I am willing to hire a team to help using $500,000 of my own startup capital.
Willing to travel extensively
Willing to hire a team in Turkey or the United States. The advantage of Turkey would be that I can hire more skilled workers.
I have been a Fortune 500 manager and have lived in Turkey. Europe and am well traveled.
No business can prosper on its own accord in the world business environment of today. Mergers and Acquisitions play a vital role in the businesses of today. Before I go into the details of the question, let me discuss the M&A in a little more detail. The term ‘mergers and acquisitions’ refer to the buying and selling – acquiring and disposing – of both private businesses and public companies. In the case of the acquisition of a publicly traded company, this may also be referred to as a takeover. In practice, very few transactions are structured as pure mergers, where two companies come together, combining their businesses and management teams, but with neither of them taking control of each other. The vast majority involve the acquisition of one company by another, with a clear target, acquirer (buyer) and vendor (seller).
Over many decades, M&A has been a major contributor to world economic growth, and to activity in global financial markets. The objective of an acquisition should be – and usually is – enhancement of shareholder value. At its simplest, this means that an acquirer must be able to generate a better return on its capital than it would achieve otherwise. This could be achieved through increasing revenue, cutting costs, making its assets work more efficiently, solving problems with its suppliers or getting access to more opportunities for growth; or it could just come about through paying a low price for good assets. In financial terms, enhancement of shareholder value requires that the net present value of the combined business (its post-acquisition cash flows, discounted by the post-acquisition cost of capital) must be greater than the sum of the pre-acquisition value of the acquirer and the acquisition cost.
A = acquirer; T = target
Value (A+T) > (Value A + Cost T)
Synergies are benefits that can only come about when two entities are joined together: so that “two plus two equals five”. To enhance shareholder value, the value of two businesses joined must be greater than they were when they were separate. If the total future earnings from the acquisition, or total capital uplift, are less than or equal to the cost of the acquisition, then the deal is a wasted exercise. The benefits from the acquisition must outweigh the cost – and to achieve this, either the target must be ‘cheap’, or the acquisition must be able to generate synergies for the buyer.
Synergies are benefits that can only be achieved by putting two businesses together. They can be classified as follows:
i. Commercial synergies: those benefits that come from improvements in the underlying business of the companies. For example, increased sales volumes; ability to charge higher prices; reduced production or administration costs; greater efficiencies. They will usually result in improved profit margins or better return on capital statistics.
ii. Financial synergies: those benefits that come from better use of capital. For example, being able to reduce the cost of borrowings or the cost of equity capital; reducing the company’s tax charge; making use of surplus cash; improving the mix of equity and borrowings. Financial synergies are usually reflected in lower weighted average cost of capital (WACC) and improved earnings per share (EPS).
iii. Asset synergies: those benefits that come from better use of the acquirer’s or target’s assets. For example, combining administration functions and then selling the ‘spare’ head office building; using excess manufacturing capacity to generate higher production volumes; combining a distribution network. These synergies can be measured using metrics such as return on capital employed (ROCE) or return on assets (RoA).
Most acquisitions come about either because the acquirer’s management has spotted an opportunity for growth, or because they have identified an issue which is restricting their growth. Let us look at various acquisition strategies:
1. Scale Acquisition: Bubbles may be trying to increase its market share, in a competitive and shrinking market. It could do this by acquiring a regional competitor business, which would give it a larger share of its existing market while at the same time eliminating an element of competition. This type of transaction, aimed just at increasing the scale of operations, is sometimes referred to as a scale acquisition. Where are the synergies? These could come from economies of scale: with this larger market share, Bubbles should have greater purchasing power, and be able to purchase raw materials more cheaply and perhaps extract a higher price from retailers. Asset synergies could also come from using the distribution networks of the target company more effectively, putting additional volumes through its production facilities and eliminating duplicated head office or other assets. In some cases, the business could also achieve revenue synergies, if, by sharing brands or sales forces, the combined companies can create higher revenues than they could get independently. Another area where value can be enhanced is management. This could come from applying management skills and expertise to problem-solve and re-energise the target, at the same time as eliminating any duplicated roles. And finally, by increasing the critical mass of the company, Bubbles may be able to achieve some financial synergies, through better and cheaper access to debt and equity capital or by pooling working capital resources.
2. Scope Acquisitions: As an alternative to investing in its mainstream business, Bubbles could buy a company which also sells chocolate but in different geographical markets; or it could buy a business which sells different, complementary products (perhaps chocolate biscuits) in the same markets as the purchaser. This is sometimes referred to as a scope acquisition – a broadening of the scope of the acquirer – and sometimes referred to as horizontal integration. Either way, Bubbles is staying within its central area of activity, but widening its geographical or product range.
