Mergers and Acquisitions
Foreign sovereign funds
(A sovereign wealth fund, sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.) - Largest pools of government-controlled capital - two of the largest ( Abu Dhabi, Citigroup) They have made large investemnets in UBS Citigroup Investment have thus far been minority investments - seeking control
Acquisition and development
(Copyright, financing, budgeting) Many large firms grow by buying smaller firms e.g. tech companies common practice in Pharma practice in Pharma industry for large Pharma to buy small biotechs Diageo has been buying smaller drinks companies for years, including George Clooney's tequila company
Growth and R&D development
(Pfizer used its 1998 acquisition of Warner Lambert to acquire the leading selling drug in the world - Lipitor - $11 billion annual sales.) This helped Pfizer to become the leading pharmaceutical company in the world.
Hubris Hypothesis?????
(top managers typically overestimate their ability to create value from an acquisition.) managers seek to acquire firms for their own personal motives may pay a premium for companies for this reason managers may believe their own valuation are superior to the market may cause overpay this does not mean that hubris explains all takeovers Empirical evidence on hubris hypothesis : If Hubris Hypothesis is true then you would expect the stock price of the acquirer to fall after the announcement of the acquisition. This is often the case. • P. Dodd 1980: Found statistically significant negative returns for acquirer following the announcement of merger plans • P. Asquith 1983: Failed to find a consistent negative response
Corporate charter amendments
- Staggered boards - Supermajority provisions - Fair price provisions - Dual capitalizations - Antigreenmail provisions
Financial Synergy
- Usually associated with Conglomerate merger - Company is regarded as Diversifier portfolio - Cashflow from unrelated diversifications are not correlated smooths cf, reduces volatility Financial synergy is when the combination of two firms results in greater value than if the they were to operate separately .(2+2=5) financial synergies are most often evaluated in the context of mergers and acquisitions However controversies ??
Motives and Determinants of Mergers
- growth - Synergy - economies of scale - Diversification -Improved management -Hubris hypothesis - Financial synergy - Horizontal mergers and pursuit of monopoly power - tax benefits
Characteristics of 4th Merger Wave
- number of hostile mergers up - size of target larger - industry trends- more mergers within certain industries, (oil and natural gas ) - deregulation - baking, for example, airlines - role of raider: ??
operating economies: Reduction in operating cost
1. Elimination of duplicate facilities 2. Reduction in Various departments: a) Marketing b) Purchasing c) sales
Desired characteristic of targets
1. Low P/E ratio but high book value 2. Firms with undervalued assets 3. High liquidity 4. High steady cash flows 5. Unused borrowing capacity 6. No antitrust problems 7. No concentrated block of stock in hands of insiders 8.Management amenable to takeover 9. Overfunded pension plan
two types of growth
1. Organic Growth: Internal growth 2. Non-Organic Growth: Growth through acquisitions
Reasons for Joint Ventures/SAs
1. Where large amounts of capital are needed Eg LV needed capital to offset risk of general insurance. Insufficiently capitalised. Allianz - Entry to property insurance, casualty insurance, UK market 2. As a means of R and D - To share risk and high costs of technological development Toshiba and Western Digital - Memory Chips 3. As a means of R and D, to allow smaller more agile companies to do the basic research eg Pharma 4. As a way of rationalising - getting economies of scale. Eg Motor Industry 5. To expand into foreign markets On December 2nd Faurecia SA, a French autoparts maker, announced that it had signed two joint venture agreements in Iran, one with MAAD and the other with Azin Khodro Co. It is often a requirement to have a local partner. Eg China 6. To ensure quality and reliability in the supply chain Toyota and Johnson Controls 7. To cope with competitive pressure Some of the world's biggest traders of agricultural commodities are seeking new alliances and joint ventures as they battle tough market conditions ?Mr Ramirez adds that LDC's fertiliser business could partner with a potash producer to help it bear price risk while tie-ups with distributors could improve the reach of its orange juice business, Japanese Companies overcame traditional rivalry to cope with declining domestic demand and need to compete externally Nb JVs and SAs that were explicitly about limiting competition would fall foul of competition laws. ? In summary, normally either for Capital sharing, Risk sharing and/or taking advantage of complementarity Much the same applies to SAs Eg Renault-Nissan
GM Joint Venture with Shanghai Auto
1997 GM entered into a 50:50 joint venture with Shanghai Automotive Industry Corp. Called Shanghai General Motors Venture makes Buicks and Chevrolets for Chinese market GM exchanged its technology and know how for quick access to the Chinese market This gave GM some short term growth Shanghai Auto also entered into a similar joint venture with Volkswagen to market the Passant Shanghai Auto then took this know how and is making its own cars that are quite similar but cheaper Shanghai markets the Roewe 750 It is $7,000 less than the Buick LaCrosse Not a cheap "knock off" GM sought a long term deal but Shanghai would not accept it The Chinese government has been pressuring Chinese companies to make their own brands and not just to joint ventures using foreign products Toyota was contacted as a possible joint venture candidate Toyota rejected it Presumably the loss of intellectual property was not worth the short term gains
