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Analysis of Mergers and Acquisitions Schneider and Square D

Analysis of Mergers and Acquisitions Schneider and Square D. Roisin Byrne John Pagazani Tara Trussell. Electric Equipment Industry . Two sources of revenue - new construction and maintenance of existing equipment. Demand follows economic conditions Industry Trends in 1990

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Analysis of Mergers and Acquisitions Schneider and Square D

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  1. Analysis of Mergers and Acquisitions Schneider and Square D Roisin Byrne John Pagazani Tara Trussell

  2. Electric Equipment Industry • Two sources of revenue - new construction and maintenance of existing equipment. • Demand follows economic conditions • Industry Trends in 1990 • Globalization of product standards has led to international expansion • Industry concentration of manufacturing and research capabilities due to increasing costs of development and production and globalization • Average rate of growth for US firms is 7%

  3. Schneider Background • One of the largest industrial groups in France • 1981 – restructuring program to divest loss-making businesses to simplify operational structure and focus on two core businesses: • Electrical equipment manufacturing for power distribution and automation of industrial complexes • Electrical building contracting

  4. Schneider Background • Third restructuring stage • Geographical diversification (based on emerging industry trends) • Two major acquisitions in 1989 • 15% of DAVY, leading British engineering company • Controlling interest in Federal Pioneer, the leading Canadian electrical equipment manufacturer. • 1990 Sales – 51 billion francs • 85,000 world wide employees • Schneider ranked second or third in most segments of the global electrical equipment industry

  5. Square D Background • Major supplier of electrical equipment, services and systems in the U.S. • Owns and operates 18 manufacturing plants in 11 foreign countries • Concentrated in electrical distribution and industrial control • Strength is network of independent electrical distributors (wholesalers) which market its products. • Relationship building

  6. Square D Background • Profitable for last 59 years • Change in top management in 1980’s • Revitalization Plan • Consolidation • Reorganized into three externally focused sectors (industrial control, electrical distribution, international markets) • Resources were realigned to strengthen core businesses • 1990 Sales - $1.7 billion U.S. • 71% electrical distribution segment • 29% industrial control segment

  7. Strategic Fit & Synergy Sources • Rationalizing R&D, technology sharing • Access to larger distribution channels • Rationalizing manufacturing capabilities • Expanding Square D’s product lines by incorporating products from Schneider’s subsidiaries

  8. Pros Allow access into US market for Schneider and European market for Square D Unlock synergies through industry concentration (lower expenses, boost revenues) Globalization: Leadership in both US and Europe under one set of IEC standards Cons Leaning toward a hostile takeover situation; unfriendly Price will be bid up due to Square D’s resistance Merging of two very different cultures will be necessary to unlock synergies, but will prove difficult Strategic Fit

  9. Square D – Accounting Analysis • The accounting analysis of Square D did not yield any apparent distortions or cause for concern • All major accounting policies and treatments were reasonable for the industry

  10. Square D – Financial Analysis

  11. Square D – Financial Analysis Cont’d

  12. Square D – Financial Analysis Cont’d Implications of Lazard’s Assumptions

  13. Square D – Valuation AssumptionsPre Merger • Discounted Abnormal Earnings Method • Group’s assumptions • Optimistic, realistic, pessimistic • Using Lazard’s assumptions • Discounted Cash Flow Method • Group’s assumptions • Optimistic, realistic, pessimistic • Using Lazard’s assumptions

  14. Square D – Valuation AssumptionsPre Merger Lazard’s Assumptions • Sales growth: 3.5% in 1991 and 7% long term. 7% is approximately the growth over the last cycle (86-90) & average rate for US firms. • EBIT: 15-16% of sales. 15% - 16% is high relative to 12.9% (current). This is also higher than 6yr average of 14.6%. Ratio should be between 14% – 15%. Equivalent to NOPAT margin between 9.5% - 10%. • NWC: 11-13% of sales. Lazard’s NWC/Sales includes cash, therefore (NWC+$) / Sales. 12% in last 2 yrs using Lazard’s method. • Capital Expenditure: 5% of sales • Depreciation Expenses: 4% of sales between 1991 and 1997, 4.3% long term

  15. Square D – Valuation AssumptionsPre Merger What is Square D worth as a “Stand Alone” company? Using Lazard's Assumptions

  16. Square D – Valuation AssumptionsPost Merger • Discounted Abnormal Earnings Method • Group’s assumptions • Optimistic, realistic, pessimistic • Using Lazard’s assumptions • Discounted Cash Flow Method • Group’s assumptions • Optimistic, realistic, pessimistic • Using Lazard’s assumptions

  17. Square D – Valuation AssumptionsPost Merger Synergy Estimates • Savings of $60 million per year in expenses (after tax) • $150 million cash generated due to disposal of Square D’s unrelated assets

  18. Square D – Valuation AssumptionsPost Merger What is Square D worth with merger synergies? Using Lazard's Assumptions

  19. Square D – Valuation Summary Basis for setting price Used for sensitivity

  20. Square D Recommended Bid Based on Realistic Assumptions and Post-Merger Valuation on Square D: • We recommend Schneider bid maximum $70.38/share for Square D stock • This is a 93% premium over market value before takeover activity ($36.50/share October 22, 1990) • This is a 41% premium over realistic pre-merger valuation ($49.81/share) • Market value pre-merger versus valuation pre-merger tells us stock is undervalued.

  21. Schneider and Square D – What actually happened? • Feb 18, 1991 – Schneider made unsolicited takeover offer ($78/share) to Square D’s board; if rejected, would undertake a hostile takeover; Square D’s stock jumped to $72.25 • Feb 27, 1991 – Square D’s board unanimously rejected offer and filed suit alleging that Schneider breached the confidentiality agreement signed in 1998 • March 4, 1991 – Schneider offered to buy all of Square D’s outstanding shares of common stock (incl. Common Share Purchase Rights) for $78/share

  22. Schneider and Square D – What actually happened? • Mid-March 1991 – Siemens cited as having contact with Square D • March 1991 – Square D brought additional suits against Schneider for violating i) US anti-trust laws; ii) US banking regulations; iii) Canadian anti-trust laws; and iv) making false/misleading filings at the SEC • April 1991 – Square D postponed annual meeting to June 21. Schneider challenged and got Federal Court to rule that must take place 40 days after anti-trust ruling and resolution of alleged confidentiality breach

  23. Schneider and Square D – What actually happened? • May 10, 1991 – Dept. of Justice dropped the anti-trust investigation and cleared way for merger • May 11, 1991 – Square D proposed taking on an additional $1 billion in debt in a leverage recap • May 13, 1991 – Schneider raised offer price to $88/share. The following day, Square D had no other choice but to accept the deal

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