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Analysis of corporate peformance, how performance is achieved, diagnosing poor performance, and how peformance is boosted by mergers and acquisitions
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Boosting Corporate Performance
through Mergers & Acquisitions
Errol DanzigerDanziger Capital Partners LLP
September 2011
This Presentation Reviews Three Topics…
• What is corporate performance, and how is it measured?
• How can corporate performance be improved?
• How can mergers and acquisitions boost performance?
What Is Corporate Performance?
In a nutshell -
• Firm profitability
• Operating efficiency
• Manufacturing or service productivity
• Shareholder and debtholder returns
Performance Analysis is a Process that …
• Evaluates the firm’s progress towards achieving goals and objectives set by management
• Compares firm performance with other companies in the firm’s peer group
Whose Performance Matters?
One or more, or all, of :
• The company
• The CEO
• The senior management
• The operating management
• The line management
• The operating personnel
When is Performance Evaluated?
Daily, by banks examining yesterday’s performance and calculating tomorrow’s value at risk
Monthly, by firms that have to repay debt based on a monthly repayment schedule
Quarterly, by listed companies that have to file a quarterly stock exchange trading update
Annually, by major companies that have to report comprehensive annual results to shareholders
How is Performance Measured?
• On an absolute basis, as where a automobile manufacturer measures the number of units produced per day
• On a comparative basis, as where one firm’s results are compared with the results of other listed companies in its industry
• Against a benchmark that reflects the performance of the broader economy, such as the FTSE 100 or the S&P 500
Approaches to Measuring Performance
Accounting measures
Market value measures
Economic Value Added
Share price
Cost of capital
Accounting Measures of Performance
= Operating income
Sales margins- operating costs
Operating income- operating costs
- depreciation- provisions
= Net income
Market Value Measures of Performance
• Return on equity = ratio of net income : equity
• Return on assets = ratio of net income : total value of assets
• Return on assets = profit margin x asset utilisation
Ratio of –market value per share : book value per share
Economic Value Added®• Net income after deducting the return demanded by investors.
• EVA =
= residual income =
= income earned – income required =
= income earned – cost of capital x investment
0
5
10
15
20
25
30
35
40
1997 2000 2003 2006 2009
SHAREHOLDERSFUNDS
Mallet plc
Shareholders’ FundsMovement 1997 - 2010
Share Price
Every change in share price reflects –
Firm-specific news – a new product, CEO appointment, change in corporate governance
Economic news – interest rate rise or fall, recession or boom
Industry news – competitor launches competing product
Cost of Capital
“A company that generates a
return on capital
that is less than
cost of capital
is destroying value.”
- Errol Danziger
Reasons for Poor Corporate Performance
• Inefficient management of existing assets
• Under-investment in new opportunities
• Over-investment in ill-advised projects
• Strategic neglect of industry trends and opportunities
• Inadequate leverage with inferior return on equity
• Excessive leverage with increased bankruptcy risk
• Financing errors in currency, loan period and loan term matching
• Excessive cash retention
• Excessive conglomeration
How can Performance be Boosted?
• Increase cash flow from assets in place
• Increase expected growth
• Lengthen period of high growth
• Reduce cost of financing
• Manage non-operating assets
Increasing Cash Flow from Assets in Place
• Redeploy existing assets to more
profitable uses
• Improve operating efficiency and eliminate wasteful expenditure
• Reduce the corporation tax burden
• Reduce maintenance of capital equipment
• Reduce working capital expenditure on inventory and receivables
Increase Expected Growth
• Make new investments in new projects and firms
• Use existing assets more efficiently by changing the use of existing assets to more productive applications
Lengthen the Period of High Growth
• Lengthen the initial high growth period in which firm growth outperforms competitors and exceeds cost of capital, before the firm becomes a stable growth firm
• Strengthen barriers to entry by competitors by making products and services “must have”
Reducing the cost of financing
• Make products or services less discretionary, by converting them into “must haves”
• Reduce operating leverage by limiting the amount of fixed costs
• Change the financing mix by increasing cheaper debt financing and reducing expensive equity financing
• Match financing to assets by ensuring that long-term assets are not financed with short-term borrowing
Improve Management of Non-operating Assets
• Cash and marketable securities reduced by dividend payments and share buybacks
• Holdings in subsidiaries and affiliates rationalised and publicised
• Pension fund assets and liabilities balanced to ensure that balance sheet is not harmed
Mergers and Acquisitions can Boost Performance
Because -
• Shareholders like to invest in acquisitive companies
• Analysts like to recommend growth companies
• Acquisitions mean quick growth and better financial performance short-term
Acquisitions boost performance through …
• Finding bargains that have been undervalued by the market
• Financial and operating synergy realised through M&A
• Restructuring of targets to make them profitable once more
• Merging with successful companies that can improve bidder performance
Operating synergy achieved through …
• Economies of scale gained through
combining two businesses and reducing combined costs
• Pricing power enabling market
dominance to increase revenues
• Functional strength by combining complementary advantages of parties
• Higher growth rate by increased size and product range
Financial synergy achieved through …
• Cash slack providing flexibility to
pursue new projects
• Debt capacity enabling greater leverage across the combined
firm
• Tax benefits of ability to utilise target’s operating losses
Restructuring the target, where success depends on …
• Poor performance attributable to incumbent or past management
• Acquisition followed by changed management or new management practices
• Target’s market price reflecting target’s status quo situation and not post-merger position
Achieving performance targets in M&A
• Size and quality
• Cost savings versus growth
• Acquisition for consolidation
• Synergy valuation
• Type of synergy
• Mergers boost operating performance
• Mergers generate excess returns
• Relatedness beats conglomeration
• Scaling for size
Based on a presentation delivered at the Performance and Management
Conference 2011: Delivering Efficiency and High Performance, London, 21
June 2011
Danziger Capital Partners LLP
Stirling House
9 Burroughs Gardens
London NW4 4AU
United Kingdom
www.danzigerplc.com
Danziger Capital Partners LLP are corporate finance advisers, specialising in debt and equity capital raising, and mergers and acquisitions.