malaysia & asia pacific

MALAYSIA & ASIA PACIFIC : “M&A” HUB FOR THE FUTURE30 July 2008 | Kuala Lumpur, Malaysia

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About Mergers and Acquisitions

• M&A is only a part of the larger context of strategic management

• M&A is a tool that, when used properly, can obtain higher returns for your company

• Like any tool it must be used correctly to achieve the desired results

"M&A is one of the most important means by which companies respond to changing conditions "

- Robert Bruner

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Course Objective

The objective of this course is to provide you with a working framework for understanding and using mergers, acquisitions, and strategic alternatives as tools for your firm.

This new knowledge will help you:

• Solve strategic problems

• Conceive of new possibilities

• Avoid ‘bad deals’ and non-objective advice

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Presentation Format

If you have a question or comment during the presentation, please raise your hand.

Questions are encouraged!

There will be a competitive quiz game at the end of each section to test your knowledge

Glossary located at the back of your participant guides

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Day One Summary

Today we will cover:

• Historic, Present and Future M&A Drivers

• Types of Transactions

• Synergies

• Competitive Analysis

• Defenses to hostile takeovers

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Day Two Summary

On Day Two we will cover:

• Valuation

• Deal Design

• Financing Methods

• Integration Concepts

OVERVIEW OF PAST, CURRENT & FUTURE TRENDS

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Forces Driving M&A

Historically

• Low cost of debt capital

• Deregulation

• Need for critical mass

• Over capacity

• Privatization

• Technological change

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Forces Driving M&A

Presently

• America’s Sub-prime Mortgage Crisis

• Energy Prices

• Inflation

• Commodity Prices

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Recent Trends

Source: Second Quarter 2008 Mergers & Acquisitions Review. Thompson Reuters.http://www.thomsonreuters.com/content/PDF/financial/league_tables/ma/2008/2Q08_global_ma_advisory.pdf

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Future of M&A In Southeast Asia

In line with the U.S.-led global slowdown, signs of moderating activity emerged in Asia in late 2007 and early 2008. While growth remains high, led by China and India, and domestic demand is still buoyant, key activity indicators suggest that momentum in the region is easing. Both export and import growth have picked up in recent months, although this development partly reflects price effects. Given the still-robust pace of activity, inflation pressures have risen as food and commodity price increases have begun to generate some second-round effects; producer price pressures have risen as well. Current account surpluses and reserve accumulation continue to be prominent in the region as exchange rate appreciation, particularly as measured on an effective basis, remains modest.

International Monetary Fund. Regional Economic Outlook. 11-April-2008.http://www.imf.org/external/pubs/ft/reo/2008/APD/ENG/areo0408.pdf

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… It’s complicated!

Economic outlook relative to the rest of the world is positive, but…

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Very Notable Risks:

• Inflation

• Decline of trading partners (US recession)

• Increased relative value of MYR

• Tighter credit markets (difficult to borrow money)

• It is unlikely that Asia Pacific will ‘delink’ from other world economies and be unaffected

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New Opportunities as Well:

• Growing trade in ‘non traditional markets’ such as Latin America, Eastern Europe, Middle East

• Obtain investment from abroad – M&A!

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M&A is one of several tools that will help Malaysian companies perform in this uncertain market

Every risk is also an opportunity

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Impact of Foreign Direct Investment

• Unexpected entry of new buyers

• Increases purchase prices

• Changes market assumptions

• Foreign acquirers motivated differently

• Growth by market expansion

• Extension of technology and brands

• Acquisition of special resources

• Tax and currency arbitrage

• Demonstrates fundamental assumptions about local market

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Drivers of Cross Border M&A

•Exploit market imperfections

• Cheap labor and raw materials, trade liberalization, country's integration into capital markets

• Extend the reach of the buyer's or target's intangible assets

• Reduce tax through jurisdiction arbitrage

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Drivers of Cross Border M&A

• Reduce risk through diversification

• Exploit the differences in capital market and currency conditions

• Improve governance

• Combined valuation in home market rises when buyer is coming from a more regulated capital market country

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Sovereign Wealth Funds

What are Sovereign Wealth Funds?

• State-owned investment fund

• Often funded by central banks, who accumulate the funds in the course of their fiscal management of a nation's banking system (foreign currency reserves, currency stabilization, etc)

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Why are they important?

• Significant recent growth due to high oil prices

• Notable investments globally

• Entry can change market assumptions

• Many may questions motivations

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Fund Country Established Source AUM($Billion USD)

Abu Dhabi Investment Authority

UAE 1976 Oil $875

Government Pension Fund of Norway

Norway 1990 Oil $391

Government of Singapore Investment Corp1

Singapore 1981 Non Commodity

$330

Kuwait Investment Authority

Kuwait 1953 Oil $264

China Investment Corporation

China 2007 NonCommodity

$200

1 Does not include Singapore’s Temasek Holdings , Established 1974, AUM $159 Billion

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Why Malaysia is a Good Place for M&A

•Friendly government policies

• Relatively Stable Government

• Allow 100% foreign ownership of Malaysian company

• Tax incentives

• Intellectual property protection

• Workforce

• Multilingual, English speaking

• Strong productivity

• Sufficient infrastructure

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Key Players in M&A

Now that we understand the general environment, we should understand the key players in a M&A transaction and their diverse motivations.

Successful navigation of these players is key for the long term success of any transaction.

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Key Players in M&A

Acquirer Target

• Board of Directors• Management• Employees

• Equity Investors• Debt Investors

• Banks

• Investment Bankers• Accountants• Attorneys

• Board of Directors• Management• Employees

• Equity Investors• Debt Investors

• Banks

• Investment Bankers• Accountants• Attorneys

ALL WITH THEIR OWN MOTIVATIONS!

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Key Players in M&A

Others

• Other Potential Buyers• Competitors

• Free riders• Arbitrageurs

• Analysts• Media

ALL WITH THEIR OWN MOTIVATIONS!

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‘Winners’ and ‘Losers’ in a Transaction

How do we define success?

• Creation of market value?

• Gained financial stability?

• Improved strategic position?

• Gained organizational strength?

• Enhanced brand?

• Improved processes?

Decide your goal at thebeginning of the process!

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How do we define success?

Did it meet the goals and benchmarks you set at the beginning of the process?

YES NOor

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Quiz Game

What are some of the key drivers in M&A?

How do you decide on your definition of success?

Who are the key players in a transaction?

You are competing against a foreign firm to acquire a Malaysian company. How does this

affect your deal strategy?

FORMS OF MERGERS & ACQUISITIONS

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Buy Side vs. Sell Side (in Acquisitions)

Defined

• Acquirer

• Not always the successor firm

Motivations

• Obtain maximum value for their shareholders

Defined

• Side of the transaction being purchased

Motivations

• Obtain maximum value for their shareholders

Buy Side Sell Side

In complex deals identities may grow fuzzy, but motivations remain the same.

