mergers & acq

7/30/2019 Mergers & acq

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MERGERS AND ACQUISITIONS AS A BUSINESSSTRATEGY IN SOUTH-EAST ASIA

By Nicholas R. H. Bloy


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-2-SDV/KLP-Mergers&Acquisitions-15Apr98-NB-oel-KLP

Kindly direct all questions/enquiries to:

The Boston Consulting GroupLevel 27, Menara IMC, 8 Jalan Sultan Ismail

50250 Kuala LumpurTel: 603 - 238 5770 Fax: 603 - 238 5784

INTRODUCTION TO SPEAKER

Nicholas R. H. BloyPartner

The Boston Consulting Group

Mr. Bloy, who founded the practice of The Boston Consulting group in South-East Asia in 1990, is Head ofBCGs Asia (non-Japan) Marketing Committee, Head of BCGs Asia (non-Japan) Energy and Utilities practice andHead of BCGs Kuala Lumpur office. He started in consulting in 1987 and has worked in Boston, London,Munich, Sydney, Hong Kong and Kuala Lumpur. Mr. Bloy is also a visiting lecturer at the London School ofEconomies. Since the beginning of the 90s Nick has spent significant time in Malaysia advising privateMalaysian conglomerates, state-owned entities and multinational companies on issues of direction andperformance.

He has worked on a broad range of strategic issues in Europe, the United States, Latin America and Asia. Thiswork has covered industry sectors such as oil & gas, consumer goods, cement, energy, utilities, engineering,media, airline, steel, construction materials, financial services, printing, food & drinks and telecommunications.Project assignments have included areas of process reengineering, strategy development, portfoliorestructuring, diversification strategy, mergers and acquisitions, new product development, organisationaleffectiveness, value-based management and privatisation.

Prior to going the business school, Mr. Bloy worked with Citicorp.

Mr. Bloy obtained an MBA with Deans List Honours from INSEAD and a BA with Honours in French Language

and Literature from University College of London.


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M&A ACTIVITY - A HUGE AND GROWING PHENOMENONHowever, Asia Lags

968

677

491

355

249

162156215

1

990

1

991

1

992

1

993

1

994

1

995

1

996

1

997

$BnUS Europe Asia

507

344313

176155154182

229

1

990

1

991

1

992

1

993

1

994

1

995

1

996

1

997

5735

61

1717

2343 19

1

990

1

991

1

992

1

993

1

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1

995

1

996

1

997

$Bn $Bn

Global M&A deal volume has grown at 28% p.a. since 1992 (1)

CAGR = 27.6% CAGR = 7.9% CAGR = 9.2%

(1) Fortune magazineSource: Securities Data Corp; Asia Inc.

SEA


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TRANSACTION SIZE IS INCREASING DRAMATICALLY

2326

34 36

22

42

33

80

30

60

14.3

BellAtlantic/Nynex

KKR/RJR

Nabisco

UBS/SBC

Sandoz/Ciba

NatiousBank/ Bank

America

Worldcom/MCI

Travelers/Citicorp

Banc One/First

Chicago

Mitsui/TaiyoKafe

MitsubishiBank/BOT

Glaxo/Wellcome

Financial Services

Telecoms

Pharmaceuticals

Others

Late1980s 1995 1996 1997

Source: Asian Wall Street Journal; securities Data company; BCG analysis

1 Q 1998

Deal Value (US $bn)


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ONLY FOUR INDUSTRIES ACCOUNT FOR~55% OF TRANSACTION VALUE

Cross-Border

Domestic(estimates)

Top 100 Deals From 1995 to 1997(1)

FinancialServices

Pharmaceuticals Telecom Defence/Aerospace

Other

(1) Top 100 deals annually, cumulative total from 1995 to 1997; estimates for domestic deals based on split of Top 10 deals 1990-96Source: Securities Data Corp; BCG estimates and analysis

Deal Value(US $bn)


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HOWEVER, ASIAN MIX MORE SKEWED TO FINANCIAL SERVICES

Cross-Border

Domestic

Top 50 Asian M&A Deals(1)

FinancialServices

Telecom Transportation Other

(1) Top 50 deals annually, cumulative total from 1996 and 1997Source: Asia, Inc.; BCG analysis

Deal Value(US $bn)


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DIFFERENT TYPES OF DEAL AND VALUE LOGIC

Acquirer/Acquire RelationshipOverlapping businesses

Complementary businesses Geographic expansion Product line extension

New customer segments Different part of value

chain Transfer of capabilities to

different business

Source of Value

Cost reductionProcess enhancementThroughputimprovement

Revenue growthAsset growthProcess enhancement

InternationalExamples

Boeing/ McDonnelDouglas

Glaxo/Wellcome

Salomon/SmithBarney

HansonTrust/Numerous

MalaysianExamples

RHB/Sime

Finance

Companies

Commerce/MBf

Renong/ Cima

Geographies Customers Product lines



EXAMPLES FROM THE BANKING INDUSTRY



Other Sources(1)

