Mergers & Acquisitions Veronika Hermann Claudia Kaufmann Hanna Weinzinger

Contents Introduction Introduction Basic Terms Basic Terms Situation in Europe Situation in Europe Theory of Acquisitions Theory of Acquisitions Choice between Greenfield & Acquisitions Choice between Greenfield & Acquisitions Clusters Clusters Case Study Case Study

What is a merger? A merger occurs when one corporation is combined with and disappears into another corporation

Federal Trade Commission Vertical merger Vertical merger Horizontal merger Horizontal merger Product extension merger Product extension merger Market extension merger Market extension merger Conglomerate merger Conglomerate merger

What is a corporate acquisition? A corporate acquisition is the process by which the shares or assets of a corporation come to be owned by a buyer Asset deal Asset deal Share deal Share deal

Situation in Europe Mostly strategic alliances Mostly strategic alliances International trend towards acquisitions International trend towards acquisitions

Situation in Europe Differences between alliances on the one hand and mergers and acquisitions on the other hand: Consensual decision-making Consensual decision-making Transient nature and reversibility of alliances Transient nature and reversibility of alliances

Situation in Europe What should the European firms do? More offensive strategy More offensive strategy Transfer of know-how and skills Transfer of know-how and skills  Complementary alliances

Strategically unrelated firms NPV(A+B)=NPV(A)+NPV(B) Normal economic profit Normal economic profit Not economically viable Not economically viable

Strategically related firms NPV(A+B)>NPV(A)+NPV(B) Above-normal economic profits: target firm Above-normal economic profits: target firm Normal economic profits: bidding firm Normal economic profits: bidding firm Economically viable Economically viable

Why are there so many M&A? Ensuring survival Ensuring survival Free cash flow Free cash flow Agency problems Agency problems Managerial hubris Managerial hubris The potential for above-normal profits The potential for above-normal profits

Rules for Bidding Firm Managers Search for rare synergies Search for rare synergies Keep information away from other bidders Keep information away from other bidders Keep information away from targets Keep information away from targets Avoid winning bidding wars Avoid winning bidding wars Close the deal quickly Close the deal quickly

Rules for Target Firm Managers Seek information from bidders Seek information from bidders Invite other bidders to join the bidding competition Invite other bidders to join the bidding competition Delay but do not stop the acquisition Delay but do not stop the acquisition

Organizing a merged organization Postacquisition coordination and integration Postacquisition coordination and integration Problem: operational, functional, strategic and cultural differences Problem: operational, functional, strategic and cultural differences  additional costs

Choice of entry mode greenfield vs. acquisition Transaction Cost Theory Transaction Cost Theory Theory of Mergers and Acquisitions (Oster, 1990) Theory of Mergers and Acquisitions (Oster, 1990) Theory of the Growth of the Firm (Edith Penrose, Theory of the Growth of the Firm (Edith Penrose, 1959) 1959) Capital Market Imperfections (Chatterjee, 1990) Capital Market Imperfections (Chatterjee, 1990)

Transaction Cost Theory cost structure of entry modes cost structure of entry modes locating facilities abroad more efficient than exporting locating facilities abroad more efficient than exporting choice between greenfield and acquisition choice between greenfield and acquisition firm specific advantages (superior organizational or technical ability) firm specific advantages (superior organizational or technical ability)

Transaction Cost Theory high R&D intensity – greenfield investment high R&D intensity – greenfield investment little knowledge of foreign market – acquisition little knowledge of foreign market – acquisition high diversification – acquisition high diversification – acquisition

Mergers and Acquisition Theory Oster (1990) two reason to prefer acquisition vs. greenfield two reason to prefer acquisition vs. greenfield value of assets acquired lower than replacement cost value of assets acquired lower than replacement cost possibility to leverage firm specific advantage more efficiently possibility to leverage firm specific advantage more efficiently

Mergers and Acquisitions Theory strong value of HC vs. FC – acquisition strong value of HC vs. FC – acquisition lower stock market prices abroad – acqui lower stock market prices abroad – acqui acquiring rivals – less competition acquiring rivals – less competition speedy entry via acquisition speedy entry via acquisition little knowledge of foreign culture – acqui little knowledge of foreign culture – acqui high concentration of target industry – acqui high concentration of target industry – acqui

Theory of the Growth of the Firm Penrose (1959) low endowment in Human Resources – acquisition low endowment in Human Resources – acquisition high size of subsidiary realtive to headquarter - acquisitions high size of subsidiary realtive to headquarter - acquisitions

