Value creation through mergers & acquisitions: Why do or don’t mergers and acquisitions bring the anticipated results? A multiple case study into the reason why some acquisitions add value
and others don’t.
In Search of
Value
Why do or don’t mergers
and acquisitions bring the
anticipated added value?
Author: Tienhoven, Eelke van Student number: 10475796 Reviewer: Jeroen Kraaijenbrink Date: 24/01/2016
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Statement of Originality
This document is written by Student Eelke van Tienhoven who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Content
Abstract………..…….……….3
1) Introduction………..………4
2) Theory and propositions………..……….……….6
2.1) Value destruction, or at best no benefits………6
2.2) Neutral, or positive effects from acquisitions………..10
3) Research methods………….……….………..13
4) Case reviews………..….………..18
4.1 Case 1………..………..18
4.2 Case 2………..………..24
4.3 Case 3………..………..30
4.4 Case 4………..………..35
4.5 Case 5………..………..40
5) Results & Cross case analysis…….………43
5.1 Cross case analysis based on financial performance……….44
5.2 Cross case analysis reviewing propositions……….49
5.3 Reviewing propositions outside the cross case analysis……….52
6) Discussion & Implications……….54
References……….57
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Abstract
At present, there is no real academic consensus whether or not Mergers and Acquisitions (M&A) add value to the acquiring company, although the tendency in the literature is that they do not bring value. The outcome of this research suggests otherwise. Contrary to most of the existing literature, this research is not based on stock price evaluation or reviewing financial data from annual accounts but is based on 1st hand quantitative and qualitative data and entails multiple years.
Through case studies, multiple acquisition done in the period 2004 - 2014 by a globally operating telecommunications provider are reviewed and the results indicate that in almost all cases they have all added value to the acquiring company. Not always to the anticipated levels and not always in the anticipated way, but overall results are positive.
Based on prior research, multiple propositions related to value creation through M&A have been formulated, reviewed and ranked against each case. The results indicate signs of Hubris, Agency problems and value leakage through reallocation of effort. This study identifies how, why and where Hubris and Agency issues occur and suggests actions on how the impact of these phenomena can be limited. One of the suggestions is that by institutionalizing structured criticism at various stages in the acquisition process from other parts within the organization could potentially reduce the impact of Hubris and Agency problems. Value leakage through reallocation of effort seems difficult to entirely eliminate as it will always occur at a certain level but by making it visible and by anticipating on it in the acquisition plan (and price) it becomes less of an issue as it is then part of an holistic view of the integration process.
Potential explanation why these results suggest value creation through M&A, which is in contrast with most research, could lay in the fact this study focusses on a single organization present in one industry and that this organization does not use M&A to diversify. Further research is necessary to investigate if that explanation holds.
This study reconfirms the value and importance of case study work next to empirical research. It also provides suggestions on how further research could be structured. It indicates future research could focus on constructing a framework that identifies factors as Hubris, Agency problems, etc. at each stage of an acquisition (due diligence, bidding process, integration) and assesses its impact on the total acquisition process. This could potentially result in practical suggestions so that organizations can actively manage these factors along the entire process of an acquisition.
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1) Introduction
This sections elaborates on the relevance of this research, discussing general background, mechanics behind mergers and acquisitions and the implications.
Mergers and acquisitions are deployed by organizations to enhance their scale, increase their market dominance or diversify through the purchase of (parts of) other organizations.
Merger and acquisition (M&A) activities between organizations have been around as long as businesses itself exists. Organizations aim to use M&A to improve their (market) position; in the form of economies of scale to save costs, enhancing revenues through market size, product development or pricing power, diversification, or to acquire a competitor’s (scarce)
resources.(Lubatkin, 1983; Porter, 1987).
Problem analysis
M&A comes at a price; the purchasing company (effectively its shareholders) has to pay the owners of the targeted organization to compensate for their loss of future profits. This compensation (acquisition price) is calculated based on multiple variables but often comes down to potential future financial performance of the target company summarized in terms of Ebitda, Capex and Free cash flow. This potential future financial performance explains partly why some companies are willing to pay a higher acquisition price for the same target then others. If the target company is expected to have a good strategic fit and organizational fit with the acquiring company the potential for combined future profits is higher than if there is less strategic or organizational fit with the acquiring company (Datta, 1991). For example, a car manufacturing conglomerate buying a car parts manufacturing company to vertically integrate certain activities may see more future profit potential (cost synergies, buying power) than an investor who is looking at the car parts manufacturer on a standalone basis and is for that reason potentially willing and able to pay more. In reality multiple other factors play an important reason in M&A valuation but future profit potential is the main theme.
Correctly assessing the value of a target company and an organization’s ability to effectively integrate the newly acquired company is vital in the M&A process (Wilcox, Chang & Grover, 2000, Pablo, 1994). If the acquiring company overestimates potential future profits of the target and pays too much, it wastes valuable capital which could have been invested elsewhere with more
profitability or could have been returned to its shareholders. Alternatively, the value of a target company is underestimated resulting in a bid which is too low (or no bid at all) and a competitor does the acquisition. In this case a valuable opportunity to create value is missed. Just as important is an organization’s ability to effectively integrate newly acquired activities into its own operations to gain maximum leverage on the new combined activities. If a company fails to do so this can result in suboptimal use of newly acquired resources and thus not bringing the expected future profits. Needless to say this also results in a loss of (shareholder) value, since the price paid for the acquisitions is then not justified by future profits.
Academic omissions
Existing studies into value creation through M&A predominantly focus on shareholder value and as such try to measure value creation via a short term or long term analysis of stock prices or other financial KPI’s (profit, free cash flow) of the investigated companies (Lys & Vincent, 1995; Moeller, Schlingemann & Stulz, 2003; Dutta & Jog, 2009). An example of such short term analysis is
Martynova & Renneboog’s (2008) research into short term wealth effects of acquisitions measured
via valuation of stock prices. One of their comments is that fluctuations in stock prices in such a short period around the bidding process are purely the results of the dynamics around the bidding process and do not give a fair representation whether value was actually created or destroyed
5 through acquisitions. Accordingly, analyzing value creation over such a short period might not be the best method. A second omission in the existing literature is the analysis method itself; most research focusses on analysis of stock price development or other financial KPI’s such profit or free cash flow deducted from public financial statements (Meglio & Rinsberg, 2010; Cartwright, Teerikangas, Rouzies, Wilson-Evered, 2012). This might work when one transparent organization (clear insight in financials and structure) buys another transparent organization. In that case, comparing the joint profit or free cash flow with a projection of profit of when they were standalone gives a good picture on value creation or not. In reality most organizations are not that transparent (publicly available information is limited to annual statements etc.) and especially when a large multinational conglomerate buys another party the mid –long term effect of that acquisition is very difficult to isolate from its normal business activities. The reason that this method is still widely used is most likely attributable to the fact that it is very difficult to get better data. Most companies are not willing to share detailed information on the results of their acquisitions as it is deemed too valuable information to competitors and potential future acquisition targets. From an academic research perspective this poses a potential issue, since the available data is often impacted by other events rather than just the M&A activities which are the focal point. So for researchers it becomes very difficult to base conclusions on these data as the effects of the true focal point of the research (value creation through M&A in this case) cannot be separated properly from other events which occurred. Thirdly, although there is extensive research done on if M&A creates value (with ambiguous results), there is limited research into why value was created or destroyed.
