Summary
Summary Contemporary issues in Finance: Corporate financial restructuring
- Course
- Institution
The document contains all the subject matter that was covered in the lesson. You can also find part 2 on the account.
[Show more]
Seller
Follow
StudentHW2003
Reviews received
Content preview
Contemporary issues in financeInhoud
NON-M&A growth strategies & divestitures .............................................................................. 5
Mergers and acquisitions ....................................................................................................... 5
Value creation by M&A activities ....................................................................................... 5
Example of mergers & acquisitions .................................................................................... 6
Horizontal M&A .................................................................................................................. 6
Vertical M&A ...................................................................................................................... 7
Conglomerate M&A............................................................................................................ 9
M&A Waves ...................................................................................................................... 10
Rising corporate profits .................................................................................................... 11
Corporate profits & sustainable growth ........................................................................... 12
Strategic versus financial acquirors .................................................................................. 12
Value destruction by M&A’s ............................................................................................. 13
Does M&A pay? .................................................................................................................... 14
Empirical evidence ........................................................................................................... 14
M&A value creation.......................................................................................................... 22
Alternative forms of growth ................................................................................................. 23
Corporate cooperation ..................................................................................................... 24
Divestitures ....................................................................................................................... 28
Financial restructuring.............................................................................................................. 40
Financial and strategic value creation .................................................................................. 40
Leveraged recapitalizations .................................................................................................. 40
Leveraged recaps: empirical studies ................................................................................ 45
Leveraged recaps: empirical studies → post recap performance .................................... 46
Leveraged recaps: Financial crisis..................................................................................... 46
Dual-class stock recapitalization (DCR) ................................................................................ 49
Exchange offer ...................................................................................................................... 51
Financial distress .................................................................................................................. 52
Bankruptcy ....................................................................................................................... 53
Costs of financial distress ................................................................................................. 54
1
, Costs of financial distress: cross-industry ........................................................................ 55
Costs of financial distress: cross-country ......................................................................... 55
Liquidations ...................................................................................................................... 57
Going private & leveraged buyouts .......................................................................................... 58
Going private ........................................................................................................................ 58
Leveraged buyouts ............................................................................................................... 58
LBO vs Leveraged recap .................................................................................................... 58
LBO deal structure ............................................................................................................ 58
LBO/MBO example: Wavell Corporation .......................................................................... 59
Valuation of LBO companies ................................................................................................ 61
Valuation of LBO companies: Example ............................................................................. 62
LBO stages ........................................................................................................................ 64
Exit strategies ....................................................................................................................... 65
Empirical studies .................................................................................................................. 66
‘80s samples ..................................................................................................................... 66
empirical studies .............................................................................................................. 66
Value creation in LBO ........................................................................................................... 67
positive ............................................................................................................................. 67
expropriation .................................................................................................................... 68
Post buyout....................................................................................................................... 68
LBO activity ....................................................................................................................... 71
LBO Waves ........................................................................................................................ 71
Buy out boom ................................................................................................................... 72
Private equity ....................................................................................................................... 72
Private equity in Europe (2006/2007) .............................................................................. 73
Buyout boom: valuations & leverage ................................................................................... 75
Buyout boom: example: Blackstone/Hilton ..................................................................... 76
Buyout bust .......................................................................................................................... 78
Buyout bust: LBO activity ................................................................................................. 78
LBO post boom: lower risk? ............................................................................................. 79
Share purchases ....................................................................................................................... 82
Repurchases & payout policy ............................................................................................... 82
2
, Repurchases vs. dividends:................................................................................................... 82
US quoted companies ...................................................................................................... 82
UK quoted companies ...................................................................................................... 83
Repurchases versus LBO/recap ............................................................................................ 84
Repurchases motives ............................................................................................................ 85
Fixed-price tender (FPT) offers ............................................................................................. 85
Dutch auction repurchases (DAR) ........................................................................................ 87
Transferable put rights (TPR) ................................................................................................ 88
Open market repurchases (OMR) ........................................................................................ 88
Event studies ........................................................................................................................ 89
