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    Mergers and Acquisitions: Rights Reserved. Mcgraw-Hill/Irwin

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    Mergers and Acquisition Theory

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    Mergers and Acquisitions: Rights Reserved. Mcgraw-Hill/Irwin

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    kkn35
    122 views23 pages
    Mergers and Acquisition Theory

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    Mergers and Acquisition

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    Mergers and Acquisition Theory

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    © All Rights Reserved
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    Download as ppt, pdf, or txt
    122 views23 pages

    Mergers and Acquisitions: Rights Reserved. Mcgraw-Hill/Irwin

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    kkn35
    Mergers and Acquisition Theory

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    © All Rights Reserved
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    Download as ppt, pdf, or txt
    of 23

    Chapter

    19

    Mergers and Acquisitions

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Key Concepts and Skills


    Be able to define the various terms associated with
    M&A activity
    Understand the various reasons for mergers and
    whether or not those reasons are in the best interest
    of shareholders
    Understand the various methods for paying for an
    acquisition
    Understand the various defensive tactics that are
    available

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Chapter Outline
    19.1 The Legal Forms of Acquisitions
    19.2 Taxes and Acquisitions
    19.3 Accounting for Acquisitions
    19.4 Gains from Acquisition
    19.5 Some Financial Side Effects of Acquisitions
    19.6 The Cost of an Acquisition
    19.7 Defensive Tactics
    19.8 Some Evidence on Acquisitions: Does M&A Pay?
    19.9 Divestitures and Restructurings
    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.1 The Legal Forms of Acquisitions

    There are three basic legal procedures that


    one firm can use to acquire another firm:

    Merger or Consolidation
    Acquisition of Stock
    Acquisition of Assets

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Merger versus Consolidation

    Merger
    One firm is acquired by another
    Acquiring firm retains name and acquired firm ceases
    to exist
    Advantage legally simple
    Disadvantage must be approved by stockholders of
    both firms

    Consolidation

    Entirely new firm is created from combination of


    existing firms

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Acquisitions

    A firm can be acquired by another firm or individual(s)


    purchasing voting shares of the firms stock
    Tender offer public offer to buy shares
    Stock acquisition

    No stockholder vote required


    Can deal directly with stockholders, even if management is unfriendly
    May be delayed if some target shareholders hold out for more money
    complete absorption requires a merger

    Classifications

    Horizontal both firms are in the same industry


    Vertical firms are in different stages of the production process
    Conglomerate firms are unrelated

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Varieties of Takeovers
    Merger

    Takeovers

    Acquisition

    Acquisition of Stock

    Proxy Contest

    Acquisition of Assets

    Going Private
    (LBO)

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.2 Taxes and Acquisitions

    If it is a taxable acquisition, selling


    shareholders need to figure their cost basis
    and pay taxes on any capital gains.
    If it is not a taxable event, shareholders are
    deemed to have exchanged their old shares
    for new ones of equivalent value.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.3 Accounting for Acquisitions

    The Purchase Method

    Pooling of Interests

    The source of much goodwill


    Pooling of interest is generally used when the
    acquiring firm issues voting stock in exchange for at
    least 90 percent of the outstanding voting stock of
    the acquired firm.

    Purchase accounting is generally used under


    other financing arrangements.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.4 Gains from Acquisition

    Most acquisitions fail to create value for the


    acquirer.
    The main reason why they do not lies in failures to
    integrate two companies after a merger.

    Intellectual capital often walks out the door when


    acquisitions aren't handled carefully.
    Traditionally, acquisitions deliver value when they allow
    for scale economies or market power, better products and
    services in the market, or learning from the new firms.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Synergy

    Suppose firm A is contemplating acquiring firm B.


    The synergy from the acquisition is
    Synergy = VAB (VA + VB)
    The synergy of an acquisition can be determined
    from the standard discounted cash flow model:

    Synergy =

    t=1

    McGraw-Hill/Irwin

    CFt
    (1 + r)t

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Sources of Synergy

    Revenue Enhancement
    Cost Reduction

    Tax Gains

    Replacement of ineffective managers


    Economies of scale or scope
    Net operating losses
    Unused debt capacity

    Incremental new investment required in


    working capital and fixed assets

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Calculating Value

    Avoiding Mistakes

    Do not ignore market values


    Estimate only Incremental cash flows
    Use the correct discount rate
    Dont forget transactions costs

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.5 Some Financial Side Effects

    Earnings Growth

    If there are no synergies or other benefits to the


    merger, then the growth in EPS is just an artifact of a
    larger firm and is not true growth (i.e., an accounting
    illusion).

    Diversification

    Shareholders who wish to diversify can accomplish


    this at much lower cost with one phone call to their
    broker than can management with a takeover.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.6 The Cost of an Acquisition

    Typically, a firm would use NPV analysis


    when making acquisitions.
    The analysis is straightforward with a cash
    offer, but gets complicated when the
    consideration is stock.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Cash Acquisition

    The NPV of a cash acquisition is:

    NPV = (VB + V) cash cost = VB* cash cost

    Value of the combined firm is:

    VAB = VA + (VB* cash cost)

    Often, the entire NPV goes to the target firm.


    Remember that a zero-NPV investment may
    also be desirable.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Stock Acquisition

    Value of combined firm

    Cost of acquisition

    VAB = VA + VB + V

    Depends on the number of shares given to the target


    stockholders
    Depends on the price of the combined firms stock after the
    merger

    Considerations when choosing between cash and stock

    Sharing gains target stockholders dont participate in stock


    price appreciation with a cash acquisition
    Taxes cash acquisitions are generally taxable
    Control cash acquisitions do not dilute control

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.7 Defensive Tactics

    Corporate charter
    Establishes conditions that allow for a takeover
    Supermajority voting requirement

    Targeted repurchase (a.k.a. greenmail)


    Standstill agreements
    Poison pills (share rights plans)
    Leveraged buyouts

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    More (Colorful) Terms

    Golden parachute
    Poison put
    Crown jewel
    White knight
    Lockup
    Shark repellent
    Bear hug
    Fair price provision
    Dual class capitalization
    Countertender offer

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.8 Evidence on Acquisitions

    Shareholders of target companies tend to earn excess


    returns in a merger:

    Shareholders of target companies gain more in a tender


    offer than in a straight merger.
    Target firm managers have a tendency to oppose mergers,
    thus driving up the tender price.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Evidence on Acquisitions

    Shareholders of bidding firms earn a small excess


    return in a tender offer, but none in a straight merger:

    Anticipated gains from mergers may not be achieved.


    Bidding firms are generally larger, so it takes a larger
    dollar gain to get the same percentage gain.
    Management may not be acting in stockholders best
    interest.
    Takeover market may be competitive.
    Announcement may not contain new information about
    the bidding firm.

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    19.9 Divestitures and Restructurings

    Divestiture company sells a piece of itself to


    another company
    Equity carve-out company creates a new company
    out of a subsidiary and then sells a minority interest
    to the public through an IPO
    Spin-off company creates a new company out of a
    subsidiary and distributes the shares of the new
    company to the parent companys stockholders
    Split-up company is split into two or more
    companies and shares of all companies are distributed
    to the original firms shareholders

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

    Quick Quiz

    What are the different methods for achieving a takeover?


    How do we account for acquisitions?
    What are some of the reasons cited for mergers? Which
    of these may be in stockholders best interest and which
    generally are not?
    What are some of the defensive tactics that firms use to
    thwart takeovers?
    How can a firm restructure itself? How do these methods
    differ in terms of ownership?

    McGraw-Hill/Irwin

    Copyright 2007 by The McGraw-Hill Companies, Inc. All

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