IFM7 Chapter 17 - Gatton College of Business and Economics
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Transcript IFM7 Chapter 17 - Gatton College of Business and Economics
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
Target
Consideration
Company
Raiders
Cash or securities offered
Advisors
I-Banks, Consultants, Attorneys, Accountants
M&A Types
Friendly - Mgmt support
Hostile - Without mgmt support
Horizontal
2 Competitors
Vertical
Williams Act ’68 made more difficult
Target in same industry, but different production stage
Conglomerate
2 Unrelated Firms
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
M&A Motivation
‘Synergy’
Whole is worth more than the sum of the parts
Break-up Value
Market Power
Agency Issues, Hubris
Diversification
Avoid takeover attempts
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
Stock Acquisition
Value of combined firm
Cost of acquisition
VAB = VA + (VB* - cash cost)
VAB = VA + VB + V
Depends on # shares given to target stockholders
Depends on post-merger stock price
Example
Cash vs. Stock
Sharing gains
Taxes
Cash acquisitions are generally taxable
Control
Target stockholders don’t participate in stock price
appreciation with a cash acquisition
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
Value to Acquirer
Target - 10 million shares, $9/share
~ Target’s value to bidder
Target’s current market value
Merger premium
= $163.9 million
= $ 90.0 million
= $ 73.9 million
Change in Shareholders’
Wealth
Acquirer
Target
$9.00
0
5
$16.39
10
15
Bargaining Range =
Synergy
20
Price Paid
for Target
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
Operating Risk
Winner’s Curse
Integration issues, culture
Mgmt resources
Continued subsidization of sub-par groups
Financial Risk
Leverage