Consolidation
2 equal-sized companies combine and a while new company is created Example: Burroughs and sherry = Unysis
horizonal integration
2 similar companies that propose a merger Horizontal integration is the process of a company increasing production of goods or services at the same part of the supply chain. A company may do this via internal expansion, acquisition or merger. The process can lead to monopoly if a company captures the vast majority of the market for that product or service (example Asda and Sainsbury)
Roll up acquisitions
A Rollup (also "Roll-up" or "Roll up") is a process used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged.
Why is growth important?
A company may not be able to grow fast enough by internal expantion internal expansion usually takes more time than acquisitions called organic Critical issue: premium paid for this speed - prices Does the price of quicker development exceed the price paid for internal development by too much to justify difference • Use project evaluation techniques (e.g, NPV or IRR) • Falling stock prices - In periods of falling stock prices the costs of acquiring assets through purchase of whole companies may justify the acquisition To improve returns: • With no growth, the return on a share (the bit that shareholders are interested in); • R = d/p • With growth • R=d/p+g However, Growth in sales doesn't necessarily translate to growth in earnings if sales growth is induced by declining margins. To stop the business from declining and falling behind the competition, also referred to as Defensive Growth or Pro- active Growth. Business Culture
strategic alliance
A long-term partnership between two or more companies established to help each company build competitive market advantages. An agreement where one agrees to be a subsidiary of another is merger, if one (management) doesn't agree but owners (investors ) agreed it is acquisition. A strategic alliance is sharing of IP?, or non compete alliance where both work independently but has right to use other person knowledge in the agreed upon field Advantages: - more flexible that a joint venture - wide varieties may enable companies to pursue goals without a large financial commitment Disadvantages - Greater opportunities fo opportunistic behaviour by merger partener - could lose valued know-how
Subsidairy merger
A merger - merger of two companies in which the target becomes a subsidiary example: GM acquired EDS and made it a subsidiary and issued class e shares Advantages: May allow the buyer to keep the Taggert as a seprate subsidiary corporation and insulate the parent company from the target's liabilities
Comparison M and A
Acquisitions Rapid augmentation of firm capabilities Consequences are long lasting Often costly due to takeover premium Challenges of combining organizations
Bolt on Acquisitions
Acquisitions that fit in naturally with a company's existing line of business. They are sometimes referred to as add-on or tuck-in acquisitions. Fich, Nguyen and officer found that some of the shareholders of acquirer's were bold on deals where the target was small relative to the ?? A good example: purchase of Alberto Culver by Unilever
Joint ventures (JV)
Alternative to merger or acquisition - Allows bidder to accomplish the goals it has in mind without incurring the cots of complete acquisition of the target Goals: - Enter new market - lock up source of supply - Develop a new product - preempt competitors from achieving certain goal (Occurs when two or more parties, typically businesses, enter into a business relationship for a single enterprise or transaction to share the investments, risk, profits and losses; requires each party to make a significant investment, but one that is lower than if a single company were to conduct the business alone)
successor
Attempts to avoid such liabilities that may give rise to a lawsuit that a fraudulent conveyance of assets -An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.-
Drawback JV/SA
Can easily be failure of commitment cooperation and trust. Eg VW and Suzuki Less easy to control Toshiba and Western Digital - Memory Chips
Principles of US Supreme Court
Deal price resulted from an open process, Was informed by Robust public information Easy access to non public info Many parties had chance to submit a bid
anti-takeover tactics
Defence (sic) also emerged at this time Stock repurchase - is a purchase by the target of its own-issued shares from its shareholders
Build-Up Method
Discount Rate = Long Term Treasury return + risk premium Risk Premium = look at rates on higher risk securities AAA Corporate Bonds High Yield Bonds Equity Risk Premium Additional Risk Factors Size premium
Main Business Valuation Methods
Discounted Cash Flows (DCF) - Intrinsic value Comparable Multiples - Market value Capitalization of Earnings Net Asset Value
Examples of Achieved Cost Economy Synergies
Exxon Mobil: Announced in August 2000 that it expected $4.6 billion in cost savings from its megamerger Merger: Dec 19998: 82Billion Created world's larger oil company ????
