Sense and Non-Cents of Mergers & Acquisitions

8/9/2019 Sense and Non-Cents of Mergers & Acquisitions

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Sense and Non-cents of

Mergers & Acquisitions

March 28, 2006

Charles H. Troe, Managing Director


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West Ridge Associates, LLCCharles H. Troe, Managing Director

Chuck has over 30 years of experience as a senior officer and principal in investmentbanking firms and as a partner in large law firms. His Mergers & Acquisition andCorporate Finance transactional experience is diverse in type, size and industry,including technology, telecommunications, basic industry, manufacturing, distribution,banking and finance, insurance, real estate, lodging, and oil and gas. He is a recognizedexpert in the medical technology industry in which he has executed many transactions.

He is active in industry organizations, including as Program Chair of the Life ScienceIndustry Council and as a member of the Board of Directors of the Los AngelesBiomedical Research Institute at Harbor UCLA Medical Center.

Chuck is the founder of West Ridge Associates, LLC. He has been Managing Director ofMosaic Capital, Managing Director and Principal of Taurus Capital Group, LLC, and a

Managing Director of Barrington Associates, Southern California investment bankingfirms providing merger and acquisition, corporate finance, business valuation, and relatedinvestment banking services to middle market companies. Previously, he was a Partnerin large national law firms, including 14 years with Mayer, Brown, Rowe & Maw.

He has served on the boards of directors of numerous growth stage and middle marketcompanies in the medical device, technology and oil and gas industries

Chuck received his B.B.A. degree from the University of Iowa and his J.D. from theUniversity of Chicago.


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Source: Mergerstat

M&A Activity

# Deals Value

Current M&A Environment - Domestic

0

2,000

4,000

6,000

8,000

10,000

12,000

92 93 94 95 96 97 98 99 00 01 02 03 04 05

$0.0T

$0.2T

$0.4T

$0.6T

$0.8T

$1.0T

$1.2T

$1.4T

$1.6T# Deals Value ($T)


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$- $25B $50B $75B $100B $125B

Misc Services

Household Goods

Software and Services

Broadcasting

Drugs, Med Supl & Equip

Banks/Fin

Oil/Gas

Communications 316 deals

141 deals

397 deals

389 deals

645 deals

1,736 deals

73 deals

1,153 deals

M&A Activity by Sector(Total 2005)

Source: Mergerstat



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Current M&A Environment One Day Sample

Lucent Technologies Inc. and Frances Alcatel SA said they were in advanced talks on amerger . . . With a market value of $33 billion in the rapidly consolidatingtelecommunications industry.

Bayer AGs $19.7 billion takeover offer for Schering AG yesterday was aimed at rescuing thecompany from the latest trend in Europes heater merger market: a wave of hostile bids.

Three days after [the acquisition of Suez SA was scuttled by political moves] Suez was

merging instead with state-owned Gas de France to create an all French global energygiant.

General Motors Corp. sold . . . a stake in [a GMAC real estate unit for 8.8 billion to KKR].

Wall Street Journal, March 24,2006


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M&A Has Become Globalized

2005 International Transactions

1,315 Inbound Transactions totaled $71.971B

1,548 Outbound Transactions Totaled $86.320B

1000

1100

1200

1300

1400

1500

1600

Inbound Outbound

$60,000

$65,000

$70,000

$75,000

$80,000

$85,000

$90,000

Total Number of Transactions Total Value of Reported Transactions ($B)


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Representative International Transactions in 2005 Included:

Inbound

GlaxoSmithKline PLC acquired Corixa Corp a vaccine and antigen based product developer for $320M

Computershare LTDs acquired Equiserve LP who services shareholder records for publicly traded

companies for $307M

Access Co., Ltd. Acquired PalmSource, Inc. a develops and licensor of platform software for $312M

Outbound

eBay, Inc. acquired Shopping.com Ltd. a provider of shopping services via the internet for $623M

Madison Dearborn Partners LLC acquired Sirona Dental Systems GmbH a manufacturer anddistributor of dental equipment for $1.03B

Eastman Kodak Co. Acquired Creo, Inc. a developer of imaging software technologies for $954M

