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Another Quantum Leap in Microfinance: Preparing for Future Growth through
Consolidation
Hosted by the EFSE Development Facility
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Kristin DuchȃteauHead of Department Advisory Services OeEB
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Dr. Modibo CameraPresident, A2FAlfredo BelloVice President, A2F
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Another Quantum Leap in Microfinance:Preparing for Future Growth through Consolidation
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Introduction
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Definition
Market consolidation happens when two or more companies join to form an entirely new company.A+B=C
Consolidation is brought about through a merger or acquisition process (M&A). Often these terms are used interchangeably.
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Objectives of the session
Understand mergers & acquisitions as part of corporate life
Be better equipped for approaching merger discussions
Be aware of critical success factors and potential challenges
Be sensitive to integration challenges, especially to the need to provide the right incentives to all parties
Be aware of potential regulatory issues
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Ground Rules
Share your personal experience
Every question is worth asking
One conversation at the time
Help us stay on track and on schedule
Fun is allowed
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The Business Case for M&As
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Creating value through mergers
$1.2 Trillion spent on global M&A in 1st half of 2010
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M&A’s are Part of Corporate Life
30,000 mergers annually in recent years80
transactions a day
$2 Trillion every year
Companies pay more frequently in cash than stocks. In 2010, 66% of US merger transactions were paid in cash, compared to 54% in 2009
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Typology
• Two or more legal entities agree to cooperate to achieve a common business goal (share P&L)
• A partnership that is presumed to be of limited scope or duration
• A range of possible formal collaboration or relationships among legal entities short of a legal merger
• A combination of two or more institutions in which only one survives and the other goes out of existence
Merger
Alliance
Partner-ship
Joint Venture
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Business Logic & Key Drivers
Sector consolidation
Regional Expansion
Extension of the product range
Enhanced Access to Capital
More desirable legal structure
Acquisition of new skills
What are your company’s strategic objectives?
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Stylized Facts
83% of mergers failed to unlock value (KMPG, 1999)
70% of US mergers in 1995-2001 failed to create meaningfulshareholder value (Bain)
Bain found some evidence of a positive trend during economic downturns: US mergers right after 2001-2002 almost tripled the shareholder returns than mergers in 1996-2000
Every second merger fails to achieve desired results (Oliver Wyman, 2008)
Study after study puts the failure rate of M&As btw 70–90 %
In 1995, about 50% of U.S. mergers underperformed their industry index. In 2005, the figure was about 30%
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Frequent acquirers outperform in the long term
-0,20,7 0,7
1,01,5
3,0
-101234
Annual excess return (%)(1987-2006)
One of the world’s best serial acquirers, over the past 14 yrs it has averaged 26% annual
revenue growth
357
5
11
8
1212
45
2
23
16
11162126
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
CISCO’s Acquisitions
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Examples of Corporate Mergers
United/Continental (2011) – Honeymoon?
Microsoft/Skype (2011) – Overpaid?
Wells Fargo/ Wachovia (2008) – A blissful acquisition?
HP/Compaq (2001) – Synergies at last!!..
AOL/Time Warner (2000) – The biggest mistake in corporate history
Daimler/Chrysler (1998) – Where did the synergies go?
Exxon-Mobil (1998) – Archetype of successful merger
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Star Alliance - - An Alternative Model
Alliance of 27 airline companies Goal is to expand their geographic network in the most
efficient way A single ticket, one major frequent flyer plan, shared
lounges, coordinated schedules, consistent quality Built an internationally-recognized brand but individual
airlines kept their own brands Individual airlines remain independent companies Hostile takeovers on fellow members prohibited
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What is specific to Microfinance?
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The Market Perspective
Large number of MFIs active today, many
not sustainable
Saturation in most
advanced markets (over-indebtedness)
Lower level of differentiation among MFIs
Out-growth of “classic” business models?
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Ownership and Governance
Not-for-profit tend to have unclear ownership structures – Who really are the organization’s owners?
Often management exercises almost total control on the MFI operations – does that make them the owners?
How to treat the capital grants given to the MFI? How to align interest between the MFIs and
management?Ownership & governance M&A as imperfect channel
is often unclear to growth & sustainability
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How to value Sweat Equity?
Recognizing the value of “sweat equity” is critical
Management’s leverage not to be underestimated
The example of K-Rep and its ESOPK-Rep
Holding Company
K-Rep Development Agency NGO
K-Rep Consulting Services
K-Rep Bank Ltd
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Regulation
In most countries, regulation is untested or inadequate for mergers of microfinance players
M&As can lead to change of legal status with more stringent regulatory requirements (e.g., capital adequacy, profile of Board members, etc.)
