Merger & Acquisition an der Universität zu Köln

1. Strategic Tasks

- inform and advise the firm on the transaction opportunities to enhance strategic vision

- inform and advise on potential strategic course corrections

2. Operational Tasks

-  opportunity identification, planning and structuring of transactions, valuation, and negotiation

3. Coordination tasks

- financial diligence, legal, tax diligence, and tax structuring

• Multi-disciplinary team
• 3-8 FTEs
• Report to CEO or CFO
• Generate about 80% of deal opportunities
• Contribute about 50% of M&A tasks (mostly planning & transaction phase)

• The consolidation or combination of one firm with another [A+B=A’ or C].
• The shareholders of the combining firms often remain as joint owners of the combined entity.

-> e.g. Daimler & Chrysler

• The purchase of one firm of another (or of parts of it) [A+B=A’].
• The acquired firm’s shareholders stop to be owners of that firm.

-> e.g. Bayer & Monsanto

• The sale of a firm (or parts of it) to another firm [A-B=A’].
• The selling firm’s shareholders stop to be owners of that firm (or of the parts sold).
-> e.g. Bayer & BMS (Covestro)

• Low cost of capital
• High stock market valuations and over-valued acquirers (instead of buying with cash, over-value the target company -> stock-based buying)
• Limited organic growth opportunities or high growth period (because faster growth through external growth)
• Industry shocks (technological, regulatory, etc.) that disrupt competitive market positions (e.g. acquire companies with disruptive technologies/more productive production processes)
• Copy-cat behavior (M&A to keep up with competitors, e.g. because they enter new markets you follow)

Firm A should acquire Firm B if the stakeholders in both firms will be better off.

For shareholders:

Increase in share value, i.e. the combined value of A+B > the stand-alone value of A + stand-alone value of B + the benefits - cost of executing the merger or acquisition

Bondholders:

Reduction of default risk

Management:

Job security and prospects

Employees:

Job security and prospects

• finding a partner with high potential synergies

• Effective synergy measurement

• Effective integration management

When?
Due-diligence

Where?

Potential synergy

What?

Overestimating of synergy value

Why?

- Agency conflicts

- Hubris (Überheblichkeit)

- Inter-firm causal ambiguity 

- Ineffective assessment models

How to avoid?

- Assess the “expected synergy” carefully

- Use a risk-management approach for board-level discussion

- Conduct a careful analysis of the reasons for an M&A

When?
Due-diligence

Where?

Integration costs

What?

Overestimation the synergy value / Underestimating the integration costs

Why?

- Lack of attention

- Hubris

- Inappropriate background of the management involved

- High costs of coordination

How to avoid?

- Build cross-functional teams from technical, operational and financial positions

- Carefully assess the “integration costs”

- Obtain M&A insurance

When?

Post-merger integration

Where?

Realized synergy

What?

Failure to achieve synergy value

Why?

- Lack of attention

- Intra-firm causal ambiguity

- Cultural differences

- Absence of integration plans

How to avoid?

- Pay attention to the action plan

- Carefully analyze and organize the cultural integration

- Select the correct integration approach

• Increased risk of lay-off

• Remaining employees have greater career prospects in a larger firm

• Remaining employees may benefit from improved firm competitiveness (greater job security)