Corporate Life Cycle, IPO, M&A, Chapter11/7 Bankruptcy

JWI 531 Financial Management II, week6 summary, 5/18/13

Learning more about the corporate life cycle, pros & cons of IPOs, M&A, Private equity investment, Chapter11/7 bankruptcy made this another exciting week. I loved the lecture for the immense clarity it brought to these concepts. Increasingly I am gaining confidence in finance from the solid foundation I am getting here. I know I can build an intelligent financial infrastructure for my enterprise.

Great week. Takeaways below.
Dr DP

JWI 531 Financial Management II, week6 summary, 5/18/13

I. Cycle of Change
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Change is the norm in business world
Companies are constantly transforming
new opportunities lie in every turn
Change happens.
Adapt and thrive.

II. The corporate life cycle - Adulthood to the End of Life
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Mature Organization Stage
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Early stage decisions affect capital structure dramatically
Mature organizations expected to produce consistently profitable growth
- major financing events predictable
- additional capital through Debt and/or Equity financing from private parties & financial institutions
- culmination: IPO

III. IPO
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Size: 100s of Billions
Register company's equity on exchanges such as Nasdaq or NYSE
Equity becomes public equity - anyone can now buy or sell shares of company's stock
IPO filing time must be carefully and strategically chosen - # IPOs/month correlates to S&P500 (Bespoke Investment Group, 2010)
Offer the company's shares to the market ONLY when there is appetite for stocks

IPOs Pros
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Rewards risk-taking of early-stage investors
Provides massive infusion of capital for long term growth

IPOs Cons
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Public shareholders demand significant ROE, consistent growth, structured strategic vision
Complex process
Numerous regulatory hurdles
>50% of IPOs decline in price within first 12 months
Significant compliance costs
Restrictions on liquidation of owner's stake
Financial statements available publicly to competitors and potential suitors

Alternatives to IPO
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Acquisitions
Debt
Cashflow from operations

IV. M&A
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Genetic mutation that can push a company in a new direction
Mergers: companies look to form strategic relationships to generate competitive advantage
Acquisitions: Bigger firms acquire smaller firms (eg. competitors) to expand, enhance product offering and strengthen strategic position
M&A: business owners can liquidate stakes and move on
M&A is correlated with health of economy ie S&P500
Straight cash offerings, stock, options, stock swaps
M&As fail >50% of the time due to poor strategy, culture clash, integration roadblocks
Key to plan ahead for bumps in the road

V. Private Equity Investment
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size: $ 2.5Trillion
Hands-on style of financing
Comes towards end of life of business
Investors take over Ownership in a privately held business, pay a healthy premium, take over operations, turn the business around or strip it apart or sell off assets
helps a firm in economic distress when market is unwilling to offer financing
investors get intimately involved in investments, day to day operations, efficiency optimizing, reaping benefits
Advantages: no public registration, financial and operations secrets can be kept inside

VI. Chapter11 Bankruptcy: End of Line
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death of equity ownership at the point in time
all other possibilities tried and exhausted: selling at discount to a competitor, attracting new investors and owners, offering individual assets for sale
offers breathing room to restructure an organization's obligations to debt holders - company and financiers work it out
some companies recover (eg Airline industry), most vanish

VII. Chapter7 Bankruptcy
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Liquidate the company
company's assets are frozen
trustee appointed to oversee process
inventory of assets taken and distributed to seniors: debt holders, senior creditors

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DQ Exercise
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I. Why M&A
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M&A is the fastest, most powerful tool a company can use to change its competitive game. It adds real fire power to growth arsenal. M&A gives twice the talent to pick from.


II. Potential Benefits of Mergers & Acquisitions:
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Allows a firm to obtain in a single transaction
- capabilities or resources that would take years to develop
- reduced costs through consolidation and eliminatiion of redundant positions and activities
- increase in firm's market share & competitive advantage from greater size

III. Problems with M&A
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Majority of M&As fail (http://www.businessweek.com/managing/content/jun2010/ca20100622_394659.htm)
Benefits of M&A are many times not realized.
It feels like death to most people in the acquired organization, with lives turned upside down (Welch, 2006). This is why only the most experienced M&A experts should be selected for the job and tasked with the responsibility of completing the merger successfully from start to finish.

IV. How to avoid common traps in M&A and make a successful merger or acquisition?
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1. Check if the same business result can be achieved at lower risk with a partnership or organic growth.
2. Does it make strategic sense and further the strategic objectives of the firm ?
    Is this acquisition aimed at getting quick results that organic growth cannot match ?
    Is this to Acquire a competitor?
    Is this to move quickly into an area where you don't currently compete?
3. If acquisition is justified, are clear criteria for selection of target company set ? How will the new company look like? (businessweek.com, 2010)
4. Does the acquisition create value? Does it extend the capability of the firm ? Does it have scalable IP? Can the acquired organization take advantage of the firm's strengths to grow rapidly ? (IBM annual report, 2012)
5. Before starting the merger process, stay aware of the common traps in M&A (Welch, 2005)
Sin#1 - Beware of merger of equals. Anticipate people dueling over who is really in charge. Identify roles and responsibilities ahead of the acquisiton.
Sin#2 - Cultural fit based on values of the two companies is as important as strategic fit that is based on products, technologies and numbers. Some cultures don't combine, they combust. Cross-cultural differences in a merger are usually not addressed until it is too late.
Sin#3 - Reverse hostage situation
Due to deep concessions given, the acquired firm is in charge in the end. Don't pay too much for something you don't own.
Sin#4 - Being afraid rather than going boldly
Complete the integration process within 90 days of closing (eg. Lou Gerstner at IBM managed transitions successfully by drawing attention to the firm-wide priorities of the 90-days). Do not let uncertainty morph into inertia or fear.
Sin#5 - Conqueror syndrome
Don't march into new territory and install your people everywhere.
For new and expanded firm to survive, it needs the best team - you may need to let go of some of your own.
Sin#6 - Paying too much
Beware of deal Heat that comes from overheated desire.
Don't get caught in the negotiation frenzy fanned by competitive bidders and investment bankers.