standard of value - fair value & Delaware court
Fair Value - Statutory standard that applies in dissenting stockholder disputes There is a lot of case law from the US Past judgements from the Delaware Court have found that target shareholders may NOT have received fair value 1. If there was no formal valuation process 2. There was no attempt to encourage an auction for the Target Both Target directors and Acquiring Co can be liable (fair value and Delaware court ) fair value is determined "exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation," such as synergies, because the appraisal seeks to value the company on a "going concern" basis. Delaware statute that protects dissenting shareholders from being run over by a majority ratifying a buyout, allows holdouts to file an "appraisal" petition asking judges to award them "fair value" price However this is now being arbitraged by cynical target investors to try to achieve more The Delaware Court is famous for using its own DCF valuations. However the FT Article demonstrates how arbitrary these can be. Very assumption dependent Which is perhaps why the Delaware court is moving toward market value 'the court placed significant emphasis on the efficient market for Aruba's stock, which...created a reliable method for determining fair value' synergies, which "would not have changed Aruba's standalone value." Liquidation Value - opposite of Going Concern Value - (if there was such a thing) - This is the value that the owner realizes when the business is terminated and the assets are sold off. a) Orderly Liquidation: Assets sold over a reasonable time period so as to get the best price. b) Forced Liquidation: Assets sold quickly such as through an auction sale. Note: In computing liquidation value you need to include all the Costs of Liquidation (ie. Commissions, Legal & Accounting) Book Value - accounting term - Also called Net Asset Value or Shareholder Equity - Book Value = Assets - Liabilities - Assets: usually valued at historical costs minus depreciation - assets not at market value Note: Intangible Assets - May not be fully included on balance sheet - Longer an Asset is on Books: more likely there is greater deviation from Book Value and Value in Use
!!!!!!!!!!!!!Growth through acquisitions (+ most important reason)??????????/
For many companies M&A is a key part of their growth strategy THE NEED TO MAINTAIN A PIPELINE OF NEW PRODUCTS • Success with drug development can't be guaranteed and may have to be bought int.
Pursuit of #1 Ranking in Industry and Roll-Up Acquisitions
General Electric and CEO Jack Welch - is a leading proponent of this strategy • Companies recently active in roll-up acquisitions: • WorldCom (formerly LDDS) and its CEO Bernie Ebbers bought up long distance companies throughout the United States . - Grew this company to be one of the largest • U.S. Office Products and CEO Jonathan Ledecky bought hundreds of office supply companies. ??
Active Antitakeover Measures
Greenmail: Payment of a premium to buy shares of threatening shareholders • Standstill Agreements: Payment to threatening shareholder not to purchase any more shares • White Knights: Friendly buyer preferred compared to hostile buyer • White Squire: Friendly buyer of a block of stock that it is put in safe hands • Lock-Up Transactions: Sale of assets that make target less desirable • Lock-Up Options: An option that gives potential buyer right to buy certain assets at an attractive price • Just Say No: Say do not want to be bought • Pac-Man Defense: Make bid for the hostile bidder • ESOP is always almost negative for Targ. shareholders • Just Say No - legitimate if done in Targ. Shareholders' interests. • Litigation (+) if acquirer stays the course • (-) if bid is abandoned LiabilityRestructuringandRecapitalisation • i.e.Moredebt,lessequityandconcentratedinfewer hands • Researchsuggeststhatimpactontarget shareholder wealth is negative. • Raiders (of the lost Ark) - The opposite acquirer's side. Surprisingly has (+) effect.
