The PPT About The Financial Decision Making----4
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Lesson9CreatingaBusinessPlan.pptxMN7029 Week 4.3
M&A & International Business
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
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Week 4.3 – Learning Objects
Identify the main reasons why a company will undertake M&A;
Discuss the legal forms of a takeover;
Consider methods for valuing shares;
Discuss what a business needs to consider when expanding overseas
Identify the key components of a business plan;
Understand what help is available.
Why did Facebook buy Instagram
Two videos to introduce M&A – ten years ago but still very relevant. Key issues to draw out:
$1bn acquisition – before Instagram made any profit, only 8 employees and had only raised $7.5m previously from angel investors and VC
Strategic – Instagram made no money – Facebook was lagging behind in mobile engagement
Facebook going public – money for investment for growing the business, Facebook shares could be used as currency to buy the business
Acquisition of customers
“Acquisition” of the Instagram team
Backdoor into Twitter
Eliminate the threat of Instagram, but kept as a separate brand
Reputation – did customers like this? Facebook had a different profile to Instagram users.
The acquisition was a mixture of cash and stock – i.e. owners of Instagram received Facebook shares
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What is a Merger/Acquisition
“Where two businesses combine this can take the form of either a merger or takeover”
Merger usually describes where two businesses are a similar size, takeover tends to refer a larger company acquiring control of a smaller business.
Structurally this involves one company acquiring the shares (ownership) of another business, but that is just the start as the businesses will need to integrate to make the merger a success
Explanation of the terms
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Figure 12.2 The rationale for mergers
The economic rational for a merger:
A business has a current present value (we might use different techniques to calculate this)
It’s target also has a value
Combining the two gives a gain which means that the value of the combined business is greater than the sum of its parts (therefore it creates an increase in shareholder wealth)
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Figure 12.3 Motives for mergers that enhance shareholder wealth
These are some of the wealth enhancing motives that can create an enhances business value following a merger
Benefits of scale – possibly better negotiation of deals with suppliers as the company becomes larger and more powerful. Also opportunity to reduce costs by combining back office functions, for example one HR team, one finance team
Eliminate competition – does this mean opportunity to charge higher prices, or if competition looks like it might take market share in future e.g. Instagram
Inefficient management – a company may not be performing to its full potential because of inefficient management. Therefore when the acquiring company buys it there may be a chance to fulfil untapped potential
Protect sources of supply – if a company relies on another for its supply e.g. a mobile phone company acquiring the company that supplies microchips
Complementary resources – e.g. combined goods or services that could be sold together to make a more valuable product
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Other motives for mergers
Management interests and goals
Other motives for mergers
Diversification
Undervalued shares
Some other motives are diversification of the business e.g. to reduce risk of concentrating on one industry or product, management desire to build a larger business and if the company feels that the shares are undervalued
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Who benefits?
The main players are:
Shareholders in the bidding business
Managers
Shareholders in the target business
Advisers
Assuming the economic calculations are correct then both sets of shareholders can benefit from a combined business as the value of the combined entity will be higher than the sum of the individual entities. The managers may now be the management team of a larger entity which can mean more responsibility or personal satisfaction – they are also often given a successful merger completion bonus or shares in the new entity. The whole process also needs a large set of advisers – accountants, tax advisers, lawyers which can be very lucrative for the adviser team
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Why do mergers fail?
Integration problems
Management neglect
Overpayment
Hidden problems
However not all mergers are successful – some reasons for failure include:
Overpayment – have the entities miscalculated their respective value or the value of the combined benefits? A miscalculation or incorrect cost of capital may mean that a merger could reduce rather than increase shareholder value.
Integration may not be successful – if the teams have different cultures or values or redundancies are required to achieve merger benefits this can lead to staff dissatisfaction and an impact on company trading. It may also be costly to integrate large computer systems.
A merger can take a huge amount of time and respouirces – there is a danger managers will take their eye of normal trading operations
There may be hidden problems in the company that were not picked up during the process of reviewing the company.
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Do Acquiring Shareholders Benefit??
Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave, MOELLER, SCHLINGEMANN, STULZ, JOURNAL OF FINANCE • VOL. LX, NO. 2 • APRIL 2005
Yearly aggregate dollar return of acquiring-firm shareholders
A video about Kraft takeover of Cadbury and some of the issues around it
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Write down of acquisitions
When companies acquire another company they may be able to account for intangibles such as goodwill. However, they also need to review that value each year
Inflation, poor performance and weakened demand may mean that companies write down their acquisition value and take a hit to their accounts
2021 European Goodwill Impairment Study, Kroll
Successfully implementing a merger
Rapid integration
Incentivising managers
Early planning
Ensuring sales force fully engaged throughout
Retaining talented employees
Awareness of cultural issues
Here are some tips for successful mergers
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Due diligence
May cover an examination of:
Legal obligations
Assets owned
Financial health
Strategic fit
During the merger planning process companies will undertake a due diligence. This is a review of the target to determine its financial health etc etc
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Due diligence (Continued)
May cover an examination of:
Key relationships
Marketing and production
Market prospects
Other issues
The valuation of shares
Methods based on stock market information
Methods based on future cash flows
Methods based on the value of the business’s assets
The main methods include:
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
How do we value a target to decide how much to pay for it? If it is a listed company then the stock exchange provides a price for the company’s shares. However, it is more complicated if it is not listed. We might look at the company’s assets, but the accounts will show the assets at the price they were purchased at minus depreciation so this may not be accurate. It also does not take account of assets that cannot appear in accounts such as internally generated goodwill. Another way is to find a similar company listed on the stock exchange and use their ratios (e.g. earnings per share) to determine the value of a similar but unlisted company. Finally we can use methods based on the present value of future cash flows, just as we learned during the session on NPV of capital asset investments.
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One of the most talked about acquisitions of last year was Elon Musk’s takeover of Twitter.
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How does Twitter make money?
It can be interesting to consider his reasons for the takeover, but first it’s helpful to consider how Twitter makes money – does anyone know?
Answer – advertising and sales of data
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The takeover of Twitter
Video explaining the timeline of the Twitter acqusition
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Twitter performance and accounts
Source Twitter accounts 2021
Twitter has had only 2 years where it made profits – so why would Elon Musk want to buy it?
It’s revenue comes from advertising and data licencing
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Some interesting points…
How was it funded? https://www.reuters.com/markets/us/how-will-elon-musk-pay-twitter-2022-10-07/
The price was $44bn and this was funded party via debt and equity with other investors and his cash from the sale of his Tesla shares
Can he come up with a business model to make Twitter more profitable? Paying for blue ticks?
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I don’t know who this will help, but I feel its my duty to add to the business school syllabus the importance of price negotiation with the famous horror author Stephen King
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Practical Aspects of a Takeover
Company A
Company B
Shareholders of A
Shareholders of B
Company A pays cash to the shareholders of company B in exchange for their shares.
Company A
Company B
Shareholders of A
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Practically for accountants there are three ways a takeover or merger can take place
Firstly Company A pays cash for the shares of company B – therefore the shareholders of B are no longer involved and walk away with cash
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Practical Aspects of a Takeover
Company A
Company B
Shareholders of A
Shareholders of B
2. Company A issues shares to the shareholders of company B in exchange for their shares.
Company A
Company B
Shareholders of A
Shareholders of B
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Secondly Company A gives shares in Company A to the shareholders in Company B in exchange for their shares in Company B, so now both groups of shareholders own the merged companies. This is what happened when Facebook acquired Instagram
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Practical Aspects of a Takeover
Company A
Company B
Shareholders of A
Shareholders of B
3. Company A issues loan stock to the shareholders of company B in exchange for their shares.
Company A
Company B
Shareholders of A
Shareholders of B
Loan stock
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Thirdly, if the company does not have enough cash to buy the shares it can issue a loan note to the original shareholders of company B, so they become lenders rather than owners
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Protections
City Code on Takeovers and Mergers
Competition and Markets Authority
UK sales revenue>£70m
Combined business has 25% of market
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
One of the risk of mergers in that they can damage competition in the market. Theerfore many countries have mechanism that mergers over acertain size need to be approved by a regulatory body. In the UK the CMA need to approve mergers over this size.