Beware of potential implications for the tax regime
Regulation can sometimes create a misalignment of interests and incentives between the MFIs and management
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Some MF mergers and consolidations
NGOs (Partner & Bosvita, FORA
fund; Opportunity International Russia; MDF Kamurj; BOM)
NGOs and Formal Financial
Institutions (Financiera Confia)
Formal Financial Institutions (Xac
Bank, Financiera El Comercio;, BFP &
Solife)
Failed merger attempts
(PRODEM/FIE; Genesis/BancoSol)
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Joint Venture
Bancamía(2008)
BBVA Foundation
(51%)
CMM Medellin (24.5%)
CMM Colombia (24.5%)
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BBVA Foundation Alliance Network
BBVA Foundation
Bancamía(Colombia)
EdpymeConfianza
(Peru)
Caja NuestraGente (Peru)
ServiciosMicrofinancieros
(Chile) Corporaciónpara las
Microfinanzas(PR)
ServiciosMicrofinancieros
(Argentina)
Microserfin(Panama)
2008 Merger of Caja Rural NorPeru + Caja Rural del Sur + Edpyme Crear Tacna
2008 merger of CMM Medellin + CMM Colombia
Plans to merge and turn into a Bank
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Key Issues to be considered
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M&A Stages
Determine what you are
looking for
Look around for a good
partner
Investigate Negotiate
Integrate
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DEFINE WHAT YOU ARE LOOKING FOR?
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First take a closer look at yourself
Understand your institution’s strategic position and your value proposition
Do a detailed SWOT analysis to identify areas for improvement
Determine your needs and ways of addressing them internally
Determine what requirements you are looking for in another organization
Consider hiring external advisor for this process
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LOOK AROUND FOR A GOOD PARTNER
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Finding the Perfect Match
Assessing the strategic fit and real synergies
• Think about what you want
• Due diligence in financial and human capital areas: does it match what I am looking for?
• Do you share common goals and principles?
• Do you have complementary skills?
What counts for a good match?
• Mutual need• Shared Vision• Mutual trust• Commitment
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INVESTIGATE
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Is it worth it?
Costs Benefits
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Non-financial Due Diligence
Cultural integration may require restructuring the organization, redesigning compensation and incentives, rethinking decision and authority rights
Are both organizations willing to adapt their practices? Stress and uncertainty about job security
WHO’s going to get the TOP JOBs?
Mergers depend on people!
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NEGOTIATE
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What is the right price for the deal?
MFIs can’t be valued as traditional banks Scarcity of information on microfinance
valuation Transaction size and net income growth are
key drivers of valuations Ultimately, the right price depends on what
purpose the merger will serve
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Valuation: In Theory
Two broad approaches: Asset based (with a multiple) Earnings based (with a multiple) (with
adjustments for expected merger synergies, and merger costs)
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Valuation: In Theory
Example: Earnings-based valuation:
Example: Asset-based valuation:
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Microfinance Valuations by Region
Median Historical P/E Median Historical P/BV
2005 2006 2007 2008 2005 2006 2007 2008Africa
5.6 6.2 17.1 11.8 0.9 1.2 1.6 1.7
Asia NA NA NA 6.0 1.7 2.0 7.0 2.4ECA 9.3 8.6 13.8 9.3 1.8 1.3 1.0 2.0
LAC NA 6.7 5.6 7.8 1.4 1.2 1.1 1.2
Source: 2009 CGAP/JP Morgan paper on Microfinance Equity Valuation
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Valuation: In Practice (Not a Science)
Ultimately a Negotiation: with imperfections all-round: What are the strategic objectives of each side? How much does each side need the transaction?
What if nothing happens? Are you negotiating with only one buyer / seller?
Or is it a more competitive bidding process? Who are the key decision makers (shareholders,
management)? (are you negotiating with both?) If an NGO - what will happen to the proceeds? What does each side want? (Max price? Job
security? Legacy?)
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INTEGRATION
How do you make it work?
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Not an Easy Task
Challenges
•Overestimation of synergies•Inadequate due diligence•Poor post-merger integration•Poor leadership•Conflicting corporate cultures
Key Ingredients for Success
• Define key added value and set clear priorities for integration
• Meticulous planning and execution
• A compelling vision that all stakeholders understand and embrace
• A fast and focused transition
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Post-Merger Integration in 3 steps
Preparation
Form a competent integration team
Define strategic direction and targets of new
company
Identify & plan changes in HR, procurement,
products, processes
Operational Integration
Implement details of the integration plan
Eliminate product redundancies, select the
right people, communicate to customers
Achieve short-term financial and market goals
Strategic Integration
Focus on achieving new strategy to ensure
competitive positioning in the market
Monitor progress and adjust strategic goals as
needed
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Planning the “morning after”
Integration planning starts during due diligence Don’t lose sight of why you picked your partner
– appreciate value and uniqueness Decide the desired level of integration, plan
meticulously but act quickly Select a trusted and respected outside broker to
facilitate negotiations and change management Clear leadership – a single skilled person in
charge Communicate, Communicate, Communicate –
beat the grapevine!
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Key Change Management Aspects
First things First - “Do I still have a job?” Performance, morale and productivity usually
go down as staff are worried about their futures
Most qualified people may leave if uncertain Ensure a focus on customers – don’t lose sight
of the market by looking-inward Give management and staff the right
incentives to support the merger
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Lunch12:30 – 14:00
EFSE Annual Meeting 2011