Mergers & Mergers & AcquisitionsAcquisitions

Veronika HermannVeronika Hermann

Claudia KaufmannClaudia Kaufmann

Hanna WeinzingerHanna Weinzinger

ContentsContents

• IntroductionIntroduction

• Basic TermsBasic Terms

• Situation in EuropeSituation in Europe

• Theory of AcquisitionsTheory of Acquisitions

• Choice between Greenfield & Choice between Greenfield & AcquisitionsAcquisitions

• ClustersClusters

• Case StudyCase Study

What is a merger?What is a merger?

A merger occurs when one A merger occurs when one corporation is combined with and corporation is combined with and disappears into another corporationdisappears into another corporation

Federal Trade CommissionFederal Trade Commission

• Vertical mergerVertical merger

• Horizontal mergerHorizontal merger

• Product extension mergerProduct extension merger

• Market extension mergerMarket extension merger

• Conglomerate mergerConglomerate merger

What is a corporate What is a corporate acquisition? acquisition?

A corporate acquisition is the process A corporate acquisition is the process by which the shares or assets of a by which the shares or assets of a corporation come to be owned by a corporation come to be owned by a buyerbuyer

• Asset dealAsset deal

• Share dealShare deal

Situation in EuropeSituation in Europe

• Mostly strategic alliancesMostly strategic alliances

• International trend towards International trend towards acquisitionsacquisitions

Situation in EuropeSituation in Europe

Differences between alliances on the Differences between alliances on the one hand and mergers and one hand and mergers and acquisitions on the other hand:acquisitions on the other hand:

• Consensual decision-makingConsensual decision-making

• Transient nature and reversibility of Transient nature and reversibility of alliancesalliances

Situation in EuropeSituation in Europe

What should the European firms do?What should the European firms do?

• More offensive strategyMore offensive strategy

• Transfer of know-how and skillsTransfer of know-how and skills

Complementary alliancesComplementary alliances

Strategically unrelated firmsStrategically unrelated firms

NPV(A+B)=NPV(A)+NPV(B)NPV(A+B)=NPV(A)+NPV(B)

• Normal economic profitNormal economic profit

• Not economically viableNot economically viable

Strategically related firmsStrategically related firms

NPV(A+B)>NPV(A)+NPV(B)NPV(A+B)>NPV(A)+NPV(B)

• Above-normal economic profits: Above-normal economic profits: target firmtarget firm

• Normal economic profits: bidding firmNormal economic profits: bidding firm

• Economically viableEconomically viable

Why are there so many Why are there so many M&A?M&A?

• Ensuring survivalEnsuring survival

• Free cash flowFree cash flow

• Agency problemsAgency problems

• Managerial hubrisManagerial hubris

• The potential for above-normal The potential for above-normal profitsprofits

Rules for Bidding Firm Rules for Bidding Firm ManagersManagers

• Search for rare synergiesSearch for rare synergies

• Keep information away from other Keep information away from other biddersbidders

• Keep information away from targetsKeep information away from targets

• Avoid winning bidding warsAvoid winning bidding wars

• Close the deal quicklyClose the deal quickly

Rules for Target Firm Rules for Target Firm Managers Managers

• Seek information from biddersSeek information from bidders

• Invite other bidders to join the Invite other bidders to join the bidding competitionbidding competition

• Delay but do not stop the acquisitionDelay but do not stop the acquisition

Organizing a merged Organizing a merged organizationorganization

• Postacquisition coordination and Postacquisition coordination and integrationintegration

• Problem: operational, functional, Problem: operational, functional, strategic and cultural differencesstrategic and cultural differences

additional costsadditional costs

Choice of entry modeChoice of entry modegreenfield vs. acquisitiongreenfield vs. acquisition

• Transaction Cost Theory Transaction Cost Theory • Theory of Mergers and Acquisitions (Oster, Theory of Mergers and Acquisitions (Oster, 1990)1990)• Theory of the Growth of the Firm (Edith Theory of the Growth of the Firm (Edith Penrose,Penrose, 1959)1959)• Capital Market Imperfections (Chatterjee, Capital Market Imperfections (Chatterjee, 1990)1990)

