Transcript Schneider and Square D Kalpa Dattani Muhammad Khawer Ron Porter

Schneider and Square D
Kalpa Dattani
Muhammad Khawer
Ron Porter
Saba Sharih
Tony Yang
Wednesday July 19, 2006
AGENDA
Companies Overview
Industry Analysis
Strategic Fit
Integration Logic
M&A Transaction Capacity
Takeover Logic
What Happened
Key Learning's
Class Discussion
What synergies would you consider in
a Merger & Acquisition Transaction?
M&A Value Drivers Framework
Combination Logic
Takeover
Logic
Integration
Logic
Transaction Capacity
Framework provided by: Professor John C. Banks, M&A Professor WLU
Value
Created
Combination Logic
Describes how the transaction supports
corporate direction and intentions
Model provided by: Professor John C. Banks, M&A Professor WLU
Groupe Schneider
A prominent French Multinational Corporation
Largest industrial group in France
1990 Sales 51 billion francs
85,000 employees in 115 countries
Worldwide ranked 184 in Fortune’s 500
Ranked 2nd – 3rd in most segments of global
electrical industry
3 stage-restructuring by Didier Pineau-Valencienne,
CEO and Chairman:
1. Divest loss-making businesses to simplify
operational structure and strength financial position
Groupe Schneider
2. Focus on two core businesses:
I.
Electrical equipment for power distribution and
automation of industrial complexes
II. Electrical building contracting
3. Geographical diversification through acquisitions
I.
15% of DAVY
II. Controlling interests in Federal Pioneer
Subsidiaries
1. Merlin Gerin
2. Telemecanique
3. Jeumont Schneider
4. Spie Batignolles
Square D
A prominent American Company
Supplier of electrical equipment, services & systems
Profitable last 59 years
1990 Sales $1.7 billion
71% electrical distribution segment
29% industrial control segment
18 manufacturing plants in 11 countries
Operation concentration:
1. Electrical distribution
2. Industrial control
Strong network of independent electrical distributors
and wholesalers
Square D
Jerre Stead revitalized the company:
1. Changed top management in 1980’s
2. Consolidated US and Canadian facilities
3. Reorganized businesses into 3 externally focused
sectors
-industrial control
-electrical distribution
-international markets
Resources were redeployed to strengthen core
businesses
Industry Ranking
- Electrical: 3rd behind Westinghouse and GE
- Industrial control: 2nd after Allen Bradley
Industry Analysis
Cyclical to the Economy
Revenue Sources:
1. new construction
2. maintenance of existing equipment
Demand follows economic conditions
Industry Trends in 1990
Globalization: market growth
Internationalization of product standards
- International Electrical Commission
- National Electrical Manufacturers Association
Industry concentration: manufacturing and
research capabilities
Industry Predictions
Early 1991, upturn in economy and industry
1992, expected unified standards for Europe which
would be dominant in the world
Further development of global market for electrical
equipment
Increased consolidation to take advantage of
economies of scale
Positive Strategic Fit
 Market penetration and new market access:
USA for Schneider
Europe for Square D
 Economies of scale: manufacturing, procurement,
sales and marketing
 Combination of complementary resources: R&D and
technology expertise
 Increase product lines
 Cost and revenue synergies
 Positive capital market reaction
 Increase market power and barriers to entry
Negative Strategic Fit
 Premium acquisition price due to resistance and
rumors
 Integration challenges:
 hostile take-over
 two very different cultures
 resource and knowledge sharing difficulties
 Difficult to realize revenue synergies
 Opportunity cost: distract management from the core
business, therefore destroying stakeholder value
 Foreign exchange, currency consolidation
Porter’s Five Forces
Threat of New
Entrants
Low
-capital intensive
-need expertise
Bargaining Power
of Suppliers
Moderate
-equipment suppliers
-labour unions
Intensity of Rivalry
Moderate
-consolidation
-globalization
Threat of
Substitutes
Low
-no other substitutes
Bargaining Power
of Buyers
Low to Moderate
-need for conversion
-high switching costs
Class Discussion
Implications of a Hostile and Friendly
take-over
Integration Logic
Describes how the businesses are joined together
Value Creators
Focus on synergy realization
Rationalizing R&D manufacturing
capabilities; Cross-sell products Telemecanique and Merlin Guerin
Combine similar processes
Sharing benefits of existing technologies
Blend cultures and ideas
French – hierarchical, avoid uncertainty,
centralized; U.S. – individualism, lowcontext communication, egalitarianism
Centralize support activities that
apply to multiple units
R&D, shared service consolidation
Retain good people
Need to offer retention incentives
Attend to employee concerns and
resistance
Quickly communicate new roles for those
who are part of new organization
Act quickly
Capitalize on synergies quickly, avoid lost
opportunities
Integration Logic
Describes how the businesses are joined together
Value Destroyers
Ineffective Integration – poorly
planned, poorly executed, too
slow, too fast
Remains to be planned and executed
Suppression of effective business
systems of target firm, destroying
the basis of prior success
Schneider needs to respect value
drivers in Square D and standardize and
convert when it doesn’t erode
competitive advantage
Power struggles or incompatibility
in new boardroom
Takeover defenses by Schneider are
initial bad omen (Delaware requires 85%
shares tendered; Common Stock
Purchase Plan)
Mergers of equals delay requisite
decisions
Schneider is $10B sales 1990; Square D
is $1.7B sales so Schneider will control
Transaction Capacity
Describes the expertise (internal and external) and
control processes used to handle the transaction
Value Creators
Develop a global mindset
Needs to think global, not multinational
Flexible systems, structures, processes
Schneider geographical diversification,
acquisition program underway
Facilitate organizational learning,
responsible independence
Schneider organization should be
developing required practices
Use investment bankers, especially for
pricing
Lazard Freres used for valuation of
Square D
Develop a core competence in integration
management
Two major acquisitions completed in
1989
Form a leadership team responsible for
facilitating synergy realization
Should have been lesson learned from
earlier success
Transaction Capacity
Describes the expertise (internal and external) and
control processes used to handle the transaction
Value Destroyers
Unduly hyped by investment
bankers, consulting firms, and/or
lawyers
Fairly optimistic estimates provided by
Lazard Freres, but not unreasonable
Hubris of top executives –
ambition to run a bigger firm and
increase salary
Didier Pineau-Valencienne sounds like
a flamboyant big-thinker and
expansionist but facts back up plan
Top executives want to cash out
stock options
Not known
Mergers of equals delay requisite
decisions
Not the case – Schneider is 6x larger
Class Discussion
When does a company become a
target of take-over?
