Merger Integration

2

TEAM MEMBERS

Nalin Singla

Engagement Manager

Consultants

Aaron ByrneSenior Consultant

Erin EngelsSenior Consultant

Eriko ItoSenior Consultant

Andy SchultzConsultant

Carissa Holler Library Information Services

Dr. Anju Seth

Faculty Advisor

3

AGENDA

• Project Background & Approach

• Updated Tool Overview

• Reasons for Proposed Mergers

• Average Value of Proposed Mergers

• Companies With Unrealized Value

• Areas of Synergy

• Reasons for Failed Mergers

• Market Overview

• Pre-merger Market

• Post-merger Market

• Competitive Analysis

• Trends

• Recommendations

• Appendices

4

PROJECT BACKGROUND & APPROACH

• BearingPoint had created a whitepaper entitled “Unleashing your company’s unrealized value: Transformation through business integration”.

• The whitepaper was validated by the OSBI team as a part of the previous project to create a tool which measured the unrealized values of companies during M&A activities

• Two industries were analyzed•Banking•Electronics

Project Background

• Update & analyze the value tool for additional industries

•Telecommunications•Software

• Perform analysis related to unrealized value of proposed merger synergies

• Define and estimate market size for pre-merger and post-merger services

• Provide a competitive analysis of the pre-merger, transaction support & post-merger integration services

• Identify significant trends in U.S. and global M&A

OSBI Project Goals

5

Conduct competitive analysis of merger services market

Analyze unrealized value of proposed mergers

PROJECT BACKGROUND & APPROACH

This diagram represents the process flows for the project. The remainder of this report will expound upon the arrows highlighted on this slide.

Identified 3rd & 4th industry

Updated tool for 3rd & 4th industry

Identified value drivers

from S-4 reports

Identified reasons for proposed mergers

Identified reasons for

failed mergers

Identified areas of synergy

Conducted competitive analysis

of key consulting firms providing M&A

services

Analyzed pre/post merger market

Analyzed merger

services market

Analyzed M&A

market trends

Data Gathering

Analysis & Evaluation

Consistent client interaction & input

6

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

7

UPDATED TOOL OVERVIEW

1. BearingPoint created a whitepaper entitled “Unleashing Your Company’s Unrealized Value: Transformation Through Business Integration”

2. Electronics and Banking industries were selected as analysis targets based upon an industry evaluation and selection model: 22 industries were ranked on the basis of M&A activity, industry beta, market cap. & availability of company’s financial data

3. Companies were evaluated with respect to generic and company-specific value drivers for two industries (Banking & Electronics). Each of the industry specific driers are mapped to accounting ratios.

4. The tool analyzes changes in the financial performance of a company for a period of eight (8) years with the changes in financial performance of the overall industry for the same period

5. The tool identifies companies who lost value due to M&A activity and provides a positive/negative score for each company which tells how a company compared to the industry average

Value DriversIndustry Selection Tool Architecture Companies who lost

value due to M&A Activity

Whitepaper on

Unrealized value1

The structure of the “Value Predictability Tool” developed by the OSBI team

M&A activity

Industry Beta

Financial Data avail

Market Cap.

Weighted Average

Generic Drivers

Industry Drivers

Ranked

80%

20%

1 2 3 4 5

Company specific data

Industry average

co

mp

are

Note: “Industry selection”, “Value drivers” & “Tool architecture” slides are attached in the appendix

8

UPDATED TOOL OVERVIEW – Industry Selection

Industries for further analysis were identified based on their ranking across three different scenarios. The four industries selected ranked highest in at least two of the three scenarios

Scenario 2

1. Electronics2. Banking3. Software4. Telecommunications

Top 4 IndustriesIndustries not considered

Scenario 3Scenario 1Industry Name

NOTE: Retail/Wholesale was number one in ranking, but was not used because of the diversity of the industry and value drivers

9

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

10

REASONS FOR PROPOSED MERGERS - Electronics

Driver ListTimes Cited

Complementary Products (Consolidate Product Offering) 29

Expertise in Area (Technical Know-How) 24

Capture Market Segment 20

Distribution Channels (Network) 18

Tax Benefits (Taxation) 17

Product List (Breadth of Service Offerings & Solutions) 15

R&D Capabilities (Complements Technical Spending) 9

Customer Relations (Combat Growing Competition) 8

Economies of Scale 7

Financial Resources 7

Resources (Threshold Size to Compete with Large Players) 6

Increased Size Increases Bargaining Power 6

Others 6

Sources: Value Predictability Tool and Mergant Online

29

24

20

18

17

15

9

8

7

7

6

6

6

“Complementary products” & “R&D capabilities” would be the major drivers for M&A activity in the electronics industry

Future Trend

“Consolidation of product offerings” & “Gaining technical expertise in a particular area” are the top reasons for mergers in the electronics industry

11

REASONS FOR PROPOSED MERGERS - Banking

Driver ListTimesCited

Financial Risk and Superior Performance to Shareholders

25

Financial Strength in Assets & Revenue 24

Broader Product Line 21

Bigger Management and Economies of Scale 20

Good Financial Performance 20

Opportunity to Expand into Domestic/International Market 19

Greater Competitive Position 18

Greater Distribution Network 17

Similar Vision and Customer Service/Marketing Approach 17

Specialized Service Expansion 16

Market Share 15

Marketing Advantages 13

Others 18

Sources: Value Predictability Tool and Mergent Online

25

24

21

20

20

19

18

17

17

16

15

13

18

“Financial risk and superior performance to shareholders” & “Financial strength in assets & revenues” are the top reasons for mergers in the banking industry

“Market reach”, “Greater distribution network” & “Gaining competitive position” would be the major drivers for M&A activity in the banking industry

Future Trend

12

REASONS FOR PROPOSED MERGERS – Software & Telecom

Driver ListTimescited

Alliances/Partnerships w/ Complementary Product Manufacturers

17

Growth Areas -- Financial Sector, Banking/Insurance; Wireless, BPO

9

Market Share 8

Others 8


Software

Telecommunication

Driver ListTimes Cited

Geographic Reach -- Market Size, Customer Base

10

Services -- Wireless, Voice, Data 9

Bundled Technology 6

Others 15

Future Trend - Banking

Future Trend - Telecom

17

9

8

8

10

9

6

15

“Complement product range”, “Expansion into other industries” and “Market share” would be the major

drivers of M&A activity in the software industry

“Geographic Reach”, “Service range” & “Bundled technology” would be the major drivers of M&A activity in the telecommunications industry

13

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

14

AVERAGE VALUE OF PROPOSED SYNERGIES

Source: Wealth destruction on a massive scale? By Moeller, Schlingemann, Stulz – August 2003

The losses of the bidders exceed the gains of targets from 1998 through 2001 by $134 billion

Note: The report analyzed data from 1980 – 2001 but results provided only for 1997-2001 to maintain consistency in overall analysis of the whole project

In 1998-2001 a small number of firms accounted for huge “aggregate dollar losses”, which means that without these announcements, the wealth of acquiring shareholders would have increased

-150

-130

-110

-90

-70

-50

-30

-10

10 -4 +24 -240

1980 1990 1998 2001

Aggregate dollar return to acquiring firm shareholdersAggregate difference between acquiring & target firm shareholder value

Billion $

15

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

16

69%

31%

Realized Value

Underperforming

Underperforming Companies that Underwent M&A Activities

(# of M&A Activities, 1997-2000)

Cirrus Logic (1)

Gateway (1)

Maxtor (1)

Silicon Graphics (1)

Western Digital (1)

Andrew Corporation (2)

Imation (2)

Atmel Corporation (4)

Natl. Semiconductor (6)

NCR (8)

3COM (10)

Hewlett-Packard (10)

Motorola (12)

Lucent (35)

Thirty-one percent (31%) of electronics companies that underwent M&A activities

underperformed based on value predictability tool analysis.

COMPANIES WITH UNREALIZED VALUE - Electronics

80% of companies in electronics industry underwent M&A activities between 1997 and 2000.