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Transaction Decision Framework

Business Strategy

Diversity or Expand

Organic

Internal Investment (“make”)

Inorganic

Merger or Acquisition

Minority Investment

Outbound Joint Venture

Strategic Alliance

Contractual Relationship

Restructure, Redeploy Assets, or

Exit

Partial

Inbound Joint Venture

Sale of Minority Interest

Spin Off

Carve Out

Split Off

Tracking Stock

Total

Divest

LBO / Go Private

Third Party Sale

Liquidate

Financial Restructuring

Abstracted from:= Bruner, Robert. Applied Mergers and Acquisitions. Exhibit 6.10. Wiley & Sons 2004.

Buy Side

Sell Side

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Buy Side – Diversify or Expand


What is an Internal Investment?

• Investment by the firm in itself in a new or existing business unit for the purpose of increasing organic growth

• Not a necessarily a form of M&A

• Should be considered a strategic option

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Strengths

• Full control of outcome

• Cost effective

• Fewer integration issues

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Weaknesses

• Much slower

• Results not guaranteed

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When to use Internal Investments:

• Your firm has the capacity to develop the technology internally

• Your firm has the time to grow organically

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Once your decide on an inorganic (M&A) growth path, you need to determine:

• How much return you will require (relationship benefits)

• How much control you need

• How well you need to manage risk

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Inorganic Growth Opportunity Decision Tree (Buy Side)

Need to Manage Risks

Need for Control

Relationship Benefits

-

Higher

Higher

Higher


Lower

Acquisition or Joint Venture

Lower

HigherAcquisition or Joint Venture

LowerJoint Venture or Minority Investment

Lower

Higher

Higher Minority Investment

LowerMinority Investment, Alliance, or Complex

Contractual Agreement

LowerHigher Alliance or Complex Contractual

Agreement

Lower Simple Contractual Agreement

Abstract from: Bruner, Robert. Applied Mergers and Acquisitions. Exhibit 6.20. Wiley & Sons 2004.

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Horizontal Merger

What is a horizontal merger?

• Combination of peer firms at the same level of the production process in an industry

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Before Horizontal Merger After Horizontal Merger

Consumers

Fuel Station Fuel Station

Oil Refiner Oil Refiner

Oil Producer Oil Producer

Consumers


Oil Refiner


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Horizontal Merger

Strengths

• Improves margins by either:

• Improving economies of scale

• Increasing market power

• Allows for more optimal use of capacity

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Horizontal Merger

Weaknesses

• Antitrust considerations

•Economies of scale may not be helpful long term

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Vertical Merger

What is a vertical merger?

• Entails combining firms vertically along the value chain

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Before Vertical Merger After Vertical Merger

Consumers


Oil Refiner Oil Refiner


Consumers


Oil Refiner

Oil ProducerOil Producer

Oil Refiner

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Vertical Merger

Strengths

• Cuts out intermediaries, reduces overhead expense and redundant assets

• Improved coordination from production to sale

•Divergent interests reconciled

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Vertical Merger

Weaknesses

• Can lead to long term supply chain inefficiency from complacency

• Restricts flexibility of the company

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Vertical Merger

When to use Vertical Mergers:

• Supply prices increasing more than production cost

• Too many middlemen

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Conglomerate Merger

What is a Conglomerate Merger?

• Holding company with a portfolio of diverse unrelated businesses

•Can be:

• Financial Conglomerate

• Managerial Conglomerate

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Conglomerate

Parent Company

Subsidiary A (Telecom Service)

Subsidiary B (Computer Hardware)

Subsidiary C (Car Parts)

Contains Common Management Functions (Accounting, Marketing,

etc)

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Conglomerate Merger

What is a Financial Conglomerate?

• Provides flow of funds to each segment of their operations

• Undertake strategic planning, but do not participate in management of operating entities

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Conglomerate Merger

What is a Managerial Conglomerate?

• Provides management staff, common corporate functions, and oversight of operating entities

• Provides flow of funds to each segment of their operations

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Conglomerate Merger

Strengths

• Reduced Default Risk and hence lower cost of debt

• Avoids “gambler’s ruin”

• Benefit to establishing programs of financial planning oversight

• Distinction between performance of management and underlying assets

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Conglomerate Merger

Weaknesses

• Subject to “conglomerate discount” by market

• Inability to manage all businesses equally well

• Investors can (sometimes) do better themselves

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What is an Outbound Joint Venture?

• Separate entity formed by the partnership of two companies

• Generally used to develop a new technology or process, which would help both companies

• Outbound = You have majority control

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When to use an Outbound Joint Venture?

• A new technology is too expensive for only one company to develop

• There are more possible users of a technology in different industries

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Minority Investment

What is a Minority Investment?

• You acquire a less than major equity position in another company

• Used to signify strong commitment as you have an interest in their economic success

• “Cross Shareholding Agreement”

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Minority Investment

When to use a Minority Investment:

• You have a strategic interest in another company

• Failure of the other company would mean hardship for yours

• You are trying to gain control in the long term

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Contractual Relationships

• Licensing Agreements

• Co-Marketing Agreements

• Co-Development Agreements

• Joint Purchasing Agreements

• Franchising

• Long Term Supply Agreements

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Strengths of Contractual Relationships

• Inexpensive

• Usually have a conditional exit clause

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Weaknesses of Contractual Relationships

• No equity involved

• Relying upon the soundness of another company that you do not control

• Limited economic upside

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Sell Side – Restructure, Redeploy, or Exit

Now to Sell Side… The other side of the transaction…

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Business Strategy

Diversity or Expand

Organic


Inorganic


Minority Investment


Strategic Alliance



Exit

Partial



Spin Off

Carve Out

Split Off

Tracking Stock

Total

Divest

LBO / Go Private

Third Party Sale

Liquidate


Abstracted from: Bruner, Robert. Applied Mergers and Acquisitions. Exhibit 6.10. Wiley & Sons 2004.

Buy Side

Sell Side

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Sale of Assets

What is a Sale of Assets?

• Sale of tangible or intangible assets in exchange for value

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Sale of Assets

Strengths

• Immediate economic benefit

• Straightforward

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Sale of Assets

Weaknesses

• No longer have use of asset

• Selling company is responsible for capital gains

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Sale of Assets

When to use a Sale of Assets?

• Asset no longer provides value for your company

• You need to raise capital

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What is a Sale of Minority Interest?

• Sale of a less than majority stake in the parent company to a third party

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Public Shareholders

Parent Company

Subsidiary A Subsidiary B

New Owners

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Strengths

• Other company has a financial interest in your success

• Demonstrated commitment to your company

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Weaknesses

• May dilute value for existing shareholders

• May lose some control over operations in the long term

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When to use a Sale of Minority Interest:

• When you can gain a strong, long term, strategic benefactor

• Need to raise capital

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Carve Out

What is a Carve Out?