When summarizing the three main issues in the existing literature, the following shortfalls become evident; measurement over short time frame, measurement based on KPI’s which are polluted, and not enough focus on the ‘why’ question. Most of these gaps in existing literature can be traced back to a lack of available data as described above.
Research Objective & relevance
This research aims to expand the existing knowledge on value creation through M&A in two ways. Firstly, by financially assessing the value creation of multiple acquisitions over a multiyear time frame based on firsthand (internal) information (acquisition plan vs. realized results). This addresses the existing academic gap of short term focus and the lack of available first- hand data. Relevance lies in the fact that a comparison can be made between the existing academic approach based on large sample studies and this research based on firsthand ‘cleaner’ information.
Secondly this research will focus on the ‘why’ of certain events. Based on the outcomes of the analysis of the acquisition plan and rationale behind it a deep dive will be done to understand which factors and drivers are at play during the acquisition and integration process and how they affect the question if value is created or not. Having access to internal documentation and resources such board materials, due diligence analysis and employees, provides a richness of information which is not widely available in existing literature
Thesis outline
Order of this research is as follows. Chapter 2 discusses existing theory and hypothesis, where the theory is split following the existing academic blocks; those who do not see added value from M&A and those who do see added value. Chapter 3 describes the methods used for the various case studies and lists the data and its sources. Chapter 4 is an in-depth analysis of the various cases describing findings per case. Chapter 5 entails a cross case analysis to detect potential trends in findings and summarizes those findings. Chapter 6 discusses the results and how they relate back to the existing literature and concludes on results and suggestions for future research.
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2) Theory & propositions
This section reviews existing literature on whether M&A adds or destroys (shareholder) value for the acquiring company. In paragraph 2.1 the literature which supports the view that M&A does not create any benefits will be discussed. Consequently paragraph 2.2 will discuss the academic views which support the idea that M&A does create benefits. These reviews will result in 5 propositions. In paragraph 2.1 & 2.2 the existing academic views will be presented on a per author base in order to clearly show where findings differ or overlap.
Extensive research has been done in the field of value creation through Merger & Acquisition activities. In general the outcomes are ambiguous and opinions vary on whether M&A creates or destroys shareholder value for the acquiring firms (Martynova & Renneboog, 2008; Trillas, 2002; Zollo & Singh, 2004; Bower, 2001).
The fact if M&A creates value or not is commonly expressed in a form of financial benefits. The beneficiaries of these financial benefits can be separated into two categories, firstly being acquisition target (or effectively its owners) who receive (financial) compensation for selling their assets. Secondly, there are potential benefits for the acquiring party as well. The acquiring party aims to increase value by purchasing this asset and merging it into its existing operations or by optimizing its resources, creating synergies etc. If the acquiring party would not think it would be able to create this value it would obviously not spend scarce capital and resources on it. The latter form of value creation (benefits accruing to acquiring party) is the focal point of this research. As such, the theory discussed below will focus on that part of value creation, discussing both major academic blocks; those who believe no value is added via M&A and those who believe there is added value.
2.1) Value destruction, or at best no benefits
2.1a) Acquisition performance measured
Martynova & Renneboog (2008) have played a central role in M&A research because of their vast research and comparison of existing academic literature, as such their 2008 paper (being an expansive literature review) forms an important part of this section of literature review. Martynova & Renneboog (2008) make a clear distinction in their research on mergers and acquisitions over the past century between value creation for the shareholders of the targeted company and the shareholders of the bidding company. They find that “The empirical literature is
unanimous in its conclusion that takeovers are expected to create value for the target and bidder shareholders combined (as reflected in the announcement abnormal returns), with the majority of the gains accruing to the target shareholders, so limited to no value for the buying party. The evidence on the wealth effects for the bidder shareholders is mixed; some reap small positive abnormal returns whereas others suffer (small) losses” (p6 Martynova & Renneboog, 2008). By
looking at short term wealth effect (via valuation of stock prices) they clearly find M&A does bring value to the target companies’ shareholders but not so much for the buying party. Martynova & Renneboog (2008) also find that on average abnormal returns as of the takeover announcement for the bidding companies is statistically indistinguishable from zero (derived from research by Asquith 1983; Eckbo 1983; Byrd & Hickman 1992; Chang 1998 and confirmed by Andrade et al in 2001), which indicates no, or very limited added value for the bidding company on short term.
Furthermore they argue that this kind of value creation, accruing mostly to the target company is the result of the dynamics in the bidding process around announcement day where shareholders speculate on a potential upwards revision of the offer by the bidding company. When considering the wealth effects over a period of two to three months the results for the bidding companies are ambiguous with significant positive effects, significant negative effects and effects which are statistically no different than zero. These effects are partially affected by the means of payment of
7 that takeover(cash, equity, combination of the two), the fact whether it’s a hostile takeover or a friendly bid also plays an important role, also whether a company is acquiring a company within its own segment or is acquiring to diversify is an important aspect.
The results of Martynova & Renneboog’s (2008) research further suggests that there is no proof to support suggestions that value creation based on (cost) synergy potential is actually visible in improved performance post- acquisition versus the period pre –acquisition.
