VT2006 Fek D 1200

/ INTERNATIONAL MARKETING - MASTER THESIS - EXo11o /
WAY TO SUCCESSFUL GROWTH THROUGH ACQUISITIONS
GROUP AUTHOR TUTOR
#12oo OLGA MAKSIMENKO CHARLOTTA EDLUND
2oo6
MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo
ABSTRACT Course: Program: MASTER THESIS Exo11o MIMA INTERNATIONAL MARKETING Authour: OLGA MAKSIMENKO Group #: 12oo Date: 2oo5-o5-31 Title: WAY TO SUCCESSFUL GROWTH THROUGH ACQUISITIONS Vishay Intertechnology would like to keep on expanding its business by means of acquiring innovative companies, mainly in the wireless sector, however some of their acquisitions have Management not achieved desired success. Therefore, how does this Problem: company successfully organize the pre-deal planning and postdeal integration processes of acquisitions in order to preserve profits and fruitful performance of the acquired companies? The purpose of this paper is, first, to find out more about the current experience of Vishay when it comes to acquisitions (in order to understand what kind of companies Vishay is interested in, and what the general company values and strategies in this respect are at present) and, second, to define Purpose: according to the chosen theoretical framework how the planning process and selection of the right acquisition candidates for Vishay should be conducted, and once a target is selected, what the best post-acquisition priorities and behaviour should be. This study begins with an introduction, a short company and chosen topic backgrounds, problem statement and purpose. Theoretical framework comes next, and it represents the theories upon which the research is based. Then there is a methodology chapter, which explains when, where, why and how the information has been gathered. The findings chapter contains broader information about Vishay, the acquired companies, competitors and some other facts which are relevant to the purpose etc. It is followed by analysis, where Method: selected theories are applied particularly to Vishay, and certain suggestions and recommendations are made in order to fulfil the purpose and solve the problem statement of this master thesis. In the end, there is a conclusion, which summarizes the most important points and facts, discovered during the research process. Finally, references provide the reader with a list of all the literature used, and make it easier to find further information about acquisitions, mergers, their benefits and drawbacks, Vishay etc. This project is going to be useful for Vishay management in particular (Vishay is interested in the results of the research), Target group: as well as for other companies and individuals (i.e. students, conducting a research on a similar topic), who would like to learn more about successful mergers and acquisitions. What marks successful acquisitions is a sure sense of purpose, an understanding of the type of acquisition, the reduction of uncertainty and the speed with which actions are Conclusion: carried out. An aggressive acquisition strategy and a continuing commitment to product innovation have enabled Vishay to become a global industry leader. Key words Acquisitions, mergers, Vishay, semiconductors, components
2 M I M A 2oo6 International Marketing
TABLE OF CONTENTS
1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3.1 3.2 3.3 3.4 3.5 4.1 4.2 4.3 4.4 4.5 5.1 5.2 5.3 5.4 5.5 5.6 1. INTRODUCTION___________________________________________________________________________ 4 MANAGEMENT PROBLEM _______________________________________________________________________ 5 PURPOSE ___________________________________________________________________________________ 5 DISPOSITION ________________________________________________________________________________ 5 2. THEORETICAL FRAMEWORK________________________________________________________________ 7 FRAMEWORK ________________________________________________________________ OVERVIEW__________________________________________________________________________________ 8 MERGER MANAGEMENT MODEL (M3) ___________________________________________________________ 11 INTEGRATION CREATING VALUE ________________________________________________________________ 16 QUESTIONNAIRES ____________________________________________________________________________ 21 ALTERNATIVE GROWTH OPPORTUNITIES ___________________________________________________________ 23 STRUCTURING THE DEAL _______________________________________________________________________ 25 CULTURAL CHALLENGES IN M&A ________________________________________________________________ 26 3. METHODOLOGY _________________________________________________________________________ 28 CHOICE OF TOPIC ___________________________________________________________________________ INFORMATION GATHERING _____________________________________________________________________ THEORY SELECTION & ANALYSIS PROCESS __________________________________________________________ TARGET AUDIENCE ___________________________________________________________________________ TIMETABLE _________________________________________________________________________________ 29 30 32 35 35
4. EMPIRICAL FINDINGS ____________________________________________________________________ 36 . VISHAY INTERTECHNOLOGY COMPANY PROFILE _____________________________________________________ VISHAY CUSTOMERS & MARKETING ______________________________________________________________ COMPETITION ______________________________________________________________________________ MAJOR ACQUISITIONS CONDUCTED BY VISHAY _____________________________________________________ INTERVIEW SUMMARY VIEW ON ACQUISITION POLICY _______________________________________________ 36 38 42 42 46
5. ANALYSIS _______________________________________________________________________________ 54 ACQUISITION TYPE DEFINITION __________________________________________________________________ PLANNING _________________________________________________________________________________ DUE DILIGENCE (RISK ASSESSMENT)______________________________________________________________ DEAL SIGNING _____________________________________________________________________________ INTEGRATION _______________________________________________________________________________ RECOMMENDATIONS _________________________________________________________________________ 54 57 62 63 65 68
6. CONCLUSION ___________________________________________________________________________ 72 7. REFERENCES_____________________________________________________________________________ 74 APPENDIX _________________________________________________________________________________ 76
A.1 QUESTIONS FOR THE INTERVIEW (PRELIMINARY) ________________________________________________________ 76 A.2 MAJOR MARKETS VISHAYS COMPONENT CONTENT __________________________________________________ 77 A.3 CORPORATE STRUCTURE _________________________________________________________________________ 78
M I M A 2oo6
International Marketing
1. INTRODUCTION
Over the last 20 years, mergers and acquisitions activity has been one of the chief methods for organizational growth. Making them work is a subject of great interest of today. Whether the goal is improving margins, increasing market share or raising shareholder value, growth is critical. Despite the fact that acquisition success rates are quite low, corporations have turned to this strategy for future success. Why? Because attempts at gradual growth often take too long to achieve greater market share; investment in research and development has proved inefficient or too expensive; or simply because they expect to succeed where others have failed. Since the costs of failed acquisitions are so great, the challenge to make them more successful is urgent. The term mergers and acquisitions (M&As) encompasses a widening range of activities, including joint ventures, licensing, spinoffs, tracking stocks, restructuring, alliances, and other corporate interactions such as network relationships. The fundamental role of M&A activities is to enable firms to adjust more effectively to new challenges and opportunities. If done efficiently, M&As can increase revenues and market share, improve profitability, and enhance enterprise values (Lynch, Lind, 2002). In 1985 Vishay Intertechnology, having grown from a start-up into the world's leading manufacturer of its original products, Vishay began an ongoing series of strategic acquisitions to become a broad-line manufacturer of electronic components, that provides "one-stop shop" service to customers. Vishays successful acquisition history includes such top names as Dale, Sfernice, Draloric, Sprague, Vitramon, Siliconix, General Semiconductor, BCcomponents, Beyschlag and many others, which represent an unmatched collection of discrete semiconductors, passive components, integrated modules, stress sensors etc. Those technologies are used virtually in all types of electronic devices and equipment, in the industrial, military, computer, aerospace, automotive, and medical consumer, telecommunications,
4 M I M A 2oo6
markets. Vishay's global footprint includes manufacturing facilities in China and other Asian countries, Israel, Europe, and the Americas, and sales offices around the world (Zandman, 1995).
1.1 Management problem

Vishay Intertechnology would like to keep on expanding its business by means of acquiring innovative companies, mainly in the wireless sector, however some of their acquisitions have not achieved desired success. Therefore, how does this company successfully organize the pre-deal planning and post-deal integration processes of acquisitions in order to preserve profits and fruitful performance of the acquired companies?
1.2 Purpose
The purpose of this paper is, first, to find out more about the current experience of Vishay when it comes to acquisitions (in order to understand what kind of companies Vishay is interested in, and what the general company values and strategies in this respect are at present) and, second, to define according to the chosen theoretical framework how the planning process and selection of the right acquisition candidates for Vishay should be conducted, and once a target is selected, what the best post-acquisition priorities and behaviour should be.
1.3 Disposition
This study begins with an introduction, a short company and chosen topic backgrounds, problem statement and purpose. Theoretical framework comes next, and it represents the theories upon which the research is based. Then there is a methodology chapter, which explains when, where, why and how the information has been gathered. The findings chapter contains broader information about Vishay, the acquired companies, competitors and some other facts which are relevant to the purpose etc. It is followed by analysis, where selected theories are
applied
particularly
to
Vishay,
and
certain
suggestions
and
recommendations are made in order to fulfil the purpose and solve the problem statement of this master thesis.In the end, there is a conclusion, which summarizes the most important points and facts, discovered during the research process. Finally, references provide the reader with a list of all the literature used, and make it easier to find further information about acquisitions, mergers, their benefits and drawbacks, Vishay etc.
M I M A 2oo6
2. THEORETICAL FRAMEWORK
To come up with efficient ideas on how to solve the problematic issue, one needs a strong theoretical background. In this chapter we discuss what theories our future analysis is going to be based on. The definitions of an acquisition and a merger. An acquisition is when one larger company purchases a smaller company, while a "merger" is when two approximately equal-sized companies merge to combine forces (Central Washington University Archive, 2006). These two terms usually come hand in hand. The concept of mergers and acquisitions (M&As) encompasses a widening range of activities, including joint ventures, licensing, spinoffs, equity carveouts, tracking stocks, restructuring, alliances, and other corporate interactions such as network relationships. Another important term, when it comes to M&As, is due diligence. There is no dictionary definition of due diligence. There is no standard legal definition either. A lawyer would probably define it roughly as follows: a process of enquiry and investigation made by a prospective purchaser in order to confirm that it is buying what it thinks it is buying (Howson, 2003). The same author Howson mentions different types of DD commercial, environmental, financial, R&D etc. Economists identify five reasons why companies engage in takeovers (A Guide to Successful M&As, Prism, 2005). The first two are the most important ones: 1. Increasing efficiency through economies of scale or other so-called synergies; 2. Gaining market power, sometimes by forming a monopoly or oligopoly; 3. Removing incompetent management in the target company; 4. Satisfying the self-serving expansion desire of the acquiring companys
management; 5. Taking advantage of opportunities for diversification. If done efficiently, M&As can increase revenues and market share, improve profitability, and enhance enterprise values (Weston, 2001).
2.1 Overview
The academic research shows that half of all mergers and acquisitions do not achieve their intended success. The major problem occurs because the acquisition is not effectively integrated. Even if the strategy, the choice of target, the negotiation of the sale and purchase agreement are successful, poor post-deal integration will more than likely increase the probability of a poor deal. The key to integration is advance planning. Pre-deal due diligence is the ideal vehicle for the investigative work needed for advance planning. The purpose of due diligence is to give the buyer an assessment of the risks and benefits of the deal both as an aid to negotiation and as an aid to delivering value post-completion (Howson, 2003). Type Table 2.1.1 The different types of M&A Strategic objectives Due diligence focus
Eliminate overcapacity, gain market share, achieve scale economies A successful company expands geographically; operating units remain local Acquisitions to extend a companys product line or its international coverage Acquisitions used instead of in-house R& D to build a market position quickly A company bets that a new industry is emerging and tries to establish a position by culling resources from existing industries whose boundaries are eroding Retaining market share, rationalization costs especially Human Resources Retaining customers; strength of product relative to competition Cultural and systems integration; strength of product relative to competition Technical and intellectual due diligence; retention of key people Commercial due diligence; technical due diligence; retention of key staff
The overcapacity M&A
The geographic M&A Product or extension M&A The M&A as R&D
roll-up market
The industry convergence M&A
Source: Howson, 2003, Due Diligence: The Critical Stage in Acquisitions and Mergers
M I M A 2oo6
Howson lists five good reasons for mergers and acquisitions, each of which, as shown in Table 2.1.1, is going to mean a different due diligence focus. Following this logic, the due diligence process is likely to be most effective if it concentrates on those areas for which the deal is occurring. As Peter Howson mentions in his book called Due Diligence: The Critical Stage in Acquistions and Mergers, stage one of the acquisition process is about identifying an acquisition target and making an approach. This can only sensibly be done following a proper strategic review in which acquisition has been identified as a logical strategic tool. If an approach leads on to agreement to take things further, the deal enters the second stage. The two parties sketch out the broad terms of the deal and the buyer will begin due diligence. Successful due diligence leads to negotiation and, if all goes well, the deal completes. Then the buyer enters stage four, in many ways the most important stage of all, where the acquisition must be bedded in and made to pay its way. Figure 2.1.1 Acquisition process
Source: Howson, 2003, Due Diligence: The Critical Stage in Acquisitions and Mergers
Many acquisitions fail due to shortcomings at the post-acquisition implementation stage than at the pre-acquisition investigation stage. According to the research (KPMG, 1999) conducted by a world-renowned consulting company called KPMG, there is an 83 per cent correlation between implementation success and overall acquisition success.
Figure 2.1.2 Pre-deal activities that increase the chance of success
Source: KPMG, 1999
As shown in Figure 2.1.2, this found three hard keys and three soft keys to acquisition success. The KPMG study tries to show those things which give deals a better chance of success. Pre-deal synergy evaluation emerged as the main hard key to success. As KPMG describes, acquirers who carried this out thoroughly had a 28 per cent better than average chance of overall deal success. A proper due diligence programme, should have five strands (Howson, 2003): - the verification of assets and liabilities - the identification and quantification of risks - the protection needed against such risks which will in turn feed into the negotiations - the identification of synergy benefits (which may also feed into price negotiations) - post-acquisition planning.
10 M I M A 2oo6
2.2 Merger Management Model (M3)