Source: Value Predictability Tool

53%

24%

20%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Electronics

No M&A Activities and UnderperformingNo M&A Activities and Realized ValueM&A Activities and UnderperformingM&A Activities and Realized Value

Companies that

underwent M & A

Activities

17

59%41%

Realized Value

Underperforming

COMPANIES WITH UNREALIZED VALUE - Banking


(# of M & A Activities, 1997-2000)

Bank of America (1) Bank One (4) (now J.P. Morgan Chase & Co. JPM)

Cendant (1)

Astoria (2) Morgan Stanley (4)

CIT Group (2) Assoc. Banc Corp (5)

KeyCorp (2) Compass Bancshares (12)

Peoples Bank (2) Zions Corporation (17)

PNC (2) Bank of New York (19)

Suntrust (2) Regions Financial (20)

Huntington (3) 1st Tennessee Natl. (3)(now First Horizon, FHN)

American Express (4)

Forty-one percent (41%) of capital markets and banking companies that underwent M&A activities underperformed

based on value predictability tool analysis.

80% of companies in

banking industry

underwent M&A activities between 1997

and 2000.


47%

33%

7%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Banking

No M&A Activities and UnderperformingNo M&A Activities and Realized ValueM&A Activities and UnderperformingM&A Activities and Realized Value

Companies that

underwent M & A

Activities

18

12(57%)

9(43%)

Realized Value

Underperforming

COMPANIES WITH UNREALIZED VALUE – Software & Telecom


(# of M & A Activities, 1997-2000)

National Instruments Corp. (1)

Reynolds & Reynolds Co.(1)

BMC Software Inc. (5)

Parametric Technology Corp. (7)

Novell Inc. (10)

BEA Systems Inc. (12)

Intuit Inc. (14)

Cadence Design Systems Inc. (20)

Computer Assoc Intl Inc. (29)

21 software companies underwent M&A activities between 1997 and 2000.

TelecommunicationUnderperforming Companies that

Underwent M&A Activities (# of M & A Activities, 1997-2000)

US Cellular Telephone Corp. (1)

Qwest Communications Intl Inc. (5)

Nextel Communications Inc. (16)

AT&T Corp. (34)

17 companies underwent M&A activities between 1997 and 2000

• 1 company performed lower than the industry avg.

• 3 companies did not realize significant value (almost same as the industry average)

100% of companies on value predictability tool analysis underwent M&A activity between 1997-2000

So

ftware

Software

Tele

com


19

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

20

AREAS OF SYNERGY – Reverse Engineering of the Tool

LOGIC USED

1. Match relevant companies to industry specific drivers.

2. Pick the Composite Score and the Industry Specific Drivers Score, and calculate the correlation. (“CORREL” excel function)

3. If there are less than five relevant companies cited in each driver, neglected the correlation

4. Sorted as “Strong Impact ” if the correlation is more than 0.5, “Weak Impact” if it is between -0.2 and 0,2, and “Adverse Impact” if it is less than -0.5

M&A ActivitiesReason

Cited

Industry Driver Scoring

Composite Scoring

Generic DriverScoring

M&A ActivitiesReason

Cited

Industry Driver Scoring

Current tool Reverse engineering

Strong negative

correlation

Weak correlation (indifferent)

Strong positive

correlation

-1 10.5-0.2 0.2-0.5

Measurement

Correlation

21

strong negative correlation weak correlation strong positive correlation

-1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Complementary products(Consolidate Product Offering)

Increased size Would helpincrease the bargaining power

Product list (Breadth of ServiceOfferings & solutions)

Correlation

Resources (Threshold Size tocompete with large players)

R&D capabilities (ComplementsTechnical Spending)

Expertise in area (TechnicalKnow How)

Capture Market Segment

Distribution Channels (Network)

Customer Relations (Combatgrowing competition)

Economies of scale

Tax Benefits (Taxation)

66

67

1624

1220

618

68

717

59

1729

66

1015

0.85

0.81

0.65

0.56

0.47

0.44

0.26

0.02

-0.01

-0.05

-0.08

AREAS OF SYNERGY – Electronics

*Financial Resources 0.75 (4 firms), Alternative Non-M&A activities that improve competitive position 0.93 (3 firms), To generate cash to pursue further acquisition strategy N/A (1 firm), Workforce N/A (1 firm), Brand Equity/Loyalty N/A (1 firm)

Number of companies stated

Number of times stated

Correlation

Though fewer firms stated, “Resources” and “Economies of Scale” have a large impact on the firm’s overall performance.

High number of firms stated, “Expertise in Area” and “Capture Market Segment,” has relatively high impact on the firms overall performance.

Most companies stated “Complementary products,” as a reason for merger but it actually doesn’t correlate with a firms overall performance.

“R&D capabilities,” “Big Size & Bargaining Power,” and “Product List” don’t impact the overall performance.

“Resources” and “Economies of Scale” are highly correlated with the firm’s overall performance

Ele

ctro

nic

s V

alu

e D

rive

rs

22


-1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Correlation

Specialized Service Expansion

Similar Vision and customerservice/marketing approach

Opportunity to expand intodomestic/international market

Share Strength

Financial Risk and superiorperformance to shareholders

Marketing advantages

Market share

Greater distribution network

Broader product line

Financial Strength in Assets,Revenue

Good financial performances

Bigger Management and Goodeconomies of scale

Gaining Competitive Position

Attractiveness to its futureemployees

55

1313

1515

1717

2121

2425

1616

1717

1919

2020

2020

1818

55

2524

0.99

0.75

0.64

0.62

0.33

0.33

0.2

0.19

0.16

0.16

0.14

0.02

-0.15

-0.2

AREAS OF SYNERGY – Banking

“Share Strength,” “Marketing Advantages,” “Market Share,” and “Grater Distribution Network” are highly correlated to the firm’s overall performance. However, fewer firms stated “Share Strength” and “Marketing Advantages” as their reason for M&A.

Although more firms stated “Opportunity to Expand into Domestic/International Market,” “Good financial performances,” ”Bigger Management and Economies of Scale,” “Gaining Competitive Position,” and “”Financial Strength in Assets, Revenue” as their reason for M&A, these factors are not correlated to the firm’s overall performance.



Correlation*Ownership rights (merger percentage) 0.91 (4 firms), Capital availability 0.53 (4 firms)

“Share Strength” and “Marketing Advantage” have the highest correlation

23


-1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1Growth areas: IT services tofinancial sector, banking and

insurance; Wireless, BPO

Correlation

Alliances/Partnerships w/complementary product mfgs.

Market share

79

78

1317

0.86

0.76

-0.36


-1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Correlation

Bundled technology

Services--wireless, voice, data

Geographic Reach --market size,customer base

710

79

66

0.77

-0.01

-0.03

Telecommunication

*Wi-Fi Capabilities & Alliances -0.28 (3 firms), Customer service --call center operations N/A (2 firms), Equipment manufacturers' performance (ie Motorola) N/A (2 firms), R&D Spending for future network capabilities N/A (2 firms), Technology-based subsidiary performance (IP/R&D)--indicator of underlying value N/A (1 firms), Mobile Game sector value within phones N/A (1 firms), Multimedia messaging N/A (1 firms), Venture Backed startups N/A (0 firms)



Correlation

AREAS OF SYNERGY – Software & Telecom

Software

*Operating costs - salaries are big costs (Solution: Open source alternatives, outsourcing, etc.) -0.37 (3 firms), R&D spending (for product based companies) -0.84 (3 firms), Penetration of Emerging/Expanding International Markets (particularly China) N/A (2 firms)

Though fewer firms stated, “Growth Areas” and “Market Share” have high correlation with the firms’ overall performance.

Even though stated by many firms, “Alliances/ Partner-ships with Complementary Product Mfgs” has a slightly negative effect.

“Geographic Reach” is highly correlated with the overall performance. “Services” and “Bundled Technology” are indifferent.

“Growth Areas (Software)” and “Geographic Reach (Telecom) ” have the significant impact on firms’ composite scores.

