Over the past few months, mergers and acquisitions (M&A) have been on the top of many corporate agendas. Not only in the US, but also in Europe was the year 2005 sometimes referred to as “merger wave” with a number of relatively sizeable cross-border transactions. Similarly, M&A activity in Switzerland was on a four-year high, backed by a strong market performance. Given the relevance of an M&A-related topic we are interested whether cor-porate takeovers with a synergy-rationale actually benefit shareholders of the acquiring firm.
We studied the case of Hexagon who acquired Leica Geosystems after a bidding battle against Danaher in 2005. Since Hexagon ended up paying a relatively high premium of 51.4% to Leica shareholders, the transaction appears illustrative to test for a positive return from a Hexagon shareholder’s perspective. If Leica’s market value were equal to the value it represents to Hexagon, the premium paid would be a good measure of the synergy benefits Hexagon expects. However, as broker targets suggest and our DCF valuation confirms, Leica shares were undervalued by the market in the period preceding the takeover announcements. Our thorough analysis will demonstrate that, as a result of Leica’s undervaluation prior to takeover announcements and due to the substantial synergy benefits that could be created through the combination, Hexagons takeover of Leica Geosystems was indeed creating shareholder value for both Hexagon and Leica shareholders.
Contents
1 Introduction
1.1 Background
1.2 Objective
1.3 Structure
2 Theories
2.1 The Concept of Shareholder Value
2.2 Distinguishing Between Mergers and Acquisitions
2.3 Theories on Corporate Takeovers
2.3.1 Increasing Shareholder Value
2.3.1.1 Synergies
2.3.1.2 Efficiencies
2.3.2 Hubris – The Winner’s Curse
2.3.3 Agency Problems
2.3.3.1 Free Cash Flow Hypothesis
2.3.3.2 Market for Corporate Control
3 The Swiss M&A Landscape
3.1 The Swiss Market in Year 2005
3.1.1 Favorable Swiss Market Performance
3.1.2 High M&A Transaction Volumes
3.2 Premia Analysis
3.3 What Are Drivers for M&A?
3.4 Unsolicited Takeover Offers in Switzerland
4 In Search of Shareholder Value
4.1 Introduction
4.2 The Companies Involved
4.2.1 Leica Geosystems
4.2.2 Hexagon
4.2.3 Danaher Corporation
4.3 Transaction Overview
4.4 Assessing the Return to Hexagon Shareholders
4.4.1 Broker Targets
4.4.2 Comparables Analysis
4.4.3 Leica DCF Valuation (Stand-Alone)
4.4.3.1 Introduction
4.4.3.2 Method
4.4.3.3 Derivation of the Parameters
4.4.3.4 Results
4.4.4 Leica DCF Valuation (Incl. Synergies)
4.4.4.1 Method
4.4.4.2 Result
4.4.5 Assembling the Pieces: Valuation Summary
4.4.6 How Did the Market React?
5 Conclusion
Objectives and Topics
The primary objective of this thesis is to analyze the corporate takeover of Leica Geosystems by Hexagon AB to determine whether the transaction successfully enhanced shareholder value for the acquiring firm. By investigating the financial rationale, market conditions, and valuation discrepancies, the study evaluates the success of the acquisition through a discounted cash flow (DCF) framework and market reaction analysis.
- Theoretical foundations of shareholder value and corporate takeover motives.
- Evaluation of the Swiss M&A market landscape in 2005.
- DCF valuation of Leica Geosystems on a stand-alone basis and including synergies.
- Analysis of market reactions and the distribution of value created by the takeover.
Excerpt from the Book
1.1 Background
“The challenge is to value synergy benefits, both from operational and financial synergies. [...] However, research has demonstrated that companies are invariably over-optimistic when estimating synergy benefits, notably on the revenue side.”
UBS Investment Research [18], p. 3.
Today, mergers and acquisitions (M&A) have quite a substantial impact on the market and the ownership structures. They vary in terms of transaction size, sector, and geographic region, all ranging from a small family business up to EUR 42.5 billion announcements such as the public tender offer for Endesa by Gas Natural in 2005. One thing they (usually) do have in common is the expected creation of shareholder value. However, previous studies suggest that a large percentage of corporate acquisitions does not create shareholder value, yet, is value destroying. Reasons include over-estimation of synergies that translate into large premia.
Given the recent rise in M&A activity in Switzerland, a revisit of this topic is highly relevant. This because good markets create competition for sought-after assets and a sense of “affordability” among management which increases the likelihood of over-paying and destroying shareholder value.
Summary of Chapters
1 Introduction: This chapter outlines the background, defines the objective of analyzing the Hexagon-Leica takeover, and describes the thesis structure.
2 Theories: This section covers the fundamental concepts of shareholder value, differences between mergers and acquisitions, and various academic theories regarding takeover motives.
3 The Swiss M&A Landscape: This chapter provides an overview of the 2005 Swiss market environment, including performance, transaction volumes, and an analysis of premia and unsolicited takeover offers.
4 In Search of Shareholder Value: This main section details the companies involved, the transaction timeline, and conducts an in-depth DCF valuation and market reaction analysis to determine if shareholder value was created.
5 Conclusion: The final chapter summarizes the findings, confirming that the Hexagon takeover was indeed value-creating after accounting for synergies and fair fundamental valuation.
Keywords
Shareholder Value, Mergers and Acquisitions, M&A, Corporate Takeover, Hexagon, Leica Geosystems, Discounted Cash Flow, DCF, Synergies, Valuation, Agency Problems, Market for Corporate Control, Swiss Market Index, Premium Analysis, Share Price Reaction
Frequently Asked Questions
What is the core focus of this thesis?
The work investigates the corporate takeover of Leica Geosystems by Hexagon AB to determine if the acquisition resulted in genuine shareholder value creation for the acquiring firm's investors.
What are the central thematic fields addressed?
Key topics include corporate finance theory, M&A motives, valuation techniques, market efficiency, and specific analysis of the Swiss M&A landscape during 2005.
What is the primary research objective?
The objective is to evaluate whether the high premium paid by Hexagon was justified by synergy benefits and to assess the success of the acquisition through a rigorous financial valuation.
Which scientific methodology is employed?
The study utilizes a Discounted Cash Flow (DCF) analysis, a comparable company analysis (comps), and an examination of stock market price reactions relative to the Efficient Market Hypothesis (EMH).
What does the main part of the thesis cover?
The main part focuses on the practical application of valuation models, comparing the stand-alone value of Leica with the value including projected synergies and contrasting these with market offers.
Which keywords characterize this paper?
Relevant keywords include Shareholder Value, M&A, Corporate Takeover, Discounted Cash Flow, Synergies, Valuation, and the specific companies involved (Hexagon, Leica Geosystems).
Why was the Leica Geosystems case selected for this study?
Leica was chosen because it represents a high-profile, synergy-based takeover in Switzerland in 2005, characterized by a significant premium and competitive bidding from Danaher.
What was the conclusion regarding the value created by Hexagon?
Based on the calculations, the author concludes that the acquisition was indeed value-creating for Hexagon shareholders, despite the substantial initial premium paid.
- Citation du texte
- Patrick Jungo (Auteur), 2006, Assessing the Creation of Shareholder Value - The Case of Leica Geosystems, Munich, GRIN Verlag, https://www.grin.com/document/52913
