Mergers & Acquisitions Can consequent from Strategic Alliances

Alliances oftentimes effect in mergers and/or acquisitions. Partnering relationships, such as joint ventures or strategic alliances, can sometimes lead to a merger or acquisition situation. After clubs work together for a duration of time and get to know one another's strengths, weaknesses, and synergistic possibilities, new connection opportunities become apparent. One could argue that a joint investment or strategic alliance is simply the getting to know each other part of a courtship in the middle of clubs and that the real marriage does not occur until the connection has been consummated by a merger or acquisition.

To make the point, Dan McQueen, president, at Fluid Components International (Fci) built a Partnering connection with Vortab, a small technology company. Vortab produced static mixers, a technology favorable for flow conditioning that complemented Fci's goods offering. While Vortab also had three other distribution partners in increasing to Fci, Fci's volume with Vortab continued to grow to the point that Vortab's technology became an prominent part of Fci's total sales volume. After about three years into the relationship, Fci acquired Vortab.

Att Call Conference

Because of the close connection in the middle of Vortab and Fci, when the Vortab was put up for sale McQueen knew its true value. Resulting from his knowledge, Fci was able to buy Vortab at a much more realistic price than Vortab's asking price. The Vortab technology integrated well with Fci's core competency technology and today Fci also distributes Vortab through some of its non-direct competitors.

The following list demonstrates some of the definite values created or developed from the varied organizational blending methods:

· Operational resource sharing

· Functional skill transfer

· Management skill transfer

· Leverage (economies of scale)

· Capability increases

Mergers

Mergers occur when two or more organizations come together to blend or link their strengths. Also in the deal is a blending of their weaknesses. The hopeful effect is a new more grand assosication that can better furnish goods and services, passage markets, and deliver the top ability buyer service. Mergers offer promise for synergistic possibilities. This is achieved by the blending of cultures and retaining the core strengths of each. In this scenario, a new and distinct assosication generally emerges. The goal is a sharing of power, but commonly the strongest rise to the top leadership.

Exxon - Mobil

The Federal Trade Commission gave Exxon and Mobil the green light On November 30, 1999 for their billion merger. The next day the transaction was completed. The merged assosication officially became Exxon Mobil Corp. The merger literally brings "the clubs back to their roots when they were part of John Rockefeller's acceptable Oil empire. That firm was the largest oil firm in the world before it was busted up by the government in 1911."

At the 1998 proclamation of their intention to merge, Mobil chairman, Lucio Noto made a commentary about the need to merge. He said, "Today's proclamation combination does not mean rhat we could not survive on our own. This is not a combination based on desperation, it's one based on opportunity. But we need to face some facts. The world has changed. The easy things are behind us. The easy oil, the easy cost savings, they're done. Both organizations have pursued internal efficiencies to the extent that they could."

While part of the deal was the selling of a Northern California refinery and practically 2,500 gas center locations, the divestiture represents only a fraction of their combined 8 billion in assets. Lee Raymond, Exxon chairman, now chairman and chief administrative of the merged firm said, "The merger will allow Exxon Mobil to compete more effectively with recently combined multinational oil clubs and the large state-owned oil clubs that are rapidly increasing covering their home areas."

Exxon Mobil is now like a small oil-rich nation. They have practically 21 billion barrels of oil and gas reserves on hand, adequate to satisfy the world's whole energy needs for more than a year. Yet, there is still the opening to cut costs. The clubs expect their merger's economies of scale to cut about .8 billion in costs in the near term. They also plan to cut about 9,000 jobs out of the 123,000 worldwide.

Aol - Time Warner

On January 10, 2000, Steve Case, chairman and chief administrative of America Online (Aol), sent an e-letter to his 20 million members. He said, "Less than two weeks ago, population all over the world came together in a global celebration of the new century, and the new millennium. As I said in my first community modernize of the 21st Century, all of us at Aol are very excited by the challenges and prospects of this new era, a time we think of as the Internet Century.

