Change management in

multinational corporations

Lectures 5-6
Mergers & Acquisitions - meanings

Combining different companies (Mergers)

Buying companies (Acquisitions)

Selling companies (Disposals)

Splitting companies (De-Merger/Spin-offs)

What is a Merger?
In a MERGER, two (or more) corporations come
together to combine and share their resources
to achieve common objectives.

The shareholders of the combining firms often

remain as joint owners of the combined entity.

A new entity may be formed subsuming the

merged firms
What is an Acquisition?
In an ACQUISITION, one firm purchases the assets or
shares of another.

The acquired firm’s shareholders cease to be owners of

that firm.

The acquired firm becomes the subsidiary of the

acquirer.

Acquisitions usually take the form of a public tender

offer.
Financial classification of M&As

Strategic acquisitions:
Generate operating synergies (reduce competition, attain
economies of scale or scope, R&D synergies)
Most of them horizontal

Financial acquisitions:
Bidder thinks that target is undervalued (due to different
information or because of bad management)

Leveraged buyouts

Conglomerate acquisitions:
Motivated by financial synergies (taxes, diversification)
Motives behind Mergers &
Acquisitions?
Seller’s perspective

Strategic aspects
Leading aspects
Lack of growth potential
Succession planning
High competition
Other focus Incomplete / incompetent
management team

Financial aspects
Distressed sale Opportunistic / “hidden” aspects
Realisation of earnings (Private Equity, Attractive offer
Venture Capital) Anticipated market downturn
Rationing of financial resources
Peaks for cyclic businesses /
markets
 Motives behind Mergers &
Acquisitions?
Buyer’s perspective
Strategic aspects
Opportunistic reasons
Synergies
Asset stripping
Economies of scale Take advantage of financial difficulties of
Technology/Know-how competitor
Growth (horizontal / vertical integration)
Diversification (region / product)
Transformation
Access to (leadership) resources Irrational behaviour
Empire building
Financial and Tax Re-investment of free cash flows
Use of trapped cash, e.g. EMEA headquarters to
avoid taxing in home countries
Avoidance of share buy backs
 Motives behind Mergers &
Acquisitions?
Management perspective
Pitfall:
Influence and prestige after the transaction?
Former owner downgraded to
management level
Former management downgraded to
employee level
Principal-agency problem
Low effort during the M&A process,
“sabotage” of negotiations
Opportunistic behaviour, “mental switch”
to preferred new owner
Management Buy-out

Wins:
Financial
Independence:
Capital gains (if shareholders)
Upgrading (e.g. new shareholders,
Transaction bonus management buy-in)
Personal wins (CV)
Why M&As fail?

Bad luck
When realization lower than expectations
Empire Building
Managers maximise own utility, not shareholders’
This utility is typically linked with growth and size of assets
Gugler et al. (2003): Around 15% of all mergers and 35% of all failures
Hubris and bounded rationality
Being over-optimistic about efficiency gains (Booz-Allen & Hamilton,
1999).
Not foreseeing cultural conflict and post-merger problems (Weber and
Cameron, 2003).
Interaction of synergies and agency conflicts can lead to coordination
problems
(Fulghieri and Hodrick, 2003) - Managers foresee “good equilibrium”, but
end up in “bad equilibrium”.
Gugler et al. (2003): Around 28% of all mergers and 65% of all failures
Main challenges
 Participants in the M&A
process
BUYER SELLER

Lead Lead
Advisor Advisor

Internal & external Stakeholders Internal & external Stakeholders

experts Public experts Public
Strategy advisors Shareholder Strategy advisors Shareholder
Board of directors Tax experts Board of directors
Tax experts
Antitrust division Legal experts Antitrust division
Legal experts Customer Accountants Customer
Accountants Employees Financing partners Employees
Financing partners Banks Industrial specialists Banks
Industrial specialists Investor Relation /
Communication
Investor Relation /
Communication
 Acquisition proces
1-3 months 1 month 1-2 months 1-2 months 1-3 months

Evaluation and Final negotiations

Preparation work Initiation of Evaluation
clarification of
Business diagnostic / contact indicative bids of offers Representations and
financial performance
warranties?
Vendor assistance
Confidentiality Short-list Indemnities?
Identification of potential bidders Selection of
agreements Earn-out?
risks and issues (i.e. preferred
bidders Regulatory issues?
Pension, legal, tax) Management
Business plan Dispatch of presentation Information
Preliminary valuation Information Final offers and concept
Memorandum negotiation of
Data room SPA
Identification of potential
Due Diligence
buyers
Indicative Singning
bids Revised bids
Marketing documents incl. mark up to
Teaser document share purchase
Information memorandum agreement Closing
Process letter
 Who are the potential buyers?

