Download - MA&CR mod1
-
8/8/2019 MA&CR mod1
1/59
-
8/8/2019 MA&CR mod1
2/59
KISS may turn a toad to a prince
investors may bankroll the princess who wish
to pay double for the right KISS
They were princes, when purchased, after a
KISS they became toads.
2
-
8/8/2019 MA&CR mod1
3/59
Why firms choose M&A instead of internal
growth?
Types of firms engaging in M&A activities, ie.,
which firms are likely to be acquiring, which
acquired, etc
Implications on aggregate merger activity
3
-
8/8/2019 MA&CR mod1
4/59
Expansion
M&A
Tender Offer
Joint Venture
Sell offs
Spin offs
Split offs
Split ups
Divestitures
Equity carve outs
4
-
8/8/2019 MA&CR mod1
5/59
Corporate Control
Premium Buy-backs
Standstill agreements
Antitakeover Amendments
Proxy Contests
Changes in Ownership Structure
Exchange Offers
Share Repurchases
Going Private
Leveraged Buy-outs
5
-
8/8/2019 MA&CR mod1
6/59
Any transaction that forms one economic unit
from two or more previous units.
6
The purchase of a controlling interest in a firm,
generally via a tender offer for the target
shares.
-
8/8/2019 MA&CR mod1
7/59
A method of effecting a takeover via a public offer
to target firm shareholders to buy their shares.
7
A combination of subsets of assets contributed by 2 or
more business entities for a specific business purpose
and limited duration. Each of the venture partners
continues to exist as a separate firm, and the joint
venture represents a new business enterprise.
-
8/8/2019 MA&CR mod1
8/59
8
A transaction in which a company distributes in a prorata basis all the shares it owns in a subsidiary to its
own shareholders. Creates a new public company with
(initially) the same proportional equity ownership asthe parent company.
The creation of an independent company through the
sale or distribution of new shares of anexisting business/division of a parent company.
Example: Ocwen & Ocwen Solutions named asAltisource
Portfolio Solutions
-
8/8/2019 MA&CR mod1
9/59
A transaction in which some, but not all, parent company shareholders receive shares in a
subsidiary in return for relinquishing their parent company shares.
McDonalds (MCD) split off of Chipotle Mexican Grill (CMG.B). I first heard
about the McDonalds split-off of Chipotle in September of 2006.
McDonalds offered to exchange up to an aggregate of 16,539,967 shares of
Chipotle class B common stock for outstanding shares of McDonalds
common stock. The exchange offer was designed to permit holders of
McDonalds common stock to exchange their shares for shares of Chipotle
class B common stock at a 10% discount to the calculated per-share value of
Chipotle class B common stock. Stated another way, for each $1.00 of
McDonalds common stock accepted in the exchange offer, the tendering
holder would receive approximately $1.11 of Chipotle class B common
stock, based on calculated per-share values, subject to a limit ratio and to
proration.
9
-
8/8/2019 MA&CR mod1
10/59
10
A transaction in which a company spins off all of its
subsidiaries to its shareholders and ceases to exist.
A corporate action in which a single company splits into
two or more separately run companies. Shares of the
original company are exchanged for shares in the new
companies, with the exact distribution of shares
depending on each situation. This is an effective way to
break up a company into several independent
companies. After a split-up, the original company
ceases to exist.
-
8/8/2019 MA&CR mod1
11/59
Sale of a segment of a company (assets, a product line,
a subsidiary) to a third party for cash/or securities.
11
A transaction in which a company spins off all of its
subsidiaries to its shareholders and ceases to exist.
A transaction in which a parent firm offers some of a
subsidiarys common stock to the general public, to bring
in a cash infusion to the parent without loss of control.
-
8/8/2019 MA&CR mod1
12/59
A voluntary contract by a large block shareholder (or
former large block holder bought out in a negotiated
repurchase) not to make further investment in the
target company for a specified period of time.
12
Repurchasing the stock of a large block holder (anunwanted acquirer) at a premium over market price.
-
8/8/2019 MA&CR mod1
13/59
An attempt by a dissident group of shareholders to gain
representation on a firms Board of Directors.
13
A corporate charter amendment which is intended tomake it more difficult for an unwanted acquirer to
takeover the firm.
-
8/8/2019 MA&CR mod1
14/59
A public corporation buys its own shares, by tender
offer, on the open market, or in a negotiated buy
back from a large block holder. 14
A transaction which provides one class (or more) ofsecurities with the right or option to exchange part
or all of their holdings for a different class of the
firms securities. This enables a change in the capitalstructure with no change in investment.