Recent Trends
Growth of emerging markets acquireres growth of foreign sovereign funds investments also private equity remains popular
junk bonds
High-risk, high-interest bonds which are issued without an investment grading (Not always legal)
Hubris vs Managerialism
Hubris: Managers believe their valuation is superior to the market and then may overpay. Managerialism: Managers may know they are overpaying but they do so to pursue their own goals.
Risks of Joint Ventures: Case of GM
If the venture involves one party exchanging technological know how with the other this may present a risk Ex: GM joint venture into China China is the 2nd largest auto market GM wanted to offset its loss of market share, especially in the US market, by growth in China It wanted to do so quickly as other automakers were also focusing on China
Factors Establishing Comparability: Business Factors
Industry Sub-sector of an industry How cyclical is the industry Products & Services High end or low end? Customers or Clients Sales by customer Concentration Distribution Network Use distributors? Geographic Market National or Global Regional?
Nota Bene
JV is only supposed to have a fixed life span for defined purpose. However, Dow-Corning lasted 70+ years
Strategic Alliance in Gaughan
Joint Purchasing Renault - expertise diesel powertrain, Nissan - expertise petrol poewertrain Nissan - expertise manufacturing, Renault - expertise finance Efficiency from sharing engine types
The Difference JV versus SA
Joint Venture usually has separate legal constitution. Additional tax allowance. Depreciation, losses etc against tax. 'Arms-length' from parent. May have different brand name - reputational reasons Limited liability of JV Less unambiguous than SA. Specific commitment.
Joint Ventures and Strategic Alliances
Joint Ventures: when 2 or more companies combine assets or other efforts toward some common goal Usually a separate entity is created Very common in pharmaceutical industry - working with biotech companies Strategic Alliances: Less formal association Separate entity may not be created Ex: airline industry - airline partners
With JV/SA
Joint ventures/Strategic Alliances Reduce relative size of investments and risks Create new entities and relationships Can develop learning and new opportunities Can be seen as a real option
FCF and Taxes
May be more interested in after-tax free cash flow
Shareholder Wealth Effects of Joint Ventures
McConnell & Nantell (1985) Studied 136 joint ventures 1972-1979 involving 210 companies Found positive shareholder wealth effects on announcement of 0.73% Woodbridge and Snow (1990) Analyzed 767 announcements including joint ventures as well as other strategic initiatives Their sub-sample of just the joint ventures showed positive shareholder wealth effects
Discounted cashflows
One of the more often used valuation methods Uses cash flows instead of accounting earnings
Common Comparable Multiples: (business valuations)
P/E Multiples Price/EBITDA Average P/E Paid Higher for Public vs. Private Businesses
Holding company
Parent company owns sufficients stock in target to control target - usually can be achieved from less than 51% (10%) - alternative to 100% Advantages - Lower cost - No control premium - May get control without soliciting target shareholde approval
Competition policy????
Regulations designed to promote competition and restrict monopoly practices. ??
Discount Rate Must Be Risk-Adjusted by:
Risk Premium - should reflect the variability of the variability of the projected future earnings Market Guides - look to market to find projected traded securities whose return have a similar variability
Brilliance China Automotive Holdings, Ltd
Similar strategy for this Hong Kong based automaker Brilliance - founded in 1990 Listed in NYSE 1992 and Hong Kong 1999 Was first company with all of its assets in the Peoples Republic of China to be listed on NYSE Formed a joint venture with BMW to manufacture 3 and 5 series cars
Capitalization of Earnings (29-31)
Simplistic Method - sometimes used in closely held valuations Treats income as a perpetuity Capitalization Method: Step 1: Select an Appropriate Earnings Base Step 2: Select an Appropriate Capitalization Rate a) Select Discount Rate b) Select Growth Rate c) Subtract Growth Rate from Discount Rate Step 3: Divide the Earnings Base by the Capitalization Rate Ex: Company X's earnings are expected to be $20,000,000. Earnings have been growing at 5% per year. A 15% discount rate has been selected. a) Capitalization Rate = 15% - 5% = 10% b) Value = $20,000,000/.10 = $200,000,000
Factors Establishing Comparability: Financial Factors
Size Less than or greater than $5 billion Profitability How profitable Gross and net margins EBIT/Sales, EBITDA/Sales Growth Historical growth of sales & profitabilityLeverage and Credit Profile How much debt does company have? Unused debt capacity More unused capacity greater value to financial buyer Ability to borrow more Bond ratings
Pursuit of #1 or #2 Ranking
Something emphasised by Jack Welsh of GE Idea is that the number 1 or number 2 ranking gives these competitors a major advantage over the other competitors GE would acquire companies that are not number 1 or number 2 if they thought they could infuse capital, and so forth to help them achieve that position.
