M&A Strategies and Process

20 September 2005
Agenda

I. M&A Rationale & Options

II. M&A Process

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I. M&A Rationale & Options

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 M&A Rationale & Options

Common M&A benefits

Description

A listed company that is significantly undervalued and an unlisted

Undervalued
company with weak management are both potentially ‘cheap’ targets of a
target
stronger company.

Post-acquisition income of acquiror is higher than the sum of acquiror’s

Revenue
and target’s income due to revenue synergies such as effective cross-
synergies
selling, increased productivity, etc.

Post-acquisition expenses of acquiror are lower than the sum of acquiror’s

Cost synergies and target’s expenses due to cost synergies that often stem from
increased economies of scale, e.g. lower production costs.

Post-acquisition acquiror can extract benefits from improved

Financial
synergies capital/financial structure, such as tax benefits or losses, larger debt
capacity, or higher excess cash that can be invested in new projects.

Acquiror decides to merge with or acquire target to diversify revenue

Diversification sources (business diversification) or expand core business overseas
(geographic diversification).

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 M&A Rationale & Options

Potential revenue synergies

ƒ In general, revenue synergies can be extracted in the following ways:

9 Increased pricing power stemming from larger size of the business
9 Leveraging a larger customer base or target countries for exports
9 Faster/better new product launches as a result of combined R&D
departments
9 Improved efficiency from combining distribution channels/departments
of acquiror and target
9 ‘Technology transfer’ from the more productive salesforce of the two
companies to the other
9 Using cross-selling opportunities through combined distribution network

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 M&A Rationale & Options

Potential cost synergies

ƒ In general, cost synergies can be extracted in the following ways:

9 Fixed cost saving by combining back office functions, e.g. IT, human
resources, procurement, etc.
9 Production cost saving, Magnitude of cost saving from M&A in raw
e.g. pooling of logistical material procurement and other production
cost items
resources if factories of 25
25%
acquiror and target are

Percentage Savings (%)

20 20%
located in the same
17%
area, and taking 15

advantage of higher 12%

10
bargaining power to
lower raw material costs 5
5%
9 Greater combined 4% 4% 3%
0
benefits from Raw materials Components Other Others**
production costs*
outsourcing Note: * “Other production costs” : packaging, transportation, etc.
** “Others” : computers, insurance premiums, office
equipment
Source: “Managing Procurement through a Merger,” Booz-Allen &
Hamilton, 2002

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 M&A Rationale & Options

Potential financial synergies

ƒ Financial synergies can be classified in 3 main categories:

9 “Cash slack” for investments: when the acquiror has excess cash but no
investment opportunities, the acquisition of a cash-strapped target that
has attractive projects on hand will allow the acquiror to invest in those
projects.
9 Tax benefits: tax burden of post-M&A entity may be lower than
combined tax burden of acquiror and target. However, Thai law does not
allow a post-merger entity to utilize tax benefits from retained loss of
previous companies in case of merger (where the operation is
‘transferred’ to a new entity).
9 Increased borrowing capacity: larger balance sheet post-M&A may result
in higher debt service capacity and improved credit rating from the
lenders’ perspective, thereby lowering funding costs.

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 M&A Rationale & Options

Types of M&A
ƒ One crucial factor in determining the value of M&A synergies is the acquiror’s
ability in extracting value from its own and the target’s resources, which
depends on the type of M&A:
บริษัท Horizontal integration Vertical integration Functional integration

Acquiror

Type Acquiror Target Acquiror Target

Produces X Produces X Target Better sales Better computer

or Y
M&A with a company that
produces the same product to
Explana- expand production base, or
tion different products to broaden
business scope
Supplier of acquiror
M&A with supplier or distributor
of acquiror’s products to reduce
production costs
dept. dept.
M&A with a company that offers
comparative advantages to
leverage each other’s strengths

SHIN Corp’s acquisition of T.C.C. Group’s acquisition of The establishment of Ayudhya

Examples Digital Phone Company (DPC) Berli Jucker PLC (which supplies Allianz C.P. Life PLC by three
in glass bottles to T.C.C.’s liquor allies: Bank of Ayudhya, Allianz
Thailand and beer businesses) group, and T.C.C. Group

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 M&A Rationale & Options

Common M&A risks

ƒ Execution risks – i.e. risks that M&A will not yield expected synergies – are often
overlooked. Booz-Allen Hamilton found that roughly 53% of all global M&A deals
failed for the following reasons:
ƒ Managers paid more attention to operational benefits than overall M&A synergies.
ƒ Relied too much on ‘natural’ benefits, such as increased production capacity, and ignored
M&A benefits
changes in business structure, strategy, and operational procedures that are required to extract
optimal benefits.

