Mergers & Acq

MERGERS AND ACQUISITIONS AS A BUSINESS STRATEGY IN SOUTH-EAST ASIA
By Nicholas R. H. Bloy
INTRODUCTION TO SPEAKER
Nicholas R. H. Bloy Partner The Boston Consulting Group Mr. Bloy, who founded the practice of The Boston Consulting group in South-East Asia in 1990, is Head of BCGs Asia (non-Japan) Marketing Committee, Head of BCGs Asia (non-Japan) Energy and Utilities practice and Head of BCGs Kuala Lumpur office. He started in consulting in 1987 and has worked in Boston, London, Munich, Sydney, Hong Kong and Kuala Lumpur. Mr. Bloy is also a visiting lecturer at the London School of Economies. Since the beginning of the 90s Nick has spent significant time in Malaysia advising private Malaysian conglomerates, state-owned entities and multinational companies on issues of direction and performance. He has worked on a broad range of strategic issues in Europe, the United States, Latin America and Asia. This work has covered industry sectors such as oil & gas, consumer goods, cement, energy, utilities, engineering, media, airline, steel, construction materials, financial services, printing, food & drinks and telecommunications. Project assignments have included areas of process reengineering, strategy development, portfolio restructuring, diversification strategy, mergers and acquisitions, new product development, organisational effectiveness, value-based management and privatisation. Prior to going the business school, Mr. Bloy worked with Citicorp. Mr. Bloy obtained an MBA with Deans List Honours from INSEAD and a BA with Honours in French Language and Literature from University College of London. Kindly direct all questions/enquiries to: The Boston Consulting Group Level 27, Menara IMC, 8 Jalan Sultan Ismail 50250 Kuala Lumpur Tel: 603 - 238 5770 Fax: 603 - 238 5784
SDV/KLP-Mergers&Acquisitions-15Apr98-NB-oel-KLP
-2-
M&A ACTIVITY - A HUGE AND GROWING PHENOMENON However, Asia Lags

US
$Bn CAGR = 27.6% $Bn CAGR = 7.9%
Europe
$Bn
Asia
507
CAGR = 9.2%
968 677 491 355 215 249 156 162
SEA
313 344 229 182 154 155 176

43 19 17 23 17 61 57 35
1990
1991
1992
1993
1994
1995
1996
1990
1991
1992
1993
1994
1995
1996
1990
1991
1992
1993
1994
1995
1996
Global M&A deal volume has grown at 28% p.a. since 1992(1)
(1) Fortune magazine Source: Securities Data Corp; Asia Inc.
1997
1997
1997
-3-
TRANSACTION SIZE IS INCREASING DRAMATICALLY

Deal Value (US $bn)
80
60 42 34 26 23 14.3 36 22 33 30
KKR/ Mitsui/ Glaxo/ Mitsubishi Sandoz/ Ciba RJR Taiyo Wellcome Bank/ BOT Nabisco Kafe Late 1980s 1995 1996
Bell Worldcom/ Atlantic/ MCI Nynex 1997
UBS/ Travelers/ Banc One/ Natious First Bank/ Bank SBC Citicorp Chicago America 1 Q 1998
Financial Services Telecoms Pharmaceuticals Others Source: Asian Wall Street Journal; securities Data company; BCG analysis
-4-
ONLY FOUR INDUSTRIES ACCOUNT FOR ~55% OF TRANSACTION VALUE

Top 100 Deals From 1995 to 1997 (1)
CrossBorder
Domestic (estimates)
Deal Value (US $bn)
Financial Services
Pharmaceuticals
Telecom
Defence/ Aerospace
Other
(1) Top 100 deals annually, cumulative total from 1995 to 1997; estimates for domestic deals based on split of Top 10 deals 1990-96 Source: Securities Data Corp; BCG estimates and analysis
-5-
HOWEVER, ASIAN MIX MORE SKEWED TO FINANCIAL SERVICES

Top 50 Asian M&A Deals(1)
CrossBorder
Domestic
Deal Value (US $bn)
Financial Services
Telecom
Transportation
Other
(1) Top 50 deals annually, cumulative total from 1996 and 1997 Source: Asia, Inc.; BCG analysis
-6-
DIFFERENT TYPES OF DEAL AND VALUE LOGIC
Acquirer/Acquire Relationship Overlapping businesses
Source of Value
International Examples Boeing/ McDonnel Douglas Glaxo/Wellcome
Malaysian Examples RHB/Sime
Geographies Customers Product lines
Cost reduction Process enhancement Throughput improvement
Finance Companies
Complementary businesses Geographic expansion Product line extension New customer segments Different part of value chain Transfer of capabilities to different business
Revenue growth Asset growth Process enhancement
Salomon/Smith Barney
Commerce/MBf
Renong/ Cima Hanson Trust/Numerous
-7-
EXAMPLES FROM THE BANKING INDUSTRY
-8-
BANK MERGERS REDUCE COSTS BY AVERAGE OF 15%