This model was developed by John G. Lynch and Barbara Lind and is presented in their study called Escaping Merger and Acquisition Madness (2002). Based on participation in a number of acquisitions, authors develop an idea that there are types of acquisition, and some of them are easier to manage than others. The objective of their study was to identify pre and post-acquisition conditions of merger success. Their work led them to consider two aspects disparity and good will the interplay of which makes it easier to identify the candidates for acquisitions, planning the acquisition, and carrying out the deal in the best possible way (Table 2.2.1). Table 2.2.1 Disparity and goodwill elements Disparity Business model Products Markets Channels Brand Technology Leadership strategy Goodwill Management/Leadership Customer relationships Market knowledge and relationships Business/value chain integration Organizational Structure Intellectual property Organizational capabilities Culture
Source: Lynch, Lind, 2002, Escaping Merger and Acquisition Madness
If a business has wide disparity, it means that the acquiring company have never operated businesses similar to the one they have acquired, nor are there likely to be synergistic opportunities for the combined firms. Mergers between businesses with similar products, markets and channels of distribution are much more likely to be successful. Business goodwill in an acquisition is usually defined as the premium paid in excess of book value. Lots of intangible factors go into goodwill, i.e. organizational culture, quality of management, the companys vivacity
and the knowledge contained in the organization and its customer and marketplace relationships. Disparity and goodwill need to be examined, in order to assess accurately the degree of similarity or difference. This underscores the need to perform in depth due diligence pre-merger, and its value as a means of organizing the integration process. There are 4 basic acquisition types (Lynch, Lind, 2002). They are shown in Figure 2.2.1, which represents a Merger Management Model, through which it is possible to examine disparity and goodwill. Figure 2.2.1 Merger Management Model
The plan and prosper acquisition. High goodwill/Low disparity. In this category industries, channels and markets are the same or similar, but existing management and sales team have a special enterprise or a series of customer relationships that form a significant part of the value of the enterprise. Merging these entities quickly without careful planning for capturing this goodwill will most likely cause loss of business to competitors. The stand and hold acquisition. High goodwill/High disparity. This kind of acquisition should be done very carefully. Consideration may be given to integrating financial systems and group buying, but attempts at full integration are likely to reduce and destroy value. This is an investment made for long-term performance prospects.
12 M I M A 2oo6
The merge and grow acquisition. Low goodwill/Low disparity. This is a classic type of acquisition and is usually a strategy for gaining market share. They key behaviour here is fast, but careful integration. The speed with which redundancies are reduced is a key indicator of success. The general goal is to reduce expenses to pre-acquisition levels while attempting to maximize the revenues. Careful customer management needs to be done at the same time. The segment or sell acquisition. Low goodwill/High disparity. This category is least desirable. Managers have little chance of leveraging their own business knowledge and the acquired entity offers little special knowledge and few relationships to the purchaser. Such acquisitions are sometimes pursued for vertical integration purposes, but prospects for success are not high. Figure 2.2.2 M3 Strategies
Taking M3 analysis further identifies a serious of steps (strategies) the managers can follow, which follow the basic types of acquisitions described above. Lynch and Lind (2002) suggest that there is no specific order in which those should be carried out (Figure 2.2.2). Merge and grow acquisition actions. Identify swiftly those business
elements with common characteristics, methodologies, technology and skills. The objective here is to merge these quickly, and demonstrate early success for both internal and external audiences. Find parts organizations that can be collapsed into each other easily. Reduce duplication and expenses rapidly. Make sure the empowered managers collapse these organizational elements into each other with the least disruption of the main business. Make successes visible inside and outside the organization. Empower people to consider the most beneficial culture and climate they wish to inculcate right at the beginning. Plan and prosper acquisition actions. Identify the high goodwill/low disparity entities and make a conscious decision to retain as much goodwill as possible. Use financial resources broadly to execute the merger as a gradual transition over a stated interval of time (24 months at least). The end point should be the same as the merge and grow acquisition. The goodwill retention goal in this kind of acquisition is a delicate one and therefore needs to take place over time, in stages. It is worth extra effort to retain people who keep hold of the goodwill elements. Contracts, bonuses are all effective tools. Key steps are to identify the goodwill elements and have a visible plan for retaining them. The objective is to achieve high levels of synergy over time while maintaining the value (goodwill) of the deal. Stand and hold acquisition actions. The objective is to find effective measures and ways of assuring knowledge transfer and succession inside the newly acquired entity. If it is a multi-divisional acquisition, identify high goodwill/high disparity elements and ensure their continued success by holding them apart. Consider any vertical integration possibilities. Consider creating a freestanding subsidiary to hold elements like this. For example if the acquired organization has a unit that does not exist in the acquiring organization, great care must be taken to protect the value here. The segment or sell acquisition actions. This is an acquisition that
probably should not have happened from a strategic standpoint. Perhaps it was driven by the desire to acquire one specific piece of the business. This does not mean value cannot be realized, however, by segmenting the organization into its components and dealing with them individually. For example, there may be parts of the organization that do have strong synergy with existing businesses of the acquirer. In addition, there may be pieces of the organization of much greater value to others; consider selling them off promptly. Freestanding pieces could be held portfoliostyle. Figure 2.2.3 Managing Integration with M3 analysis
The integration process is crucial for acquisitions success. Prioritizing the steps according to the M3 model can help ensure the best acquisition outcome. In a plan and grow acquisition, one obviously needs to pay attention to retaining goodwill by having in place employment contracts
and compensation plans to retain people who have special market and customer. In a merge and grow acquisition, there is a need to act swiftly and surely to retain customers while cutting costs. In a stand and hold acquisition, the key is financial reporting and analysis. These ensure that the investment is effective and remains on track. To some extent, these factors that are a part of any acquisition organizational structures, elimination of redundancy, cost cutting always raise issues. There are also other key variables which fit all acquisitions, such as integration of financial and IT systems and alignment of products and services, which need to be managed carefully. The most important thing is, however, the attention management is willing to devote to assuring the real completion of the deal.
2.3 Integration creating value

The subsequent successful integration of the target will determine how much of the projected value is created. To ensure successful integration, one should think through the integration strategy and act correspondingly, from the very start of the takeover process. Figure 2.3.1
Source: Mercer Human Resource Consulting, 2006
16 M I M A 2oo6
There are 4 types of value creation when it comes to M&As: Resource sharing value is created by combining companies on the operating level Functional skills transfer value is created by moving people or sharing information, knowledge and know-how Transfer of general management skills through improved insight, coordination and control Combination benefits value is created by leveraging cash resources, by borrowing capacity, by increased purchasing power, or by greater market power Mercer Human Resource Consulting company made a research (2006) on critical merger and acquisition integration issues (Figure 2.3.1). They think that the way to a successful integration is developing an effective strategic integration plan. However, integration considerations should begin even prior to the purchase of the potential target. The first step is to find out if integration is possible at all. With this in mind, the following are some examples of integration factors to consider when deciding whether to evaluate or avoid a Target company: Cultural Fit (Buyer and Target) - Employees are like-minded; similar business environment (entrepreneurial, bureaucratic, casual, formal); similar employee incentive structure, motivation and drive. Organizational Fit (Buyer and Target) - Senior-management is likeminded; similar management reporting philosophy; structures; similar decision-making management processes; similar similar
responsibilities and autonomy levels. Location (Target) - Target is located near an existing Buyer location, as remote locations present serious management obstacles; similar type of facility, equipment, and employee spaces. Strength of Management Team (Buyer and Target) Management team will be committed to merger or acquisition; team is confident and
able to navigate the new territory and rise to new and unique challenges; team is respectful of existing organizational structure and authority, team is forward looking and sees the big picture; team is capable of motivating their employees. Employee Morale (Target) - Employees are positive and inspired; employees are driven and want an opportunity to prove their abilities; employees have not been previously bought and sold and assimilated; employees are talented and offer a broad breadth of experience. Organizational Readiness (Buyer) - Organization receiving the Target's product or technology is ready and positioned to receive on all levels - the management level, the personnel level, the space level, the customer and partner level, and the budget level. Customer Satisfaction (Target) - Referenceable customers; loyal customers; few potential conflicts legally; few potential conflicts with Buyer; i.e. Oracle Corporation buying a company whose biggest customer is SAP. Human Resources Issues (Target) - Consistent and enforced HR practices; few severance issues or non-standard employee agreements, pension liabilities, VISA issues, or foreign transfer issues; no labor disputes; availability of all HR and benefits agreements to which the Target company was a party. Financial Situation (Target) - Clean financials; organized and well-kept books; routinely audited by a known and reputable firm; no SEC issues or investigations; competent team committed to seeing the deal through close. Legal Issues (Target) - No outstanding or potential claims, labor disputes, class action suits, employment suits, product quality suits; acceptable number of commercial claims; well-organized and documented file of existing contracts and agreements with customers, suppliers, distributors, and partners; the use of standard contracts and agreements. Another consulting company Metrus Group, which specializes on acquisitions, thinks that creating a strategic framework for integration is
all important. Figure 2.3.2 represents a summary of the integration process issues they suggest to focus on. Figure 2.3.2 Successful Integration Approach
Source: Metrus Group, 2006
After the evaluation stage, with a positive decision to acquire, the close of a deal or the announcement of an internal restructuring are crucial. New information is being discovered and conflict over assumptions, resources, style, and roles is frequent. Process integration needs to begin, and customers must be protected. Metrus suggests working with senior management during this crucial period. A company should focus on the development of an integration strategy and the development of an integration scorecard that measures all of the important elements that must be attended to during this period, with clear success targets, accountabilities, and monitoring. It is also important during this period to quickly assess the cultures of the different organizations to develop a plan for uniting the different cultures, and actively anticipating and managing the differences that will lead to conflict. This period of uncertainty is also one of the highest risk periods to
customers. Many will have negative experiences due to systems' conversions, changes in relationships due to downsizing or location changes, a lack of clear customer policies across the organizations and many more reasons. Service recovery, communication of policies, and setting correct expectations will be critical for success. Figure 2.3.3 Integration Problems
Source: A.T. Kearneys global PMI survey, 1999
The last stage integration implementation - can also generate problems (Figure 2.3.3 - full list of potential integration-related problems). There may be a chaotic state in both the acquirer and target companies. Some of the hard decisions have been made and plans executed. However, the customer, process and culture integration is rarely complete at this point. Clear strategic goals, such as customer loyalty, employee commitment, core process cycle times and so forth are critical to ensure that the limited resources of the organization are focusing on the really important activities - activities that produce value in the new context. Ongoing monitoring of these factors, and integration tracking are essential to efficiently and effectively complete the integration with the
20 M I M A 2oo6
expected value.
2.4 Questionnaires
Questionnaires are mainly based on the concepts presented by Eric Armour and Peter Howson. Eric Armour, in his work called How boards can improve the odds of M&A success? suggests the use of the following questionnaire when it comes to the assessment of the acquisition efficiency: 1. Does the reward potential warrant the risk and management distraction? Can the M&A deliver shareholder returns equal to top-quartile performance in the industry? How risky are the value-creation opportunities that underpin the deal? How much top management time will be consumed? Are there other high-potential initiatives that will receive less attention or be slowed? 2. Are strategies well grounded? Does the M&A build upon a successful business model? Will the acquisition significantly improve the profitability or growth of the acquirer's markets? How will management use the acquisition to develop competitive advantage? Are the projected competitive advantages and corresponding financial improvements realistic relative to competitor performance? 3. Is the integration plan well designed? Does clarity exist around the ``high-value opportunities'' (HVOs) that management should pursue? Is there sufficient specificity around what needs to be done to capture
the HVOs? Does clear management accountability exist for delivering the HVOs? 4. Are top managers establishing a common management model to drive long-term success? Do the two management teams agree on the definition of success? Is there agreement on the best metric(s) for measuring performance? Is there a process for agreeing and resolving the high-value opportunities in the future? M&A research studies show a dismal track record for most deals over the last two decades, with the bottom line being that a huge amount of shareholder value has been destroyed through M& A activity (Armour, 2002). According to Eric Armour, a Board of Directors can improve their contribution by doing the following: Hold high standards for value creation (does the size of the prize exceed the investment?) Raise the bar to ensure that the opportunity offers sufficient reward potential. An innovative way to think about the appropriate return on a merger or acquisition is to set a goal of doubling the value of the business every four to five years. Test the strategies and benefits. Does the deal improve either the market economics (market profitability, size, or growth) or competitive position (relative differentiation or relative cost) of the business units? Probing the linkage between strategic position and financial performance can help to test whether a deal truly has the potential to create value. Compelling arguments can be made in support of M&A deals that fill in market gaps, accelerate growth in critical areas, or enhance the business model. In contrast, using an acquisition to fix an enterprise's business model often leads to value destruction.
22 M I M A 2oo6
Ensure that the integration team's focus is on clearly defined and communicated high value opportunities (HVOs). Deals that delay integration for 3-6 months will often eliminate more than half of the value creation potential. Avoid this by focusing precious management time not on operational integration issues but rather on the 8-10 highest value opportunities. Ensure that a common management model is part of the integration efforts. A ``merger of minds'' includes: a clear definition of what constitutes ``success'', agreement upon performance evaluation and the high value opportunities. Peter Howson, in his turn, in his work called Due Diligence: The Critical Stage in Acquistions and Mergers, lists a few checkpoint questions to be considered prior, during and after the acquisition. They are quite extensive, therefore the most relevant have been chosen for the construction of the questionnaire to the management. A full list of questions can be found in the Appendix part.
2.5 Alternative Growth Opportunities

