P1251917001EYjXq

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Schneider and Square D
Kalpa Dattani Muhammad Khawer Ron Porter Saba
Sharih Tony Yang Wednesday July 19, 2006
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AGENDA

• Companies Overview
• Industry Analysis
• Strategic Fit
• Integration Logic
• MA Transaction Capacity
• Takeover Logic
• What Happened
• Key Learning's

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Class Discussion
What synergies would you consider in a Merger
Acquisition Transaction?
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MA Value Drivers Framework
Framework provided by Professor John C. Banks,
MA Professor WLU
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• Combination Logic
• Describes how the transaction supports corporate
  direction and intentions

Model provided by Professor John C. Banks, MA
Professor WLU
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Groupe Schneider

• A prominent French Multinational Corporation
• Largest industrial group in France
• 1990 Sales 51 billion francs
• 85,000 employees in 115 countries
• Worldwide ranked 184 in Fortunes 500
• Ranked 2nd 3rd in most segments of global
  electrical industry
• 3 stage-restructuring by Didier
  Pineau-Valencienne, CEO and Chairman
• Divest loss-making businesses to simplify
  operational structure and strength financial
  position

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Groupe Schneider

• Focus on two core businesses
• Electrical equipment for power distribution and
  automation of industrial complexes
• Electrical building contracting
• Geographical diversification through acquisitions
  
• 15 of DAVY
• Controlling interests in Federal Pioneer
• Subsidiaries
• 1. Merlin Gerin
• 2. Telemecanique
• 3. Jeumont Schneider
• 4. Spie Batignolles

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Square D

• A prominent American Company
• Supplier of electrical equipment, services
  systems
• Profitable last 59 years
• 1990 Sales 1.7 billion
• 71 electrical distribution segment
• 29 industrial control segment
• 18 manufacturing plants in 11 countries
• Operation concentration
• Electrical distribution
• Industrial control
• Strong network of independent electrical
  distributors and wholesalers

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Square D

• Jerre Stead revitalized the company
• 1. Changed top management in 1980s
• 2. Consolidated US and Canadian facilities
• 3. Reorganized businesses into 3 externally
  focused sectors
• -industrial control
• -electrical distribution
• -international markets
• Resources were redeployed to strengthen core
  businesses
• Industry Ranking
• - Electrical 3rd behind Westinghouse and GE
• - Industrial control 2nd after Allen Bradley

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Industry Analysis

• Cyclical to the Economy
• Revenue Sources
• 1. new construction
• 2. maintenance of existing equipment
• Demand follows economic conditions
• Industry Trends in 1990
• Globalization market growth
• Internationalization of product standards
• - International Electrical Commission
• - National Electrical Manufacturers Association
• Industry concentration manufacturing and
  research capabilities

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Industry Predictions

• Early 1991, upturn in economy and industry
• 1992, expected unified standards for Europe
  which would be dominant in the world
• Further development of global market for
  electrical equipment
• Increased consolidation to take advantage of
  economies of scale

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Positive Strategic Fit

• Market penetration and new market access
• USA for Schneider
• Europe for Square D
• Economies of scale manufacturing, procurement,
  sales and marketing
• Combination of complementary resources RD and
  technology expertise
• Increase product lines
• Cost and revenue synergies
• Positive capital market reaction
• Increase market power and barriers to entry

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Negative Strategic Fit

• Premium acquisition price due to resistance and
  rumors
• Integration challenges
• hostile take-over
• two very different cultures
• resource and knowledge sharing difficulties
• Difficult to realize revenue synergies
• Opportunity cost distract management from the
  core business, therefore destroying stakeholder
  value
• Foreign exchange, currency consolidation

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Porters Five Forces
Threat of New EntrantsLow -capital intensive
-need expertise
Intensity of RivalryModerate -consolidation -gl
obalization

• Bargaining Power of BuyersLow to Moderate
• need for conversion
• high switching costs

Bargaining Power of SuppliersModerate -equipment
suppliers -labour unions
Threat of SubstitutesLow -no other substitutes
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Class Discussion
Implications of a Hostile and Friendly
take-over
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Integration Logic

• Describes how the businesses are joined together

Value Creators Value Creators
Focus on synergy realization Rationalizing RD manufacturing capabilities Cross-sell products - Telemecanique and Merlin Guerin
Combine similar processes Sharing benefits of existing technologies
Blend cultures and ideas French hierarchical, avoid uncertainty, centralized U.S. individualism, low-context communication, egalitarianism
Centralize support activities that apply to multiple units RD, shared service consolidation
Retain good people Need to offer retention incentives
Attend to employee concerns and resistance Quickly communicate new roles for those who are part of new organization
Act quickly Capitalize on synergies quickly, avoid lost opportunities
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Integration Logic