Current M&A Environment - International


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Source: Piper Jaffray

M&A Multiples by Company Size12-months ending 12/21/2005


8.910.0

12.7

16.215.1

5.8

9.5

7.8

9.9 10.1

02

4

6

8

10

12

14

16

18

20

$1000

x EBIT x EBITDA


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9.9 9.8 9.9 9.8

8.8

9.710.3 10.6

0

2

4

6

8

10

12

1998 1999 2000 2001 2002 2003 2004 2005

M&A EBITDA MultiplesManufacturing Sector

Source: Mergerstat


Average Enterprise Value/EBITDA


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9.6 9.5

8.2 8.8 8.39.0

11.310.9

0

2

4

6

8

10

12

1998 1999 2000 2001 2002 2003 2004 2005

M&A EBITDA MultiplesServices Sector

Source: Mergerstat

Average Enterprise Value/EBITDA



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9.0 9.5

7.88.6

10.2

8.7

12.1

9.4

0

2

4

6

8

10

12

14

1998 1999 2000 2001 2002 2003 2004 2005

M&A EBITDA MultiplesRetail Sector

Source: Mergerstat



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EBIT Multiples

4

6

8

10

12

14

16

1998 1999 2000 2001 2002 2003 2004 2005

All Sectors Mfg'g Services Retail Med Device

Source: Mergerstat

EBITDA Multiples



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Historical Acquisition Premiums 2001 2005(Acquisition price compared to market price 30 days prior)

432

269 270 282 260

50 46

31 33

88

0

100

200

300

400

500

2001 2002 2003 2004 2005

#ofDeals

0

20

40

60

80

100

Acqu

isitionPremium

Total Number of Deals Acquisition Premium %

Source: Mergerstat


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Conventional Wisdom is that Acquisitions do not Work

The Opinion of the Experts:

Research indicates that up to 80% of mergers fail, Robert W. Holthausen, TheNomura Securities Co. Professor; Professor of Accounting and Finance andManagement Chairperson, Accounting Department, at the Wharton Business School,University of Pennsylvania

"The truth is mistakes happen. The accepted data say that most mergers andacquisitions don't work out, Martin Sikora, Editor, Mergers & Acquisitions: TheDealmakers Journal


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Cumulative Adjusted Returns on Equity for 2,805 TransactionsFrom 1985 to 2005

Best and Worst From 5 Days prior to Announcement to 756 Days After

Source: Profiles of Outlying M&A Transactions, 1985 2000 Robert F. Bruner

Conventional Wisdom is that Acquisitions do not Work


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Spectacular Failures DaimlerChrysler

May 7, 1998 Announcement

The Wall Street Journal named it the biggest industrial merger of all time.

Forbes reported, No, this merger isn't about savings. It isn't about blending Germancaution with Yankee freewheelingIt is about taking two splendid companies andtransforming them into a real world-scale, truly multinational business.

Business Week(1998), emphasized, The merger of Daimler Benz and Chrysler

Corp. will clearly rock the global auto industry. But the creation of this newpowerhouse is more than an industrial mega deal. It's perhaps the first sign that theforces of globalization have succeeded in reshaping Europe Inc. companies such asDaimler Benz now seem to be strong and confident enough to deal on an equalfooting with their American counterparts.

Within five years, well be among the Big Three automotive companies in the world,Robert Eaton, Chrysler CEO.


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Integration Problems

Cultural differences were more complicated, if not impossible to solve. The lifestylesof the German and American managers turned out to be very different. Americans

enjoyed much higher salaries, while the Germans enjoyed larger expense budgets.

From the outset, the German obsession with planning has kept everyone on edge,said one of Chryslers executives.

According to Chrysler marketing chief Jim Holden: We felt like we were marrying up,and it was clear that they thought they were marrying down.


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DaimlerChrysler Average Market Cap ($mm)


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(3.00)

(2.00)

(1.00)

-

1.00

2.00

3.00

DaimlerChrysler Historical Earnings Per Share


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Spectacular Failures AOL Time Warner

2000 Announcement"Together, they represent an unprecedented powerhouse, said Scott Ehrens, amedia analyst with Bear Stearns. "If their mantra is content, this alliance isunbeatable. Now they have this great platform they can cross-fertilize with contentand redistribute.

"I dont think this is too much to say this really is a historic merger; a time whenweve transformed the landscape of media and the Internet, said Steve Case,AOLs chairman and chief executive officer.

Todays announcement really does change the tectonic plates in this world, saidChristopher Dixon, media analyst with PaineWebber.

