Process Analysis of Mergers and Acquisitions - Coursework Example

?Mergers and Acquisitions-B Table of Contents Introduction 3 Strategy – How Does The Target Company Appear To Fit into the Acquirer’s Long-Term Strategy? 4 2. Regulatory – Were There Any Regulatory Implications? 5 3. Valuation – How Have the Company Valuations Been Justified? 6 4. Financing – How Is The Acquisition To Be Financed? 7 5. Defence Tactics – Were the Tactics Employed Sensible Ones? Were the Managers of the Target Company Genuinely Resisting or Simply Seeking to Squeeze Out a Higher Offer? 8 6. Implementation – Will the Acquired Company be Difficult to Integrate? Are any Sell-Offs Likely? 10 7. Risk – Given that the Majority of Takeovers Destroy Shareholder Value, What Are the Major Risks? 11 Conclusion 13 References 14 Introduction Evidences reveal that M&As can be quite risky to lead the pathway of the acquiring company’s destruction and on the other hand, be highly beneficial to assist the company in the attainment of its long-term objectives. Despite the immense risk, companies opt for M&As in order to gain the benefits of operational leap, integration, larger customer base, channels and higher competencies (Galpin & Herdon, 2007). One of the most risky acquisitions in the recent past can be identified as the acquisition of National Westminster Bank (NatWest) by the Royal Bank of Scotland (RBS) in the year 2000. It is recorded as one of the most daring acquisitions, due to the fact that during the period of acquiring NatWest, RBS was recognised to be smaller than the target company. It took a great effort from RBS’s end to complete the deal and rewarded it the reputation of one of the leaders in the British Banking Industry (Larsen, 2007). With this concern, the paper will examine the entire process of acquisition considering the various aspects, such as strategic fitness of NatWest, regulatory factors influencing the process, justification of the valuation of acquisition, defence tactics applied, implementation of integration and risks involved in the acquisition. 1. Strategy – How Does The Target Company Appear To Fit into the Acquirer’s Long-Term Strategy? According to the experts, strategic fitness of the target company in M&A is considered to be one of the most significant aspects while determining the plan. Because, underneath every M&A the observed motive of the acquiring company or the merging companies are to increase the value of the two companies together which would be more than the sum of the total values of both the companies. Strategic fit of the target company, thus, holds a significant position to increase the overall value of the acquirer (Lee & Pennings, 1996). The strategic fit of the acquisition and the target company can be analysed in depth considering the fact that M&As are often termed as a past of the strategic objective of the acquirer to attain growth and higher competency (Edinburgh Business School, 2008). The objective can be well identified in the acquisition of NatWest by RBS. It was a horizontal acquisition, which means that the target company and the acquirer belonged to similar product line and also to a similar cultural background. This reduced the constraints in terms of cultural divergences. The prime objective of the acquisition depended on the fact that RBS was facing major difficulties in terms of shrinking stock prices to approx 32% and required growth. Similarly, with an increased competition and reducing market share led by the falling stock price and increased operational costs; NatWest opted to go for an M&A in order to survive in the industry (Mahar & Polson, 2003). Being three times larger than RBS, NatWest was able to reward a higher market share and increased balance sheet value quite instantly after the acquisition with a paid bid of ?21 billion (NatWest, n.d). Subsequently, the stock price of RBS increased rapidly over the next two years (Mahar & Polson, 2003). Therefore, it is quite apparent that the acquisition proved to be a successful one in the short-term as well as in the long-term perspective. The market capitalisation of the group, its profit and geographic distribution of income, operating profit and employees were all at a healthy position during the next five years after the acquisition. Not only the value of balance sheet of the group was at a rise, but also the overall value of NatWest was increasing (RBS, 2005). 2. Regulatory – Were There Any Regulatory Implications? During the financial year 1999-2000, RBS was recognised as a small and inexperienced bank in the British Banking Industry which ranked in the fifteenth position of the list, whereas, NatWest was considered to be among the top retail bankers in the industry (Flowers & Lees, 2002). On the process to purchase NatWest, RBS was perpetually titled as an inexperienced bank which in turn signified that the acquisition was inappropriate. Where on one hand NatWest was considering to launch a hostile bid to avert its purchase by an ‘inferior’ bank, RBS was set at its strategic directions for the acquisition. At the same time, both the banks were on the verdict to obtain sufficient amount of public responses to execute their plans (Mahar & Polson, 2003). This in turn increased the necessity of approval from the government. After the approval was gained the event took another leap and increased the hostility of the acquisition of NatWest (Mahar & Polson, 2003). Thus, the significance of regulatory implications in the acquisition of NatWest is quite remarkable. However, the obligations were performed by the companies with efficiency (The Royal Bank of Scotland Group Plc, 2000; Millward, 2005). 