BCG Experience
Cost Savings (% of combined NIE)(2)
Other Sources(1)
Cost Savings (% of combined NIE)(2)
17.5
Other HR Sales-Mktg Central Opns
15.0 1.5 1.0
0.5 1.2 1.6 3.5 10.0
12.0
Treasury Trust Corporate Retail
1.0 3.5
8.0
IT Development and Operations
5.3 5.0
Operations and Systems
4.5
2.0 3.5
Branch Network/ Customer Service

Year 1 Year 2
5.5
Other Support Areas
Slow Year 1 Fast Month 6

(1) (2)
Year 2 Month 12
Year 3 Month 18
Year 4 Month 24
Year 3
First Manhattan; Chemical - MHT experience, BCG analysis NIE: Non Interest Expense -9-
MORTGAGE SERVICING SHOWS SCALE BENEFITS

Mortgage Servicing (Unit Cost Per Loan)
Direct Cost/Loan 1,000 Serviced ($US)
100
Slope = 89%
10 1,000
10,000
100,000
1,000,000 Number Of Loans Serviced
Note: Log scale Source: Inside Mortgage Finance; BCG analysis

-10-
THERE ARE SIGNIFICANT SCALE EFFECTS IN CASH HANDLING

Cash Handling Scale (FTE Cost Per Cash Volume)
FTEs Per Bn Counted (Log Scale)
Slope = 81%
Annual Volume Of Cash Centre (Log Scale)

Source: BCG client experience
-11-
IT DATA CENTRES SHOW SCALE EFFECT

Data Processing Example : USA Example of MVS(1) Environment
Unit Cost (US$K/MIPS)
1000
Slope = 89%
100
10 1 10 20 100 1000
Data Centre Size (MIPS)

(1) MVS: IBM Operating System for Mainframes, typical Legacy System Source: BCG experience
-12-
IT IS CHEAPER PER ACCOUNT TO PROMOTE LARGER BRANDS
Brand Advertising (Index, UK Retail Banks, 1995)

Index of brand adspend per current account customer 100
10

Slope = 65%

1 0.1
10 Index of number of current accounts
Note: Log scale Source: Mori; MEAL; BCG analysis

-13-
COST SAVINGS POTENTIAL VARIES BY TYPE OF COST AND MERGER PROXIMITY

Estimated Non-Interest Expense Savings Type of Mergers Area of the Bank In-Market Contiguous 10% 25% 50% 20% 40% 25% 25% Out-of-Market 5% 15% 40% 15% 15% 10% 15%
Branches
Operations Systems Trust Indirect Overhead Other Weighted Average
20% 30% 55% 25% 60% 30% 35%
Source: Bottom Line Banking; First Manhattan Consulting Group

-14-
WHAT HAPPENED TO THE VULTURES OF 1982?

The 26 Most Acquisitive Of The Top 250 US Banks Of 1982
26 vultures in 1982 12 turkeys (stock prices ~15% lower than their peer group) 9 stagnant banks 8 dead ducks (stock prices ~25% lower than their peer group) 12 banks were acquired 6 eagles (stock prices higher than their peer group) 5 super regionals
1982 - 1984
1982 - 1989
1982 - 1989 Annual asset growth