Net Asset Value
Tangible Assets minus liabilities Useful for companies with high values of tangible assets Investment Trusts Miners Property Companies
NAV
Tangible Assets minus liabilities at book value (historical cost - depreciation) ) Useful for Mining companies Property Companies Investment Cos As lots of tangible assets
Free Cash Flows
The amount of cash flow available for immediate use to the owners of the business + Earnings + Depreciation - Capital Expenditures needed to keep the business going - Changes of Working Capital If a rapidly growing business working capital needs may rise Can get quick idea by looking at net working capital as % of sales and see if rising over time as sales rise In our analysis we will assume it is stable and thus not include this
Synergy
The power that results from the combination of two or more forces Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. Synergy is a term that is most commonly used in the context of mergers and acquisitions (M&A). Synergy, or the potential financial benefit achieved through the combining of companies, is often a driving force behind a merger. 2+2 = 5 ( combined firm is more valuable than separate firms Two types: - cost reducing synergies: easier to predict snd achieve - economies of scale - revenue Enhancing synergies: - harder to achieve - harder to predict Example: cross-selling of products and services
Equity value
The value of the company to the owners Equity value is the market value if the stock is publicly listed Equity value = Enterprise Value - Debt + Cash
•Capital Structure Changes
These types of changes involve changing the capital structure in such a way as to make it less attractive to acquirers. It encompasses many other individual approaches I. Issue more shares 1. General issue 2. White squire 3. ESOP II. Buyback own shares 1. Self tender 2. Target share repurchases 3. Open market purchases III. Recapitalization plan IV. Assume more debt 1. Issue more bonds 2. Take out bank loan
Do bad bidders become Good Targets?
They determined that companies that make acquisitions which cause their equity to lose value are increasingly likely to become takeover targets. They found that "the likelihood of becoming a takeover target is significantly and inversely related to the abnormal stock price performance with the firm's acquisition." (Mitchell and Lehn, p. 393) • Their analysis shows that takeovers can be both a problem and a solution. • Takeovers that reduce market value may be bad deals, assuming the market correctly assesses them, and this is a problem. • The deals market, however, may take care of the problem through another takeover of the "bad bidders.
Using Industry P/E Ratio
Two Reasons Why The Target Firm's P/E May be Different than Industry P/E 1. Target's expected earnings may be different from industry's average earnings 2. Firm's risk factor may be different than industry's So comparability is an issue
Merger of Equals (MOE)
Two companies of equal size - usually one company ends up being the dominant one example: Daimler merger of equals with Chrysler Here Daimler acquired Chrysler kderkorian sued and said not a merger of equals but an acquisition and if so he wanted his premium - lost this suit.
When to use DCF or Capitalization of Earnings
Use DCF: If earnings vary from year-to-year, especially early in the projection, and they can be forecasted individually. Earnings Growth is Constant: Use Capitalization of Earnings.
