1. Defence Various terminology Tactics: Their Why are firms - - PDF document

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Mergers & Acquisitions II

Successes, Drawbacks, Restructuring & Trends

Compiled and Presented By: Alex Kent, Simon Giddings, Aaron Brigatti

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http://www.mergers-acq.co.uk

Key Areas Covered:

• 1. Defence tactics
• Why are firms susceptible to take-over?
• Implications to Shareholders
• 2. Success & Failures
• Are shareholders the winners?
• 3. Corporate Restructuring
• 4. Trends & Susceptible Areas

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• 1. Defence

Tactics: Their Successes and Implications

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Defence Tactics

Various terminology Why are firms susceptible to take-

• ver?

Pre-bid defences Implications to Shareholder

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Various Terminology

White Knight Yellow Knight Gray Knight Black Knight Sandbag Macaroni Defence Poison Pill People Pill Sleeping Beauty Pac-Man Shark Repellent Greenmail

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White Knight

What does it mean? A company that makes a friendly takeover offer for control of a target company which is being faced with a hostile takeover from a separate party. The Knight in shining armour comes to the rescue!

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Yellow Knight

What does it mean? Used to describe the situation where a company making a takeover attempt ends up discussing a merger with the target company.

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Gray Knight

What does it mean? A second, unsolicited bidder in a corporate takeover who enters in order to take advantage of any problems between the first bidder and the target company. Think of a Gray Knight as a vulture, circling and waiting to clean up whatever mess is left.

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Black Knight

What does it mean? A company which makes a hostile takeover offer on a target company. The bad guy...if it's your company being targeted.

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Sandbag

What does it mean? A tactic used by management to stall with a company that is showing interest in taking them over. The company stalls in hopes that another more favourable company will take them over.

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Macaroni Defence

What does it mean? An approach taken by a company that does not want to be taken over. The company issues a large number of bonds with the condition they must be redeemed at a high price if the company is taken over. Why is it called Macaroni Defence? Because if a company is in danger, the redemption price of the bonds expands like Macaroni in a pot!

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Poison Pill

What does it mean? A strategy used by corporations to discourage the hostile takeover by another company by making it's stock less attractive to the acquirer. This is similar to the macaroni defence except it uses equity rather than bonds.

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People Pill

What does it mean? A defensive strategy to ward off a hostile

• takeover. Management threatens that, in

the event of a takeover the entire management team will resign. This is a version of the poison pill defence.

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Sleeping Beauty

What does it mean? A company that is prime for takeover and which has not been approached by an acquirer. Reasons for being a sleeping beauty are that it has large cash reserves, undervalued real estate, or otherwise huge potential.

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Pac-Man

What does it mean? A form of defence used in a hostile takeover

• situation. The takeover target turns around

and tries to takeover the company that has made a hostile bid for it. Just think all those years of Atari might just pay off someday.

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Shark Repellent

What does it mean? Any number of measures taken by a corporation to discourage an unwanted takeover attempt. Examples of shark repellent include Golden Parachute contracts with executives, a defensive merger with another company, a super-majority provision, etc.

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Greenmail

What does it mean? A situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover. A very dirty, but effective practice.

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Which Companies are Susceptible?

All Public Limited Companies at risk

No restrictions in transfer of shares

More Vulnerability = More Risk of Takeover

Shareholders dissatisfied with company Undercapitalised Inadequacies of Management

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Implications to Shareholders

A "raider" bids for shares of the target firm Dealing *direct* with the firm’s shareholders. Some instances, paid a premium of 30- 50% of their shares!! Share of the raider’s “gains” from the acquisitions.

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Pre-bid Defences - Internal

Internal Defences

Improve efficiency & Reduce costs Improve Strategy: Restructuring,

divestment ...