Strategic industrial buyers

Financial investors (Private equity, PE)

Existing management (Management buy-out, MBO)

New management (Management buy-in, MBI)

Public investors (Initial public offering, IPO)

 Potential buyers – Strategic,
industrial buyers
Short description
Largest category of potential buyers (may or may not operate in the same market)
Objective: Acquisition of 100% of the shares (or assets)
Potential buyers are clients, customers, suppliers or direct competitors as well as potential competitors
Dependent on size and industry: domestic or foreign buyers

Preconditions and challenges

Willingness of company owner to sell
Diligent sales process

Advantages
Typically highest transaction value potential
Likely to be premium buyer
Improvement of the strategic and financial positioning of the company
In general, fast and lean due diligence process and share purchase agreements
Disadvantages
Disclosure of sensitive information (due diligence) required
Change of corporate/management culture
High transparency requirements in respect of quoted buyers
 Potential buyers – Financial
investors, Private Equity
Short description
Clear investment focus (in terms of industry and company size)
Investment objectives: high-growth / restructuring / mature companies
Focus on financial optimisation (e.g. working capital)

Preconditions and challenges

Willingness and capability for change

Advantages
Realisation of high sales price (dependent on market environment)
Continuity of management
Sometimes the only group of interested buyers
Disadvantages
Complex sales process with extensive due diligence and complex and extensive share
purchase agreement (representations and warranties)
Synergies?
Confidentiality Agreement. Also
known as “Non-Disclosure
Agreement” (NDA)
Main content:
Regulates under what circumstances, to whom, when and
what information may be circulated

Regulates how to deal with confidential information (e.g.

mark the information as confidential, obligation to return
or destroy the information received)

Disclaimer
Prohibition of poaching
Follow-up time
 Teaser. Also known as
“Blind profile”

Short description of the target (2-3

pages) / Key investment
considerations

Provided by the seller’s advisor to

potential buyers to get an idea
whether the buyer has a general
interest in the company (target)

Name of target remains undisclosed /

Contact on a no-name basis
What is an Information
Memorandum?

Main goal: Providing potential acquirers with detailed information (public

and private) about the company to be in a position to issue an indicative
bid
Main content:
1. Executive summary / Key investment considerations
2. Market and competition
3. Description of the business:
Products / Services
Customers
Operations / Production
4. Sales and marketing
5. Management
6. Employees
7. Financial information
 What is an Indicative
Bid/Offer?

Letter issued by the potential buyer to the seller,

describing the terms and conditions for carrying out
the transaction:
Basically non binding
But: factual and moral binding effect
If offer is attractive to the seller, potential
buyer will be invited to due diligence
Content:
Purchase price (range) and assumptions
Premises for the execution (i.e. due
diligence, committee approvals, antitrust division)
Source of financing
Strategic rationale behind transaction
Management / employee
Time schedule
Exclusivity clause
Contacts
Other declarations:
Heads of Agreement, also called Letter of
Intent, Term sheet or Memorandum of
Understanding:
Typically prepared and agreed when an auction
process is not pursued or prior to granting
exclusivity to the preferred buyer
Non-binding agreement setting forth the basic
terms and condition under which an
investment will be made
Tactics seen in the past:
Making high indicative offers to get short listed,
obtaining further information and then
reducing their offers
 Management Presentation
Objective:
Opportunity for the management to present the company, its strategy and themselves
Opportunity for the potential buyer to get a first impression of the management and to ask
questions on the business and the future performance

Main content:

1. Executive summary

What the business does

What sets it apart from the competition / Investment highlights

Key people

2. Product and Services

Unique selling propositions

Future development

3. Customer / Competition / Market

4. Strategy for the business

5. Financial performance
 Objectives and results of a
due diligence process

Business analysis Identification of risks Financial analysis

Due diligence

Input for the

Synergy Adjustment Valuation/
“Deal share
potential/ of business purchase
breakers” purchase
integration plan price
agreement
 Due diligence performed by
the buyer and its advisors
Financial Legal Tax and transaction
structure
Illustration of „Key Value Drivers“
Litigations and law cases
Analysis of balance sheet Fiscal assessments in the past
Liabilities, warranty claims
Net working capital / Net debt Deferred taxes
Licenses, patents, trademarks
Analysis of Profit and loss statements Fiscal optimisation of transaction
Relevant contracts and agreements
Analysis of budget and business plan structure
Competition law
projections Dividend policy
Competition law matters
Investment plans Double taxation
Actuarial matters
Cash flow analysis
Bribery / FCPA Rules / Compliance
Correspondence with auditors (e.g.
Social security and
Humanletters)
management resources IT/ MIS
pension
Internal controlling, Management
Organisational chart and key People Pension funds and trusts
information system
Track record / qualifications of the Bonus programs and social
management contributions Quality of IT

Constitution of workforce (Age, Incentive schemes for Compatibility

Licenses
qualification/skills, assignments) management, employee stock
Proprietary developments
Working conditions, work ethics, attractiveness ownership plan (ESOP)
of employer Expense reimbursement policy Capital expenditures in the past

Employment situation
 Due diligence performed by
the buyer and its advisors
Market Operational Technical

Product pipeline
Product margins Plants and facilities
Innovations, research &
Market environment, competitors Production processes
Customers and suppliers Inventory and purchase development
Quality of products
Market size and market share Supply management
R&D expenditures
Market/growth potential Working capital management
Scalability of production Protection of intellectual
property
Lifecycle of products
Quality control

Treasury and risk Real estate Environmental

Insurances
Rate of utilisation Exposure to toxic elements
Currency risks
Required space Medical risks
Cash management Locations Waste management
Dunning process, trade receivables, Market value of properties Production restraints
doubtful debts
Development and expansion Old environmental damages,
Credit facilities and financing structure plans contaminations
Claims from environmental issues
Example: Pricing in an M&A
transaction
 Determination of the
negotiation process

What is the negotiation position (relative strength) between seller and buyer?
What is the tactic? Playing hard? Only suggested after careful thought and discussion
“Soft factors”
• “One name – one voice” in the whole negotiation process
• Order of the negotiation items on the agenda has an impact on the negotiation
outcome
• Same hierarchy level on both sides of negotiation table
• Who drafts the share purchase agreement? Amendments to be made by whom
(“mark-up” to the SPA)? Question of power?
• Controlled auction process: seller is in the driver’s seat, determines the time
schedule/next process steps and also conducts the negotiations with one (or several)
potential buyer(s)
• Exclusivity agreement: seller is bound (until specified date or milestone) to
negotiate with one party only
• Equal treatment of all potential buyers by the seller?
 Important success factors
for an M&A process - seller
Attractiveness of the company to be sold
Value of the company
Economic environment
Number and quality of potential bidders
Synergy potential with potential buyers
Reasons for the disposal (“Selling story”)
Involvement of key people
Identification of key people within the
company
Early involvement in the confidential process
Incentive/performance bonus for securing
key people’s loyalty
Elaboration of career opportunities with new
owner
Quality of Lead Advisor
Careful process preparation
Securing confidentiality
Identification and contacting of potential
buyers
Willingness of potential buyers
Persistence while contacting potential
buyers
Professional sales documentation
(Information Memorandum) and well
prepared due diligence and
management presentation
Structuring of a competitive bidding contest
 Important success factors
for an M&A process - buyer
Strategic fit / Due diligence
Plausibility of business plan
Tax, legal and environmental assessment
Controlling, financials
Synergy potential
Value of the company, pricing
Involvement of key people
Identification of key
Elaboration of career opportunities
Integration concept
Early planning and communication
Maintain momentum from deal completion
while ensuring day-to-day business
Availability of management and financial
resources
Fast execution, especially during the first
100 days
Concentrate time and resources on value
drivers and growth opportunities