Theoretical valuing of a business
Value of Business = Future benefits derived from a business Steps in Valuation of Benefits Process: 1. Project future benefits from business - Projection process may utilize historical data - This can be an involved process 2. Determine present value of future benefits
Discounted Future free cashflows
Value= .. Step 1: Forecast free cash flows for six periods - really projects DCF for 5 yrs but will need to go 1 more year to get terminal value (more later) - This involves selecting an appropriate growth rate - This growth rate is applied to an appropriate base - Denoted FCF: usually a historical average or the last annual free cash flow Step 2: Select a Discount Rate - should reflect the anticipated risk of the cash flow stream - typically Weighted Average Cost of Capital (WACC) Easier to capitalise Step 3: Capitalize post-year 5 free cash flows - Divide FCF by the appropriate capitalization rate - This capitalization rate is usually the discount rate minus the anticipated average annual growth in free cash flows in the years after year 5. Step 4: Discount this capitalized amount back to year zero terms Step 5: Add the two discounted amounts together
Horizontal vs. Vertical Joint Ventures
Vertical joint ventures: between corporate buyers and sellers Horizontal joint ventures: between companies in the same line of business (ie sell different products to each other's customers) Johnson & Houston (2000) Analyzed 191 joint ventures 1991 - 1995 Found overall positive shareholder wealth effects for joint ventures 1.67% Sub-samples: Horizontal: lower gains than vertical ventures Gains shared more Johnson & Houston (cont) Vertical joint ventures: had average gains of 2.67% Suppliers got 70% of the gains Buyers realized less of the gains So for joint ventures: horizontal has lower returns than vertical
Strategic Alliances
Very common in pharmaceutical industry Used for R&D of new drugs Governance: can be a problem Because the agreement is less formal there can be a problem of controlling the actions of the other party Airline Industry - seems to work well Way of airlines offering expanded routes without investing huge increases in capital While alliances are popular in the pharmaceutical industry some companies believe M&A is the better route Ex: April 2008 Japan's Takeda Pharmaceutical Co. did tender offer for Millennium Pharmaceuticals Inc for $8.8 billion The addition in Millennium should give Takeda's revenues a boost Millennium is a biotech specializing on cancer research Takeda had 2 leading drugs coming off patent protection - Prevacid (ulcers) & Actos (diabetes) Millennium - had blood cancer drug Valcade Has 7 products in clinical trial
Leverage Buyout (LBO)
an attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing - where debt is used to take public company private
Tender Offer
an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares where a bider makes an offer directly to target company's shareholders - done in hostile deals
speculative bubble
an unrealistic or unfounded rise in economic values
Asset purchases: De Facto Merger
another way the buyer may assume the seller's liabilities unintentionally occurs where an asset purchase is later treated as a merger - unions and successor liability - unions may try to maintain the prior owner's contracts through the principle of successor Liability new buyers may require regeneration of union agreements as a precondition to an acquisition of a troubled seller
Private Equity
capital that is not listed on a public exchange and is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity investments in companies that are not traded on a stock exchange
Executive Compensation and corporate acquisition Decisions
closely related to Hubris hypothesis -- managers of companies acquire other companies to increase their size which, in turn, allow them to enjoy higher compensation and benefits. (executive compensation played in the corporate acquisition decisions of 51 firms which made 84 acquisitions over period 82-86) for companies that engaged in acquisitions they found a positive relationship between firm size and executive compensation but not for these that did not when they separated out good acquisitions from bad ones, they found good acquisitions increased compensation while bad deals didn't.
Diversification
company growth through starting up or acquiring businesses outside the company's current products and markets
Winner's Curse of Acquisitions (Varaiya's Analysis of winner's curse)
concept associated with many auction contests those that overestimate value of auction item will overbid and will auctions example: free agent markets of spots --> helps explain why bidders may overpay (supports hubris hypothesis) (Varaiya's Analysis of winner's curse) Measured overpayment = (winning bid - highest bid prior to the market responding negatively to bid prices)
scale economy
declining per unit costs as output rises may only last within certain range of output e.g. harper & Row acquiring south western publishing - ???this is a advantage of large size. large organisation often has lower costs per unit of production or per unit transition cost than smaller organisation Great deal of analysis and discussion of economies of scale in the litterer of economic theory Indeed a fine distinction is made between scale and return. How
Going Concern
financial statements are preGoing Concern Value - not a standard of value - An assumption that the business is a viable and on-going business - ex Going concern opinion: 5/01/03 KPMG issued going concern opinion re Mirant Corp's ability to stay in business - in electricity generating business this proved accurate, filed for Ch 11 7/14/05 and emerged from Ch 11 1/03/06 pared with the expectation that a business will remain in operation indefinitely
Important to This strategy: Cutting losses
if no. 1 or 2 ranking cannot be achieved then you need to cut losses and sell and use capital in other more productive businesses Example : occurred in 2005 when GE sold off its reinsurance business other examples include DQ' shrinkage of its finances and banking business.