Fred Weston, in his book Mergers and Acquisitions (2001) analyzes how different forms of external relationships with other companies can contribute to a companys growth. Some of them could be interesting for Vishay, as an alternative to M&A growth strategy. There are 7 major types of growth strategies: 1. Internal base or core growth. Internal growth and external growth through M&A activities are not mutually exclusive. Indeed, M&A are likely to have the highest returns if they are built on successful existing operations. An advantage of internal growth is that it avoids the problems of mergers where combining different cultures and integrating two separate organizations can be formidable. Internal growth can be
achieved through development of new products, use and rationalization of plant capacity, the leveraging of a highly skilled marketing and sales force, minor augmentation of logistics, etc. 2. Joint ventures. The participants in a joint venture continue as separate firms, but create a new corporation, partnership, or other business form. Joint ventures are limited in scope and duration. Several objectives may be achieved by a joint venture, i.e. an opportunity to share risks, technologies and managerial skills, reduction of investment costs, knowledge broadening, improvement of cooperation on an international level, allowing to by-pass certain trade barriers (especially when acquisitions are not allowed by the government of a foreign country) etc. 3. Alliances and partnerships. Alliances are less formal than joint ventures. A new entity need not be created. A formal contract may not be written. The sizes of participants may be highly unequal. Partner firms pool resources, expertise, and ideas so that the partners will have a continuing need for one another. Evolving relationships require adaptability and change over time. The alliance may involve multiple partners. Since the relationship is less legalistic, mutual trust is required. The speed of change in a relationship may be rapid. Firms may modify and move to other alliances as attractive possibilities emerge. Some creative people do not wish to be in the environment of large firms. But large firms may increase their access to creative people through alliances with small firms. 4. Investments. Investments may be made for several multiple reasons. One is to receive high returns from companies with high growth opportunities. A 2nd reason may be to learn more about a potentially interesting new product to market opportunity. A 3rd possibility is that the investment may enable the progress of the receiving firm. 5. Exclusive agreements. Each company benefits from the strength and specialized assets of the other. As a result, some business activities can
be performed at lower costs. Since a contract agreement is used, a more formal alliance is established. This kind of growth opportunity usually involves rights for manufacturing or marketing. 6. Licensing. It means granting the know-how rights and sometimes the physical equipment required to produce specified products in return for a royalty fee arrangement. The advantage of licensing to the licensor is that the royalties represent a high return on a relatively small investment. It helps enter into newer markets quicker and build broader market & brand recognition as well as acceptance. 7. Franchising. Franchise agreements are contracts between the
franchisor (parent) and the franchisee that grant the rights to use the parents name, brand, reputation, and business model at a specified location within a designated market area. Franchising is widely used in activities such as restaurants, motels and hotels, automobile dealerships, tax services, travel agents, pest control services, and weight control.
2.6 Structuring the deal

Deal structuring for an acquisition or a merger involves the choice of accounting method, taxability, methods of payment and the use of managerial skills in designing the terms of a transaction (Weston, 2001). Clearly what the buyers and sellers actually receive from a deal is defined by these factors, so lets take a closer look at them. Accounting method. The only method for accounting
permitted today by the Financial Accounting Standards Board (FASB) is the purchase method. It requires that actual transaction prices be reflected in the financial statements of the combined firm. In purchase accounting the excess of the market value of the consideration paid over the book value of target equity is assigned first to depreciable assets and the remainder to goodwill. The goodwill created is required to be written off over a period no longer than 40 years.
Taxes & payment methods. If the merger or tender offer involves exchanging the stock of one company for the stock of the other, it is a non-taxable transaction. If cash or debt is used, it is a taxable transaction. Practically, when it comes to paying less tax, third-party acquisitions are wide-spread. The parent company creates a shell subsidiary. This shell issues stock, which is all purchased by the parent company. The target for acquisition, is then bought with stock of the parent held by its subsidiary. In this case the parent company acquires control of the target through the subsidiary without taking responsibilities for the known as well as unknown liabilities of the target. In taxable acquisitions, to reduce tax, the acquiring firm may assign the excess of purchase price over the book value of equity acquired to depreciable assets, as described under purchase accounting.
2.7 Cultural challenges in M&A

Corporate culture, as stated by Fred Weston (M&A, 2001) is defined by an organizations values, traditions, norms, beliefs, and behaviour patterns. Corporate culture can be represented in a formal manner as organizational values and expectations. It also is expressed in informal relationships and networks. Either way, it can be defined as all kinds of behaviour which are appreciated and rewarded by the organization. A companys corporate culture has to be defined, promoted and managed effectively before it can engage in mergers and acquisitions. If a company cant deal with its own problems, combining two or more, would only create even more difficulties. Here are a few things suggested by Weston that should probably be reviewed before considering M&A as a way of expanding business: Consistency of formal statements of values Kinds of actions and behaviour that are to be rewarded
26 M I M A 2oo6
Employee training program for individual development Recognition of contributions to organizational effectiveness Planning to recognize cultural factors of acquired businesses Vision of a company as a system of interdependent processes Due diligence must include coverage of cultural factors Culture should be considered at the earliest planning sessions
Cultural differences are often one of the main causes why M&A fail or lose their potential value. The worst thing is to pretend the problem doesnt exist and say, just because it sounds good, something like you often hear at the press-conferences where CEOs talk about their plans for the future: we are stronger together. Not necessarily. Being stronger means a lot of effort on both sides, of the acquiring and the acquired company. Possible solutions for cultural issues maybe take various forms. One way is to admit and respect the differences. Another practise is to exchange executives of the companies that have been brought together. Ultimately, the cultures should probably move towards similarity, by means of human resource management.
27 M I M A 2oo6
3. METHODOLOGY
Figure 3.1 Method CONCEPT DEVELOPMENT choice of topic, theory selection
DATA COLLECTION primary (interviews, internal info access) & secondary (online databases ,internet, library) sources
ANALYSIS gaining deeper understanding of the companys M&A process, plan for increasing chances of its success, recommendations & suggestions
In this section the information gathering process, choice of topic, target audience and theory application will be discussed. To fulfil the purpose of this thesis (to, first, describe the current experience of Vishay when it comes to acquisitions - in order to understand what kind of companies Vishay is interested in, and what the general company values and strategies in this respect are at present - and, second, to define according to the chosen theoretical framework how the planning process and the selection of right acquisition candidates for Vishay should be conducted, and once a target is selected, what the best post-acquisition priorities and behaviour should be) different methods have been used for collecting information and forming the conceptual framework. The developed research model is supposed to structurally analyze the problem statement. Some issues and additional questions arised in the process of analysis, therefore the method was kept updated throughout the whole process of writing the thesis. There is also a number of possible problems
which could occur, and those are potentially delimiting to the breadth of the research. They might be caused, e.g. by privacy reasons (unwillingness of the employees to share certain information, mention their names?), lack of cooperation etc. In that case, all the delimitations are stated in an appropriate section of the thesis.
3.1 Choice of topic

The choice of topic for this master thesis was made partly due to the personal contact from Vishay Intertechnology Bjrn Hogstrand, the companys sales manager in Northern Europe, who has been a loyal employee for over 10 years. He provided an opportunity to contact other people in the company, directly connected to the acquisition process. Bjrn also gave an access to a lot of company-related information, such as Vishay presentations, reports, brochures, press releases, annual reports, a book by its founder Felix Zandman, called The Last Journey etc. Bjrn defined a few guidelines on what kind of management problem Vishay is worried about at the moment. The main concern, according to him, is how to make the best out of acquisitions and improve further integration process inside Vishays business network, in order to preserve profits and fruitful performance of acquired companies. Some of the recent acquisitions conducted by the company have not achieved an expected success. In fact, at the moment, Vishay is even considering to do some changes in their expansion strategy. Their long-term historical growth in revenues and net earnings has resulted in large part from their strategy of expansion through acquisitions. However, according to Bjrn, they are not sure they will identify or successfully complete transactions with suitable acquisition candidates in the future. Vishay is also not sure that acquisitions that they complete in the future will be successful. If an acquired business fails to operate as anticipated or cannot be successfully
integrated with the other businesses, the results of operations, enterprise value, market value and prospects could all be materially and adversely affected. According to Vishay Annual Report (2005) to remain competitive, particularly when business conditions are difficult, they attempt to reduce the cost structure through restructuring activities. This includes acquisition-related restructuring, where Vishay attempts to streamline the operations of companies they acquire and achieve synergies between the acquisitions and the existing businesses. It also includes restructuring existing businesses, where Vishay seeks to eliminate redundant facilities and staff positions and move operations, where possible, to jurisdictions with lower labor costs. The biggest problem with acquisitions usually arises when a big or a well known company is acquired, and even though many of the Vishays acquisitions have been successful, there is always room for improvement. All this gave an idea of the problem statement for the master thesis, the results of which later will be handed in to the people who assisted in the research for comments and verification.
3.2 Information gathering

