Bachelor Thesis, 2010
72 Pages, Grade: 1,3
II Table of Figures
III List of Abbreviations
1.1 Background & Purpose
2 Mergers & Acquisitions
2.1 Definition and Distinction of Mergers & Acquisitions
2.2 Selected Types of Mergers & Acquisitions
2.2.1 Strategic Alignment Approach
2.2.2 Attitude Approach
2.2.3 Regional Approach
2.3 The M&A Process
2.3.1 The Pre Merger Phase
2.3.2 The Transaction Phase
2.3.3 The Post Merger Integration Phase
3 Synergies in Mergers & Acquisitions
3.1 Definitions and Distinctions of Synergy Terms
3.2 Typical Synergy Potentials in Mergers & Acquisitions
3.2.1 Functional specific Synergy Potentials
3.2.2 Financial specific Synergy Potentials
3.2.3 Management specific Synergy Potentials
3.3 Synergy Pitfalls
3.4 The Connection between Synergies and the Price Premium in M&A
4 Synergy Management and Synergy Tracking in the M&A Process
4.1 Fundamentals of Synergy Management and Synergy Tracking
4.2 Requirements on Synergy Tracking during M&A Projects
4.2.1 Identification of Synergy Potentials
4.2.2 Quantification of Synergy Potentials
4.2.3 Planning of Synergy Potentials and Realization Measures
4.2.4 Monitoring and Reporting
4.4 Challenges for Synergy Tracking during Mergers & Acquisitions
4.5 Risk Factor Human Capital in Mergers & Acquisitions
4.6 Institutional Integration of Synergy Tracking
5 Valuation of Synergy Potentials in Mergers & Acquisitions
5.1 Company Valuation as a Framework for Synergy Valuation
5.2 Discounted Cash Flow Analysis
5.2.2 Periodic Net-Synergy Cash Flows
5.2.3 Calculation of Discount Rates for Synergy Valuation
5.2.4 Assessment of Discounted Cash Flow Analysis
5.3 Consideration of Synergy Realization Probabilities
6 Synergy Tracking Tool for Post Merger Integration
6.2.1 Single Business Plan
6.2.2 Synergy Action Plan
6.2.3 Merged Business Plan
6.2.4 Synergy Business Plan
6.3 Allocation of Synergy Effects
6.4 Variance Analysis
6.5 Application Example: NewCo
7 Summary and Future Perspectives
Figure 1: Critical Factors of Success in Mergers and Acquisitions
Figure 2: The M&A Process
Figure 3: Step Model of Subjective Company Valuation
Figure 4: The Synergy Realization Process
Figure 5: Synergy Potentials within the Value Chain
Figure 6: Systematization of Operational Synergy Tracking
Figure 7: Elements of Synergy Tracking
Figure 8: Exemplary Draft of an Action Plan for Synergy Tracking
Figure 9: Calculation Scheme of DCF Analysis for Company Valuation
Figure 10: Calculation of Net-Synergy Cash Flows with the Indirect Method
Figure 11: Tracking Tool: Single Business Plan/Income Statement NewCo
Figure 12: Tracking Tool: Single Business Plan/Income Statement Company B
Figure 13: Tracking Tool: Single Business Plan/Combined Income Statement
Figure 14: Tracking Tool: Synergy Action Plan
Figure 15: Tracking Tool: Synergy Business Plan/Income Statement
Figure 16: Tracking Tool: Variance Analysis/Shared Services/Administration
Figure 17: Tracking Tool: Variance Analysis/Sales & Marketing
Figure 18: Tracking Tool: Reporting Sheet
illustration not visible in this excerpt
In Business Development, Mergers & Acquisitions (M&A) have become an increasingly attractive growth opportunity among companies over a long period of time. Nowadays, there is hardly a day where current developments of ongoing M&A transactions or speculations about presumed M&A deals cannot be followed in the daily press. Other external growth opportunities, such as strategic alliances, joint ventures, and franchising (inorganic growth) are still behind M&A as a strategic alternative. Organic growth, which can be achieved by increasing sales personnel, developing new products or expanding in new geographical areas, presents another alternative. Nonetheless, M&A are often preferred because they provide a faster way to enter new markets and to make operations more efficient. Moreover, the constantly increasing global competition, strengthened through lowered market entry barriers and trade enhancing conventions between several countries, contribute to an increased consolidation pressure among businesses.