Further support for the statement that acquisitions do not bring value to the acquiring firm and its’ shareholders is presented by Trillas (Trillas, 2002). Her research focusses specifically on acquisitions in the telecommunications industry. Based on an analysis of stock prices of the acquiring firm before and after acquisitions she finds in the twelve cases researched by her that on average the abnormal returns do not differ significantly from zero. This means that the acquiring firm did not incur any significant value creation from the acquisition (measured via share price valuation). These findings contribute to the idea that the results for value creation for the acquiring firm in the
telecommunication industry are no different than for other industries and confirm what most empirical studies have stated; abnormal returns for the bidder are statistically not different from zero. To partly explain this lack of value creation Trillas points towards the agency theory but also specifically towards political and regulatory factors which are heavily influencing takeover activity. Rau and Vermaelen (Raghavendra Rau, P & Vermaelen, 1998) find that bidders in acquisitions underperform in the three years after acquisition which is in line with earlier findings that bidders incur no value creation or even destroy value via acquisitions. Rau and Vermaelen take their research one step deeper and argue this is predominantly driven due to poor post- acquisition performance. Where Martynova and Renneboog (Martynova & Renneboog, 2008) find that short term and mid short term wealth effects for the bidder are statistically insignificant, Rau and Vermaelen allocate the long term wealth effect (or the lack of) to poor post- acquisition performance.
In line with the above literature one would not expect to see significant value creation effects in the cases which are reviewed in this research. To properly assess if that is indeed the case the following needs to be taken into consideration; the acquisition plan for each acquisition is in essence a business case with a positive return on investment and thus of added value to the shareholders. This business case only remains positive if indeed the projected financial targets are met after the actual acquisition. In case of significant underperformance versus the original plan we can assume value destruction has occurred, while in case the financial results are in line, or better than planned we can assume value creation. Following the findings in the literature discussed above (value destruction, or no benefits) we would expect to see a significant underperformance of the actual results of the newly acquired company compared to what was in the acquisition plan (which includes value creation assumptions), this leads to the following proposition;
Proposition 1)
The realized financial benefits over the investigated period are significantly lower than the results projected for that period in the original acquisition plan.
2.1b) Acquisition performance explained
The fact that many acquisitions take place despite most of the evidence pointing in the direction of no value creation, or even value destruction for the bidding company is often attributed to agency problems (Amihud & Lev, 1981; Jensen, 1986) Managerial hubris (Roll, 1986) and
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Agency problems.
According to the Agency theory problems can arise when the goals of the principle (shareholder for instance) and the agent(s) (company management) are not properly aligned (Jensen & Meckling, 1976; Eisenhardt, 1989). According to Eisenhardt (1989), Agency theory can be divided along two lines; the Positivist approach and the Principal agent approach. The first focusing on practical examples of situations where the goals of the principle and the agent are not aligned and trying to find a governance structure to resolve that. The latter (principal agent) is more a theoretical approach looking to find a general applicable theory. This research can be grouped under the Positivist approach as it focus on specific Agency issues impacting Mergers and Acquisitions rather than trying to build a general theory.
An example of Agency problems within the field of M&A is risk spreading by management through diversification via acquisitions. New companies are acquired to create a broad portfolio in order to stabilize companies’ results. However these acquisitions may not necessarily be a good investment or a good fit with the company. In this case an acquisition is done for the wrong reason; risk aversion rather than creating value for the shareholder. In this example the shareholders function as the principle and the company’s executives as the agent, the latter should operate in a way which is best for the principle. Instead they are for instance worried about their own position due to volatile company results and decide to expand the company’s portfolio to reduce volatility. Although this might seem logical at first glance it may actually not be a good idea if it is not the best way to use the company’s scarce resources. In this case the acquisition brings certain stability to the company’s results which the executives would welcome but it might not be the most efficient use of resources and capital, which is in essence then value destroying for the shareholders. Another example is when management’s focus is on short term stock valuation (driven by own incentives), they are then more likely to do stock value boosting acquisitions which seem good on a short term but might be value destroying on long term (Harford & Li, 2007). This short term focus on management’s own incentives can lead to empire building, which is also discussed by Ang & Cheng (2006) who argue that focus on short term stock value leads to consequent over-valuation and empire building. Shareholders (principle in this example) like pension funds, insurance companies, etc. have a long term horizon when it comes to their return on stock investments. The executives (agents) of the companies they invest in however, often have an equity reward scheme which varies between the 1-3 years. Driven by the 1-1-3 years reward scheme they will do as much as possible to maximize value for that period as it is in their own interest. They might be inclined to do acquisitions which are favorable in the short term but are value destroying in the long term. If this happens they do not operate in a way which is most beneficial to the principle (shareholders with long term view) but operate in their own interest. This is important to this research as the focal company has a strong focus on stock value (as they do not pay dividend, the only way to create shareholder value is to increase stock value) and uses stock options as an important part of their incentives scheme
Hubris.
Next to Agency issues, Managerial hubris can play an important factor in the M&A process. Managerial Hubris comes in many forms according to Roll (1986); one of them is that management of the acquiring company is convinced that they can make a proper valuation of the target company. Roll (1986) argues this could be erroneous thinking since there is no observable market price via which the target can be compared with other assets. This means that the valuation is a rather ‘isolated’ event which due to its complexity and lack of available information is sensitive to errors. Another form of Hubris in the valuation process is overestimating management’s own potential of adding value to a newly acquired business (Roll, 1986) and identifying managerial weaknesses of the target. This can lead to over- valuation of the target firm because overestimating own added value to future potential can lead to willingness to pay a higher acquisition price.
9 This research will try to address the latter part of the hubris forms described above (added value of management of the bidding firm can bring to the target firm). The focal firm of this research has developed a set of best practices in the form of scale efficiencies, process improvements, operational examples based on other cable companies it currently operates. When it does a valuation of a potential target it tries to measure that target against its own set of KPI’s to identify potential weaknesses and improvement areas. The less efficient a potential target is the more potential and thus future growth there is. These potential improvements are reflected in the acquisition plan. The question is how realistic these improvement plans are and if the perceived added value of that acquiring company’s management is correct or is overestimated. One way of identifying this issue is by assessing the target company’s performance before and after the acquisition. By identifying whether or not the acquisition plans project a significant uplift in performance of the acquired company after the acquisition, compared to the period prior to the acquisition, we get an idea of management’s perception of its own added value. If management of the acquiring company indeed thinks it will be able to add significant value to the target one would expect a projected performance improvement.
If there is indeed a significant expected uplift of results in the acquisition plan for the period after the acquisition it could be an indication that management of the buying party believes it has the ability to create additional value which the target company on its own apparently could not. If there is no uplift visible the question is why the focal company decided to buy this firm and is willing to pay a premium (none of the acquisitions were purchased in a situation where the selling party ‘had to sell’, sellers did make a profit in all cases). The acquisition plans that are the focal points of this research represent management’s estimation of (improved) financial performance. The benefits and financial targets in the acquisition plans represent the justification of a certain price at which shareholder value is created, otherwise the acquisition would not have been done or the acquisition plan would be different. This leads to the following proposition.
