International

Takeovers and
Restructuring
through
Merger and
Acquisition

Dr. Harris Turino

Agenda

International Takeovers and

Restructuring Phenomena
The New M&A Playbook
Merger and Acquisition
One of strategic decisions a corporate undertake is
merger & acquisition (M&A).
M&A as Growth Source
M&A is one of growth sources, beside market share gain
and portfolio momentum (McKinsey & Co, 2008).

10%

5%
1.8%

PM MA MS
1999-2006 = 16.8%
Categorization of Integration
Industry A Industry B

sub sub

Upstream

Midstream

Downstream

Horizontal Conglo- Vertical

Integration meration Integration
M&A Phenomena

There are two interesting phenomena about

M&A:

o Reoccurrence of M&A Wave

(M&A is increasing and decreasing sharply)

o The failing of most M&A activities

(most of them fail to grow value)
 Part I:
M&A Phenomena
M&A Wave
M&A activities occur along the time.
Within certain period, those activities increase
significantly, and then drop sharply.
The phenomenon reoccur along the 20th century
until now, and it is called M&A Wave.
Both increasing or decreasing of M&A activities
triggered by environmental changes.
Literatures identified that there are 6 M&A waves.
MA Waves: The 1st 4th Wave

1968-1970s

1981-
1989
1916-1929
1887-1904
MA Waves: The 4th 5th Wave

The Fifth
Wave
The Fourth Wave
1981 - 1989 1992-2000

Number of MA Transactions in US Economy (Gaughan, 2001)

MA Waves: The 4th 5th Wave

The Fifth
Wave
The Fourth Wave

Dollar Value of US Acquisition of Foreign Company (Gaughan, 2001)

The Fifth and Sixth Wave

The Sixth Wave

2003 - 2009
The Fifth Wave
 The 1st 3rd M&A Wave
Wave Trigger Description Ending

1st Wave The growing of Between Economy slowdown

(1887-1904) economy after civil monopolists in (panic in 1903)
war heavy industry Stock market crash
Monopoly Pacific railroad
Horizontal (1904)
Sherman act
2nd Wave Economic boom Between Stock market crash
(1916-1929) after WW-1. Oligopolies (oil, (1929)
Technological food, metal etc) Great depression
Consolidati
development Vertical integrate (1932)
on
(e.g. Ford) Bank facilities
3rd Wave Stock price boom Conglomeration Poor performance of
(1968-1970s) Low interest rate Financed by conglomeration
New inventions equities Hart-Scott-Rodino
Conglomer
(laser, DNA, Small acquired Antitrust Act
ation
computer, etc). bigger company Suez channel crisis
 The 4th 6th M&A Wave
Wave Trigger Description Ending
4th Wave Antitrust relaxation Acquired Anti-takeover law
(1981-1989) Deregulation company much Junk bond crisis
Increase value and larger size Financial institution
Hostile efficiency to Foreign takeover reform
Takeover compete in global was spreading Gulf war
market Hostile takeover
5th Wave Globalization Banking & telco The burst of stock
(1992-2000) Technology change Financed by market bubble
Deregulation equities (millennium and
Mega Deal Stock market boom Long-term profit dot.com)
Impose resources in motive Revolution of corp.
global market Premium price governance
6th Wave Abundant liquidity Buying less Subprime mortgage
(2003-2009) Stock market boom undervalued firm crisis
Low interest rate Government
encouragement
The End of Sixth Wave?

Source: Capital Logix

The Big Questions

Why M&A Activities Fail?

How M&A Failures are Interpreted?
Why Companies are Convinced and Try Again?
The Failing of M&A Activities
The failing of M&A activities is defined as the destroying
of acquirer firms value post-M&A.

Large volume of studies stated that:

o Around the announcement date, the shareholder value slightly
tend to be positive (some studies indicate negative)
o Post-M&A (2 years or up to 5 years), the result is consistent, i.e.
significant negative performance (in term of shareholder return,
stock price, profitability).

Ruback (1988) said, Reluctantly, I think we have to

accept this result as a fact.

Christensen et al. (2011) stated 70-90% of M&A activities

fail to grow firm value.
Why M&A Activities Fail?
Incorrectly match candidate to strategic purpose
of the deal.
Fail to differentiate between deal for H1 and
H2/H3.
Three Growth Horizon

Future
Idea generation
Idea development
Horizon-3:
PROFIT

Create viable
options
Horizon-2:
Build Emerging Idea diffusion
Business New business launced

Horizon-1:
Extend and Defend Existing business that
Core Business generate cash today
Now
Now
TIME Future

Sustained revenue growth occurs if there is the flow of

portfolio across Horizon
Why M&A Activities Fail?
Incorrectly match candidate to strategic purpose
of the deal.
Fail to differentiate between deal for H1 and
H2/H3.
Too expensive (premium price).
Overoptimistic about the target of success, and
tend to neglect the negative aspects.
Fail to integrate culture, process, system
effectively as the complexity task increase.
M&A is a Complex Transaction
How M&A Failures are Interpreted?
Internal and external attribution
o Internal attribution for failure is rare (e.g. lack of preparation,
lack of planning effort, lack of capabilities).
o Most managers blame external factors to justify the failure
(economic slowdown, competitors reaction, choice of wrong
consultant, changing market, new technology invention, etc).

