mergers & acquisitions ii successes, drawbacks, restructuring & trends compiled and...

Mergers & Acquisitions II

Successes, Drawbacks, Restructuring & Trends

Compiled and Presented By:Alex Kent, Simon Giddings, Aaron Brigatti

Friday, 1 December 2000 Mergers & Acquisitions II 2

http://www.mergers-acq.co.uk

Key Areas Covered:

1. Defence tactics Why are firms susceptible to take-

over? Implications to Shareholders

2. Success & Failures Are shareholders the winners?

3. Corporate Restructuring4. Trends & Susceptible Areas



1. Defence Tactics: Their

Successes and Implications



Defence Tactics

Various terminologyWhy are firms susceptible to take-over?Pre-bid defencesImplications to Shareholder



Various Terminology

White KnightYellow KnightGray KnightBlack KnightSandbagMacaroni Defence

Poison PillPeople PillSleeping BeautyPac-ManShark Repellent Greenmail



White Knight

What does it mean?A company that makes a friendly takeover offer for control of a target company which is being faced with a hostile takeover from a separate party.

The Knight in shining armour comes to the rescue!



Yellow Knight

What does it mean?Used to describe the situation where a company making a takeover attempt ends up discussing a merger with the target company.



Gray Knight

What does it mean?A second, unsolicited bidder in a corporate takeover who enters in order to take advantage of any problems between the first bidder and the target company.

Think of a Gray Knight as a vulture, circling and waiting to clean up whatever mess is left.



Black Knight

What does it mean?A company which makes a hostile takeover offer on a target company.

The bad guy...if it's your company being targeted.



Sandbag

What does it mean?A tactic used by management to stall with a company that is showing interest in taking them over.

The company stalls in hopes that another more favourable company will take them over.



Macaroni Defence

What does it mean?An approach taken by a company that does not want to be taken over. The company issues a large number of bonds with the condition they must be redeemed at a high price if the company is taken over.

Why is it called Macaroni Defence? Because if a company is in danger, the redemption price of the bonds expands like Macaroni in a pot!



Poison Pill

What does it mean?A strategy used by corporations to discourage the hostile takeover by another company by making it's stock less attractive to the acquirer.

This is similar to the macaroni defence except it uses equity rather than bonds.



People Pill

What does it mean?A defensive strategy to ward off a hostile takeover. Management threatens that, in the event of a takeover the entire management team will resign.

This is a version of the poison pill defence.



Sleeping Beauty

What does it mean?A company that is prime for takeover and which has not been approached by an acquirer.

Reasons for being a sleeping beauty are that it has large cash reserves, undervalued real estate, or otherwise huge potential.



Pac-Man

What does it mean?A form of defence used in a hostile takeover situation. The takeover target turns around and tries to takeover the company that has made a hostile bid for it.

Just think all those years of Atari might just pay off someday.



Shark Repellent

What does it mean?Any number of measures taken by a corporation to discourage an unwanted takeover attempt.

Examples of shark repellent include Golden Parachute contracts with executives, a defensive merger with another company, a super-majority provision, etc.



Greenmail

What does it mean?A situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover.

A very dirty, but effective practice.



Which Companies are Susceptible?

All Public Limited Companies at riskNo restrictions in transfer of shares

More Vulnerability = More Risk of TakeoverShareholders dissatisfied with companyUndercapitalised Inadequacies of Management



Implications to Shareholders

A "raider" bids for shares of the target firmDealing *direct* with the firm’s shareholders.Some instances, paid a premium of 30-50% of their shares!!Share of the raider’s “gains” from the acquisitions.




Pre-bid Defences - Internal

Internal Defences Improve efficiency & Reduce costs Improve Strategy: Restructuring,

divestment ...Change Ownership StructureChange Management StructureUse Organisational Constituencies



Pre-bid Defences - External

External DefencesCultivate Shareholders & InvestorsPublicise company strategy Improve imageMake strategic defence investmentsMonitor share register for unusual

purchases



Post-offer Defences

First Response & Pre-emption LetterDefence DocumentProfit Report / ForecastPromise of higher DividendsAsset RevaluationShare Support CampaignRegulatory Appeal . . .



