Creating Value From Mergers And Acquisitions

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02 Nov 2017

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Introduction

Sudi Sadarsanam (2003) wrote in his book Creating Value from Mergers and Acquisitions, that « Mergers and Acquisitions (M&A), by witch two companies are combined to achieve certain strategic and business objective, are transactions of great significance, not only to the companies themselves but also to many other constituencies, such as workers, managers, competitors, communities and the economy. Their success or failure has enormous consequences for shareholders and lenders as well as the above constituencies. » (1p.)

Based on this quotation I can state that Merges and Acquisitions of companies is one of the most important phenomenons in the last 20 years happening in economic world. M&A hit many companies throughout economic spectrum in developed countries but in emerging markets as well. In my opinion we have to perceive them as one of the most important form of integration, which enable to companies competitive advantage (dominance). M&A are linked to complicated decisions, financial as well as investing. M&A contains all crucial parts of business, for instance, strategic management and analysis, banking, all kinds of law, taxes, finance, human resources, management of company value, restructure and integration. To implement M&A without problem require knowledge and competence, team work of specialists with high level of knowledge and practical experience in fields mentioned above.

In proof of increasing level of M&A is that in year 2007 the value of total M&A reached 3.6 billion USD. The global crisis decreased the M&A and acquisitions due to decrease of profits and inaccessible loans. The global market with M&A dropped to bottom by mid of the year 2009. The total value of M&A by 2009 reached almost 2 billion USD. (BIČÍK, M., 2007)

The year 2007 registered not only increase of M&A, but as well more tries of hostile takeovers. The amount of such takeovers increased contrary to year 2006 from 94 to 355. Here we can classify one of the largest merge in the world, Arcelor S.A., head quartered in Luxemburg, has been taken over by Mittal Steel Company N.V., headquartered in Netherland. The value of this merge has been 40 milliard dollars. The rising activity in central and eastern Europe has been followed by worldwide trend. Volume of M&A in Czech Republic and border countries reached in 2005 102 milliards of dollars. To compare with 2004 the amount was lower more than half with only 48 milliards dollars. The amount of M&A increased from 1165 in 2004 to 1667 in year 2005. That information comes from statistics from company Dealogic, which has arranged advising company KPMG. [1] The maturation of M&A market in Czech Republic is proofed by the fact, that some Czech companies acquired foreign companies. In this time period were expending companies such as ÄŒEZ, a.s., Zentiva Group, a.s. , and AGROFERT HOLDING, a.s. Rising local importance of managing companies lead to write the thesis.

In the last years managers, who are taking part in M&A, highlight importance of human factor in those processes. Very often importance of this factor is not taken in to consideration, which is necessary to apply in complicated situation which are evoked during M&A.

M&A processes of companies are subject of many different studies and researches, which usually are focused one law area and financially-economic area. No as often these studies and researches are focused on social, organizational and managing aspects induced by M&A. It is necessary to underline that as well these processes are important elements of integration processes, because these processes can influence process and result of M&A.

The aim of this thesis is to analyze the success of M&A of particular companies by index EVA.

This thesis is written to observe and evaluation of mergers and acquisitions. M&A are complicated processes, due to which changes are happening in the most important moments of the company’s life. Of course the changes are happening in companies which are perished as well as in the new arising company.

Targets and methodology

Target

The target of the thesis is to analyze success and affectivity of M&A of particular companies by index EVA.

For evaluation of success and affectivity of M&A, I used in this thesis method EVA (Economic Value Added). The reasons of usage such a method are mentioned in chapter XXX, but main reasons are results of Deloit research and CFO Research Services (2007), which are saying that philosophy of managing value of company is very important part. It is applied in companies with success across different industry sectors. As well as method EVA was used in professor’s Ken C. Yook work „The measurement of post-acquisition performance using EVA published in Quarterly Journal of Business and Economics, University of Nebraska-Lincoln (2004).