Failures as near win

o Managers act as a gambler who believe they will win next time.

Conceptual development
o The failure of M&A is sometimes perceived as lack of supported
concept (theory).
o Failures of M&A is a source of academic research to develop new
concept.
o Consultants continue to offer the updated development, and
influence managers to try in the next deal
Why Companies are Convinced and Try Again?
Pressure to grow
o M&A is often seen as only viable option to grow.
o With failure experiences in the past, manager is more confidence
to reach success.

New concepts and Herd Behavior

Divert from past M&A failure
o The successful M&A is easier to remember than the failure one
o Closing attention to failure M&A

Overemphasize the positive deals and aspects

o Company employs managers that have much experience in M&A
transactions
o The manager have the success story in the past (even tough
most of the stories are about the failure).

Fill the gap with serial M&As

How to create value
from M&A?
 Part II:
The New M&A Playbook
The Motives Behind M&A
Guidance to Successful M&A
M&A Motive: Transaction Cost
(Coase, 1937)

The world comprises economic exchanges.

Each time the economic exchanges carried out, it
needs cost, i.e. transaction cost.

Cost of External Cost of Internal

Transaction (CET) Transaction (CIT)
Transaction Cost of learning, Management error,
Cost Cost of haggling, Inefficiency, etc
Commission, etc.

If there is positive cost saving (CIT < CET), firm

will coordinate activities internally.
M&A Motive: Contractual Relationship
(Williamson, 1979)

INVESTMENT CHARACTERISTIC
Non-Specific Mixed Highly Idiosyncratic
One-time/ Purchasing Purchasing Constructing
Occasional Standard Equipment Customized Equipment Plant
FREQUENCY

MARKET TRILATERAL GOVERNANCE

GOVERNANCE BILATERAL UNIFIED
Recurrent GOVERNANCE GOVERNANCE
Purchasing Purchasing Purchasing Specific
Standard Material Customized Material Intermediate-product

Market governance: sales contract, short-term, generic products.

Trilateral governance: agreement, longer-term, more specific and
complex items, 3rd party needed to evaluate the performance and
resolving disputes in the future.
Bilateral governance: strategic alliance, joint venture
Unified governance: merger & acquisition
M&A Motives: Modern View
(Auster & Sirower, 2002)

Literatures summarize that the motives behind

M&A activities are:
o Increase market share
o Gaining resources, new skills, and/or talents
o Improve innovation and learning
o Increase synergetic benefit (cross-utilization)
o Sharing Risk
o Increasing global competitiveness
M&A Motives: Modern View
(Schonberg, 2003)

Strategic Financial Managerial

Market penetration Attract Managers hubris

Enter new market investors Strengthen
Differentiation attention position
Strengthen Increase EPS New career
resources Capital gain opportunity
Get new skill, etc Increase etc
leverage, etc
M&A Motives: Modern View
(Christensen et al., 2011)

Boost Reinventing
company performance Business Model
Strengthen existing business Creating new ways of doing
competitiveness to improve business since value of
performance existing business fades

Leverage My Business Reinvent My Business

Model (LBM) Model (RBM)
LBM and RMB

LBM RBM

Buy Resources Buy Business Model

Strengthen Establish new growth
competitiveness platform
Improve existing Improve corporate
business performance performance

It must be very careful because It is treated as other SBU or

of the task complexity and division. The probability to
overpriced. success (grow value) is higher
The probability to failure is high. than LBM
 LBM can be viewed as
kidney transplantation
Physician must investigate very carefully
whether our body can receive the kidney
or not
Final Tips for M&A Process
1. Paying the right price
o In general, overpaid occurred especially in the 5th wave
of M&A (Mega Deals).
o It is typically that acquirers overpay for LBM, and
underpay for RBM.
o Analysts often judge that disruptive BMs stock price is
overpriced, because of their lower margin. But, it is
actually underpriced likely to grow.
o Research on 37 disruptors companies indicated that
they grew 46% p.a. (on average) within 10 years.
o Case: Behavioral between seller and buyer
Final Tips for M&A Process
2. Avoiding Integration Mistake
o In LBM, acquired companys BM is folded because its
resources are taken.
o In RBM, acquirer buys the BM of acquired company.
o The mistake of BM integration will trigger disaster
Final Tips for M&A Process
3. Decision Dilemma

o Make or Buy.

o Consideration :
o Price of the deal
o Speed of the growth
 Everyday
The wrong company are
purchased for the wrong purpose.

The wrong measure of value are

applied in pricing the deal, and the
wrong elements are integrated into
the wrong BM.
Thank You