Mergers and Acquisitions
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Transcript of Mergers and Acquisitions
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Mergers and Acquisitions
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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
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M&A Introduction Purchase & Sale of Firms or Divisions Bidder
Company Raiders
Target Consideration
Cash or securities offered Advisors
I-Banks, Consultants, Attorneys, Accountants
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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
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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
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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
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Takeovers Control transfers from one group to
another Possible forms
Acquisition Merger or consolidation Acquisition of stock Acquisition of assets
Proxy contest Going private
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‘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
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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
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Revenue Enhancement Marketing gains
Advertising Distribution network Product mix
Strategic benefits Market power
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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
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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
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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
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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
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M&A Valuation Market values Only incremental cash flows Appropriate discount rate Consider transaction costs
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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.
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Defensive Tactics Corporate charter
Establishes conditions that allow for a takeover
Standstill agreements / Targeted repurchase
Poison pills (share rights plans) Leveraged buyouts
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Free-Rider Problem Purchase toe-hold Buy from large shareholders Two-tiered offer
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~ 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
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Price Paid for Target0 5 10 15 20
Change in Shareholders’
Wealth
Acquirer Target
Bargaining Range = Synergy
$9.00 $16.39
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Market Reaction Target shares increase +20% Bidder shares are stagnant or decrease
Stock offers: -1.5% Cash offers: unclear
Effect on competitors varies
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M&A Risk Overpayment
Winner’s Curse
Operating Risk Integration issues, culture Mgmt resources Continued subsidization of sub-par groups
Financial Risk Leverage