-
8/8/2019 MA&CR mod1
15/59
The purchase of a company by a small group of
investors, financed largely by debt. Usually entailsgoing private.
15
The transformation of a public corporation into aprivately held firm. (often via leveraged buy out or
management buy out).
-
8/8/2019 MA&CR mod1
16/59
Globalization and Liberalization of economy.
Intense competitive environment .
Advancement in technical know how.
Sustain , excel and compete both indomestic and international market.
16
-
8/8/2019 MA&CR mod1
17/59
The share holders of two companies deciding topool the resources of the companies under a
common entity to do the business activity is called
merger. Two companies agree to go forward as a single
company rather than separately owned & operated.
Both companies stocks are surrendered and newstock is issued in its place.
17
-
8/8/2019 MA&CR mod1
18/59
Top ten acquisition made by Indian
companies.
acquirer target co country
targeted
deal value
$ million
industries
Tata Steel Corus group UK 12000 Steel
Hindal Co Novels CANADA 5982 Steel
Videocon Daewoo Elec co. KOREA 729 Steel
Dr. Reddys labs Beta Pharmatical GERMAN 597 Pharma
Suzlon Energy Hansen Group BELGIUM 565 Energy
HPCL Kenya PetroleumRefinery ltd
KENYA 500 Oil Gas
Rambaxy Labs Terapia s a ROMANIA 324 Pharma
Tata Steel Nat steel SINGAPOR
E
293 Steel
Videocon Thomson FRANCE 290 Electronics
VSNL Teleg lobe CANADA 239 Telecom
18
-
8/8/2019 MA&CR mod1
19/59
To take advantage of economies of scale.
To increase market share, control suppliers
To take tax advantages.
To redirect the firms activities by deploying
surplus cash from one business to finance
profitable growth in another.
To increase size, so as to compete at the global
level.
19
-
8/8/2019 MA&CR mod1
20/59
Factors contributing to merger waves:
Shocks (e.g., technological change, deregulation, andescalating commodity prices)
Ample liquidity and low cost of capital
Overvaluation of acquirer share prices relative to targetshare prices
Why it is important to anticipate M&A waves:
Financial markets reward firms pursuing promisingopportunities early on and penalize those that followlater in the cycle.
Acquisitions made early in the wave often earnsubstantially higher financial returns than those made
later in the cycle.
-
8/8/2019 MA&CR mod1
21/59
Empire building.
To achieve core competency.
To diversify product range
To rehabilitate sick companies.
To take advantage of speedy entry in the market
rather then taking risk in green-field ventures.
To increase returns to the shareholders.
To lower the cost of production
21
-
8/8/2019 MA&CR mod1
22/59
Strategic Motives
Financial Motives
Organizational Motives
-
8/8/2019 MA&CR mod1
23/59
Expansion and growth (less time consuming
and more cost effective)
Dealing with entity of MNCs.
Economies of scale.
Synergy V(AB)>V(A)+V(B)
value merged company > independent value of
company A & company B leading to higher EPS.
Market Penetration
23
-
8/8/2019 MA&CR mod1
24/59
Deployment of surplus funds.
Fund raising capacity (increase asset base)
Increase MC.
Tax planning (acquire a sick company)
Creating shareholder value.
Operating economies (savings on OH & other OE)
Tax benefits.
Revival of sick units.
-
8/8/2019 MA&CR mod1
25/59
Superior Management.
Ego satisfaction.
Retention of managerial talent. Removal of inefficient management
-
8/8/2019 MA&CR mod1
26/59
Growth orientation (escape from small home market to
achieve the economies of scale)
Access to inputs
Unique advantages : To exploit company`s brands,
reputation, design, production & management
capabilities
Defensive strategies : To avoid countrys political and
economic instability, to circumvent protective barriers
Client needs
Opportunism
-
8/8/2019 MA&CR mod1
27/59
Merger activity is an example of integration taking place within
industries. This can be:
Vertical integration, where firms at different stages in the production
chain merge (Forward & Backward)
or
Horizontal integration, where competing firms in the same industry
merge
or
Conglomerate: no clear substitute or complementary relationship.
or
Circular: involves merger of companies which produce different
products that are unrelated and but are marketed through the same
channel
27
-
8/8/2019 MA&CR mod1
28/59
Two firms producing the same product merge
to achieve economies of scale.
The right size can change over time
McDonald and Douglas aircraft corporations
initially merged to compete with Boeing.
