M&A in wine country Introduction to the simulation
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Overview of the simulation
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Player objectives: Bel Vino
Bel vino (BV):
•You are the CEO. The CEO has authority from his board to negotiate possible business combinations. •The objective is to maximize value for BV shareholders. • Two possibilities available:
•Stock merger with Starshine. •Acquisition for cash by International Beverage.
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Player objectives: Starshine
Starshine (SS):
•You are the CEO. The CEO has authority from his board to negotiate possible business combinations. •The objective is to maximize value for SS shareholders. • Two possibilities available:
•Stock merger with Bel Vino. •Acquisition for cash by International Beverage.
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Player objectives: International Beverage
International Beverage (IB):
•You are the CEO. The CEO has authority from his board to negotiate possible business combinations. •The objective is to maximize value for IB shareholders. • The sole choice is an all cash acquisition of either BV or SS, but not both. •IB is never a target but only a bidder
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Simulation Structure •Round 1: Preparation
•Read preparatory manual. •Undertake valuation of both BV and SS. •Enter a reservation price (private!) . The reservation price can be used as reference value during negotiation. •Round 2: Interactive Game Play • The three roles participate in open bidding and negotiation •Simulation ends when two companies strike a deal or time runs out!
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The wine industry An overview
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The U.S. Wine industry • Us in 2012 is the world third largest wine market.
• Consumption growth at compound annual rate of 4%. LT growth (expected) 3% max. • Three segments: • Basic (50%)
buy on price
• Popular Premium (35%) • Ultra-Premium (25%)
price and brand brand and quality
• Wine making K intensive:
• Land acquisition\ Vineyard development \ Investments in inventory
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The U.S. Wine industry • Producer-Wholesaler-Retailer Chain
• Distributions channels become more concentrated due to consolidation. • Sales and marketing cost vary in the industry: • Larger Wineries: spend heavily on adv and promotion. • Smaller wineries: marketing efforts at the distributor level.
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Meet the players:International Beverage
• Leading international producer with a broad portfolio
• Owns vineyard, bottling capacity and selected distribution channels in US and abroad. • Revenues’ growth driven by acquisition based strategy: • Buy small producers: cost cutting, increasing sales (distribution network + marketing). • WS critical of rollup strategy: acquisition overpaid? Not enough value generated?
• Management is under scrutiny!
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Meet the players: Bel Vino
• High end California Winery.
• Annual sales have lagged behind competitors: • No satisfactory relations with international distributors • No growth in the US market (heightened competition for attention from national distributors) • Conflicts in the higher management rank. •
Different possible views of company future: Management: protect prestigious brand vs Outsiders: enter midrange wine segment.
• High financial discipline (control of costs, strong in contract negotiations…) Imperial College Business School
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Meet the players: Starshine
• Midsize wine producer
• Has acquired few midrange labels • Successful network of national distributors VS increasing pressure from low cost imports. • Criticized for inattention to cost control, especially in sales and marketing. • Executives praised as market savvy and creative. Credited with marketing innovations.
• JV with international wine producers.
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Does M&A Make Sense in this industry? • Traditionally fragmented industry
• Distributors in the U.S. have recently become larger, more powerful • Large producers can negotiate favorable terms with distributors, or established their own distributors.
• Small producers can market and sell directly to specialty retailers, restaurants, and consumers. • Medium-size producers can do neither economically – Bel Vino and Starshine both have a version of this problem – International Beverage is large and covers international markets
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A deal between BV and SS?
Some Ideas:
• Value creation through: • Better distribution: they can negotiate better terms with distributors. • BV strong name but lacks growth
• SS creative management but not savvy on cost control • Further value creation opportunities in your confidential information!
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What about IB?
Large player. How can he benefit small companies?
Some Ideas: • Strong distribution: national ad international channels But what about BV and SS? • BV perhaps proud of its history and SS independent and creative? • What would create an incentive for the two companies to accept an offer from IB? Good price? More growth? Quicker growth?
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The simulation steps
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The valuation exercise
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The valuation exercise • You have 3 templates:
• Generate forecasts for the period 2009-13 • Set up DCF valuation • Calculate the WACC
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The simulation Round 1
Reservation prices
• The valuation exercise gives us standalone prices. • But what if a firm is acquired? Say SS? • Improved distributions, better margins… • How do we include such aspects in our valuation? • We review projections. But how? • Real world: expertise, due diligence, knowledge of the industry…
• Simulation: Private information!
