Documente Academic
Documente Profesional
Documente Cultură
Mergers, Acquisitions,
& Other Restructuring
Activities
If you give a man a fish, you feed
him for a day. If you teach a man
to fish, you feed him
for a life time.
Lao Tze
Course Layout: M&A & Other
Restructuring Activities
Part I: M&A Part II: M&A Part III: M&A Part IV: Deal Part V:
Environment Process Valuation & Structuring & Alternative
Modeling Financing Strategies
Cross-Border
Transactions
Course Learning Objectives
Spurred by
Entry of U.S. into WWI
Post-war boom
Boom ended with
1929 stock market crash
Passage of Clayton Act which more clearly
defined monopolistic practices
The Conglomerate Era (1965-1969)
Assumptions: Assumptions:
Price = $4 per unit of output sold Firm A acquires Firm B which is producing
Variable costs = $2.75 per unit of output 500,000 units of the same product per year
Fixed costs = $1,000,000 Firm A closes Firm Bs plant and transfers
Firm A is producing 1,000,000 units of output per production to Firm As plant
year Price = $4 per unit of output sold
Firm A is producing at 50% of plant capacity Variable costs = $2.75 per unit of output
Fixed costs = $1,000,000
Profit = price x quantity variable costs Profit = price x quantity variable costs
fixed costs fixed costs
= $4 x 1,000,000 - $2.75 x 1,000,000 = $4 x 1,500,000 - $2.75 x 1,500,000
- $1,000,000 - $1,000,000
= $250,000 = $6,000,000 - $4,125,000 - $1,000,000
= $875,000
Profit margin (%)1 = $250,000 / $4,000,000 = 6.25% Profit margin (%)2 = $875,000 / $6,000,000 = 14.58%
Fixed costs per unit = $1,000,000/1,000,000 = $1 Fixed costs per unit = $1,000,000/1.500,000 = $.67
Key Point: Profit margin improvement is due to spreading fixed costs over more units of output.
1Margin per $ of revenue = $4.00 - $2.75 - $1.00 = $.25
2Margin per $ of revenue = $4.00 - $2.75 - $.67 = $.58
Illustrating Economies of Scope
Pre-Merger: Post-Merger:
Key Point: Cost savings due to expanding the scope of a single center to
support all 8 manufacturing facilities of the combined firms.
Empirical Findings
Around transaction announcement date, abnormal returns average
Poor strategy
Discussion Questions
1. Discuss whether you believe current conditions
in the U.S. and global markets are conducive
to high levels of M&A activity? Be specific.
2. Of the factors potentially contributing to current
conditions, which do you consider most
important and why?
3. Speculate about what you believe will happen
to the number of M&As over the next several
years in the U.S.? Globally? Defend your
arguments.
Application: Xerox Buys ACS
In late 2009, Xerox, traditionally an office equipment manufacturer, acquired Affiliated
Computer Systems (ACS) for $6.4 billion. With annual sales of about $6.5 billion, ACS
handles paper-based tasks such as billing and claims processing for governments and
private companies. With about one-fourth of ACS revenue derived from the healthcare and
government sectors through long-term contracts, the acquisition gives Xerox a greater
penetration into markets which should benefit from the 2009 government stimulus
spending and 2010 healthcare legislation. There is little customer overlap between the two
firms.
Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into
services achieved limited success due largely to poor management execution. While some
progress in shifting away from the firms dependence on printers and copier sales was
evident, the pace was far too slow. Xerox was looking for a way to accelerate transitioning
from a product driven company to one whose revenues were more dependent on the
delivery of business services.
More than two-thirds of ACS revenue comes from the operation of client back office
operations such as accounting, human resources, claims management, and other
outsourcing services, with the rest coming from providing technology consulting services.
ACS would also triple Xeroxs service revenues to $10 billion. Xerox chose to run ACS as a
separate standalone business.
Discussion Questions:
1. What alternatives to a merger do you think they could have considered?
2. Why do you think they chose a merger strategy? (Hint: Consider the
advantages and disadvantages of alternative implementation strategies.)
3. How are Xerox and ACS similar and how are they different? In what way will their
similarities and differences help or hurt the long-term success of the merger?
4. How might the decision to manage ACS as a separate business affect realizing the full
value of the transaction?
Things to Remember
Motivations for acquisitions:
Strategic realignment
Synergy
Diversification
Financial considerations
Hubris
Common reasons M&As fail to meet expectations
Overpayment due to overestimating synergy
Slow pace of integration
Poor strategy
M&As typically reward target shareholders far more than bidder
shareholders
Success rate of M&A not significantly different from alternative ways
of increasing shareholder value