Another form of scope acquisition is vertical integration. This is the term used when a company expands into different stages in its supply chain. For example, Bubbles might want to secure its access to good quality, competitively priced cocoa beans, and could do this by acquiring a cocoa plantation or harvesting business. Alternatively, if it wants to have control over its end markets, it might acquire a chocolate retail business. In this case, the synergies would come mainly from cost reduction – cutting out the margins paid to the middleman. However, the reduction in the company’s risk will also contribute to an increase in its value. Backward integration refers to an acquisition further back along the supply chain –for example, a manufacturer buying a producer of raw materials. Forward integration refers to an acquisition further on the supply chain – for example, a motor manufacturer buying a motor retailer or after-sales service business.
3. Diversification: Diversification involves buying a company in an unrelated business. If Bubbles decided that there was limited growth in the chocolate market, it might acquire a company in a completely unrelated activity (say, clothing) or in a different but linked activity (such as bakery products). The scope for synergies is far lower with this strategy; in most cases it relies on financial and asset synergies to enhance shareholder value. This is a strategy which was popular in Europe and North America in the 1980s but fell out of favour in the 1990s, as investors developed a preference for focused businesses. There are some notable exceptions: Berkshire Hathaway, for example, has a very successful model of growth by focused, diversified acquisition. The diversified conglomerate corporate model is also strong in much of the Far East. One example is Samsung of Korea, which owns businesses as wide-ranging as consumer electronics, military hardware, apartments, ships and an amusement park.
Capital efficiency might be a motive for Bubbles to make acquisitions. Since the credit crisis, companies have accumulated cash to a point where, according to credit rating agency Moody’s, US non-financial corporates had total cash balances of $1.24 trillion by the end of 2011; Apple, for example, had over $121 billion in cash by the end of 2012. A trading company with significant amounts of surplus cash is likely to find its share price depressed, because this cash is an asset that earns a pitiful return, and dilutes both the company’s earnings per share and its return on capital employed. If there is no short-term use for the cash in the business, Bubbles would eventually find itself under pressure from its shareholders to release the cash, either by making acquisitions, or through a return to shareholders in the form of special dividends or share buybacks. Unusually, a company may be required to buy another for regulatory reasons. Under the UK Takeover Code, for example, when a person or persons acting in concert acquire a holding which gives them 30% or more of the voting rights in a public company, they are required to make a mandatory offer for that company; ie, an offer to acquire all the remaining shares of that company. A whole range of other reasons may lie behind acquisitions. Fear of takeover may prompt public companies to make pre-emptive acquisitions. This could be to ‘get in first’ with an attack on a potential bidder, to make themselves appear more dynamic, or to make themselves too big to be acquired themselves. Other purchasers (like Hanson, above) might specialize in asset-stripping – buying underperforming, failing or illiquid companies at a discount, in order to sell off under-valued assets at a higher price. And of course, there may be personal elements, such as management ambition, greed, or inter-company feuds, that drive a board towards an acquisition strategy.
An active M&A market needs both willing, funded buyers and willing, realistic sellers, with a common view on pricing. So, looking now at the other side of the transaction, why are businesses sold?
A corporate strategic review may prompt a company to refocus its activities in a particular direction, or to focus only on those activities it considers to be core, so that the board adopts a disposal strategy. There are many reasons that specific companies are selected:
i. Sometimes the businesses to be sold are under-performing, relative to the group, and therefore dilute shareholder returns and EPS.
ii. There may be a lack of synergies between the subsidiaries and the group, so that there is no visible logic in keeping them. The capital invested in them can be used more profitably elsewhere.
iii. The parent may have acquired a company with non-core or unwanted subsidiaries and choose to sell these off to recover some of the acquisition cost and create a more streamlined whole.
Cash can of course be a key disposal driver; if a parent company is short of cash and has limited or no access to credit facilities or equity funding, it may have to resort to asset sales, including business disposals, to create liquidity. Sometimes there is one particular subsidiary that is highly cash negative, or needs substantial cash to expand, so that the decision is taken to spin it off.
In owner-managed businesses, the disposal may be motivated by personal considerations such as the retirement of the owner-manager (with the timing often dictated by tax planning issues) combined with lack of family succession. Other personal motivations could include financial necessity, perhaps due to litigation or divorce, or even boredom.