Takeover Logic
Describes how the deal is designed and
negotiated
Model provided by: Professor John C. Banks, M&A Professor WLU
Accounting Analysis
No apparent distortions
Reasonable accounting policies
Square D as “Stand Alone” company
Financial Analysis
Square D as “Stand Alone” company
Financial Analysis
Square D as “Stand Alone” company
Financial Analysis
Square D as “Stand Alone” company
Financial Analysis
Square D as “Stand Alone” company
Implications of Lazard’s Assumptions
Financial Valuation
Discounted Abnormal Earnings
Investors pay more
Earnings above normal level
Ability to generate Abnormal Earnings
Discounted Cash Flow (DCF)
Forecasted cash flows
Cost of capital
Present value
Square D as “Stand Alone” company
Financial Valuation
Square D as “Stand Alone” company
Financial Valuation
Square D as “Stand Alone” company
Financial Valuation
Share Price
(Pre-Merger)
Class Guess
75-115
45 - 74
25 - 44
?
?
?
Square D as “Stand Alone” company
Financial Valuation
Square D Valuation
120.00
113.01113.01
100.00
80.00
66.63 66.63
Discounted Abnormal Earnings
54.60
Share Price 60.00
48.75
Discounted Cash Flow
41.29 41.29
40.00
20.00
0.00
1
Optimistic
2
Realistic
3
Pessimistic
4
Lazard
Square D as “Stand Alone” company
Bidding Recommendation
Opening bid $61/share
hostile take-over = premium
market outlook positive
revenue & cost synergies
economies of scale: manufacturing, R&D
Walk-away price $81/share
Subsequent Events
Feb 18, 1991
Schneider offered $78/share in cash
Square D’s stock price jumped to $72.25/share
Feb 27, 1991
Square D’s Board rejected the offer
Filed law suit alleging Schneider breached the
confidentiality agreement signed in 1988
March 4, 1991,
Schneider offered to buy all of Square D’s
outstanding shares for $78/share (Schneider
already owned only 1.4%)
Subsequent Events
Mid-March 1991
Siemens was reported as having contacts with
Square D
March, 1991,
Square D brought additional law suits against
Schneider for violating:
US anti-trust laws and acquisition laws
US banking regulations
Canadian anti-trust laws
Making false & misleading filings at the
SEC
Subsequent Events
April 1991
Square D postponed annual meeting to June 21
Schneider challenged the decision and got a
federal court’s ruling - annual meeting must take
place in 40 days following outcome of the anti-trust
suits and resolution of complaints
May 10, 1991
Dept. of Justice dropped its anti-trust investigation
against Schneider – cleared the way for the merger
Subsequent Events
May 11, 1991
Square D proposed taking on additional $1 billion
in debt in a leverage recap
May 13, 1991
Schneider raised offer price to $88/share.
May 14, 1991
Square D accepted the offer & acquisition
succeeded
Merged Financials
1990
…
1996
1997
$2,209
$2,309
$2,444
8.7%
4.5%
5.9%
$178
$251
$328
$420
Operating
earnings/sal
es
10.8%
11.3%
14.2%
17.2%
Return on
capital
21.7%
22.2%
28.6%
35.5%
Sales
$1,653
Sales
Growth
Operating
Earnings
1995
M&A Statistics
McKinsey Client Studies
• Only 36% of firms get cost synergies
• Only 17% of firms achieve revenue synergies
KPMG Studies on M&A Revenue enhancement
• 45% existing products to new customers
• 42% new geographical markets
• 34% new products
• 32% new distribution channels
• 25% cross selling
Thank You
&
Questions