Capital Market Imperfections Chatterjee (1990) high grade of leverage – acquisition high grade of leverage – acquisition greenfield more expensive than acquisition greenfield more expensive than acquisition

Entry Mode Choice & International Strategy global strategy global strategy multidomestic strategy multidomestic strategy transnational strategy transnational strategy international strategy international strategy

Entry Mode Choice & International Strategy global firms (cheap production in few locations, same marketing strategy/products everywhere) – greenfield global firms (cheap production in few locations, same marketing strategy/products everywhere) – greenfield Multidomestic firm (locally adequate products & marketing strategy, production & R&D in every market) - acquisition Multidomestic firm (locally adequate products & marketing strategy, production & R&D in every market) - acquisition

Relationship headquarter - subsidiaries greenfield higher level of control over subsidiaries than acquisition greenfield higher level of control over subsidiaries than acquisition greenfield more expatriates than acquisition greenfield more expatriates than acquisition acquisition higher level of local responsiveness than greenfield acquisition higher level of local responsiveness than greenfield Over time headquarter – subsidiary relationship will converge towards preferred entry mode Over time headquarter – subsidiary relationship will converge towards preferred entry mode

Synergy Realization of Mergers and Acquis an integrative model an integrative model combination potential combination potential organizational integration organizational integration empolyee resistance empolyee resistance synergy realization synergy realization

Synergy realization Organizational integration Combination potential Employee resistance An integrative Merger and Acquisition Model

Synergy Realization of Mergers and Acquis great management style similarities = great organizational integration = little empolyee resistance great management style similarities = great organizational integration = little empolyee resistance cross border M&As, combination potential (+), organizational integration (-), empolyee resistance (+) cross border M&As, combination potential (+), organizational integration (-), empolyee resistance (+) great size of target relative to bidder = great combination potential = great organizational integration great size of target relative to bidder = great combination potential = great organizational integration

Case Study

Introduction 1. Company and group 2. History 3. Organizational Structure 4. Divisions 5. M&A Process 6. M&A-Practical Experiences

Who is Mondi Packaging? Mondi: international, integrated forest products and packaging group Mondi: international, integrated forest products and packaging group manufactures a range of products including: Pulp, Graphic papers, Packaging papers, Converted packaging (including corrugated board), Solid wood products, Wood chip. manufactures a range of products including: Pulp, Graphic papers, Packaging papers, Converted packaging (including corrugated board), Solid wood products, Wood chip.

History : acquisition of the group`s first 2 plants in Poland : acquisition of the group`s first 2 plants in Poland 1999: acquisition from Amcor Fibre Packaging Europe of 21 plants in the UK and France 1999: acquisition from Amcor Fibre Packaging Europe of 21 plants in the UK and France 2001: acquisition from Danisco UK of 16 plants and 2 paper mills 2001: acquisition from Danisco UK of 16 plants and 2 paper mills : Acquisition of 2 sheet plants in Ireland : Acquisition of 2 sheet plants in Ireland 2002: Acquisition of 8 plants in France and the UK through the joint purchase of La Rochette with Saica, as well as the acquisition of an additional plant in the UK and in Poland. 2002: Acquisition of 8 plants in France and the UK through the joint purchase of La Rochette with Saica, as well as the acquisition of an additional plant in the UK and in Poland : Acquisition of 10 plants and 5 paper mills in Austria, Germany, Poland, Switzerland, Italy, Belgium and China through a merger with the Roman Bauernfeind Group : Acquisition of 10 plants and 5 paper mills in Austria, Germany, Poland, Switzerland, Italy, Belgium and China through a merger with the Roman Bauernfeind Group.

Organizational Structure

Divisions Paper Division Paper Division Corrugated Division Corrugated Division Bag Division Bag Division Flexibles Division Flexibles Division Coating Division Coating Division

M&A Process 1. Sourcing 2. Due Diligence 3. Valuation 4. Negotiation 5. Contract 6. Closing

Case Study Interview with Mr. Stürzenbecher, responsable for M&A Interview with Mr. Stürzenbecher, responsable for M&A criteria to search for acquisitions: criteria to search for acquisitions: 1. Customers 2. Machines`quality 3. Company`s organisation

Case Study Places to gain market shares Places to gain market shares 1. China 2. India 3. Arabic countries

Problems Different cultures Different cultures Different strategies Different strategies Different aims Different aims Different languages Different languages

Solutions Expatriates Expatriates Integration Integration Meetings, seminars-> to get to know the foreign working colleagues Meetings, seminars-> to get to know the foreign working colleagues

THANK YOU FOR PAYING ATTENTION HermannKaufmannWeinzinger