Change Ownership Structure Change Management Structure Use Organisational Constituencies

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Pre-bid Defences - External

External Defences

Cultivate Shareholders & Investors Publicise company strategy Improve image Make strategic defence investments Monitor share register for unusual

purchases

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Post-offer Defences

First Response & Pre-emption Letter Defence Document Profit Report / Forecast Promise of higher Dividends Asset Revaluation Share Support Campaign Regulatory Appeal . . .

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. . . More Post-offer Defences

Litigation Acquisition & Divestment Unions / Workforce Customers / Suppliers Red Herring Advertisements

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Costs Of Defence

Breakdown of costs of a £30million target (£000)

Stockbroker Fees 75 ccountant's Fees 35 Misc. 1 P.R. 5 Solicitor's Fees 35 Printing 2 Merchant Bank Fees 320

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• 2. Success and

Failures of Merger & Take-Over Activities

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Success & Drawbacks

Technological Issues Cultural Issues

Freeserve – T-Online or Wanadoo National Differences

Synergies Achieved Are All Mergers Successful?

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Technological Issues

Technology issues: One challenge could be integrating two or more converging businesses' front-office technology - the IT systems seen by customers or used to interact with them

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Cultural Issues

Cultural issues: These are the other main problem faced when bringing two

• r more companies together. Many

apparently logical mergers have fallen through late on because of "cultural differences".

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Freeserve - Failures

For example, cultural differences were cited last week as one reason why T-Online of Germany did not buy Freeserve, the UK internet service, from Dixons, the electrical goods retailer.

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Freeserve: Share Price

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National Differences

Further levels of cultural complication are added when there is an international element to the merger Often the case with deals that have been driven by convergence. National differences have often thwarted successful mergers in the old economy So why should things be any different in the brave new economy

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Are All Mergers Successful?

NO!!!! But why?

In 1993, a study was carried out to

determine if UK mergers are generally successful.

It turned out that 54% of the mergers

examined were not financially successful!

So what went wrong…

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Causes Of Failure .

Management Attitudes – 85%

0% 20% 40% 60% 80% 100%

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Causes Of Failure ..

Lack Of Post-Acquisition Integration Planning – 80%

0% 20% 40% 60% 80% 100%

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Causes Of Failure …

Lack of Knowledge by the Bidder of the Target and its Industry – 45%

0% 20% 40% 60% 80% 100%

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Causes Of Failure .…

Poor Management & Management Practices In The Target – 45%

0% 20% 40% 60% 80% 100%

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Causes Of Failure ..…

Little or no experience of the bidder management in acquiring other firms – 30%

0% 20% 40% 60% 80% 100%

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Have We Learnt Anything?

The same study was carried out in 1973, with pretty much the same

• results. In 20 years, social trends have

not altered the fact that on average just over half of all UK mergers fail. Have we learnt anything at all?

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Well Yes! Why?

Number Of Mergers Are Down! Knowledge about the failure of mergers could be responsible for the huge drop in annual mergers since the 1980s.

500 1000 1500 2000 Mergers Per Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Year Friday, 1 December 2000 Mergers & Acquisitions II 40

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Well Yes! Why?

A greater professionalism among corporate management leading to fewer cheap targets. Share prices were low in the 80s, leading to many cheap targets. Questions have been raised to the importance of large, diversified companies.

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How can a company increase the odds?

A well-formulated vision A pre-merger process that targets companies with the right capabilities A post-merger process that seeks to capture well-defined sources of value

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• 3. Corporate

Restructuring After Mergers/ Take-Overs

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Corporate Restructuring

What actually happens after a merger

• r take-over?

What happens to:

The Head Office Divestments Managers Employees Failures

Case Study – Psion v Teklogik

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The Head Office

It is very unlikely to have two head

• ffices

Natural conclusion: One must go! This can often lead to massive job losses in that location If some of the target’s management are lucky, then they might be offered “Golden Parachutes”.

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Divestments

Why would a merged company want to sell of a part of itself?