Referring to the deals ability to accelerate the combined companys revenue stream

while generating significant efficiencies on the advertising and marketing endGerald Levin stated I concluded that either we would do something with AOL or wewould build ourselves, but this is infinitely preferable.


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2001 2004

Market Capitalizationdrops 75 percent withintwo years of the deal'scompletion

There is a vicious purgeof the top executivesresponsible for themerger

Dicey accounting

practices areinvestigated

The poisonousatmosphere-all this hasresulted in a constantbarrage of ugly news

headlines and poormorale at the company

Aol Time Warner Market Capitalization ($mm)

-

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

America Online Time Warner Inc. (NYSE:TWX) - Common Stock - Avg Market Cap ($mm)


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2005

Steve Case resigns to avoid future conflicts with Revolutions internet activity

This merger has most definitely qualified as a disaster of belly flop proportions, by anymeasure you might care to use, which AOL Time Warner's own magazine, Fortune,

dubbed "one of the greatest train wrecks in corporate history."

(14.00)

(12.00)

(10.00)

(8.00)

(6.00)

(4.00)

(2.00)

-

2.00

Q1

1999

Q2

1999

Q3

1999

Q4

1999

Q1

2000

Q2

2000

Q3

2000

Q4

2000

Q1

2001

Q2

2001

Q3

2001

Q4

2001

Q1

2002

Q2

2002

Q3

2002

Q4

2002

Q1

2003

Q2

2003

Q3

2003

Q4

2003

Q1

2004

Q2

2004

Q3

2004

Q4

2004

Q1

2005

Q2

2005

Q3

2005

Time Warner Inc. (NYSE:TWX) - Co mmo n Stoc k - Basic EPS

AOL Time Warner Historical Earnings Per Share


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Heisneberg Principle Or String Theory

What would have happened to Compaq if it had not been Acquired by HP?

Key Financials

For the Fiscal Period Ending

In Currency

12 months

Dec-31-1997A

USD

12 months

Dec-31-1998A

USD

12 months

Dec-31-1999A

USD

12 months

Dec-31-2000A

USD

12 months

Dec-31-2001A

USD

LTM2

12 months

Mar-31-2002A

USD

Total Revenue 24,584.0 31,169.0 38,447.0 42,222.0 33,554.0 32,101.0

Growth Over Prior Year 22.9% 26.8% 23.4% 9.8% (20.5%) (23.4%)

Gross Profit 6,751.0 7,189.0 8,649.0 9,805.0 7,112.0 6,626.0

Margin % 27.5% 23.1% 22.5% 23.2% 21.2% 20.6%

EBITDA 3,532.0 1,751.0 2,050.0 3,699.0 1,856.0 1,661.0

Margin % 14.4% 5.6% 5.3% 8.8% 5.5% 5.2%

EBIT 2,987.0 858.0 648.0 2,292.0 479.0 352.0Margin % 12.2% 2.8% 1.7% 5.4% 1.4% 1.1%

Earnings from Cont. Ops. 1,855.0 (2,743.0) 569.0 595.0 (563.0) (610.0)

Margin % 7.5% (8.8%) 1.5% 1.4% (1.7%) (1.9%)

Net Income 1,855.0 (2,743.0) 569.0 569.0 (785.0) (610.0)

Margin % 7.5% (8.8%) 1.5% 1.3% (2.3%) (1.9%)

Diluted EPS Excl. Extra Items 3 1.186 (1.706) 0.341 0.342 (0.334) (0.360)

Growth Over Prior Year 36.4% NM NM 0.3% NM NM

Financial Results were deteriorating


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What would have happened to Compaq if it had not been Acquired by HP?

Public Markets Lost Interest (small upswing due to imminent closing of HP deal)

Heisneberg Principle Or String Theory


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Spectacular Failures

BUT WAIT Theres more!!!

It was clear pretty soon after the merger that there really wasnt much synergy.Les Moonves commenting on the spin off of CBS from Viacom on CNBC Jan. 4, 2006

The potential move [to break up Tyco International] comes amid a great dismantling ofconglomerates formed during the 1990s. Pinched by stagnant stock prices and investors

demanding more focused companies, the likes of Viacom and Cendant Corp. have recentlyundone years of empire-building.

