This is a summary of the first part of the course 'Strategic Financial Management' taught by Prof. R. Goncharenko. All materials seen are included as well as some examples to clarify the theory. The summary is based on the PowerPoint slides of Prof. R. Goncharenko and notes taken in class.
Summary Strategic Financial Management (Part 1)
This is a summary of the first part of the course ‘Strategic Financial Management’ taught by
Prof. R. Goncharenko. The summary is based on the PowerPoint slides of Prof. R.
Goncharenko and notes taken in class.
Academic year: 2020-2021
0
,Inhoudsopgave
PART 1 ............................................................................................................................................................1
1 INTRODUCTION TO MERGERS AND ACQUISITIONS .................................................................................1
1.1 WHAT IS A MERGER?..................................................................................................................................1
1.2 WHAT IS AN ACQUISITION?..........................................................................................................................1
1.2.1 Friendly takeovers .......................................................................................................................1
1.2.2 Hostile takeovers .........................................................................................................................2
1.3 M&A: IMPORTANT CONSIDERATIONS IN DOING THE DEAL..................................................................................2
1.4 M&A PROFESSIONALS ................................................................................................................................4
1.5 WHY DO COMPANIES MERGE OR ACQUIRE? ....................................................................................................5
1.6 MERGERS AND CONGLOMERATES..................................................................................................................6
1.6.1 Vertical integration .....................................................................................................................6
1.6.2 Horizontal integration .................................................................................................................7
1.6.3 Conglomeration ..........................................................................................................................7
1.7 MERGERS: SUCCESSFUL OR FAILURE? .............................................................................................................8
1.8 MERGERS: PAST, PRESENT AND FUTURE .........................................................................................................8
2 VALUATION FOR MERGERS AND ACQUISITIONS ...................................................................................10
2.1 COMPARABLES APPROACH .........................................................................................................................10
2.2 THE DISCOUNTED FREE CASH FLOW (DFCF) METHOD ....................................................................................11
2.3 CASE STUDY: WHATSAPP ACQUISITION BY FACEBOOK .....................................................................................13
3 THEORIES OF MERGERS AND ACQUISITIONS ........................................................................................14
3.1 THEORIES OF VALUE CREATION VERSUS DISTRACTION IN M&A’S .......................................................................14
3.2 THE THEORIES OF TAKEOVERS .....................................................................................................................14
3.2.1 Managerial incentives ...............................................................................................................14
3.2.2 Positive theory of takeovers ......................................................................................................14
3.3 MANAGERIAL RESISTANCE .........................................................................................................................17
4 EVENT STUDY ANALYSIS .......................................................................................................................18
4.1 ONE VARIABLE REGRESSION MODEL .............................................................................................................18
4.2 AN EVENT STUDY .....................................................................................................................................19
4.2.1 Constant Mean Return Model ...................................................................................................20
4.2.2 A Market Model for Normal Returns.........................................................................................20
4.3 AGGREGATION OF THE ABNORMAL RETURNS .................................................................................................21
4.3.1 Aggregation through time: cumulative abnormal returns (CARs) ............................................22
4.3.2 Aggregation across firms ..........................................................................................................22
4.3.3 Aggregation across firms and time ...........................................................................................22
4.4 AN ALTERNATIVE APPROACH ......................................................................................................................23
5 EMPIRICAL EVIDENCE ON M&AS ..........................................................................................................25
5.1 MAIN THEORIES OF M&A .........................................................................................................................25
5.1.1 Mergers as value-increasing decisions ......................................................................................25
5.1.2 Mergers as value-reducing decisions ........................................................................................25
5.1.3 Managerial hubris and zero-value M&As .................................................................................25
5.2 THE COMBINED RETURNS IN M&AS ............................................................................................................26
5.3 FACTORS RELATED TO TARGET RETURNS .......................................................................................................27
5.3.1 Type of merger and method of payment ..................................................................................27
5.3.2 Single versus multiple bidders ...................................................................................................28
5.3.3 Target run-up ............................................................................................................................28
5.3.4 Takeover bidding and takeover premiums ................................................................................29
5.4 FACTORS RELATED TO BIDDER RETURN .........................................................................................................29
5.4.1 Method of payment ..................................................................................................................29
5.4.2 Single versus multiple bidders ...................................................................................................29
5.4.3 Do bad bidders become good targets? .....................................................................................29
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, 5.5 TAKEOVER REGULATION AND TAKEOVER HOSTILITY .........................................................................................29
5.5.1 The effect of the William Act .....................................................................................................30
5.5.2 Takeover impediments in the 1980s .........................................................................................30
5.6 POST-MERGER OPERATING PERFORMANCE....................................................................................................30
5.7 EFFICIENCY VERSUS MARKET POWER ............................................................................................................31
5.8 EFFECTS OF CONCENTRATION .....................................................................................................................31
6 INITIAL PUBLIC OFFERINGS (IPOS) ........................................................................................................32
6.1 EXTERNAL FINANCING AND IPOS ................................................................................................................32
6.1.1 External financing .....................................................................................................................32
6.1.2 An IPO = going public ................................................................................................................32
6.2 FACTORS THAT INFLUENCE IPO TIMING ........................................................................................................33
6.2.1 Bull market and IPO activities ...................................................................................................33
6.2.2 Attractiveness of the IPO market ..............................................................................................33
6.3 IPO PROCESS ..........................................................................................................................................33
6.3.1 Underwriters and IPO ................................................................................................................33
6.3.2 Due diligence and filings ...........................................................................................................34
6.3.3 Pricing .......................................................................................................................................34
6.3.4 Stabilization ..............................................................................................................................35
6.3.5 Transition to market competition .............................................................................................35
6.4 REVERSE MERGER: GOING PUBLIC WITHOUT AN IPO .......................................................................................35
6.5 IPOS ARE ON AVERAGE UNDERPRICED IN MOST YEARS .....................................................................................35
6.6 CURRENT TRENDS IN IPOS .........................................................................................................................36
6.7 CASE STUDY: FACEBOOK’S IPO IN 2012 ......................................................................................................37
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,Part 1
1 Introduction to mergers and acquisitions
1.1 What is a merger?
A merger= a transaction where two firms agree (through the process of negotiation) to
integrate their operations on a relatively co-equal basis because they have resources and
capabilities that together may create a stronger competitive advantage.
