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7/29/2019 M & A_PPT
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Mergers and Acquisitions
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Mergers and Acquisitions
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Types of TakeoversGeneral Guidelines
Takeover The transfer of control from one ownership group to another.
Acquisition The purchase of one firm by another
Merger The combination of two firms into a new legal entity A new company is created Both sets of shareholders have to approve the transaction.
Amalgamation A genuine merger in which both sets of shareholders must
approve the transaction Requires a fairness opinion by an independent expert on the true
value of the firms shares when a public minority exists
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Types of TakeoversHow the Deal is Financed
Cash Transaction The receipt of cash for shares by shareholders in the
target company.
Share Transaction The offer by an acquiring company of shares or a
combination of cash and shares to the targetcompanys shareholders.
Going Private Transaction (Issuer bid) A special form of acquisition where the purchaser
already owns a majority stake in the target company.
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Mergers and Acquisitions
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General Intent of the Legislation
Transparency Information Disclosure To ensure complete and timely information be available to all
parties (especially minority shareholders) throughout theprocess while at the same time not letting this requirement stallthe process unduly.
Fair Treatment To avoid oppression or coercion of minority shareholders. To permit competing bids during the process and not have the
first bidder have special rights. (In this way, shareholders havethe opportunity to get the greatest and fairest price for their
shares.)
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The Takeover Bid ProcessProrated Settlement and Price
Takeover bid does not have to be for 100 % of theshares.
Tender offer price cannot be for less than the averageprice that the acquirer bought shares in the previous90 days. (prohibits coercive bids)
If more shares are tendered than required under thetender, everyone who tendered shares will get aprorated number purchased.
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Friendly Acquisition
The acquisition of a target company that is willing to betaken over.
Usually, the target will accommodate overtures andprovide access to confidential information to facilitatethe scoping and due diligence processes.
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Friendly AcquisitionsThe Friendly Takeover Process
1. Normally starts when the target voluntarily puts itself into play. Target uses an investment bank to prepare an offering memorandum
May set up a data room and use confidentiality agreements to permitaccess to interest parties practicing due diligence
A signed letter of intent signals the willingness of the parties to move to
the next step (usually includes a termination or break fee) Legal team checks documents, accounting team may seek advance tax
ruling from CRA Final sale may require negotiations over the structure of the deal
including: Tax planning Legal structures
2. Can be initiated by a friendly overture by an acquisitor seekinginformation that will assist in the valuation process.
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Hostile Takeovers
A takeover in which the target has no desire to be acquired andactively rebuffs the acquirer and refuses to provide anyconfidential information.
The acquirer usually has already accumulated an interest in thetarget (20% of the outstanding shares) and this preemptiveinvestment indicates the strength of resolve of the acquirer.
During this process the acquirer will try to monitormanagement/board reaction and fight attempts by them toput into effect shareholder rights plans or to launch otherdefensive tactics.
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Mergers and Acquisitions
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Classifications Mergers and
Acquisitions
1. Horizontal A merger in which two firms in the same industry combine. Often in an attempt to achieve economies of scale and/or scope.
2. Vertical A merger in which one firm acquires a supplier or another firm
that is closer to its existing customers. Often in an attempt to control supply or distribution channels.
3. Conglomerate A merger in which two firms in unrelated businesses combine.
Purpose is often to diversify the company by combininguncorrelated assets and income streams
4. Cross-border (International) M&As A merger or acquisition involving a Canadian and a foreign firm a
either the acquiring or target company.
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Motivations for Mergers and
AcquisitionsCreation of Synergy Motive for M&As
The primary motive should be the creation ofsynergy.
Synergy value is created from economies ofintegrating a target and acquiring a company; theamount by which the value of the combined firm
exceeds the sum value of the two individual firms.
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Creation of Synergy Motive for
M&As
Synergy is the additional value created (V) :
Where:VT = the pre-merger value of the target firm
VA - T = value of the post merger firm
VA = value of the pre-merger acquiring firm
)V-(VVV TATA [ 15-1]
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Value Creation Motivations for
M&AEfficiency Increases and Financing Synergies
Efficiency Increases
New management team will be more efficient and addmore value than what the target now has.
The combined firm can make use of unusedproduction/sales/marketing channel capacity
Financing Synergy
Reduced cash f low variability Increase in debt capacity
Reduction in average issuing costs
Fewer information problems
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Mergers and Acquisitions
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Valuation IssuesWhat is Fair Market Value?
Fair market value (FMV) is the highest price obtainable in anopen and unrestricted market between knowledgeable, informed
and prudent parties acting at arms length, with neither partybeing under any compulsion to transact.
Key phrases in this definition:1. Open and unrestricted market (where supply and demand can freely
operate)
2. Knowledgeable, informed and prudent parties
3. Arms length
4. Neither party under any compulsion to transact.
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Valuation IssuesTypes of AcquirersDetermining fair market value depends on the perspective of the
acquirer. Some acquirers are more likely to be able to realize synergiesthan others and those with the greatest ability to generate synergies arethe ones who can justify higher prices.
Types of acquirers and the impact of their perspective on value include:1. Passive investors use estimated cash f lows currently present2. Strategic investors use estimated synergies and changes that are
forecast to arise through integration of operations with their own3. Financials valued on the basis of reorganized and refinanced
operations4. Managers value the firm based on their own job potential and ability to
motivate staff and reorganize the firms operations. (MBOs)
Market pricing will reflect these different buyers and their importance atdifferent stages of the business cycle.
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Valuation IssuesThe Effect of an Acquisition on Earnings per Share
An acquiring firm can increase its EPS if it acquires afirm that has a P/E ratio lower than its own.
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Mergers and Acquisitions
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Accounting for Acquisitions
Historically firms could use one of two approaches toaccount for business combinations
1. Purchase method and
2. Pooling-of-interest method (no longer allowed)
While more popular in other countries, the pooling ofinterest is no longer allowed by:
CICA in Canada Financial Accounting Standards Board (FASB) in the U.S.
and
Internal Accounting Standards Board (IASB)
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Accounting for AcquisitionsThe Purchase Method
One firm assumes all assets and liabilities and operatingresults going forward of the target firm.
How is this done? All assets and liabilities are expressed at their fair market value
(FMV) as of the acquisition date.
If the FMV > the target firms equity, the excess amount is goodwilland reported as an intangible asset on the left hand side of thebalance sheet.
Goodwill is no longer amortized but must be annually assessed todetermine if has been permanently impaired in which case, the
value will be written down and charged against earnings per share.
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Thank you
CHAPTER 15 Mergers and Acquisitions 15 - 23