24

AREAS OF SYNERGY - Key Success Factors and Opportunities

Drivers with strong future trends and high correlations are key success factors for industries

Drivers

Com

plem

enta

ry p

rodu

cts

(Con

solid

ate

Pro

duct

Off

erin

g)

Exp

ertis

e in

are

a (T

echn

ical

Kno

w H

ow)

Cap

ture

Mar

ket

Seg

men

t

Dis

trib

utio

n C

hann

els

(Net

wor

k)

Tax

Ben

efits

(T

axat

ion)

Pro

duct

list

(B

read

th o

f S

ervi

ce O

ffer

ings

& s

olut

ions

)

R&

D c

apab

ilitie

s (C

ompl

emen

ts T

echn

ical

Spe

ndin

g)

Cus

tom

er R

elat

ions

(C

omba

t gr

owin

g co

mpe

titio

n)

Eco

nom

ies

of s

cale

Fin

anci

al R

esou

rces

Res

ourc

es (

Thr

esho

ld S

ize

to c

ompe

te w

ith la

rge

play

ers)

Incr

ease

d si

ze W

ould

hel

p in

crea

se t

he b

arga

inin

g po

wer

Oth

ers

Fin

anci

al R

isk

and

supe

rior

perf

orm

ance

to

shar

ehol

ders

Fin

anci

al S

tren

gth

in A

sset

s, R

even

ue

Bro

ader

pro

duct

line

Big

ger

Man

agem

ent

and

Goo

d ec

onom

ies

of s

cale

Goo

d fin

anci

al p

erfo

rman

ces

Opp

ortu

nity

to

expa

nd in

to d

omes

tic/in

tern

atio

nal m

arke

t

Gai

ning

Com

petit

ive

Pos

ition

Gre

ater

dis

trib

utio

n ne

twor

k

Sim

ilar

Vis

ion

and

cust

omer

ser

vice

/mar

ketin

g ap

proa

ch

Spe

cial

ized

Ser

vice

Exp

ansi

on

Mar

ket

shar

e

Mar

ketin

g ad

vant

ages

Sha

re S

tren

gth

Att

ract

iven

ess

to it

s fu

ture

em

ploy

ees

Oth

ers

Alli

ance

s/P

artn

ersh

ips

w/

com

plem

enta

ry p

rodu

ct m

fgs.

Gro

wth

are

as

Mar

ket

shar

e

Oth

ers

Geo

grap

hic

Rea

ch -

-mar

ket

size

, cu

stom

er b

ase

Ser

vice

s--w

irele

ss,

voic

e, d

ata

Bun

dled

tec

hnol

ogy

Oth

ers

# of times cited 29 24 20 18 17 15 9 8 7 7 6 6 9 25 24 21 20 20 19 18 17 17 16 15 13 5 5 8 17 9 8 8 10 9 6 15

future trend

correlation

Banking Software TelecomElectronics

25

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

26

REASONS FOR FAILED MERGERS – Numerical data

Deal Characteristics 1998-2001 　

　 Large loss Other

Loss/Gain (billion) -397 157

Transaction value (TV, million) 9,586 268

TV/ Assets (market) 0.198 0.157

TV/ Equity (market) 0.267 0.296

Days to completion 125.8 67.0

Cash in payment (%) 22.6 56.9

Equity in payment (%) 71.6 35.2

Pure cash deal (%) 10.3 41.1

Pure equity deal (%) 51.7 25.8

Tender-offer (%) 12.6 3.0

Hostile deal (%) 1.1 0.1

Same industry (%) 41.4 31.6

Private target (%) 14.9 51.7

Public target (%) 75.9 20.9

Subsidiary target (%) 9.2 27.4

Competed deal (%) 8.0 0.7

Liquidity index 0.117 0.151

Large loss deals have a large transaction value, but there is nothing noticeable when

it is normalized by firm market value.

Days to completion is longer in large loss deals

Equity payment is used more often with large loss deals

Acquisitions of public firms are more likely to be large loss

More competition could explain the large loss deals

Out of 4,136 acquisition announcements, 87 are responsible for 43.4% of the loss. (comparison between +1day and -2day of announcement)

Source: Sara B. Moeller, "Wealth destruction on a massive scale? “

Longer days to complete, large transaction value, and more competition are major reasons for M&A losses.

27

REASONS FOR FAILED MERGERS – Conceptual Data

Types of Failed Mergers

Serial acquirers, high valuation firms Firms with large capitalization, low managerial share

ownership, or large holdings of cash Equity is used for payment Conglomerate acquisitions Acquisitions opposed by target management Acquisitions of public firms Acquisitions by firms with low leverage

Management

Decreased profitability Changes in productivity Loss of market share Management's strategy is not sustainable Differential levels of managerial skills and

compensation differentials A lack of internal growth opportunities Management’s discretion caused from the high

valuations of the firms was used for destroying shareholder wealth.

Cost and Environment

Overpays for the target firm Transaction costs (e.g. finding target, negotiating

terms, writing contracts, swapping goods) overwhelm the gains from a deal

Run out of profitable acquisition opportunities

Management - Indirect “Soft” Costs

Lack of external focus on the customer, competition, and the marketplace

Low staff motivation and morale Loss of key executives-nearly half within three years Loss of key staff-many long-serving high performers

and informal leaders Brand confusion-loss of brand focus Decreased customer service levels and satisfaction Impediments to information transfer

Sources: Sara B. Moeller, "Wealth destruction on a massive scale?”/ “Mergers, Acquisitions, and Organizational Effectiveness” iPlanet/ “Market Failures” HBS 700127 - 2004

28

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

29

MARKET OVERVIEW - Market Definition

Total market size is equal in the pre and post-merger markets, assuming unsuccessful mergers are discounted. The current market size for consulting firms is further refined by the number of merging and merged entities that use consulting services in the pre and post-merger market

respectively. However, the current market size does not reflect future market size. Demand for services can, and should, be stimulated by consultants who educate their clients about the tangible benefits of consulting involvement

• Supply can be estimated, but remains unpredictable in the M&A market.

• Supply is driven by the need for growth through acquisition, and/or consolidation within an industry

• Within a given M&A transaction supply is defined by two phases

ACQUIRER

TARGET

NEW ENTITY

Pre-merger Market Post-merger Market

SUPPLY

SUPPLY

SUPPLY

SUPPLY

Demand for Services

Demand for Services

Demand for Services

INVESTMENT BANKSFULLFILL PRE-MERGER SERVICE DEMAND

ITJOINT VENTURE / PRE-MERGER

OPPORTUNITIES

SUSTAINED RELATIONSHIPSOPPORTUNITIES FOR FUTURE SERVICES

MARKET DEMAND = NEED FOR SERVICES

MARKET SUPPLY = M&A TRANSACTIONS

• Demand for services is plentiful, but within a highly competitive environment

MANAGEMENT CONSULTING FIRMS FILL POST-MERGER SERVICE DEMAND

30

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

31

PRE-MERGER MARKET

$0.00

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

$4,000.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003($

in m

illion

s)

0

2,000

4,000

6,000

8,000

10,000

12,000

Dea

ls

Total Fees Deals

Source: M&A Almanac, Feb 2004 Vol. 39 No. 2

Source: M&A: The Dealmaker’s Journal, March 2004 Vol. 39 No.3

Top M&A Investment Banks – 2003 Disclosed Values

Advisor Fees ($mil) # of Deals

Morgan Stanley

Credit Suisse First Boston

Citigroup

UBS

Merrill Lynch

Goldman, Sachs

$117.5

84.9

74.5

49.0

49.8

36

11

10

8

3

8

5

Advisor Fees ($mil)

Deutsche Bank

Rohatyn Associates

Lehman Brothers

HSBC Holdings

Allen & Co.

J.P. Morgan

34.7

31.5

30.6

28.0

28.0

27.9

5

6

6

1

Bear, Stearns

Keefe Bruyette & Woods

Sandler O’Neil

Banc of America

17.6

16.2

16.7

16.1

Stephens

Brown, Gibbons, Lang

Rothschild

Dresdner Leinwort Wasserstein

9.4

7.4

6.6

5.4

1

2

8

7

9

5

1

1

1

1

# of Deals

Total market = 5,212 * 100% * 1M = $5,212M

(Market Size = Total Transactions * % Used * Fee)

Total market = 3,935 * 100% * 1M = $3,935M

2003 M&A Transactions Data

30 yr. mean M&A Transactions Data

Market for Pre-M&A Consulting Services: Revenue

Strategy Consulting firms are becoming increasingly more involved in pre-merger activities. There are two options for BearingPoint; become more strategy focused, or form alliance with Investment Bank.