However, it turned out that M&A are fairly sensitive projects that are vulnerable to fail. It is proved that a huge number of M&A did not deliver on their promises. The majority of failed M&A are a result of mismanagement during the Post Merger Integration (PMI) when processes have to be adjusted, personnel need to be teamed up and corporate cultures have to be reconciled. The importance of the PMI within M&A transactions was determined during a survey among leading managers by the consulting firm AT Kearney (See Figure 1):
illustration not visible in this excerpt
During the PMI, synergies, as the dominant motive for M&A, which are identified before the transaction, have to be realized. However, synergies can frequently not be realized due to a poor quality of information, a high level of complexity or bad implementation strategies. In spite of these difficulties, many companies have not established a well-functioning synergy management and synergy tracking in their organizational structures yet.
This thesis deals predominantly with aspects of synergy management whereby the main focus is on synergy tracking as a support function of the synergy management. An emphasis is on the analysis of realization efforts that need to be done by the management during the PMI. To provide a solution and ease the aforementioned issues of synergy realization, a synergy tracking tool, which serves as an effective support instrument during the PMI is developed.
The introductory part of this thesis is followed by the theoretical framework that comprises chapter two and three. In the second chapter, fundamentals and principles of M&A science are analyzed in order to provide the reader with necessary background knowledge in topics of M&A. It follows an introduction of synergies, as the value driver in M&A, in chapter three. In addition, different types of synergy potentials in M&A transactions are defined and synergy risks are discussed. The body of this thesis includes the three subsequent chapters. In Chapter four the general necessity of synergy management and synergy tracking within M&A is explained and a distinction between these functions is made. Furthermore, the tasks of synergy tracking are described in detail and challenges which have to be coped with while synergy tracking are addressed. In order to provide a comprehensive understanding of the synergy tracking tool, the valuation of synergy potentials is the main topic in chapter five. In this context the Discounted Cash-Flow analysis (DCF), as the dominant method of company valuation as well as the valuation of synergy potentials, is discussed. The synergy tracking tool is presented in chapter six. After the description of the structure, certain features required to fulfill the tracking tasks are explained. The thesis ends with a summary of the main aspects of synergy management and future perspectives for the M&A market.
The term M&A, which refers to Mergers & Acquisitions, comes originally from the Anglo-Saxon language and has not been commonly defined yet. Overall, it includes all processes that deal with the sale or the purchase of companies or parts of companies whereas the change of the ownership structure is considered as the main characteristic.
An acquisition is defined as a purchase of a company, a part of a company, majority- or minority ownership. A merger on the other hand is a consolidation of two or more independent companies whereby at least one part loses its autonomy. Hence, M&A have to be differentiated from strategic cooperations, such as joint ventures and strategic alliances that are characterized by contracts between the parties involved. In addition, cooperation agreements are time-limited while M&A are rather considered to be long-lasting. However, this distinction is called into question since the activity of financial investors that aim for quick profits by investing in companies, such as Private Equity firms, has increased on the M&A market.
Several criteria are used to classify M&A transactions. In the following, the criteria are chosen based on their particular impact on synergies in M&A.
M&A transactions can be divided into horizontal, vertical, and conglomerate M&A. A horizontal M&A refers to a transaction which takes place between companies within the same industry that operate on the same value-added step. A popular example for a horizontal M&A transaction is the merger between the auto manufacturer Daimler and Chrysler in the year 1998. The main motives of these M&A transactions are often to increase market share, to improve the competitiveness by acquiring direct competitors or realize cost synergies, such as economies of scale and scope. Companies involved in a vertical M&A also share the same industry, but operate on different steps of the value chain. Motives for this type of M&A are often to extend the vertical integration within the value chain or to discard dependences on supplier or customer. As last type within the strategic alignment approach, conglomerate M&A are to be addressed. These are transactions which take place between entities that do not compete on the same market. Conglomerate M&A provide businesses with the option to have instant access to new markets. Companies engaged in this type of M&A transaction search for new business opportunities on new markets or try to lower their operational risk by diversification.
Most of this thesis assumes that the target company is interested in the buyer`s offer and is a willing participant in the acquisition process (friendly takeover). However, a considerable portion of M&A transactions are events in which not only the ownership structure is affected, but also the management of the target company is replaced and changes in leadership style and business strategies are enforced by the acquirer. Therefore, resistance on the side of the target company can often be experienced. The management tries to avert the M&A approach for instance by implementing “poisen pills” or by encouraging other companies to enter a bid competition in order to force up the deal value. These so called hostile or unfriendly takeovers cause often particular difficulties in the synergy management process since important information about the acquisition target are not provided and have to be gathered from public sources.