I believe we have only just begun to see clearly how the interactive medium will transform our economy, our society, and our lives. And we are carefully to lead the way at Aol, as we have for 15 years--by bringing more population into the world of interactive services, and production the online caress an even more requisite part of our members' lives.

That is why I am so pleased to tell you about an inspiring major improvement at Aol. Today, America Online and Time Warner agreed to join forces, creating the world's first media and communications firm for the Internet Century. The new company, to be created by the end of this year, will be called Aol Time Warner, and we believe that it will quite literally turn the landscape of media and communications in the new millennium."

The next day newspaper headlines read, "America Online, Time Warner propose 3-Billion Merger." The Los Angeles Times said, "In an audacious deal bringing together original entertainment and the new world of the Internet, America Online and Time Warner Inc. On Monday announced they will merge in the largest firm transaction in history."

The story later revealed the value comparisons of the companies. While Aol earns less than Time Warner, the stock market thinks Aol's shares are worth more. "America Online is valued by the stock market at nearly twice Time Warner--3 billion, compared with 1 billion as of Friday's [1/7/00] market close--even though it has one-third Time Warner's every year revenues." The record also stated "Aol earned 2 million on .8 billion in sales in the year ended Sept. 30 [1999]."
Aol chairman, Case wants to move fast. The Times record stated, "Case said the two chairman began discussing a combination this fall [1999], he has tried to impress upon Levin [Gerald Levin, chairman at Time Warner] the need to operate the new firm at Internet speeds." (We all know the rest of the story...nothing is forever.)

The prophets of gloom are all the time ready to point out the down side to deals. In Upside magazine, Loren Fox reported some of the challenges to the marriage. They are:

· "The holy grail of strategic synergy has been elusive in the media world."

· "In the offline world, it's preponderant that Time and Warner Brothers have continued to run fairly independently despite a decade as Time Warner."

· "'From any standpoint, this has not been a success to date,' says Yahoo President and Coo Jeff Mallett."

· "When you buy the company, you get things you don't need."

· "Warner might make these deals easier, but it might also bring new risks--even for Aol, a veteran of 25 acquisitions over the last six years. Employees might flee to pure dot-com companies, ego clashes could stymie plans or financial gains may never cover the large prime paid for Time Warner."

· "You don't need to own everything to do what Aol and Time Warner are doing."

Warner-Lambert

Merger mania can make strange bedfellows, let alone promises unfulfilled. Alliances can lead to mergers. Warner-Lambert is an example of all the above. This is corporate soap opera at its best.

· June 16, 1999, Warner-Lambert firm announced that it has signed a letter of intent with Pfizer Inc. To continue and progress its very thriving co-promotion of the cholesterol-lowering agent Lipitor (atorvastatin calcium). The companies, which began co-promoting Lipitor in 1997, will continue their collaboration for a total of ten years. Further, with a goal of increasing their goods collaborations, the clubs plan to peruse inherent Lipitor line extensions and goods combinations and other areas of mutual interest.

· November 4, 1999, newspapers across America record on "one of the biggest mergers of any kind, ever." The Wall street Journal said, "Now, American Home is set to merge with Warner-Lambert Co. In a stock deal that is valued at about billion. It stands as the biggest deal in drug-industry history and one of on the biggest mergers of any kind, ever." Also reported, "Warner-Lambert held talks with Pfizer Inc. At the same time it was negotiating with American Home."

· November 4, 1999, The New York Times runs a story titled, "Can a Strong-Willed Chief Share Power in a Merger?" The record lead with, "The planned merger in the middle of American Home Products and Warner-Lambert once again raises the inquire of whether John R. Stafford, American Home's famously strong-willed chairman and chief executive, is capable of sharing and, possibly more important, letting go of power."

· January 13, 2000, Warner-Lambert firm indicated that, as a effect of changing events, it is exploring strategic alternatives, together with meeting with Pfizer, following Pfizer's new approach. In that regard, Warner-Lambert said that its Board of Directors has authorized administration to enter into discussions with Pfizer to peruse a inherent firm combination. The firm stated that, in light of changing circumstances, its Board had closed that there is a cheap likelihood that Pfizer's previously announced conditional proposal could lead to a transaction, reasonably capable of being completed, that is better financially for Warner-Lambert shareholders than the proposed merger with American Home Products.

