Analysis of corporate peformance, how performance is achieved, diagnosing poor performance, and how peformance is boosted by mergers and acquisitions

1. Boosting
Corporate Performance
through
Mergers & Acquisitions
Errol Danziger
Danziger Capital Partners LLP
September 2011

2. This Presentation Reviews Three
Topics…
• What is corporate performance, and
how is it measured?
• How can corporate performance
be improved?
• How can mergers and acquisitions
boost performance?

3. What Is Corporate Performance?
In a nutshell -
• Firm profitability
• Operating efficiency
• Manufacturing or service productivity
• Shareholder and debtholder returns

4. Performance Analysis
is a Process that …
• Evaluates the firm’s progress
towards achieving goals and
objectives set by management
• Compares firm performance
with other companies in the
firm’s peer group

5. Whose Performance Matters?
One or more, or all, of :
• The company
• The CEO
• The senior management
• The operating management
• The line management
• The operating personnel

6. When is Performance Evaluated?
Daily, by banks examining yesterday’s
performance and calculating tomorrow’s
value at risk
Monthly, by firms that have to repay debt
based on a monthly repayment schedule
Quarterly, by listed companies that have to file
a quarterly stock exchange trading update
Annually, by major companies that have to
report comprehensive annual results to
shareholders

7. How is Performance Measured?
• On an absolute basis, as where a
automobile manufacturer measures the
number of units produced per day
• On a comparative basis, as where one
firm’s results are compared with the
results of other listed companies in its
industry
• Against a benchmark that reflects the
performance of the broader economy,
such as the FTSE 100 or the S&P 500

8. Approaches to Measuring
Performance
Accounting measures
Share price Market value measures
Economic Value Added
Cost of capital

9. Accounting Measures of
Performance
Sales margins
- operating costs
= Operating income
Operating income
- operating costs
- depreciation
- provisions
= Net income

10. Market Value Measures of
Performance
• Return on equity =
ratio of net income : equity
• Return on assets =
ratio of net income : total value of assets
• Return on assets =
profit margin x asset utilisation
Ratio of –
market value per share : book value per share

11. Economic Value Added®
• Net income after deducting the return demanded by investors.
• EVA =
= residual income =
= income earned – income required =
= income earned – cost of capital x investment
40
35 Mallet plc
30 Shareholders’ Funds
Movement 1997 - 2010
25
20 SHAREHOLDERS
FUNDS
15
10
5
0
1997 2000 2003 2006 2009

12. Share Price
Every change in share price reflects –
Firm-specific news – a new product,
CEO appointment, change in
corporate governance
Economic news – interest rate rise or
fall, recession or boom
Industry news – competitor launches
competing product

13. Cost of Capital
“A company that generates a
return on capital
that is less than
cost of capital
is destroying value.”
- Errol Danziger

14. Reasons for
Poor Corporate Performance
• Inefficient management of existing assets
• Under-investment in new opportunities
• Over-investment in ill-advised projects
• Strategic neglect of industry trends and opportunities
• Inadequate leverage with inferior return on equity
• Excessive leverage with increased bankruptcy risk
• Financing errors in currency, loan period and loan
term matching
• Excessive cash retention
• Excessive conglomeration

15. How can Performance be
Boosted?
• Increase cash flow from assets in
place
• Increase expected growth
• Lengthen period of high growth
• Reduce cost of financing
• Manage non-operating assets

16. Increasing Cash Flow from
Assets in Place
• Redeploy existing assets to more
profitable uses
• Improve operating efficiency and eliminate
wasteful expenditure
• Reduce the corporation tax burden
• Reduce maintenance of capital equipment
• Reduce working capital expenditure on
inventory and receivables

17. Increase Expected Growth
• Make new investments in new
projects and firms
• Use existing assets more
efficiently by changing the use of
existing assets to more
productive applications

18. Lengthen the Period of
High Growth
• Lengthen the initial high growth
period in which firm growth
outperforms competitors and
exceeds cost of capital, before the
firm becomes a stable growth firm
• Strengthen barriers to entry by
competitors by making products and
services “must have”

19. Reducing the cost of financing
• Make products or services less
discretionary, by converting them into
“must haves”
• Reduce operating leverage by limiting the
amount of fixed costs
• Change the financing mix by increasing
cheaper debt financing and reducing
expensive equity financing
• Match financing to assets by ensuring that
long-term assets are not financed with
short-term borrowing

20. Improve Management of
Non-operating Assets
• Cash and marketable securities
reduced by dividend payments and
share buybacks
• Holdings in subsidiaries and
affiliates rationalised and publicised
• Pension fund assets and liabilities
balanced to ensure that balance
sheet is not harmed

21. Mergers and Acquisitions can
Boost Performance
Because -
• Shareholders like to invest in
acquisitive companies
• Analysts like to recommend growth
companies
• Acquisitions mean quick growth and
better financial performance short-
term

22. Acquisitions boost performance
through …
• Finding bargains that have been
undervalued by the market
• Financial and operating synergy
realised through M&A
• Restructuring of targets to make
them profitable once more
• Merging with successful companies
that can improve bidder
performance

23. Operating synergy achieved
through …
• Economies of scale gained through
combining two businesses and reducing
combined costs
• Pricing power enabling market
dominance to increase revenues
• Functional strength by combining
complementary advantages of parties
• Higher growth rate by increased size and
product range

24. Financial synergy achieved
through …
• Cash slack providing flexibility to
pursue new projects
• Debt capacity enabling greater
leverage across the combined
firm
• Tax benefits of ability to utilise
target’s operating losses

25. Restructuring the target, where
success depends on …
• Poor performance attributable to
incumbent or past management
• Acquisition followed by changed
management or new management
practices
• Target’s market price reflecting
target’s status quo situation and not
post-merger position

26. Achieving performance targets in
M&A
• Size and quality
• Cost savings versus growth
• Acquisition for consolidation
• Synergy valuation
• Type of synergy
• Mergers boost operating performance
• Mergers generate excess returns
• Relatedness beats conglomeration
• Scaling for size

27. Based on a presentation delivered at the Performance and Management
Conference 2011: Delivering Efficiency and High Performance, London, 21
June 2011
Danziger Capital Partners LLP are corporate finance advisers, specialising in
debt and equity capital raising, and mergers and acquisitions.
Danziger Capital Partners LLP
Stirling House
9 Burroughs Gardens
London NW4 4AU
United Kingdom
www.danzigerplc.com