Copenhagen Business School Department of Economics Master Thesis Cand. Merc. Applied Economics and Finance Mergers & Acquisitions – Value Creation through the Realization of synergies December 2009 Supervisor: Thomas Einfeldt, Department of Finance Author: Helene Jo Bjerre Østergård 168,942 Characters / 74.3 Pages [Type text] Executive Summary Synergies are often used as the justification for pursuing an acquisition of another company. The desire to achieve the well-known 1 + 1 = 3 spurs companies to strive to achieve synergies through acquisitions. However, there is significant evidence that the average transaction does not create post merger value and therefore, you may wonder why companies continuously pursue acquisitions. Theoretically, when realizing synergies; an extensive integration process, management, planning, and financial evaluation are essential for the realization of synergies to succeed. These findings are in general consistent with those of experienced professionals who, additionally, emphasise communication, people, and the underlying assumptions of the acquisition as key elements of successful synergy realization. Empirical evidence show that the average M&A transaction creates value for the target company’s shareholders, destroy value for shareholders of the acquiring company, and break- even when evaluating the combined company after the merger. In Denmark, the evidence does not differ from the global results and based on acquisitions in 2004 and 2005, companies did not perform above average. To deviate from the empirical evidence a clinical study of Vestas Wind Systems A/S’ acquisition of NEG Micon A/S in 2004 showed that M&A is not an easy task. Cultural integration and an overall strategy for the combined company turned out to be the decisive factor for the development of Vestas after the merger. Also, Vestas struggled to overcome significant failures in the turbines and implementing the goal to overcome this into the vision and strategy turned out satisfactory. Overall, the project has come to three groupings of recommendations; • The strategic fit and underlying assumptions. Understanding the target company and preparing the process based on the underlying assumptions is essential. • Synergies. No matter which synergies are expected, the valuation and assessment are of great importance. • A strong common vision. A powerful common vision of the combined company creates coherence across the company and determines an overall future strategy. In this case management is key. Paying attention to these three areas; strategic fit and planning, synergy assessment and evaluation, and management, companies should be better suited to achieve success in the acquisition process. Page 1 of 86 I. Table of Contents Executive Summary ............................................................................................................................. 1 I. Table of Contents ........................................................................................................................... 2 II. Figures, Tables, and Equations ...................................................................................................... 4 III. Structure of the Project ................................................................................................................... 5 1. Introduction .................................................................................................................................. 7 1.1. Motivation ................................................................................................................................ 7 1.2. Problem Statement ................................................................................................................... 7 1.3. Methodology ............................................................................................................................ 8 1.3.1. Validity of Data and Resources .......................................................................................... 9 1.3.2. Delimitation ...................................................................................................................... 10 1.4. Acknowledgements ................................................................................................................ 10 2. M&A, Value Creation, and Synergies ...................................................................................... 11 2.1. Mergers & Acquisitions ......................................................................................................... 11 2.1.1. The Cycles of M&A ......................................................................................................... 11 2.1.2. Motives and Drive Forces of M&A ................................................................................. 12 2.2. Value Creation ........................................................................................................................ 14 2.3. Synergies ................................................................................................................................ 15 2.3.1. Synergistic Theory ........................................................................................................... 15 2.3.2. Cost Synergies vs. Revenue Synergies ............................................................................ 16 2.3.3. Valuation of Synergies ..................................................................................................... 17 2.3.4. Pitfalls of Synergies ......................................................................................................... 18 2.4. Conclusion .............................................................................................................................. 20 3. The Realization of Synergies in the Acquisition Process ........................................................ 21 3.1. Realization of Synergy ........................................................................................................... 21 3.1.1. Foundations of Synergy ................................................................................................... 21 3.1.2. Evaluation of Synergy ...................................................................................................... 22 3.1.3. The Disciplined Approach ............................................................................................... 24 3.1.4. A Common Framework .................................................................................................... 25 3.2. Synergies and the Acquisition Process ................................................................................... 25 3.2.1. The Acquisition Process ................................................................................................... 25 3.2.2. Synergies in the Acquisition Process ............................................................................... 26 3.3. Conclusion .............................................................................................................................. 26 4. Key elements of the Integration Process .................................................................................. 27 4.1. Strategy ................................................................................................................................... 27 4.2. Organizational Issues ............................................................................................................. 28 4.2.1. Organizational Structure and Change .............................................................................. 28 4.2.2. Corporate Culture ............................................................................................................. 28 4.3. Managerial Actions ................................................................................................................ 29 4.4. Conclusion .............................................................................................................................. 30 5. Measuring Performance when Achieving Synergies ............................................................... 31 5.1. Company Objectives .............................................................................................................. 31 5.2. Financial key ratios ................................................................................................................ 31 Page 2 of 86 5.3. The Balanced Scorecard as a Tool for Measuring Synergies ................................................. 32 5.4. Conclusion .............................................................................................................................. 33 6. Empirical Evidence on Value Creation .................................................................................... 34 6.1. Global Evidence ..................................................................................................................... 34 6.1.1. Sample Selection .............................................................................................................. 34 6.1.2. Overview and Evidence ................................................................................................... 35 6.1.3. Future Studies ................................................................................................................... 40 6.2. Evidence on Value Creation in Danish Companies ..............................................................