Boosting Corporate Performance

through Mergers & Acquisitions

Errol DanzigerDanziger Capital Partners LLP

September 2011

This Presentation Reviews Three Topics…

• What is corporate performance, and how is it measured?

• How can corporate performance be improved?

• How can mergers and acquisitions boost performance?

What Is Corporate Performance?

In a nutshell -

• Firm profitability

• Operating efficiency

• Manufacturing or service productivity

• Shareholder and debtholder returns

Performance Analysis is a Process that …

• Evaluates the firm’s progress towards achieving goals and objectives set by management

• Compares firm performance with other companies in the firm’s peer group

Whose Performance Matters?

One or more, or all, of :

• The company

• The CEO

• The senior management

• The operating management

• The line management

• The operating personnel

When is Performance Evaluated?

Daily, by banks examining yesterday’s performance and calculating tomorrow’s value at risk

Monthly, by firms that have to repay debt based on a monthly repayment schedule

Quarterly, by listed companies that have to file a quarterly stock exchange trading update

Annually, by major companies that have to report comprehensive annual results to shareholders

How is Performance Measured?

• On an absolute basis, as where a automobile manufacturer measures the number of units produced per day

• On a comparative basis, as where one firm’s results are compared with the results of other listed companies in its industry

• Against a benchmark that reflects the performance of the broader economy, such as the FTSE 100 or the S&P 500

Approaches to Measuring Performance

Accounting measures

Market value measures

Economic Value Added

Share price

Cost of capital

Accounting Measures of Performance

= Operating income

Sales margins- operating costs

Operating income- operating costs

- depreciation- provisions

= Net income

Market Value Measures of Performance

• Return on equity = ratio of net income : equity

• Return on assets = ratio of net income : total value of assets

• Return on assets = profit margin x asset utilisation

Ratio of –market value per share : book value per share

Economic Value Added®• Net income after deducting the return demanded by investors.

• EVA =

= residual income =

= income earned – income required =

= income earned – cost of capital x investment

0

5

10

15

20

25

30

35

40

1997 2000 2003 2006 2009

SHAREHOLDERSFUNDS

Mallet plc

Shareholders’ FundsMovement 1997 - 2010

Share Price

Every change in share price reflects –

Firm-specific news – a new product, CEO appointment, change in corporate governance

Economic news – interest rate rise or fall, recession or boom

Industry news – competitor launches competing product

Cost of Capital

“A company that generates a

return on capital

that is less than

cost of capital

is destroying value.”

- Errol Danziger

Reasons for Poor Corporate Performance

• Inefficient management of existing assets

• Under-investment in new opportunities

• Over-investment in ill-advised projects

• Strategic neglect of industry trends and opportunities

• Inadequate leverage with inferior return on equity

• Excessive leverage with increased bankruptcy risk

• Financing errors in currency, loan period and loan term matching

• Excessive cash retention

• Excessive conglomeration

How can Performance be Boosted?

• Increase cash flow from assets in place

• Increase expected growth

• Lengthen period of high growth

• Reduce cost of financing

• Manage non-operating assets

Increasing Cash Flow from Assets in Place

• Redeploy existing assets to more

profitable uses

• Improve operating efficiency and eliminate wasteful expenditure

• Reduce the corporation tax burden

• Reduce maintenance of capital equipment

• Reduce working capital expenditure on inventory and receivables

Increase Expected Growth

• Make new investments in new projects and firms

• Use existing assets more efficiently by changing the use of existing assets to more productive applications

Lengthen the Period of High Growth

• Lengthen the initial high growth period in which firm growth outperforms competitors and exceeds cost of capital, before the firm becomes a stable growth firm

• Strengthen barriers to entry by competitors by making products and services “must have”

Reducing the cost of financing

• Make products or services less discretionary, by converting them into “must haves”

• Reduce operating leverage by limiting the amount of fixed costs

• Change the financing mix by increasing cheaper debt financing and reducing expensive equity financing

• Match financing to assets by ensuring that long-term assets are not financed with short-term borrowing

Improve Management of Non-operating Assets

• Cash and marketable securities reduced by dividend payments and share buybacks

• Holdings in subsidiaries and affiliates rationalised and publicised

• Pension fund assets and liabilities balanced to ensure that balance sheet is not harmed

Mergers and Acquisitions can Boost Performance

Because -

• Shareholders like to invest in acquisitive companies

• Analysts like to recommend growth companies

• Acquisitions mean quick growth and better financial performance short-term

Acquisitions boost performance through …

• Finding bargains that have been undervalued by the market

• Financial and operating synergy realised through M&A

• Restructuring of targets to make them profitable once more

• Merging with successful companies that can improve bidder performance

Operating synergy achieved through …

• Economies of scale gained through

combining two businesses and reducing combined costs

• Pricing power enabling market

dominance to increase revenues

• Functional strength by combining complementary advantages of parties

• Higher growth rate by increased size and product range

Financial synergy achieved through …

• Cash slack providing flexibility to

pursue new projects

• Debt capacity enabling greater leverage across the combined

firm

• Tax benefits of ability to utilise target’s operating losses

Restructuring the target, where success depends on …

• Poor performance attributable to incumbent or past management

• Acquisition followed by changed management or new management practices

• Target’s market price reflecting target’s status quo situation and not post-merger position

Achieving performance targets in M&A

• Size and quality

• Cost savings versus growth

• Acquisition for consolidation

• Synergy valuation

• Type of synergy

• Mergers boost operating performance

• Mergers generate excess returns

• Relatedness beats conglomeration

• Scaling for size

Based on a presentation delivered at the Performance and Management

Conference 2011: Delivering Efficiency and High Performance, London, 21

June 2011

Danziger Capital Partners LLP

Stirling House

9 Burroughs Gardens

London NW4 4AU

United Kingdom

www.danzigerplc.com

Danziger Capital Partners LLP are corporate finance advisers, specialising in debt and equity capital raising, and mergers and acquisitions.