Lodewijk J.R. De Vink, chairman, president and chief administrative officer of Warner-Lambert, stated, "It has all the time been the Board's objective to regain the best inherent transaction for Warner-Lambert shareholders and we will now pursue discussions with Pfizer to settle if a combination with them to achieve that goal is possible." The firm emphasized that there can be no assurance that any business transaction on a transaction with Pfizer, or that any other transaction, will eventuate.

· January 24, 2000, in response to inquiries, Warner-Lambert firm said that it would continue to peruse strategic alternatives, together with discussions with Pfizer. The Company's unwavering goal is to furnish the greatest value to Warner-Lambert shareholders. Warner-Lambert officials emphasized that there can be no assurance that any transaction will be completed and offered no further comment.

Was American Home Products the bride left at the altar? The Wall street Journal didn't think so, in fact they called American Home the Runaway Bride in their November article. Additionally they listed any clubs that American Home has them selves left at the altar.

· Early November 1997, American Home Products and SmithKline Beecham begin merger talks.

· January 30, 1999, Talks break off.

· June 1, 1998, American Home and Monsanto announce business transaction to merge.

· October 13, 1998, American Home and Monsanto cancel plans to merge.

· November 3, 1999, American Home and Warner-Lambert Co. In talks to merge.

Acquisitions

An acquisition is basically the function of one firm inspiring and digesting another. The effect is that the acquiring firm shores up core weaknesses or adds a new ability without giving up control, as might occur in a merger. Added capabilities, rather than synergy is commonly the reasoning behind acquisitions. In this situation, the acquiring company's culture prevails. oftentimes one firm will regain other for their intellectual property, their employees or to growth market share. There are numerous strategies and reasons why one firm acquires another, as you will soon discover.

Guardian protection Services has been acquiring alarm clubs within its northeast region of carrying out to supplement its internal growth. Russ Cersosimo, president says, "This is just other way for us to satisfy our appetite for growth. Our desire is to progress our opportunities in the other offices. That is other suspect why it is inspiring for us to look to regain companies, to get their commercial base and commercial sales force that is in place in those offices. We wanted to make sure that we can Ant. Eject the new accounts without putting strain on our paper flow and the systems we have in place."

Who does R&D acquisitions well? Electronics firm recently answered, "Cisco Systems Inc., San Jose, the networking tool company, which boasts many success stories among its 40 acquisitions of the past six years." None of their acquisitions were in mature markets, rather all were prominent edge, allowing Cisco to broaden its goods offering. Cisco hedges its acquisition bets through volume. Ammar Hanafi, director of the firm improvement group at Cisco says it counts on two out of three acquisitions succeeding and the remaining third doing just okay. Acquiring people, intellectual properties and specialized skills is prominent to clubs like Cisco. They think that even if the acquired technology does not pan out, they have the engineers. Generally, any fast growing firm like Cisco cannot hire population fast adequate and the acquired personnel are a boon to the company's progress. Keeping of acquired employees is at the heart of their acquisition strategy. "If we're going to lose the population who are prominent to the success of the target company, we're probably not going to have an interest," says Cisco controller Dennis Powell.

"Cisco doesn't do big acquisitions, the cultural issues are too huge," Hanafi says. Cisco buys early stage clubs with small or no revenues. While they often have paid very high prices for the acquisition, they seem to do better than most with their selection. in the middle of 1993 and 1996, Cisco bought cutting edge Lan switching technologies for a total of 6 million in stock. More than half was spent on Grand Junction Networks Inc., which developed fast Ethernet switchers. At the time of purchase, it is estimated that Grand Junction's every year revenues were million. "Today, the four Lan switching acquisitions list for billion of Cisco's billion in every year revenues." "We regain clubs because we believe they will be successful. If we didn't believe in their success, we would not regain them," says Powell.