Private equity and venture capital firms are always, by their nature, both buyers and sellers. The classic management buy-out (MBO) model starts with the private equity firm’s co-acquisition of a business, alongside incumbent management, from its previous owners. This is followed by financial and management investment in that business, in order to create a step change in its equity value. Then, after around three to five years, comes the exit – with the private equity firm either selling that business, or carrying out an IPO, in order to realize a capital gain and release funds for further reinvestment in other businesses. This three- to five-year cycle of ‘find-buy-change-sell’ means that private equity firms have been major players in the M&A markets, both as acquirers and sellers, for decades. Occasionally a disposal is required for regulatory reasons. One example is where an anti-trust (competition) ruling requires an acquirer to sell all or part of its acquisition target, to avoid a monopolistic or anti-competitive situation. Equally, a purchaser or vendor could agree to dispose of a subsidiary during negotiations, in a pre-emptive attempt to avoid a negative ruling. Sometimes, regulatory changes within a specific industry may give rise to a wave of disposals; for example, the privatization of the electricity industry in the UK in the 1990s involved the break-up of companies into transmission, supply, retail, and generation.
There are five commonly referred to types of business combinations known as mergers: conglomerate merger, horizontal merger, market extension merger, vertical merger and product extension merger.
1. Conglomerate: A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.
2. Horizontal Merger: A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be remarkably similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.
3. Market Extension Mergers: A market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base. A particularly good example of market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion. Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan Atlanta region as far as deposit market share is concerned. One of the major benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the North American market. With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta, which is among the leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations.
4. Product Extension Mergers: A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits. The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN. Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. It is expected that the products of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.
5. Vertical Merger: A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one. A vertical merger joins two companies that may not compete with each other but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business. Synergy, the idea that the value and performance of two companies’ combined will be greater than the sum of the separate individual parts is one of the reasons companies merger.
Some 50%–75% of acquisitions do not enhance shareholder value – although success rates have increased in recent years. The factors behind this are as follows:
1. Strategy: success seems to be more common in transactions involving companies in the same industry than for those in different industries. Those involving targets both in different geographies and in different industries have tended to have least success. The evidence for ‘full’ diversification strategies is mixed, with some studies showing value being enhanced and others showing value destruction.
2. Price and timing: hindsight is sometimes the only test of whether an acquirer has overpaid for a business; but acquisitions in competitive situations, hostile bids and acquisitions at the top of the market (such as in 2006–7), are priced at high multiples, and inevitably have to struggle harder for financial success. When high financial leverage is added to a high price and poor timing, value destruction is almost guaranteed.
3. Post-acquisition integration of the businesses: successful acquisitions are those where management have moved fast, to ensure that the projected synergies can be transformed into actual benefits, and that value is not in fact destroyed. Companies with poor cultural fit tend to fare least well. The best performing deals are where the acquirer has a long-established track record of planning and integrating strategically motivated acquisitions: these are serial purchasers with extensive experience of creating value.
Successful acquisitions start with clear objectives; after all, it’s hard to measure success without them. So, the acquirer’s management must be able to communicate and justify the purpose of its acquisitions. These objectives should be SMART (Specific, Measurable, Achievable, Realistic and Timely) and they must be linked to the acquirer’s underlying strategy. They must also be clearly communicated: firstly, to the deal advisers when the transaction is being identified and negotiated, and later, to line managers and employees once agreement has been reached and the integration must be justified. In particular, it is essential that management should be clear as to their underlying M&A objectives and benchmarks for success when due diligence starts. This ensures that they can brief the advisers to focus their investigations on the areas that are key to success, as well as making sure that advisers understand what issues would constitute a deal-breaker. Any deal structure, such as an earn-out or incentive bonus scheme, should also be structured around the underlying deal objectives and be focused on minimising any threat to these. These objectives will also form the basis of the acquisition integration plan. For example:
1) The corporate strategy is to gain market share. The deal objective is to improve market share from 10% to 20% within two years. The plan to achieve this is to consolidate the target and acquirer product lines, and combine the sales forces, eliminating overlaps in products and staffing. The plan might include reducing the selling price to gain competitive advantage, or ensuring margins are retained by making selective redundancies.
2) The corporate strategy is to create a vertically integrated business. The deal objective is to reduce purchases of raw materials from third-party suppliers from 100% to 50% within one year, and improve group gross margins from, say, 25% to 45% in the same time period. The plan is to invest in additional production facilities (so that the target can meet the acquirer’s raw material needs) and cancel or scale down third-party supply contracts, replacing them with supplies sourced from the target at cost.
Success lies in planning ahead, and the acquirer’s management team should be developing their detailed implementation plan as the deal negotiations progress.
The implementation plan needs to consider the following main points:
1) What does success look like? The definition of success can include financial metrics –margins, EPS, share price, return on assets or an industry-specific measure. However, it is useful to include non-financial benchmarks for success, such as headcount reduction, customer retention, or industry specific key performance indicators. These non-financial benchmarks are much more easily built into management’s day-to-day action plan, creating clarity about the individual steps that need to be taken, and making it clear which individual members of the integration team are accountable for them.
