Mergers and Acquisitions
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Transcript of Mergers and Acquisitions
Mergers and Acquisitions
M&A Market Market for Corporate Control
Competition for control of firm assets
Associated with Downsizing “It’s amazing that the basic cause of downsizing
is so rarely acknowledged: these companies have more workers than they need or can afford to pay… If we must blame somebody for the layoffs, it ought to be you and me…. I haven’t met one person who would agree to pay AT&T twice the going rate if AT&T would promise to stop laying people off. These companies are responding to the constant pressure from consumers and shareholders.”
- Peter Lynch, formerly of Fidelity’s Magellan fund
M&A Introduction Purchase & Sale of Firms or Divisions Bidder
Company Raiders
Target Consideration
Cash or securities offered Advisors
I-Banks, Consultants, Attorneys, Accountants
Friendly - Mgmt support Hostile - Without mgmt support
Williams Act ’68 made more difficult
Horizontal 2 Competitors
Vertical Target in same industry, but different
production stage Conglomerate
2 Unrelated Firms
M&A Types
Taxes Tax-free acquisition
Business purpose; not solely to avoid taxes Continuity of equity interest
Target stockholders have an equity interest in the combined firm
Taxable acquisition Firm purchased with cash Capital gains
Target stockholders require a higher price to cover the taxes
Merger versus Consolidation
Merger One firm is acquired by another Acquired firm ceases to exist Advantage: legally simple Disadvantage: approval of both
stockholders
Consolidation New firm is created by combining
existing firms
Takeovers Control transfers from one group to
another Possible forms
Acquisition Merger or consolidation Acquisition of stock Acquisition of assets
Proxy contest Going private
‘Synergy’ Whole is worth more than the sum of
the parts Break-up Value Market Power
Agency Issues, Hubris Diversification Avoid takeover attempts
M&A Motivation
Synergy ΔV = VAB – (VA + VB)
Synergy: ΔV > 0 Possible sources
Δ CF = Δ Rev. - Δ Costs - Δ Taxes - Δ Cap Req.
Increase revenue Reduce costs Lower taxes or capital requirements
Revenue Enhancement Marketing gains
Advertising Distribution network Product mix
Strategic benefits Market power
Cost Reductions Economies of scale
Lower average cost by spreading overhead
Economies of scope (vertical integration) Coordinate operations more effectively Reduced search cost for suppliers or
customers Reduce contracting problems
Lower Taxes or Capital Needs
Taxes: Take advantages of net operating losses
Carry-backs and carry-forwards IRS can prevent merger if sole purpose is to
avoid taxes Unused debt capacity
Capital Requirements: Reduce relative to the two firms operating
separately
Acquisitions Cash Acquisition
NPV = VB* – cash cost Value of the combined firm VAB = VA + (VB* -
cash cost)
Stock Acquisition Value of combined firm VAB = VA + VB + V Cost of acquisition
Depends on # shares given to target stockholders Depends on post-merger stock price
Example
Cash vs. Stock Sharing gains
Target stockholders don’t participate in stock price appreciation with a cash acquisition
Taxes Cash acquisitions are generally taxable
Control Cash acquisitions do not dilute control
Signal Stock acquisitions indicate your stock is
overvalued
M&A Valuation Market values Only incremental cash flows Appropriate discount rate Consider transaction costs
After Valuation Friendly
Work with management Hostile
Toe-hold or Bear-hug Open market purchase Threaten target BOD with tender offer
Proxy Fight Tender Offer
Defenses Poison pills/put, greenmail, golden parachute,
etc.
Defensive Tactics Corporate charter
Establishes conditions that allow for a takeover
Standstill agreements / Targeted repurchase
Poison pills (share rights plans) Leveraged buyouts
Free-Rider Problem Purchase toe-hold Buy from large shareholders Two-tiered offer
~ Target’s value to bidder = $163.9 million
Target’s current market value = $ 90.0 million
Merger premium = $ 73.9 million
Target - 10 million shares, $9/share
Value to Acquirer
Price Paid for Target0 5 10 15 20
Change in Shareholders’
Wealth
Acquirer Target
Bargaining Range = Synergy
$9.00 $16.39
Market Reaction Target shares increase +20% Bidder shares are stagnant or decrease
Stock offers: -1.5% Cash offers: unclear
Effect on competitors varies
M&A Risk Overpayment
Winner’s Curse
Operating Risk Integration issues, culture Mgmt resources Continued subsidization of sub-par groups
Financial Risk Leverage