90’s.................................................................................................................................... 89
Undervaluation model ......................................................................................................... 90
Repurchases versus dividends .............................................................................................. 91
empirical evidence ........................................................................................................... 92
Motives of the dividend versus repurchase choice .......................................................... 92
Alternative use of dividends ............................................................................................. 93
Repurchase motives: support stock price: ....................................................................... 94
Buyback boom .................................................................................................................. 94
Financial crisis: industry-specific drop in repurchases ......................................................... 95
Recession: general drop in repurchases ........................................................................... 95
US: return of the mega buybacks ..................................................................................... 95
Europe: lower buyback ..................................................................................................... 96
Investment strategy: example .............................................................................................. 97
Bull market ....................................................................................................................... 97
Bear market ...................................................................................................................... 98
Investment strategies & merger arbitrage ............................................................................... 99
Takeover targets ................................................................................................................... 99
Detecting targets ................................................................................................................ 100
Event driven mutual funds ................................................................................................. 103
Example: ......................................................................................................................... 103
Post-bid strategy: Merger arbitrage ................................................................................... 104
Risk components ............................................................................................................ 104
3
, Process............................................................................................................................ 105
Strategies ........................................................................................................................ 105
Cash offer........................................................................................................................ 106
Exchange offer ................................................................................................................ 108
Combined offer............................................................................................................... 110
Other offer types ............................................................................................................ 110
Merger arbitrage: ABN Amro ......................................................................................... 111
Empirical evidence on merger arbitrage performance .................................................. 112
Merger arbitrage funds ...................................................................................................... 112
Merger arbitrage funds and leverage................................................................................. 113
Selling points .................................................................................................................. 113
Problems with selling points .......................................................................................... 114
Survivorship bias ............................................................................................................ 114
Merger arbitrage funds .................................................................................................. 115
Merger arbitrage funds: returns .................................................................................... 116
S&P Merger arbitrage index ........................................................................................... 116
Merger arbitrage funds: Correlation with other assets ................................................. 117
Betas in bear and bull markets ....................................................................................... 117
During crises ................................................................................................................... 118
Why are hedge funds not crisis-proof? .............................................................................. 118
4
,NON-M&A growth strategies & divestitures
Mergers and acquisitions
Goal → generate value (= positive NPV transactions) by looking for synergies
• Synergy = the sum is greater than the parts
o “Synergy is a term widely used in business to explain an acquisition that
otherwise makes no sense” warren Buffet
Goal → Traditionally: economies of scale
• Cost reduction in production, administrative expenses and R&D
• Increased market power
Value creation by M&A activities
Wider definition of synergy gains:
• Economies of scope
o Wider range of products
o Complementarities
• Technological benefits:
o Buying existing technology and/or patents
o Buying R&D capacity & know-how
• Attract new skills
o Management
o highly qualified personnel
• Client relationship
o “Follow the client”
o one-stop shopping solutions
• Globalisation
o Growth in foreign markets
o Delocalised production (low wages, low regulation)
• Diversification
o reduce risk in uncertain times
5
,Example of mergers & acquisitions
Merger: = union of 2 partners of more or less equal size; thorough restructuring of new
entity, often with new name
• Merger by amalgamation/consolidation
• Acquisition (merger by absorption):
o clearly dominant partner; smaller party is integrated in existing structure of
the larger party
o Takeover ≈ acquisition; often with negative connotations (hostile takeover)
Horizontal M&A
• Two companies active in the same industry
• Objective → Economies of scale
• Potentially adverse effects on competition and prices for consumers and suppliers
6
,AB InBev & SABMiller (2016)
Rationale of the deal:
• Absolute No. 1 position for AB InBev in global beer market:
o Revenue: to 60 billion USD
o Production: 788 million hectolitres of beer (=1/3 of total beer production)
• Improved geographical presence: access for AB Inbev to African, Asian and South
American markets
• Expected synergies: cost savings of approx. $2 billion a year
o 30% by reducing offices/local headquarters
o 25% due to better purchasing conditions
o 45% efficiency gains in distribution & production (approx. 6000 fewer jobs)
Before and after the deal:
Vertical M&A
• Two companies active in different phases of the supply chain
• Goal:
o efficiency gains through better coordination within the chain reduce search
and contract costs
o ensuring supply
• Potentially detrimental effects on competition and suppliers with indirect effects on
consumers
• Classic examples:
o petrochemical company/oil producer
o wholesale/retail
o telecom infrastructure/telecom operator
7
,Industrial firms:
Ikea produces his own wood
Media:
Impact on markets and competitors
• Upstream foreclosure:
o = wood production (example: Ikea)
o U1 no longer wishes to sell to D2
• Downstream foreclosure:
o = Furniture production (example: Ikea)
o D1 no longer wishes to buy from U2
8
,Conglomerate M&A
• Two companies with different activities
• Financial conglomerates: → reduce financial risk and better financial policy
o Diversification for better risk/return ratio
o Avoidance of financial distress (gambler's ruin)
o Economies of scale in financing (internal capital markets)
o Monitoring of management
• Managerial conglomerates:
o ≈ financial conglomerates + greater role for headquarters in sharing
management capacity
Example: general Electrics
they gave loans to their other
companies were interest rates where higher and banks didn’t want to gave them these loans
Conglomerates
• = Concentric companies: ≈ conglomerate, but with more links between different
activities (expanding into related activities; international expansion, etc.)
9
, M&A Waves
deal value has exploded in times
Example: 1st Wave – US 1897-1904
• Major technological changes, economic growth and industrial processes
• Mostly horizontal deals
• "Merging for monopoly"
o For instance Standard Oil (85% market share), American Tobacco (90%), U.S.
Steel (75%)
10
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller StudentHW2003. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $8.20. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
48756 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 15 years now