Success of the acquisition is evaluated based on comparison of the level of the value before the acquisition and after it. The period of analysis was established on 3 years before and 3 years after the M&A. This period of time was chosen according to opinions of different authors, for instance Synek M. (2007) in his book Manažérská ekonomika, Frąckowiak W. (2009) in her book Fuzje i przejęcia.. This three years before and after acquisition period is applied in many different research works papers, for instance „The Postmerger Financial Performance of Hotel Companies" Li-Tzang(Jane) Hsu, SooCheong (Shawn) Jang (2007) or "The long-term Operating Performance of European Mergers and Acquisitions" Martynova, Oosting. Renneboog (2006). Shareholders expect the positive effect in as shortest as possible period, they don’t want to wait for uncertain result many years, success and increase of the value is expected as soon as possible.

The success and efficiency of M&A in this thesis is understood as company´s value creating, which is measured by EVA. The reason why is used this method is mentioned in previous paragraphs.

Methodology

This thesis has several phases, which were followed to achieve desired target. Main phases are:

Literature recherché- understanding the problem of Value Based Management (VBM), Mergers and Acquisitions as well as understanding concept of Economic Value Added index. Literature recherché of Czech, Polish, worldwide literature.

Data analysis of particular companies- EVA analysis within companies to measure the success of M&A. EVA analysis within Válcovny Plechu Frydek Místek, Moravskoslezské Drátovny, and Eiffage Construction Česká republika

Evaluation of results- summarizing gotten results and appraisal of gathered details

Some of the basic methods of research are used during elaboration of this thesis. In the following part I´m going to describe these methods and their usage in this thesis.

Empirical method- this method is mainly used in measuring and monitoring of companies ‘sample. Analysis of documents was used as data gathering methodology, to learn companies, their way of managing.

Logical approach-

Quantitative research- research was based mainly on secondary data from data all over the world, books, magazines, data from companies’ databases, with the aim to identify link in VBM within creating EVA. Primary data were used as well. This data came mainly from communication with companies’ representatives. The main tool was EVA. Main data used for this reason are coming from accounting statements, annual reports, and gathered intern information.

Terms and information about Merges and Acquisitions

These two terms are used very frequently, and as many people think they are synonyms. However is necessary to distinguish them. The main difference between M&A is their mode of financing.

Acquisition

The acquisition takes place when company number 1 is buying company number 2. This transaction takes place, when company number 1 is willing to have major package of shares in order to assume control of the target firm (company number 2). The price offered during the negotiation process is called as acquisition price. The price is usually higher than actual value of the company. The difference between offered price and actual value price is called acquisition premium. Premium´s reason is to motivate shareholders enough, to agree with handover of the shares in favor of potential buyer (aquirer). (Šantrůček, 2001)

The term takeover is widely used when one firm assumes control of another. In the real life exist a few ways how companies can be acquired, those ways can be combined.

Generally we diversify two basic ways of takeover:

Hostile takeover: occurs when the initial approach was unsolicited, the target was not seeking a merger, the approach was contested by the target’s management, and control changed hands (i.e., usually requiring the purchase of more than half of the target’s voting common stock). The acquirer may attempt to circumvent management by offering to buy shares directly from the target’s shareholders (i.e., a hostile tender offer) and by buying shares in a public stock exchange. (DePamphilis, 2012)

Friendly Takeover: In a friendly takeover of control, the target’s board and management are receptive to the idea and recom mend shareholder approval. To gain control, the acquiring company usually must offer a premium to the current stock price. A formal proposal to buy shares in another firm, usually for cash or securities, or both, is called a tender offer. While tender offers are used in a number of circumstances, they most often result from friendly negotiations (i.e., negotiated tender offers) between the boards of the acquirer and the target firm. Friendly takeovers are often consummated at a lower purchase price than hostile transactions. Acquirers prefer friendly takeovers because the postmerger integration process is usually more expeditious when both parties are cooperating fully. For these reasons, most transactions tend to be friendly. (DePamphilis, 2012)

The proof of those practices is takeover of steelmaker Arcelor S.A. by other steel giant Mittal Steel, as another example mentioned, could be takeover of company Aventis between Sanofi-Synthelabo and Novartis, or PeopleSoft and Oracle Corporation and many others.

Reasons of acquisition

The primary reason of acquisition is an opportunity to get economical profit of acquirer, thanks to Target Company, respectively increasing the market value of the master company. The condition for successful acquisition is increasing Net Present Value of Acquirer´s Company after takeover.