• Describes how the businesses are joined together

Value Destroyers Value Destroyers
Ineffective Integration poorly planned, poorly executed, too slow, too fast Remains to be planned and executed
Suppression of effective business systems of target firm, destroying the basis of prior success Schneider needs to respect value drivers in Square D and standardize and convert when it doesnt erode competitive advantage
Power struggles or incompatibility in new boardroom Takeover defenses by Schneider are initial bad omen (Delaware requires 85 shares tendered Common Stock Purchase Plan)
Mergers of equals delay requisite decisions Schneider is 10B sales 1990 Square D is 1.7B sales so Schneider will control
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Transaction Capacity

• Describes the expertise (internal and external)
  and control processes used to handle the
  transaction

Value Creators Value Creators
Develop a global mindset Needs to think global, not multinational
Flexible systems, structures, processes Schneider geographical diversification, acquisition program underway
Facilitate organizational learning, responsible independence Schneider organization should be developing required practices
Use investment bankers, especially for pricing Lazard Freres used for valuation of Square D
Develop a core competence in integration management Two major acquisitions completed in 1989
Form a leadership team responsible for facilitating synergy realization Should have been lesson learned from earlier success
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Transaction Capacity

• Describes the expertise (internal and external)
  and control processes used to handle the
  transaction

Value Destroyers Value Destroyers
Unduly hyped by investment bankers, consulting firms, and/or lawyers Fairly optimistic estimates provided by Lazard Freres, but not unreasonable
Hubris of top executives ambition to run a bigger firm and increase salary Didier Pineau-Valencienne sounds like a flamboyant big-thinker and expansionist but facts back up plan
Top executives want to cash out stock options Not known
Mergers of equals delay requisite decisions Not the case Schneider is 6x larger
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Class Discussion
When does a company become a target of
take-over?
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• Takeover Logic
• Describes how the deal is designed and negotiated

Model provided by Professor John C. Banks, MA
Professor WLU
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Accounting Analysis
No apparent distortions Reasonable accounting
policies
Square D as Stand Alone company
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Financial Analysis
Square D as Stand Alone company
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Financial Analysis
Square D as Stand Alone company
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Financial Analysis
Square D as Stand Alone company
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Financial Analysis
Square D as Stand Alone company
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Implications of Lazards Assumptions
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Financial Valuation

• Discounted Abnormal Earnings
• Investors pay more
• Earnings above normal level
• Ability to generate Abnormal Earnings
• Discounted Cash Flow (DCF)
• Forecasted cash flows
• Cost of capital
• Present value

Square D as Stand Alone company
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Financial Valuation
Square D as Stand Alone company
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Financial Valuation
Square D as Stand Alone company
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Financial Valuation
Square D as Stand Alone company
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Financial Valuation
Square D as Stand Alone company
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Bidding Recommendation

• Opening bid 61/share
• hostile take-over premium
• market outlook positive
• revenue cost synergies
• economies of scale manufacturing, RD
• Walk-away price 81/share

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Subsequent Events

• Feb 18, 1991
• Schneider offered 78/share in cash
• Square Ds stock price jumped to 72.25/share
• Feb 27, 1991
• Square Ds Board rejected the offer
• Filed law suit alleging Schneider breached the
  confidentiality agreement signed in 1988
• March 4, 1991,
• Schneider offered to buy all of Square Ds
  outstanding shares for 78/share (Schneider
  already owned only 1.4)

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Subsequent Events

• Mid-March 1991
• Siemens was reported as having contacts with
  Square D
• March, 1991,
• Square D brought additional law suits against
  Schneider for violating
• US anti-trust laws and acquisition laws
• US banking regulations
• Canadian anti-trust laws
• Making false misleading filings at the SEC

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Subsequent Events

• April 1991
• Square D postponed annual meeting to June 21
• Schneider challenged the decision and got a
  federal courts ruling - annual meeting must take
  place in 40 days following outcome of the
  anti-trust suits and resolution of complaints
• May 10, 1991
• Dept. of Justice dropped its anti-trust
  investigation against Schneider cleared the way
  for the merger

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Subsequent Events

• May 11, 1991
• Square D proposed taking on additional 1 billion
  in debt in a leverage recap
• May 13, 1991
• Schneider raised offer price to 88/share.
• May 14, 1991
• Square D accepted the offer acquisition
  succeeded

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Merged Financials
   1990   1995  1996  1997
Sales 1,653 2,209 2,309 2,444
Sales Growth 8.7 4.5 5.9
Operating Earnings 178 251 328 420
Operating earnings/sales 10.8 11.3 14.2 17.2
Return on capital 21.7 22.2 28.6 35.5
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MA Statistics

• McKinsey Client Studies
• Only 36 of firms get cost synergies
• Only 17 of firms achieve revenue synergies
• KPMG Studies on MA Revenue enhancement
• 45 existing products to new customers
• 42 new geographical markets
• 34 new products
• 32 new distribution channels
• 25 cross selling

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Thank You Questions