, 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
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