Fees for investment banks in the pre-merger market have

trended downward in the recent past as a result of

increased competition. Deal activity began to pick up in 2003 and momentum has

carried into 2004.

Target firms for alliances should be selected based on

deal activity

32

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

33

POST-MERGER MARKET

0

20

40

60

80

100%

Levels of Market - Demand Side

PopulationPercentage

Penetrated market ?

Specific Functional Integration

Potential market

Total market

Source: M&A Almanac, Feb 2004 Vol. 39 No. 2

Source: M&A: Post-merger integration: An Accenture survey conducted by the Economist Intelligence Unit, Jun 23, 2004

Accenture/EIU Survey: Did your company use a PMI consultant?

18%

37%

45%

Yes – Overall integration needs

Yes –Specific functional integration (IT)

No

Potential market

Available market

Penetrated market

-

Overall percentage of market utilizing PMI services

-

Specific functional integration marketOverall integration market

-

-Customers that rely on BearingPoint for M&A Services

Total market Total M&A Deals

Market for M&A Services Definitions

The potential market for overall M&A integration consulting ~$2,164M

Methodology: Market size was estimated using the number of transactions multiplied by the percentage of firms using specific and overall M&A integration services multiplied by an estimated transaction fee of $1M. Percentage used was determined by an Accenture EIU survey.

(Market Size = Total Transactions * % Used * Fee)

30 yr. mean M&A Transactions Data

Market for M&A Services: Revenue

Available market:Specific functional integration = 5,212 * 37% * 1M = $1,930MOverall integration needs= 5,212 * 18% * 1M = $938M

Potential market = 5,212 * 55% * 1M = $2,867M

2003 M&A Transactions Data Total market = 5,212 * 100% * 1M = $5,212M

Available market:Specific functional integration = 3,935* 37% * 1M = $1,456MOverall integration needs= 3,935 * 18% * 1M = $708M

Potential market = 3,935 * 55% * 1M = $2,164MTotal market = 3,935 * 100% * 1M = $3,935M

Overall Integration Needs

34

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

35

COMPETITIVE ANALYSIS - Competitive Market Positioning

Breadth ofService Offering

Narrow

Broad

OfferingTailored Solution

Standard Solution

IBM

Accenture

BearingPoint

Deloitte

Booz Allen

BCG

BAINMcKinsey

HPCSC AT Kearney

PRTM

Roland Berger

Quadrant 1

Quadrant 4

Quadrant 3

Quadrant 2Broad Service

Offering

Standard Solution

Broad Service Offering

Tailored Solution

Standard Solution

Narrow Service Offering

Tailored Solution

Narrow Service Offering

Quadrant 1Quadrant 2

Quadrant 3 Quadrant 4

Methodology: Researched overall number of services offered by firm, as well as number of consultants within each firm. Consultant number was normalized by overall firm size and used as a metric to measure a firms emphasis on tailored solutions

Competitors offering significant services within M&A

Per

cep

tual

Map

Key

The management consulting industry can be defined in multiple ways. Defining it according to service offering breadth and product vs. consultant led not only examines market placement, but also business strategy focus

BearingPoint’s present position in the management consulting industry offers opportunities to attract

clients, seeking holistic solutions, away from traditionally focused strategy consulting firms

Quadrant 4 firms primarily focus on pre-merger service offerings

Quadrant 1 firms attempt to achieve balance in M&A service offerings

36

COMPETITIVE ANALYSIS – SWOT: Broad Service Offerings / Tailored Solution

Accenture

BearingPoint

Deloitte

PRTM

Strengths Weakness Opportunities Threats

Abi

lity

to p

rovi

de h

olis

tic s

olut

ion

Bro

adly

focu

sed

Not

sou

ght

to p

rovi

de in

-dep

th e

xper

tise

Larg

e m

arke

t rea

ch p

rovi

des

oppo

rtun

ities

for

grow

th in

st

rate

gy c

onsu

lting

eng

agem

ents

Attr

activ

enes

s of

sub

stan

tial r

even

ues

is e

ncou

ragi

ng

trad

ition

al s

trat

egy-

focu

sed

cons

ultin

g fir

ms

to e

xpan

d of

ferin

gs a

nd s

eek

acqu

isiti

ons

prov

idin

g co

mpl

emen

tary

se

rvic

es

• Gov’t ties

• Capabilities designed to

generate revenue and reduce costs

• Depth of experience

• Massive man power

• Multi-disciplinary

nature

• Known in national &

global markets

• Strong tech capabilities

• Strong culture

• Too reliant on certain

industries

• Utilize capabilities to expand into additional industries capturing

market share

• High competition in

saturated industries

Quadrant 1

BearingPoint’s ability to become a major player in M&A hinges on its ability to offer clients strong strategic as well practical solutions & implementation

Industry diversification across services including M&A will be essential in maximizing profit potential

37

COMPETITIVE ANALYSIS – SWOT: Narrow Service Offerings / Tailored Solution

AT Kearney

Booz Allen Hamilton

Bain & Company

BCG

McKinsey

Strengths Weakness Opportunities Threats

High Brand Equity

top-level engagements

Global Reach

Mostly privatized

allowing for sustainability of competitive advantages

Narrowly focused

Inability to proved complete solution

Inability to generate revenues comparable

to broad service providers

• EDS merger

• Foundation in tech sectors

• Cross sector work

• Govt. consulting

• Clients outperform market 3:1

• Small-Med. Sized client base

• Strong culture

• Known as a solution

innovator

• Strong culture

• Considered most powerful

• Serves more than 2/3 of

Fortune 1000

Opportunity to expand services, capturing greater

market share

Reputation creates extensive

opportunities for joint venture relationships

Threat of broader providers seeking to

obtain more “Strategy” work

Specificity of services leading to loss of clients

seeking one-stop solutions

Quadrant 4

Market Leaders are not invincible, but they recognize the need to protect industry position and are active in doing so

38

COMPETITIVE ANALYSIS – Attempt to Quantify Firm Success

Multi-Variable Linear Regression Analysis

Dependent variable: sales/employee

Independent variables: years established

# of industries served

# of services available

brand equity

An attempt was made to identify and quantify industry key success factors through public sources of information and a multiple-variable linear regression analysis

Results were both economically & statistically inconclusive

39

Transaction Value (in Billions) $1

31,9

46.

9

$8

3,8

81.8

$71,

766

.4

$2

6,9

53.1

$23,

205

.2

$2

0,0

91.6

$16,

648

.3

$1

4,9

14.8

$13,

053

.3

$9

,74

6.0

$9

,41

9.3

$8

,41

9.4

$7

,45

3.3

$6

,70

6.4

$6

,41

0.9

$6

,00

0.9

$5

,82

0.3

$5

,74

4.2

$4

,83

8.1

$4

,32

1.1

$3

,89

0.7

$3

,04

6.6

$2

,59

3.4

$2

,59

1.3

$2

,30

4.0

$1

,73

4.9

$1

,73

1.9

$1

,34

6.5

$1

,13

4.3

$8

81.9

$523

.8

$4

96.8

$447

.1

Industries Listed from highest to lowest Deal Value

Nu

mb

er o

f In

du

strie

s S

erv

ed

Ind

ustr

y of

ferin

gs

Alig

ned

w/ B

earin

g P

oin

t

B

ankin

g &

Fin

ance

Le

isure

& E

nte

rtain

ment

C

om

munic

ati

ons

C

om

pute

r S

oft

ware

, S

upplie

s &

SV

C's

D

rugs,

Medic

al S

upplie

s &

Equip

ment

R

eta

il

Oil

& G

as

B

roadca

stin

g

Chem

icals

, Pain

ts &

Coati

ngs

H

ealt

h S

erv

ices

W

hole

sale

& D

istr

ibuti

on

In

sura

nce

M

inin

g &

Min

era

ls

Real Est

ate

Paper

Ele

ctri

cal Equip

ment

Ele

ctro

nic

s

Indust

rial &

Farm

Equip

ment

& M

ach

inery

Energ

y S

erv

ices

B

evera

ges

C

onst

ruct

ion M

inin

g &

Oil

Equip

& M

ach

.