M&A have become increasingly international during the last years. This increase is a result of major economic forces which have been pushed forward, such as the European Union’s single market, the globalization of the marketplace and the increasing global competition. Many companies realized that they need to go global in order to maintain a competitive edge. This development has resulted in a significant increase of cross-border M&A over the last years. However, cross-border M&A compared to domestic M&A are particularly exposed by the risk of failure. This has mainly to do with the high degree of complexity that has to be dealt with when M&A are conducted and synergies are due to be created. Companies involved in these transactions have to manage issues, such as cultural differences, different business laws, and varying market regulations. Therefore, international M&A projects need to be carefully planned and systematically conducted to a particular extent.
Generally it can be said that M&A transactions fulfill all characteristics of a project, which are the uniqueness of the goal, time limitation, complexity, shortage of resources, and strategic importance. M&A transactions are complex projects in which many different parties and people are involved and need to contribute in order to achieve the proposed outcome. Therefore, most M&A transactions follow a similar pattern and go through a typical series of actions. According to most scientific literature this process is divided into three main phases, even though there are also sources that follow a multi-phase model. In the following, the M&A process is described based on the three phase model from the acquiring company`s point of view (See Figure 2):
illustration not visible in this excerpt
Selected actions are described that have to be taken during the respective phases to ensure a successful M&A transaction and to give an overview over the main tasks during an M&A process. A complete and detailed analysis of all steps that are shown on the graph cannot be provided in this thesis. Hence, the description is limited on the core content of the actions shown on the chart.
During the pre merger phase the basic strategy has to be determined and strategic goals need to be defined. At the same time, other alternatives, such as internal growth strategies are to be analyzed and compared with the proposed M&A strategy. This is fundamental to decide whether external growth creates the most value for the company and should be done before every M&A proposal.
After the decision for an M&A was made and the management defined common strategic goals, the acquirer searches for the ideal partner to accomplish the strategic objectives. Before the management conducts the strategic screening for possible candidates, it creates a company profile which incorporates all required characteristics that the target company has to possess. The so-called Long List includes all interesting companies that might be approached. These companies are later evaluated by means of their strategic, cultural, and financial fit to the acquiring company, which then leads to a more comprised list (Short List). The strategic screening of potential M&A partner prevents integration since fundamental problems emerging later in the M&A process can be foreseen.
The first contact to the selected companies takes place during the pre-selection process . At this stage, the potential target companies are approached in order to assess their willingness of an M&A transaction. Moreover, further information about the potential acquisition targets is gathered and used as additional selection criteria.
Within the planning phase, the management has to agree on the legal form of the new organization and need to decide how the target company is to integrate in the organizational structure. In addition, the general transaction structure, if asset or share deal, and its financing have to be clarified. Moreover, responsibilities for the further M&A process have to be assigned and decision power among these people has to be determined.
An initial company analysis is done during the simulation phase. The future developments of the company on stand-alone basis as well as of the combined companies after the merger are evaluated. This analysis helps to identify actions that are required to optimize the M&A process. In addition, synergy potentials are initially analyzed so that the management can obtain a first overview of the possible advantages and negative effects in case of an M&A transaction.
A first estimation of the target company`s value is done during the pre-merger valuation phase. Although at this time only little information to calculate a reliable value of the target company is available, it gives an idea about the expected amount to invest. Thus, it helps when decisions about the financing of the transaction are to be made and enables to approach potential investors at an early stage.
Moreover, core areas that need to be particularly investigated during the Due Diligence can be de determined.
At the end of the pre merger phase contracts, such as the Non-Disclosure Agreement (NDA) and the Letter of intent (LoI), have to be signed. The NDA engages the contracting parties to treat all information which is provided during the M&A transaction confidentially and prevents misuse by third parties. A LoI is a non-binding summary about the general outlines of an M&A transaction and underlines the parties` interest in the M&A proposal. Therefore, conceptual issues, such as misinterpretations and other factors that can expose the M&A proposal in the ongoing process can be avoided on either side.
The transaction phase of the M&A process begins with the Due Diligence (DD) of the target company. The DD is a complex investigation of the target company`s current situation in which core aspects for the valuation of the acquisition target are analyzed to gain essential company information. Based on the results of the DD a realistic estimation of the target company`s value can be made. At this stage, the vendor provides the acquirer with all information that is required to evaluate the target company, thus the DD helps to estimate synergy potentials, which result from the merger, and to assess risks involved in the transaction. In addition, it helps the acquirer to derive a price range for negotiations about the final deal value. A traditional DD incorporates three fields of investigation: financial, tax, and legal DD. However; this approach falls to short in ensuring a successful M&A transaction since it fails to consider potential issues during the PMI, such as “employee resistance”. Therefore, aspects concerning human capital should also be part of the DD. An in-depth DD significantly increases the likelihood of success in M&A, because it creates a foundation to identify synergy potentials.
