sense and non-cents of mergers & acquisitions
TRANSCRIPT
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Sense and Non-cents of
Mergers & Acquisitions
March 28, 2006
Charles H. Troe, Managing Director
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West Ridge Associates, LLCCharles H. Troe, Managing Director
Chuck has over 30 years of experience as a senior officer and principal in investmentbanking firms and as a partner in large law firms. His Mergers & Acquisition andCorporate Finance transactional experience is diverse in type, size and industry,including technology, telecommunications, basic industry, manufacturing, distribution,banking and finance, insurance, real estate, lodging, and oil and gas. He is a recognizedexpert in the medical technology industry in which he has executed many transactions.
He is active in industry organizations, including as Program Chair of the Life ScienceIndustry Council and as a member of the Board of Directors of the Los AngelesBiomedical Research Institute at Harbor UCLA Medical Center.
Chuck is the founder of West Ridge Associates, LLC. He has been Managing Director ofMosaic Capital, Managing Director and Principal of Taurus Capital Group, LLC, and a
Managing Director of Barrington Associates, Southern California investment bankingfirms providing merger and acquisition, corporate finance, business valuation, and relatedinvestment banking services to middle market companies. Previously, he was a Partnerin large national law firms, including 14 years with Mayer, Brown, Rowe & Maw.
He has served on the boards of directors of numerous growth stage and middle marketcompanies in the medical device, technology and oil and gas industries
Chuck received his B.B.A. degree from the University of Iowa and his J.D. from theUniversity of Chicago.
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Source: Mergerstat
M&A Activity
# Deals Value
Current M&A Environment - Domestic
0
2,000
4,000
6,000
8,000
10,000
12,000
92 93 94 95 96 97 98 99 00 01 02 03 04 05
$0.0T
$0.2T
$0.4T
$0.6T
$0.8T
$1.0T
$1.2T
$1.4T
$1.6T# Deals Value ($T)
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$- $25B $50B $75B $100B $125B
Misc Services
Household Goods
Software and Services
Broadcasting
Drugs, Med Supl & Equip
Banks/Fin
Oil/Gas
Communications 316 deals
141 deals
397 deals
389 deals
645 deals
1,736 deals
73 deals
1,153 deals
M&A Activity by Sector(Total 2005)
Source: Mergerstat
Current M&A Environment - Domestic
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Current M&A Environment One Day Sample
Lucent Technologies Inc. and Frances Alcatel SA said they were in advanced talks on amerger . . . With a market value of $33 billion in the rapidly consolidatingtelecommunications industry.
Bayer AGs $19.7 billion takeover offer for Schering AG yesterday was aimed at rescuing thecompany from the latest trend in Europes heater merger market: a wave of hostile bids.
Three days after [the acquisition of Suez SA was scuttled by political moves] Suez was
merging instead with state-owned Gas de France to create an all French global energygiant.
General Motors Corp. sold . . . a stake in [a GMAC real estate unit for 8.8 billion to KKR].
Wall Street Journal, March 24,2006
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M&A Has Become Globalized
2005 International Transactions
1,315 Inbound Transactions totaled $71.971B
1,548 Outbound Transactions Totaled $86.320B
1000
1100
1200
1300
1400
1500
1600
Inbound Outbound
$60,000
$65,000
$70,000
$75,000
$80,000
$85,000
$90,000
Total Number of Transactions Total Value of Reported Transactions ($B)
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Representative International Transactions in 2005 Included:
Inbound
GlaxoSmithKline PLC acquired Corixa Corp a vaccine and antigen based product developer for $320M
Computershare LTDs acquired Equiserve LP who services shareholder records for publicly traded
companies for $307M
Access Co., Ltd. Acquired PalmSource, Inc. a develops and licensor of platform software for $312M
Outbound
eBay, Inc. acquired Shopping.com Ltd. a provider of shopping services via the internet for $623M
Madison Dearborn Partners LLC acquired Sirona Dental Systems GmbH a manufacturer anddistributor of dental equipment for $1.03B
Eastman Kodak Co. Acquired Creo, Inc. a developer of imaging software technologies for $954M
Current M&A Environment - International
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Source: Piper Jaffray
M&A Multiples by Company Size12-months ending 12/21/2005
Current M&A Environment - Domestic
8.910.0
12.7
16.215.1
5.8
9.5
7.8
9.9 10.1
02
4
6
8
10
12
14
16
18
20
$1000
x EBIT x EBITDA
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9.9 9.8 9.9 9.8