3. Valuation – How Have the Company Valuations Been Justified? The valuation of the company purchased is perceived to be considerably significant in the case of M&As. It is due to the fact that the determined value of the target company signifies the appropriate price of purchase. It also depicts the significance or the future prospects of the purchase. However, valuation of the target company depends on the assumptions considered by the acquirer and also in the applied method of valuation (Moeller & Brady, 2007). Valuation of a company can be determined according to three approaches, i.e. cost approach, market approach and income approach. The cost approach indicates the calculation of the net assets of the target company, while, market approach considers the value of the market share earned by the company. Income approach concentrates on the present value of the company considering its net income for the current year and the anticipated income or cash flow for the future years (Ray, 2010). In the acquisition of NatWest by RBS in the year 2000, proper consideration was provided to the net assets of the target company along with its market share and current as well as future anticipations. However, chief consideration was provided to the cash flow of the current and anticipated years which depict the valuation method to be focused on the income approach (The Royal Bank of Scotland Group Plc, 1999). Conclusively, it can be stated that the acquirer focused on the implication of the income approach while measuring the accurate value of the target company. The valuation method has been justified explicitly in the statements provided to the shareholders and the offer document for NatWest Bank Plc. 4. Financing – How Is The Acquisition To Be Financed? Due to the fact that the target company was three times larger than the acquirer, RBS had to pay quite a large sum of money to the shareholders of NatWest in cash. It was also because of the fact that the deal was based on the cash payment as per the characteristics of acquisition (Dash, 2010). Thus, RBS had to concentrate on its financing aspects for the completion of the acquisition. It was also observed that the acquirer needed a certain amount of funding in this regard. The bank can be further observed to focus on the leveraged buy-out strategy to collect the required amount. As stated in the material contract, RBS considered an underwriting arrangement with its financial advisors, Merill Lynch, Goldman Sachs and Warburg Dillon Read. According to the contract, the Additional Value Shares which the ordinary shareholders of the bank wished to sell would be purchased by the advisors on the book building basis. In turn of the Additional Value Shares, the financial advisors would be providing a funding or 37.5%, 37.5% and 25% respectively (The Royal Bank of Scotland Group Plc, 2000). 5. Defence Tactics – Were the Tactics Employed Sensible Ones? Were the Managers of the Target Company Genuinely Resisting or Simply Seeking to Squeeze Out a Higher Offer? In order to defend them against the acquisition by a relatively smaller bank, NatWest was observed to apply few defence tactics which were evidently quite aggressive in nature. In 1999, Bank of Scotland offered to acquire NatWest on the ground that the management decisions in the target company was ineffective and the acquisition could foster the growth of both the banks. On the contrary, NatWest argued that the offer was inadequate as it indicated being acquired by a smaller company stating that the shareholder wealth could be effectively maximised in future if the bank operated independently. Moreover, NatWest was recorded to be in the central of acquiring Legal and General which gave a hostile shape to the bid (Mahar & Polson, 2003). With the purpose to operate independently, the managers of NatWest ultimately decided to host numerous operational strategies at the same time which would probably prevent the acquisition. Subsequently, the board of directors replaced the CEO of the company and also announced the desertion of the Legal and General propose. Recently after the announcement of the abandonment of the Legal and General bid, the company leaders accepted the critique of poor management practices which had till then influenced the strength of the bank to a large extent. Furthermore, NatWest’s managers initiated to announce their cost savings plan through layoffs and selling of non-core assets (Mahar & Polson, 2003). It can be witnessed from the above discussion that the defence strategies adopted by NatWest were not the sensible ones as it reflects the emotional contravention more than a rational viewpoint. Changing the CEO and discarding the bid at its midst, depicts the struggle faced by the bank managers. However, providing the bank a positive support was still uncertain which indicated the inefficiency of the defence strategy employed by the managers of NatWest. To be mentioned, the objective of both the banks was to increase their future potential and competency. Despite, NatWest was observed to consider every available opportunity to prevent the acquisition. However, the managers of NatWest continuously refused the proposal still after the government approved the acquisition. The approval attracted many other potential acquirers in the industry which increased the aggressiveness of the situation. During this period, RBS offered a friendlier offer to NatWest which was again refused. Thus, the acquirer opted for a hostile bid and announced 15.9 pounds per share. Notably the acquisition was being led by Bank of Scotland which admitted its defeat in the hostile bid after the end of its 60 days period and continuously increasing amounts of bid from the end of RBS. Ultimately, RBS won the battle and took over NatWest (Mahar & Polson, 2003). The fact significantly supports the thought that managers of NatWest were more concentrated on the value of the offer rather than genuinely resisting the acquisition. The thought can further be confirmed with the assistance of the shareholders’ responses regarding the offers forwarded by the Bank of Scotland and RBS. For instance, according to the experts the offer proposed by Bank of Scotland apparently was financially quite high but lacked in economic value due to which it did not earn sufficient amount of shareholders’ vote. On the contrary, RBS’s offer involved cash which remarked a certain economic value due to which it was favoured by the shareholders of the company (Mahar & Polson, 2003). 