Little known West Coast Texas Pacific Group (Tpg) has been acquiring at a feverish pace. Their semiconductor and telecom buying spree includes, Gt Com in 1995, At&T Paradyne (from Lucent Technologies Inc.) in 1996, Zilog Inc. In 1997, Landis & Gyr Communications Sa in 1998, On Semiconductor (from Motorola Inc.), Zhone Technologies Inc., Mvx.Com and developed TelCom Group Inc. In 1999.

Tpg banks heavily on intellectual capital. Many believe that by being part of Tpg, their particular biggest advantage is passage to broad pool of talented and well-connected people. Ceos can take advantage of Tpg's contacts in other industries colse to the world. "Tpg has this ability to build a virtual advisory board...that they don't even have to pay for," says Armando Geday, president and Ceo of GlobeSpan Inc.

Lucent Technologies, Inc. Has also been rampaging through the same market as Cisco. Lucent's 1999 (January to August) acquisitions as listed in Cfo magazine include:

· Kenan Systems for billion

· Ascend Communications for billion

· Sybarus for million

· Enable Semiconductor for million

· Mosaix for 5 million

· Zetax Tecnologia, $ N/A

· Batik Equipamentos, $ N/A

· Nexabit Networks for 0 million

· Ccom, Edisin, $ N/A

· SpecTran for million

· International Network Services for .7 billion.

An advantage that Lucent has over its competitors is passage to its 25,000-employee Bell Labs idea factory. As such, they are more likely to buy technology rather than R&D. Still, Lucent continually reviews the comparative advantages of technology and R&D in connection to its own projects in reviewing acquisition possibilities. Lucent administrative vice president and Cfo Donald Peterson says, "In every space in which we have acquired, we have had simultaneous study projects inside. It makes us knowledgeable, and lets us have a build-versus-buy option."

Lucent wants their units as a hole to do well and if acquisition helps that cause, they acquire. Peterson also says, "We view acquisition as a tool among many that our firm units can use to progress their firm plans. We evaluate acquisitions one by one, in the context of the firm strategy of the unit."

Tyco International Ltd. Is a diversified global constructor and provider of commercial products and systems with leadership positions in each of its four firm segments: Disposable and Specialty Products, Fire and protection Services, Flow Control, and Electrical and Electronic Components. through its corporate strategies of high-value production, decentralized operations, growth through synergistic and strategic acquisitions, and expansion through product/market globalization, Tyco has evolved. From Tyco's beginnings in 1960 as a conspiratorially held study laboratory, it has transformed into today's multinational commercial corporation that is listed on the New York Stock Exchange. The firm operates in more than 80 countries colse to the world and had fiscal 1999 revenues in excess of billion.

In the mid-1980s, Tyco returned its focus to sharply accelerating growth. While this period, it reorganized its subsidiaries into the current firm segments listed above. The Company's name was changed from Tyco Laboratories, Inc. To Tyco International Ltd. In 1993, to reflect Tyco's global operations more accurately. Furthermore, it became, and remains, Tyco's procedure to focus on adding high-quality, cost-competitive, low-tech industrial/commercial products to its goods lines that can be marketed globally.

In addition, the firm adopted synergistic and strategic acquisition guidelines that established three base-line standards for inherent acquisitions, including:

1. A firm to be acquired must be in a firm linked to one of Tyco's four firm segments.

2. A firm to be acquired must be able to progress the goods line and/or improve goods distribution in at least one of Tyco's firm segments.

3. A firm to be acquired that will introduce a new goods or goods line must be using a manufacturing and/or processing technology already customary to one of Tyco's firm segments.

Tyco also developed a very disciplined arrival to acquisitions based on three key criteria that the firm continues to use today to gauge inherent acquisitions:

1. Post-acquisition results will have an immediate sure impact on earnings;

2. Opportunities to improve operating profits must be substantial;

3. All acquisitions must be non-dilutive to shareholders.

Fasb Accounting Rule Change

The rules of the game are changing. Some of the accounting benefits of acquisition will soon disappear. Spending some extra time with your accounting and legal departments could prove beneficial in the long-term.