Proposition 2)
The acquisition plans show a significant expected uplift in results in the years after acquisition compared to the years before acquisition.
The expected uplift described with the second proposition is based on management plans of the acquiring firm. These can be cost synergies, new product implementations, process improvements, price increases, market development etc. The extent to which these plans are reached or not can also signal whether or not Hubris plays a role. The more management thinks it can add value to the target, the more aggressive the acquisition plans become and the harder it will become to execute those plans. The expectation is to see an overestimation of the projected value creation effect driven by the fact that the focal company perceives its added value through initiatives such as product development and cost synergies as too positive.
Proposition 3)
The assumptions on how the focal company could support the expected performance improvement of the target after acquisition are too optimistic.
Glamour firms
The fact if a company is considered to be a ‘glamour firm’ or a ‘value’ firm also plays a role in post- acquisition performance according to Rau and Vermaelen (1998). Glamour firms have been defined as firms with high stock market prices relative to an accounting-based measure of firm worth (e.g., low Book/Market ratios). In contrast, value firms have been defined as firms with low stock market prices (Chirinko & Schaller, 2003). In their research Rau and Vermaelen (Rau & Vermaelen, 1998) analyze stock price development of bidding companies in the three years after acquisition, they find that specifically ‘glamour’ firms which have a low book to market ratio yield negative abnormal
10 returns after an acquisition and thus destroy shareholder value rather than creating it. Opposite to the ‘glamour’ firms, the so called ‘value’ firms with a high book to market ratio actually yield significant positive abnormal returns in the three years after acquisition. Rau and Vermaelen attribute that performance difference to the fact that ‘value’ firms are less exposed to managerial hubris due to the fact that a significant transaction like an acquisition has a larger impact on future performance than in the case of the ‘glamour’ company which already has a good track record and there will less likely be any objection of shareholders given the good track record of the Glamour firm. This finding is line with the performance extrapolation hypothesis which Rau & Vermaelen summarize as follows; “According to the performance extrapolation hypothesis, the market over-extrapolates the past performance of the bidder when it assesses the value of an acquisition. At the same time, managers and other decision makers (such as large shareholders and the board of directors) who have to approve an acquisition, indirectly receive feedback on the quality of the bidder’s management from the market. Specifically, we argue that in companies with low book-to-market ratios (‘glamour’ firms), managers are more likely to overestimate their own abilities to manage an acquisition, i.e., they will be infected by hubris“.
Prior research has shown that acquisition results are impacted by the fact if the bidding party is considered to be a glamour firm or a value firm, therefore it useful for this research to understand whether or not the focal company is considered to be a glamour. Once it is established if the focal company is a glamour firm or not it is interesting to see how the outcome compares to the results of the first hypotheses (performance results). Since Rau & Vermaelen (1998) argue that a glamour firms destroy shareholder value through acquisitions these negative results should be reflected in the outcome of the first hypotheses.
In itself and as a stand -alone proposition this doesn’t have much meaning but when viewed together with the other propositions around hubris and over- optimism this proposition could be providing additional evidence supporting the other propositions (or to contradict them).
Especially with a company that does acquisitions on a regular basis it is interesting to see if this is indeed the case.
Proposition 4)
The focal company of this research is a ‘glamour’ firm according to the definition of Rau and Vermaelen (Rau and Vermaelen, 1996).
2.2) Neutral, or positive effects from acquisitions
Contrary to a majority of empirical evidence and the studies discussed earlier that acquisitions do not bring value to the acquiring companies, Dutta and Jog (2008) find in their study that there is no proof of long term negative abnormal results. Their research consists of an analysis of 1300 M&A events in the period of 1993 – 2002, and focusses completely on Canada. Important to realize is that although the research does not find evidence of negative abnormal returns the authors also clearly state “our results also show that there is no significant difference between three year
post-acquisition and three year pre-post-acquisition operating performance of Canadian acquiring firms.” Which means that although there is no significant added value from the acquisitions, they also find no evidence for value destruction, contrary to the literature discussed in section 2.1. The above findings in itself should trigger the question if the acquisitions served any useful purpose since the additional organizational efforts and costs that are associated with an acquisition are not taken into consideration in this research but are nevertheless significant and present, in the form of
“reallocation of effort for instance” (Meyer, 2008). Dutta and Jog (2009) try to provide an
explanation on why their results differ significantly from existing research on M&A by pointing to the different regulatory climate in Canada compared to the US, as most of the existing studies are based on US events. They argue that Canada has a less strict antitrust legislation than the US which makes it easier for Canadian companies to capitalize on their market dominance than US based
11 corporations. This might indeed be part of the explanation as in the US bidding firms are often forced to take on antitrust measures by the government which can limited their market size and power and thus have a negative effect. When comparing Dutta and Jog’s (2009) results to Trillas (2002) which focusses entirely on the European market we could draw a similar conclusion. Trillas’ (2002) results are in line with most of the US based findings, showing no benefits for the bidder and even in some cases negative abnormal returns. When taking the regulatory argument into
consideration one could state that just as in US focussed research this plays a role as well in the European based research. On average (still differs slightly per country) the European legislation on antitrust is even more strict than in the US which would than partially explain the differences in results between Canadian based research and research based on US and European events. If indeed the differences in regulatory legislation between Canada and two of the worlds’ largest economic markets (US and Europe) play such an important role one could ask the question if the Canadian based research is representative for the entire world and if it is generalizable enough. Typical in that sense is that two other studies, (Andre, Kooli, & Her, 2004; Eckbo & Thorburn, 2000) which are quoted in the Dutta and Jog (2009) research who also investigated M&A in Canada (although with smaller sample size) find results which are more in line with existing US based research indicating negative abnormal returns.
Capron and Mitchel (Capron & Mitchell, 1997) do find proof of improved financial performance and improved capabilities in their study into four acquisition cases in the telecommunications equipment Industry. They find that strategic reconfiguration and efficiency gains led to improved financial performance in most cases. This contradicts with the general academic consensus that M&A does not create value and often even destroys value. Important to note here is the difference in research set up that might play a role. Capron and Mitchel (1997) use a survey conducted amongst senior executives of the acquiring companies to determine the outcome of the acquisitions which might lead to biased answers. Most of the other empirical research is based on an analysis of stock price and as such is less influenced by management’s opinion. Considering the findings of Capron and Mitchel (1997) who do find added value based on management’s perception and the results of many other research based on stock price valuation showing no benefits for the shareholders there is a gap which could partially be explained by Hubris and Agency problems (management overestimates itself) but can also be explained by so called ‘value leakage’ in the post-acquisition phase.