8.8
9.710.3 10.6
0
2
4
6
8
10
12
1998 1999 2000 2001 2002 2003 2004 2005
M&A EBITDA MultiplesManufacturing Sector
Source: Mergerstat
Current M&A Environment - Domestic
Average Enterprise Value/EBITDA
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9.6 9.5
8.2 8.8 8.39.0
11.310.9
0
2
4
6
8
10
12
1998 1999 2000 2001 2002 2003 2004 2005
M&A EBITDA MultiplesServices Sector
Source: Mergerstat
Average Enterprise Value/EBITDA
Current M&A Environment - Domestic
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9.0 9.5
7.88.6
10.2
8.7
12.1
9.4
0
2
4
6
8
10
12
14
1998 1999 2000 2001 2002 2003 2004 2005
M&A EBITDA MultiplesRetail Sector
Source: Mergerstat
Current M&A Environment - Domestic
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EBIT Multiples
4
6
8
10
12
14
16
1998 1999 2000 2001 2002 2003 2004 2005
All Sectors Mfg'g Services Retail Med Device
Source: Mergerstat
EBITDA Multiples
Current M&A Environment - Domestic
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Current M&A Environment - Domestic
Historical Acquisition Premiums 2001 2005(Acquisition price compared to market price 30 days prior)
432
269 270 282 260
50 46
31 33
88
0
100
200
300
400
500
2001 2002 2003 2004 2005
#ofDeals
0
20
40
60
80
100
Acqu
isitionPremium
Total Number of Deals Acquisition Premium %
Source: Mergerstat
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Conventional Wisdom is that Acquisitions do not Work
The Opinion of the Experts:
Research indicates that up to 80% of mergers fail, Robert W. Holthausen, TheNomura Securities Co. Professor; Professor of Accounting and Finance andManagement Chairperson, Accounting Department, at the Wharton Business School,University of Pennsylvania
"The truth is mistakes happen. The accepted data say that most mergers andacquisitions don't work out, Martin Sikora, Editor, Mergers & Acquisitions: TheDealmakers Journal
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Cumulative Adjusted Returns on Equity for 2,805 TransactionsFrom 1985 to 2005
Best and Worst From 5 Days prior to Announcement to 756 Days After
Source: Profiles of Outlying M&A Transactions, 1985 2000 Robert F. Bruner
Conventional Wisdom is that Acquisitions do not Work
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Spectacular Failures DaimlerChrysler
May 7, 1998 Announcement
The Wall Street Journal named it the biggest industrial merger of all time.
Forbes reported, No, this merger isn't about savings. It isn't about blending Germancaution with Yankee freewheelingIt is about taking two splendid companies andtransforming them into a real world-scale, truly multinational business.
Business Week(1998), emphasized, The merger of Daimler Benz and Chrysler
Corp. will clearly rock the global auto industry. But the creation of this newpowerhouse is more than an industrial mega deal. It's perhaps the first sign that theforces of globalization have succeeded in reshaping Europe Inc. companies such asDaimler Benz now seem to be strong and confident enough to deal on an equalfooting with their American counterparts.
Within five years, well be among the Big Three automotive companies in the world,Robert Eaton, Chrysler CEO.
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Spectacular Failures DaimlerChrysler
Integration Problems
Cultural differences were more complicated, if not impossible to solve. The lifestylesof the German and American managers turned out to be very different. Americans
enjoyed much higher salaries, while the Germans enjoyed larger expense budgets.
From the outset, the German obsession with planning has kept everyone on edge,said one of Chryslers executives.
According to Chrysler marketing chief Jim Holden: We felt like we were marrying up,and it was clear that they thought they were marrying down.
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Spectacular Failures DaimlerChrysler
DaimlerChrysler Average Market Cap ($mm)
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Spectacular Failures DaimlerChrysler
(3.00)
(2.00)
(1.00)
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1.00
2.00
3.00
DaimlerChrysler Historical Earnings Per Share
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Spectacular Failures AOL Time Warner
2000 Announcement"Together, they represent an unprecedented powerhouse, said Scott Ehrens, amedia analyst with Bear Stearns. "If their mantra is content, this alliance isunbeatable. Now they have this great platform they can cross-fertilize with contentand redistribute.
"I dont think this is too much to say this really is a historic merger; a time whenweve transformed the landscape of media and the Internet, said Steve Case,AOLs chairman and chief executive officer.