The Due Diligence builds then the information source for the pre-closing-integration-plan. Moreover, actions required to realize synergy potentials are specified and part of in this plan. These actions have to be allocated to their respective departments to engage people with these tasks. Furthermore, the actions must be scheduled and milestones for integration projects of the PMI are to define. To ensure a manageable integration process and enable support functions like synergy tracking, synergy potentials have to be quantified.
The actual valuation of the acquisition target takes place during the subsequent valuation phase. All knowledge about the acquisition target gained during the DD provides important input for this process, which can now be conducted based on a sufficient information basis. It has to be noted, that the result of this valuation represents only the so-called subjective value of the acquiring party’s point of view and not the final deal value. Essentially, it presents the maximum price which the acquirer would pay for the acquisition target.
Several methods to value a company exist. In this thesis the Discounted Cash Flow analysis (DCF) is applied as the most used method in practice. The first step by valuing the acquisition target is to calculate the Stand-alone value which is the company value assumed that the acquisition target would continue to operate as it did before. Afterwards, restructuring potentials that would arise from an M&A transaction, such as the disposal of redundant asset and the estimated synergy value, are added. Eventually, value decreasing effects, such as dysergies and integration costs have to be subtracted (See Figure 3):
illustration not visible in this excerpt
From the chart above, it can be concludeded that the final deal value is set within the negotiating range to an amount that both parties finally agree on. The exceeding amount of the Stand-alone value that has to be paid is called the price premium. In order to add value through the M&A transaction, the Present Value (PV) of the net-synergy effects has to be higher than the price premium. Thus, it can be concluded that the identified synergies justify the price premium.  Likewise, it makes demands for the synergy management to realize synergies at least to the amount of the price premium to prevent value destruction after the transaction.
The valuation is regularly done by both sides and results in different prices due to different objectives of the parties involved. In particular, differences concerning the valuation of restructuring potentials and synergy values can often be noticed.
When both parties choose to continue with the M&A transaction after the valuation and potentials resulting from the merger are disclosed, they enter into the negotiation phase. The final deal value depends often on factors such as, market power, and negotiating skills of the parties involved
After both parties agreed on a deal value, contracts must be signed as an official purchase agreement (Signing). In addition, implementation contracts that include additional agreements relating warranties and underwriting terms that were given by the parties during the process have to be signed.
The transaction phase ends with the closing after approvals from public authorities, such as the Antitrust Division, were given.
The Post Merger Integration (PMI) has a huge impact on the success of M&A transactions. In this phase previously planned synergies, which were calculated in the deal value, have to be realized in order to achieve the initial goals. Although the PMI is often seen as the final phase of the M&A process, important tasks, such as personnel integration and target tracking, have to set in at earlier stages to ensure a successful integration process. Gerds & Schewe suggest a separate “Merger DD” to overcome risks, such as “employee resistance” and poor-quality information, which cause problems during the PMI. Therefore, PMI is sometimes also seen as a cross-sectional phase of the M&A process.
To make sure that all necessary actions are taken to meet the initial goals, a Post Merger Integration plan has to be created. In this plan the required tasks are timed and assigned to the persons in charge in order to keep the process manageable. It builds on the pre-merger integration plan and can be seen as an extension of this under improved conditions and a higher level of detail.
During the organizational integration, all operations, which were earlier done separately, need to be combined. The degree of integration and the pace in which the integration process is conducted are influential factors in this phase. Despite the pursuit of a short integration process in many businesses, problems caused by overloaded employees must be considered. Hence, it is important to adjust the pace of integration to the abilities of the workforce. The legal integration as another task of the PMI refers to obligations, such as requesting the record in the company register for the newly formed business.
During the personnel implementation, the management has often to deal with issues, such as job insecurity among employees and the refusal to adapt to new corporate cultures. For this reason, it is necessary to incorporate incentive systems to keep employees motivated and to ease their apprehensions.
Target tracking within the PMI comprises actions, such as synergy management and synergy tracking. The main task is to monitor business processes and make adjustments in order to realize synergy effects. At the same time, measures in respect of human capital such as, monitoring the development of the workforce to prevent losses of key employees are to be induced.