• Organize a business unit as a separate entity and sell a majority of the shares in the new entity

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Carve Out via IPO

Public Shareholders

Subsidiary BSubsidiary A

Parent Company

New Public Shareholders

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Carve Out

Strengths

• Generates cash for the parent company

• Monetizes (values) the parent’s interest in the subsidiary

• Greater transparency for investors to value the subsidiary

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Carve Out

Weaknesses

• Parent company no longer has control of the carved out business unit

• Inefficiency created duplication of some management functions

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Carve Out

When to use a Carve Out:

• Activities of the business unit no longer meet the strategic goals of your company

• Market overvalues the subsidiary

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Spin Off

What is a Spin Off?

• Organize a business unit as a separate entity and sell a minority of the shares in the new entity

• Parent company retains a majority interest

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Spin Off via IPO

Public Shareholders

Subsidiary A

( <50% Shares of Sub B)

Parent Company

Subsidiary B

( >50% Control)

New Investors

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Spin Off via Dividend

Public Shareholders

Subsidiary A

( <50% Shares of Sub B)

Parent Company

Subsidiary B

( >50% Control)

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Spin Off

Strengths

• Creates greater transparency for investors to value the subsidiary

• Parent retains control

• Parent is able to later sell part or all of its ownership interest in the new entity for a (greater) gain

• Generally non-taxable event if transaction done via dividend

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Spin Off

Weaknesses

• Parent no longer fully participates in financial success of subsidiary

• Some inefficiency created by duplication of some management

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Split Off / Exchange

What is a Split Off or Exchange?

• Portion of the parent company’s shares are exchanged for shares of the subsidiary

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Split Off via Exchange of Parent Shares

X% Public Shareholders

Subsidiary BSubsidiary A

Parent Company

(1-X%) Public Shareholders

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Strengths

• New entity owned largely by the same shareholders

• Parent able to reclaim some of their shares for treasury

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Weaknesses

• Anticipate other activities of the parent company will outperform those of the subsidiary in the long term (the subsidiary would be dilutive to earnings)

• No immediate economic gain

• Complex tax rules

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When to use a Split Off or Exchange

• Subsidiary dilutive to earnings of the parent company

• Subsidiary no longer fits the strategic direction of the company

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Tracking Stock

What is a Tracking Stock?

• Creation of a special equity claim on subsidiary

• Dividend of Tracking Stock tied directly to net income of subsidiary

• No transfer of actual ownership

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Tracking Stock via IPO

Public Shareholders

Parent Company

Subsidiary A

New Public TS Shareholders

Subsidiary B

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Tracking Stock

Strengths

• Monetizes subsidiary without actually selling ownership

• Provides investors additional transparency

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Tracking Stock

Weaknesses

• Intercompany transactions become complicated (such as lending)

• Tracking stock dividend decreases value for parent company

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Tracking Stock

When to use a Tracking Stock?

• When your company experiences a conglomerate discount from significantly diverse operations

• When your company has a successful division that is not fully reflected in the share price of your company

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Financial Recapitalization

What is a Financial Recapitalization?

• Changes the firm’s capital structure by optimizing the debt to equity mix

• May be used as an alternative or defensive measure to being acquired

•Can be:

• Leveraged Restructuring

• ESOP Restructuring

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Financial Recapitalization – Leveraged Restructuring

What is a Leveraged Restructuring?

• Company borrows money to repurchase equity or pay extraordinary dividend

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Strengths

• Rewards shareholders

• Retains company equity that can later be resold at (possibly) a higher price

FO

RM

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FM

ERG

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& A

CQ

UISITIO

NS



Weaknesses

• Company takes on additional debt

• Can be expensive

• Limited tangible benefit for company

FO

RM

SO

FM

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& A

CQ

UISITIO

NS



When to use Leveraged Restructuring?

• Company is undervalued by market

• Interest rates are low

FO

RM

SO

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& A

CQ

UISITIO

NS


Financial Recapitalization – ESOP Restructuring

What is an ESOP Restructuring?

• ESOP = Employee Stock Ownership Program

• ESOP purchases additional shares of company stock

• May be either repurchased by the company to sell to ESOP or issued from treasury

• ESOP may take on debt to acquire shares, either from outside source of lent by company

FO

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CQ

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Strengths

• Can be beneficial to have ESOP as significant shareholder

• Reduces common shares available for purchase

FO

RM

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& A

CQ

UISITIO

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Weaknesses

• Can be expensive

• Dilutes existing shareholders if shares issued from treasury

• Can be problematic if firm is to be purchased

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& A

CQ

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When to use ESOP Restructuring

• Want to ensure friendly shareholder with significant stake in company (defensive move)

• Create employee or management incentive for greater corporate performance

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Quiz Game

If you are trying to reduce the impact of raw materials cost inflation on your company, what form of M&A makes the most sense?

What types of transactions would allow you to significantly reduce your R&D expense for a new technology?

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Quiz Game

What M&A options should you consider if you have a factory that is only 30% utilized?

What types of transactions make sense if you have a business unit that no longer fits with the strategic direction of your firm?

What types of transactions allow you to raise money specifically for the further development of one of your business units?

~ BREAK

PORTFOLIO APPROACH TO M&A

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Overview of Portfolio Theory

Goal of Conglomerate Portfolio Theory:

To create a portfolio of SBUs that is well-balanced in terms of cash inflow and outflow, and growth prospects

Cost-effective organizations structure to buy and divest off business units, which is often where competitive advantage is created.

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Considering Risk

Alpha Risk α

What is Alpha Risk α ?

• Diversifiable, Unsystematic risk (ex: changes due to weather, strike, fire).

• Mediate by developing a portfolio of businesses (ex: skis and bicycles)

• Unrelated M&A reduces alpha

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Considering Risk

Beta Risk β

What is Beta Risk β ?

• Non-diversifiable, systematic risk (shareholder risk)

• Variance in returns associated with changes in market/economy conditions

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Is Diversification Desirable

• Increases Size

• Reduced Alpha

• Buy Undervalued Stock

• Use Available Free Cash Flow

• Cash flows of unrelated businesses are not correlated

• Lowers risk of bankruptcy and allows more debt

• Implementation Problems: Financial controls, bureaucracy

• No Relationship-Size returns

• Managers interests of stockholders interests

• Conglomerate Discounts

• Can be hostile takeover targets

• Only Related mergers lower costs

• Only Related mergers reduce their beta risk

Yes No

Conclusion: Only if acquirer manages organizational risk AND exploits a core competence!

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Growth Share Matrix (BCG Matrix)

Purpose: Identify relative positions of firms in an industry or divisions within a firm.