BANK MERGERS REDUCE COSTS BY AVERAGE OF 15%

(1) First Manhattan; Chemical - MHT experience, BCG analysis(2) NIE: Non Interest Expense

3.5

4.5

12.0

8.0

2.0

3.5

1.0

1.0

1.5

15.0

Other

HR

Sales-Mktg

Central

Opns

ITDevelopmentandOperations

Branch

Network/CustomerService

Year 1Month 6

Year 2Month 12

Year 3Month 18

Year 4Month 24

SlowFast

Cost Savings(% of combined NIE)(2)

Cost Savings(% of combined NIE)(2)

5.5

5.3

3.5

1.6

10.0

5.0

1.2

0.5

17.5

Treasury

Year 1 Year 2 Year 3

Trust

Corporate

Retail

Operationsand Systems

Other

SupportAreas

BCG Experience



Slope = 89%

10

100

1,000

1,000 10,000 100,000 1,000,000

MORTGAGE SERVICING SHOWS SCALE BENEFITS

Direct Cost/LoanServiced ($US)

Number OfLoans Serviced

Note: Log scaleSource: Inside Mortgage Finance; BCG analysis

Mortgage Servicing

(Unit Cost Per Loan)



THERE ARE SIGNIFICANT SCALE EFFECTS IN CASH HANDLING

Cash Handling Scale

(FTE Cost Per Cash Volume)

Source: BCG client experience

Annual VolumeOf Cash Centre

(Log Scale)

FTEs Per BnCounted

(Log Scale)

Slope = 81%



IT DATA CENTRES SHOW SCALE EFFECTData Processing Example : USA Example of MVS(1) Environment

Unit Cost(US$K/MIPS)

Data Centre Size(MIPS)

(1) MVS: IBM Operating System for Mainframes, typical Legacy SystemSource: BCG experience

10

100

1000

1 10 100 100020

Slope = 89%



IT IS CHEAPER PER ACCOUNT TO PROMOTE LARGER BRANDS

Note: Log scaleSource: Mori; MEAL; BCG analysis

Brand Advertising(Index, UK Retail Banks, 1995)Index of brandadspend percurrent accountcustomer

Index of number ofcurrent accounts

Slope = 65%

1

10

100

0.1 1 10



COST SAVINGS POTENTIAL VARIES BYTYPE OF COST AND MERGER PROXIMITY

Estimated Non-Interest Expense Savings

Type of Mergers

Out-of-MarketContiguousIn-MarketArea of the Bank

5%

15%

40%

15%

15%

10%

15%

10%

25%

50%

20%

40%

25%

25%

20%

30%

55%

25%

60%

30%

35%

Branches

Operations

Systems

Trust

Indirect Overhead

Other

Weighted Average

Source: Bottom Line Banking; First Manhattan Consulting Group


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26 vulturesin 1982

12 turkeys(stock prices~15% lower

than their peergroup)

8 dead ducks(stock prices~25% lower

than their peergroup)

6 eagles(stock priceshigher thantheir peer

group)

9 stagnantbanks

12 banks wereacquired

5 superregionals

WHAT HAPPENED TO THE VULTURES OF 1982?The 26 Most Acquisitive Of The Top 250 US Banks Of 1982

Source: BAI

1982 - 1984

1982 - 1989

1982 - 1989

Annu al asset growth 7.5% - 28% 9.5%

1982 - 1989

Tota l stock pr ice growth 24% - 236% 205%

Top 250 banks


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IN THE SHORT RUN, VALUE TRANSFERREDTO THE TARGET SHAREHOLDERS

Cumulative Abnormal Returns*(%, 1982-1987)

*Cumulative daily market returns (capital gains and dividends) in excess of the total market return (Wilshire Index -1982-87; NYSE Composite Index - 1995)Source: SNL Securities (19 Megamergers >$500m deal value); Journal of Financial Services Research 10/89; BCG analysis

15 daysbefore

4 daysbefore

2 daysbefore

1 daybefore(15)

(10)

(5)

0

5

10

15

Day ofannounce-

mentTarget

Acquirer


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OVER THE LONG RUN, SOME OF THE LOST VALUE IS CLAWED BACK

Cumulative Stock PricePerformance*- Major US Mergers**

(%, 1991-96)

*Annual stock appreciation versus SNL Bank Index appreciationExcess ReturnT = { [Stock priceT - Stock PriceT-1] X100/Stock PriceT-1} - { [SNLT - SNLT-1] X100/SNLT-1}**Bank America - Continental, BoA-SecPac, Chem-MHC, Chem-Chase, Comerica-Manuf National, First Chicago-NBD, FirstUnion-First Fidelity, Fleet-BoNE, Keycorp-Society, NCNB-C&S-Sovran, Society-Ameritrust, Wells-First InterstateSource: SNL Securities; BCG analysis