Todays announcement really does change the tectonic plates in this world, saidChristopher Dixon, media analyst with PaineWebber.
Referring to the deals ability to accelerate the combined companys revenue stream
while generating significant efficiencies on the advertising and marketing endGerald Levin stated I concluded that either we would do something with AOL or wewould build ourselves, but this is infinitely preferable.
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Spectacular Failures AOL Time Warner
2001 2004
Market Capitalizationdrops 75 percent withintwo years of the deal'scompletion
There is a vicious purgeof the top executivesresponsible for themerger
Dicey accounting
practices areinvestigated
The poisonousatmosphere-all this hasresulted in a constantbarrage of ugly news
headlines and poormorale at the company
Aol Time Warner Market Capitalization ($mm)
-
50,000.00
100,000.00
150,000.00
200,000.00
250,000.00
America Online Time Warner Inc. (NYSE:TWX) - Common Stock - Avg Market Cap ($mm)
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Spectacular Failures AOL Time Warner
2005
Steve Case resigns to avoid future conflicts with Revolutions internet activity
This merger has most definitely qualified as a disaster of belly flop proportions, by anymeasure you might care to use, which AOL Time Warner's own magazine, Fortune,
dubbed "one of the greatest train wrecks in corporate history."
(14.00)
(12.00)
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Time Warner Inc. (NYSE:TWX) - Co mmo n Stoc k - Basic EPS
AOL Time Warner Historical Earnings Per Share
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Heisneberg Principle Or String Theory
What would have happened to Compaq if it had not been Acquired by HP?
Key Financials
For the Fiscal Period Ending
In Currency
12 months
Dec-31-1997A
USD
12 months
Dec-31-1998A
USD
12 months
Dec-31-1999A
USD
12 months
Dec-31-2000A
USD
12 months
Dec-31-2001A
USD
LTM2
12 months
Mar-31-2002A
USD
Total Revenue 24,584.0 31,169.0 38,447.0 42,222.0 33,554.0 32,101.0
Growth Over Prior Year 22.9% 26.8% 23.4% 9.8% (20.5%) (23.4%)
Gross Profit 6,751.0 7,189.0 8,649.0 9,805.0 7,112.0 6,626.0
Margin % 27.5% 23.1% 22.5% 23.2% 21.2% 20.6%
EBITDA 3,532.0 1,751.0 2,050.0 3,699.0 1,856.0 1,661.0
Margin % 14.4% 5.6% 5.3% 8.8% 5.5% 5.2%
EBIT 2,987.0 858.0 648.0 2,292.0 479.0 352.0Margin % 12.2% 2.8% 1.7% 5.4% 1.4% 1.1%
Earnings from Cont. Ops. 1,855.0 (2,743.0) 569.0 595.0 (563.0) (610.0)
Margin % 7.5% (8.8%) 1.5% 1.4% (1.7%) (1.9%)
Net Income 1,855.0 (2,743.0) 569.0 569.0 (785.0) (610.0)
Margin % 7.5% (8.8%) 1.5% 1.3% (2.3%) (1.9%)
Diluted EPS Excl. Extra Items 3 1.186 (1.706) 0.341 0.342 (0.334) (0.360)
Growth Over Prior Year 36.4% NM NM 0.3% NM NM
Financial Results were deteriorating
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What would have happened to Compaq if it had not been Acquired by HP?
Public Markets Lost Interest (small upswing due to imminent closing of HP deal)
Heisneberg Principle Or String Theory
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Spectacular Failures
BUT WAIT Theres more!!!
It was clear pretty soon after the merger that there really wasnt much synergy.Les Moonves commenting on the spin off of CBS from Viacom on CNBC Jan. 4, 2006
The potential move [to break up Tyco International] comes amid a great dismantling ofconglomerates formed during the 1990s. Pinched by stagnant stock prices and investors
demanding more focused companies, the likes of Viacom and Cendant Corp. have recentlyundone years of empire-building.
Wall Street Journal, January 9,2006
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Spectacular Failures
Some bad (i.e. non-strategic) reasons for M&A Transactions
Ego the edifice complex
Short-term secondary market gainBuy-side CEO compensationInvestment banking feesBenefit-benefit analysisAmnesia Does anyone remember the 60sStupidity
One good (i.e. strategic) reason with a bad result
Incorrect analysis of strategic considerations
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Strategic Reasons for Buying or Selling
Product Extension merger of firms selling non-competing products to related marketingchannels
Example: Proctor & Gamble Companys acquisition of The Gillette Company
"This combination of two best-in-class consumer products companies, at a timewhen they are both operating from a position of strength, is a unique opportunity,"said A.G. Lafley, chairman, president and chief executive of Procter & Gamble."Gillette and P&G have similar cultures and complementary core strengths inbranding, innovation, scale and go-to-market capabilities, making it a terrific fit.