Tra

nsp

ort

ati

on

H

ouse

hold

Goods

Fa

bri

cate

d M

eta

l Pro

duct

s

Tim

ber

& F

ore

st P

roduct

s

Appare

l

Furn

iture

Toys

& R

ecr

eati

onal Pro

duct

s

Aero

space

, A

ircr

aft

& D

efe

nse

A

uto

moti

ve P

roduct

s &

Acc

ess

ori

es

Toile

trie

s &

Cosm

eti

cs

Auto

s &

Tru

cks

B

uild

ing P

roduct

s

Accenture 25 14

ATKearney 13 10

Booz Allen Hamilton 19 13

Bain & Company 15 12

Boston Consulting Group 9 11

Bearing Point 22

Deloitte 9 9

McKinsey 18 13

PRTM 15 12

Roland Berger 10 9

Industries served by BearingPoint Industries served by competitors Industries not served by BearingPoint

COMPETITIVE ANALYSIS – Competitive Industry Comparison (M&A)

Although the industries BearingPoint is focusing on cultivating for M&A service business are highly active in deal volume, they are also highly competitive and saturated markets

40

Transaction Value (in Billions) $1

31,9

46.

9

$8

3,8

81.8

$71,

766

.4

$2

6,9

53.1

$23,

205

.2

$2

0,0

91.6

$16,

648

.3

$1

4,9

14.8

$13,

053

.3

$9

,74

6.0

$9

,41

9.3

$8

,41

9.4

$7

,45

3.3

$6

,70

6.4

$6

,41

0.9

$6

,00

0.9

$5

,82

0.3

$5

,74

4.2

$4

,83

8.1

$4

,32

1.1

$3

,89

0.7

$3

,04

6.6

$2

,59

3.4

$2

,59

1.3

$2

,30

4.0

$1

,73

4.9

$1

,73

1.9

$1

,34

6.5

$1

,13

4.3

$8

81.9

$523

.8

$4

96.8

$447

.1

Industries Listed from highest to lowest Deal Value

Nu

mb

er o

f In

dus

trie

s S

erv

ed

Ind

ustr

y of

ferin

gs

Alig

ned

w/ B

earin

g P

oin

t

B

ankin

g &

Fin

ance

Le

isure

& E

nte

rtain

ment

C

om

munic

ati

ons

C

om

pute

r S

oft

ware

, S

upplie

s &

SV

C's

D

rugs,

Medic

al S

upplie

s &

Equip

ment

R

eta

il

Oil

& G

as

B

roadca

stin

g

Chem

icals

, Pain

ts &

Coati

ngs

H

ealt

h S

erv

ices

W

hole

sale

& D

istr

ibuti

on

In

sura

nce

M

inin

g &

Min

era

ls

Real Est

ate

Paper

Ele

ctri

cal Equip

ment

Ele

ctro

nic

s

Indust

rial &

Farm

Equip

ment

& M

ach

inery

Energ

y S

erv

ices

B

evera

ges

C

onst

ruct

ion M

inin

g &

Oil

Equip

& M

ach

.

Tra

nsp

ort

ati

on

H

ouse

hold

Goods

Fa

bri

cate

d M

eta

l Pro

duct

s

Tim

ber

& F

ore

st P

roduct

s

Appare

l

Furn

iture

Toys

& R

ecr

eati

onal Pro

duct

s

Aero

space

, A

ircr

aft

& D

efe

nse

A

uto

moti

ve P

roduct

s &

Acc

ess

ori

es

Toile

trie

s &

Cosm

eti

cs

Auto

s &

Tru

cks

B

uild

ing P

roduct

s

Accenture 25 14

ATKearney 13 10

Booz Allen Hamilton 19 13

Bain & Company 15 12

Boston Consulting Group 9 11

Bearing Point 22

Deloitte 9 9

McKinsey 18 13

PRTM 15 12

Roland Berger 10 9

COMPETITIVE ANALYSIS – Competitive Industry Comparison (M&A)

Industries served by BearingPoint Industries served by competitors Industries not served by BearingPoint

Several industries heavily active in mergers and acquisitions are underserved. Furthermore some of these industries are areas where BearingPoint has competency

41

COMPETITIVE ANALYSIS – Competitive Service Offerings (M&A)

11% >M&A Offering

1% > M&A Offering

Boston Consulting

Group

Accenture AT Kearney

Booz Allen Hamilton

Bain & Company

Bearing Point

Deloitte McKinsey PRTM Roland Berger

7%17%

4%

14%

30%

19%

4%

20% 18%

5%

93%83%

96%

86%

70%

81%

96%

80% 82%

95%

0%

10%

20%

50%

30%

40%

60%

70%

80%

90%

100%

M&A Service Offerings as a Percentage of Overall Service Offerings

2% < M&A Offering

5% < M&A Offering

1% < M&A Offering

Services Unrelated to M&A

M&A Services

The following identified firms have made merger and acquisition services a primary portion of their overall service offering and will be BearingPoint’s primary competition within the M&A service market

42

COMPETITIVE ANALYSIS – Competitive Service Offerings (M&A)

Premerger Services

Strategy Articulation / Growth

Shareholder Value

Financial Due Diligence

Operational Due Diligence

Cultural Assessment

Pricing Analysis & Allocation

Valuation of Intangibles

Post Merger

Project Management Planning

Realizing Merger Synergies

Strategy Change

Integration & Alignment

Organizational Design

Change ManagementWork Force TransitionCommunication PlanCultural AlignmentEmployee RetentionCompensation/ Benefit Alignment

AT

Kea

rney

Number of Competing Services 4 5 3 8 5 6 6 8 1

Acc

entu

re

Boo

z A

llen

Bai

n &

C

ompa

ny

Bea

ring

Poi

nt

BC

G

Del

oitte

McK

inse

y

PR

TM

Rol

and

Ber

ger

50%

50%

50%

50%

80%

20%

100% 80%

20%

67%

33%

33%

67%

100% 70%

30% 100%

Value Preservation

Value Realization

Value Creation

Additionally firms that target M&A services as primary business focus share multiple service offerings with BearingPoint. Recognizing which services competitors are offering as well as if they focus on pre

or post-merger services will allow BearingPoint to tailor its service offerings more effectively

43

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

44

TRENDS – U.S. Mergers & Acquisitions

Most Active M&A Industries

By Dollar Value - 2003

Industry % of Total Value ($bil)

Investment & Commodity Firms

Food

Credit Institutions

Utilities

Real Estate

Business Services

$27.7

27.1

26.0

22.9

23.5

22.3

5.5%

5.4

5.2

4.6

4.7

4.4

Oil & Gas

Transportation & Shipping

Commercial Banks

Radio & TV Stations

21.4

21.2

18.2

16.4

4.3

4.2

3.6

3.3

Most Active M&A Industries

By Number of Deals - 2003

Industry % of Total No. of deals

Business Services

Insurance

Investment & Commodity Firms

Real Estate

Electronic & Electrical Equip

Software

999

457

226

198

221

194

16.7%

7.6

3.8

3.3

3.7

3.2

Measuring, Med. & Photo. Equip.

Durable Goods Wholesaling

Oil & Gas

Drugs

185

169

169

155

3.1

2.8

2.8

2.6

Speed of Completion

Deal closing is taking much longer post 9/11, with increased due diligence – John Nidecker, “The Trends of M&A” NVST. 14 Jan 2002

“In terms of the speed of completing a deal, tier-1 advisors were found to be more efficient in terms of the amount of time required to complete deals, other things equal.”

- Hunter & Jagtiani, “An analysis of advisor choice, fees, and effort in mergers and acquisitions.”

Advisor Switching Costs

“The more intense the prior banking relationship between the acquirer and the bank, the more likely it is that the bank will be chosen to advise the acquiring firm in a merger. This is because the acquirer extracts implicit or explicit commitments regarding access to bank loans in the future post-merger period.”-Julapa Jagtiani, Stavros Peristiani & Anthony Saunders. “The Role of Bank Advisors in Mergers and Acquisitions’

Investment Bank Consolidation

“The new phenomenon is that there are more and more deals with multiple advisors…” Downward forces on fees in the recent past “will ultimately force investment banks to think the unthinkable: merge with themselves.”-Raghavan, Anita. “Deals and Deal Makers: Artful Deal Advisers Look Beyond Quantity.” The Wall Street Journal. 11 Dec. 2003.