Apart from Bjrns contribution with the literature and info, for theoretical framework, main the book Mergers and Acquisitions: New Strategies for Improving the Odds of Success (Emerald Group Publishing Limited, 2002) had been used. Earlier research of the subject includes a M3 Model by John Lynch and Barbara Lind, which comes from their study called Escaping merger and acquisition madness (MCB UP Limited, 2002). It accurately describes all the steps of making acquisitions successful, both on pre and post stages. This existing model will be very helpful, when the primarily data gathered from the company (for example, by means of a questionnaire suggested by Eric Armour and during discussions with Bjrn and other company employees), as well as
secondary data coming from literature and Internet, is going to be analysed. Several supporting concepts (i.e. those of Fred Weston, Eric Armour, Peter Howson etc.), academic articles and websites that have been looked through, which are all mentioned in the reference section, provide addition material for the theoretical part. Information from the company (primary data) was collected during personal interviews, e-mail correspondence and phone conversations. The questions are mainly based on the concepts from the theoretical framework by Armour and Howson. They both constructed some sort of check-lists for the acquiring companies which pinpoint the most important aspects that should be taken into consideration in the process of an acquisition. People, selected for the interview, are those that are familiar with the acquisition process at Vishay. However, due to privacy reasons, their names and exact positions in the company will remain undisclosed. They are all from the European office of Vishay situated in Holland, therefore the contact with these people proved to be impossible in person, as the thesis writing was to take place in Sweden. In this regard preference has been given to conducting the interviews via email, phone and MSN. Six interviews were undertaken with the Vishay senior and middle management employees. Participation was voluntary, and, and as mentioned above, respondents were promised anonymity. In practice this involved ensuring that comments in feedback could not be attributed to any one individual. Length of employment ranged from ten months to ten years, and at the time of the interviews respondents had occupied their roles for between five months and six years. Each individual interview began with a statement that the questionnaire is more of a thin red line designed to guide the answer, which could be presented in a form of an essay with personal opinions and concerns on the matter, or, if its been discussed during a personal/phone interview,
a person was free to share whatever information is appropriate to mention according to his point of view. In the latter case unprejudiced notes have been taken to summarize the answers. Some information has been sent via email clarifying a few questions, for instance regarding investments, Vishay view on acquisitions and debt increase, and it is therefore hard to say if these are the employees own words or general facts provided in certain company documents. Other sources for primary data include an access to the Vishays corporate server, which contains a number of documents and publications related to the company, as well as an ability to download several files connected to the problem statement from a network in Bjrns office. Questions to the management are based both on the questionnaire by Eric Armour and Peter Howsons acquisition checklists. For literature search in general (secondary data), a number of databases has been used: ABI/Inform Global database, Elin@Mlardalen, MarketLine business information centre, Ebrary, as well as Google Scholar search engine to find any other relevant and up-to-date information. And even though Internet contains a lot of relevant material, some books and articles have been borrowed or copied from the Eskilstuna Stadsbibliotek. The keywords entered in the search fields included such words and phrases as: M&As, acquisition models, passive component industry, integration strategy, Vishay Intertechnology, wireless sector, successful acquisitions, names of the authors whose theories are used in this project etc.
3.3 Theory selection & analysis process

Theoretical framework consists of an overview of what is an acquisition and its process and 5 main parts: Merger management model (M3),
Integration,
Questionnaire,
Cultural
challenges,
Alternative
growth
opportunities. The search for relevant theories from the beginning was directed at looking for an already developed model of an acquisition process, both when it comes to pre and post acquisition stages. After a careful research of the subject, the merger management model (M3), together with the Due Diligence concept presented by Peter Howson, seemed to be most appropriate. Even though they are very good, they do not contain all the necessary information, so in order to fulfil the purpose of this study both of them need to be complemented by other sources (e.g. more suggestions on the integration process). This helps avoid biased and narrow analysis. Figure 3.3.1 Theoretical Framework & Empirical Findings M3 ANALYSIS basic research model VISHAY COMPANY INFO
ADDITIONAL THEORIES complementary information to M3, questionnaire construction INTERVIEW SUMMARY
RECOMMENDATIONS alternative growth strategies, creation , cultural challenges in the acquisition of foreign companies, other COMPANY RISKS & CONCERNS
Using the M3 model is helpful in understanding the full implications of the acquisition and in suggesting prescriptive behaviour for
assuring success. It concentrates on different types of acquisitions and steps needed to be taken at all stages of the process. The analysis will therefore be focused on clearing out which type of acquisitions is more appropriate for Vishay, based on their company values and aims for the future. After that, a description of how the whole process has to be organized is suggested. The sequence of the analysis is defined by the Acquisition Process figure (p. 9), as the use of only M3 model seems not enough. These two are combined together and complemented by most important parts of Peter Howsons due diligence approach and Fred Westons deal structure will be mentioned in the planning stage. Critical integration issues, developed by famous consulting groups, specializing in the acquisition business, are a good addition to the M3 proposition. By means of putting together the findings taken from the interview and concepts described in the theoretical framework, which were insufficient if used separately from one another, a plan for the construction of the acquisition process for Vishay is suggested. Questions to the company, which are vital in order to be able to collect the primary data for analysis, are created in an open manner, meaning that a person answering them is free to state his own opinion on the subject. The questions themselves are based on the checkpoints selected by Eric Armour and Peter Howson. Findings chapter contains interview summaries, while appendix a list of questions asked. Alternative growth opportunities were discussed with the management as they are already considering another expansion strategy than the one by means of acquisitions. This part is mentioned in suggestions and recommendations. Cultural challenges are an additional important factor when it comes to acquisitions conducted by Vishay (and it is one of the major risks connected with international acquisitions failing to understand cultural differences), since they are a big multinational company and lots of acquired businesses have a foreign culture. Judging
by the results of the interview, some additional recommendations are made, as the one concerning the creation of the acquisition department. So, ultimately, an attempt is made to find out about the current acquisition program (experience, organization, concerns etc.) that Vishay has and at the same time create a summarized plan (based on company values and anticipated risks) on how to achieve more success in this direction.
3.4 Target audience

Hopefully, when complete, this project is going to be useful for Vishay management in particular (Vishay is interested in the results of the research), as well as for other companies and individuals (i.e. students, conducting a research on a similar topic), who would like to learn more about successful mergers and acquisitions.
3.5 Timetable
Most research stages have been strictly defined by the course schedule (seminar, presentation deadlines, etc.), which turned out to be very disciplinary and, consequently, worth the effort. Heres a rough timetable of this papers progress: Table 3.5.1 Deadlines
Process Literature search + Problem Topic presentation Literature search + Theory PM1 Literature search + Method PM2 Primary & Secondary data collection/analysis PM3 Further analysis and corrections Final Upload Thesis presentation
Deadline 060208-060307 060308 060309-060330 060331 060408-060422 060423 060424-060503 060512 060513-060531 060531 060607
4. EMPIRICAL FINDINGS
This chapter contains certain facts which are useful for the future analysis and a broader understanding of Vishay company values, as well as a summary of an interview with the Vishay employees, responsible for the acquision process.
4.1 Vishay Intertechnology Company Profile 4.1.1 History

In the 1950s, as the electronics industry began its accelerated growth, Dr. Felix Zandman, a physicist, and current Chairman and CEO of Vishay, was issued patents for his PhotoStress coatings and instruments. These devices are used to reveal and measure the distribution of stresses in structures under live load conditions. Dr. Zandmans research in this area led him to develop Bulk Metal foil resistors ultra-precise, ultra-stable resistors that provide performance far beyond any other resistor available In 1962, Dr. Zandman, with the financial help of the late Alfred P. Slaner, founded Vishay to develop and manufacture Bulk Metal foil resistors. Concurrently, J.E. Starr, a colleague of Dr. Zandman, developed foil resistance strain gages, which also became a part of Vishay. The Company was named after Dr. Zandmans and Mr. Slaners ancestral village in Lithuania, in memory of family members who perished in the Holocaust. Throughout the 60s and 70s, Vishay established itself as a technical and market leader in PhotoStress products, strain gages, and foil resistors. By the early 80s, Vishay was positioned to grow significantly. Because the markets for resistance strain gages and ultra-precise resistors were relatively small, the Company moved to expand into highvolume resistors and eventually also capacitors, inductors, and discrete
semiconductors. Such components are used by the billions every year, in every sector of the electronics industry. Vishays aggressive acquisition strategy and a continuing commitment to product innovation have enabled the Company to become a global industry leader (Zandman, Company Presentation, 2005).
4.1.2 Present
Figure 4.1.2.1 Corporate Strategies
Source: Felix Zandman Company Presentation, 2005
Vishay, a Fortune 1,000 Company with an annual sales rate of $2.5 billion, is the largest U.S. and European manufacturer of passive electronic components (resistors, capacitors, inductors) and a major producer of discrete semiconductors (diodes, optoelectronics, transistors), IrDCs (infrared communication devices), and power and analog switching integrated circuits. The Companys components can be found in products manufactured in a broad range of industries worldwide. With headquarters in Malvern, Pennsylvania, Vishay employs over 20,000 people in 60 plants in the U.S., Mexico, Germany, Austria, the United Kingdom, France, Portugal, the Czech Republic, Hungary, Israel, Taiwan, China and the Philippines (Zandman, Company Presentation, 2005).
37 M I M A 2oo6
4.2 Vishay Customers & Marketing 1