. . . More Post-offer Defences

LitigationAcquisition & DivestmentUnions / WorkforceCustomers / SuppliersRed HerringAdvertisements



Costs Of DefenceBreakdown of costs of a £30million target (£000)

Stockbroker Fees75

Accountant's Fees35

Misc.1

P.R.5

Solicitor's Fees35

Printing2

Merchant Bank Fees320



2. Success and Failures of

Merger & Take-Over Activities



Success & Drawbacks

Technological IssuesCultural IssuesFreeserve – T-Online or WanadooNational Differences

Synergies AchievedAre All Mergers Successful?



Technological Issues

Technology issues: One challenge could be integrating two or more converging businesses' front-office technology - the IT systems seen by customers or used to interact with them



Cultural Issues

Cultural issues: These are the other main problem faced when bringing two or more companies together. Many apparently logical mergers have fallen through late on because of "cultural differences".



Freeserve - Failures

For example, cultural differences were cited last week as one reason why T-Online of Germany did not buy Freeserve, the UK internet service, from Dixons, the electrical goods retailer.



Freeserve: Share Price



National Differences

Further levels of cultural complication are added when there is an international element to the mergerOften the case with deals that have been driven by convergence. National differences have often thwarted successful mergers in the old economySo why should things be any different in the brave new economy



Are All Mergers Successful?

NO!!!!But why? In 1993, a study was carried out to

determine if UK mergers are generally successful.

It turned out that 54% of the mergers examined were not financially successful!

So what went wrong…



Causes Of Failure .

Management Attitudes – 85%

0%

20%

40%

60%

80%

100%



Causes Of Failure ..Lack Of Post-Acquisition Integration Planning – 80%

0%

20%

40%

60%

80%

100%



Causes Of Failure …Lack of Knowledge by the Bidder of the Target and its Industry – 45%

0%

20%

40%

60%

80%

100%



Causes Of Failure .…Poor Management & Management Practices In The Target – 45%

0%

20%

40%

60%

80%

100%



Causes Of Failure ..…Little or no experience of the bidder management in acquiring other firms – 30%

0%

20%

40%

60%

80%

100%



Have We Learnt Anything?

The same study was carried out in 1973, with pretty much the same results. In 20 years, social trends have not altered the fact that on average just over half of all UK mergers fail.

Have we learnt anything at all?



Well Yes! Why?

Number Of Mergers Are Down!

Knowledge about the failure of mergers could be responsible for the huge drop in annual mergers since the 1980s.

0

500

1000

1500

2000

Mer

gers

Per

Yea

r

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year



Well Yes! Why?

A greater professionalism among corporate management leading to fewer cheap targets.Share prices were low in the 80s, leading to many cheap targets.Questions have been raised to the importance of large, diversified companies.



How can a company increase the odds?

A well-formulated visionA pre-merger process that targets companies with the right capabilitiesA post-merger process that seeks to capture well-defined sources of value



3. Corporate Restructuring After Mergers/

Take-Overs



Corporate RestructuringWhat actually happens after a merger or take-over?What happens to:The Head OfficeDivestmentsManagersEmployeesFailures

Case Study – Psion v Teklogik



The Head Office

It is very unlikely to have two head officesNatural conclusion: One must go!This can often lead to massive job losses in that locationIf some of the target’s management are lucky, then they might be offered “Golden Parachutes”.