1982 - 1989 Total stock price growth
Source: BAI
Top 250 banks

7.5% 28% 9.5%
24%
236%
205%
-15-
IN THE SHORT RUN, VALUE TRANSFERRED TO THE TARGET SHAREHOLDERS

Cumulative Abnormal Returns* (%, 1982-1987)
15 10 5 0 (5) (10) days (15) 15 before
Target Acquirer
4 days before
2 days before
1 day before
Day of announcement
*Cumulative daily market returns (capital gains and dividends) in excess of the total market return (Wilshire Index -1982-87; NYSE Composite Index - 1995) Source: SNL Securities (19 Megamergers >$500m deal value); Journal of Financial Services Research 10/89; BCG analysis
-16-
OVER THE LONG RUN, SOME OF THE LOST VALUE IS CLAWED BACK
Cumulative Stock Price Performance*- Major US Mergers** (%, 1991-96)
120
100
80 Acquiring Entity Merged Entity
60
40
20
0 2 Years Prior 1 Year Prior Announcement Year 1 Year Post 2 Years Post 3 Years Post
*Annual stock appreciation versus SNL Bank Index appreciation Excess ReturnT = { [Stock priceT - Stock PriceT-1] X100/Stock PriceT-1} - { [SNLT - SNLT-1] X100/SNLT-1} **Bank America - Continental, BoA-SecPac, Chem-MHC, Chem-Chase, Comerica-Manuf National, First Chicago-NBD, First Union-First Fidelity, Fleet-BoNE, Keycorp-Society, NCNB-C&S-Sovran, Society-Ameritrust, Wells-First Interstate Source: SNL Securities; BCG analysis
-17-
THE EUROPEAN EXPERIENCE IS EVEN MORE MARKED(1)

(Index, Base = 1 at 12 Months Prior To Announcement)
1.1
0.9
Announcement month
0.8
0.7 -12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60
Note: Data not available for all mergers for whole period (-12-60) (1) Performance relative to relevant bank index for Banco: Central-Banco de Vizcaya, Banci di Roma - Banco di Spirito, ING, ABN-AMRO, Lloyds - TSB, Den Danske - Hadlesbank - Provensbanken Source: Various European Stock Exchanges; Tradeline
-18-
MOST MAJOR ACQUIROR STOCK PRICES DROP RELATIVE TO THEIR NON-ACQUIRING PEERS
Stock price of 100 acquirors: relative to peer average (%) 90 (peer average = 80 100) 70
60 50 40 30 20 10 0 After 1 year After 2 years After 3 years After 4 years After 5 years After 6 years
Source: BAI
-19-
HALF OF ALL ACQUISITIONS ARE CONSIDERED UNSUCCESSFUL

Tracking Study on US Acquisition Performance Success
52%
272 Acquisitions Failure
48%
Source: Harvard Business School; BCG analysis

-20-
WHY DO ACQUISITIONS FAIL?

BCG Global Survey Top 10 Reasons For Merger/Acquisition Failure
Post-merger integration poorly planned and executed Absense of real strategic fit Paid to high a price Competitor reactions Poor negotiations Inadequate accounting/ legal due diligence Others 30% 28% <20% 78% 64% 55% 54%
Warren Buffet Self-Assessment
The thrill of the chase blinded pursuers to the consequences of the catch Warren Buffet, Berkshire Hathway Annual Report
-21-
MALAYSIAN CONTEXT
-22-
LOW M&A ACTIVITY IN MALAYSIA GIVEN ABSENCE OF WILLING BUYERS AND WILLING SELLERS
Inflated asset value Too expensive to buy Little growth from M&A Few constraints on funding growth No need to sell
High liquidity/low cost of capital Equity markets - stock market cap + 35% (1992-1996) Commercial debt - loan growth + 54% CAGR (1992-1996) Real cost of capital (at 50:50) - 7.5%
-23-
BECAUSE HISTORIC MARKET VALUES HAVE BEEN HIGH, LITTLE TRANSACTION ACTIVITY HAS BEEN OBSERVED
Value/Ton of Industrial Commodity Product
Example from Client work
1997 M&A Deal values as % of GDP

%
700 600 500 400 300 200 100 0 1992 1993 1994 1995 1996
Greenfield Cost Market Value
14 12.5 12 10 8 6 4 2 0 US Europe Asia 1.3 5.5
DCF Value
-24-
UNDERLYING M&A DYNAMICS HAVE REVERSED IN MALAYSIA

Liquidity has dried up . . .
RM (billion)
. . . Leading to a realignment of values

Value/Ton of Industrial Commodity Product
900 800 700 600 500
Stock Market Cap Loan Growth Greenfield Cost DCF Value Market Value
Example from Client work
900 800 700 600 500 400 300 200 100 0