Figure 4.2.1
Vishay sells its products to original equipment manufacturers (OEMs), electronic manufacturing services (EMS) companies, which manufacture for OEMs on an outsourcing basis, and independent distributors that maintain large inventories of electronic components for resale to OEMs. During 2005, approximately 48% of Vishay sales were to distributors, approximately 44% of the sales were to OEMs, and approximately 8% of the sales were to EMS companies. To better serve its customers, Vishay maintains production facilities in regions where they market the bulk of the products. They work with the customers so that their products are incorporated into the design of electronic equipment at the research and prototype stages. Vishay also employs a staff of application and field engineers to assist the customers, independent manufacturers representatives and distributors in solving technical problems and developing products to meet specific needs.
Information is based on Vishays Form K10 - May 2005 International Marketing 38 M I M A 2oo6
Vishay sales organizations are regionally based. The aim of the sales organizations is to unify the activities of all the divisions and subsidiaries, provide efficiencies by eliminating duplication of functions, and bring greater value to end customers by allowing them to deal with one entity for their semiconductor and passive electronic component purchasing needs. Vishay markets its products in different geographic areas as follows: North America: Sales are made by the North American sales force, sales representative organizations and distributors. Sales representatives are compensated by commissions. Regional sales directors employed by Vishay coordinate these representatives and the North American sales force. Their North American sales headquarters are located in Shelton, Connecticut. Regional sales offices are located in or near Chicago, Illinois; Tampa, Florida; Irving, Texas; Santa Clara, California; Orange County, California; Hauppauge, New York; Juarez, Mexico; and Guadalajara, Mexico. South America: Sales are made by the South American sales force, sales representative organizations and distributors. Sales representatives are compensated by commissions. Regional sales directors employed by Vishay coordinate these representatives and the South American sales force. Vishays South American sales office is located in Campinas, Brazil. Europe: Sales of the products in Europe are made by the European sales force, sales representative organizations and distributors. Bjrn Hogstrand is part of this team. Sales representatives are compensated by commissions. Regional sales directors employed by Vishay coordinate these representatives and the European sales force. The European headquarters are in Selb, Germany. Regional sales offices are in Heilbronn, Heide, and Selb, Germany; Sunderland and Bracknell, United Kingdom; Paris, Lyon, and Nice, France; Madrid, Spain; Stockholm, Sweden; Helsinki, Finland; Milan, Italy; Istanbul, Turkey; Warsaw,
Poland; Moscow, Russia; Budapest, Hungary; Voecklabruck, Austria; and Eindhoven, the Netherlands. Asia: Sales are made in Hong Kong, Korea, the Republic of China (Taiwan), the Peoples Republic of China and in Southeast Asia by the Asia sales force, sales representative organizations and distributors. The Asian sales headquarters are in Singapore. Regional sales offices are located in Singapore; Taipei, Taiwan; Beijing, Shanghai, Shenzhen and Hong Kong, China; Tokyo and Osaka, Japan; Seoul and Gumi, Korea; New Delhi, Pune and Bangalore, India; Penang, Malaysia; and Bangkok, Thailand. Sales in the rest of the world are made through sales representatives, stocking representatives and distributors. Vishay has also established a Strategic Global Account program, which aligns each of the top customers with an identified Strategic Global Account manager, enabling their diverse product families to have one face to the customer. Each Strategic Global Account manager coordinates sales, marketing, and contract administration for all Vishay products, providing one-stop access to one of the broadest selections of discrete electronic components available directly from a manufacturing source anywhere in the world. In addition, Vishay has launched an initiative to better meet the needs of their customers for technical and applications support. As a project started two years ago, Vishays Business Development group now puts a team of dedicated Field Application Engineers (FAEs) in the field for the exclusive support of their customers engineering needs. Organized by market segment, the Business Development FAEs bring specific knowledge of component applications in their areas of expertise in the automotive, telecommunications, computer, consumer/entertainment, industrial, peripherals, and digital consumer market segments. With the ultimate goal of a Vishay design-in the process by which their customers specify a Vishay component in their products this exciting new program offers the customers superior access to Vishay technologies
while at the same time increasing design wins, and ultimately sales, for Vishay. Most importantly, the process is closely monitored via a proprietary database developed by the Vishay Business Development group. This database captures very specific design activity and allows for real-time measurement of new business potential for the management team. Vishays top 30 customers have been quite stable despite not having long-term commitments to purchase their products. With selected customers, Vishay have signed two to three year contracts for specific products. Sales to the top 30 customers comprise approximately 60% of the total sales. Figure 4.2.2 Global Revenues
During 2005, approximately 26% of Vishays net sales were attributable to customers in the Americas, approximately 37% were attributable to customers in Europe, and approximately 37% were attributable to customers in Asia. During 2005, the share of net sales by end-use market was as follows: Industrial, 34%; Computer, 20%; Automotive, 17%; Consumer Products, 12%; Telecommunications, 11%; Aerospace and Military, 4%; Medical, 2%.
41 M I M A 2oo6
4.3 Competition
Vishay
faces strong competition in various product lines from both
domestic and foreign manufacturers that produce products using technologies similar to theirs. Primary competitors by product type include: Discrete Devices: Fairchild Semiconductor, International Rectifier, Infineon, ON Semiconductor, Philips, Rohm, STMicroelectronics, Toshiba. Integrated Circuits: Fairchild Semiconductor, International Rectifier, Infineon, Maxim, ON Semiconductor, STMicroelectronics, Texas Instruments. Optoelectronics: Avago (formerly Agilent Semiconductor Products Division), Fairchild Semiconductor, Sharp, Toshiba. Resistors and Inductors: EPCOS, KOA, Rohm, Yageo. Capacitors: AVX, EPCOS, KEMET, Murata, TDK, Yageo. Measurements Group: various niche competitors. There are many other companies that produce products in the markets in which Vishay competes.
4.4 Major acquisitions conducted by Vishay
Since 1985, Vishay pursued a business strategy that is principally based on expanding within the electronic components industry, primarily through the acquisition of other manufacturers of electronic components that have established positions in major markets, reputations for product quality and reliability, and product lines with which Vishay has substantial marketing and technical expertise.
Below is an overview of their major strategic acquisitions: Siliconix and Telefunken. Vishay acquired an 80.4% interest in Siliconix incorporated in March 1998 from Daimler-Benz A.G. They subsequently
2, 3
Information is based on a personal interviews & company material, retrieved May 2006 International Marketing 42 M I M A 2oo6
acquired the minority interest in Siliconix in May 2005, making Siliconix a wholly-owned subsidiary of Vishay. Siliconix, based in Santa Clara, California, designs, markets and manufactures power and analog semiconductor products, such as metal-oxide-semiconductor field-effect transistors (MOSFETs), junction field-effect transistors (JFETs), bipolar switches, signal processing ICs and power ICs for computers, cell phones, fixed communications networks, automobiles and other electronic systems. Siliconix has manufacturing facilities in Santa Clara, California and Itzehoe, Germany, maintains assembly and testing facilities in the Republic of China (Taiwan), is party to a joint venture in Shanghai, the Peoples Republic of China and has subcontractors in the Philippines, the Peoples Republic of China, and the United States. Figure 4.5.1 Acquisition History
Concurrent with the 1998 transaction in which Vishay acquired the 80.4% interest in Siliconix, they also acquired from Daimler-Benz the semiconductor business unit of TEMIC Telefunken Microelectronic GmbH headquartered in Heilbronn, Germany, but promptly disposed of its integrated circuits division. This business, renamed Vishay Semiconductor GmbH, offers a product line of diodes, RF transistors,
optoelectronic semiconductors, infrared data transceivers (IRDCs) and light-emitting diodes (LEDs).
Electro-Films, Cera-Mite and Spectrol. In May 2000, Vishay acquired Electro-Films, Inc., a manufacturer of thin film components and networks on ceramic and silicon. In August 2000, they acquired CeraMite Corporation, a worldwide supplier of ceramic capacitors used in power supplies, electronic lighting and other applications, and thermistors (temperature-sensitive resistors) used in refrigeration, HVAC, telecommunications and other electronic applications. Separately, in August 2000, Vishay acquired Spectrol, a manufacturer of sensing potentiometers used primarily in the automotive industry and trimmer potentiometers used in various kinds of electronic circuitry.
Tansitor and Mallory. In January 2001, Vishay acquired Tansitor, a leading manufacturer of wet tantalum electrolytic capacitors and miniature conformal coated solid tantalum capacitors. These components have power management applications in the military, aerospace and medical industries. In November 2001, they acquired Yosemite Investment, Inc. d/b/a the North American Capacitor Company, known as Mallory, a manufacturer and distributor of wet tantalum capacitors and other products. As a result of these two acquisitions, Vishay has become the number one manufacturer of wet tantalum capacitors worldwide.
Infineon infrared components business. In July 2001, Vishay acquired the infrared components business of Infineon A.G. As a result, they added several new device types to their optoelectronics portfolio.
General Semiconductor. On November 2, 2001, VIshay completed the acquisition of General Semiconductor, Inc., a leader in the design, manufacture management
44 M I M A 2oo6
and
distribution General
of
semiconductors
for
the
power and
market.
Semiconductor
manufactures
distributes a broad range of power management products, including rectifiers, transient voltage suppressors, small-signal transistors, diodes, MOSFETs and analog ICs. As a result of this acquisition, Vishay became the number one manufacturer of diodes and rectifiers worldwide.
Measurements Group
acquisitions. In
2002,
Vishay
made
several
acquisitions as part of their Measurements Groups strategy of vertical market integration. In January 2002, the Company acquired the transducer and strain gage business of Sensortronics, Inc. In June 2002, they acquired Tedea-Huntleigh BV, a leading manufacturer of load cells used in digital scales by the weighing industry. In July 2002, Vishay purchased the BLH and Nobel businesses from Thermo Electron Corporation. BLH and Nobel are engaged in the production and sale of load cell based process weighing systems, weighing and batching instruments, web tension instruments, weighing scales, servo control systems, and components relating to load cells, including strain gages, foil gages and transducers. In October 2002, Celtron Technologies was also acquired, another company engaged in the production and sale of load cells used in digital scales for the weighing industry. As a result of these acquisitions, the product portfolio of the Measurements Group has been expanded and Vishay is now a world leader in stress analysis products and transducers used in the weighing industry (load cells). Figure 4.5.2 Participation in Multiple-End Markets
45 M I M A 2oo6
BCcomponents. In December 2002, Vishay completed the acquisition of BCcomponents Holdings B.V., a leading manufacturer of passive components with operations in Europe, India and the Peoples Republic of China. The product lines of BCcomponents include linear and nonlinear resistors; ceramic, film and aluminum electrolytic capacitors; and trimming potentiometers. This major acquisition has significantly enhanced Companys global market position in passive components.
Aeroflex thin film interconnect business. In September 2004, Vishay acquired all of the outstanding shares of Aeroflex Pearl River Inc. (renamed Vishay MIC Technology, Inc.), the former thin film interconnect subsidiary of Aeroflex, Incorporated. This business has significant synergies with their existing Electro-Films business, and has been fully integrated into their Electro-Films production facility. SI Technologies. In April 2005, Vishay completed the acquisition of SI Technologies, Inc., a designer, manufacturer, and marketer of highperformance industrial sensors and controls, weighing and automotive systems, and related products. Alpha Electronics K.K. In November 2005, Vishay acquired Alpha Electronics K.K., a Japanese manufacturer of foil resistors.
4.5 Interview Summary View on Acquisition Policy

