Mergers and Acquisitions

Reasons for M&A

access to management or technical talent enhanced reputation in marketplace or with stakeholders reduction of operating expenses or costs access to new product lines growth in market share (complement/extend current business) quick access to new markets or entry into new industry reduction in number of competitors access to new technology, manufacturing capacity or suppliers

Underlying premise:
must be done while returning objective shareholder value in the short-term accretive in first two years Price Waterhouse Coopers (1996): nationwide study of 120 acquisitions objectives of deal only met 50% of time aerospace mergers and acquisitions service sector consolidations etc.

Mixed bag of proven return to stockholders:

A&D Acquisitions
Price ~ 100% of revenue the norm; up from 50% in early 90s At 7% net earnings, the payback period is excessive The softer considerations rise in importance access to talent/technology critical mass reduction in competition leverage back into existing units

These are the factors from which it is increasingly difficult to generate L3 acquisition of Raytheon AIS leverage; expensive Yet Consolidation juggernaut yet to run its course AvWk 12/01 TRW, UTC P&W, etc., etc., in play BAE Systems, GD, North-Grum, etc., etc., 50-75 transactions per year going forward

net tangible assets and enhanced ROR

acquiring

Aerospace Industry Investment Mergers and Acquisitions Key Driver: Technology Cycles (Emerging/Aging) What is the relationship between the driver and investments: Quick response to emerging technology needs Quick divestiture of non-core technology Does the driver have a Major, Moderate, or Minor effect or impact on investment decisions, as measured by what? It can have a major impact as measured by number of acquisitions, dollars invested, or PE paid What actions/initiatives are being taken within the A&D industry to address these impacts? Careful and pragmatic evaluation of the ROI, leverage, and synergy of each acquisition What actions are recommended for further study or evaluation? Aerospace Industry Investment Mergers and Acquisitions Key Driver: Market Characteristics (Vertical/Horizontal/Growing/ Shrinking/Fragmentation) What is the relationship between the driver and investments: Instant or quick access to markets or market segments

 Compliment or extend access to markets/segments Does the driver have a Major, Moderate, or Minor effect or impact on investment decisions, as measured by what? Major, as measured by added breadth in marketplace or greater market share What actions/initiatives are being taken within the A&D industry to address these impacts? Address need to consolidate market share What actions are recommended for further study or evaluation? Aerospace Industry Investment Mergers and Acquisitions Key Driver: Supplier Consolidation What is the relationship between the driver and investments: Suppliers are under the same pressures and A&D industry increase market share, eliminate excess capacity, access new market segments Does the driver have a Major, Moderate, or Minor effect or impact on investment decisions, as measured by what? Major as measured by added breadth in marketplace or greater market share What actions/initiatives are being taken within the A&D industry to address these impacts? What actions are recommended for further study or evaluation? Aerospace Industry Investment Mergers and Acquisitions Key Driver: Policy / Legislation What is the relationship between the driver and investments: Has been an impediment to some deep mergers and acquisitions, though business realities are diminishing the impediments M&A of the few remaining primes M&A of selected core suppliers (reduced/eliminated competition) Trans-Atlantic M&A, national barriers, technology transfer

Does the driver have a Major, Moderate, or Minor effect or impact Has been major, might be moving to moderate, as measured by

on investment decisions, as measured by what? FTC denials or strictness of enforcement of technology/national security statutes and regulations Key Driver: Policy / Legislation (concluded) What actions/initiatives are being taken within the A&D industry to address these impacts? Confront the legislators and administrators; creative alliances What actions are recommended for further study or evaluation?

Aerospace Industry Investment Mergers and Acquisitions Key Driver: Capacity Management (Production/Human/R&D) What is the relationship between the driver and investments: Allows excess capacity to be eliminated or consolidated into the best of the best Allows capacity of acquiring firm to be rapidly increased Preserves critical mass Does the driver have a Major, Moderate, or Minor effect or impact on investment decisions, as measured by what? Major for aerospace plants closed/consolidated, new capacity to be added What actions/initiatives are being taken within the A&D industry to address these impacts? What actions are recommended for further study or evaluation?

Different types of Mergers, Acquisition and Takeovers

Mergers, Acquisition and Takeovers are an integral part of a companys strategy and can have a huge impact on stock prices. Today more and more companies are looking to go global and increase their market share. Mergers, Acquisition and Takeovers are an effective way of achieving these goals and this is why there has been a phenomenal growth in global M&A activity. There are companies which look to grow only through acquisitions. Companies like Cisco in the U.S. have an acquisition team in place to hunt for good acquisition targets. Mergers and Acquisition is also called an inorganic way to grow. Theoretically Mergers and Acquisitions grow or enhance shareholder value, however historically most of the mergers and acquisitions have been unsuccessful and destroyed shareholder value. There are several ways that a Merger, Acquisition or Takeover can take place. They can be mutually agreed or an outright acquisition, the effect of the transaction is different therefore it is important to understand the different types of transactions:

Hostile Takeover:
This is the most negative takeover out of all and also an unfriendly one. The management and the board of the target company strongly resist the acquisition. These types of takeovers are usually bad for the employees of the target company as following the takeover usually there is a lot of downsizing. This kind of takeover generally occurs with distress firms or companies who are facing cash crunch but have good prospects ahead or a company whose management is inefficient.

Dawn Raid:
In Dawn Raid a firm or investor buys a substantial stake in the target firm as soon as the market opens. Due to the early trading the company does not come to know about the heavy buying. When the company comes to know about this, by then it is too late and the control falls in the hands of the acquirer. This kind of acquisition happened a lot in the UK, however lately there have been some restrictions placed on this practice.

Poison Pill:
This is an anti takeover strategy used by the management of the target firm to make the firm less attractive for acquisition. A kind of poison pill is to issue right shares of the company at a heavy discount such that the equity holding gets diluted and the firm becomes less attractive or more difficult or expensive for acquisition.