Chapter 1 Introduction to M A

8/8/2019 Chapter 1 Introduction to M A

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Introduction to Mergers,

Acquisitions, & OtherRestructuring Activities


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Course Learning O jectives

efine what cor orate restructuring is and why it occurs

Identify co only used valuation techniques

escri e how cor orate restructuring creates/destroys value

Identify co only used takeover tactics and defenses

evelo a highly ractical lanning ased a roach toanaging the M&A rocess

Identify challenges and solutions associated with each hase of

the M&A rocess

escri e advantages and disadvantages of alternative M&A

deal structures escri e how to lan, structure, and anage J s, artnershi s,

alliances, licensing arrange ents, equity artnershi s,

franchises, and inority invest ents


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Current Cha ter Learning O jectives

ri ary o jective: What cor orate restructuring is

and why it occurs

econdary o jective: rovide students with an

understanding of

Co only used M&A voca ulary

M&A as only one of a nu er of strategic o tions

for increasing shareholder value

M&A activity in an historical conte t

The ri ary otivations for M&A activity

Key e irica l findings


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Alternative or s ofCor orate

Restructuring

Restructuring Activity

Cor orate Restructuring

alance heet

Assets Only

inancial Restructuring(lia ilities only)

O erational Restructuring

otential trategy

Rede loy Assets

Mergers, reak-U s, &in-Offs

Acquisitions,divestitures, etc.

Increase leverage to lowercost of ca ital or as atakeover defense

ivestitures, wides reade loyee reduction, orreorganization


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Building a Co on oca ulary

tatutory Merger

u sidiary Merger

Consolidation

Acquisition

Leveraged Buyout

Holding Co any

Co ination of 2 fir s with

only one surviving

Target eco es a su sidiary

of the arent

Two or ore fir s erge to

for a new co any

urchase of a target fir ,controlling interest, ors ecific target assets

Buyout financed ri arily y

de t

One fir with invest ents in

a nu er of o erating

co anies


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Alternative Ways of

Increasing hareholder alue

olo venture (AKA going it alone or organic growth)

artnering (Marketing/distri ution alliances, J s,

licensing, franchising, and equity invest ents)

Mergers and acquisitions Minority invest ents in other fir s

Asset swa s

inancial restructuring

O erational restructuring


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Merger Waves

HorizontalConsolidation (1897-1904)

Increasing Concentration (1916-1929)

The Conglo erate ra (1965-1969)

The Retrench ent ra (1981-1989)

Age of the trategic Mega erger(1992-2000)


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HorizontalConsolidation (1897-1904)

urred y

rive for efficiency,

La enforce ent of antitrust laws

Westward igration, and

Technological change

Resulted in concentration in etals,

trans ortation, and ining industry M&A oo ended y 1904 stock arket

crash and fraudulent financing


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Increasing Concentration (1916-1929)

urred y

ntry of U. . into WWI

ost-war oo Boo ended with

1929 stock arket crash

assage ofClayton Act which oreclearly defined ono olistic ractices


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The Conglo erate ra (1965-1969)

Conglo erates e loy financial engineering to oost

their share rice

High / fir s acquired lower / target fir s

Co ined fir s share rice increased if investorsa lied the higher / to the co ined fir s

Nu er of high-growth, low / fir s declined as

conglo erates id u their rices

Higher urchase rice for target fir s and increasingleverage of conglo erates rought era to a close


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The Retrench ent ra (1981-1989)

trategic U. . uyers and foreign ultinationals

do inated first half of decade

econd half do inated y financial uyers

Buyouts often financed y junk onds

re elBurnha rovided arket liquidity

ra ended with ankru tcy of severallarge

LBOs and de ise of re elBurnha


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Age of the trategic Mega erger

(1992-2000)

ollar volu e of transactions reached record in each

year etween 1995 and 2000

urchase rices reached record levels due to

oaring stock arket Consolidation in any industries

Technological innovation

Benign antitrust olicies

eriod ended with the colla se in glo al stock arketsand worldwide recession


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Motivations for M&A

trategic realign ent Technological change eregulation

ynergy cono ies of sca le/sco e Cross-selling

iversification (Related/Unrelated) inancial considerations

Acquirer elieves target is undervalued Boo ing stock arket

alling interest rates Market ower go/Hu ris Ta considerations


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Empirical indings

Around transaction announcement date, a normal

returns average

20% for target shareholders in friendly transactions;

30-35% in hostile transactions

Bidders shareholders earn 2-3%

50-80% of M&As fail to outperform their industry peers or

earn their cost of capital during the 3-5 years following

closing

No evidence that alternative strategies to M&As arelikely to e more successful


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Primary Reasons for M&As requent

ailure to Meet Expectations

Overpayment due to over-estimatingsynergy

low pace of integration

Poor strategy


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Things to Remember

Motivations for acquisitions:

trategic rea lignment

ynergy

iversification

inancial considerations

Hubris

Common reasons M&As fail to meet expectations

Overpayment due to overestimating synergy

low pace of integration

Poor strategy

M&As typically reward target shareholders farmore than biddershareholders

uccess rate of M&A not significantly different from alternative waysof increasing shareholder value

Documents

Chapter 1 Introduction to M A