Relative Market ShareM

arke

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Low

HighHigh Low

STARS QUESTION MARKS

CASH COWS DOGS

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arke

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Low

HighHigh Low

Circle size indicates size of cash flow


CASH COWS DOGS

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“Cash Cows”

• A business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units.

• High market share, but low growth, and hence low ongoing investments to support the business. Firms in this section are net providers of cash. With multi-business firms, cash cows are typically milked to support the growth of other divisions.

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“Stars”

• A business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.

• Firm with high market share and high growth: It generates plenty of cash for its ongoing expansion. And because of its strong market position, the continued investment to grow the business is attractive.

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“Dogs”

• A business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

• Firm with low growth and low market share. The business has low competitive power in the marketplace and has low prospects for growing the business into a more attractive position. Unless the position is changed, the business will be a sump for cash.

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“Question Marks”

• A business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown.

• High growth rate and low market share - demands high rate of investment to grow the business but does not command the market position that might justify the investment

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Assess your firm’s business units


arke

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Low

HighHigh Low


CASH COWS DOGS

Where does your business unit fit in?

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• Highlights the kinds of attention various business unit may want/need

• Simple

• Focused on market position, not directly on shareholder value

• Oversimplifies

Strengths Weaknesses

There needs to be a better way, right?

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Industry Attractiveness-Strength Matrix (GE / McKinsey Matrix)

Strong Average Weak

Hig

hM

ed

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Low

Ind

ust

ry A

ttra

ctiv

en

ess

Competitive Position of the Unit

Invest Selective Growth

Up or Out (Access unit's profitability and

prospects for improving position)

Selective GrowthUp or Out

(Restructure to Improve) Harvest

Up or Out(Analyze long term

profitability and prospects for endgame)

Harvest Divest

M&A Opportunity

M&A Opportunity

M&A Opportunity

M&A Opportunity

M&A Opportunity

M&A Opportunity

M&A Opportunity

M&A Opportunity

M&A Opportunity

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Industry Attractiveness-Strength Matrix (GE / McKinsey Matrix)

Industry Attractiveness Factors

• Market growth rate

• Market size

• Demand variability

• Industry profitability

• Industry rivalry

• Global opportunities

• Macro environmental factors

Allot a weighting to each to determine “Industry Attractiveness”

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Industry Stage & Its Affect on Value

Start-Up Phase Growth Phase Maturity / Decline Phase

Time

Rev

enu

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Start-Up / Development Stage

Stage is typically characterized exceptionally high growth and low profitability.

Companies require high levels of capital to fund their growth

High price to earnings ratio

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Growth

Stage is characterized by strong profitability, market development, and new market entrants

Companies require external funding to sustain growth

Market participants generally become cash flow positive by the end of this stage

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Maturity

Stage is characterized by a fully developed marketplace and consolidation within the industry

Market participants compete on product quality and price and will emphasize production efficiency

Significant industry consolidation occurs in this stage

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Decline

Stage characterized by steady, but declining revenue and increased presence of substitutes

Low price to earnings ratio

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Aggregate Growth of Conglomerate

Time

Rev

enu

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Business 1

Business 2

Business 3

Business 4

Utilizing outcome of Industry Attractiveness-Strength Matrix

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Implications of M&A on Stock Performance

Cash Flow

Accretive M&A

• Typically increase the stock price due to an improved PE multiple

Dilutive M&A

• Typically decreases stock price due to a diminished P/E multiple

• Must be well justified

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Momentum Acquiring

What is Momentum Acquiring?

Corporate mergers and acquisitions for the primary purpose of growing earnings per share or revenue via accretive acquisitions.

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Momentum Acquiring

Strength

• Market appears to favor EPS and revenue growth

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Momentum Acquiring

Weaknesses

• Strategy is unsustainable

• Integration issues

• Promotes uneconomic deals

• Dilutes shareholders

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Momentum Acquiring

Don’t get caught in the trap of pursing ‘phantom gains’!

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Stock Performance Indicators

Alpha Risk

Beta Risk

Earnings per Share

Risks of over diversification

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Conclusion

• Unrelated acquisitions increase Beta and overall cost of capital

• Related acquisitions reduce Beta

• Investors respond favorably to restructuring, divestitures, spin-offs, and carve outs

• These transactions liberate value

• Investors tend to discount synergies

• Greater discount to Revenue Enhancement Synergies rather than Cost Saving Synergies

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Conclusion

• When judging success on stock performance, always:

• Use a valid benchmark

• Define it as ‘abnormal returns’ rather than absolute returns

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Quiz Game

Why would you want to use “Momentum Acquiring”?

Your firm makes an accretive acquisition in an unrelated industry. What are the affects on: alpha, beta, and stock price?

REASONS FOR A TRANSACTION

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Overview

“M&A is one of the most important means by which companies respond to changing conditions”

- Robert BrunerApplied Mergers & Acquisitions

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Overview

We have learned that diversification alone is not a sufficient reason for a merger or acquisition. The transaction must capitalize on a core competence.

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Improving Operating Synergies

Core Competencies

What is a Core Competency?

• Capabilities that serve as a source of competitive advantage for the business over the competition

• Also called Business Fit

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Core Competencies

Characteristics of a Core Competency

• Valuable

• Rare

• Difficult to Imitate

• No Substitutes Reasonably Exist

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Core Competencies versus Synergies

• Core Competencies are different that Synergies

• Think of Synergies as WHAT and Core Competencies as WHY

• Synergies are how 2 + 2 = 5, and Core Competencies are why the sum is greater than its parts

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GrowthBenefits from acquiring opportunities in other industries or sectors, revenues, profitability, or

customers

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DiversificationBenefits from acquiring operations in different

industries or sectors that provide growth, complementary cash flow, or access to new

opportunities.

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Acquire TechnologyBenefits from acquiring new business processes or

new technology.

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Acquire TalentBenefits from acquiring a group of successful

managers or management program.

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Acquire

Research & Development

CapacityBenefits from acquiring additional research and

development capacity.

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Market AccessBenefits from acquiring companies in different

markets or countries to gain a new or enhanced sales channel.

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Enhanced Capacity Utilization

Benefits from acquiring to increase sales capacity and consolidate production.

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Enhanced Purchasing Power

Benefits from acquiring companies to grow purchasing to gain enhanced economies of scale.

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Enhanced Utilization of Marketing

Benefits from acquiring companies to more effectively market the target’s products.

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Gain Greater Control of Vital Assets

Benefits from acquiring a company you have a joint venture with to acquire the full interest of the

venture.

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Enhanced Financial Synergies

“The market is readily persuaded by the cost-cutting motive for mergers, while subjecting other rationales

to considerable skepticism.”

- Houston and Ryngaert

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Cross SellingBenefits from acquiring companies that have

overlapping customer groups.

