importance. A cultural review can help determine what the target company's ethics are regarding its employees and shareholders and its ties with communities, as well as assessing the emotional and soft issues that a purchase will throw up. These issues can range from how employees are remunerated to whether they are allowed to dress down on Fridays.
Due diligence - Link to integration
Most value destruction in the mergers and acquisitions world is found in failed integration rather than poor deal execution. The process may provide valuable opportunities to get to know company personnel, their state of mind and level of motivation.
http://www.dofonline.co.uk/governance/the-importance-of-due-diligence.html
Human Due Diligence in Hostile Takeovers
In Hostile Territory
The rhetoric of hostile negotiations as it plays out in public seems designed to amplify cultural differences between two companies. From the target pours the language of resistance, decrying the poor fit and often questioning the motives and track record of the acquirer, sometimes in highly personal terms. For its part, the acquirer blasts away at the performance of the target’s management team, usually casting it in the worst possible light. Hostile acquirers that win the day often end up alienating at least part of the organization they are taking over, creating cultural terrorists in the process who do everything in their power to resist integration.
In this environment, it’s clearly impossible to employ most of the analytic tools we describe in this article ahead of time. Executive teams can’t spend time together, except in highly charged circumstances with lawyers on hand. Acquirers can’t expect to see inside data on questions of employee satisfaction, compensation and promotion processes, or decision-making norms. But companies cannot afford to ignore human due diligence just because the target won’t cooperate. Although hostile bids are rare, they also tend to be large. Hostile deals accounted for about 1% of all deals announced in 2006, for instance, but they accounted for 17% of deal value during the same period. Last year, the 374 uninvited bids made by corporate and private-equity buyers added up to offers worth $700 billion. What’s more, such deals often turn out to be game-changing for the companies involved and their industries.
Fortunately, there is a certain amount you can do in a hostile situation in advance. You can analyze published reports and news stories about your target. Senior executives who have moved on from the target company can sometimes provide useful views of their former employer’s culture. Customers and suppliers often have valuable insight into the decision-making processes and capabilities of the organization and may know how these compare with those of the acquirer. Any progress you make with this kind of human due diligence will help to test your investment thesis, determine boundaries for pricing, and identify some of the hot-button issues for the target’s employees. It will also help keep you focused on life after the deal and the critical next steps you will need to take to improve it.
Don’t rest on your laurels once the deal is completed. On your first day as boss, launch an aggressive “get to know you” program. As you become acquainted with the people, focus especially on the next generation of leaders, usually two levels below the CEO. These managers have not fought the pitched defensive battles a hostile takeover generates and thus often see the opportunities that a business combination can provide. They will be your key allies as you move to overcome resistance and build support, because they are highly influential down the ranks of the organization. Decisions they make to stay or leave will have a significant ripple effect. You should follow up this program with employee surveys, interviews, and visits, all of which should be framed to protect your investment—the people you acquired.
Properly presented, human due diligence can be more than a learning exercise. It can be an important part of the healing process that needs to happen before your hostile acquisition can deliver the value you were so desperate to obtain.
For more read HBR article in April 2007
The rhetoric of hostile negotiations as it plays out in public seems designed to amplify cultural differences between two companies. From the target pours the language of resistance, decrying the poor fit and often questioning the motives and track record of the acquirer, sometimes in highly personal terms. For its part, the acquirer blasts away at the performance of the target’s management team, usually casting it in the worst possible light. Hostile acquirers that win the day often end up alienating at least part of the organization they are taking over, creating cultural terrorists in the process who do everything in their power to resist integration.
In this environment, it’s clearly impossible to employ most of the analytic tools we describe in this article ahead of time. Executive teams can’t spend time together, except in highly charged circumstances with lawyers on hand. Acquirers can’t expect to see inside data on questions of employee satisfaction, compensation and promotion processes, or decision-making norms. But companies cannot afford to ignore human due diligence just because the target won’t cooperate. Although hostile bids are rare, they also tend to be large. Hostile deals accounted for about 1% of all deals announced in 2006, for instance, but they accounted for 17% of deal value during the same period. Last year, the 374 uninvited bids made by corporate and private-equity buyers added up to offers worth $700 billion. What’s more, such deals often turn out to be game-changing for the companies involved and their industries.