Corporate ƒ Concerned more with preserving ‘status quo’ corporate culture than nurturing a more
culture appropriate culture post-acquisition.

Organization ƒ Did not encourage employees to participate in organizational changes, both pre- and post-M&A
al change ƒ Did not promote important organizational changes.

ƒ Did not encourage employees to change work habits, or voice constructive criticisms or
Leadership
suggestions post-M&A.

ƒ Could not realize the full extent of cost savings envisioned pre-acquisition, due to insufficient
Post-merger
planning that should include methods to effectively leverage/pool resources of combined firms.
integration
ƒ Ineffectual post-merger integration that disrupts normal business operations.

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 M&A Rationale & Options

Summary of M&A benefits

ƒ An M&A which is driven by business rationale is “successful” if the value of all
combined synergies exceeds acquisition costs.
ƒ An M&A which is driven by undervalued asset rationale is “successful” if the
acquiror can sell assets at higher price than acquisition price, or replace assets
at lower cost than acquisition price.

Value of total synergies > Acquisition costs

Combined net Revenue Cost Financial Acquisition Pro forma

profits of synergies synergies synergies costs post-M&A
acquiror net profits
and target
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M&A Rationale & Options

Other issues

Acquisition costs typically include:

ƒ Fees for various advisors, including financial advisor, legal advisor, and
technical advisor
ƒ Costs related to post-M&A integration, such as severance pay in case of
human resources rationalization, closing down overlapping offices, etc.

Limitations on M&A or transfer of share ownership in Articles of Association:

ƒ A company’s Articles of Association (AoA) may forbid or restrict the transfer
of share ownership or business.
ƒ Therefore, acquiror or target may need to amend AoA before proceeding
with the deal.

Management and human resources structure post-M&A:

ƒ Acquiror must consider post-M&A management structure, such as allocation
of authority among high-level executives.
ƒ Acquiror should also consider improving pay scale and other employee
incentives to entice quality employees to remain with the firm post-M&A.

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M&A Rationale & Options

Overview of M&A options

ƒ There are 3 methods to conduct an M&A under Thai law. Share acquisition is
the most popular method due to reasonable timeframe and lower tax burden.
Description Payment type
ƒ Full merger of two companies: must
establish a new entity to which existing ƒ Share swap only
Full companies must transfer all assets and (between existing
merger liabilities. companies and
ƒ All existing companies must be dissolved new entity)
post-M&A.

ƒ Acquiror pays in cash or use share swap

Share for shares of target company.
acquisi- ƒ Target company becomes ƒ Cash or shares
tion associate/subsidiary of acquiror post-
acquisition.

Asset ƒ Acquiror buys assets of target company.

acquisi- ƒ No change in target’s shareholding ƒ Cash or shares
tion structure in an all-cash acquisition.