Companies undergoing a merger dissolve to create a new company:
Company A + Company B = Company C
1.2 What is an acquisition?
An acquisition= a transaction where one firm buys another firm with the intent of more
effectively using a core competence by making the acquired firm a subsidiary within its
portfolio of business.
In an acquisition the acquired company B typically dissolves becoming a part of the acquiring
company A, there is no new company:
Company A + Company B = Company A
A synonym for acquisition is takeover and a synonym for the acquired company is target.
• In most cases the acquirer acquires the target by buying its shares
• The acquirer keeps buying the shares from the target’s shareholders up to a point
where it becomes the owner
• Achieving ownership may require purchase of all or a majority of the target shares
• Different countries have different laws and regulations on what defines target
ownership
• The decision on whether or not to sell shares in the target lies with the shareholders
of the acquired company
1.2.1 Friendly takeovers
A takeover is friendly if the tender offer made by the acquiring company is accepted by the
board of directors/management.
A tender offer= an offer to buy the shares of the shareholders of a target company.
• The target may view the acquisition as an opportunity to develop into new areas and
use the resources offered by the acquirer
• This happens particularly in the case of small successful companies that wish to
develop and expand but are held back by a lack of capital
• The smaller company may actively seek out a larger partner willing to provide the
necessary investment
1
,1.2.2 Hostile takeovers
Suppose that the tender offer is rejected by the target’s management. The acquirer then can
take the tender offer directly to the shareholders, employ a proxy fight or attempt to buy the
necessary company stock in the open market.
In taking the offer directly to the shareholders, the sale of the stock only takes place if a
sufficient number of stockholders, usually a majority, agrees to accept the offer.
In a proxy fight opposing groups of stockholders persuade other stockholders to allow them
to use their shares for proxy votes. If the acquirer acquires enough proxies, it can use them to
vote to accept the offer.
Buying large amounts of the target’s shares on the open market is problematic as the target’s
share price will tend to increase in value as son as any large-scale purchases are detected. The
acquirer may attempt to buy as much stock as possible in the shortest possible time (= dawn
raid).
Anti-takeover plans/poison pills:
• Hostile takeover, if successful, unsurprisingly results in firing of the incumbent
management (after all they did not want to tender in the first place).
Incumbent management= the old management, the management from before the
hostile takeover.
• The incumbent manager anticipates this unpleasantry by employing different takeover
defence mechanisms: a takeover plan.
• An anti-takeover plan devised to be automatically activated when a company turns
target in a hostile takeover.
• A plan whereby all the firm’s debt becomes due if the current management is removed
(e.g. The target company might raise borrowing distorting the normal debt-equity
ratio).
• OR the target company may issue convertible securities which are converted into
equity to deter the efforts of the acquirer because such a conversion would dilute the
acquirer’s shares and, thus, discourage the acquisition.
Summary (mergers versus acquisitions):
Mergers Acquisitions
Two or more companies merge into a new One company buys another one
one
Mutual decision (negotiation) Negotiation is not required
Highly complicated transaction Relatively simple transaction
Dilution of ownership No dilution of ownership for the acquirer
1.3 M&A: important considerations in doing the deal
The important considerations in doing merger/acquisition deals are:
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, • Taxation: tax consideration is important and often affects the type of acquisition and
the form of payments.
• Stock versus asset acquisition:
o Stock acquisition:
§ In a stock acquisition, a buyer acquires a target company’s stock
directly form the selling shareholders.
§ With a stock sale, the buyer is assuming ownership of both assets and
liabilities – including potential liabilities from past actions of the
business.
§ The buyer is merely stepping into the shoes of the previous owner and
the business continues on.
§ The financial debt and legal risk could play a factor in reducing the
purchase price of the sale.
§ With a stock acquisition, the owner is treated as making a disposition
of a capital asset and any proceeds will receive capital gains treatment
(i.e. taxed).
§ One reason for a stock sale is when there is a right, licence or exclusive
distributorship that cannot be otherwise transferred.
o Asset acquisition:
§ An asset acquisition is the purchase of a company through buying its
assets instead of its stock.
§ In most jurisdictions, an asset acquisition typically also involves an
assumption of certain liabilities.
§ However, the parties can negotiate over which assets will be acquired
and which liabilities will be assumed.
§ The use of an asset acquisition strategy is common when buyers wish
to gain control of assets owned by a bankrupt company but are not
interested in acquiring the entire business operation due to the
financial state of that company.
§ Use of an asset acquisition can often be productive when buyout offers
are rejected by the target company.
• Forms of payment:
o Cash payment:
§ Cash is the most common and simplest form of payment.
§ Cash used in M&A transactions may be arranged by the acquiring
company from internal sources, SEO’s or through additional debt.
§ The main advantage of cash payment is that the corporate identity and
ownership structure of the acquirer remains unchanged.
§ Typical when the acquiring company is much larger than the target
company and it has substantial cash reserves.
§ However, the drawback of this method is that the acquirer must
compensate the target’s shareholders the tax that those have to pay on
their capital gains.
o Payment with stock/stock swaps:
§ Stock payments is a non-cash payment method in which acquiring
companies issues its own equity share to the target company as
purchase consideration of the deal.
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