George Donnelly, in his record in Cfo magazine writes, "The current state of accounting rules is clearly a factor in the frenetic acquisition action at Cisco Systems and Lucent Technologies Inc. Like many high-tech companies, the two giants can regain with small drag on their finances, because pooling-of-interest accounting enables them to avoid onerous goodwill charges that otherwise would ravage earnings.

But because of the death sentence the Financial Accounting Standards Board has levied on pooling, clubs must use straight-purchase accounting after January 1, 2001. Then buyers will have to amortize goodwill for no more than 20 years."

Consolidations and Rollups

Bill Wade in commercial Distribution said: "The basic premise couldn't be any simpler. Take a very fragmented industry--like distribution--facing technological change, buyer upheaval or lasting financing difficulties. Add in a few well-healed foreign firms or, worse, a consolidate of previously unknown competitors from covering the business. Since the manufactures leaders are probably family-run businesses with small succession strategies, the next step to safe profit and continue growth is clear: consolidate."

A consolidation or rollup, as it's oftentimes called, generally occurs when an assosication or personel with deep pockets sets out to buy any small clubs in a fragmented manufactures and rein them in under a new or communal pennant. In 1997 the National connection of Wholesale-Distributors reported that 42 of the 54 industries they studied had been significantly affected by consolidation. oftentimes a pro administration and buying strength originate economies of scale that allows the consolidator to pluck the low hanging fruit in the industry. They will invest significantly in systems to eliminate the duplication of endeavor and inefficiencies that exist within the manufactures being consolidated.

While some call it smoke and mirrors, many consolidators are compliancy excellent results. In 1997, at 39 years old, financial whiz Jonathan Ledecky pulled off a bold deal. As reported in Cfo magazine, He went to the communal equity markets and raised half a billion dollars for his company, Consolidation Capital Corp., in a brazen preliminary communal offering. Without revenues, assets, operating history or identity (name or industry), he raised the capital in a blind pool on the strength of his prestige alone.

U.S. Office Products (Usop) is the effect of 220 acquisitions. Sharp Pencil was one of six conspiratorially owned office-supply clubs that Ledecky put together. But he didn't stop, after two years, and 220 acquisitions later, Usop was a member of the Fortune 500, with .8 in revenues. "It was crazy," says Donald Platt, senior vice president and Cfo at Usop. Platt did rely very on covering resources, together with a team of lawyers and accountants to get the job done (the 220 acquisitions). "We restricted then to well-managed, profitable companies. At worst, we would still be production money," says Platt.

H. Wayne Huizenga is the owner of the Florida Marlins baseball team. He is also the king of consolidators. He pioneered his technique by rolling-up trash-truck businesses to originate Waste administration Inc., the nation's largest waste company. He went on to originate the largest video chain, Blockbuster Video. With AutoNation, Huizenga, now struggling, is attacking the retail automobile industry. In mid-December 1999 AutoNation had 409 retail franchises but announced the conclusion of 23 of their used-car superstores.

Michael Riley learned about consolidations while serving as personal attorney for Huizenga. In July 1999, Riley's company, Atlas Recreational Holdings Inc., paid million to buy controlling interest in the only publicly traded Rv dealership chain in the United States, Holiday Rv Superstores Inc., in Orlando, Florida. Riley's avowed intention is to grow the firm from in every year sales in 1998 to billion by 2003 by acquiring other dealerships.

Riley says, "Consolidations literally will help. We can bring advantages to sales and service. We can make a dissimilarity in warranty. There is a real value added when you put these clubs together."

Same Industry, distinct Strategies

In mid-1997, roll-ups, United Rentals and NationsRent were formed. They are in a race, but are using distinct strategies to achieve their results. After two years of ravenously gobbling up companies, United had 482 locations while NationsRent had accumulated only 138 stores. NationsRent has been developing a nationwide identity with stores that look-alike and have the same signage and layout. United Rentals presence is virtually unknown since the stores support their previous appearance.