How far should the target be integrated into the acquirer’s business? The acquirer has four options:
a. To allow the target full autonomy, so it continues to operate independently. This will reduce the potential for synergies but may work well in transactions where there are major cultural differences, or where the businesses are in very different regions or industries.
b. To impose financial controls alone (accounting, setting of performance targets, restrictions on investment, etc.). This may be the best method in a diversification strategy, or for cross-border deals where political and cultural barriers are an issue.
c. To combine only those functions that are key to achieving the deal objectives – such as research and development, manufacturing, or sales and marketing. If there is limited synergy or efficiency to be gained from full integration, this may be a simpler and more transparent approach.
d. To aim at full integration of the two businesses, so that they will be ‘merged’ at every level of the organisation. This approach should achieve the greatest synergistic benefit, but it will also present the most difficulty and complexity.
What are the potential barriers to success?
i. Some of these are almost universal issues, found in very many deals, and may have been identified during due diligence. These include such problems as resistance on the part of target staff, difficulty in integrating the businesses effectively, problems in integrating information or accounting systems, loss of key staff, customers or suppliers.
ii. Some of the barriers are deal-specific: legal or regulatory barriers, historic rivalry at senior management level, or management with no integration expertise. Either way, the acquirer must anticipate these barriers and take action to avoid them.
There are two vital components to a successfully implemented integration plan. These are timing, and communication.
1. Timing: Many synergies are dependent on their timing to create value. For example, if the plan includes the sale of an office building within the first three months post-closing, then every month’s delay results in additional cost in the form of insurance, security, utilities, rent or interest expense, and of the course the cost of running two buildings. The same applies to all forms of synergy, in that any delay in creating economic benefit reduces potential value. Equally, the acquirer must maintain impetus to ensure that value is not destroyed through sheer inertia. Plans that never come to fruition, deadlines missed, and commitments shelved, all undermine confidence in management and destroy value. There are also certain dates where timely action is crucial in ensuring success.
There are also certain dates where timely action is crucial in ensuring success.
1. The announcement date
In an ideal world, the deal parties would maintain confidentiality with regards the transaction until closing. In many cases, however, rumour and speculation or regulation force an announcement before the acquirer is able to take control, and often before the transaction is even agreed. Unless this situation is carefully handled, employees may face an extended period of uncertainty over the company’s future and their individual jobs, which can damage morale and create antagonism between two workforces. The acquirer must take steps, without delay to:
i. prevent internal rumour spreading, by implementing a communication programme; this is discussed below
ii. avoid loss of key staff
iii. use public relations and investor relations to ensure the acquisition strategy and rationale are clearly understood
2. The closing date
At closing, the acquirer takes legal control of the target and has a short window of opportunity to take operational control. This will include financial control –transferring signing and budgetary authority – and the introduction of new reporting lines. There is also a short window of opportunity here – some say just 48 hours – to take psychological control of the target, by clearly and unequivocally declaring the company’s new mission, standards and procedures, and ensuring all staff are informed officially of the integration process and the changes that are to be made.
3. The first three months
A study by consultants Ernst & Young and Warwick Business School in 1997 showed that the first 90 days of an acquisition are critical in determining success: “if [major changes] are not tackled in the first ninety days, they may not be tackled at all”. Other studies set the figure at 100 days, or three months, but the consensus is that this early stage is critical. Major initiatives that must be focused on include improving terms of business with customers and suppliers; managing difficult staffing issues (including introducing a fair, transparent procedure for redundancies if required); eliminating head office cost duplications; and IT systems integration.
Communication: Acquisitions are dependent for their success on the co-operation and support of a wide range of stakeholders, including employees, customers, suppliers, managers, bankers, and shareholders. Clear and effective communication with these stakeholders is a vital part of the integration process. A communication programme should be part of the integration plan, and it should involve senior, respected, articulate managers to communicate internally (to staff) and externally (to external stakeholders). Some of the tools that can be used are:
1. Using a staff intranet, to be updated regularly, together with FAQs covering, for example, the M&A process, redundancy procedures, and including core documentation such as deal documents in public deals, personnel policies, press statements. This should be introduced as soon as the transaction is first announced, even if it is not yet completed.
2. A confidential helpline for staff who have concerns about their own employment status.
3. Company or divisional ‘town hall meetings’ to provide formal updates on the transaction or integration process and provide a forum for questions.
4. Recognised deal ‘champions’ with regional communication responsibility for each operating area and available for questions.
5. Regular analyst briefings, shareholder updates and investor meetings, where appropriate.
Communication is particularly important at each of the critical stages mentioned above (announcement, closing and the first three months) as these are the times at which stakeholder support can most easily be lost or won. If the acquirer can explain the logic of the underlying transaction, and the benefits to stakeholders, and can then show that a fair and transparent process is being used for the integration, where staff, customers and employees are sufficiently respected to be kept informed at all stages, then this will go a long way towards gaining stakeholder co-operation with the deal implementation.
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