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Eliminate Intermediaries

Benefits from acquiring companies involved in different stages of the value chain.

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Improve LogisticsBenefits from acquiring companies with production or

distribution facilities.

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Asset ReductionBenefits from acquiring companies where you can close one of the redundant headquarters, unused

plants, or excess inventory.

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Tax ReductionBenefits from acquiring a company with net operating

losses or higher levels of depreciation.

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Reduce Financing CostBenefits from either acquiring a company with

inversely correlated cash flows or a firm that would contribute to a lower overall default risk.

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Acquire LiquidityBenefits from acquiring a company that has significant balance sheet liquidity and financing for acquisition is

long term.

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Coinsurance EffectBenefits from acquiring a company that contributes to

an overall lower default risk.

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Enhancing Financial Synergies

Cautionary Note

The benefits from operating and financial synergies are anticipated, but not guaranteed.

Remember to discount the synergy by a cost of capital appropriate for the risk.

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Quiz Game

Scenario: You are Malaysia’s second largest producer of solar panels and you are considering the acquisition of Malaysia’s third largest producer of solar panels (XYZ Co). After a well publicized IPO four years ago, XYZ Co built three brand new production facilities, but has failed to achieve profitability. XYZ Co’s brand is well known worldwide, while you have focused on providing high quality solar panels under private label contract for other companies. What are the potential synergies?

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Quiz Game

Scenario: You are Malaysia’s second largest provider of high speed data services. Nine years ago you formed an (inbound) joint venture with YYY Co to lay an undersea cable between Malaysia and Hong Kong. This cable now carried 90% of your internet and voice traffic. All of the other undersea cables from Malaysia are owned fully or jointly by your competitor who charges you exorbitant fees for usage. YYY Co is rumored to be near bankruptcy due to financial mismanagement. What are the potential synergies?

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Quiz Game

Scenario: You are Malaysia’s largest owner of commercial real estate, which generates large amounts of recurring cash flow. What types of acquisitions should you consider?

~ LUNCH

VALUING SYNERGIES: KEY DRIVERS OF DEAL VALUE

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Value Created by an Acquisition

What is the value created by an acquisition?

[Value of Synergies] – [Purchase Price] = Value

or

[Maximum Purchase Price] – [Purchase Price] = Value

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What is the value created by an acquisition?

[Value of Synergies] – [Actual Purchase Price] = Value

Thus, the determination of synergy value determines how profitable the transaction is.

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Considerations when valuing a synergy

• Establish the credibility of the source

• Choose a discount rate consistent with the risk

• Use realistic assumptions

• Consider all values only after tax

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Formula for Synergy Value

FCFt= Free Cash Flow at time tWACC = Weighted Average Cost of Capital

t = Time period

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Formula for Synergy Value - Perpetuity Terminal Value

Because we cannot complete this calculation indefinitely, we add a terminal value for all future years (usually after the first five years)

FCFt+1= Free Cash Flow at time t+1r = Risk Free Rate of Return (a component of WACC)

g = Perpetual Growth Rate

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Cross Border Acquisitions

Why acquire across borders?

• New Markets

• New Customers

• New Opportunities

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• Valuing synergies across borders is more complicated

• You can either:

• Value the target in local currency and convert it

• Convert the target to your currency then convert

• Opinions vary, but I prefer the first option

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• There are some complications that make the results of the two methods vary:

• Inflation assumptions

• Currency exchange rates

• Tax rates

• Timing of cash remittance

• Political risk

• Governance

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• Financial advisors routinely offer one or two year forecasts, but do not provide longer term projections of forward rate contracts required to fully value to cash flows from the target

• The only practical alternative is the interest rate parity formula, solving for the forward rate yield

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• More than just currencies vary across borders

• Accounting methods may also vary. Be aware of:

• Composition of Balance Sheet “Cash”

• Expense and Investment Recognition

• Pension Accounting

• Inflation Accounting

• These differences are minor in DCF analysis, but more notable in other methods

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• Political risk is also an important consideration

• Political risk is the probability that a government will intervene to the detriment of the corporation

• Many use sovereign debt credit ratings as a proxy for political risk

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• Integration of the home and target companies’ markets also affect valuation

• Interest rates and equity multiples

• More integrated markets typically have higher valuations

• There is a governance premium applied to companies in more integrated markets

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• Weak systems of fairness and justice can impose unanticipated costs

• Valuation model needs to reflect this

• Always have expertise on hand to navigate the foreign market

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• Estimate the Cost of Equity consistent with the risk of the foreign target

• Check for market segmentation and require compensation for it

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Common Reasoning Pitfalls

• Phantom gains

• Synergies not achieved

• Revenue growth without profitability

• Unrealistic synergies

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Quiz Game

What is the value of an acquisition?

How would your company benefit financially from acquiring a related company in a high risk part of Africa?

The vice president of sales for your company says that he can sell your company’s widgets to all of your target company’s customers. How would you reflect this in your model?

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Quiz Game

You are considering acquiring one of your suppliers in Africa. A minority interest in your target is owned by a prominent African diplomat. What enhanced due diligence should you undertake?

Your company’s CEO wants to acquire XYZ Co because it will double your company’s revenue. What is the first financial statistic you should check before responding?

ACQUIRER’S PERSPECTIVE: PART 1 - EVALUATION

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Maximum Acceptable Price

• Remember Synergies less Price Paid equals value created

• Purchase price must be less than the value of synergies

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Don’t Forget To…

• At this stage it is easy to get excited and forget some basics. It is important to do these things before you proceed:

• Inform your Board of Directors

• For a special guidance committee

• Retain strategic advisors

• Write down the goal of your transaction so you don’t forget!

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Step 1: Competitive Analysis

Purpose

• The purpose of the competitive analysis is to identify companies with synergies that are likely to result in a sustainable competitive advantage.

• The key is to identify synergies that will be worth more to your company than the target company

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Methods

• There are any number of ways to identify synergies for a sustainable competitive advantage, but I prefer the following two methods:

• Porter’s Five Forces Model

• Fit Model

• I use the Porter model for evaluating your company, and then the Fit model for seeing how well qualified targets fit

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Porter’s 5 Forces Model

• Consists of evaluating a company along five competitive ‘forces’:

• Barriers to Entry

• Customer Power

• Supplier Power

• Threat of Substitutes

• Rivalry Conduct

• Use the results to determine your company’s weaknesses and look for targets that make them stronger

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Barriers to Entry

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Customer Power(Bargaining Power of Customers)

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Supplier Power(Bargaining Power of Suppliers)

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Threat of Substitutes

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Rivalry Conduct

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Step 2: Search and Screen

Sample Searching Criteria

Quantitative criteria is often useful for narrowing down the universe of potential acquisitions. You may want to consider searching by:

• Size of Business (sales and assets)

• Profitability

• Risk Exposure

• Asset Type (tangible versus intangible)