MergedEntity

Acquiring

Entity

2 Years Prior 1 Year Prior Announce-ment Year

1 Year Post 2 Years Post 3 Years Post0

20

40

60

80

100

120


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0.7

0.8

0.9

1

1.1

-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60

THE EUROPEAN EXPERIENCE IS EVEN MORE MARKED(1)

(Index, Base = 1 at 12 Months Prior To Announcement)

Note: Data not available for all mergers for whole period (-12-60)(1) Performance relative to relevant bank index for Banco: Central-Banco de Vizcaya, Banci di Roma - Banco di Spirito, ING, ABN-AMRO,

Lloyds - TSB, Den Danske - Hadlesbank - ProvensbankenSource: Various European Stock Exchanges; Tradeline

Announcementmonth


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MOST MAJOR ACQUIROR STOCK PRICES DROPRELATIVE TO THEIR NON-ACQUIRING PEERS

After1 year

After2 years

After3 years

After4 years

After5 years

After6 years

010

20

30

40

50

60

70

80

90

100Stock price ofacquirors: relativeto peer average (%)(peer average =100)

Source: BAI


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HALF OF ALL ACQUISITIONS ARE CONSIDEREDUNSUCCESSFUL

Tracking Study on US Acquisition Performance

272 Acquisitions

52%

48%

Success

Failure

Source: Harvard Business School; BCG analysis


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WHY DO ACQUISITIONS FAIL?

BCG Global Survey Warren Buffet Self-Assessment

The thrill of the chase blinded pursuers

to the consequences of the catch

Warren Buffet,

Berkshire Hathway Annual Report

Top 10 Reasons For Merger/AcquisitionFailure

Post-merger integrationpoorly planned and executed

78%

64%

55%

54%

30%

28%


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MALAYSIAN CONTEXT


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LOW M&A ACTIVITY IN MALAYSIA GIVEN ABSENCE OFWILLING BUYERS AND WILLING SELLERS

Inflated asset value Too expensive to buy Few constraints onfunding growth

No need to sell

High liquidity/low cost of capital Equity markets

- stock market cap + 35% (1992-1996) Commercial debt

- loan growth + 54% CAGR (1992-1996) Real cost of capital (at 50:50)

- 7.5%

Littlegrowth

from M&A


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BECAUSE HISTORIC MARKET VALUES HAVE BEEN HIGH, LITTLETRANSACTION ACTIVITY HAS BEEN OBSERVED

1997 M&A Deal values as % of GDP

1.3

5.5

12.5

0

2

4

6

8

10

12

14

US Europe Asia

Value/Ton of Industrial Commodity Product

0

100

200

300

400

500

600

700

1992 1993 1994 1995 1996

MarketValue

DCFValue

GreenfieldCost

%Example from Client work


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Liquidity has dried up . . .

UNDERLYING M&A DYNAMICS HAVE REVERSED IN MALAYSIA

0

100

200

300

400

500

600

700

800

900

1990

1991

1992

1993

1994

1995

1996

1997

1998

StockMarket

Cap

LoanGrowth

MarketValue

DCFValue

GreenfieldCost

RM (billion)

0100

200

300

400

500

600

700

800

900

1992

1993

1994

1995

1996

1997

1998

Value/Ton of Industrial Commodity Product

Example from Client work

. . . Leading to a realignment of values


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DIFFERENT MIX OF TRANSITIONS IN MALAYSIA DEPENDINGON COMMERCIAL SECTOR AND NATURE OF OWNERSHIP

Domestic Cross-BorderTransactions

Telecoms

Cement/Steel/OtherIndustrial Commodities

Property

ConglomerateBreak ups

FinancialServices

Timber


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ORGANISATIONAL PORTFOLIO AND OPTIONS

Value

MarketPosition

Build

Business Unit Strategy Products Customers Delivery systems Capabilities Organisation Processes Etc

Merchant Banks, Accountants, Lawyers

Strategy Consultants and/or Merchant Banks

Strategy Consultants

PerformanceImprovement

Plan

Acquisition Search /Prioritisation

Strategic Due Diligence

Valuation

Negotiation

Post-mergerintegration

AcquirerSearch

Accounting / LegalDue Diligence

TransactionMechanisms

Acquire

Divest


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CAVEAT EMPTOR

Extraordinary opportunities for cash-rich companies . . .

. . . but

M&A is a subset amongst a firms strategy options M&A is risky

M&A requires professional advice

- strategy consultants

- merchant banks

- lawyers

- accountants

mergers & acq

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