This concept of value leakage, explained by Meyer (Meyer, 2008) assesses how and where in the integration process value is lost. One of the main issues he identifies is “reallocation of effort” which comes down to the fact that the acquiring company puts so much (unplanned) resources and effort into the integration phase the normal day to day business is pushed to the background which results in an overall loss of value. Together with the previous propositions it can form an important indicator. If this reallocation of effort is indeed taking place during the integration phase and it was not planned or in excess of expectations this can potentially destruct value as the integration efforts come at the expense of the normal activities which also add value to the organization. Since this reallocation of effort can form an important tangible proof towards value leakage it is important to include this research.
Proposition 5)
During the integration phase there is a significant reallocation of key resources within the acquiring company, distracting from ‘normal’ activities, leading to value destruction from an overall activities perspective.
Additional proof that M&A does create value for the bidding company as well comes from Healy, Palepu and Rubeck (Healy, Palepu, & Ruback, 1992). Their research into the results of the 50 largest mergers in the US between 1979 and 1984 reviews the operating cash flow performance in the post- acquisition performance. Healy, Palepu and Rubeck chose to use operating cash flow as a
12 that the latter is influenced by too many distorting variables (market imperfections for instance) to be a proper measure. Their conclusion is that mergers do bring significant value to the merged companies in the form of improved operating cash flow performance, especially if the merger is between (partially) overlapping businesses. Their findings show that the improved performance seems predominantly driven by increased asset productivity. The most interesting question they draw upon these findings is if this is driven by prior inefficient use of assets and whether or not it was the bidding companies’ knowledge or resources to optimize the use of these combined assets. These two questions will also be addressed via propositions 1 & 2, as they focus on company’s result after acquisitions (measured amongst others on operating cash flow) and the rationale behind the performance results.
This review of the existing academic literature has shown there is no real academic consensus on the question if M&A creates or destroys value (or has a neutral effect). It has also shown that depending on the research methods, research time frames and different industries the results can vary. This emphasizes the need for more in-depth research, focusing on the ‘why’ question based on first hand company data instead of high level reviews based on stock performance or annual accounts which do not have the ability to focus specifically on the M&A event. This research aims to contribute to the existing literature by exactly doing that; in-depth analytical reviews of existing cases of M&A events in order to assess if value was created or destroyed and to identify the drivers. The various propositions which are linked to specific theories discussed in this section are designed to help answering those questions in a structured way, building further on existing literature.
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3) Research methods
This section discusses the methodology used for this research; it describes the data collection process, validity & rigor and provides an overview of the available data.
This research reviews the acquired firm’s performance and functioning as part of the larger group after the acquisition versus the original acquisition plan and tries to explain why potential
performance differences occur. By reviewing the performance of the newly acquired company through the eyes of the acquiring party it is intended to get a holistic view on value creation through M&A for the acquiring party (group). In essence the question is; does the newly acquired company bring the added value as intended to the acquirer? The focus will be on the post-acquisition period, often referred to as ‘the integration phase’ and the financial performance post acquisition. The original valuation (pre-acquisition) will also be taken into consideration where deemed relevant.
The chosen method for this research is a multiple case study approach. In order truly find the drivers in the post –acquisition phase an in- depth review of events, documents and decisions is necessary. As described in the introduction section of this thesis, the relevance of this research lies exactly in that qualitative part rather than adding more research to the quantitative part of the literature. Five different cases which all represent significant acquisitions for the focal company will be reviewed. By using the same approach and using similar data as much as possible for all cases it becomes possible to compare the cases and to potentially identify trends and similarities among them using a cross case analysis framework. For each case (except the last one) the analysis will cover a timespan of multiple years. By doing so, the impact of ‘one off’ events disrupting the
performance of the acquired companies in a certain year is limited and it adds to the reliability of the data in a broader sense that something as complex as acquisition performance measurement cannot be captured at just one moment in time. Cases 1-4 will be reviewed following the same structure to assess how propositions 1, 2 & 3 apply and to facilitate a cross case analysis (proposition 4 applies to the focal company as a whole and is not applicable for the individual cases). The 5th case will be reviewed as a standalone case and will focus solely on the 5th proposition. Rationale behind this is that for this case (and proposition) specific information is needed which not retained for more than one year by the focal company and as such is not available for the other cases. To properly assess if reallocation of effort (5th proposition) occurs this research will use system data and input from project managers who have previously worked on integration projects. The system data (which is not retained for more than a year) entails an overview of labor and other resources spend by internal employees on specific projects (also integration projects). This way it becomes clear how much time and other resources are being spent on integration outside what was anticipated in the acquisition plan. The combination of tangible data and input from project managers support the validity of the outcome. Further details are provided in the result section of the 5th case.
Case Selection
The focal company for this research is one of the worlds’ largest international cable operators with presence predominantly in the European and South American telecommunications markets.
Through its cable networks it provides Television services, Internet and fixed line telephony, in some markets it also provide mobile services by using the network of an existing mobile phone company (MVNO). Currently it operates in 14 countries, has revenues of USD 18bln and 38,000 employees. Growth through M&A is a core part of the company’s strategy, as is creating value for its
shareholders through share buyback programs and appropriate leverage. On average the focal company has done a considerable acquisition (more than E 1bln) every 2 years in the period between 2004 and 2014, this excludes various other smaller takeovers.
Acquisition cases in multiple countries were selected, detailed acquisition plans and current ‘standalone’ results are available (contrary to many small acquisitions which are consolidated into results of existing operations and therefore not identifiable after acquisition). Due to their size (Euro
14 2 BLN+) they have a significant impact on the focal firms’ performance and as such received
sufficient attention in both internal and external documentation.
For the selected cases a dedicated integration (project) team, together with people from the
‘normal’ operations worked on the integration phase. As part of validating the rigor of this study it is important to hear opinions from both dedicated experts and from people who do not work on mergers and acquisitions on a daily basis.
Note: Upon specific request (condition for using the data) of the focal company, all company names and dates (year) of acquisitions have been removed. This data is deemed to be too
sensitive to be shared publicly. In combination with the other information in this research it would be possible to exactly link the provided information to the company or its subsidiaries.