Fortunately, there is a certain amount you can do in a hostile situation in advance. You can analyze published reports and news stories about your target. Senior executives who have moved on from the target company can sometimes provide useful views of their former employer’s culture. Customers and suppliers often have valuable insight into the decision-making processes and capabilities of the organization and may know how these compare with those of the acquirer. Any progress you make with this kind of human due diligence will help to test your investment thesis, determine boundaries for pricing, and identify some of the hot-button issues for the target’s employees. It will also help keep you focused on life after the deal and the critical next steps you will need to take to improve it.
Don’t rest on your laurels once the deal is completed. On your first day as boss, launch an aggressive “get to know you” program. As you become acquainted with the people, focus especially on the next generation of leaders, usually two levels below the CEO. These managers have not fought the pitched defensive battles a hostile takeover generates and thus often see the opportunities that a business combination can provide. They will be your key allies as you move to overcome resistance and build support, because they are highly influential down the ranks of the organization. Decisions they make to stay or leave will have a significant ripple effect. You should follow up this program with employee surveys, interviews, and visits, all of which should be framed to protect your investment—the people you acquired.
Properly presented, human due diligence can be more than a learning exercise. It can be an important part of the healing process that needs to happen before your hostile acquisition can deliver the value you were so desperate to obtain.
For more read HBR article in April 2007
Acquisition due diligence - KPMG view
Acquisition due diligence
Acquisition due diligence assesses the risks and opportunities of a proposed transaction. It helps to reduce the risk of post-transaction unpleasant surprises.
It’s vital that the results of any due diligence process are relevant to the transaction including:
valuation of the target and therefore the purchase price
sale and purchase agreement (e.g. accounting definitions, accounting and tax warranties and indemnities, etc)
integration plan (e.g. deal synergies).
There are a range of circumstances in which companies can benefit from externally provided acquisition due diligence.
Where any organisation is considering an acquisition, merger or joint venture.
Where the organisation or deal manager has limited experience in undertaking due diligence.
Where existing advisers face a conflict of interest, or are not well placed to undertake the necessary due diligence.
Where the required due diligence demands technical capabilities and commercial experience beyond the organisation’s internal resources.
How we can help
KPMG can provide acquisition due diligence covering financial considerations (e.g. the integrity of historic and forecast information), tax, commercial factors (e.g. customers, suppliers, markets, competitors), superannuation, IT and human resources.
Appraising available information about the target and the proposed merged entity to more objectively evaluate the merits of the deal and the valuation supporting the offer price.
Identifying issues likely to affect negotiations.
Helping to reduce the risks associated with the deal by identifying and quantifying risks and benefits (e.g. identifying suitable warranties and indemnities for inclusion in the sale and purchase agreement).
Why select us
Global quality and consistency
KPMG’s international accreditation program delivers consistent global quality to all our clients. In each of KPMG’s 40 accredited Transaction Services groups our people go through the same rigorous training and skills development process.
Industry knowledge
We concentrate our experience by market sectors worldwide. For example, our global Financial Services Transaction team works exclusively with our banking, insurance and financial investment clients.
Transaction success factors
We’re continually analysing and researching transactions to improve our understanding of what makes a deal successful. The insights gained in this way are built into our services.
Service and performance
Penetrating financial, commercial and industry analysis is vital in understanding and managing the risks inherent in any business transaction. It reveals the risks and opportunities that lie behind the figures, allowing clients to challenge deal assumptions.
We deploy a proprietary methodology that’s under constant development by KPMG’s global research and development team - resulting in clear, quality reports focused on the transaction issues critical to the deal.
http://www.kpmg.com.au/default.aspx?tabid=807
Acquisition due diligence assesses the risks and opportunities of a proposed transaction. It helps to reduce the risk of post-transaction unpleasant surprises.
It’s vital that the results of any due diligence process are relevant to the transaction including:
valuation of the target and therefore the purchase price
sale and purchase agreement (e.g. accounting definitions, accounting and tax warranties and indemnities, etc)
integration plan (e.g. deal synergies).
There are a range of circumstances in which companies can benefit from externally provided acquisition due diligence.
Where any organisation is considering an acquisition, merger or joint venture.
Where the organisation or deal manager has limited experience in undertaking due diligence.
Where existing advisers face a conflict of interest, or are not well placed to undertake the necessary due diligence.