Wall Street Journal, January 9,2006


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Spectacular Failures

Some bad (i.e. non-strategic) reasons for M&A Transactions

Ego the edifice complex

Short-term secondary market gainBuy-side CEO compensationInvestment banking feesBenefit-benefit analysisAmnesia Does anyone remember the 60sStupidity

One good (i.e. strategic) reason with a bad result

Incorrect analysis of strategic considerations


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Strategic Reasons for Buying or Selling

Product Extension merger of firms selling non-competing products to related marketingchannels

Example: Proctor & Gamble Companys acquisition of The Gillette Company

"This combination of two best-in-class consumer products companies, at a timewhen they are both operating from a position of strength, is a unique opportunity,"said A.G. Lafley, chairman, president and chief executive of Procter & Gamble."Gillette and P&G have similar cultures and complementary core strengths inbranding, innovation, scale and go-to-market capabilities, making it a terrific fit.

"It (the deal) brings together two companies that are complementary in theirstrengths, cultures and vision to create the potential for superior sustainable growth,said James M. Kilts, Gillette's chairman of the board, chief executive officer, andpresident.

"This merger is going to create the greatest consumer products company in theworld," said Warren E. Buffett, chairman and CEO of Berkshire Hathaway Inc.,Gillette's largest shareholder. "It's a dream deal. To quantify that, I intend topurchase enough shares so that by the time the deal is closed, we will have 100million shares of P&G."


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Economies of Scale More assets and accounts, lower per dollar overhead = greaterprofits. Its a pretty simple formula, and it usually works.

Example: JPM Chase & Co. merger with Bank One Corporation

This is a strategic business combination designed to create shareholder valuethrough balanced business mix, Greater Scale, and enhanced competitiveness

The combined company will be a leading global financial services enterprise, withtop-tier positions in consumer banking, investment banking, and other key business

segments

The combined company will have assets of $1.1 trillion, a strong capital base, 2,300branches in seventeen states and top-tier positions in retail banking and lending,credit cards, investment banking, asset management, private banking, treasury and

securities services, middle-market, and private equity.

Source jpmorganchase.com


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Market Share merger of firms selling competing products in the same markets, or separategeographic markets

Example: Hewlett-Packards acquisition of Compaq Computer Corporation

Upon announcement in September 2001, based on figures reported for the past fourquarters, the combined company would have annual sales of $87.4 billion and anoperating income of $3.9 billion. Just slightly less than IBMs total sales of $90.1billion in the same four quarters.

"Without question, the merger improved the product portfolio of the company. Wehave better products to sell. We have a broader, stronger sales force. With that,clearly we'll have increased share," said Jeff Clarke, executive vice president formerger integration at H-P.

In 2003, while discussing the Compag acquisition, Jim Milton, HP's enterprisesystems group vice-president, said One of the factors behind HP's success, whichhas run contrary to what many analysts had expected, is that the company hasstolen market share from its main rivals.


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Brand Equity because many aspects of brand equity are intangible there is no one cut anddried way to valuate a brand irrefutably

Example: SBC Global acquired AT&T and adopted the AT&T Name

"The combination of SBC and AT&T companies gives us the local, global, andwireless network resources and the expertise to set the standard for deliveringmeaningful innovations and making the promise of integrated communications andentertainment a reality for consumers and businesses," said Edward E. Whitacre Jr.,chairman and CEO of AT&T Inc.

"That name is priceless," said Robert Rosenberg, president of The Insight ResearchCorp. in Boonton, N.J.

CoreBrand, a communications firm that studies brand equity, estimated the AT&T

name alone is worth $2.4 billion.


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R&D PurchasesThere are many different practice areas of medicine, each with separateproduct lines, therefore it is often cheaper and faster to acquire another companysproduct lines.

Example: Amgens acquisition of Immunex

Amgens acquisition of Immunex brings together the worlds most successful biotechcompanies, significantly accelerating Amgens long-term growth

The new Amgen will have an unparalleled, diversified portfolio of 3 blockbusterdrugs with long patent lives, including Amgens EPOGEN and NEUPOGEN andImmunexs ENBREL, along with Amgens potential blockbuster Aranesp

The new Amgen will have leadership in three targeted therapeutic areas --nephrology, oncology, and inflammation -- with a rich pipeline and R&D focus inproteins and antibodies

Acquisition of Immunex will increase Amgens long-term product sales growth rate tothe low 30s and cash EPS growth rate to the mid-20s, driven by potential ENBRELsales of $3 billion or more by 2005.