< Interview questions and more information on how they were conducted can be found in the methodology and appendix parts of this thesis > For over 15 years Vishay have successfully implemented a two step plan of growth through acquisitions followed by periods of integration, cost reductions and synergy implementation. Relying on the strength of their balance sheet, Vishay continues to explore opportunities to acquire electronic component manufacturers that have established positions in
major markets, reputations for product quality and reliability, and product lines with which they have substantial marketing and technical similarities. Vishay is interested in both acquiring market share and new
technologies. They seek to explore opportunities with privately held developers of electronic components, or start-ups, whether through acquisition, alliances. They made first such investment in August 2004, when they acquired substantially all of the assets of RFWaves, Ltd., an integrated circuit design house located in Israel. Vishay made an additional investment in October 2005, when they acquired substantially all of the assets of CyOptics Israel, Ltd., the Israeli subsidiary of Cyoptics, Inc., a manufacturer of infrared devices. They initially plan to use the facility acquired from CyOptics principally for research and development purposes. The company, however, still has no acquisition department, and perhaps this is a bit of a shortcoming, since just a few people in the company are involved in all the issues connected with M&As. There is a certain model that Vishay is using. It allows the Company to focus primarily on the targets revenues and customer base, the strategic fit of the targets product line with the Companys existing product offerings, opportunities for cost cutting and integration with the Companys existing operations and production and other post-acquisition synergies, rather than on the targets assets, such as its property, equipment and inventory. As a result, the fair value of the acquired assets may correspond to a relatively smaller portion of the acquisition price, with the Company recording a substantial amount of goodwill related to the acquisition. These principles applied in particular to acquisitions in the Passive Components segment during 2002. The
investment
in
non-controlling
interests,
or
strategic
passive electronics business is a mature industry that, in general, has a slow organic growth rate linked to general macroeconomic trends. Restructuring, severance costs, employee termination and similar integration costs Vishay incurs in connection with their acquisition activities. These amounts are included in the costs of their acquisitions and do not affect earnings or losses on their statement of operations.
Vishay does use professional consulting and auditing companies help to organize, evaluate and structurize many business operations, not only the acquisition process. Ernst & Young is one of the most famous ones that they work with.
Vishay is presently evaluating some smaller acquisition targets to enhance new product development, round out their product lines, or grow some high margin niche market businesses. Vishay are also continuing the exploration of opportunities to acquire a larger target in order to gain market share and more effectively penetrate many geographic markets. Many of the acquired companies have been successfully combined with the businesses of Vishay, even though not all of them. The integration of their two largest acquisitions of this decade, General Semiconductor in 2001 and BCcomponents in 2002 have gone surprisingly well, even better than expected. In each case they have achieved, or they are well on the way to achieving, anticipated synergies and annual cost savings. Recently Vishay have also acquired Infineons infrared components business. The Infineon infrared components business acquisition cost was $120 million, and the General Semiconductor acquisition cost was approximately $500 million. Additional product lines are usually added by acquisitions. Each time, however, they have to lay off some people and close some plants. Vishay have benefited from that by implementing some restructuring plans to make the company leaner and stronger. Vishay strategy attempts to
streamline operations of companies they acquire and achieve synergies between the acquisitions and the existing businesses. It includes restructuring the existing businesses, where they seek to eliminate redundant facilities and staff positions and move operations where possible to jurisdictions with lower labour costs. What has already been done in direction of improvement of Vishay acquisition activity in recent years is that they have taken steps to assure their competitiveness, enhance their operating efficiency and strengthen their liquidity. In this regard, Vishay:
(i)
closed
or
consolidated
several
manufacturing
facilities
and
administrative offices; (ii) reduced the headcount, particularly in high-labor-cost countries; and (iii) integrated their acquisitions within their existing management and operational infrastructure. But there are still a lot risky points which make acquisitions perhaps not the most safe way to expansion and growth. Those force the Company to consider other possible business strategies. RISKS & CONCERNS: General. Vishays long-term historical growth in revenues and net earnings has resulted in large part from their strategy of expansion through acquisitions. However, they are not sure that they will identify or successfully complete transactions with suitable acquisition candidates in the future. Vishay also cannot be certain that acquisitions that they complete in the future will be successful. If an acquired business fails to operate as anticipated or cannot be successfully integrated with their other businesses, results of operations, enterprise value, market value and prospects could all be materially and adversely affected. Integration. In the event of an acquisition, Vishay usually tries to adapt
the company to its own business strategy. This requires a lot of changes in final organizational structures. The following is a list of actions, concerns, and issues that create undue risk of failure: 1. Replacement of management teams fails to recognize or value targets underlying business strengths; 2. Failure to involve future target firm leader as part of the acquisition team; 3. Failure to make the target leader solicit solid commitment to success; 4. In international acquisitions, failure to distinguish work/culture differences and motivational drivers; 5. Failure to continuously review progress on milestones set Employment transfer (the risks associated with transferring employees from one employer to another). Most mergers and acquisitions are structured in a manner that ensures employees will receive the same or substantially similar pension, employment benefit and post-retirement benefit coverage after the transaction as before. So, the main employment transfer risk faced by Vishay to a transaction is avoiding wrongful dismissal while at the same time transferring employees in bulk without advance notice. This also means risks of getting sued by employees or former employees for damages arising from pension and benefit plan changes made in the course of a transaction, or by another party to the transaction over errors or misstatements in the transaction agreements. Corporate climate. Corporate culture, managerial style, processes
performance, information systems and other factors of accomplished acquisition are often contradictory or very different to Vishay. This sometimes can make the new clients that Vishay wanted to gain in the acquisition leave. Investment in new technologies. Vishay believes that investment in new technologies that are related to their core businesses is important to position them for the future. There are numerous risks in investments of this nature including the limited operating history of such start-up entities that are being acquired, their need for capital and their limited or absence of production experience, as well as the risk that their technologies may prove ineffective or fail to gain acceptance in the
marketplace. There can be no assurance, therefore, that the investments in start-up enterprises will prove successful. Debt increase. The companys outstanding debt increased from
approximately $141 million at the end of 2000 to approximately $752 million at the end of 2005, primarily due to the acquisition activity. While the debt levels decreased in 2004 and remained essentially flat in 2005, the marketplace could react negatively to the current debt levels which in turn could affect the share price and also make it more difficult for Vishay to obtain financing in the future. Financing. If Vishay is to undertake a substantial acquisition for cash, the acquisition would likely need to be financed in part through bank borrowings or the issuance of public or private debt. This acquisition financing would likely decrease the ratio of earnings to fixed charges and adversely affect other leverage criteria. Under the existing credit facility, Vishay is required to obtain the lenders consent for certain additional debt financing and to comply with other covenants including the application of specific financial ratios. Vishay cannot be sure that the necessary acquisition financing would be available to them on acceptable terms if and when required. If they were to undertake an acquisition for equity, the acquisition may have a negative effect on the interests of the holders of their common stock. Environmental. Vishay adopted an Environmental Health and Safety Corporate Policy that commits them to achieve and maintain compliance with applicable environmental laws. Certain obligations as a potentially responsible party (PRP) have arisen in connection with business acquisitions. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. With each acquisition, Vishay attempts to identify potential environmental concerns and to minimize the environmental matters they may be required to address. Vishay often unavoidably inherits certain pre-existing environmental liabilities, generally based on successor
liability doctrines. Although they have never been involved in any environmental matter that has had a negative impact on their overall operations, there can be no assurance that in connection with any past or future acquisition this may not occur in the future.
SAMPLE CAUSES OF FAILURE: - Possible mistakes or incorrect evaluations in due diligence, either made by Vishay or the target company. Even though the Company is trying to do a comprehensive risk assessment and management profile for each deal, sometimes its hard to adequately quantify all the risks. - Strategic failures. It happens that sometimes a deal can be driven by the need to increase the market share more than by sound strategic thinking. This can be caused by some very human issues: Pressures in the environment move Vishay executives not to be last in line to make an acquisition. Issues like executive ego or organization stagnation and need of financial growth are also among the questionable motives for an occasional acquisition. - Overestimation of synergies. The lack of synergies and negative impact of integrating the businesses may be overlooked. This happens because the integration process is sometimes managed poorly or is not fast enough. What happens in the first 100 days after the deal is signed is critical; it sets the mood for the integration process. - Moving too slowly allows the conflict of corporate cultures to occur. The culture that makes Vishay as a company great may be at odds with the main values of the target. It is important not to underestimate the power of culture when signing the deal, especially if its done on an international level. New understandings by the acquirers and the acquired, new relationships and new ways of working are all necessary, but not easy to achieve.
52 M I M A 2oo6
- Lack of risk management strategies. Before every deal, VIshay must prepare for multiple ``what if'' scenarios, because there is always a risk that the acquisition is not going to work. The integration plan usually incorporates back-up plans for changing conditions. But correcting such tactical errors is only the first step toward improving the business values which two companies are supposed to achieve. In the end, one of the employees of Vishay mentioned that they follow an old tradition that that completion of any deal always happens at 4 oclock in the morning, and usually at the weekend, even though all the participants struggle to avoid this! For some strange reason, many other companies follow this superstition as well, its like an unwritten law.
53 M I M A 2oo6
5. ANALYSIS
This chapter combines findings and theories in order to make recommendations on how to solve Vishays management problem, i.e.: Vishay Intertechnology would like to keep on expanding its business by means of acquiring innovative companies, mainly in the wireless sector, however some of their acquisitions have not achieved desired success. Therefore, how does this company successfully organize the pre-deal planning and post-deal integration processes of acquisitions in order to preserve profits and fruitful performance of the acquired companies? So, ultimately, this thesis part attempts to create a summarized plan (based on company values and anticipated risks) on how to achieve more success with future acquisitions for Vishay. To do that, the analysis is structured roughly according to the sequence of the acquisition process, mentioned in the Figure 2.1.1 of the theoretical framework, which suggests 4 stages for the train of thought when organizing an acquisition. Those would be: 1. Planning; 2. Due Diligence or assessment of risks; 3. Signing the deal; 4. Integration. In order to proceed with the analysis, it is important to find out what type of acquisitions Vishay should focus on, according to its company values and prospects for the future.
5.1 Acquisition type definition

According to the interview summary, Vishay continues to explore opportunities to acquire electronic component manufacturers that have established positions in major markets, reputations for product quality and reliability, and product lines with which they have substantial marketing and technical similarities. Vishay is interested in both acquiring market share and new technologies. They seek to
explore opportunities with privately held developers of electronic components, or start-ups, whether through acquisition, investment in non-controlling interests, or strategic alliances. Based on this description, it is easy to apply Lynch & Linds M3 Model to Vishay, which starts with defining what type of acquisitions the company is mostly interested in. To do that, the model suggests using a disparity/goodwill comparison. Disparity and goodwill need to be examined in order to assess accurately the degree of similarity or difference. This will help to perform an in depth due diligence and facilitate the integration process. Disparity between businesses is a degree to which the basic business models of the companies are different or similar. The targets and Vishay seem to have low disparity, and such businesses with similar products, markets and channels of distribution are much more likely to be successful. But caution needs to be exercised in making assumptions about similarity of businesses. For example, even though two companies might appear similar on the surface, there could be profound differences. The markets they serve, their particular competencies, the relationships with important customers can make one very different from another. As mention in the theory chapter, business goodwill in an acquisition is usually defined as the premium paid in excess of book value. This should be supplemented by many critical, but intangible factors which go into goodwill. These include organization culture, quality of management, the company's vivacity and the knowledge contained in the organization and its customer and marketplace relationships. Often, for example, it is the leadership of an individual or a manager that has driven the organization's success. In order to maximize the value of a transaction, the acquirer needs to recognize and find ways to maintain this portion of goodwill. For Vishay, the goodwill plays an important role, since according to
them, they are generally interested in innovative talented developers of electronic components. It would be very sad to not use their potential to the maximum. By examining disparity and goodwill through the merger management model its authors identified four basic types of acquisitions (for more details, see: theoretical framework): The plan and prosper acquisition; The stand and hold acquisition; The merge and grow acquisition; The segment or sell acquisition. Each type of an acquisition requires a different approach to making it successful. Specifically for Vishay, its possible to say that the business they usually acquire have high goodwill and low disparity. This stands for The Plan and Prosper Acquisition type. This category is one in which the industries, channels and markets are the same or similar, but the entrepreneur or existing management and sales team usually has some special expertise and a series of customer relationships that form a significant part of the value of the enterprise. Lynch & Lind suggest that merging these entities quickly without careful planning for capturing this goodwill over time will most likely cause loss of business to competitors. In this instance, careful succession planning, merging of cultures, incentives for contributory behavior are all strategies to employ. Often, earn-outs or other incentives are an effective motivational device. Again, while the businesses are similar, significant effort must be expended to identify and retain the goodwill resulting from unique customer relationships and company know-how. In conclusion, it is important to mention that even though most of
Vishays acquisitions seem to belong to The Pland and Prosper Acquisition type, it doesnt mean that some of them cant be classified as other types suggested by M3 Model. Therefore, in each case, an individual approach is crucial.
5.2 Planning
Planning is vitally important for a Plan and Prosper Acquisition, which is easy to figure out even from its title. First step in the planning process, would logically be an evaluation of the potential candidate for an acquisition. Based on the selected theory, suggested by Mercer Human Resource Consulting, Vishay should make its choice of the target, according to specific factors indicating a possibility for future integration opportunities. This is very important, since Plan and Prosper Acquisition requires that most effort is to be put into integration process, which is essential for capturing goodwill. Assessment of a candidate can be done by analysing: Cultural Fit (Buyer and Target) - Employees are like-minded, circulate in similar bureaucratic, or adaptable business environments (entrepreneurial, casual, formal); similar organizational structures,
motivation and values. In Vishays case this is not always the way it is, since many businesses that they acquire are foreign, and are situated in completely different parts of the world. To be able to decide if cultures are going to fit, a careful study of the target company and its home country is necessary. Organizational Fit (Buyer and Target) - Senior-management is likeminded; similar management reporting philosophy; structures; similar decision-making management processes; similar similar
responsibilities and autonomy levels. Vishay should take it into consideration, however it is possible only if the acquisition is not aggressive and both parties are interested in the deal, but as
history shows sometimes Vishay acquires weak business and engages in aggressive tactics, especially when it comes to small companies. In this case organizational fit requires more careful planning, setting of values and perhaps a use of professional consultants would be a good idea. Location (Target) - Target is located near an existing Buyer location, as remote locations present serious management obstacles; similar type of facility, equipment, and employee spaces. Vishay is a big multinational company, therefore it acquires companies all over the world, so the same as with the cultural fit, location of the target should be carefully considered, because acquiring businesses in unstable economies or regions might cause a lot problems in the future. Strength of Management Team (Buyer and Target) Management team will be committed to merger or acquisition; team is confident and able to navigate the new territory and rise to new and unique challenges; team is respectful of existing organizational structure and authority, team is forward looking and sees the big picture; team is capable of motivating their employees. For Vishay strength of the management team is vital, as it is one of the most significant elements of goodwill, which it is supposed to capture. Therefore motivation, mutual respect and determination to make the best out of a talented management team should be held in high priority. Employee Morale (Target) - Employees are positive and inspired; employees are driven and want an opportunity to prove their abilities; employees have not been previously bought and sold and assimilated; employees are talented and offer a broad breadth of experience. Together with the management team, employees of the acquired company, represent an important element of goodwill. Employee morale is hard to estimate prior to the conclusion of the deal, but there is always a number of valuable professionals in every business Vishay is interested in, which is partly due to the nature of the industry. Therefore Vishay should make sure to keep all the people they can benefit from having.
Organizational Readiness (Buyer) - Organization receiving the Target's product or technology is ready and positioned to receive on all levels - the management level, the personnel level, the space level, the customer and partner level, and the budget level. This point is obvious and crucial, since if Vishays debt is too high or the company is not ready to concentrate on the acquisition, it is impossible to be successful, and perhaps proceeding with the take over in such circumstances can only cause damage to the Company. Customer Satisfaction (Target) - Referenceable customers; loyal customers; few potential conflicts legally; few potential conflicts with Buyer. As mentioned in the interview, sometimes legal conflicts arise due to a so-called minority interest, where certain customers or shareholders of the target company file charges against Vishay. This is however considered normal at Vishay, as legal proceedings are a common part of their business routines. On the other hand, corporate culture, managerial style, processes performance, information systems and other aspects of the target are often contradictory or very different to Vishay. This sometimes can make the new clients that Vishay wanted to gain in the acquisition leave. Human Resources Issues (Target) - Consistent and enforced HR practices; few severance issues or non-standard employee agreements, pension liabilities, VISA issues, or foreign transfer issues; no labor disputes; availability of all HR and benefits agreements to which the Target company was a party. HR issues come hand in hand with Employee Morale and if managed efficiently, they help capture potential goodwill of the target company. Vishay needs to make sure that they will be able to provide all the employees that Vishay is determined to keep with security and motivation similar (superior) to the one they had prior to the acquisition. Financial Situation (Target) - Clean financials; organized and well-kept
books; routinely audited by a known and reputable firm; no SEC issues or investigations; competent team committed to seeing the deal through close. This point is also hard to estimate for Vishay prior to the signing of the deal, as some financial faults are hidden. A mistake here may raise the cost of an acquisition and reduce previously calculated future profits and synergies. Legal Issues (Target) - No outstanding or potential claims, labor disputes, class action suits, employment suits, product quality suits; acceptable number of commercial claims; well-organized and documented file of existing contracts and agreements with customers, suppliers, distributors, and partners; the use of standard contracts and agreements. Together with dirty finances, a dirty legal record has about the same consequences. Inability to learn everything about possible negative aspects of a targets legal history, might cause Vishay a lot of extra money and time, and reduce chances of success. After the choice has been made, the planning process should have 2 main focus areas. According to the M3 analysis, a Plan and Prosper Acquisition should focus on a strategy that with careful succession planning enables the capture of goodwill elements. These two points include a broad variety of aspects to keep in mind, which in the end are all aimed at achieving deep integration of the target company with Vishays existing business structure. Here is some of the steps which need to be taken: - Identify the high goodwill/low disparity entities and make a conscious decision to retain as much goodwill as possible. - Use financial incentives broadly to execute the merger as a gradual transition over a stated interval of time (24 months at least). The goodwill retention goal in this kind of acquisition is a delicate one and therefore needs to take place over time, in stages or stair-steps. It is
worth extra effort to retain people who embody the goodwill elements. Contracts, bonuses, earn-outs are all effective tools. - Key steps are to identify the goodwill elements and have a visible plan for retaining them. The objective is to achieve high levels of synergy over time while maintaining the value (goodwill) of the deal. For each acquisition goodwill elements are different, here is an example of what can be classified as some of them: - Management/ leadership - Customer relationships - Market knowledge and relationships - Business/ value chain integration - Organizational structure - Intellectual property - Organizational capabilities - Culture To complete the list of things which need to be thought-out carefully during the planning stage, KPMG company pin-points certain activities that might help increase chances of success. They include: - pre-deal synergy evaluation - integration project planning - due diligence - selecting management team - resolving cultural issues - communication on all levels All these stages seem to be more or less applied by Vishay, however as stated in the interview summary, the lack of synergies, their
4
Integration leader/co-leaders, Functional heads, Representation from both sides, Consulting support International Marketing 61 M I M A 2oo6
4
overestimation and negative impact of integrating the businesses may be overlooked. This happens because the integration process is sometimes managed poorly or is not fast enough. What happens in the first 100 days after the deal is signed is critical; it sets the mood for the integration process. Cultural issues, even though they are of course considered, are also hard to foresee at the planning stage, they can turn out to be difficult to predict in some cases.
5.3 Due Diligence (Risk Assessment)