"It (the deal) brings together two companies that are complementary in theirstrengths, cultures and vision to create the potential for superior sustainable growth,said James M. Kilts, Gillette's chairman of the board, chief executive officer, andpresident.
"This merger is going to create the greatest consumer products company in theworld," said Warren E. Buffett, chairman and CEO of Berkshire Hathaway Inc.,Gillette's largest shareholder. "It's a dream deal. To quantify that, I intend topurchase enough shares so that by the time the deal is closed, we will have 100million shares of P&G."
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Strategic Reasons for Buying or Selling
Economies of Scale More assets and accounts, lower per dollar overhead = greaterprofits. Its a pretty simple formula, and it usually works.
Example: JPM Chase & Co. merger with Bank One Corporation
This is a strategic business combination designed to create shareholder valuethrough balanced business mix, Greater Scale, and enhanced competitiveness
The combined company will be a leading global financial services enterprise, withtop-tier positions in consumer banking, investment banking, and other key business
segments
The combined company will have assets of $1.1 trillion, a strong capital base, 2,300branches in seventeen states and top-tier positions in retail banking and lending,credit cards, investment banking, asset management, private banking, treasury and
securities services, middle-market, and private equity.
Source jpmorganchase.com
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Strategic Reasons for Buying or Selling
Market Share merger of firms selling competing products in the same markets, or separategeographic markets
Example: Hewlett-Packards acquisition of Compaq Computer Corporation
Upon announcement in September 2001, based on figures reported for the past fourquarters, the combined company would have annual sales of $87.4 billion and anoperating income of $3.9 billion. Just slightly less than IBMs total sales of $90.1billion in the same four quarters.
"Without question, the merger improved the product portfolio of the company. Wehave better products to sell. We have a broader, stronger sales force. With that,clearly we'll have increased share," said Jeff Clarke, executive vice president formerger integration at H-P.
In 2003, while discussing the Compag acquisition, Jim Milton, HP's enterprisesystems group vice-president, said One of the factors behind HP's success, whichhas run contrary to what many analysts had expected, is that the company hasstolen market share from its main rivals.
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Strategic Reasons for Buying or Selling
Brand Equity because many aspects of brand equity are intangible there is no one cut anddried way to valuate a brand irrefutably
Example: SBC Global acquired AT&T and adopted the AT&T Name
"The combination of SBC and AT&T companies gives us the local, global, andwireless network resources and the expertise to set the standard for deliveringmeaningful innovations and making the promise of integrated communications andentertainment a reality for consumers and businesses," said Edward E. Whitacre Jr.,chairman and CEO of AT&T Inc.
"That name is priceless," said Robert Rosenberg, president of The Insight ResearchCorp. in Boonton, N.J.
CoreBrand, a communications firm that studies brand equity, estimated the AT&T
name alone is worth $2.4 billion.
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Strategic Reasons for Buying or Selling
R&D PurchasesThere are many different practice areas of medicine, each with separateproduct lines, therefore it is often cheaper and faster to acquire another companysproduct lines.
Example: Amgens acquisition of Immunex
Amgens acquisition of Immunex brings together the worlds most successful biotechcompanies, significantly accelerating Amgens long-term growth
The new Amgen will have an unparalleled, diversified portfolio of 3 blockbusterdrugs with long patent lives, including Amgens EPOGEN and NEUPOGEN andImmunexs ENBREL, along with Amgens potential blockbuster Aranesp
The new Amgen will have leadership in three targeted therapeutic areas --nephrology, oncology, and inflammation -- with a rich pipeline and R&D focus inproteins and antibodies
Acquisition of Immunex will increase Amgens long-term product sales growth rate tothe low 30s and cash EPS growth rate to the mid-20s, driven by potential ENBRELsales of $3 billion or more by 2005.