6. Implementation – Will the Acquired Company be Difficult to Integrate? Are any Sell-Offs Likely? NatWest was recognised as a competitive retail banker in the European market which was established in the year 1968 as a merged entity of National Provincial Bank and Westminster Bank. By the end of the 20th century, the retail bank already had its foothold fixed in the European and international market which included America, Japan and other developed economies comprising more than 3500 branches in total and a wide series of innovative services (NatWest, n.d). On the similar context, RBS was recognised as a smaller bank in the European industry during the period with limited network of 650 branches. However, the bank provided significant consideration to the technological assistance which proved to be a great help to the bank in its future operations. It also provided significant consideration to its services in the financial services sector (RBS, 2011). Hence, it is quite apparent that both the banks belonged to a similar market environment and offered indifferent product line to their customers. Thus, the cultural as well as the operational barriers likely to arise in the M&As get reduced. With these virtues, the integration was not likely to be difficult, however, it raised few constraints which potentially increased the probability of sell-offs. The market size of the target company was quite large compared to that of the acquirer which raised the challenge of overexpansion. In order to minimise this risk, sell-offs were likely to take place. 7. Risk – Given that the Majority of Takeovers Destroy Shareholder Value, What Are the Major Risks? M&As, which lack in efficient planning and aftermath analysis often raises a few risks. These can be identified in terms of hampered human resource practices of both the entities, destruction of shareholder value, reduced sustainability, complex organisational culture and others (Galpin & Herndon, 2007). Undoubtedly, the acquisition raised numerous risks to be faced by the acquirer. One of the major risks was the infringement of shareholder value of not only the acquiring company but also of the target company. It is due to the fact that the acquisition under leveraged buy-out approach instigates the pay off for the shareholders of the target company which certainly requires a considerable accountability. To be precise, few major risks which can be identified in the acquisition of NatWest are related to the human resource issues and marketing issues along with the infringement of shareholders value. As the acquirer is recognised to be a smaller company and lacks in experience to control the operations of huge corporate, it is most likely to influence the marketing operations of the target company. The organisational culture is also observed to be different in both the companies which could be hampered by the acquisition. Another major risk which could have risen was the destruction of the shareholder value. For instance, the acquisition increased the share value of RBS to a great extent which depicted the essentiality of capital restructuring in the organisation which could in turn hamper the shareholder value and the shareholder interest in turn. Conclusion In order to gain the advantage of operational leap, organisations such as, RBS often opt to acquire companies horizontally which can be quite risky at times. Most of the companies often face a similar challenge while acquiring their competitors on the horizontal line i.e. the sudden leap of organisational structure which can be defined as overexpansion. Undoubtedly, RBS also faced the risk which it dealt with efficacy and thus maintained its survival in the industry. However, in the recent phenomenon, the company’s decision to acquire another competitor ABN Amro has been defined as a mistake by the experts. As a consequence, the company is facing a severe period to rejuvenate its growth as a market leader (Independent, 2009). Hence, companies should be more emphasised on the selection of the target company, efficiently evaluating its strategic fit and later consequences. References Dash, A. P., 2010. Mergers and Acquisitions. I. K. International Pvt Ltd. 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Mergers and Acquisitions: Strategic - Organizational Fit and Outcomes. University of Pennsylvania. [Online] Available at: http://www-management.wharton.upenn.edu/pennings/documents/mergers_acquisitions.pdf [Accessed April 22, 2011]. Mahar, J. & Polson, K., 2003. The Battle for NatWest. St. Bonaventure University. [Online] Available at: www.financeprofessor.com/.../The%20Battle%20for%20NatWest11%5B1%5D.26.03.doc [Accessed April 22, 2011]. Millward, L., 2005. Understanding Occupational and Organizational Psychology. SAGE. Moeller, S. & Brady, C., 2007. Intelligent M&A: Navigating the Mergers and Acquisitions Minefield. John Wiley and Sons. NatWest, No Date. NatWest - A History. About Us. [Online] Available at: http://www.natwest.com/global/about-us.ashx [Accessed April 22, 2011]. Ray, K. G., 2010. Mergers and Acquisitions. PHI Learning Pvt. Ltd. RBS, 2005. Annual Report and Accounts 2005. The Royal Bank of Scotland Group. 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