Source of Gains
job cuts: cut 19000 jobs from original workforce of 127000 More duplication than expected combined technology led to greatest cost savings in oil extraction then first thought
5th Merger wave (1994 -2001)
much more activity happening outwit the uk merger waves in the EU and particularly on the UK - Roll-Ups: Market attention with consolidating deals -Consolidations: Consolidate through larger scale acquisitions of companies The major industries: 1. Funeral Homes 2. Office Products 3. Floral Products But, failed to deliver on promised gains, such as lower costs and greater synergies
Emerging Market Acquirer
new type of bidder that became important in the 5th merger relatively new breed of acquirer from emerging markets, which have targeted companies in the developed world for a variety of reasons.
acquisition
one company is usually bigger than the other when valuing details the smaller company is assumed to be the acquired and the nurse of value places on the deal
Real Options
options to invest in, modify, or dispose of a capital investment project Real options is the school of thought that the ability to change direction has value over and above the direct NPV expected from investments such as M&A, JV, SA. In particular, JV or SA may have considerable real option value as they increase flexibility.
Price/Equity Ratio ( needed?)
ratio of stock price to earnings per share
Economies of scope
savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology being able to offer wider range of services or products to same customer example: commercial bank with major retail network acquiring a bank with strong trust department Reduction in total cost of producing and selling several products by a multi product firm compared to the aggregate cost when each product is produced and sold by independent firm ability to transfer a resource a resource to a new use reduction in total cost of producing and selling several pr
hostile takeover
the acquisition of a company over the opposition of its management when a bid is successfully put to a target shareholders by a potential acquirer without the approval of the target board
corporate management
the set of managers whose responsibility is to supervise and oversee the divisional managers
Enterprise Value
total market value of the stock + book value of all liabilities - cashEnterprise Value: the value of the whole company - From an asset valuation perspective it is the value of the assets, or debt plus equity In theory EV = Sum DCF = Equity + Debt - Cash on the Balance Sheet Theoretically independent of capital structure Ex: if issue new debt and receive cash The cash on asset side offsets the debt on the liability side
Fourth Wave (cont.)
• Development of antitakeover strategies and tactics • Role of investment bankers and attorneys • Development of laws: federal and state • Development of the junk bond market • High number of leveraged buyouts and going private transactions • Relaxed antitrust enforcement
key points part 2
• General Evidence on Anti-Takeover Amendments] • Announcement of ATA is typically negative • However, can be positive depending on market perception of ? • Dual Cap - possibly neutral/small neg. effect • Fair Price - Evidence is mixed • Golden Parachute • Weak as defence - small proportion of total cost of M&A • Evidence suggests target shareholders benefit • Highly controversial • Active Anti Takeover Measures • For all of the following, it would typically be in terms of examples plus empirical evidence • Reincorporation - neutral effect on Targ. shareholder wealth. • Self Tender - Now illegal in US under SEC rules • Greenmail- legal in US, though nullified by tax changes • Emp Ev. Effect of greenmail - very mixed. Possibly depends on insider (+)/outsider (- ) • Standstill Agreement - Emp Ev (-) White Squire - Couple of extended examples, no empirical evidence • White Knight - Emp Ev (-) for WK itself.
lecture 10
• Poison pills largely a US phenomenon • Do not exist in UK (Or indeed any other 'frustrating action') • Nevertheless in many countries, market for corporate control not seen as a 'good thing' • Hence poison pills may actually be allowed. e.g. Japan. 1983 Martin Lipton - Original PP based on preference shares • Problems with these first poison pills: • 1985 Perfected as right attached to ordinary share. • Right was detached on first triggering event - still redeemable • Exercisable at second triggering event • Original right 50% discount on acquirer • However could be avoided and also trap the target. e.g. Crown Zellerbach • Hence, as well as previous flip over, flip in also developed to avoid trap. • Variation on poison pill is back end provision. Still a right which may avoid takoever but different from f.o. and f.i. • Voting Plan - Variation on original poison pills which gives super-voting to existing preferred stock in event of takeover • Mechanics of poison pills - triggering events etc. • Legality of poison pills in the US • Usually held to be legal provided the basic principles are observed It is in the shareholders' interests • It does not prevent the possibility of an auction process • The target management have a much more clearly defined plan for the company than the acquirer. • Can even discriminate against acquirer, though note BNY and Irving Empirical Evidence - How do we explain the apparent contradiction? • Finally, Oracle versus PeopleSoft - Relatively Recent Interesting case
