acquisition or organic growth choice - m&a

7/30/2019 Acquisition or Organic Growth Choice - M&A

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Acquisitions

orOrganic Growth?

Authors: Enrico Donisi, Mike Kaiser, Enzo Lazzerini, Francesco Furno,Gianluca Venturi

Module: Principles of Financial Management, FIN252

Teacher: Olena Etokova

Date: 18th November 2011


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Table of Contents

1. Introduction

2. Acquisitions

3. Acquisitions Case Study

4. Greenfield Investments

5. Greenfield Investments Case Study

6. Conclusions

7. Final Remarks

8. List of References


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Introduction

In order to maximiseshareholders wealth, themanagement looks for ways toincrease the companys value.

Basically, this implies enlarging thecompanys operations. Thisexpansion could be within the

national borders or, as increasinglyhappens, outside the nationalborders.


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Introduction (II)

There are two main strategies thatcould be undertaken in order toincrease the companys dimension:

Acquisitions(also referred as M&A)

OrganicGrowth(also called Greenfield Investment)


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AcquisitionsDefinition:

A corporate action in which acompany buys most, if not all, of the target

company's ownership stakes in order toassume control of the target firm

[Investopedia.com]


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Types of Acquisitions

Brownfield

Friendly/Hostile acquisition

Economic classification:

Asset Purchase

Stock Purchase

Mergers

Tax-free Acquisitions


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The process of an Acquisition

1. Initiating the acquisition process

2. The non-disclosure agreement

3. Calculating the purchase prices

4. The Term Sheet

5. Due Diligence

6. Further Negotiation

7. The purchase agreement

8. Anti-Trust Notification

9. Acquisition Integration

[Source: Axiomate.com]


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Reasons for Acquisitions

To achievesynergiesbetween

companies

involved

There is a synergy every time the new value of the twocompanies involved in the acquisition outweighs the sumof the single values.


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Operating synergies: Cost reduction Growth

Market power

Financial synergies: Combination

Tax benefits To increase the debt capacity To achieve lower cost of capital

Synergies


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Disadvantages

Business risk

Financial risk

Integration

Retention

Dilution

Culture shock

[McHenry D. and Silva W, 2011]


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A successful example ofAcquisitions:

Unicredit Group


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UnicreditCompany Profile

Unicredit is an italian based bankfounded in 1998 through the mergersof several Italian banks.

In 1999 it stated in its annual strategythe purpose to expand in Central-EastEurope through acquisitions.

In 2007 Unicredit was based in 23European Countries, with 40 millionCustomers, 10,000 Branches and180,000 Employees.


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UnicreditTimeline of major acquisitions

Bank Pekao

Splitska BankBulbank

Polno Banka

ZagrebackaBank

Koc. Financial ServiceZivnostenka Banka

Demirbank

HVB

Bank AustriaCreditanstalt

Capitalia

1999 2000 2001 2002 2005 2007

Remarkable acquisitions were:- Bank Pekao (POL)- HVB (De) & BA-CA (Au)- Capitalia (IT)


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UnicreditMarket Cap growth

In 2001 FT500, the bank ranked 29thamong European financial servicesfirms in terms of market capitalization.Two landmark acquisitions

(HVB/Bank Austria and Capitalia),together with several medium-sizedand smaller acquisition as well as astrong presence in Eastern Europe

propelled Unicredit to #4 in 2007.

[Arthur D. Little, 2008]


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UnicreditAcquisitions effects on stock price

2005-2007

Focus on HVB acquisition (15 November 2005):- Stock price +25% by the end of the year- Stock price +63.4% by May 2007

U i di


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UnicreditNet profit 1998-2007 (in mln )

The profit increased by 527% on a ten yearsbasis.

After the acquisition of HVB net profit increased by40% in one year (05-06).

0

1000

2000

3000

4000

5000

6000

Capitalia

Poland

CEE (until 2005 includingPoland)

Hvb (pro forma)

Italy division (from 2006with HVB and BA-CA)


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UnicreditThe biggest European Bank

Franchise (2008)


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Greenfield Investments

Definition:

A kind of foreign investment where aparent company of a multinational

company expands its existing facilities orinvests new facilities in a sector where

such facilities do not exist[InvestorWord.com]


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Reasons for GreenfieldInvestments

Greenfield

Investment

Tailoredfacilities and

plants

Homogeneityof corporate

culture

Avoidingorganizational

conflicts

Completecontrol over

the newsubsidiary


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Reasons for GreenfieldInvestments (II)

In addition, a greenfield investment iswelcomed by the host country.

This is due to the fact that, unlikeacquisitions, organic growth creates newproduction capacity andjobs.


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A successful example of

greenfield investment


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HYUNDAI:Growth through greenfield

Hyundai is the fifth largestautomotive group in the world

In 2010 they increased global sales by16.3% over 2009, selling 3.61 millionvehicles (Hyundai.com).

Over the past few years, Hyundai MotorCompany has invested in greenfield

projects in many emerging markets,such as Brazil, India, Bulgaria andCzech.


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HYUNDAI: The Greenfieldproject in India

In 1996 Hyundai founded HyundaiMotor India (HMI)

HMI was the first self-sufficientmanufacturing unit and greenfield

investment of an overseas automobilecompany in the Indian car industry(Jongsoo Park, 2004)


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The first plant production was builtin the district of Chennai, hiringmore than 2,500 people.