Diversification of the reasons of acquisition based on E. Kislinger (2001) and D. DePamphilis (2012) as follows:

Theory of effectiveness- is the prime target of mergers, mainly due to:

Financial synergy- decreasing costs, effectively use the financial sources

Operating synergy- merging some areas of activity, increasing know how

Management synergy- ability to manage the new created company

Monopoly theory- monopoly is understood as a failure at the market, but it can be one of reasons why companies mergers, due to it barriers to entry to market can be created, reducing the competitors, or penetrance to areas where company has not been yet.

Value theory- It is about to have possibility to invest, to have opportunity to invest available financial funds and obtaining the company, about which acquiring company thinks, that is underestimated on the market. The aim is to add new value and valorize the investment.

Building empire theory- management is satisfying their ego, without mainstreaming who has provided capital.

Process theory- Process changes are appearing during the evolution of the company. Managers have to take decision without having sufficient amount of information, in the end of this process usually the outcome is merger or acquisition.

Transfer theory- this theory says that behavior of the company´s management is influenced mostly by macro-economic factors, various shocks, and globalization. Except it management is under pressure of international tenders, where they have to count with financial innovations, liberal antitrust politics and many other factors influencing current wave of acquisition.

Mergers

Simply said merger is "higher" form of acquisition, the definition of mergers is described as a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be considerably different organization after the merger, it retains its original identity. (FrÄ…ckowiak, 2009)

Below are mentioned four types of mergers sorted by strategic intention. [2] 

Horizontal mergers (horizontal integration): The consolidation of firms that are direct rivals--i.e. firms that sell substitutable products or services within the same geographic market. This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition. For example mergers car manufacturers.

Vertical Mergers (vertical integration): The consolidation of firms that have potential or actual buyer-seller relationships. Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment.

In vertical merger, companies that do not own operations in each major segment of the value chain "backward integrate" by acquiring a supplier or "forward integrate" by acquiring a distributor.

Purchase of

Raw Material

Manufacturing/ IT operation

Post sale Support

Product Delivery and Service

Manufacturing/ IT operation

Forward Integration

Backward Integration

Exhibit The corporate value chain. Source:Mergers, Acquisitions, and Other Restructuring Activities

Conglomerate Mergers: Consolidated firms may share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated. Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. This is just a unification of businesses from different verticals under one flagship enterprise or firm. For example grocery producer mergers with electronics producer.

Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company. Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements.

The reasons of buyer or seller should come from fundamentals of basics of M&A, it means creating economic value added for shareholder, and so to entire growth of the company. The reasons of M&A we can divide to four basic groups. [3] 

Technical and production reason

Marketing, or sales reason

Financial reason

Managerial reason [4] 

Reasons of M&A

Specifications of M&A

Technical and production reasons

Increasing managerial electivity

Getting more productive managers

Elimination of nonproductive managers

Synergic [5] effects at production

Economy of scale

Decreasing transaction costs

Benefits from technical integration

Marketing, or sales reason

Increasing market share

Increasing value added

Pushing out the competitors from the market

Risk diversification

Penetrations to new branches

Financial motivations

Utilization of financial exceeds

Takeover of cash

Lower Costs of Capital

Tax benefits

Underestimation of target company

Underestimation by capital market

Buyer gets better price

Managerial reason

Management´s remuneration increase

Increase of power and prestige

Authority expansion

Reduction managing risk

Exhibit Reasons and motives of M&A

Source : FRĄCKOWIAK, W., Fuzje i Przejęcia . Warszawa : Polske Wydawnictvo Ekonomiczne, 2009. s. 492. ISBN 978-83-208-1786-7. s. 32-33. Donald DePamphilis

History of M&A

Since a long time in many high developed national economies M&A have been appearing in high concentration. Those periods are called merger waves. Experts have been seeing here certain cyclist. The most significantly is possible to see such a periodicity in American economy, nevertheless such a waves have been appearing in European union, Australia, Canada, Japan and South Korea as well. Naturally for world´s tendencies is crucial American market. M&A which have been appearing here are forming those effects in global scale. [6] 

What triggers these waves and why they subside are not fully understood, although several possible contextual explanatory factors have been identified. Another, possibly related, aspect of the phenomenon of merger waves is that merger often happen in industry cluster. [7] 

In the XX century was recorded 5 finished waves of M&A, but some authors already describes sixth wave, which hapend in XXI century. There are two competing explanations for this phenomenon. Martynova and Renneboog argue that merger waves occur when firms in industries react to "shocks" in their operating environments, such as from deregulation or the emergence of new technologies, distribution channels, substitute products, as well as asustained rise in commodity prices. The size and length of the M&A wave depends to a large part on how many industries are affected by these shocks, as well as the extent of the impact.

