FREE online courses on Mergers & Acquisitions - Summary

 

Course Summary

 

Mergers and acquisitions are among the most difficult of business transactions. There is no shortage of stress. All of a sudden a new company must be formed with:

 

• Newer and more ambitious financial goals.
• Quicker turnaround times for growth.
• Restructuring of departments and the old company.
• Introduction of cultural differences.
• Higher rates of employee turnover.
• Lower levels of productivity.
• Communication problems.

 

There are numerous reasons why companies decide to merge. Some studies indicate that companies merge for improving efficiencies and lowering costs. Other studies show that companies merge to increase market share and gain a competitive advantage. The ultimate goal behind a merger and acquisition is to generate synergy values. Good strategic planning is the key to understanding if synergy values do in fact exist. A well-researched and realistic plan will dramatically improve the chances of realizing synergy values.

 

Several legal documents will solidify the merger and acquisition process, including a Letter of Intent, which scrutinizes the proposed merger and the Merger & Acquisition Agreement, which finalizes the deal.

 

Mergers are also subject to government regulation. One such regulation is anti-trust which attempts to prevent companies from forming a monopoly. In a competitive marketplace, companies sell products and services where prices equal marginal costs. This results in an industry characterized by low prices and high levels of production. An industry characterized by a monopoly allows the company to produce at lower levels and higher prices to the customer.

 

The main control within the merger and acquisition process is Due Diligence. Due diligence obtains as much information as possible about the target company and attempts to build a comparison between the target company and the acquiring company to see if there is a good fit. If there is a good fit, there is the possibility that a merger between the two companies will improve growth, market share, earnings, etc. One area that should not be overlooked is social and cultural issues. These "people" related issues will become extremely important when it comes time to actually combine or integrate the two companies.

 

A merger is like a marriage; the two partners must be compatible. Each side should add value so that together the two are much stronger. Unfortunately, many mergers fail to work. Overpaying for the acquisition is a common mistake because of an incomplete valuation model. Therefore, it is essential to develop a complete valuation model, including analysis under different scenarios with recognition of value drivers. A good starting point for determining value is to extend the Discounted Cash Flow Model since it corresponds well to market values. Core value drivers (such as free cash flows) should be emphasized over traditional type earnings (such as EBITDA).

 

Some key points to remember in the valuation process include:

 

1. Most valuations will focus on valuing the equity of the Target Company.
2. The discount rate used should match-up with the associated risk of cash flows.
3. The forecast should focus on long-term cash flows over a period of time that captures a normal operating cycle for the company.
4. The forecast should be realistic by fitting with historical facts.
5. A comprehensive model is required based on an understanding of what drives value for the company.
6. The final forecast should be tested against independent sources.

 

If pre merger phases are complete, we can move forward to integrate the two companies. This will require the conversion of information systems, combining of workforces, and other projects. Many failures can be traced to people problems, such as cultural differences between the companies, which can lead to resistance. Additionally, if you fail to retain key personnel, the integration process will be much more difficult. The best defense against personnel defections is to have a great place to work. If the company has a bad reputation as an employer, then defections will surely occur.

 

Some of the risk factors associated with post merger integration are:

 

1. What level of integration do we implement?
2. What can we do to retain key personnel?
3. How serious are the cultural differences between the companies?
4. What kinds of conflicts and competition can we expect during integration?
5. To what extent do the people of both company's understand the merger?
6. Who will govern and control the new company?

 

Success with post merger integration is improved when:

 

1. The two companies have a history of effective planning and strategizing.
2. The two companies have a history of successful change management.
3. The merger will improve the strategies of both companies.
4. Sufficient resources are allocated for integrating the two companies.
5. Integration takes place by design and not by chance.
6. Both company's have prepared for integration in advance through due diligence.
7. Human and cultural issues are directly addressed as part of integration.
8. The integration process is viewed as evolutionary with several concurrent projects going on, trying to integrate the two companies as quickly as possible.

 

Finally, not all companies will openly embrace mergers; substituting internal investment for external investment. Some companies are very successful with their internal investment programs and a sudden shift to external investments (mergers) may not fit with the company. A number of measures can be employed for preventing a merger, including:

 

• Poison Pills - Issuing rights to shareholders, exercised when a takeover attempt occurs.
• Golden Parachutes - Special compensation paid to executives should they depart within one year of a merger.
• Changes to the Corporate Charter - Staggering the terms of board members and requiring a super-majority approval for a merger.
• Recapitalizations - Making major changes to the capital structure, such as large issues of debt to buy back the stock.

 

However, despite all of these anti-takeover defenses, most acquiring companies are successful in taking control of the Target Company. Additionally, the stock prices for companies with anti-takeover defenses are discounted for the obstacles encountered in trying to remove management.