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Sample Searching Criteria

And also by some broad qualitative criteria:

• Industry and Position in Industry

• Resources and Strategic Capabilities

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Fit Model

During the search process, you develop a “short list” of truly attractive candidates. You then evaluate these using the Fit model, which includes:

• Business Fit

• Organizational Fit

• Financial Fit

This is usually prepared by the due diligence committee

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Fit Model

Business FitSynergies, Relatedness, & Combined Portfolio

AC

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Fit Model

Organizational FitImplementation & Integration

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Fit Model

Financial FitValue Creation

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Due Diligence

Due diligence is an ongoing process throughout the transaction

At the beginning it is broad and based on public information, but as additional information is provided, it gets more specific

Diligence should be oriented towards the strategic or financial benefits of a combination

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Due Diligence Focus Areas

Legal

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Accounting

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Tax

AC

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Information Technology

AC

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Risk and Insurance

AC

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Environmental

AC

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Market Presence & Sales

AC

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Operations

AC

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Real & Personal Property Issues

AC

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Intellectual Assets

AC

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Finance

AC

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Cross-Border Issues

AC

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Human Resources

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Culture

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Ethics

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Due Diligence - Reminders

• Remember it is the job of the due diligence committee to not only see issues with the potential targets, but to foresee potential integration issues

• By the time you get to making an offer, you should have a good idea about how you will integrate the acquisition

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• Describe a scenario where Customer Power would be high.

• Describe a scenario where Rivalry Conduct would be a high risk.

• After plotting both your company’s and your target’s business units on a Growth-Share Matrix, you see a greater concentration to the top right. What are the financial implications?

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• What should you watch for when completing Cultural Due Diligence?

~BREAK

SELLER’S PERSPECTIVE OF AN M&A TRANSACTION

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When to Consider the Sale of Your Company

There are many reasons to consider the sale of your company, but they generally fall into three classes:

• Price is high enough

• Realization of a new strategic direction

• Realization of insurmountable strategic threat

SELLER’S

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When to Consider the Break Up of Your Company

There are many more reasons to consider the restructuring of your company:

• Greater value (conglomerate discount)

• Unit too far away from core

• Need to gain financing

• Need to sharpen focus

• Need to correct a mistake acquisition

• Market does not fully value your company

• Optimize capital structure

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Types of Transactions

We already know the types of transactions possible, but lets refresh:

• Joint Venture

• Sale of Minority Interest

• Spin Off

• Carve Out

• Split Off

• Tracking Stock

• Financial Restructuring

SELLER’S

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Business Strategy

Diversity or Expand

Organic


Inorganic


Minority Investment


Strategic Alliance



Exit

Partial



Spin Off

Carve Out

Split Off

Tracking Stock

Total

Divest

LBO / Go Private

Third Party Sale

Liquidate


Abstracted from: Bruner, Robert. Applied Mergers and Acquisitions. Exhibit 6.10. Wiley & Sons 2004. Pg 139

Buy Side

Sell Side

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Restructuring Framework Diagram (Sell Side)

Need for Control

Ongoing Relationship

Benefit

Is the Asset a

Growing Concern?

-

Yes

Higher

Higher

Tracking Stock

Lower

Partial Spin Off, Split Off, Carve Out, or Sale of Minority Interest

Lower

Higher

Partial Spin Off, Split Off, Carve Out, or Sale of Minority Interest

LowerFull Unit Divestiture, Spin Off, Carve Out, or

Split Off

No

Higher

HigherFull Sale followed by Leaseback, Licensing,

or Contract

Lower Full Sale followed by Leaseback, Licensing, or Contract

LowerHigher Full Sale followed by Leaseback, Licensing,

or Contract

LowerAsset Sale or Liquidation

Abstracted from: Bruner, Robert. Applied Mergers and Acquisitions. Exhibit 6.21. Wiley & Sons 2004.

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Sell Side – Method of Payment

Overview

• Statistically the shareholders of target firms have better performance than acquiring firms (Bruner)

• Nonetheless, you should be aware of the benefits and weaknesses of different methods of payment

• Financing of acquisition will be discussed tomorrow

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Sell Side – Method of Payment

• Immediate liquidity

• Tax Considerations

• Could be invested and worth more

• Longer term commitment

• Dilution of EPS

• Lower future market value

• Potential for “phantom gains”

Cash or Debt Stock

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Strategies to Defend Against Hostile Takeovers

Overview

• Not all acquisitions are friendly

• The “best offense is a good defense”

• It is best to have defensive measures in place prior to the possibility of a hostile acquisition

• Existence creates value for shareholders to prevent undervaluation in hostile takeover

• Costly to companies with underperforming management

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Proactive Defenses

Modification of the company’s charter to include one or more of the following can be an effective deterrent of hostile activity:

• Classified Board

• Supermajority provision

• Fair Price Provision

• Dual Class Recapitalization

• “Poison Pills”

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Proactive Defenses

Classified Board

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Proactive Defenses

Supermajority Provision

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Proactive Defenses

Fair Price Protection Provision

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Proactive Defenses

Dual Class Recapitalization

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Proactive Defenses

Poison Pill

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Proactive Defenses

Poison Put

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Proactive Defenses

“Chewable” Poison Pill

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Proactive Defenses

Proactive defenses force potential acquirers to negotiate with the Board, which results in a higher price.

However, proactive defenses are also a slippery slope in that they can keep entrenched management and boards in place when it is not in the best interest of the shareholders.

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Deal Embedded Defenses

Once a deal proposal is imminent, there are several other steps that can be taken:

• Deal Termination Fees

• Toehold Stakes

• Asset Lockups

• Stock Lockups

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Deal Embedded Defenses take place once a letter of intent has been issued by the potential acquirer.

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Deal Termination Fees

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Toehold Stakes

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Asset Lockups

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Stock Lockups

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Reactive Defenses

Once a deal proposal is imminent, there are several reactive defenses that can be taken:

• Litigation

• Regulatory or legislative protection

• Countertender offers

• Asset restructuring, share repurchases, leveraged recap

• White Knights

• White Squires

• Leveraged Buyout

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Reactive Defenses

Litigation

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Reactive Defenses

Regulatory of Legislative Protection

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Reactive Defenses

Countertender Offer

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Reactive Defenses

Asset Restructuring, Share Repurchases, Leveraged Recapitalization

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Reactive Defenses

White Knight, White Squire

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Reactive Defenses

Leveraged Buyout

(Go Private)

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Negotiating the Best Deal

• When seriously considering a transaction, always retain an investment banking firm with industry experience

• Defensive measures discussed help your company get the deal on your terms. Should not be used as an excuse for entrenched management.