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The simulation Round 1 How much is a company worth? This is state contingent. NO DEAL
DEAL
STANDALONE PRICE:
REVISITED PRICE:
We use valuation methods
We include the effects of the Deal. But how much do we want to pay? Implied stock price
Zero NPV transaction
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Reservation prices
What is the reservation price? • If you are a bidder: It is the highest price you are willing to pay for your target. • If you are a target: It is the lowest price at which you are willing to be acquired.
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What now? The next steps! • You are assigned a role.
•You receive confidential information. •You form a reservation price and submit it. Eg: if you are BV : •Reservation price on SS: max you are willing to pay. •Reservation price on BV: min you are willing to accept. •Once you all input your reservation prices, you proceed to Round 2. •In round 2: negotiate and bid! Do good deals to maximize value rather than do a deal for the sake of it: NO DEAL is an acceptable outcome!
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How do we take this forward?
• Next week you submit your outcomes. •Include: •Reservation prices •Opening moves •Stock price reactions: what happened when a bid was done? Only the
bidder target prices were affected? Did you notice any specific pattern? •Feel free to include any other element you find of interest. •Next week, a few days after I receive your slides, I put them together and send you back an overview! •I hope you enjoy this simulation!
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Simulation Debrief
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Debrief: submitted reservation prices The Simulation computes its own “Objective Reservation Prices” by target and role, based on: •Standalone values for each target. •Confidential information by target and role, incorporated into a DCF valuation of each target. •Let’s take a look at your submitted prices, by bidder and target: Mean, Max, and Min
•Then we’ll compare your mean reservation prices to the objective prices
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Debrief: submitted reservation prices, SS
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Debrief: submitted reservation prices, BV
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Debrief: submitted reservation prices •As you can see there is variation in reservation prices. •Consider the prices submitted by same players in different groups on the same company (say IB on BV, last slide), you can see they differ, although they have the same information. Why? •Different interpretation of info. •Different valuation methods. •Additional factors you take into consideration.
•Think about the winner’s curse in real life auctions…
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Debrief: submitted reservation prices •In this data you don’t see any own firm bias. •The own firm bias would be present if each firm has a higher reservation price for itself than the objective one. This pattern often emerges, but not in our case!
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Debrief: Zone of Possible Agreement (ZOPA) Team 4
•ZOPA represents the overlap if any between two partners reservation prices. Any deal in the ZOPA is viewed positively by both parties. •Let’s look at what happened by team:
There is ZOPA, but narrow: min BV=49< max SS=53 ZOPA=4
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There is no ZOPA: min BV> max SS
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Debrief: Zone of Possible Agreement (ZOPA) Team 4
•As you can see the deal takes place in the ZOPA. •SS is offered 5$ more that its min. •BV pays 13$ less than its max.
There is ZOPA: min SS=48< max IB=76 ZOPA=28 There is ZOPA: min SS=48< max BV=66 ZOPA=18
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Debrief: Zone of Possible Agreement (ZOPA) Team 2
•Only room for an agreement between SS and IB.
There is ZOPA: min SS=48< max IB=76 ZOPA=28
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Debrief: Zone of Possible Agreement (ZOPA) Team 3
•Very small room for an offer from SS to BV.
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Debrief: Stock price thorough negotiation Team 2
•Very small room for an agreement for an offer from SS to BV. Overall IB does not have large price volatility. Notice that from H onwards you have a clear downward path for BV and upward path for SS. Up to H, SS and BV are negotiating. When any of the companies make an offer the prices of the 3 companies react. For example in In H, BV rejects SS offer. SS price drops. In I SS rejects IB offer, but IB continues submitting offers to SS till they acquire the company. SS price keeps increasing. In this time frame, BV stock price keep slowly decreasing IB price does not drop at the deal: they are not overpaying. Imperial College Business School
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Debrief: Stock price thorough negotiation Team 4
•You can have a look at the stock price reaction for team 4. •Does the stock price of a company increases after an offer? If so how much? •Does the price of the company left out of a potential deal decrease? •Does an offer reveal information to the market?
•You can consider various points…
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Debrief: Stock price thorough negotiation Team 4
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Debrief: Stock price thorough negotiation Team 4
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