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Summary coporate valuation restructering and M&As - M&A pa
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Corporate valuationM&A part
Merger: Two or more companies come together to combine their resources and achieve a common goal.
In practice, one company is often dominant. Mergers are often friendly (supported by incumbent
management)
Acquisition: One company acquires shares and control of another company
M&A is important because:
- An important event in firm’s life cycles
- Acts as a corporate governance tool
- May generate value
- Also, it is a big business
See slides for M&A businesses
Drivers of the merger business
1. Technological change → computers, internet, and information systems
2. Economics of scale, economies of scope, and the need to catch up technologically
a. AT&T acquired companies in the 1990s to catch up
b. Complementarities between internet, TV and other services
3. Globalization and freer trade
i. GATT, introduction of the EURO
4. Changes in industrial organisation
a. Increased competition in airlines, financial services etc
5. Deregulation and regulation
6. Economic conditions trends
Do M&As create value?
- Yes → M&A creates value by facilitating efficiency and moving resources to their optimal use
- No → firms are already operating at their optimal capacity. M&A is just a way to redistribute
the existing wealth across stakeholders
Read slide for opinion of Warren Buffet, he thinks that M&A does not create value
Merger terminology (not really important in the exam)
- Tender offer: A firm makes an offer directly to the shareholders to sell (tender) their shares at
specified prices. Some tender offers may be hostile
- Conditional tender offer: The tender offer is conditional on the bidding receiving a certain
percentage of shares (normally 50%)
- Restricted tender offer: The bidder only accepts a certain percentage of outstanding shares, i.e.
50%. Often there is prorating all tendering shareholders sell a percentage of the tendered shares
- Two tier tender offer: A first tier is employed to get 50% of the shares - this offer is normally in
cash. The second tier a lower value can be offered since control has already been achieved. The
second tier is often paid in securities such as debt rather than cash or equity of the bidder
- Three piece suitor, three steps:
- An initial toehold is acquired by the bidder
, - Toehold: An initial stake in the target firm (normally 5%)
- At 5% regulation 13(d) requires that the ownership is disclosed to the Securities
and Exchange Commission (SEC)
- A tender offer is made to get control
- Minority shareholders are bought out in a squeeze-out
- Minority squeeze out: Majority of shareholders forces the sale of shares from the minority to the
majority
- Equity carve out: An offering of a full or partial interest of a subsidiary to the investment public
- Divestiture: A sale of a particular set of assets of the firm to another firm
Three types of mergers, vertical horizontal and conglomerate mergers
1. horizontal merger: two merging firms are competitors in the same industry
a. Possible explanation, economies of scale
b. Other possible explanation, monopoly power
i. Cannot explain why mergers bunch in time
ii. Not all small firms merge horizontally
c. Industry roll up - a particular form of a horizontal merger
i. One firm acquires a number of small firms in an industry, often motivated by the
pursuit of economies of scale
ii. Often the consolidator undertakes an IPO to get financing to purchase the small
firms
iii. Many consolidators that have taken the IPO route have filed for bankruptcy
2. vertical merger: One of the merging firms uses the other firms’ output as input
a. Oil industry (exploration, producing, refining, marketing. Pharmaceutical industry (R&D,
drug production, marketing)
b. Why vertical integration:
i. Improvement in production and inventory planning
ii. Reduction of search, negotiation, payment collection and advertising costs if
producer is located within the firm
iii. Hold up problem may be avoided and is solved with a vertical merger. Hold up
problem:
1. One firm must make an investment to transact with another. This
investment is relation-specific; that is, its value is appreciably lower
(perhaps zero) in any use other than supporting the transaction between
the two parties.
2. Impossible to draw up a complete contract that covers all the possible
issues that might arise in carrying out the transaction and could affect the
sharing of the returns from the investment.
3. Example: Dies used to shape steel into the specific forms needed for
sections of the body of a particular car model. These dies are expensive
—they can cost tens of millions of dollars. Further, they are next-to-
worthless if not used to make the part in question. Suppose the dies are
paid for and owned by an outside part supplier. Then the supplier will be
vulnerable to hold-up. Because any original contract is incomplete,
situations are very likely to arise after the investment has been made that
, require the two parties to negotiate over the nature and terms of their
future interactions. Such ex post bargaining may allow the automobile
manufacturer to take advantage of the fact that the dies cannot be used
elsewhere to force a price reduction that grabs some of the returns to the
investment that the supplier had hoped to enjoy.
4. The outcome: the supplier may then be unwilling to invest in the specific
assets or it may expend resources to protect itself against the threat of
hold up. In either case, inefficiency results, either the market does not
bring about optimal investment, or resources are expended on socially
wasteful defensive measures. Having the auto company own the dies
solves the problem.
3. Conglomerate: Merging firms are in unrelated businesses. (e.g. merger of mobil oil and
montgomery ward)
a. Reduce risk through diversification
i. Combination of businesses whose returns re not highly correlated would reduce
the overall variance of the returns
b. Better financial planning and control
i. In practice, conglomerates have more professional financial planning
ii. Improves resource allocation
c. Can be easier to change the management
i. Less dependent on business specific know
Legal aspects of the merger
- Statutory provisions of mergers (depends on the country(ies) that firms are chartered)
- Percentage of vote required to approve M&A
- Who is entitled to vote
- The rights of the voters that object to the transaction
- Ex. statutes of Delaware (typical)
- Board of directors have to approve the transaction first
- Then submitted for ratification to the shareholders of respective corporation
- Prior to the 1960s mos states required ⅔ majority
- 1967 Delaware required majority vote, other stated include california, michigan
and new jersey
- New york still requires ⅔ majority
- Most mergers are approved
-
Motives for mergers
1. Economies of scale
a. Bradley, desai kim (1983,1988(
2. Transaction cost efficiency
a. Coase (1937)
3. Agency costs of FCF
a. Jensen (1937)
4. Disciplinary effects
a. Manne (1965), Alchian and Demsets (1972)
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