Boeing and McDonald-Douglas merge to compete
with AirBus.
28
-
8/8/2019 MA&CR mod1
29/59
Decrease in competition
Economies of scale
Better market control
Avoid duplicate facilities
Decrease the WC
Increased monopoly
Tret to small players
No guarantee of the maket
29
-
8/8/2019 MA&CR mod1
30/59
A firm in industry A sells
its output to industry B.
Two firms merge to
integrate their
production.
30
Seed andFertilizer
Companies
Grain Farms
Cereal
Companies
-
8/8/2019 MA&CR mod1
31/59
A firm in industry A
sells its output to
industry B.
Two firms merge to
integrate theirproduction.
31
Seed andFertilizer
Companies
Grain Farms
Cereal
CompaniesBasic Theorem: you cannot
create monopoly power by avertical integration. If one
industry is monopolized, it
does not increase its
monopoly power by verticalintegration into a
competitive industry.
-
8/8/2019 MA&CR mod1
32/59
Cost Reduction
Economies of Control
Better Planning
Monopoly by the input supplier
Price discrimination
32
-
8/8/2019 MA&CR mod1
33/59
Financial Conglomerates
Do not participate in the operating decisions but
take strategic decisions only. This improves risk,better results.
Managerial Conglomerates
Takes advantage of unequal management
competence.
33
-
8/8/2019 MA&CR mod1
34/59
Product Expansion
Covers huge territory
Minimizes risk
34
-
8/8/2019 MA&CR mod1
35/59
Economies of scale
Avoid unhealthy competition
Synergy
Risk minimization
Consolidation of capacities
Marketing advantages
Financial advantages
Right sizing
Value creation
35
-
8/8/2019 MA&CR mod1
36/59
Valuation pitfalls
Inaccurate estimation
Overestimating synergy
Hidden liabilities
Implementation delay
Cultural differences
Poor public relations
Conflict of interest
36
-
8/8/2019 MA&CR mod1
37/59
Efficiency theories
Differential managerial efficiency
Inefficient management
Operating synergy
Pure diversification
Strategic realignment to changing environments Undervaluation
37
-
8/8/2019 MA&CR mod1
38/59
Information & Signaling
Agency problems & managerialism
Free Cash Flow Hypothesis
Market Power
Taxes
Redistribution
38
-
8/8/2019 MA&CR mod1
39/59
Change in the levels of managerial efficiency,
there is social as well as private gain.
In the extreme there will be only one firm in the
economy, leading to problem of coordination
How do they select & how do they pay?
Managerial synergyhypothesis:
Merger is required as excess managerial capacity can not be
released and expansion is not possible
Why to merge? .. get from outside
39
-
8/8/2019 MA&CR mod1
40/59
It does not perform up to the potential ie.,
other control group may do the job better.
Assumptions:
Owners are unable to replace the managers
If replacement was the sole motive then even if
it is a subsidiary then the purpose is served.
Managers are replaced after mergers.
40
-
8/8/2019 MA&CR mod1
41/59
Economies of scale exists & activities that
fall short of achieving the potentials for
economies of scale
Economies Of Scale arise of indivisibilities
Problem that would arise here is:
How to combine good parts & eliminate not
required ones?
All size firms need some amount of corporate
staff.41
-
8/8/2019 MA&CR mod1
42/59
Demand for diversification by managers, employees,
preservation of organizational reputation, financial & taxadvantage.
The arguments against are:
Shareholders can diversify across firms
Employees have firm specific knowledge
Owner manager may not like to loose control
Information is accumulated within the firm, its transfer
outside may not be possible or may be done with some noise.
Reputational Capital of the firm is established with that firm
only.
Diversification may increase the debt capacity
This can be achieved through internal growth also
42
-
8/8/2019 MA&CR mod1
43/59
Demand is increasing faster than before
So need to have more funds, there is
distinction between external & internal funds
Discussion on tax advantage & leverages
Evidences suggests that the opportunities
have improved
43
-
8/8/2019 MA&CR mod1
44/59
Strategic planning is concerned with environments not
only the operating decisions.
It says possibilities of Economies of scale or tappingthe underused capacity
They get required capacities: may be managers,
funds..by acquisition, but timings is important
Mergers is quicker than internal growth
The experiences say NPV from M&A is comparatively smaller.
44
-
8/8/2019 MA&CR mod1
45/59
Merger happen because A undervalues T
A has insider information
Market Value of the assets VS. Replacement Costs
Inflation
Inflation depressed the stock prices between 1970 & 1982
Replacement cost of the assets were high compared to the
historical book values
Qratio is the ratio of the market value of the shares
to the replacement cost of the assets represented by
these shares. declined.
