Mergers and Acquisitions Flashcards
Organic development
EasyJet as an example - in 2020 they set up a holidays business, in 2016 they set up a grocery business. Set this up due to a gap in market with Thomas Cook going bust, they grew through their own business, didn’t purchase a new one to grow.
What is a merger and acquisition
You are buying someone out and own the new business. The business pre-existed under somebody else’s ownership. Vodafone grew through M&A, buying a German company, spending 200 billion dollars on the deal.
What is a merger
Combination of two previously separate organisations- they are fairly equal in the size that both of them take
What is an acquisition
Involves one firm taking over the ownership of the other, with one company usually being a bigger company than the other - this can be friendly or hostile
What are the motives for an M&A
Financial - you may buy another organisation because that other organisation is undervalued
Strategic - want to raise the profits of our organisation, think we can raise the profit from synergies. Some of these help to generate market power
Geographically strategic deal - you merger with another company because of where they are in the world
Managerial - can be ego within it
Amount of mergers ‘merger waves’
There are general conditions - M&As this is how it works
What tends to happen is you have good companies that identify good deals, and go ahead with them, if your not one of those companies that engaged in those deals then shareholders may ask why we did not engage in those deals. Thus forcing mimcry, which in turn forces them to go out of favour, as mimcry inspires mediocrity
M&A process - Johnson et al 2017
{Target Choice - Negotiations} Due Dilligence
{Integration - Results} Completion and change of ownership
Due diligence is doing, getting the right right information about the company so there are no issues with contracts, liabilities, and legal issues
Integration - when people are involved, want it to be friction-free so people aren’t leaving the company. If you get this right the good results should flow.
Synergies
Be careful not to overestimate the synergies- does the strategic fit strengthen the acquiring firms strategy - loosing employees can reduce the amount of value
Organisational Fit
Is there a match between the managements practices, cultural practices and staff characteristics of the target and the acquiring firm
How to survive an M&A (Marks et al 2017)
Assess the situation
Seize the growth opportunities
Find your opening
How do valuations work
The premium is usually going to be 30% over current market value prices.
Companies are willing to pay more because they want the deal to go through.
If the firm is paying with stock or debt, the value of its own stock should be taken into account
Less likely to overpay if you have a CFO due to a ceo who is egotistical and feels like they have the ability to get big deals
However, the CFOs police this and if they have these qualities then they are less likely to pay more
Companies with generalist CFOs
4 criteria to not overpay (Martin 2016)
Be a smarter provider of growth capital
Provide better managerial oversight
Transfer valuable skills
Share valuable capabilities
Example of a diversification M&A
IBM - sold their core business to Lenovo, then underwent 115 M&A which is why they are as successful as they are now
How much is the usual premium for an M&A
Around 30% - recent example being twitter
What is an example of a financial takeover
You may take over a financial organisation because they are undervalued - Warren Buffet acquired GEICO - was in financial trouble - acquired whole company and turned it around
What is an example of a horizontal M&A
Iberia and BA merging - BA wanted tactical power in Madrid (in centre of world) so merged w Iberia
What is an example of a managerial takeover
Elon Musk Twitter example - came in with ego, unsettled everyone, and it can now be seen as a failure
What is a vertical M&A, and what is an example
A vertical M&A involves two companies who operate in different parts of the production process, they very rarely compete
Tesco acquired booker group in 2018 (wholesale food provider), created synergies by eliminating inefficiency and optimising the supply chain
Edge mindset - Lewis and Mckone (2016)
Journey Edge
When you answer the question “how does the deal help our customers complete their journey)
Edge Mindset - Lewis and McKone (2016)
Enterprise edge
How is the deal using our foundational assets to create value in a different context?
Merger waves
Mergers come in waves, if there is a big one, more generally happen around that time
What are the hard factors (business/financial logic) (Martin 2016)
Financial performance - how is the company performing
Valuation - what is the value of this company
Synergies - are there benefits/cost savings from merging
Due diligence - to identify liabilities, risks and oppurtunities
What are the soft factors (human issues)
Emotions of employees needs to be considered in the midst of a takeover
Talent integration - need to make sure to keep their talent
Organisational culture - cultures may differ, and need to adress the differences early in order to work towards a common goal
Ceos- power hungry, to prevent this you can bring in a CFO
Customer relations
Why is Marks et al (2017) how to survive a merger good in the context of a company
Provides guidance for the employees to manage their career, potentially alleviating fears
Optimise talent and resources as the talented employees will leverage their skill to improve
Sinkovics 2011
Post merger syndrome - employees feel depressed and unhappy as they