The second argument mentioned by Rhodes-Kropf and Viswanathan is based on the misvaluation idea discussed previously and suggests that managers use overvalued stock to buy the assets of lower-valued firms. For M&As to cluster in waves, goes the argument, valuations of many firms must increase at the same time. (DePamphills D, 2011) [8] 

First Wave Mergers : 1893-1904 (Horizontal Consolidation)

Reinforced activity in area concentration of capital came in USA in seventies and eighties of 19th century. Conditions which were prevailing that time were similar to model of free competitors. This model has been change with fast concentration of capital and production. Reinforcement of this phenomenon commenced first wave in the end of 19th century. In that time USA became the country of many horizontal mergers. During this phase merger occurred between companies, which enjoyed monopoly over their lines of production like railroads, electricity etc. Those mergers took place between heavy manufacturing industries.

In this phase many companies were formed, which are known even nowadays. Companies like a US Steel Corporation, American Tobacco Company or Oil Standard of New Jersey (from 1971 Exxon), Eastman Kodak, American Can. In some reason it was the most important wave, because in big scale it has affected the American economic. Before year 1980 the part of American economy was formed by small and middle enterprises. In consequence of mergers the economy was formed to sectors of one or couple of big companies. Approximately 71 important oligopolistic or near-competitive industries were converted into near monopolies by merger. More than 1800 firms disappeared into consolidation.Majority of the mergers that were conceived during the 1st phase ended in failure since they could not achieve the desired efficiency. The failure was fuelled by the slowdown of the economy in 1903 followed by the stock market crash of 1904. The end of a first wave was stopped by Supreme Court. The Supreme Court passed the mandate that the anticompetitive mergers could be halted. This order of court banned forming monopoly by mergers or acquisitions. (Sherman Act 1890 and Clayton Act 1914). [9] 10

Second Wave Mergers: 1916-1929 (Increasing Concentration)

This was a much smaller wave than the first in terms of its relative impact. The second wave mergers that took place from 1916 to 1929 focused on the mergers between oligopolies, rather than monopolies as in the previous phase. That’s why this phase was named oligopolistic merger. It followed the market crash and the First World War. The second wave accompanied economic growth and stock market boom. An estimated 12 000 forms disappeared during this period. For several reasons, the impact on the market structure of industries was much less dramatic than during the first wave. Technological developments like the development of railroads and transportation by motor vehicles provided the necessary infrastructure for such mergers or acquisitions to take place. The government policy encouraged firms to work in unison. This policy was implemented in the 1920s. The 2nd wave mergers that took place were mainly horizontal or conglomerate in nature. Industries that went for merger during this phase were producers of primary metals, food products, petroleum products, transportation equipments and chemicals. The investments banks played a pivotal role in facilitating the mergers and acquisitions.

The 2nd wave mergers ended with the stock market crash in 1929 and the great depression. The tax relief that was provided inspired mergers in the 1940s. [11] 12

Third Wave Mergers: 1965-1970 (The Conglomerate Era)

The amount of consolidated transaction increased in 50s of the last century, approaching to the amount of the first wave. Just in 1965 the amount doubled compared to first half of 60s. During this wave mainly occurred conglomerate mergers. That is the reason why this phase has been called conglomerate era. In that wave companies as Gulf & Western, Litton Industries or Textron incepted. Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust laws. The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were financed from equities; the investment banks no longer played an important role. 3rd wave reached the pick in 1969 and finished in 1970 with high drop of prices of shares on stock market. Some tax changes were implemented as well. Germans introduced the right increasing control on merge transactions. In other hand in USA was introduced act Hart-Scott-Rudino in 1976. [13] 