A desire to concentrate on it’s core

activities

A need to raise cash Cutting away the “bad wood”

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Managers

Predator Managers

New opportunities to enhance company’s

competitive advantage, operational efficiency and financial performance

Increased job security/enumeration

Target Managers

Uncertain futures New bosses, new culture Loss of power, status and freedom to innovate Possible Redundancies

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Employees

Usually redundancies at the redundant head

• ffice

UK Employment law gives some protection to employees in the context of takeovers If the target business is purchased, then employees may receive protection under “The Transfer of Undertaking” regulation

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Failures

Not always good for predator management. Especially if they mess things up! In the mergers boom in the 1980s, some of the more frequent predators were themselves becoming the prey or forcing themselves into receivership. Others that fail can be heavily divested or put under administration by the lenders.

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Case Study: Psion v Teklogix

Main Points: Friendly takeover Psion were looking to break into new areas They realised that their range of modems were in decline Needed to do something quickly since their shares were at an all time low

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About Psion Plc

World-leaders in mobile computing and communications Established in 1980 Earns revenues in excess of £159m and is valued on the London Stock Exchange at more than £2.5bn

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About Teklogix

Provide communications solutions to industrial users, based on local area network (LAN) technology and wide area network (WAN) technology In the year ended March 31st 2000, they took in a revenue of $209m

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12th July 2000

The Boards from both Psion and Teklogix publicly announce that the Psion will acquire Teklogix Teklogix accepted £242m, of which £100m should be paid in cash This was 41% above the closing price

• f Teklogix shares on July 11, 2000

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20th September 2000

Psion completes the acquisition of Teklogix

So, What Next?

Will Psion make an enormous profit? Will the directors of Teklogix be shot in their former Board room like unwanted pigeons? Does Psion admit to any teething problems?

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18th October 2000

PROFIT WARNING! FT reported that Psion would be lucky to break even this year FT blame thin margins (4%) and the fact that Psion can not compete with Giants such as Nokia FT argue that Psion’s prospects all hinge on merging Teklogix with Symbion technology

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Psion: Share Price

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Conclusion …

Psion spent a lot of money But they needed to move away from the laptop accessory market, which they knew was declining rapidly In the short-term, this merger has not benefited the shareholder. In the long-term who knows! But the Financial Times predicted that this merger actually saved Psion.

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• 4. Recent

Trends and Susceptible Areas

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Trends & Susceptible Areas

Enthusiasm For Merging Britain v US Makeover at Software Companies Going Ballistic! Sectors/Areas at Risk

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Enthusiasm For Merging

Increasing concern at its impact on shareholder value. The enthusiasm for merging, acquiring and disposing has enabled Britain to cut quite a dash on the international stage.

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Britain v US

Britain’s companies are now the world’s biggest overseas investors. US companies have been pushed into second place for the first time since 1988.

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Makeover at Software Companies

Post-Y2K Throes of a makeover! The 4 R’s:

Restructuring Re-engineering Revival Repositioning

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Going Ballistic!

Pace and size of merger and acquisition deals proceed seemingly unchecked. In 1999, the worldwide value of merger and acquisition deals exceeded $2.3 trillion (U.S. dollars) Top 2 and 3 of the 6 largest M&A deals of all time!

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Areas/Sectors At Risk

Communications – More Alliances? .dotcoms – Some cover the IT Sector, but the majority on AIM Some levels of retail – Sainsbury/M&S? Trend will continue Larger mergers but less of them! Refer to handout – Calendar of Past Events (Table 1)

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Missed anything?

Visit our website @ http://www.merges-acq.co.uk

View on-line presentation Links to other resources Feedback form & more!

Refer to our handout Refer to our own Q&A Ask any questions NOW!

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Possible Q&As?

Why do companies merge in the first place? What’s the real difference between mergers and acquisitions? What happens if mergers or acquisitions aren’t successful?

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Many Thanks for Listening!

We hope you enjoyed our presentation. Please take this

• pportunity to ask

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