Where the required due diligence demands technical capabilities and commercial experience beyond the organisation’s internal resources.
How we can help
KPMG can provide acquisition due diligence covering financial considerations (e.g. the integrity of historic and forecast information), tax, commercial factors (e.g. customers, suppliers, markets, competitors), superannuation, IT and human resources.
Appraising available information about the target and the proposed merged entity to more objectively evaluate the merits of the deal and the valuation supporting the offer price.
Identifying issues likely to affect negotiations.
Helping to reduce the risks associated with the deal by identifying and quantifying risks and benefits (e.g. identifying suitable warranties and indemnities for inclusion in the sale and purchase agreement).
Why select us
Global quality and consistency
KPMG’s international accreditation program delivers consistent global quality to all our clients. In each of KPMG’s 40 accredited Transaction Services groups our people go through the same rigorous training and skills development process.
Industry knowledge
We concentrate our experience by market sectors worldwide. For example, our global Financial Services Transaction team works exclusively with our banking, insurance and financial investment clients.
Transaction success factors
We’re continually analysing and researching transactions to improve our understanding of what makes a deal successful. The insights gained in this way are built into our services.
Service and performance
Penetrating financial, commercial and industry analysis is vital in understanding and managing the risks inherent in any business transaction. It reveals the risks and opportunities that lie behind the figures, allowing clients to challenge deal assumptions.
We deploy a proprietary methodology that’s under constant development by KPMG’s global research and development team - resulting in clear, quality reports focused on the transaction issues critical to the deal.
http://www.kpmg.com.au/default.aspx?tabid=807
Due Diligence
Due diligence all too often becomes an exercise in verifying the target's financial statements rather than conducting a fair analysis of the deal's strategic logic and the acquirer's ability to realize value from it. Seldom does the process lead managers to kill potential acquisitions, even when the deals are deeply flawed.
What can companies do to improve their due diligence?
In "When to Walk Away from a Deal," Harvard Business Review, Vol. 82, No. 4, April 2004, authors have taken a close look at twenty companies—both public and private—whose transactions have demonstrated high-quality due diligence, and calibrated the findings against their experiences in 2,000-odd deals that they have screened over the past ten years.
They have found that successful acquirers view due diligence as much more than an exercise in verifying data. While they go through the numbers deeply and thoroughly, they also put the broader, strategic rationale for their acquisitions under the microscope. They look at the business case in its entirety, probing for strengths and weaknesses and searching for unreliable assumptions and other flaws in the logic. They take a highly disciplined and objective approach to the process, and their senior executives pay close heed to the results of the investigations and analyses—to the extent that they are prepared to walk away from a deal, even in the very late stages of negotiations. For these companies, due diligence acts as a counterweight to the excitement that builds when managers begin to pursue a target.
All the successful acquirers were found to be consistent in their approach to due diligence. Although there were idiosyncrasies and differences in emphasis placed on their inquiries, all of them built their due diligence process as an investigation into four basic questions:
What are we really buying?
What is the target's stand-alone value?
Where are the synergies—and the skeletons?
What's our walk-away price?
What can companies do to improve their due diligence?
In "When to Walk Away from a Deal," Harvard Business Review, Vol. 82, No. 4, April 2004, authors have taken a close look at twenty companies—both public and private—whose transactions have demonstrated high-quality due diligence, and calibrated the findings against their experiences in 2,000-odd deals that they have screened over the past ten years.
They have found that successful acquirers view due diligence as much more than an exercise in verifying data. While they go through the numbers deeply and thoroughly, they also put the broader, strategic rationale for their acquisitions under the microscope. They look at the business case in its entirety, probing for strengths and weaknesses and searching for unreliable assumptions and other flaws in the logic. They take a highly disciplined and objective approach to the process, and their senior executives pay close heed to the results of the investigations and analyses—to the extent that they are prepared to walk away from a deal, even in the very late stages of negotiations. For these companies, due diligence acts as a counterweight to the excitement that builds when managers begin to pursue a target.
All the successful acquirers were found to be consistent in their approach to due diligence. Although there were idiosyncrasies and differences in emphasis placed on their inquiries, all of them built their due diligence process as an investigation into four basic questions:
What are we really buying?
What is the target's stand-alone value?
Where are the synergies—and the skeletons?
What's our walk-away price?
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