Prospects of M&A Activity

Survey of 1,301 Executives around the Globe:

45% Describe as good or excellent

46% Describe as fair

8% Describe as poor

Source: M&A: The Dealmaker’s Journal, March 2004 Vol. 39 No.3

Survey done by Thomson Financialz

45

TRENDS – Global Mergers & Acquisitions

Foreign Acquisitions of U.S Companies (1994-2003)

0

200

400

600

800

1000

1200

1400

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

No.

of D

eals

0

50

100

150

200

250

300

No. of Deals

Value ($bil)

Countries Attracting U.S. Buyers - 2003

Advisor Value ($bil)# of Deals

United Kingdom

Australia

Germany

Japan

France

Canada

151

122

92

43

45

38

$21.1

4.2

11.6

10.7

2.4

3.0

China

Italy

Netherlands

India

34

28

28

27

1.0

0.3

2.2

1.7

Countries Most Active in U.S Acquisition - 2003

Advisor Value ($bil)# of Deals

Canada

Germany

Japan

France

Australia

United Kingdom

170

118

44

28

32

20

$7.6

4.0

0.9

1.3

10.2

8.6

Switzerland

Netherlands

Spain

Sweden

20

16

12

12

5.8

0.3

0.1

0.1

U.S. Acquisitions Overseas (1994-2003)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1992 1994 1996 1998 2000 2002 2004

No

. o

f D

eals

0

20

40

60

80

100

120

140

160

180

No. of Deals

Value ($bil)

Firms within the us have begun to look abroad for acquisitions in order to gain a global presence. Contrarily foreign firm interest in acquiring U.S. companies has trended downward sine 2002.

46

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

47

RECOMMENDATIONS

Identify means to become more active in pre-merger consulting – Joint ventures / alliances w/ investment banking firms realizing high

deal volume

– Utilize “holistic solution approach” to attract customers early in the M&A process

Look to under-served industries as opportunities for growth in M&A revenue potential

Recognize industries served and services offered by competition in order to match BearingPoint capabilities with market needs

Increase transparency related to service offerings available within BearingPoint for M&A– M&A service website under SPT

48

QUESTIONS?

49

AGENDA








• Market Overview




• Trends

• Recommendations

• Appendices

50

APPENDIX I: DATA SOURCES

Industries and companies based on original Bearing Point breakdown from master Excel file Sources:

– Securities and Exchange Commission: www.sec.gov

– # of Companies Source: Hoovers Online

– Market cap 2003 Source: www.yahoo.com

– M&A Activity Source: SDC Platinum

– Industry Betas: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html

– Average value of proposed mergers / Reasons for failed mergers

Sara B. Moeller, "Wealth destruction on a massive scale? “

51

APPENDIX IIA: DATA ASSUMPTIONS AND TIMELINE

1996 1997 1998 1999 2000 2001 2002 2003

Data incorporated into the unrealized value predictability tool included financial metrics between 1996 and 2003. This 8-year set of data was obtained via BearingPoint contact Humberto Garcia-Salas and was retrieved from the FactSet database. It was assumed that the data received reflected actual financial reporting of all companies analyzed. Also, the OSBI team assumed any missing data points were linked to FactSet downloading or database errors, and missing data points did not impact scoring, target selection, or other analyses.

Unrealized Value Predictability

Tool Company-Specific Data

Industry Selection Model Industry-Specific

Data

Unrealized Value Predictability Tool M & A Transaction

Focus

2000-2003 industry data (# of M & A transactions, beta, market cap, # of companies) was used to select target industries. Companies contributing to recent data are existing companies that completed M & A in the past and may require consulting for past or future strategic activities. The number of 2000-2003 M & A transactions for respective industries parallels the 1997-2000 M & A transaction distribution.

Data on the number of M & A transactions undertaken within Electronics and Banking industries, the reasons for the M & A activities, and industry drivers were obtained from 1997-2000 SDC Platinum database information and company-respective S-4 prospectus reports. Analysis of activities during this timeframe provided ample data for post-merger financial impact to be assessed and the unrealized value predictability tool’s usability to be confirmed.

52

APPENDIX IIB: INDUSTRY SELECTION SCENARIO WEIGHTING

Metric weighting:

– Industry Beta is used to evaluate M&A activity weighting using a logic test

• Decreases the weighting in situations where the industry beta is higher than 1

• Scenario 1: Base weight of 4



– Solver used to vary Number of Companies and Market Cap metrics in 3 different scenarios

• Scenario 1: Number of Companies base = 2.75, Market Cap base = 3.25



In the final analysis, we ignored Retail/Wholesale due to the diversity

53

APPENDIX IIC: INDUSTRY-SPECIFIC VALUE DRIVERS - ELECTRONICS

Value Drivers (based on S-4 cited merger reasons) Measures Rationale

Product list (Breadth of Service Offerings & solutions) Asset Turnover Shows how N/I changes with spending on Assets

Expertise in area (Technical Know How) Sales Per Employee Know-how generates more sales and better products

R&D capabilities (Complements Technical Spending) Asset Turnover Shows how N/I changes with spending on Assets

Resources (Threshold Size to compete with large players) Market Value Shows how you can capture greater market share

Tax Benefits (Taxation) Total Income Taxes Measures potential tax breaks

Alternative Non-M&A activities that improve competitive positionMarket-to-Book Value Measures how market perceives relative to book value

Increased size Would help increase the bargaining power COGS Ratio Shows change in COGS relative to increase in net sales

Distribution Channels (Network) Current RatioShows how cash equivalents changes relative to increase in spending

To generate cash to pursue further acquisition strategy Cash Equivalents Shows potential purchasing power & leverage capabilities

Economies of scale COGS Ratio Shows change in COGS relative to increase in net sales

Customer Relations (Combat growing competition)Change in Net Sales (as %) Opportunity to bring in more customers and sales

Financial Resources Debt-Equity RatioMeasurement shows leveraged amount & potential further resources

Workforce (access to experienced technical workforce) Sales Per Employee Know-how generates more sales and better products

Complementary products (Consolidate Product Offering) Asset Turnover Shows how N/I changes with spending on Assets

Brand Equity/LoyaltySales as % of Industry Sales Measures your Sales growth relative to industry average

Capture Market SegmentSales as % of Industry Sales Measures your Sales growth relative to industry average

The value drivers for electronics industry were linked to financial measures and metrics that could be calculated based upon the data received by the OSBI team.

54

APPENDIX IID: INDUSTRY-SPECIFIC VALUE DRIVERS - BANKING


Share StrengthGain/Loss in Market Value (as %)

Measures how market/investors perceive merger & synergies

Broader product line Efficiency Ratio Doing more for less; expanding product line should expand

Financial Strength in Assets, Revenue Leverage Ratio Need to know if they are operating on debt

Ownership rights (merger percentage) Efficiency Ratio Measures how much return in operating income from activity

Financial Risk and superior performance to shareholders Return on Equity (ROE) Shows how they get increase in return for investments

Market share Sales Per Employee See how sales grow

Gaining Competitive Position Efficiency Ratio Does expansion allow the company to become more efficient

Opportunity to expand into domestic/international market Efficiency Ratio Does expansion allow the company to become more efficient

Marketing advantages Sales Per Employee See how sales grow

Greater distribution networkChange in Net Sales (as %) Opportunity to bring in more customers and sales

Bigger Management and Good economies of scale Efficiency Ratio Does expansion allow the company to become more efficient

Similar Vision and customer service/marketing approach Efficiency Ratio Does expansion allow the company to become more efficient

Good financial performances Return on Assets (ROA) Increase inflows compared to expansion

Specialized Service Expansion Efficiency Ratio Does expansion allow the company to become more efficient

Capital availability Leverage Ratio Assets increase to equity

Attractiveness to its future employeesGain/Loss in Market Value (as %) Increase in market shows company is doing better

The value drivers for banking industry were linked to financial measures and metrics that could be calculated based upon the data received by the OSBI team.