45
-
8/8/2019 MA&CR mod1
46/59
A company can add capacity easily be merging
than by internal growth
If a firm wishes to add capacity it means that
the Q ratio is high
Eg: q ratio is 0.6, and the merger premium is say
1.5, then the purchase price is 0.9 (1.5*0.6)ie., 10
percent below the replacement cost.
46
-
8/8/2019 MA&CR mod1
47/59
If the tender offer is unsuccessful, then the share value
of T is going to go up. This leads to:
Sitting on a gold mine (T is undervalued; revalue)
Kick in the pant (inspires T to implement a more effective
business strategy)
It may be acquired by somebody else who applies some
special resources in T
Researchers say: if T will not get any offer for another 5years after unsuccessful bid, the share prices are going
to fall back to the pre-offer level
47
-
8/8/2019 MA&CR mod1
48/59
Signalling Theory:
This was first developed for labour markets, says it is
less expensive if you hire high skilled labourers,
hence the level of education was the signal of thecost on training & Education
Also signals the capacity of the organization.
Ross connects this to the Capital Structure theory
Nature of firms investment policy is signaled through its
capital structure
Managers compensation is tied to the capital structure48
-
8/8/2019 MA&CR mod1
49/59
Less perquisites, if managers were owners
Costs are:
Cost of monitoring
Cost of structuring a set of contracts
Cost of bonding the guarantee that the agents
will make optimum decisions
Residual loss welfare loss arising from the
divergence of decisions.
49
-
8/8/2019 MA&CR mod1
50/59
Compensation tied to the performance and inturn to the agency problems
Stock market says: if there is low priced
stock to change the behaviour of the
managers
When these does not work out there may be
an external control exercised
50
-
8/8/2019 MA&CR mod1
51/59
Some say Mergers are sign of agency problems
Managers feel that their compensation is
related to the size of the firm, so wants to
expand using low hurdle rate, but not so.
This theory says that if there is agency
problem & there is mergers, the merger
activity is a sign of the agency problem of
inefficient, external investment by managers
51
-
8/8/2019 MA&CR mod1
52/59
Managers commit error of over optimism invaluation due to pride, animal spirits or hubris
When A values T, and the valuation of assets is
below the market price no offer is made
This theory says that:
Market is in strong form ie., Stock prices reflects all
information (pub./non-pub.)
52
-
8/8/2019 MA&CR mod1
53/59
When agency costs are large takeovers helps to
reduce them
Hypothesis by Jenson: payout of FCF can serve as
an important role in dealing with the conflict
between the managers & the shareholders.
FCF is the cash flow in excess of the amounts
required to fund all the projects that havepositive NPV, when discounted at the applicable
cost of capital
53
-
8/8/2019 MA&CR mod1
54/59
This reduces the amount of resources under the
control of the managers thereby reducing their
power.
They are under monitoring when they seek morefunds.
Issue debt for stock, managers can effectively
use the future cash flows, but this reduces the
growth
He also says: increased leverage involves cost,
increase in risk of bankruptcy.
54
-
8/8/2019 MA&CR mod1
55/59
There is agency problem with this also: ie.,
to benefit shareholders, bondholders are put
into risk
Therefore he says: Optimal debt/equity ratio
is where the marginal cost of debt equals
marginal benefits of debt
55
-
8/8/2019 MA&CR mod1
56/59
Evidences:
Firms with positive FCF, stock prices will increase
with unexpected increase in the payouts and
decrease with the unexpected decreases in payouts
This do not apply to the firms with more profitable
projects than cash flow to fund them
This theory does not apply to growth firms
56
-
8/8/2019 MA&CR mod1
57/59
M & A happens to increase the market share
But does not say how increased market share
will lead to EOS or synergy or social gain
Internal expansion also can be a solution?
Will the buying price is economical than expansion?
This may lead to undue concentration, leadingto monopoly
57
-
8/8/2019 MA&CR mod1
58/59
Sale & lease back transfers the tax credit,
mitigate tax incentives for mergers
Carryover of Net Operating Losses
Substitution of Capital Gains for ordinary income
Other Tax Incentives
58
-
8/8/2019 MA&CR mod1
59/59
Redistribution of source of value among the
shareholders
No evidence that the shareholders gain
Breech of trust may lead to demand for wages
(reduce the cost due to the competitiveness, no
competition in merger)
Managerial inefficiency