Assessing the Creation of Shareholder Value - The Case of Leica Geosystems

Contents

1 Introduction
1.1 Background
1.2 Objective
1.3 Structure

2 Theories
2.1 The Concept of Shareholder Value
2.2 Distinguishing Between Mergers and Acquisitions
2.3 Theories on Corporate Takeovers
2.3.1 Increasing Shareholder Value
2.3.1.1 Synergies
2.3.1.2 Efficiencies
2.3.2 Hubris – The Winner’s Curse
2.3.3 Agency Problems
2.3.3.1 Free Cash Flow Hypothesis
2.3.3.2 Market for Corporate Control

3 The Swiss M&A Landscape
3.1 The Swiss Market in Year
3.1.1 Favorable Swiss Market Performance
3.1.2 High M&A Transaction Volumes
3.2 Premia Analysis .
3.3 What Are Drivers for M&A?
3.4 Unsolicited Takeover Offers in Switzerland

4 In Search of Shareholder Value
4.1 Introduction
4.2 The Companies Involved
4.2.1 Leica Geosystems
4.2.2 Hexagon
4.2.3 Danaher Corporation
4.3 Transaction Overview
4.4 Assessing the Return to Hexagon Shareholders
4.4.1 Broker Targets
4.4.2 Comparables Analysis
4.4.3 Leica DCF Valuation (Stand-Alone)
4.4.3.1 Introduction
4.4.3.2 Method
4.4.3.3 Derivation of the Parameters
4.4.3.4 Results
4.4.4 Leica DCF Valuation (Incl. Synergies)
4.4.4.1 Method
4.4.4.2 Result
4.4.5 Assembling the Pieces: Valuation Summary
4.4.6 How Did the Market React?

5 Conclusion

List of Figures

1 Performance of Major Indices in 2005

2 M&A Transaction Volumes vs. SMI Performance

3 Premia Analysis of Swiss Takeovers

4 Divisional Organization of Leica Geosystems

5 Divisional Organization of Hexagon (Pre-Takeover)

6 Overview of the Measuring Technology Market

7 New Divisional Organization of Hexagon (Incl. Leica)

8 Divisional Organization of Danaher

9 Key Figures of the Companies Involved

10 Leica Share Price Analysis

11 Operating Model of Leica Geosystems

12 DCF Valuation of Leica Geosystems (Stand-Alone)

13 Valuation of the Synergy Benefits

14 Valuation Summary

15 Daily Returns upon Key Events (%)

16 Hexagon Share Price Reaction

17 Allocating the Value Generated by the Takeover

List of Tables

1 Abnormal Stock Price Changes Associated with Takeovers

2 Pattern of Gains Related to Takeover Theories

3 The Four Hostile Cases in Switzerland in 2005

1 Introduction

1.1 Background

“The challenge is to value synergy benefits, both from operational and financial synergies. [...] However, research has demonstrated that companies are invariably over-optimistic when estimating synergy benefits, notably on the revenue side.”

UBS Investment Research [18], p. 3.

Today, mergers and acquisitions (M&A) have quite a substantial impact on the market and the ownership structures. They vary in terms of transaction size, sector, and geographic region, all ranging from a small family business up to EUR 42.5 billion announcements such as the public tender offer for Endesa by Gas Natural in 2005. One thing they (usually) do have in common is the expected creation of shareholder value. However, previous studies^[1] suggest that a large percentage of corporate acquisitions does not create shareholder value, yet, is value destroying. Reasons include overestimation of synergies that translate into large premia. Given the recent rise in M&A activity in Switzerland, a revisit of this topic is highly relevant. This because good markets create competition for sought-after assets and a sense of “affordability” among management which increases the likelihood of over-paying and destroying shareholder value.

1.2 Objective

The objective of this term thesis is to analyze a corporate takeover and to determine whether is was enhancing the acquiring company’s shareholder value. We will do so by examining the case of Leica Geosystems. Last year, Hexagon AB, Sweden (“Hexagon”) acquired all outstanding shares of Leica Geosystems AG, Switzerland (“Leica”). Hexagon won the takeover battle for Leica Geosystems over Danaher Corporation, USA (“Danaher”), who contested Hexagon’s first bid as White Knight.

1.3 Structure

The paper is divided into three parts. Since we are going to evaluate the creation of shareholder value, we need to clarify the concept of shareholder value and shareholder value maximization in the firm in a first step. We will then set the stage for the subsequent analysis of the Leica takeover with an overview on selected theories on corporate takeovers. These will be grouped according to their contribution to shareholder value to the target and acquirer – value increasing, zero contribution, or value destroying. Second, we take a closer look at the Swiss market, i.e. recent market performance and M&A activity. As mentioned earlyier, if a company is fairly valued the premium serves as an approximation of the value that is expected to be created with the combination of the two firms. Therefore, it might be of interest to compare with other transactions which we will do by calculating average premia paid over the last five years. The final part focuses on the takeover of Leica Geosystems. As stated in Section 1.1, the creation of shareholder value is of vital importance when determining a “successful” transaction. Since Leica shareholders undoubtedly profited from the takeover, we want to test whether it was also a good deal for Hexagon shareholders. We will do so be an in-depth analysis including broker targets, valuation multiples, as well as a DCF valuation of Leica as stand-alone and a DCF of the synergy benefits.

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^[1] For example UBS Investment Research [18] or McKinsey [9]

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