55

APPENDIX IIE: INDUSTRY-SPECIFIC VALUE DRIVERS - SOFTWARE

The value drivers for software industry were linked to financial measures and metrics that could be calculated based upon the data received by the OSBI team.


Operating costs - salaries are big costs (Solution: Open source alternatives, outsourcing, etc.) SG&A/Net Sales SG&A is the most important factor in software

R&D spending (for product based companies) Asset Turnover Shows how N/I changes with spending on Assets

Penetration of Emerging/Expanding International Markets (particularly China)

Change in Net Sales (as %) Opportunity to bring in more customers and sales

Alliances/Partnerships w/ complementaryproduct mfgs. Asset Turnover Shows how N/I changes with spending on Assets

Market shareSales as % of Industry

Sales Measures your Sales growth relative to industry average

Growth areas: IT services to financial sector, banking and insurance; Wireless, BPO

Sales as % of Industry Sales Measures your Sales growth relative to industry average

56

APPENDIX IIF: INDUSTRY-SPECIFIC VALUE DRIVERS - Telecommunications

The value drivers for telecom industry were linked to financial measures and metrics that could be calculated based upon the data received by the OSBI team.


Customer service --call center operations Current RatioShows how cash equivalents changes relative to increase in spending

Bundled technology Asset Turnover Shows how N/I changes with spending on Assets

Services--wireless, voice, data Asset Turnover Shows how N/I changes with spending on Assets

Geographic Reach --market size, customer baseSales as % of Industry Sales

Measures your Sales growth relative to industry average

Venture Backed startupsReturn on Equity (ROE) Shows how they get increase in return for investments

Technology-based subsidiary performance (IP/R&D)--indicator of underlying value Asset Turnover Shows how N/I changes with spending on Assets

Equipment manufacturers' performance (ie Motorola) Sales GrowthMeasures your Sales growth relative to industry average

R&D Spending for future network capabilities Asset Turnover Shows how N/I changes with spending on Assets

Mobile Game sector value within phones Asset Turnover Shows how N/I changes with spending on Assets

Multimedia messaging Asset Turnover Shows how N/I changes with spending on Assets

Wi-Fi Capabilities & Alliances Asset Turnover Shows how N/I changes with spending on Assets

57

APPENDIX IIE: VALUE DRIVERS APPROACH

Process for evaluating companies with respect to generic and company-specific value drivers

Determine generic financial ratios that can be used across all companies in all the

industries

Gathered merger data for all the

companies in the Industry List Analyzed

secondary data and the S-4

statements to

determine the drivers for each particular industry

Identified appropriate

financial measures

considering the

constraints of

information heldGathered

secondary research data

Gathered acquisition/

alliance data for all companies in

Industry List

Map financial

measures with each driver for a period of five years

Fact-Set data for the

selected industries

Generic Drivers(80% Total

Weight)

Industry Specific Drivers

(20% Total Weight)

Compare company specific data to industry

average

Realized Value Co.

Under- performed

Co.

Output

For all of the companies within the two selected industries, the OSBI Team evaluated their level of performance against generic and industry-specific drivers and compared to overall industry performance.

58

APPENDIX IIF: TOOL ARCHITECTURE

M&A Activities

Non-M&A Activities

Industry Specific Drivers

Industry Driver scoring

GenericDrivers

Generic Driverscoring

Composite Scoring

GenericDrivers

COMPANIES

GenericDriver

scoring

Unrealized value

from M&A

YES

Unrealized value potentially driven

by the four other hypotheses

YES

Compared to industry average

Score less than industry

average(< 0)

Score less than industry

average(< 0)

59

Appendix III: Industries with greatest merger activities

INDUSTRY NAME M&A Activity volume (2000 – 2003)

1 RETAIL/WHOLESALE 23,283

2 ELECTRONICS 2,409

3 SOFTWARE 2,388

4 PROFESSIONAL SERVICES 2,208

5 CAPITAL MARKETS & BANKING 2,202

6 LIFE SCIENCES 1,093

7 REAL ESTATE & HOSPITALITY 1,084

8 TELECOMMUNICATIONS 1,035

9 CONTENT 1,029

10 SERVICE PROVIDERS 938

11 OIL & GAS 852

12 INDUSTRIAL PRODUCTS 814

13 PROVIDERS 775

14 UTILITIES 667

15 PAYOR 493

16 TRANSPORTATION 473

17 NATURAL RESOURCES 468

18 INSURANCE & RISK MANAGEMENT 330

19 CHEMICALS 318

20 CONSUMER PACKAGED GOODS 263

21 AUTOMOTIVE 259

22 CABLE 210

Avg. M&A activity $1981

60

Appendix IVA: Electronics: Reasons for proposed Mergers (full list)

Driver List Times Cited

Complementary Products (Consolidate Product Offering) 29

Expertise in Area (Technical Know How) 24

Capture Market Segment 20

Distribution Channels (Network) 18

Tax Benefits (Taxation) 17

Product list (Breadth of Service Offerings & solutions) 15

R&D capabilities (Complements Technical Spending) 9

Customer Relations (Combat growing competition) 8

Economies of scale 7

Financial Resources 7

Resources (Threshold Size to compete with large players) 6

Increased size Would help increase the bargaining power 6

To generate cash to pursue further acquisition strategy 2

Workforce (access to experienced technical workforce) 2

Alternative Non-M&A activities that improve competitive position 1

Brand Equity/Loyalty 1


61

Appendix IVB: Banking: Reasons for proposed Mergers (full list)


Financial Risk and Superior Performance to Shareholders 25

Financial Strength in Assets, Revenue 24

Broader Product Line 21

Bigger Management and Good Economies of Scale 20

Good Financial Performances 20

Opportunity to expand into domestic/international market 19

Gaining Competitive Position 18

Greater distribution network 17

Similar Vision and customer service/marketing approach 17

Specialized Service Expansion 16

Market share 15

Marketing advantages 13

Share Strength 5

Attractiveness to its future employees 5

Ownership rights (merger percentage) 4

Capital availability 4


62

Appendix IVC: Software: Reasons for proposed Mergers (full list)


Alliances/Partnerships w/ Complementary Product Manufacturing 13

Market Share 7

Growth Areas (IT services to financial sector, banking and insurance; Wireless, BPO)

7

Operating costs - salaries are big costs (Solution: Open source alternatives, outsourcing, etc.) 3

R&D spending (for product based companies) 3

Penetration of Emerging/Expanding International Markets (particularly China) 2


63

Appendix IVD: Telecommunications: Reasons for proposed Mergers (full list)


Geographic Reach (market size, customer base) 10

Services (wireless, voice, data) 9

Bundled Technology 6

Customer service --call center operations 3

Equipment manufacturers' performance (ie Motorola) 3

R&D Spending for future network capabilities 3

Wi-Fi Capabilities & Alliances 3

Technology-based subsidiary performance (IP/R&D)--indicator of underlying value 1