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 M&A Rationale & Options
Pros and cons of each option
Full merger
ƒ Pooling-of-interest
accounting: no need to book
goodwill, hence no impact to
P&L.
ƒ All related taxes (e.g. VAT,
Pros asset transfer) can be
waived.
ƒ Target shareholders may be
able to waive capital gains
tax.
ƒ Time-consuming: a special
shareholder resolution is
required, and both companies
must wait 6 months for
dissenting lenders.
Cons ƒ New entity must bear
liabilities and obligations of
acquiror and target.
ƒ Both acquiror and target must
dissolve.
Asset acquisition
ƒ Acquiror does not need to be
concerned with liabilities and
obligations of target
company.
ƒ Acquiror can buy only desired
assets.
ƒ License agreements and other
rights are not automatically
transferred with assets.
ƒ Potentially significant tax
burden for acquiror.
ƒ If acquiror lacks the know-
how to extract value from
assets, buying assets alone
may yield sub-optimal
results.
Share acquisition
ƒ Convenient and easy to
execute.
ƒ Flexible: can pay in cash,
share swap, or combination
of the two.
ƒ Can extract M&A synergies
without the need to dissolve
target company.
ƒ Acquiror must bear both
rights and obligations of
target, including lawsuits and
contingent liabilities that may
be difficult to audit.
ƒ Selling shareholders may be
subject to capital gains tax.
ƒ Must use purchase
accounting: negative P&L
impact from goodwill.
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M&A Rationale & Options
Potential strategies for share acquisition of listed company
Share acquisition of listed company
1) Hostile takeover (100% tender)
Strategy:
ƒ Tender for 100% of target’s shares.
ƒ Must be a “90% or nothing” offer: at least
90% of target’s shares must be tendered
(to delist target), or the offer is void.
Pros:
ƒ A clear-cut strategy: either acquiror gains
90%+ control of target (to delist target)
or none at all.
Cons:
ƒ May be difficult to buy 90%+ in one single
tender offer.
ƒ Little chance for acquiror to conduct due
diligence prior to launching the offer.
ƒ May invite competing bids that drive up
price.
2) Creeping tender (<25% initially)
Strategy:
ƒ Negotiate with major shareholders to buy
close to 25% shares (threshold for mandatory
tender offer) first.
ƒ Tender for the remaining shares to get 90%+
at a later date.
Pros:
ƒ Easier to buy the initial <25% than 100%
tender, and the success will incentivize
target’s remaining shareholders to sell their
stakes.
ƒ A significant stake (20-24.99%) will allow
acquiror to gain board seat, hence a way to
gradually obtain information necessary for
detailed valuation.
Cons:
ƒ Difficult for acquiror to sell stake if tender
offer for the remaining shares falls through.
ƒ May be more expensive than 100% tender
case.
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II. M&A Process

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 M&A Process

Overview of M&A process

approx. 2 months approx. 1 month 2.5 mths – 1 yr* approx. 5-10 mths.

Review strategy Due diligence Valuation Negotiation Closing Post-merger

ƒ Review ƒ Industry data ƒ Business ƒ FA assists ƒ Legal advisor integration
strategic plan ƒ Financials analysis during the drafts related ƒ FA co-
as well as ƒ Legal issues ƒ Strategic negotiation documents, ordinates
tangible ƒ Operational analysis process e.g. share with other
strategic data, e.g. ƒ Legal analysis ƒ Finalize purchase advisors to
goals, e.g. production ƒ FA values price & agreements, assist in post-
target ROE capacity, target terms shareholder merger
or growth efficiency, company resolution integration
ƒ Analyze and raw material ƒ FA estimates ƒ Shareholder process
quantify M&A usage M&A meeting
synergies on synergies ƒ Proceed with
a preliminary legal process
basis

* depending on M&A method used: from 2.5 months in case of share acquisition, to 1 year or longer in case of
full merger
FA = Financial Advisor

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 M&A Process

Due diligence process

ƒ Financial due diligence includes historical track record, financial projection,
documents relating to business, and in-depth management interviews.
ƒ Meanwhile, legal advisor will conduct a legal due diligence to advise on
pertinent legal issues, including legal steps required, related tax issues, and
appropriate M&A method.
Operational due
Financial due diligence Legal due diligence
diligence
ƒ Organizational ƒ Historical financials ƒ Articles of association
structure ƒ Business plan and memorandum
ƒ Business plan ƒ Financial projections ƒ Shareholding structure
ƒ Industry data / trends ƒ Budgets ƒ Lawsuits
ƒ Production capacity ƒ Capital structure ƒ Related agreements
and technology ƒ Copyrights/trademarks
ƒ Balance sheet structure
ƒ Distribution network ƒ Licenses
and channels ƒ Investment plans
ƒ Tax issues ƒ Rights
ƒ IT system
ƒ Management interviews

Post-merger Target’s fair value range, Legal issues, purchase

integration plan acquisition currency agreement, tax issues
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 M&A Process

Valuation
ƒ For M&A driven by business rationale, 3 common valuation methods are used:
Trading comparables
ƒ Value target based on trading
multiples of listed firms in the
same industry, e.g. P/E, P/BV,
P/Sales, EV/EBITDA
Discounted cash flow
ƒ Value target as the present
value of expected future cash
flows, discounted by cost of
capital
ƒ An in-depth analysis based on a
financial model built on results
from financial due diligence
Precedent transaction
comparables
ƒ Value target based on
acquisition premiums and
transaction multiples paid by
acquirors for previous
transactions in the same
industry

Results can be compared to estimate a reasonable valuation range

Sample

Trading multiples

Discounted cash flow

Precedent transactions

Value
ƒ For M&A driven by undervalued assets, value of assets can be assessed using
methods such as liquidation/salvage value, replacement costs, etc.
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