Source: Amgen.com


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267 275

318

264278 277 270

321

0

50

100

150

200

250

300

350

1998 1999 2000 2001 2002 2003 2004 2005

Source: Mergerstat

Announced Transactions Medical Device Industry

Medical Devices - Strategic Reasons for Buying or Selling


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$23.6

$40.2

$18.5

$12.4

$4.0

$11.6

$20.9

$16.2

$0B

$5B

$10B

$15B

$20B

$25B

$30B

$35B

$40B

$45B

1998 1999 2000 2001 2002 2003 2004 2005

Total Transaction Value Medical Device Industry

Source: Mergerstat



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1.91.7

1.9

2.5

1.2

1.4

2.4

2.8

0

1

1

2

2

3

3

4

1998 1999 2000 2001 2002 2003 2004 2005

M&A Revenue Multiples - Medical Device Industry

Source: Mergerstat



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13.1

9.7

13.011.8

8.9 8.8

13.8

11.8

0

2

4

6

8

1012

14

16

1998 1999 2000 2001 2002 2003 2004 2005

M&A EBITDA Multiples Medical Device Industry

Source: Mergerstat



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Platform Technology - Expertise

Example: Boston Scientific acquisition of Target Therapeutics

We acquired Target Therapeutics (in 1997) to get a foothold in the neurology business.said John Abele, Boston Scientific, Co-chairman.


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Distribution

Example: Cardinal Healthcare Inc.s merger with Allegiance

Robert Zollars, Allegiances head of distribution said Customers are interested in aone-order, one-truck approach.

We are very pleased to have reached this agreement with Allegiance, which

combines Cardinal's leading pharmaceutical services capabilities with the nation'spremier manufacturer and distributor of medical, surgical and laboratory products,stated Robert D. Walter, chairman and chief executive officer of Cardinal Health.

This is a story about growth, said Lester B. Knight, chairman and chief executive

officer of Allegiance, With Cardinal, we have a powerful partner who shares ourstrategic vision of integrating manufacturing, distribution and services to bringgreater quality and efficiency to patient care.


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Product Acquisition

Example: Johnson & Johnson proposed acquisition of Guidant Corporation

"The combination of these businesses will enable us to bring innovative newtherapies to patients and their physicians in this very important and fast growing

therapeutic area," said William C. Weldon, Chairman and Chief Executive Officer ofJohnson & Johnson.

"This exciting new partnership opens a dynamic era of innovation and productdevelopment that will benefit millions of patients around the world," said Ronald W.Dollens, President and Chief Executive Officer of Guidant.

In the interventional cardiology market, this business combination provides thecapability to accelerate development of new technologically advanced products.*

This new business can utilize Cordis' expertise, intellectual property and experiencein drug development, coating technology and polymers.*

Together with Guidant's strength in rapid and innovative development of stentplatforms and delivery systems, the combined company will bring superior productsto the market faster than either company could on its own.*

*Source: www.jnj.com


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Boston Scientific Corp. Acquisition of Guidant Corp. Case Study in Process

Boston Scientific Corp.

Market share leadership strategy

SciMed Life Systems - Became a leading manufacturer of angioplasty balloons

Guidant Corp. The combined company, with revenue of about $9 billion, will have the No. 1position in the US in selling coronary stents . . . and the No. 2 position in sellingimplantable defibrillators. (WSJ 1/26/06)


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Boston Scientific Corp. Acquisition of Guidant Corp. Case Study in Process

Boston Scientific Corp.

Integration Strategy

Were kind of like the dog that caught the bus. Now what are we going to do with the bus?

Boston Scientific CEO James Tobin commenting on the integration challenges of the Guidantacquisition

(WSJ 1/26/06)


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Concept/

Invention

Product

Development

Regulatory

Approval

Initial Sales Market

Penetration

Infrastructure Maturity

Time

Value



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Concept/

Invention

Product

Development

Regulatory

Approval

Initial Sales Market

Penetration

Infrastructure Maturity

Time

Value-Return/CostofCapita



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Conclusions

M&A Transactions work only if they are driven by strategic considerations

Strategic considerations must be correctly identified and analyzed

An efficient market will take care of the rest

Documents

Sense and Non-Cents of Mergers & Acquisitions