6. Before the merger, consider the risks you are about to take (JWI 540, Week8, Lecture1)
(i) The people in the acquired firm could prove difficult to manage
(ii) The people in the acquired firm may be used to different objectives

To counter the risks and ensure a successful merger & acquisition
(i) Manage actively
(ii) Have clear and shared goals with well-defined targets
(iii) Have clearly defined and quantified benefits supported by strong business rationale
(iv) Monitor progress - Explicit metrics and detailed reporting must be used to ensure targets are met, problems are resolved quickly and effectively.
(v) Create and encourage formal and informal connections between the two firms
Provide multiple channels of communication about both opportunities and problems.
Ensure clear accountability so there is never any doubt about who is in charge and where decisions will be made.
(vi) Place qualified managers chosen from both firms - It is vital to select, prepare, support, reward qualified managers. Wisdom to know what not to do - and not doing it - is among the most valuable contributions of a strategic manager (JWI 540, Week8, Lecture1)
(vii) Manage expectations across both firms and encourage a learning mindset

7. During the merger, keep the following four key factors in mind.

(i) Pace:
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Some acquisition situations will reward the swift; but in some cases, rushing with deal heat can hurt. Consider your Assumptions and frame of mind - You are probably thinking that the deal must get done and quickly. You may even be afraid that rivals may swoop in and snatch away your target. You have a bias for action and measure your effectiveness by how fast you can get the deal done. However, moving forward too rapidly can result in a due diligence process that fails to produce information that would be helpful in deciding whether to go forward with an acquisition. Focus instead on the spirit of discovery-driven strategy: how quickly can you discover whether there is any future in this deal ?

If there is value in the acquisition, move the process forward. But, as a merger may represent a strategic shift for the organization, think carefully about fundamental changes needed to realize the full strategic potential of the acquisition. Then rush to integrate the firms within 0 to 90 days of closing, to capture advantages, reduce uncertainty, fear, low morale and inertia in minds of people.

On the other hand, if the value of acquisition is inadequate, move on and explore other opportunities.

(ii) Power:
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Get with the top leaders of the firm you are acquiring and read the power bases in your respective firms. Senior leaders from both sides should consider and discuss how conflicts will be resolved, how decisions will be made and how ideas will be assessed. Simply assigning job titles and agreeing on formal job definitions is not enough. Look beyond the organizational charts - many decisions about resources and agendas do not fall into one person's job domain.

In every firm, informal power network influences key decisions. Create a power map of the new organization - to evaluate options, explore opportunities, and investigate financing.

Formally or informally, where will key strategic decisions be made ?
Who will make staffing and investment decisions post-merger ?
Who will control scarce resources and key assets?

Do not end up arguing endlessly about whose systems and culture to use.
Make the leadership call early on, clarify who is in charge, take the pain, get the transition over with fast, and don't worry about stepping over toes of people. Err on side of speed rather than being too sensitive about stepping on toes (Welch, podcast, JWI 540, Week8)

(iii) Information:
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To reduce anxiety, avoid miscommunication and increase trust in the firm, provide information to the employees of the firms, before, during and after the acquisition. Messages are often complicated; information cannot always be shared openly. Different audiences need to get different information at different times and in different formats.

Common errors in this area are: Sharing too much too soon or too little too late.
Define an information sharing process that works for the firm. Develop good measures and feedback around the information sharing to ensure same problems do not recur in future acquisitions.

(iv) People:
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People are stretched thin before, during, after an acquisition. Demands of integration come on top of regular work. New processes need to be learned and new tasks mastered. Most people are on edge emotionally, struggling to adapt to changes, worried about losing their jobs. This is why the following people management challenges need to be handled with care:
- match right people in right jobs in the new organization to build the skills needed to exploit the strategic advantage an acquisition creates.
- Prepare to face resistance from many people unhappy with the changes.
- Face the unpleasant task of deciding whom to let go and also deal with emotions of those who go and those who stay.
- Balance the needs of the top 20% versus the middle 70%

V. Examples of M&A successes & failures
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AOL/TimeWarner - largest M&A disaster ever. AOL purchased Time Warner for $182 Billion in 2000. The merger was reduced to 1/7th of its value and AOL was spun-off in 2009.

Tata/Jaguar - Acquisition allowed Tata access to world class engineering talent with which the firm developed a winning Range Rover product for growing markets such as India and China. Tata stock selling at the higher ever value today.

References

Welch (2005), Winning

http://www.businessweek.com/stories/2006-10-22/the-six-sins-of-m-and-a

http://www.tutor2u.net/blog/index.php/business-studies/comments/6-essential-ma-cases-tata-group-buys-jaguar-land-rover