dbs competitive m&a

Prof. Ian GiddyNew York University

Mergers & AcquisitionsHostile & Competitive

DBS Bank

Copyright ©2000 Ian H. Giddy M&A 2

Mergers and Acquisitions

“As Is” Value Merged Value Competitive Value

Concepts: Is firm to be acquired worth more within our company, or alone? To us or to them?


Gains to Target Firm Shareholders

Targets of successful tender offers and mergers earn significantly positive abnormal returns from announcement to completion of merger. Gains range from 16.9% to 34.1%.

Targets of unsuccessful tender offers also gain. But those with no new offers in 2 years lose all previous gains, while those with new offers make further gains.

Targets of unsuccessful mergers appear to lose all positive returns earned after announcement by the time failure becomes known.


Gains to Bidding Firm Shareholders

There are positive returns to successful bidders in tender offers

For successful bidders in mergers, evidence is mixed. It seems that returns are around zero.

For unsuccessful bidders in both tender offers and mergers, returns are negative.


Do Acquisitions Benefit Shareholders?Successful Bids

Technique Target Bidders

Tender offer 30% 4%

Merger 20% 0

Proxy contest 8% na

Note: Abnormal price changes are price changes adjusted to eliminate the effects of marketwide price changes


Do Acquisitions Benefit Shareholders?Unsuccessful Bids

Technique Target Bidders

Tender offer -3% -1%

Merger -3% -5%

Proxy contest 8% na

Equity Valuation:Application to Conrail

Prof. Ian GiddyNew York University


Case Study: The Acquisition of Conrail

Why merge Conrail and CSX? What’s Conrail worth? How was the CSX offer structured? How would Conrail shareholders react to

the offer?


Gains from Conrail Acquisition?

Rationale: Firm A should merge with Firm B if

[Value of AB > Value of A + Value of B + Cost of transaction]

Synergy Gain market power Discipline Taxes Financing


What is Conrail Worth?

Stand-alone valueMarket valueComparablesDiscounted present value

Value to acquirer Value in bidding-war context



Stand-alone valueMarket value: $71.00ComparablesDiscounted present value



What Is The Deal Worth?

Two-tier offer (why?)Front-end cash offer

40%*$92.50Back-end stock swap

60%*(1.85619*$46.75) Combined offer

40%*$92.50+60%*(1.85619*$46.75)

=$89.07


How Much Can a Buyer Pay?

Applying the discounted cash flow approach, we need to know:

1. The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes

2. The rate at which to discount the cash flows (required rate of return on equity)

The deadweight costs of making the acquisition (investment banks' fees, etc)

Cost of losing out!


What Gains from the Merger?

RestructuringFramework

1

2

CurrentMarketValue

3

Totalrestructuredvalue

Potentialvalue withinternal+ externalimprovements

Potentialvalue withinternalimprovements

Company’sDCF value

Maximumrestructuringopportunity

Financialstructureimprovements

4

Disposal/Acquisitionopportunities

Operatingimprovements

Current marketoverpricing orunderpricng

5

(Eg Increase D/E)


What's It Worth?

Valuation Methods Book value approach Market value approach Ratios (like P/E ratio) Break-up value Cash flow value


Estimating Future Cash Flows

Dividends? Free cash

flows to equity?

Free cash flows to firm?


Conrail: Required return

kj = RF + j (km - RF)where:kj = 16.15% (required return on company)

RF = 6.83% (US Treasury bond)

j = 1.30 (estimated Beta for company)

km = 14% (average S&P return)

We can use this required return to evaluate whether a company’s stock is worth buying.


If CSX can produce the following dollar profits for the next four years and beyond, at a discount rate of 16.15%, what is the present value of the cash flow stream?

$0 $111 $259 $381….

$1.xxxb = Present Value of cash flow stream$1.xxxb/90.2m shares =$? Per share ….add to $70 to get price could afford

Conrail: Value of Synergies?


Case Study: The Acquisition of Conrail

Could Norfolk Southern make a bid? How? How much? Does this change what CSX has to pay? Answer: Yes!

Result: Conrail shareholders opposed the CSX move and Conrail was split


Equity Valuation : Results

Estimating discount rate Estimating cash flows Application to CSX 1 & 2 Application to NS Decision?

See spreadsheet: conrail.xls


What's It Worth?

Valuation Methods Book value approach Market value approach Ratios (like P/E ratio)

Conrail: $89/4.91=18xAOL: 150x

Break-up value Cash flow value


M&A Advisory Services:1. Role of the Seller's Advisor

Develop list of buyers Analyze how different buyers would evaluate company Determine value of the company and advise seller on

probable selling price range Prepare descriptive materials showing strong points Contact buyers Control information process Control bidding process Advise on the structure of the transaction to give value to

both sides Ensure all nonfinancial terms are settled early Smooth postagreement documentation


M&A Advisory Services:2. Role of Buyer's Advisor

Thoroughly review target & subs Advise on probable price range Advise on target's receptiveness Evaluate target's options and anticipate actions Devise tactics Consider rival buyers Recommend financial structure and plan financing Advise on initial approach and follow-up Function as liason Advise on the changing tactical situation Arrange the purchase of shares through a tender offer Help arrange long term financing and asset sales


Mergers and Acquisitions: Summary

Mergers & Acquisitions Divestitures Valuation

Concept: Is a business worth more within our company, or outside it?


www.giddy.org

Ian Giddy

NYU Stern School of Business

Tel 212-998-0332; Fax 212-995-4233

[email protected]

http://www.giddy.org

dbs competitive m&a

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