First wave

Second Wave

Third Wave

Number of Mining

2 600

8 000

12 000

Value of Mining in USD [14] ( Constant 1972 dollar)

$6.4bn ($26bn)

$12bn-15bn ($24-30bn)

$70bn ($69bn)

Exhibit Comparison of 3 waves source: SUDARSANAM Creating Value from Mergers and Acquisitions, 16p

Fourth Wave Merger: 1981-1989 (The Retrenchment Era)

The 4th wave merger that started from 1981 and ended by 1989 was characterized by acquisition targets that wren much larger in size as compared to the 3rd wave mergers. Mergers took place between the oil and gas industries, pharmaceutical industries, banking and airline industries. Foreign takeovers became common with most of them being hostile takeovers. The 4th Wave mergers ended with anti-takeover laws, Financial Institutions Reform and the Gulf War.

Fifth Wave Merger: 1993-2000 (The Age of the Strategic Mega-Merger)

Recession in the beginning of 90s, which began with American-Iraq crisis in Persian Gulf, slowed down M&A. Managers focused on situation inside of company, it means reducing the costs, modification of expenses, controlling systems, and pressure on raising the profit. The 5th Wave Merger took place mainly in the banking and telecommunications industries. The mergers were driven long term rather than short term profit motives. The 5th Wave Merger ended with the burst in the stock market bubble. [15] 16

The Sixth Wave (2003–2007): (The Rebirth of Leverage)

U.S. financial markets, especially from 2005 through 2007, were characterized by an explosion of highly leveraged buyouts and private equity investments (i.e., takeovers financed by limited partnerships) and the proliferation of complex securities collateralized by pools of debt and loan obligations of varying levels of risk. Much of the financing of these transactions, as well as mortgage-backed security issues, has taken the form of syndicated debt (i.e., debt purchased by underwriters for resale to the investing public). The syndication process disperses such debt among many different investors. The issuers of the debt discharge much of the responsibility for the loans to others. Under such circumstances, lenders have an incentive to increase the volume of lending to generate fee income by reducing their underwriting standards to accept riskier loans. Once sold to others, loan originators are likely to reduce monitoring of such loans. These practices, coupled with exceedingly low interest rates made possible by a world awash in liquidity and highly accommodative monetary policies, contributed to excessive lending and encouraged acquirers to overpay significantly for target firms. (DePamphills D, 2011) [17] 18

Global outlook

American Appraisal made the global outlook and describes the global M&A market has been in a lull with greater reticence by dealmakers to undertake large-scale transformational deals since the midpoint of last year. Where deals are taking place, thereis a preference to instead focus on safer bolt-on acquisitions and digestible plays in the middle markets. [19] 

Exhibit Global M&A

Exhibit Median EBITDA by Region

Key sector overview

As companies which are being analyzed in this thesis belongs to industrial sector, this chapter is describing briefly world sector overview.

Private equity firms with undeployed funds and cash-rich corporates made a strong comeback in 2011 but this improvement was short-lived. The first half of 2012 saw valuations suffer as a result of persistent global economic malaise, though the valuation climate does vary considerably across different industry sectors. [20] 

Exhibit Median EBITDA by Sector

Industrial and Chemical sector over the past two years, the proximity of average five-year EBITDA and revenue growth rates in the Industrials & Chemicals space suggests that benefits other than synergies are driving acquisitions. With large amounts of cash still sitting on corporate balance sheets, especially in North America, moving to new territories or product lines as well as expanding market share may have been more prominent strategic drivers. [21] 

While this suggests that attitudes are becoming less defensive, median EBITDA multiples in Industrials & Chemicals stayed approximately flat between 2010 and 2011, while most other sectors saw a significant uptick. This reflects the slowdown the sector is experiencing globally. If business confidence slips further, then cost-cutting tactics are expected to come back to the fore, and M&A will be a key part of this. With increased divestitures and non-core asset sales, average valuations could fall.

European overview

American Approvial describes the European situation followingly. In the first half of 2012, 2037 deals were announced in Europe worth a total of US$333.3bn, representing 21% less value and 27% fewer deals compared to the first half of 2011. This suggests remarkable resilience to the storm brewing across the region, which is the epicenter of an unprecedented liquidity crisis.