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Video on how a VC fund values seed investment if you have time to show the first few minutes
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International Business
I wanted to finish the module with some thought about how the scale of global business can impact on financial decision making
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The Suez Canal
Video about the Suez canal being blocked – ask the class how they think this impacts supply chain and decisions about where to build factories and distribution centres in relation to customers
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When does a business need to consider international issues?
Overseas customer
Payment in a foreign currency
An overseas investor e.g. VC fund
Overseas supplier
Overseas employee
Planned market expansion
Acquisition of an overseas business
Sale to an overseas buyer
These days a business may need to consider international implications from Day 1. These are some of the areas that might be relevant:
An overseas customer – how will the product be delivered? What customs duties are there? Can the customer pay in local currency (if so exchange risk) or do you want them to pay in the company’s home currency (less attractive to customer)
If the business is trying to raise seed funding the first investor may be a foreign VC fund or investor. How does this impact how the business communicates its financial statements? Some US VC funds like to invest in a US company and so will require a change in structure of the company
Overseas supplier – same issues with currency transactions and the supply chain issues e.g. Suez
An employee might live overseas (or want to work overseas e.g. during the pandemic). This has local tax reporting requirements which can be costly and complicated.
Expansion – when you expand into a new territory there can be local complications e.g. it is very difficult to set up a business in China with foreign investors, there can be a lot of red tape, what registrations do you need to make, do you need local sales people, distribution centre. There can be cultural differences e.g. cultural customs in Japan can be unfamiliar to a UK or a US business
Over seas acquisitions or sale – how do you know you can rely on the financial statements? Currency and exchange control issues
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International considerations
Raw materials may only be available from overseas – how am I processing/transporting/storing
Manufacturing close to market reduces transport costs
Time/language differences with local market e.g. customer support
Different costs of resources e.g. overseas call centres
Diversification of risk
Cheaper finance
Managing supply chains
Local rules about doing business e.g. China
Local taxes, currency restrictions, import and export charges
There may be some compelling reasons to undertaking international operations –
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This is a video about how some small businesses dealt with the issues of exporting to overseas customers
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Financial Decision Making and International Markets
Do I need a local entity?
How much does this cost to set up?
Managing foreign currency transactions
Do I need local input?
Local employees or contractors?
Management structure and controls
Computer systems
These are the kind of questions companies consider when setting up in an international market
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What’s next?
MN7P13 for those who have completed all six modules – Steve Hills will be in touch about the classes
MN7030 for those still on the carousel, starting week commencing 30 January 2023
Edumundo results for London (Group 1)
In third place…
WatchIT (Team 5)
In second place…
The winners…
Voraus (Team 4)
Schweitzer (Team 3)
Edumundo results for Birmingham (Group 1 & 2)
In third place…
Metawatch (Team 10)
In second place…
The winners…
Bling (Team 14)
World of Watches (Team 8)
Edumundo results for Manchester (Group 2)
In third place…
ADAMS (Team 15)
In second place…
The winners…
Richard Mille (Team 16)
TITAN (Team 17)
Edumundo results for Liverpool (Group 3)
In third place…
PERFECT (Team 23)
In second place…
The winners…
Aara (Team 28)
Loisfoeribari (Team 22)
Edumundo results for Leeds (Group 4)
In third place…
Leec (Team 31)
In second place…
The winners…
Leef (Team 34)
The Better Catch (Team 35)
Edumundo results for Cardiff (Group 4 & 5)
In third place…
Carf (Team 41)
In second place…
The winners…
Cara (Team 36)
& Time (Team 43)
Edumundo results for Edinburgh (Group 5)
In third place…
Joobe (Allie)
In second place…
The winners…
Alpha (Team 46)
LEGENDS (Team 47)
Edumundo overall results