Source: Amgen.com
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267 275
318
264278 277 270
321
0
50
100
150
200
250
300
350
1998 1999 2000 2001 2002 2003 2004 2005
Source: Mergerstat
Announced Transactions Medical Device Industry
Medical Devices - Strategic Reasons for Buying or Selling
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$23.6
$40.2
$18.5
$12.4
$4.0
$11.6
$20.9
$16.2
$0B
$5B
$10B
$15B
$20B
$25B
$30B
$35B
$40B
$45B
1998 1999 2000 2001 2002 2003 2004 2005
Total Transaction Value Medical Device Industry
Source: Mergerstat
Medical Devices - Strategic Reasons for Buying or Selling
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1.91.7
1.9
2.5
1.2
1.4
2.4
2.8
0
1
1
2
2
3
3
4
1998 1999 2000 2001 2002 2003 2004 2005
M&A Revenue Multiples - Medical Device Industry
Source: Mergerstat
Medical Devices - Strategic Reasons for Buying or Selling
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13.1
9.7
13.011.8
8.9 8.8
13.8
11.8
0
2
4
6
8
1012
14
16
1998 1999 2000 2001 2002 2003 2004 2005
M&A EBITDA Multiples Medical Device Industry
Source: Mergerstat
Medical Devices - Strategic Reasons for Buying or Selling
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Medical Devices - Strategic Reasons for Buying or Selling
Platform Technology - Expertise
Example: Boston Scientific acquisition of Target Therapeutics
We acquired Target Therapeutics (in 1997) to get a foothold in the neurology business.said John Abele, Boston Scientific, Co-chairman.
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Medical Devices - Strategic Reasons for Buying or Selling
Distribution
Example: Cardinal Healthcare Inc.s merger with Allegiance
Robert Zollars, Allegiances head of distribution said Customers are interested in aone-order, one-truck approach.
We are very pleased to have reached this agreement with Allegiance, which
combines Cardinal's leading pharmaceutical services capabilities with the nation'spremier manufacturer and distributor of medical, surgical and laboratory products,stated Robert D. Walter, chairman and chief executive officer of Cardinal Health.
This is a story about growth, said Lester B. Knight, chairman and chief executive
officer of Allegiance, With Cardinal, we have a powerful partner who shares ourstrategic vision of integrating manufacturing, distribution and services to bringgreater quality and efficiency to patient care.
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Medical Devices - Strategic Reasons for Buying or Selling
Product Acquisition
Example: Johnson & Johnson proposed acquisition of Guidant Corporation
"The combination of these businesses will enable us to bring innovative newtherapies to patients and their physicians in this very important and fast growing
therapeutic area," said William C. Weldon, Chairman and Chief Executive Officer ofJohnson & Johnson.
"This exciting new partnership opens a dynamic era of innovation and productdevelopment that will benefit millions of patients around the world," said Ronald W.Dollens, President and Chief Executive Officer of Guidant.
In the interventional cardiology market, this business combination provides thecapability to accelerate development of new technologically advanced products.*
This new business can utilize Cordis' expertise, intellectual property and experiencein drug development, coating technology and polymers.*
Together with Guidant's strength in rapid and innovative development of stentplatforms and delivery systems, the combined company will bring superior productsto the market faster than either company could on its own.*
*Source: www.jnj.com
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Boston Scientific Corp. Acquisition of Guidant Corp. Case Study in Process
Boston Scientific Corp.
Market share leadership strategy
SciMed Life Systems - Became a leading manufacturer of angioplasty balloons
Guidant Corp. The combined company, with revenue of about $9 billion, will have the No. 1position in the US in selling coronary stents . . . and the No. 2 position in sellingimplantable defibrillators. (WSJ 1/26/06)
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Boston Scientific Corp. Acquisition of Guidant Corp. Case Study in Process
Boston Scientific Corp.
Integration Strategy
Were kind of like the dog that caught the bus. Now what are we going to do with the bus?
Boston Scientific CEO James Tobin commenting on the integration challenges of the Guidantacquisition
(WSJ 1/26/06)
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Concept/
Invention
Product
Development
Regulatory
Approval
Initial Sales Market
Penetration
Infrastructure Maturity
Time
Value
Medical Devices - Strategic Reasons for Buying or Selling
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Concept/
Invention
Product
Development
Regulatory
Approval
Initial Sales Market
Penetration
Infrastructure Maturity
Time
Value-Return/CostofCapita
Medical Devices - Strategic Reasons for Buying or Selling
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Conclusions
M&A Transactions work only if they are driven by strategic considerations
Strategic considerations must be correctly identified and analyzed
An efficient market will take care of the rest