Overview of selected cases
Geographical area
Acquisition
amount
Type
Market size
Analysis
timespan
Switzerland
4 bln. CHF
New market entranceTarget was nr. 2 in
size on the Swiss
market
3 years
Germany
3.5 bln. Euro
New market
entrance
Target was nr. 2 in
size on the German
market
3 years
Germany
3.2 bln Euro
Expansion of
market
presence
Target was nr. 3 in
size on the German
market
3 years
United
Kingdom
15 bln. GBP
New market
entrance
Target was nr. 2 in
size on the UK
market
2 years
Netherlands
7 bln. Euro
Expansion of
market
presence
Target was nr. 2 in
size on the NL
market
1 year
15
Data collection
Data on which the analysis will be based consists of publicly available external information, detailed internal company documents which are not publicly accessible, interviews, and discussions with employees. The latter two will be used both for information gathering purposes as well as for explaining variances, patterns and other findings which occurred in the analysis phase. Available (internal) documents for each case:
Document /
Data name
Document
type
Description
Origin
use
Acquisition
plan
excel
Detailed financial data
set providing multi-
year financial
scenario's, business
plan, drivers, etc.
M&A
department
Data source
Due
diligence &
Board
presentation
PowerPoint Presentation made for
CEO & CFO, other
board members and
major shareholder to
provide qualitative
background on the
financial data in the
acquisition plan
Strategy
department
Data source &
explanatory
Budget data
for 3 years
excel
(extracted
from
official
company
database)
Detailed financial data
over three years which
can be compared to
acquisition plan data
Financial
planning &
Analysis
department
Data source
actual data
for 3 years
excel
(extracted
from
official
company
database)
Detailed financial data
over three years which
can be compared to
acquisition plan data
Financial
planning &
Analysis
department
Data source
Narratives
packages
word/
excel
Detailed set of
management analysis
on variances between
actual results and
budgeted results,
providing explanation
on patterns and
variances
Prepared by
Operating
entities (straight
from the
acquired
companies)
explanatory
16
Divisional
Managemen
t report
PowerPoint
Analysis prepared by
Corporate financial
planning team for
company Senior
management (per
year, per operating
entity)
Financial
planning &
Analysis
department
explanatory
Interviews
1st round
word
(interview)
Obtain opinions from
2 M&A employees on
their expectations
with regards to
variances, patterns
and outcomes (before
they have seen the
results)
M&A
department
explanatory
Interviews
2nd round &
multiple Ad
–hoc
discussion
based on
findings
word
(interview)
Discussed results with
various departments &
stakeholders
See appendix 1 for
details
Various
departments
explanatory
Statistic data
word
Statistical data
(financial &
telecommunications
specific) to see if there
are patterns between
results from data
analysis (meso) and
macro environment
Governmental
statistics
organizations
(public info)
explanatory
17
Validity
This study uses a combination of inductive and deductive techniques. Based on existing theories a number of propositions is constructed which were tested during the case reviews. By using the multi case method the rigor of the results and conclusions as well as the replication logic is stronger. Furthermore, a combination of quantitative (acquisition plans, research documents, etc.) and qualitative (interviews and discussions) methods is used.
Analytical approach
The goal of this research is to measure financial performance of multiple acquisitions versus the original acquisition plan, provide explanations on the origin of potential variances and identify patterns within each case and between the different cases. To do this, the first level (review of financial performance versus acquisition plan) of analysis needs to be based on comparable segments for each case. For this purpose a number of (financial) KPI’s were selected which will be described in the section below. These KPI’s were selected because they are standards in the
telecommunications industry and/ or part of USGAAP (United States Generally Accepted Accounting Principles) reporting obligations. As such they are widely recognized, verified and accepted as performance indicator which reduces the risk of discussions around the validity of certain KPI’s. All the selected KPI’s are prominently present in the available research documents for all cases, as such they form a uniform base for the analysis and increase comparability between cases.
These KPI’s being:
Revenue; representing the company’s ability to drive growth via volume (increasing number of customers) and pricing power (getting existing and new customers to a higher price level by offering them more and better services)
Indirect expenses; a significant part of the synergies in the acquisition plan relates to indirect expenses (savings on staff cost, IT costs, Network related costs) by performing these
activities centrally for multiple countries at the same time the acquiring company expects to reap scale benefits. As such these form an important KPI to review to which extent synergies are actually realized.
Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA); being a sum of the two KPI’s above.
Capital Expenditure (Capex); representing investments in systems, cable networks and product development. Just as with the indirect expenses the acquiring company expects significant savings here based on scale and efficiency benefits.
Operating Free Cash flow (OFCF); being the sum of all of the above is the most important KPI and indicates the free cash flow generation (excluding working capital, cash tax and cash paid restructuring charges) of the acquired target. As such it indicates the ability to generate cash from normal operating activities, which in the end benefit the company and its
shareholders
All data is reviewed in local currency to eliminate the impact from currency fluctuations and represent a like for like comparison based on USGAAP accounting standards.
Strengths & limitations
This research is a multi- method case study that actually uses both quantitative as well as qualitative data which improves reliability. Opinions and input obtained via interviews and discussions with employees can be partially verified against data obtained from the acquisitions plans and vice versa. On the other hand, potential emerging patterns from these five studies need to be verified
18
4) Case results
This section consists of 5 in-depth case studies. For cases 1-4 the background and rationale are discussed, followed by an overview of (financial) performance vs. acquisition plan based on KPI’s, concluded by a section which describes the key findings, sources of differences and an attempt to explain these findings. The 5th case will be discussed separately as this focusses solely on the 5th proposition
Case 1: Acquisition in Switzerland
The first case is the acquisition of a telecom operator in Switzerland.
Background
The target was Switzerland’s largest cable operator with 1.5m subscribers and over two million revenue generating units (RGUs), representing a market share of 51% with an infrastructure which gave presence in 14 out of the 15 largest Swiss cities. Switzerland was considered a premium market given its relative high disposable income per capita. The relatively low penetration % of digital television and other premium products was considered to be a chance for upselling and increase turnover and profit’s. Furthermore Switzerland’s rather scattered networks (large number of small networks still owned by municipalities) provided chances to expand the reach via smaller takeovers. The acquiring company had no other (or prior) presence on the Swiss market.
Financial
At the time of the negotiations the owner of the target company was also preparing an initial public offering (IPO) parallel to the takeover negotiations with our focal company, potentially to increase their negotiation position with the pressure of a public floating on the stock market. The night before the IPO would commence both parties reached an agreement, total consideration paid for the target company was 4.0 billion Swiss francs.
Acquisition ratio
With the acquiring (focal) company already having presence in multiple other European countries it argues that it can realize significant costs savings, leveraging on its pan-European scale in price negotiations with vendors and centralized technology development. Therefore the acquiring (focal) company expects to realize a considerable drop in the operational expenses (Opex) and capital expenditure (Capex) of the target company after acquisition. Furthermore its access to affordable content for Digital television in combination with Switzerland’s low existing digital penetration rates opens up possibilities for upselling and migrating customers to higher price points improving margins.