Motivations for Consolidators

There are any good reasons why consolidators assault a particular industry. The following list provides some of the rational that assist them in their decision production process. As you look to profit from the trend, keep these elements in mind as you make your choice on whom to acquire.

· Confidence by the players that they can capture requisite and very profitable further market share by implementing the cutting edge management, procurement, distribution and service practices that will give them a competitive edge over smaller players.

· Gain national customers through increased capabilities in delivering the top levels of standardized service and national geographical coverage.

· Larger customers of independent distribution channels are seeking broader geographic coverage and networks of locations that allow for greater service capabilities, and the smaller customers want a high level of buyer service and response.

· Customers' desire for more goods sophistication.

· Insurance and financing synergies.

Fragmented Industries Are Ripe for Consolidations and Rollups

Some industries that are ready for consolidations or rollup examples include heavy-duty truck repair, office products, recreational vehicle dealerships, rental stores (equipment, tools and party) and distribution. Consolidation does not just happen. It is triggered by shifts in provider and buyer expectations. Consolidation in a provider base or buyer pool often alters the economic rational for the structure of an industry. Functional shifts are accompanied by serious margin shifts among channel participants.

Take observation of the speed in which an manufactures can caress consolidation. If you are a consolidator, pick the low hanging fruit before other beats you to it. If you are fighting consolidation, take observation of the state of your manufactures and make adjustments (like strategic alliances) to your firm plan if your manufactures is very fragmented.

· TruckPro, the 0 million sales creation of Haywood and Stephens Investments, was sold in May 1998 to AutoZone, the billion distribution king of do-it-yourself auto parts.

· In June 1998, nine heavy-duty distribution clubs with volumes of to million, simultaneously merged and raised million from the communal for their brand new 0 million company, TransCom Usa.

· Brentwood Associates, a investment capital company, While Spring and Summer1998, created Had Parts System, Inc. A 5 million operation, by acquiring three clubs in the Southeast.

· In July 1998, Aurora Capital's Qdsp acquired majority interest in nine heavy-duty clubs from FleetPride, a 0 million parts and service operation.

Stated in Truck Parts & Service, "Here the independent suffers a startling disadvantage to roll-ups. Consolidators have passage to large amounts of capital. The independent businessperson, however, must primarily finance his growth by income retains from current operations. New high efficiency service bays, requisite and growing training expenses, data processing and communications technology all clamor for increased working capital. The large players' acquisition cost advantage finally will win him all the mega-fleet firm and the vast majority of firm from mid-sized fleets.

Supplementing his parts acquisition cost advantage, the consolidator will be able to lower many overhead costs through centralized administration and volume discounts...Combined savings in parts acquisition cost and overhead allowance should literally exceed 4% of sales."

Some of the indicators that an manufactures (any industry) is poised for consolidation are listed below. If you observation your manufactures has similar issues, it is just a matter of time. Plan now for what is coming. Where do you want to be when the train arrives?

· A high degree of fragmentation with numerous smaller clubs and few, if any, dominating players.

· A large manufactures that is carport and growing.

· Multiple benefits for economies of scale.

· Synergies that can be achieved by consolidating companies.

· Infrequent use of developed administration facts systems.

· Limited passage to communal capital markets and somewhat inefficient capital structures among companies.

· Lack of opportunities, historically, for owners to liquidate their businesses if they wish to leave the industry.

Reasons for firm Owners Selling to Consolidators

The reasons for a firm owner to sell his or her firm are as varied as there are people. commonly it is not one suspect but any combined reasons that affect a seller's decision. The following list provides you with the general areas that might drive a selling decision:

· First generation owner, without heirs, nearing retirement.

· Lack of capital to make requisite technological and capital improvements to compete, within an industry, and with new competitors.

· Flat growth rate in industry.

· Better profitability as part of a larger organization.

· Centralized buying.

Mergers & Acquisitions Can consequent from Strategic Alliances