Transaction Cost TheoryTransaction Cost Theory

• cost structure of entry modescost structure of entry modes

• locating facilities abroad more locating facilities abroad more efficient than exportingefficient than exporting

• choice between greenfield and choice between greenfield and acquisitionacquisition

• firm specific advantages (superior firm specific advantages (superior organizational or technical ability)organizational or technical ability)

Transaction Cost TheoryTransaction Cost Theory

• high R&D intensity – greenfield high R&D intensity – greenfield investmentinvestment

• little knowledge of foreign market – little knowledge of foreign market – acquisitionacquisition

• high diversification – acquisitionhigh diversification – acquisition

Mergers and Acquisition Mergers and Acquisition TheoryTheoryOster (1990)Oster (1990)• two reason to prefer acquisition vs. two reason to prefer acquisition vs.

greenfieldgreenfield

• value of assets acquired lower than value of assets acquired lower than replacement costreplacement cost

• possibility to leverage firm specific possibility to leverage firm specific advantage more efficientlyadvantage more efficiently

Mergers and Acquisitions Mergers and Acquisitions TheoryTheory• strong value of HC vs. FC – acquisitionstrong value of HC vs. FC – acquisition

• lower stock market prices abroad – acquilower stock market prices abroad – acqui

• acquiring rivals – less competitionacquiring rivals – less competition

• speedy entry via acquisitionspeedy entry via acquisition

• little knowledge of foreign culture – acquilittle knowledge of foreign culture – acqui

• high concentration of target industry – high concentration of target industry – acquiacqui

Theory of the Growth of the Theory of the Growth of the FirmFirmPenrose (1959)Penrose (1959)• low endowment in Human Resources low endowment in Human Resources

– acquisition– acquisition

• high size of subsidiary realtive to high size of subsidiary realtive to headquarter - acquisitionsheadquarter - acquisitions

Capital Market ImperfectionsCapital Market ImperfectionsChatterjee (1990)Chatterjee (1990)

• high grade of leverage – acquisitionhigh grade of leverage – acquisition

• greenfield more expensive than greenfield more expensive than acquisitionacquisition

Entry Mode Choice & Entry Mode Choice & International StrategyInternational Strategy

• global strategyglobal strategy

• multidomestic strategymultidomestic strategy

• transnational strategytransnational strategy

• international strategyinternational strategy

Entry Mode Choice & Entry Mode Choice & International StrategyInternational Strategy

• global firms (cheap production in few global firms (cheap production in few locations, same marketing locations, same marketing strategy/products everywhere) – strategy/products everywhere) – greenfieldgreenfield

• Multidomestic firm (locally adequate Multidomestic firm (locally adequate products & marketing strategy, products & marketing strategy, production & R&D in every market) - production & R&D in every market) - acquisitionacquisition

Relationship headquarter - Relationship headquarter - subsidiariessubsidiaries

• greenfield higher level of control over greenfield higher level of control over subsidiaries than acquisitionsubsidiaries than acquisition

• greenfield more expatriates than greenfield more expatriates than acquisitionacquisition

• acquisition higher level of local acquisition higher level of local responsiveness than greenfieldresponsiveness than greenfield

• Over time headquarter – subsidiary Over time headquarter – subsidiary relationship will converge towards relationship will converge towards preferred entry modepreferred entry mode

Synergy Realization of Mergers Synergy Realization of Mergers and Acquisand Acquis

• an integrative modelan integrative model

• combination potentialcombination potential

• organizational integrationorganizational integration

• empolyee resistanceempolyee resistance

• synergy realizationsynergy realization

Synergyrealization

Organizationalintegration

Combination

potential

Employee

resistance

An integrative Merger and Acquisition Model

+

+

+

+

+

-

Synergy Realization of Mergers Synergy Realization of Mergers and Acquisand Acquis