19 Financial comparison vs. acquisition plan; highlighted through KPI’s
CHF'mln
Revenue Year 1 Year 2 Year 3
Plan 1,228.4 1,322.5 1,423.9
Actuals 1,098.2 1,104.8 1,119.0
Delta Actuals to plan -103.60 -160.94 -261.93 Delta Actuals to plan% -8.43% -12.17% -18.40%
1,090.0 1,140.0 1,190.0 1,240.0 1,290.0 1,340.0 1,390.0 1,440.0
Year 1 Year 2 Year 3
Revenue
Plan Actuals
Table 1.1
CHF'mln
Total Indirect expenses Year 1 Year 2 Year 3
Plan 405.6 420.3 435.9
Actuals 352.7 347.5 357.2
Delta Actuals to plan -36.92 -80.51 -85.33 Delta Actuals to plan% 9.10% 19.15% 19.58%
300.0 325.0 350.0 375.0 400.0 425.0 450.0 475.0 500.0
Year 1 Year 2 Year 3
Total Indirect expenses
Plan Actuals
20 CHF'mln
Ebitda Year 1 Year 2 Year 3
Plan 517.3 559.4 599.6
Actuals 583.7 611.1 616.8
Delta Actuals to plan 66.43 51.70 17.20 Delta Actuals to plan% -12.84% -9.24% -2.87%
500.0 520.0 540.0 560.0 580.0 600.0 620.0 640.0
Year 1 Year 2 Year 3
Ebitda
Plan Actuals
Table 1.3
CHF'mln
Total Capex Year 1 Year 2 Year 3
Plan 226.0 204.1 193.9
Actuals 303.4 254.0 221.7
Delta Actuals to plan 77.33 49.86 27.84 Delta Actuals to plan% -34.21% -24.43% -14.36%
150.0 175.0 200.0 225.0 250.0 275.0 300.0 325.0 350.0
Year 1 Year 2 Year 3
Total Capex
Plan Actuals
Table 1.4
CHF'mln
Operating Free cash flow Year 1 Year 2 Year 3
Plan 299.8 362.5 411.8
Actuals 280.3 357.2 395.1
Delta Actuals to plan -19.47 -5.37 -16.63 Delta Actuals to plan% 6.50% 1.48% 4.04%
275.0 300.0 325.0 350.0 375.0 400.0 425.0 450.0
Year 1 Year 2 Year 3
OFCF
Plan Actuals
Table 1.5
21
Findings, sources of differences and explanations for case 1
Revenue (table 1.1)
Observations
Revenue shows a significant under-run over the entire investigated period (3 years) versus the original acquisition plan. Shortfall seems to be driven by both too optimistic pricing assumptions as well as by a volume driven underperformance (customer base not growing as fast as expected). However the volume shortfall is mostly isolated in one specific product line; fixed line telephony. Pricing; interesting observation here is that pricing assumptions on all business lines except one were too optimistic in all years. One of the strategic cornerstones of the focal company’s approach towards newly acquired companies is to create the ability to raise prices supported by improved product packages, primarily on digital television. This strategy is based on the assumption that the parent company as a large scale player in the market has access to better content products and digital devices against competitive prices. The focal company’s strategy is to clearly differentiate from competitors based on high product quality and not as a low price operator. This is considered to be one of their key assets and one of the fundamentals to add value as large group versus an independent company. When taking into consideration that the Swiss market is widely considered a ‘premium’ market on many products (consumers are willing to pay a higher average price but demand high quality) it is interesting to see the focal company’s strategy somewhat failed in its attempt to bring products which are perceived as high quality to the Swiss market.
On the other hand, the business line “internet” shows a considerable higher price point across the investigated period than planned. In the acquisition plan there was an assumption that the Swiss telecommunications regulatory body would impose a decision to open up networks (partly) for competitors (who do not have their own network). Rationale behind this was that it would allow more competition which would lead to significant price erosion (lower consumer prices). In the end this decision was revoked, leaving the focal company with an unexpected and welcome upside. Important note to point here is that even though the pricing assumptions were consequently overestimated they were already lowered compared to the target company’s own business plan. When a company (effectively its owners) puts itself up for sale or plans an IPO it develops a multi-year business plan to outline future strategy and profitability to potential buying parties. As part of the due diligence the focal company reviewed that business plan and partially used it as a basis for its own commercial projections. To be on the safe side the focal company already took a more conservative approach on commercial (both pricing & volume) outlook of the target company but clearly that wasn’t sufficient.
(potential) Explanations/ reasons
Based on discussions with key corporate stakeholders, internal management analysis, board presentation materials and the target company’s former CFO two recurring factors emerge which seem to be of significant influence. Firstly the inability to raise prices driven by poor brand
perception compared to competitors in the period after acquisition. This was driven by a period of poor customer service and a very strong brand image of the major competitor Swisscom. Secondly there was constant delay in the introduction of new products which was supposed to be the backbone of the expected pricing power. The due diligence report which was prepared before the acquisition speaks of target company’s “inability to support focal company’s aggressive strategy of introducing new products due to inadequate IT & Network systems”. Despite this clear warning the assumptions on product innovation and related pricing power were not adjusted downwards in the acquisition plans. The fact that this potential risk was not translated into less ambitious targets was attributed to ‘the dynamics of the bidding process’ by one of the employees involved. “The M&A team is (partially) rewarded based on the deals they do, they will do as much as possible to get the deal done”.
22 Indirect expenses (table 1.2)
Observations
Next to the ability to provide high quality products, the second important support for the focal company’s acquisition strategy is its ability to increase spend efficiency due to centralization of activities and leveraging on its scale when negotiating prices with vendors. Therefore an important metric to measure the success of the acquisition is the level to which anticipated savings on indirect expenses were realized. More than pricing power and volume growth this caption is really under the control of the company itself and therefore could (partially) indicate the ability to effectively
integrate an acquired company.
The original acquisition plan included CHF 81m of cost synergies in the three years which are investigated here. When comparing the indirect expense levels from the acquisition plan with the actual results for the investigated period we see a CHF 204m under-run on actual spend versus planned indirect expenses. This is considerably better than the originally planned CHF 81m of synergies. The underrun is spread over all years but savings increase most significantly year on year from year 1 to year 2. The variance in operational expenses can be (partly) explained in relation to the lower revenues (correlation between customer growth and cost for network maintenance & rent for instance). More interesting are the significant savings which are visible on the general overhead part (administrative expenses). This seems to point to large synergy / savings potential which were not anticipated in the acquisition plan.