Exhibit European M&A

Things are worsening this year, however, as the sovereign debt crisis continues to hamper capital raising conditions, stock market volatility erodes shareholder value, and the tough business climate necessitates cautious profit forecasts for many European firms. The M&A landscape will continue to come under serious pressure as a result, with buyer uncertainty rising and many would-be sellers waiting for things to improve before beginning sale processes.

Evolution of M&A in Czech Republic

The aim of this thesis is to analyze companies, which is possible to see in chapter XXXX. Those companies have been established in Czech Republic. For this reason this chapter is designed for Czech evolution of M&A.

The very beginning of M&A is tightly connected to privatization process, which began in 1991 after decades of state-ownership. Entire process of privatization is followed by inception of bunch of law regulations. With those regulations privatization processes could have been managed. Transformation of Czech economy enabled step by step opening to surrounding world and Czech Republic started to attract foreign investors through investment encouragement.

Privatization process was done in two phases. It was so called small-scale privatization. This small-scale privatization was timely shifted before complex transformation of rights of ownership under the large-scale privatization. Small-scale privatization took a place in 1991-1993, when it finished.

Large-scale privatization using voucher privatization supposed to rapid removing property on condition that new owner would manage the company better than the state clerk. The Voucher Privatization took place in three waves. First in 1992, then second in March until November of 1994, and the last one 1993-1995. Direct privatization took apart as well, mainly this way of privatization took a part to management of privatized company.

Evolution of M&A in Czech Republic in the end of 90s mirrored trends in Western Europe. PricewaterhouseCoopers study shows that number of M&A in Czech Republic, Hungary, and Poland dropped about 32% in year 2001, which equals to the amount of transaction in Europe and in the world. The global decrease was affected by recession of economy, but as well with the beginning of war with terrorism from 11.9.2001. The value of 8,6 mld USD in 2001, which is 49% decrease in comparison to 16,8 mld USD in 2000. [22] 

PWC research from 2002 says, that amount of transaction in Czech republic, Hungary, Poland increased about 8,9% in comparison to year 2001, which is evaluated as slightly improvement of 32% drop in previous period(2000 and 2001) in those 3 countries. Evolution of estimated transactions value is showed in exhibit XXX.

The biggest transaction in Czech Republic in 2002 was privatization of Česká Spořitelna by selling shares to Austrian bank Erste Bank Sparkassen of Austria for 690 million USD.

In 2003 the volume of transactions in Czech Republic reached 4,3 milliard USD, and in comparison to the year 2002 the volume doubled. 185 M&A was signed in 2004 in Czech republic, this is 13% more than in 2003.

Exhibit The value of transaction in Czech Republic, Hungary and Poland (millions USD)

Source: DENZE, M., Central European Mergers & Acquisitions Survey, PricewaterhouseCooper, Czech republic, Hungary and Poland, 2002, [2011-06-05]. <http://www.pwc.com/en_HU/hu/publications/mergers/assets/manda_2002.pdf>

Based on published information about transaction in private sector, Czech Republic was ranked as 3rd the most active country in middle and Eastern Europe. The total value of transaction decreased from 4,3 milliard USD to 3,4 milliard USD in 2004. The most active sector remained manufacturing industry (47 transactions), afterwards food and beverages production (17 transactions), media (13 transactions). To the biggest transaction belongs sale of the 85% shares of TV Nova [23] with estimated value 652 million USD. [24] 

In 2006 the value of M&A has increased to 6,2 milliard of USD. In 2005 it was 5,9milliard USD. For complex information, the entire evolution process of value of M&A in Czech Republic between 2002 and 2010 is mentioned in the exhibit 9.

Exhibit Evolution of M&A in Czech Republic in 2002-2010

Source: study of PricewaterhouseCoopers, published by Ernst & Young z 19.4 2011

The value of M&A has been affected by global crisis. The peak has been achieved in 2007 since then M&A were decreasing in USA, Europe and Czech Republic as well. [25] Transactions value in 2010 in second quarter decreased to 2,1 milliards dollars. Data were published by ERNST&YOUNG. The mentioned amount is just experts´ assumption, because just price of 44% of total value of finished transactions were published. [26] 

In the beginning of the 90´s were just big government companies, which were automatizovany and afterwards privatized. Now on is possible to see the exact opposite in economics, concentration equity process. This process is done by M&A companies. The process is adoption of corporate and economic sphere to changing situation of increasing competitors. In global economy is possible to notice process of globalization, so companies in Czech Republic have to react adequately on this new situation, in this case companies concentration.