• When possible let the other side speak first

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Quiz Game

Scenario: Your company owns the real estate under many of KL’s cultural centers. A private equity firm is attempting a hostile acquisition of your company so that it can own the real estate and extort excessive rents from the government. You have no proactive defenses in place. What other defenses do you have?

Scenario: A sovereign wealth fund has expressed an interest in acquiring your company, but you believe it is simply a ploy to test public and government reaction. What deal feature can you suggest that would allow you to benefit in the event the deal is not completed?

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Quiz Game

Scenario: You are a manufacturing company that has recently patented a lubricant which you have been using for years that is 20% more effective than all other lubricants. A company is now attempting to acquire you with the intent of closing down all operations except the production of the lubricant, which will result in the loss of hundreds of Malaysian jobs. What is your best strategic option?

DAY 1: QUESTIONS & ANSWERS

MALAYSIA & ASIA PACIFIC : “M&A” HUB FOR THE FUTURE31 July 2008 | Kuala Lumpur, Malaysia

SUMMARY OF DAY 1 KEY POINTS

SU

MM

AR

YO

FD

AY

1


Business Strategy

Diversity or Expand

Organic


Inorganic


Minority Investment


Strategic Alliance



Exit

Partial



Spin Off

Carve Out

Split Off

Tracking Stock

Total

Divest

LBO / Go Private

Third Party Sale

Liquidate


Abstracted from: Bruner, Robert. Applied Mergers and Acquisitions. Exhibit 6.10. Wiley & Sons 2004. Pg 139

Buy Side

Sell Side

SU

MM

AR

YO

FD

AY

1

Key Points

• Historical Drivers of M&A

• Transaction Decision Framework

• Industry attractiveness matrix

• Operating Synergies

• Financial Synergies

• Deal Defenses

•Cross Border Transactions

ACQUIRER’S PERSPECTIVE: PART 2 – STRATEGY & VALUATION

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Step 3: Strategy Development

• At this stage, develop strategic scenarios for each of the qualified candidates

• Focus your strategy on how to achieve actual synergies for each candidate versus the potential synergies

• Begin to consider how the management of the target will respond

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• You should already be aware of what acquisition defenses are in place at the target

• If management is hostile, be prepared to appeal directly to shareholders via “Bear Hug” or “Green Mail”

• Be prepared for the unexpected entrance of other bidders; use your valuation to know your limits

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• At this stage, the due diligence committee should:

• Expand to include outside advisors and managers to advise on integration and valuation

• Prepare a list of private information to request once LOI and CA are signed

• Determine which areas of the target’s business require enhanced due diligence

• The goal of the due diligence committee in this stage is to advise on the content of the Letter of Intent (LOI)

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• The Letter of Intent (LOI) is a nonbinding document where the acquirer and the target publicly express their intent to complete the transaction

•The LOI does not discuss valuation or any other potential transaction terms

• The LOI is typically accompanies by a Confidentiality Agreement (CA) where the acquirer agrees not to disclose nonpublic information provided by the target

AC

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Step 4: Valuation

• There are a number of valuation methods each with specific strengths

• It is important to utilize more than one method to develop a range of potential values because any single method can be misleading

• Your retained investment banking team may be best suited to develop a valuation analysis, but if you have a lending relationship with the bank, ensure an information firewall is in place

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Step 4: Valuation

Book Value

AC

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Step 4: Valuation

Liquidation Value

AC

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Step 4: Valuation

Replacement Cost

AC

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Step 4: Valuation

Current Market Value

AC

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Step 4: Valuation

Trading Multiples

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Step 4: Valuation

Enterprise Value

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Step 4: Valuation

Equity Value

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Step 4: Valuation

Transaction Multiples

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Step 4: Valuation

Discounted Cash Flow

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Step 4: Valuation

In my experience, the three most common valuation methods are:

• Discounted Cash Flow

• Transaction Multiples

• Trading Multiples

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Step 4: Valuation


Discounted cash flow valuation is calculated by creating a working model of the operations of the target company and the anticipated synergies with the acquisition company.

Generally a range of inputs are used to generate a reasonable range of outputs

A DCF analysis can be used to value synergies if you are performing a less than total acquisition or the entire company if you are completing a full acquisition

AC

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Step 4: Valuation


FCFt = Free Cash Flow at tWACC = Weighted Average Cost of Capital

t = Time Period

r = Risk Free Rate

g = Anticipated rate of FCF growth in perpetuity

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Quiz Game

When would you want to use each of the following forms of valuation?

•Book Value Valuation

•Liquidation Value

•Replacement Cost

•Current Market Value

•Trading Multiples

•Transaction Multiples

ACQUIRER’S PERSPECTIVE: PART 3 – DEAL DESIGN & NEGOTIATION

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Step 5: Deal Design

“Deal structures are solutions to economic problems”

- Robert Bruner

AC

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Step 5: Deal Design

Good deal design involves using the tools available to you to maximize the desirable aspects of a transaction.

AC

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Step 5: Deal Design

Possible Desirables

•Create value•Improve reported financial results; avoid EPS dilution•Improve control; avoid voting dilution•Build financial flexibility•Manage risk•Preserve and improve competitive standing•Manage signals to capital markets•Manage incentives•Enhance the governance and management structure•Shape impact on employees and community

AC

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Step 5: Deal Design

Tools

•Term Sheet

•Exclusivity Agreement

•Confidentiality Agreement

•Standstill Agreement

•Letter of Intent

•Definitive Agreement

AC

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Step 5: Deal Design

Spectrum of Attractive Deals

• There is no one single best deal

• Both sides have to concede some ground in order to reach an agreement

• Concessions can be in the form of either price or constraints

AC

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Step 5: Deal Design

Spectrum of Attractive Deals

higher

Restrictive Terms (constraints)

morelesslower

Acq

uis

itio

n P

rice

Acquirer

Target

AC

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Step 5: Deal Design

Design of Terms (Constraints)

• Value to be delivered (price)

• Form of payment

• Fixed payments

• Contingent payments

• Side payments

• Financing

• Timing and Deadlines

• Commitments

• Control and Governance

• Risk Management

• Accounting Choices

AC

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Step 5: Deal Design

Deal Approval Process

1) Obtain Acquirer’s board approval to pursue acquisition

2) Senior management of the two firms decide on critical details

3) Boards of the two companies ratify the agreement

4) Shareholders ratify the agreement

… Not quite that simple…

AC

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Step 6: Negotiation

Negotiation

• Deal design is a learning process

• Seek commitment from the target

• Deadlines, termination fees, other signals

• Deadlines generally reduce bargaining costs

AC

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DESIG

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Step 6: Negotiation

Negotiation

• Conduct multi-issue, parallel bargaining

• Distinguish between claiming value and creating value

• Know what tradeoffs you are willing to consider

AC

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Step 6: Negotiation

Negotiation

• Don’t let stalemates simmer

• Take the tone of ‘bridging the gap’ versus simply making concessions

• Know your opponent

AC

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Step 6: Negotiation

Pricing Strategy (Acquirer)

• Think objectively like an investor

• Know your bargaining costs going in

• Best Alternative to Negotiated Agreement

• Low bid can invite competitors to bid

• High bid can evaporate shareholder value and leaves you less to bargain with

AC

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DESIG

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Step 6: Negotiation

BATNA (Best Alternative to Negotiated Agreement)

• Know what your next best option is if negotiations fail

•Hostile Takeover? Acquiring another firm?