(potential) Explanations/ reasons
The ex CFO of the target company indeed confirmed that after acquisition an extensive cost savings program was introduced which was not in the original acquisition plan but did create significant value. The aim of this ‘recovery plan’ was to compensate for the commercial shortfall (discussed in the revenue/ GP section) which would lead to a significant underperformance vs. acquisition plan if no countermeasures were taken.
Reason for not having these savings potentials in the original acquisition plan was rather simple; lack of insight in the exact financial and operational mechanics at the time of the acquisition. Where the selling party had broadly elaborated on future commercial growth potential, it was not very cooperative in providing details on the costs and investment side. Employees working regularly on M&A deals have explained this is common practice. As a buying party (especially if there are other interested parties) it is difficult to do a proper in-depth review of the target company’s financial performance due to a lack of detailed information and the short time frame in which these deals normally take place. So there is a clear information asymmetry between buyers and sellers. Capital investments (Capex) (table 1.4)
Observations
For Capex the same logic is roughly applied as for indirect expenses. Driven by scale benefits and centralizing or clustering certain activities (product development, procurement, network
development) with other operating units within the group synergies and savings are anticipated. For the investigated period total capex spend was CHF 155m higher than originally planned, which amounts to a variance of 25% relative to the total capex spend in that period. When taking into account that the capex spend is heavily influenced by the amount of new customers (Digital boxes, modems) which in the same period was almost 26% lower than planned we can draw the conclusion the Capex variance should have been considerably lower in reality. It seems there are two offsetting factors at play here. The customer related capex (modems, digital boxes) which should be
considerably lower based on customer data is indeed 28% lower which seems in line with the customer data trend. Next to that the non- customer related capex (IT systems, Network upgrades etc.) was 33% higher over the investigated period showing significant higher spend in each of the
23 years. Noteworthy observation is that the acquisition plan assumed a rather aggressive decrease of customer related capex based on better prices the focal company as a large group would be able to negotiate. This expected positive price effect is not supported by the existing data which shows a decrease in customer related capex spend in line with the lower customer base (implying only a volume effect).
(potential) Explanations/ reasons
One of the reasons for the expected price upside on customer related capex not materializing has to do with the competitive position of the acquired company. As described in the ‘Revenue ’ section the company suffered from branding/ image issues. Due to a very strong position of the main competitor (Swisscom) the company used premium digital boxes and the newest modems to attract more customers as a marketing tool. In the original plan this competitive issue was not foreseen. The plan assumed that customers would receive a normal (standard) digital box rather than one which had more functions (HD/ DVR). Since these boxes were used as a customer acquisition tool the company didn’t charge the real price for it to its customers (and thus missing revenues) but the company itself of course did pay a higher price than planned to its suppliers, resulting in a negative effect. The higher than anticipated investments in non- customer capex were primarily driven by investments in the Network and IT systems. After acquisition it was discovered that the target’s network infrastructure was not able to properly support the focal company’s product strategy, hence new investments in upgrading the network was necessary.
Operating free cash flow (OFCF) (table 1.5)
Looking at the overall results, represented by the operating free cash flow (OFCF)there is an CHF 41.5m under-run over the three investigated years, which translates into -4% relative to the total cumulative OFCF for the three year period. All three consecutive years show an individual
24 Case 2: Acquisition in Germany
The 2nd case is the acquisition of a cable operator in Germany
Background
The target was Germany’s second largest cable operator at the time of acquisition (after incumbent operator Kabel Deutchland AG) with more than six million RGUs (RGUs = subscriptions). As most cable operators in Germany the target company did not have a nationwide network but only operated in the states of North Rhine-Westphalia (NRW) and Hessen. This was and is considered to be one of the more prosperous parts of Germany with NRW having the largest Gross domestic product (GDP) of all German states (Source: German Federal Statistics office). The target company operated a high quality and high speed network, offering broadband internet, various (digital) television services and fixed line telephony (VoIP) to its customers. Similar to the acquisition in Switzerland, the relatively low penetration % of digital TV and other premium products (compared to other western European markets where the acquiring company was already present) was considered to be a chance for upselling and increase turnover and profit’s. Next to that, the potential to acquire other cable operators in different states in Germany in the future offered a significant upside potential with regards to scale benefits and costs savings.
Financial
The acquisition target was owned by a group of private equity firms who were looking for an exit from the German market to capitalize on their investment via an Initial public offering or an auction. Around the time of acquisition German cable assets were considered to be a premium target and multiple other companies bid for the target company. Eventually the focal company of this research won with the highest bid arguing it would be able to create bigger synergies compared to other companies which competed during the bidding process (of which a lot were private equity firms). Total consideration paid was 3.5 billion Euro which represents an Ebitda multiple of 7.4 which was considerably higher than similar cable operators were trading at that time.
Acquisition ratio
With the acquiring organization already having presence in multiple other European countries it argues that it can realize significant costs saving leveraging on its pan-European scale in price negotiations with vendors and centralized technology development. Therefore a considerable drop in indirect expenses is anticipated. Furthermore its access to affordable content for Digital television in combination with the target companies’ low existing digital penetration rates opens up
possibilities for upselling and migrating customers to higher price points improving margins. Strong competitive situation (low amount of competitors operating in the same footprint) and identified synergy potential on network investments were also arguments in favor of this acquisition. Finally the potential to acquire other German cable operators in the (near) future and merge them with the target company to create further scale benefits created a solid rationale to acquire this company in Management’s opinion.
25 Financial comparison vs. acquisition plan; highlighted through KPI’s
EUR'Mln
Revenue Year 1 Year 2 Year 3
Plan 1,017.3 1,063.1 1,105.6
Actuals 1,015.7 1,131.2 1,213.6
Delta Actuals to plan -1.60 68.08 108.04 Delta Actuals to plan% -0.16% 6.40% 9.77%
1,010.0 1,030.0 1,050.0 1,070.0 1,090.0 1,110.0 1,130.0 1,150.0 1,170.0 1,190.0 1,210.0
Year 1 Year 2 Year 3
Revenue
Plan Actuals
Table 2.1
EUR' MLN
Indirect expenses Year 1 Year 2 Year 3
Plan 382.6 368.7 379.7
Actuals 321.9 383.8 396.9
Delta Actuals to plan -60.72 15.11 17.21 Delta Actuals to plan% -15.87% 4.10% 4.53%
320.0 340.0 360.0 380.0 400.0
Year 1 Year 2 Year 3
Total Indirect expenses
Plan Actuals