As said in the theoretical framework, the purpose of due diligence is to give the buyer an assessment of the risks and benefits of the deal both as an aid to negotiation and as an aid to delivering value post-completion. Improperly calculated due diligence is mentioned in the interview as one of the causes why some of the Vishay acquisitions have failed. Even though the Company is trying to do a comprehensive risk assessment and management profile for each deal, sometimes its hard to adequately quantify all the risks. According to Howson (2003), a proper due diligence programme, should concentrate on 5 points: - the verification of assets and liabilities - the identification and quantification of risks - the protection needed against such risks which will in turn feed into the negotiations - the identification of synergy benefits (which may also feed into price negotiations) - post-acquisition planning Howson (2003) in the Figure 2.1.1 (page 7) of the theoretical framework suggests that due diligence focus differs according to corporate strategic objectives. He mentions 5 types of acquisitions in this respect: 1. The
overcapacity M&A; 2. The geographic roll-up M&A; 3. Product or market extention M&A; 4. The M&A & R&D; 5. The industry convergence M&A. Based on the interview summary with VIshay it is possible to conclude that 2 out of these types of acquisitions correspond with the Companys strategic objectives, i.e. The product or market extension M&A aimed at extension of a companys product line, market share and its international coverage (due diligence needs to focus on cultural and systems integration & strength of product relative to competition); The M&A and R&D which is using acquisitions instead of inhouse R&D to build market position quickly (due diligence is focused on intelligence and technology and retention of key people). Judging from the interview, Vishay has different areas which they consider to be risky, but the following due diligence focuses seem to be of particular importance to the Company: Commercial due diligence market share & sales growth HR due diligence retention of key personnel, corporate culture integration Environmental due diligence reduction of negative environmental impacts Technology due diligence reduction of R&D costs, increase of knowledge, know-how All of them might be a potential cause of an acquisition failure, if managed improperly. Therefore, when working on a due diligence programme, its important to concentrate particularly on these aspects and carefully construct a plan of how a newly purchased business is going to blend in with the already existing company structure.
5.4 Deal Signing