Divestments

Why would a merged company want to sell of a part of itself?A desire to concentrate on it’s core

activitiesA need to raise cash Cutting away the “bad wood”



ManagersPredator Managers New opportunities to enhance company’s

competitive advantage, operational efficiency and financial performance

Increased job security/enumeration

Target Managers Uncertain futures New bosses, new culture Loss of power, status and freedom to

innovate Possible Redundancies



Employees

Usually redundancies at the redundant head officeUK Employment law gives some protection to employees in the context of takeoversIf the target business is purchased, then employees may receive protection under “The Transfer of Undertaking” regulation



Failures

Not always good for predator management. Especially if they mess things up!In the mergers boom in the 1980s, some of the more frequent predators were themselves becoming the prey or forcing themselves into receivership.Others that fail can be heavily divested or put under administration by the lenders.



Case Study: Psion v Teklogix

Main Points:Friendly takeoverPsion were looking to break into new areasThey realised that their range of modems were in declineNeeded to do something quickly since their shares were at an all time low



About Psion Plc

World-leaders in mobile computing and communicationsEstablished in 1980Earns revenues in excess of £159m and is valued on the London Stock Exchange at more than £2.5bn



About Teklogix

Provide communications solutions to industrial users, based on local area network (LAN) technology and wide area network (WAN) technologyIn the year ended March 31st 2000, they took in a revenue of $209m



12th July 2000

The Boards from both Psion and Teklogix publicly announce that the Psion will acquire TeklogixTeklogix accepted £242m, of which £100m should be paid in cashThis was 41% above the closing price of Teklogix shares on July 11, 2000



20th September 2000

Psion completes the acquisition of Teklogix

So, What Next?Will Psion make an enormous profit?Will the directors of Teklogix be shot in their former Board room like unwanted pigeons?Does Psion admit to any teething problems?



18th October 2000

PROFIT WARNING!FT reported that Psion would be lucky to break even this yearFT blame thin margins (4%) and the fact that Psion can not compete with Giants such as NokiaFT argue that Psion’s prospects all hinge on merging Teklogix with Symbion technology



Psion: Share Price



Conclusion …

Psion spent a lot of moneyBut they needed to move away from the laptop accessory market, which they knew was declining rapidlyIn the short-term, this merger has not benefited the shareholder. In the long-term who knows! But the Financial Times predicted that this merger actually saved Psion.



4. Recent Trends and Susceptible

Areas



Trends & Susceptible Areas

Enthusiasm For Merging Britain v USMakeover at Software CompaniesGoing Ballistic!Sectors/Areas at Risk



Enthusiasm For Merging

Increasing concern at its impact on shareholder value. The enthusiasm for merging, acquiring and disposing has enabled Britain to cut quite a dash on the international stage.



Britain v US

Britain’s companies are now the world’s biggest overseas investors.US companies have been pushed into second place for the first time since 1988.



Makeover at Software Companies

Post-Y2KThroes of a makeover!The 4 R’s:RestructuringRe-engineeringRevivalRepositioning



Going Ballistic!

Pace and size of merger and acquisition deals proceed seemingly unchecked.In 1999, the worldwide value of merger and acquisition deals exceeded $2.3 trillion (U.S. dollars)Top 2 and 3 of the 6 largest M&A deals of all time!



Areas/Sectors At RiskCommunications – More Alliances?.dotcoms – Some cover the IT Sector, but the majority on AIMSome levels of retail – Sainsbury/M&S?Trend will continue Larger mergers but less of them!Refer to handout – Calendar of Past Events (Table 1)



Missed anything?

Visit our website @ http://www.merges-acq.co.ukView on-line presentationLinks to other resourcesFeedback form & more!

Refer to our handoutRefer to our own Q&AAsk any questions NOW!



Possible Q&As?

Why do companies merge in the first place?What’s the real difference between mergers and acquisitions?What happens if mergers or acquisitions aren’t successful?



Many Thanks for Listening!

We hope you enjoyed our presentation.Please take this opportunity to ask any questions which you may have.

mergers & acquisitions ii successes, drawbacks, restructuring & trends compiled and...

Documents

target company

mergers acquisitions

mergers acquisitions

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unfriendly company

company stalls

favourable company

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