Except the process mentioned above may come another evolution tendency. Relatively small companies which were established in the beginning of the 90´s had two typical signs:

The legal form was s.r.o [27] 

The companies used to have higher number of partners [28] 

Since establishment several years past, owners (partners) of such companies are getting tired and old. In some cases family needs are saturated and partners are willing to leave the company. In Czech legislation it is not simply, nor easy act. In many cases the partner has died and up to now heritage process is not finished. Like big companies are merging, small companies would split due to reasons mentioned above. [29] 

Characteristics M&A process

Merger or acquisition is very delicate issue for a company. Unusually complicated processes are linked to M&A and those processes are causing changes all areas merging companies. Among such a changes we can mention changes in ownership, legal, markets, production, commercial, personal, financial and so on. They have long term effect and running them requires significant financial funds. They are not routine actions and they require specific knowledge and qualifications. Very important is schedule timing of entire process of merger or acquisition. As shown by fact, that many process decisions of mergers or acquisitions were rushed and final results didn’t meet the expectations. It is estimated that just one fifth of transactions end by success. [30] 

Basically authors brake down the M&A process to three phases (Pre-acquisition, negotiating part, and post-merger integration), but we can even The Merger & Acquisition Process break down into five phases: [31] 32

Phase 1 - Pre Acquisition Review:

The first step is to determine as well as assess the situation if a merger or acquisition strategy which should be implemented. If a company expects difficulty in the future when it comes to maintaining core competencies, market share, return on capital, or other key performance drivers, then a merger and acquisition (M & A) program may be necessary.

It is recommended to ascertain if the company is undervalued. The pre-acquisition phase often include a valuation of the company to be able to answer questions, whether the company is undervalued, or whether M & A Program would improve company´s valuations.

In Pre Acquisition Review stage company primary should focus to determine if growth targets can be reached internally. If not, an Mergers & Acquisitions Team should be formed to establish criteria whereby the company can grow through acquisition. A rough plan should be developed on how growth will occur through M & A. In such plan should be included responsibilities within the company how information will be gathered, etc.

Phase 2 - Search & Screen Targets:

The second phase of the M & A Process is to look for possible takeover candidates. Target companies must fulfill a set of criteria so that the Target Company is a good strategic fit with the acquiring company. If the main criteria of choosing the proper candidate is increase of the company´s value due to synergic effects. Than is necessary to do versatile analyses.

Partial criteria will help to sort potential candidates to two or three. By this step short list is prepared of target companies.

Phase 3 - Investigate & Value the Target:

After short list is done we can approach to the third phase of M & A. This phase is to perform a more detail analyses of the target company. You want to confirm that the Target Company is truly a good fit with the acquiring company. For this reason for steps are used:

Strategic analysis (production-sales, economic-financial characteristic comparison, as well as estimating possibility of synergic effects.

Analysis of economic value added within target company, especially earning per share

Economic potential impact analysis of ratio between buying price and profit after transaction

Management analysis of the target company

Those above mentioned analyses should answer, which candidate is adequate in a terms of maximizing value of new created company.

Buyer has difficulties to receive all necessary valid data, because they are considered as confidential. Main data used for analyses are taken from publicly available sources. Because of such a reason is necessary to make final verification of analyses performed. This detail verification is called "due diligence."

Due diligence main objective is to find out various synergy values that can be realized through a Mergers & Acquisitions of the Target Company. Due diligence means assessing price and identifying financial risks. Due diligence is possible to do only if the way of transaction is not hostile takeover. If it is hostile takeover, then buyer is obliged to set the conditions and price of takeover. The range of due diligence is very wide, it contains all areas of company activity, as well as all environments which influence company activity and development. [33] 3435Table number XXX shows the basic range of company´s activity, which should be analyzed within due diligence.