Finally, structural adjustments due to the M&A transaction should be addressed in this context . These adjustments are required if it turns out that the integrated entity do not contribute to the firm`s strategy after all. These restructuring measures are often not done until a few years after the merger when it became evident that strategic goals cannot be achieved.
In order to avoid misinterpretation the term synergy which is often misinterpreted is defined in this chapter. In addition, a transition from the general term to synergies in the M&A context is made. The term synergy derives its origin from the word “synergo” which can be split into the two components “syn” (together) and ergo (work). Discussions and debates about synergies in the business context often refer to Ansoff`s synergy concept that he developed in contribution of science in corporate strategy. He describes positive synergies as the “2+2 = 5” effect which means that companies are able to add value while combining its product-market posture. Nowadays, synergy is frequently used as a comprehensive term that embraces positive synergies and negative synergies which are also called dysergies.
Positive synergies in the business context are defined as “synchronic interactions of previously independent companies, subsidiaries or functional departments, which lead to an increase of the company value.” Dysergies, on the contrary, are defined as “synchronic interactions of previously separated companies, subsidiaries or functional departments, which lead to a decrease of the company value.”
In the following, the term synergy is used comprehensively and refers to positive as well as negative synergies.
Another important distinction has to be made between the terms synergy effect and synergy potential. As synergy potential can be seen the economic effect which is expected when the separate entities are operating as one unit. Whereas the synergy effect describes the actual outcome after the synergy potential had been realized. This can be either a beneficial effect or a negative effect resulting from the M&A transaction. The following figure visualized these differences (See Figure 4):
 See Coenenberg; Jakoby 2000, P.178.
 See Lucks; Meckl 2002, P.6-7.
 See Booz Allen & Hamilton 2001.
 See Gerds; Schewe 2009, P.4-6.
 See Unger 2007, P.880.
 See Deloitte 2009, P.8.
 See Thomaschewski 2004, P.117.
 See Lucks; Meckl 2002, P.23.
 See Coenenberg; Jakoby 2000, P.178.
 See Jansen 2001, P.110.
 See Paprottka 1996, P.8.
 See Fischer 2008, P.18.
 See Wirtz 2003, P.18.
 See Paprottka 1996, P.11-12.
 See Wirtz 2003, P.19.
 See DePamphilis 2009, P.106.
 See Weber; Roventa 2006, P.281.
 See Lucks; Meckl 2002, P.3-5.
 See Fischer 2008, P.20-21.
 See Lucks; Meckl 2002, P.252-267.
 See Sodeik 2009, P.47.
 See Fischer 2008, P.34-35.
 See Gerds 2000, P.12.
 See Lucks; Meckl 2002, P.55, 74.
 See Fischer 2008, P.38; Lucks; Meckl 2002, P.79-86.
 See Lucks; Meckl 2002, P.87-88.
 Further reading about transaction structures provides: Wirtz 2003, P.257-258.
 See Lucks; Meckl 2002, P.97-107.
 See Borowicz et al. 2006, P.169.
 See Ibid.; Picot 2008, P.159-162.
 See Bragg 2008, P.10-13, 83-85.
 See Picot 2008, P.166.
 See Deloitte 2009, P.12; Chapter 4.5.
 See Weber; Roventa 2006, P.281.
 See Lucks; Meckl 2002, P.111-117; Chapter 4.2.
 See Lucks; Meckl 2002, P.175-176.
 See Wirtz 2003, P.202-203.
 See Lucks; Meckl 2002, P.177.
 See chapter 5.2 for a detailed analysis.
 Further reading relating the controversial discussion about the general distinction of restructuring potentials and synergy effects: See Metz 2002, P.60.
 See Thomaschewski 2004, P.99.
 See Ibid.; Chapter 3.4.
 See Biberacher 2003, P.369-371.
 See Lucks; Meckl 2002, P.190.
 See Lucks; Meckl 2002, P.191; Wirtz 2003, P.256.
 See Lucks; Meckl 2002, P.118-119.
 See Ibid.
 See Picot 2008, P.23.
 See Jansen 2001, P.227.
 See Gerds; Schewe 2009, P.122-130.
 See Jansen 2001, P.227.
 See Lucks; Meckl 2002, P.218.
 See Gerds 2000, P.51.
 See Deloitte 2009, P.17.
 See Lucks; Meckl 2002, P.129.
 See Larsson 2005, P.189-190; Chapter 4.5.
 See Lucks; Meckl 2002, P.141.
 See Ibid., P.154, 220.
 See Ibid., P.130.
 See Goold; Campbell 1998, P.133.
 See Ansoff 1965, P.72.
 See Biberacher 2003, P.53.
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