1990 1991 1992 1993 1994 1995 1996 1997 1998
400 300 200 100 0

1992 1993 1994 1995 1996 1997
1998
-25-
DIFFERENT MIX OF TRANSITIONS IN MALAYSIA DEPENDING ON COMMERCIAL SECTOR AND NATURE OF OWNERSHIP
Domestic
Transactions
Cross-Border
Financial Services Telecoms Timber Cement/Steel/Other Industrial Commodities Property
Conglomerate Break ups
-26-
ORGANISATIONAL PORTFOLIO AND OPTIONS
Market Position
Divest
Performance Improvement Plan
Acquirer Search
Value Acquire
Build
Business Unit Strategy Products Customers Delivery systems Capabilities Organisation Processes Etc
Acquisition Search / Prioritisation Strategic Due Diligence Valuation Negotiation Accounting / Legal Due Diligence
Merchant Banks, Accountants, Lawyers Strategy Consultants and/or Merchant Banks
Transaction Mechanisms Post-merger integration
Strategy Consultants
-27-
CAVEAT EMPTOR
Extraordinary opportunities for cash-rich companies . . .
. . . but
M&A is a subset amongst a firms strategy options

M&A is risky M&A requires professional advice strategy consultants merchant banks lawyers accountants
-28-

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MERGERS AND ACQUISITIONS AS A BUSINESS STRATEGY IN SOUTH-EAST ASIA

M&A ACTIVITY - A HUGE AND GROWING PHENOMENON However, Asia Lags

968 677 491 355 215 249 156 162

313 344 229 182 154 155 176

TRANSACTION SIZE IS INCREASING DRAMATICALLY

Bell Worldcom/ Atlantic/ MCI Nynex 1997

ONLY FOUR INDUSTRIES ACCOUNT FOR ~55% OF TRANSACTION VALUE

Deal Value (US $bn)

HOWEVER, ASIAN MIX MORE SKEWED TO FINANCIAL SERVICES

Deal Value (US $bn)

DIFFERENT TYPES OF DEAL AND VALUE LOGIC

Acquirer/Acquire Relationship Overlapping businesses

International Examples Boeing/ McDonnel Douglas Glaxo/Wellcome

Malaysian Examples RHB/Sime

Geographies Customers Product lines

Cost reduction Process enhancement Throughput improvement

Revenue growth Asset growth Process enhancement

Renong/ Cima Hanson Trust/Numerous

EXAMPLES FROM THE BANKING INDUSTRY

BANK MERGERS REDUCE COSTS BY AVERAGE OF 15%

15.0 1.5 1.0

0.5 1.2 1.6 3.5 10.0

Treasury Trust Corporate Retail

Operations and Systems

Branch Network/ Customer Service

Other Support Areas

Slow Year 1 Fast Month 6

MORTGAGE SERVICING SHOWS SCALE BENEFITS

1,000,000 Number Of Loans Serviced

Note: Log scale Source: Inside Mortgage Finance; BCG analysis

THERE ARE SIGNIFICANT SCALE EFFECTS IN CASH HANDLING

Annual Volume Of Cash Centre (Log Scale)

IT DATA CENTRES SHOW SCALE EFFECT

Unit Cost (US$K/MIPS)

Data Centre Size (MIPS)

IT IS CHEAPER PER ACCOUNT TO PROMOTE LARGER BRANDS

Brand Advertising (Index, UK Retail Banks, 1995)

10 Index of number of current accounts

Note: Log scale Source: Mori; MEAL; BCG analysis

COST SAVINGS POTENTIAL VARIES BY TYPE OF COST AND MERGER PROXIMITY

20% 30% 55% 25% 60% 30% 35%

Source: Bottom Line Banking; First Manhattan Consulting Group

WHAT HAPPENED TO THE VULTURES OF 1982?

1982 - 1989 Annual asset growth

Top 250 banks

IN THE SHORT RUN, VALUE TRANSFERRED TO THE TARGET SHAREHOLDERS

80 Acquiring Entity Merged Entity

THE EUROPEAN EXPERIENCE IS EVEN MORE MARKED(1)

HALF OF ALL ACQUISITIONS ARE CONSIDERED UNSUCCESSFUL

272 Acquisitions Failure

Source: Harvard Business School; BCG analysis

WHY DO ACQUISITIONS FAIL?

Warren Buffet Self-Assessment

1997 M&A Deal values as % of GDP

14 12.5 12 10 8 6 4 2 0 US Europe Asia 1.3 5.5

UNDERLYING M&A DYNAMICS HAVE REVERSED IN MALAYSIA

. . . Leading to a realignment of values

900 800 700 600 500 400 300 200 100 0

400 300 200 100 0

Financial Services Telecoms Timber Cement/Steel/Other Industrial Commodities Property

Conglomerate Break ups

ORGANISATIONAL PORTFOLIO AND OPTIONS

Performance Improvement Plan