Target company´s profile

Market, product, competitors analysis

Production process analysis

Management and employee analysis

Management organization analysis

Controlling analysis

Financial, tax, accounting analysis

R & D analysis

Ecological audit

Legal auditing

Phase 4 - Acquire through Negotiation:

After selecting Target Company and assessing it, tarts the process of negotiating a M & A. in this phase is necessary to prepare plan, which is covering issues of price, way of financing, tax questions eventually social or investment obligation. This problems require negotiation with management and key shareholders, unions, institutions financing the a M&A, authorities giving approval for transaction. Based on due diligence is possible to estimate the price.

The pricing part is one of the most important parts of entire process. Before the negotiation stars, buyer has to establish the offering price and seller it´s value. Acceptation or rejection of the transaction is by comparison of those two values. IT is necessary to mention, that "right" universal pricing does not exist, because company does not have any objective materially proving, documented and based on environmental requirements independent value.

Phase 5 - Post Merger Integration:

This is the last phase of M&A. Both sides will announce an agreement to merge, if everything goes well. Aquisitor expects positive effect positive effect of such a transaction. Sometimes the positive effect is not meet, which cause disappointment and aquisitor´s searching for reasons of such a disappointment. Simple taking control over and changing the statutory body, do not mean the success. [36] 

In doesn’t mean that within takenover company should not be changed anything. Very often those changes are necessary and can be crucial for entire takeover process. The issue is to don’t lunch avalanche of leaving valued, qualified or "unreplaceable" employees. This could cause other problems in company. [37] 

The basic rule of integration process of two companies is that doesn’t exist general rule, which could be used in a integration process. It is not possible to identify only one success way of integration. It does not exist identical takeovers, as well as does not exist identical aquisitors. Key to the success is to be prepared, timing of entire transaction, and to support control systems during realization. [38] 

Integration plan is decision about future of both companies. This plans always change conditions in three spheres:

Personal

Process (production, managing, organizational, informational)

Technological [39] 

Success evaluation of acquisition transaction by index EVA

The aim of success and affectivity evaluation of M&A transaction is not to use the most sophisticated method, but the aim is to approve existence and find crucial factors and processes influencing successiveness of M&A projects.

The success of acquisition is evaluated by comparison of value level output with the period before acquisition and after acquisition. The period of comparison was evaluated to 3 years before and 3 years after transaction was done. This time period has been chosen based on opinions of several authors, for instance Synek M. (2007), [40] in his publication Manažerská ekonomika, , FrÄ…ckowiak W. (2009) [41] in the book Fuzje i przejecia. This 3 years before and after period was applied in several research works, for instance „The postmerger financial performance of hotel companies" Li-Tzang(Jane) Hsu, SooCheong (Shawn) Jang (2007) [42] . Is necessary to have a look at the fact that shareholders want to see the positive effect in the shortest term as possible, they don’t want to wait for uncertain outcome ages.

Before 1990 the concept of shareholder value approach, known especially in USA, was mainly used for capital budgeting decisions and for mergers and acquisition pricing. From 90´s up today companies have implemented value indexes for shareholders to process planning and general estimation company´s outcome. Harvard has introduced new business concept Created Shared Value (CRV), which is linking increasing company´s value by shareholders value. CRV is more described below. [43] 

Alfred Rappaport published his book Creating Stakeholders Value in 1986. Since then the opinion has been very accepted in USA along with competitor’s globalization and privatization. The problem of managing value attracts attention of top managements in UK, continental Europe, Australia, and Japan. It is clearly visible creating shareholder value, and managing the value is becoming global norm to measure the company´s result. [44] 

Past ten years of new millennium is threat period against this way of management. Geopolitical instability and even more uncertainty of future evolution, significantly influence investor´s costs, which reflect on global stock market differences. Shocks on worldwide stocks market were as well caused by accounting and loan frauds. Enemies of Value Based management are criticizing this concept. This concept is saying that it should lead to maximizing value for shareholder, but not at any costs. Michael C. Jensen, Harvard Business School professor, said: "Managers must abandon the notion that a higher stock price is always better and recognize that an overvalued stock can be as dangerous to a company as an undervalued stock." [45] 



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