• Know how much economic value you would give up by pursuing the alternative

AC

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DESIG

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TION

Step 6: Negotiation

Hostile Takeover Tactics

• Purchasing shares directly on market

• Offer directly to target’s board (versus through management)

• Tender Offer

• Proxy contest through consent solicitation

• Challenge the target’s defenses through litigation

AC

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DESIG

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Step 6: Negotiation

Definitive Agreement

The Definitive Agreement shapes behavior between signing and deal completion, such as

• Disclosure of information

• Continuing Operations

• Conduct operations in an ordinary basis

• No extraordinary dividends or share repurchases

• No Change in compensation plans

• Best efforts to close promptly

AC

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DESIG

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Step 6: Negotiation

Definitive Agreement

Finally, the Definitive Agreement needs to state who bears the risks and consequences of the transaction not closing as planned.

AC

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Quiz Game

What are the tools available to you to sculpt a more desirable outcome?

What is BATNA and why is important during negotiations?

~BREAK

SOURCES OF FINANCING FOR ACQUISITIONS

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS

Overview

We have already discussed methods of payment to the target, but we now must focus on raising funds for the payment.

As a business we want to finance the acquisition with the lowest, reasonable cost of capital

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS

Weighted Average Cost of Capital

id = Expected yield on the target’s new debt after mergerKe = Cost of the target’s equity capitalWd = Debt as a percentage of the new firm’s capital structureWe = Equity as a percentage of the new firm’s capital structuret = Marginal tax rate of the target firm

SO

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CES

OF

FIN

AN

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GFO

RA

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Weighted Average Cost of Capital

Cost of Equity

Rf = The expected return on risk-free securities over a time

horizon consistent with your investment in the targetRm = The expected market return; Variable affected by

political risk, moving into a more risk segment, etcβ = Beta, the systematic risk of a firm’s common stock

(Rm-Rf)= The Equity Risk Premium

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS

Optimizing the Debt Tax Shield

As you note from the WACC formula, the cost of debt is discounted by the marginal tax rate

This occurs because interest paid on debt reduces the basis of the tax

The assumes no significant decline in the debt rating or cost due to the new issue

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS

Bank Debt

Bank credit approvals for mergers and acquisitions are broadly based on:

• Cash Flow

• Collateral

• Capital

• Course

• Character

Additionally, banks consider the industry as a source of risk.

SO

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CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS

Public Debt

There are several aspects of public debt that you will have to consider before deciding on this method of financing

• Maturity

• Fixed or Floating

• Currency

Unlike bank debt, you have to remain concerned that your new issue will be undersold causing you to have insufficient financing for your acquisition.

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS

Convertible Bonds

Defined:

Bond feature that allows bond principle to be converted into equity principle given certain circumstances.

Convertible bonds have a lower yield than standard bonds because of this benefit.

Convertible bonds exist as a way for debt investors to have some limited participation in equity appreciation without downside risk.

SO

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CES

OF

FIN

AN

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GFO

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Framework for Analysis: FRICTO

Flexibility

SO

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CES

OF

FIN

AN

CIN

GFO

RA

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UISITIO

NS


Risk

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS


Income

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS


Control

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS


Timing

SO

UR

CES

OF

FIN

AN

CIN

GFO

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CQ

UISITIO

NS


Other

SO

UR

CES

OF

FIN

AN

CIN

GFO

RA

CQ

UISITIO

NS

Quiz Game

Scenario: Your company is experiencing rapid growth and needs to finance an expansion of your facilities. What are your debt options?

What would the FRICTO analysis be for:

10 year, non callable, bond yielding 10% for a company in the Palm oil industry?

INTEGRATION: SOURCE OF VALUE CREATION

INTEG

RA

TION

: SO

UR

CE

OF

VA

LUE

CR

EATIO

N

7-S Framework

INTEG

RA

TION

: SO

UR

CE

OF

VA

LUE

CR

EATIO

N

Integration Approaches

Preservation Linking

Confederation Absorption

Need for Strategic InterdependenceN

eed

fo

r A

uto

no

my

INTEG

RA

TION

: SO

UR

CE

OF

VA

LUE

CR

EATIO

N

Incentives

Contingent payment to management can ensure their alignment with your strategic goals.

However ensure that the metrics for their contingent payments are based upon factors that contribute to successful integrations, rather than traditional performance factors

INTEG

RA

TION

: SO

UR

CE

OF

VA

LUE

CR

EATIO

N

Best Practices

•Board level structure must be defined at announcement

•Publish and communicate integration plan

•Have very clear business and financial targets

•Keep integration time as short as possible

•Make decisions swiftly

•Involve as many employees as possible

•Make selection process transparent

INTEG

RA

TION

: SO

UR

CE

OF

VA

LUE

CR

EATIO

N

Best Practices

•Release those who cannot culturally adjust

•Do not prolong life of integration project teams

•Move to a common systems platform

•Manage the integration process as a project

•Manage each transaction phase; celebrate victories

•Consider the influence of the press

•Allow organizations time to develop new culture

INTEG

RA

TION

: SO

UR

CE

OF

VA

LUE

CR

EATIO

N

Quiz Game

How does a ‘confederation’ method of integration vary from a ‘linking’ one?

Where do core competencies fit into the 7-S framework?

Which one of the 7 S’s is most important?

EVALUATING THE SUCCESS OF YOUR TRANSACTION

EV

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ES

UC

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OF

YO

UR

TR

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SAC

TION


• Creation of market value?

• Gained financial stability?

• Improved strategic position?

• Gained organizational strength?

• Enhanced brand?

• Improved processes?

Decide your goal at thebeginning of the process!

EV

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Were you successful?

In the end it is the shareholders who decide.

EV

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OF

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TION

Quiz Game Bonus Round

How might you use M&A to improve your company’s strategic position?

How might you use M&A to improve your company’s brand?

How can you use M&A to make your company more efficient?

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Contact Methods

Personal ContactEmail: [email protected]

Phone: +1 512 772 4090 [direct]

Postal: Mr. Will DearmanDearman Ventures8000 Centre Park Dr, Suite 115Austin, TX 78754United States

Time Zone: GMT -6 hours

LinkedIn: http://linkedin.com/in/wdearman

THANK YOU!

Please Complete Survey!

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Malaysia Investment Banking Association