HMIs strategy was to build a solidindustrial clusterwith a strongsubcontracting linkage betweenvendors (Jongsoo Park, 2004)

HYUNDAI: The Greenfieldproject in India (II)


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HYUNDAI: The Greenfieldproject in India (III)

Today, Hyundai Motor India is the largest passengercar exporter for the sixth year in a row and the secondlargest car manufacturer in India.

To support its growth and expansion plans, HMIcurrently has a 329 strong dealer network and 698 strong

service points across India.

The current annual production in the Indian plants is600,000 units.

(Source: Hyundai.com)

H d i


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Hyundai:Greenfield Projects

spread over the world

In 2006, the company has made agreenfield investment worth almost 1billion, in the Moravia-Silesia region in thenortheast of the Czech Republic. Thisrepresented the largest investment in the

Czech Republics modern history(eurofound.europa.eu).

The last FDI was made in few months ago inBrazil, beginning the construction of a plant

that aims to start production in 2012, witha goal of achieving a maximum capacity of150,000 units annually.


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Conclusions

Assuming a company would like to expand itsmarket share, reduce its costs and increaseits success, what strategy of growth should itfollow?

The advantages of one approach are really

the disadvantages of the other approach andvice versa [Lumby S. and Jones C.]


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Conclusions (II)

In order to obtain success, a company shouldchoose its strategy of growth taking intoaccount its internal strengths, weaknessesand its long-term goals.

This is due to the fact that each strategy hasadvantages and disadvantages which must beconsidered carefully.


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Conclusions (III)

Element of analysis which must be taken intoaccount when choosing which strategy toadopt [Lumby S. and Jones C.]:

Speed: an acquisition will be implementedrapidly compared to organic growth.

Critical Mass: long-term planned scales ofproduction will be reached faster through

acquisitions. Organic growth will take timebefore reaching the competitors economies ofscale and in the meantime the company couldsuffer from a competitive disadvantage.


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Conclusions (IV) Own-paperfinancing: an acquisition could be

financed by issuing new equity. Organic Growthrequires companys own credit and resources.

IntellectualAssets: with an acquisition

intellectual assets such as know-how andbusiness contacts will be acquired. With organicgrowth these will have to be developedin-house.

Risk: an acquisition implies a large investmentand it could turn out to be a mistake. Thanks tothe lower speed of organic growth, mistakescan be reduced. However, organic growthbrings more uncertainty with reference tofuture revenues and profits.


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Conclusions (V)

AcquisitionPremium: in an acquisition, theacquiring company will have to pay a premiumto persuade the existing owners of thecompany to sell. This could be overestimated.With organic growth there is no such premium.

Learningspeed: in an acquisition, themanagement will have to rapidly learn how tomanage the company. Doing this, the

management could make mistakes. Bycontrast, the slow pace of organic growth givesthe management time to learn the necessaryskills to be successful.


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Conclusions (VI)

Post-Acquisition Cultural Problems: themain reason why acquisitions turn out to beunsuccessful is the clash of organizationalcultures of the acquired and of the acquiring

company. Organic growth give manager tolearn and adapt the management culture of thenew business area.


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Final Remarks

Many mergers that seem to make economicsense fail because managers cannot handlethe complex task of integrating two firmswith different production processes,

accounting methods, and corporatecultures.

The value of most businesses depends on

humanassets[] If these people are nothappy in their new roles in the acquiringfirm, the best of them will leave.

[Ross, Westerfield, Jaffe]


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Q&A


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List of References

Arthur D. Little, www.adl.com

Braley, Myers and Marcus,Fundamentals of Corporate Finance6th Edition

Eurofound,www.eurofound.europa.eu

Hyundai,www.worldwide.hyundai.com

Investopedia,www.investopedia.com
http://www.adl.com/http://www.eurofound.europa.eu/http://www.worldwide.hyunday.com/http://www.investopedia.com/http://www.investopedia.com/http://www.worldwide.hyunday.com/http://www.eurofound.europa.eu/http://www.adl.com/


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List of References (II)

InvestorWord,www.investorword.com

INVESTMENTS&INCOME, ForeignDirect Investments (FDI),

http://www.investmentsandincome.com/investments/foreign-direct-investments.html

Jongsoo Park, 31st July 2004,Korean Perspective on FDI in India,Economical and Political Weekly
http://www.investorword.com/http://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investmentsandincome.com/investments/foreign-direct-investments.htmlhttp://www.investorword.com/


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List of References (III)

Lumby S. and Jones C., CorporateFinance 7th Edition

McHenry D. and Silva W., 2010,AnAcquisition or Organic Growth Strategy?,

PEO Insider,http://silvacapital.com/pdf/silva10.pdf

Olena Etokovas lectures

Ross, Westerfield, Jaffe, CorporateFinance Fundamentals

Unicredit Group, www.unicreditgroup.eu
http://silvacapital.com/pdf/silva10.pdfhttp://www.unicreditgroup.eu/http://www.unicreditgroup.eu/http://silvacapital.com/pdf/silva10.pdf

acquisition or organic growth choice - m&a

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