• great management style similarities = great management style similarities = great organizational integration = little great organizational integration = little empolyee resistanceempolyee resistance

• cross border M&As, combination potential cross border M&As, combination potential (+), organizational integration (-), (+), organizational integration (-), empolyee resistance (+)empolyee resistance (+)

• great size of target relative to bidder = great size of target relative to bidder = great combination potential = great great combination potential = great organizational integrationorganizational integration

Case StudyCase Study

IntroductionIntroduction

1.1. Company and groupCompany and group

2.2. HistoryHistory

3.3. Organizational StructureOrganizational Structure

4.4. DivisionsDivisions

5.5. M&A ProcessM&A Process

6.6. M&A-Practical ExperiencesM&A-Practical Experiences

Who is Mondi Packaging?Who is Mondi Packaging?

• Mondi: international, integrated forest Mondi: international, integrated forest products and packaging groupproducts and packaging group

• manufactures a range of products manufactures a range of products including: Pulp, Graphic papers, including: Pulp, Graphic papers, Packaging papers, Converted Packaging papers, Converted packaging (including corrugated packaging (including corrugated board), Solid wood products, Wood board), Solid wood products, Wood chip.chip.

HistoryHistory

• 1997-19981997-1998: : acquisition of the group`s first 2 plants in Polandacquisition of the group`s first 2 plants in Poland

• 19991999: : acquisition from Amcor Fibre Packaging Europe of 21 acquisition from Amcor Fibre Packaging Europe of 21 plants in the UK and Franceplants in the UK and France

• 20012001: : acquisition from Danisco UK of 16 plants and 2 paper acquisition from Danisco UK of 16 plants and 2 paper millsmills

• 2001-20022001-2002: : Acquisition of 2 sheet plants in IrelandAcquisition of 2 sheet plants in Ireland

• 20022002: : Acquisition of 8 plants in France and the UK through the Acquisition of 8 plants in France and the UK through the joint purchase of La Rochette with Saica, as well as the joint purchase of La Rochette with Saica, as well as the acquisition of an additional plant in the UK and in Poland.acquisition of an additional plant in the UK and in Poland.

• 20042004 : : Acquisition of 10 plants and 5 paper mills in Austria, Acquisition of 10 plants and 5 paper mills in Austria, Germany, Poland, Switzerland, Italy, Belgium and China through Germany, Poland, Switzerland, Italy, Belgium and China through

a merger with the Roman Bauernfeind Groupa merger with the Roman Bauernfeind Group..

Organizational StructureOrganizational Structure

DivisionsDivisions

• Paper DivisionPaper Division

• Corrugated DivisionCorrugated Division

• Bag DivisionBag Division

• Flexibles DivisionFlexibles Division

• Coating DivisionCoating Division

M&A ProcessM&A Process

1.1. SourcingSourcing

2.2. Due Diligence Due Diligence

3.3. Valuation Valuation

4.4. NegotiationNegotiation

5.5. ContractContract

6.6. ClosingClosing

Case StudyCase Study

• Interview with Mr. Stürzenbecher, Interview with Mr. Stürzenbecher, responsable for M&Aresponsable for M&A

• criteria to search for acquisitions:criteria to search for acquisitions:

1.1. CustomersCustomers

2.2. Machines`qualityMachines`quality

3.3. Company`s organisationCompany`s organisation

Case Study Case Study

• Places to gain market sharesPlaces to gain market shares

1.1. ChinaChina

2.2. IndiaIndia

3.3. Arabic countriesArabic countries

ProblemsProblems

• Different culturesDifferent cultures

• Different strategiesDifferent strategies

• Different aimsDifferent aims

• Different languagesDifferent languages

SolutionsSolutions

• ExpatriatesExpatriates

• IntegrationIntegration

• Meetings, seminars-> to get to know Meetings, seminars-> to get to know the foreign working colleaguesthe foreign working colleagues

THANK YOU FOR PAYING THANK YOU FOR PAYING ATTENTIONATTENTION

HermannHermann

KaufmannKaufmann

WeinzingerWeinzinger