Mobile Game sector value within phones 1

Multimedia messaging 1

Venture Backed startups 0


64

Appendix VA: Companies with Negative Composite Scores: Electronics


SILICON GRAPHICS INC -2.2094872

IMATION CORP -1.587692261

CIENA CORP -1.529922962

NATIONAL SEMICONDUCTOR CORP -1.396769166

MOTOROLA INC -1.388458967

WESTERN DIGITAL CORP -1.253487229

MAXTOR CORP -1.189871788

GATEWAY INC -1.028358936

NCR CORP -0.890153766

QUANTUM CORP -0.740821719

STORAGE TECHNOLOGY CP -0.678666711

HEWLETT-PACKARD CO -0.677409053

CIRRUS LOGIC INC -0.554717898

ACTERNA CORP -0.547692299

MATSUSHITA ELECTRIC -ADR -0.433307648

ANDREW CORP -0.372153878

65

Appendix VB: Companies with Negative Composite Scores: Banking

EDWARDS (A G) INC -2.211359262

GATX CORP -2.00353837

AMERICAN EXPRESS -1.662852049

KEYCORP -1.487328768

HUNTINGTON BANCSHARES -1.44267416

PNC FINANCIAL SVCS GROUP INC -1.370769262

BANK OF HAWAII CORP -1.370648623

PEOPLES BANK BRIDGEPORT CT -1.041692257

MELLON FINANCIAL CORP -1.01178205

BANK OF AMERICA CORP -0.962519884

BANK ONE CORP -0.953601182

PRICE (T. ROWE) GROUP -0.93225646

COMERICA INC. -0.804512739

ASSOCIATED BANC CORP -0.57628417

BANK OF NEW YORK CO INC -0.570410252

JANUS CAPITAL GROUP INC -0.556717992

CIT GROUP INC -0.553129792

FRANKLIN RESOURCES INC -0.475589722


66

Appendix VB: Companies with Negative Composite Scores (Cont): Banking

FIRST TENNESSEE NATL CORP -0.464410275

ZIONS BANCORPORATION -0.457205087

J P MORGAN CHASE & CO -0.443846166

RAYMOND JAMES FINANCIAL CORP -0.356230766

INSTINET GROUP INC -0.344820499

FANNIE MAE -0.329794854

FLEETBOSTON FINANCIAL CORP -0.287746429

CENDANT CORP -0.255460292

MORGAN STANLEY -0.247141182

ASTORIA FINL CORP -0.233538449

ASTORIA FINL CORP -0.233538449

CONCORD EFS INC -0.17241025

REGIONS FINL CORP -0.113128185

REGIONS FINL CORP -0.113128185

SUNTRUST BANKS INC -0.032671109

COMPASS BANCSHARES INC -0.0250712

HOUSEHOLD INTERNATIONAL INC -0.012345679

STUDENT LOAN CORP -0.007589743


67

Appendix VC: Companies with Negative Composite Scores: Software

COMPUTER ASSOCIATES INTL INC -1.700864315

PARAMETRIC TECHNOLOGY CORP -1.51356411

BMC SOFTWARE INC -1.431567788

NOVELL INC -1.23310256

CADENCE DESIGN SYS INC -1.069992781

BEA SYSTEMS INC -0.9392308

NATIONAL INSTRUMENTS CORP -0.414487153

REYNOLDS & REYNOLDS -CL A -0.373435885

INTUIT INC -0.303007305


68

Appendix VD: Companies with Negative Composite Scores: Telecommunications

AT&T CORP -0.603128314

NEXTEL COMMUNICATIONS 0.102717966

US CELLULAR CORP 0.105794907

QWEST COMMUNICATION INTL INC 0.113666654

WESTERN WIRELESS CORP -CL A 0.484205127

SPRINT FON GROUP 0.51369226

LEVEL 3 COMMUN INC 0.888256371


69

Appendix VI: Areas of Synergy

Impact to the overall

performanceElectronics Banking Software Telecom

Strong ResourcesEconomies of scaleExpertise in area•Capture Market Segment

•Share StrengthMarketing advantagesMarket shareCapture Market Segment

Growth areas•Market share

Geographic Reach

Indifferent or adverse effect

•Complementary products•R&D capabilities•Increased size and the bargaining power•Product list

Gaining competitive positionBigger mgmt. and good economies of scaleAttractiveness to its future employees

•Alliances with complementary product mfgs.

Services--wireless, voice, dataBundled technology

70

Appendix VIIA: Areas of Synergy: Electronics

Drivers# of

firms stated

Correlation with Composite score

Resources (Threshold Size to compete with large players) 6 0.85

Economies of scale 6 0.81

Expertise in area (Technical Know How) 16 0.65

Capture Market Segment 12 0.56

Distribution Channels (Network) 6 0.47

Customer Relations (Combat growing competition) 6 0.44

Tax Benefits (Taxation) 7 0.26

R&D capabilities (Complements Technical Spending) 5 0.02

Complementary products (Consolidate Product Offering) 17 -0.01

Increased size Would help increase the bargaining power 6 -0.05

Product list (Breadth of Service Offerings & solutions) 10 -0.08

Financial Resources 0.75 (4 firms), Alternative Non-M&A activities that improve competitive position 0.93 (3 firms)

Strong positive

correlation

Weak correlation

“Resources” and “Economies of scale” have the strong impact to the firm’s overall performance. “Complementary products” and “R&D capabilities” are indifferent to the overall performance

71

Appendix VIIB: Areas of Synergy: Banking

Drivers # of firms Correlation

Share Strength 5 0.99

Marketing advantages 13 0.75

Market share 15 0.64

Greater distribution network 17 0.62

Financial Risk and superior performance to shareholders 24 0.33

Broader product line 21 0.33

Specialized Service Expansion 16 0.2

Similar Vision and customer service/marketing approach 17 0.19

Good financial performances 20 0.16

Opportunity to expand into domestic/international market 19 0.16

Bigger Management and Good economies of scale 20 0.14

Gaining Competitive Position 18 0.02

Attractiveness to its future employees 5 -0.15

Financial Strength in Assets, Revenue 25 -0.2

Strong positive

correlation

Weak correlation

Ownership rights (merger percentage) 0.91 (4 firms), Capital availability 0.53 (4 firms)

“Share Strength” and “Marketing Advantages” have the strong impact to firm’s overall performance. “Gaining Competitive Position” and “Economies of Scale” are indifferent to the overall performance.

72

Appendix VIIC: Areas of Synergy: Software

Drivers# of firms

statedCorrelation with Composite score

Growth areas: IT services to financial sector, banking and insurance; Wireless, BPO 7 0.86

Market share 7 0.76

Alliances/Partnerships w/ complementary product mfgs. 13 -0.36

Operating costs - salaries are big costs (Solution: Open source alternatives, outsourcing, etc.) -0.37 (3 firms),

R&D spending (for product based companies) -0.84 (3 firms),

Penetration of Emerging/Expanding International Markets (particularly China) N/A (2 firms)

Strong positive

correlation

negative correlation

“Growth Areas” and “Market Share” has the strong impact to firm’s overall performance. “Alliance with complementary product mfgs.” has the adverse effect.

73

Appendix VIID: Areas of Synergy: Telecommunications

Drivers# of firms

statedCorrelation with Composite score

Geographic Reach --market size, customer base 7 0.768438

Services--wireless, voice, data 7 -0.00909

Bundled technology 6 -0.02889

Wi-Fi Capabilities & Alliances -0.28 (3 firms),

Customer service --call center operations N/A (2 firms),

Equipment manufacturers' performance (ie Motorola) N/A (2 firms)

R&D Spending for future network capabilities N/A (2 firms)

Technology-based subsidiary performance (IP/R&D)--indicator of underlying value N/A (1 firms)

Mobile Game sector value within phones N/A (1 firms)

Multimedia messaging N/A (1 firms)

Venture Backed startups N/A (0 firms)

Strong positive

correlation

Weak correlation

“Geographic Reach” has the strong impact to firm’s overall performance. “Services” and “Bundled technology” are indifferent to the overall performance.

74

Appendix VIII: Five major areas of Synergy

Operating and managerial synergies

1. Vertical integration synergies

2. Economies of scale

3. Economies of scope

4. Market power to eliminate a competitor

5. Improved corporate governance (replacement of an inefficient management team)

6. Valuable new knowledge/skills

Competitive synergies

1. Pre-emption (prevent competitor from acquiring valuable assets)

2. Multiple point competition.

Options-based synergies

1. Value of real options in presence of uncertainty

2. Growth and learning

Synergy in Cross-Border Acquisitions

1. Sharing of valuable intangible assets in the presence of failure of factor or product markets

2. Market seeking activities and operational efficiency benefits in the presence of trade barriers

3. Financial diversification (Risk reduction from diversification)

4. Obtaining undervalued assets in the presence of capital market imperfections

5. Tax advantages in the presence of differential tax regimes

6. Reduction of agency costs in the presence of cross-national variations

Sources: Sara B. Moeller, "Wealth destruction on a massive scale?”/ “Mergers, Acquisitions, and Organizational Effectiveness” iPlanet/ “Market Failures” HBS 700127

Financial synergies

1. Internal capital market

2. Coinsurance

Merger Integration

Documents

Transcript of Merger Integration