With due diligence over, next comes the stage of finalizing the details of
the deal. In general, the chosen theoretical framework suggests that deal structure should include accounting methods, taxability, methods of payment, premiums and the use of management capabilities in designing the terms of a transaction. All these aspects define what both Vishay and the company it acquires are going to get from the deal. Its essential to structure the deal correctly before signing it. Vishay should reflect the actual transaction prices in the financial statements of the combined business entity. This accounting method is called the purchase method, where the excess of the market value of the consideration paid over the book value of target equity is assigned first to depreciable assets and the remainder to goodwill. The goodwill created is required to be written off over a period no longer than 40 years. Vishay, as any other company, is naturally interested in cutting on tax payments. Therefore the acquisition should involve exchanging the stock of one company for the stock of the other, which in this case would make it a non-taxable transaction. If cash or debt are used, the taxes need to be paid. This has to be mentioned in the terms of the deal prior to signing it. Another way of tax reduction is a third-party acquisition. To do that, Vishay would need to create a shell subsidiary, which issues stock that is then purchased by the Company. The target for acquisition, is then bought with stock of the parent held by its subsidiary. By doing so Vishay can acquire control of the target through the subsidiary without taking responsibilities for any liabilities of the target. Eventually negotiations are concluded, agreement is reached and the deal is signed. Completion is the process of actually signing the sale documents. For some strange reason, there is an unwritten law in Vishay, that completion always happens at 4 oclock in the morning, and usually at the weekend.
64 M I M A 2oo6
5.5 Integration
The integration process can make or break the deal. Using the M3 model to prevent integration mishaps can be very powerful. Prioritizing the steps according to the M3 model can help ensure the best acquisition outcome. In a Plan and Prosper Acquisition, one needs to pay attention to: Retaining goodwill by having in place employment contracts and compensation plans to retain people who have special market and customer. Acting swiftly and surely to retain customers while cutting cost Controlling financial reporting and analysis, which ensure that the investment is sound and remains on track. To achieve these goals, it is important to remember that integration begins already in the pre-planning stage (Figure 2.3.2 Metrus Consulting), when one evaluates a potential candidate, as described above. All the other stages also need to be completed gradually. So Metrus Consulting created a successful integration approach which could be useful for Vishay. It relies on: 1. Successful pre-planning; 2. Accurate due diligence; 3. Development of preliminary strategy and integration scorecard; 5. 4. Structural and financial market evaluations evaluations and and recommendations; Human
recommendations; 6. Comprehensive and operating plans for the new organization; 7. Integration Implementation. The chosen theoretical framework (Mercer Consulting Figure 2.3.1) suggest levels of integration in sequence (in order of importance, last being most important): Maximization of accounting strategies Rationalization of processes
65 M I M A 2oo6
Linking IT/systems support Identification locations Stabilization of organization Addressing key employee issues Stabilization and building of a customer base of organizational efficiencies & combination of
In summary, all of the above means that once Vishay has completed the evaluation of its potential candidate and decided to proceed with the acquisition, the way it closes the deal and announces internal changes is very important. argument over It is most likely that this stage will cause a lot of resource allocation, major roles etc. However, a
rationalization of processes and protection of existing customers needs to be thought through. Vishay would need to focus on the development of an integration strategy and scorecard that is supposed to measure all the crucial elements which need to be attended to. This requires clear targets and contol. The next step for Vishay would be to create a plan on how to blend the two corporate cultures in one, at the same time being aware of possible managing differences and conflicts. This time of doubt is risky for the customers as well. Some might encounter negative consequences of systems' changes, relocations, unclear customer policies and redundancies. Service recovery and realistic expectations will be critical for success. Integration implementation which is the last stage of Metrus Consulting successful integration approach can be problematic (see Figure 2.3.3). The customer, process and culture integration is usually incomplete at this point, but at the same time a lot of important decisions need to be made and plans carried out. To some extent, these variables that are part of any acquisition organizational structures, elimination of redundancy, cost cutting always raise issues. Vishay is not an exception, because as we see from
the interview, the reasons such as lack of risk management, improperly calculated due diligence, overestimation of synergies, strategic failures, are all not uncommon to some of the acquisition failures. There are also other key variables applicable to all acquisitions, such as integration resource allocation (see Figure 5.5.1) and alignment of products and services, which need to be managed carefully. Most important of all, however, is the attention management is willing to devote to assuring the real completion of the deal. While management's actions need to fit to the type of acquisition to achieve the best effect, according to Metrus Consulting the need for greater senior level focus on the integration process is universal. Figure 5.5.1 Integration Resource Allocation
Source: Author, 2006 (Based on Mercer Consulting integration suggestions)
For the deal to succeed, the two teams must come to a ``merger of the minds'' about the best management model for running the combined company. Obviously the board cannot impose a management philosophy on the combined entity. However, it can and should ensure that a common management model is developed as part of the integration efforts. As was discovered during the interview, Vishay too has a model that allows the Company to integrate the acquired business with its existing operations and production, and aims at cost reduction and postacquisition synergies. For them retaining key personnel and goodwill is a number one priority, therefore integration issues should be planned beforehand just about as carefully as the possible risks.
According
to
Figure
2.3.3
of
the
theoretical
framework
under-
communication is one of the most frequent reasons why integration programme fails. Communication about the acquisition or a merger is a very important aspect of integration. Too often, the common behavior of senior executives at the time of the acquisition press conference is out of keeping with the nature of activities that will need to be carried out. Take Vishay for instance, if you read the articles and interviews on their acquisitions, they never mention any weaknesses, and that is of course natural, but on the other hand is sometimes far from reality. Statements such as ``together we are stronger'' give employees erroneous or misguiding messages about the way in which the acquisition is carried out. Sometimes senior executives and boards of directors congratulate themselves on signing the deal without adequate awareness of the dangers threatening its ultimate success. This leaves a negative impact both on shareholders as well as employees.
5.6 Recommendations
There are three sets of recommendations, except for an overall acquisition plan, which can be suggested to Vishay based on the information received from the interview. Those would be focused on: 1. International culture issues; 2.Creation of an acquisition department; 3. Alternative growth opportunities. International culture Vishay is a multinational company with offices all over the world. Nowadays, they seek to eliminate redundant facilities and staff positions and move operations where possible to jurisdictions with lower labour costs. They have established production in many third world countries, such as India, China etc. Since the company itself is American, its easy to conclude that cultural issues are not uncommon.
68 M I M A 2oo6
According to the interview, the culture that makes Vishay as a company great may be at odds with the main values of the target. It is important not to underestimate the power of culture when signing the deal, especially if its done on an international level. So how is it possible to reduce the cultural challenges? Possible solutions for cultural issues maybe take various forms. One way is to admit and respect the differences. But if this doesnt work, Fred Weston (M&A, 2001) suggests that the following cultural aspects need managerial attention: Consistency of company values Kinds of actions and behaviour that are to be rewarded Employee training program for individual development Recognition of contributions to organizational effectiveness Planning to recognize cultural factors of acquired businesses Vision of a company as a system of interdependent processes Due diligence must include coverage of cultural factors Culture should be considered at the earliest planning sessions
Ultimately, the cultures should probably move towards similarity, by means of human resource management. Acquisition department Except for HR management in general for a company as large as Vishay, it could be a good idea to create their own acquisition department, even though they use professional consulting and auditing companies help to organize, evaluate and structurize many business operations, including the acquisition process, since right now just a few people in the company are involved in all the issues connected with M&As. M&A department tasks may include:
69 M I M A 2oo6
Helping to shape the M&A strategy; Maintaining the flow of acquisition targets; Organizing the acquisition process; Fulfilling specialist tasks related to evaluation, financing and communication, in close cooperation with other departments (legal, finance, communications, human resources, etc) and the business managers;
Selecting, managing and coordinating the input of external advisors such as the ones they work with right now Ernst & Young; Taking care of negotions with the targets M&A department; Taking care of the integration team; Keeping an eye on the costs of the takeover process; Carring out the closure of the transaction; Etc. Alternative growth opportunities
Right now Vishay position has been really challenged when it comes to their main expansion strategy acquiring new businesses, as there are still a lot risky points which make acquisitions perhaps not the most safe way to expansion and growth. Those force the Company to consider other possible business strategies. So they try to explore opportunities with privately held developers of electronic components, or start-ups, whether through acquisition, investment in non-controlling interests, or strategic alliances. Fred Weston, in his book Mergers and Acquisitions (2001) comes up with 7 alternative growth opportunities, that can be used instead of acquisitions: 1. Internal base or core growth Vishay partially does use this type of growth strategy, since it does develop new products, rationalize plant capacity etc. This however cannot be considered as a substitute for M&A activity, since Vishay is very interested in obtaining goodwill and more rapid growth of their market share. But this strategy can be successfully
combined with their present one. 2. Joint ventures this could be a good temporary solution for Vishay, since joint ventures are time-limited. Through this strategy, there is an opportunity to share technologies, risks, managerial skills etc. Vishay could benefit from this type of growth strategy with smaller risks than those involved in M&As. 3. Alliances and partnerships this strategy is usually used on a long term and more personal basis, therefore if Vishay would chose to get engaged in it, the choice of a partner/ally should be very carefully thought through. Even though the benefits from this sort of cooperation can be great, the risks are still there (bias, personal conflicts, shared liabilities etc.) 4. Investments Vishay believes that investment in new technologies that are related to their core businesses is important to position them for the future. The Company has made a lot of investments so far, therefore it is possible to say that they are already actively using this strategy. 5. Exclusive agreements This growth opportunity is more formal than alliances and partnerships, and can be used by Vishay if, for instance, its interested in purchasing the rights for manufacturing or marketing. 6. Licensing Since Vishay is interested in new technologies, goodwill and know-how, buying rights for those or paying royalty fees in exchange for using them can be an opportunity to consider. The risks are way lower than those of M&As, since this strategy represents a high return on a relatively small investment. 7. Franchising This perhaps is not useful for a large company as Vishay, as they are unlikely to be interested in using someone elses brand name, reputation, business model etc.
71 M I M A 2oo6
6. CONCLUSION
The management problem Vishay Intertechnology has is that they would like to keep on expanding its business by means of acquiring innovative companies, mainly in the wireless sector, however some of their acquisitions have not achieved desired success. So how can they successfully organize the pre-deal planning and post-deal integration processes of acquisitions in order to preserve profits and fruitful performance of the acquired companies? The purpose of this paper was, first, to find out more about the current experience of Vishay when it comes to acquisitions (in order to understand what kind of companies Vishay is interested in, and what the general company values and strategies in this respect are at present) and, second, to define according to the chosen theoretical framework how the planning process and selection of the right acquisition candidates for Vishay should be conducted, and once a target is selected, what the best post-acquisition priorities and behaviour should be. The research showed that an aggressive acquisition strategy and a continuing commitment to product innovation have enabled Vishay to become a global industry leader, however the risks involved in this activity are so high that the Company actually started to consider other options for expanding its business. In order to be able to preserve the successful pattern Vishay needs to continue develop and perfect its acquisition program. In summary, it should follow the steps below (Wilson, 2004): Eliminate acquisition targets in industries and fields that are totally unrelated to their core business. Prioritize the existing business and identify the core competencies, and resources that are available to make the acquisition work, and in which market segment.
Once the market segments are selected, select the criteria for the acquisition candidates Identify any potential candidates that meet this criteria. Research the potential candidates further to determine potential problems or risk areas as well as any potential up side that has initially been missed such as complimentary core competencies.
When an appropriate candidate has been identified and contact made, if interest is shown commence the due diligence process. Once the acquisition has been concluded, the organisation should be integrated with determination and as quickly as possible. The objective must be to realise any synergies and structural benefits at the earliest opportunity, whilst at the same time trying to minimise the cultural shock of having a new master.
What marks successful acquisitions, regardless of the category into which they fall, is a sure sense of purpose, an understanding of the type of acquisition, the reduction of uncertainty and the speed with which actions are carried out. Using the suggested plan can be helpful in understanding the full implications of the acquisition and in suggesting prescriptive behavior for assuring success.
73 M I M A 2oo6
7. REFERENCES
Aiello, R. J. and Watkins, D. M., 2000, The fine art of friendly acquisition, Harvard Business Review, November-December, pp. 1007.
Armour, Er., 2002, How boards can improve the odds of M&A success?, Strategy & Leadership, MCB UP Limited, pp. 13-20
Ashkenas, R. N. and Francis, S. C., 2000, Integration managers; special leaders for special times, Harvard Business Review, November-December, pp. 108-117.
Bekier, M. M., Bogardos, A. J. and Oldham, T., 2001, Why mergers fail, McKinsey Quarterly, Vol. 4.
Bieshaar, H., Knight, J. and Van Wassernaer, A., 2001, Deals that create value, McKinsey Quarterly, Vol. 7, pp. 64-73. Brown, K., 2001, Deal exposes bleak future of PC business, The Wall Street Journal, 11 December.
Cartwright, S. and Cooper, C., 1992, Mergers and Acquisitions: TheHuman Factor, Butterworth-Heinemann, Oxford. Central Washington University Archive, 2006, http://www.cwu.edu/
Day, J., Mang, P., Richter, A. and Roberts, J., 2001, The innovative organization: why new ventures need more than a room of their own, McKinsey Quarterly, Vol. 2, pp. 20-31.
Howson, P., 2003, Due Diligence : The Critical Stage in Acquisitions and Mergers, Abingdon, Oxon, GBR: Gower Publishing Limited. Kay, I. T. and Shelton, M., 2000, The people problem in mergers, McKinsey Quarterly, Vol. 4, pp. 26-37.
Lajoux, A. R. and Weston, J. F., 1998, Do deals deliver on post merger performance?, Mergers and Acquisitions, Vol. 33 No. 2, September/ October.
Ludwig, H., Ringbeck, J. and Schulte-Bockum, J., 2000, Managing expectations for value, McKinsey Quarterly, Vol. 4, pp. 1214. Lynch, J., Lind, B., 2002, Escaping Merger and Acquisition Madness, Strategy & Leadership, MCB UP Limited, pp. 5-12
Mergers and Acquisitions: New Strategies for Improving the Odds of Success. 2002. Bradford, UK: Emerald Group Publishing Limited, p.5. Mercer Human Resource Consulting, 2006, http://www.mercerhr.com/ Metrus Group, 2006, http://www.metrus.com/ Mirvis, P. H. and Marks, M. L., 1992, Managing the Merger, Prentice-Hall, Englewood Cliffs, NJ. Oppermann., P, 2003, Making Mergers and Acquisitions Successful, Mercer Consulting: MMC Pritchett, P., Robinson, D. and Clarkson, R., 1997, After the Merger: The Authoritative Guide for Integration Success, McGraw-Hill, New York, NY. Sirower, M. L., 1997, The Synergy Trap, The Free Press, New York, NY. Hecht, H., The Final Victory The Story of Felix Zandman, DVD Vishay Official Website, 2006, http://www.vishay.com/ Weston, J. Fred., 2001. Mergers & Acquisitions. Blacklick, OH, USA: McGraw-Hill Professional Book Group. Zandman, F., 1995. Never The Last Journey. NY: Schocken Books. Zandman, 2005, Vishay Company Presentation
75 M I M A 2oo6
APPENDIX A.1 Questions for the interview (preliminary)

1. What are you most interested in, when acquiring a company, market share or technology? If it is the first option, arent other expansion options less risky? 2. Do you have special department dealing with M&As? 3. What are the factors which you evaluate before making a choice of the target company? 4. Does management take into consideration if the potential reward and profit of an acquisition is worth the management distraction? 5. Name some of the major acquisitions you have conducted in the past few years? What are Vishays most successful experiences? 6. Who are your main competitors? 7. Describe potential risks and your main concerns connected with acquisitions? 8. Does Vishay have a successful M&A business model? If so, why is not always working? What seems to be its main drawback or weak point? 9. Is there a set integration program? What is its main focus? 10. Do the two management teams usually agree on the definition of success? 11. Is there agreement on the best metric(s) for measuring performance? 12. Does Vishay use help from professional consulting companies dealing with the acquisitions, or they strictly use their own qualified personnel throughout the whole process? 13. Do you have a recovery plan dealing with key problems that might arise in the course of acquisition? What are its main points? 14. Are you interested in preserving the HR value of the target company or, again, is it mostly a market share that you are interested in obtaining? 15. Do you have a well-structured evaluation scheme of potential candidates? What are the main aspects that you consider when making a choice? 16. What is an average deadline for making the target a working business entity? 17. Describe a few reasons why some of the acquisitions fail?
76 M I M A 2oo6
A.2 Major Markets Vishays Component Content
77 M I M A 2oo6
A.3 Corporate Structure
78 M I M A 2oo6

VT2006 Fek D 1200

Cargado por

Información del documento

Descripción original:

Título original

Derechos de autor

Formatos disponibles

Compartir este documento

Compartir o incrustar documentos

Opciones para compartir

¿Le pareció útil este documento?

¿Este contenido es inapropiado?

Copyright:

Formatos disponibles

VT2006 Fek D 1200

Cargado por

Copyright:

Formatos disponibles

/ INTERNATIONAL MARKETING - MASTER THESIS - EXo11o /

WAY TO SUCCESSFUL GROWTH THROUGH ACQUISITIONS

GROUP AUTHOR TUTOR

#12oo OLGA MAKSIMENKO CHARLOTTA EDLUND

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

6. CONCLUSION ___________________________________________________________________________ 72 7. REFERENCES_____________________________________________________________________________ 74 APPENDIX _________________________________________________________________________________ 76

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

1.1 Management problem

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

The overcapacity M&A

The geographic M&A Product or extension M&A The M&A as R&D

The industry convergence M&A

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

Figure 2.1.2 Pre-deal activities that increase the chance of success

Source: KPMG, 1999

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

2.2 Merger Management Model (M3)

Source: Lynch, Lind, 2002, Escaping Merger and Acquisition Madness

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

Source: Lynch, Lind, 2002, Escaping Merger and Acquisition Madness

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

Source: Lynch, Lind, 2002, Escaping Merger and Acquisition Madness

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

Source: Lynch, Lind, 2002, Escaping Merger and Acquisition Madness

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

2.3 Integration creating value

Source: Mercer Human Resource Consulting, 2006

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

Source: Metrus Group, 2006

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

Source: A.T. Kearneys global PMI survey, 1999

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

2.5 Alternative Growth Opportunities

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

2.6 Structuring the deal

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

2.7 Cultural challenges in M&A

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

3.1 Choice of topic

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

3.2 Information gathering

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

3.3 Theory selection & analysis process

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

ADDITIONAL THEORIES complementary information to M3, questionnaire construction INTERVIEW SUMMARY

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

MASTER THESIS - VISHAY INTERTECHNOLOGY - GROUP 12oo

3.4 Target audience

6. CONCLUSION _____________________________________ 72 7. REFERENCES_ 74 APPENDIX ___________________________________________ 76