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
****
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
**********
Rewards risk-taking of early-stage investors
Provides massive infusion of capital for long term growth
IPOs Cons
**********
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
********************
Acquisitions
Debt
Cashflow from operations
IV. M&A
*********
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
*****************************
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
***************************************
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
*************************
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
********************
I. Why M&A
***********
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:
**************************************
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
*********************
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?
*********************************************************************
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:
*******
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:
**********
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:
*************
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:
*********
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
****************************************
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