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Mergers & Acquisitions (and Divestitures) Prof. Ian GIDDY Stern School of Business New York University igiddy/dakar

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  • Mergers & Acquisitions (and Divestitures) Prof. Ian GIDDY Stern School of Business New York University www.stern.nyu.edu/~igiddy/dakar
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  • Prof. Ian Giddy New York University Mergers & Acquisitions (and Divestitures)
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  • Copyright 2003 Ian H. Giddy M&A 3 Mergers and Acquisitions l Mergers & Acquisitions l Divestitures l Valuation Concept: Is a division or firm worth more within the company, or outside it?
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  • Copyright 2003 Ian H. Giddy M&A 4 The Gains From an Acquisition Gains from merger SynergiesControl Top lineFinancial restructuring Business Restructuring (M&A) Bottom line
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  • Copyright 2003 Ian H. Giddy M&A 5 Goal of Acquisitions and Mergers l Increase size - easy! l Increase market value - much harder!
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  • Copyright 2003 Ian H. Giddy M&A 6 Goals of Acquisitions Rationale: Firm A should merge with Firm B if [Value of AB > Value of A + Value of B + Cost of transaction] l Synergy l Gain market power l Discipline l Taxes l Financing
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  • Copyright 2003 Ian H. Giddy M&A 7 Goals of Acquisitions Rationale: Firm A should merge with Firm B if [Value of AB > Value of A + Value of B + Cost of transaction] l Synergy Eg Martell takeover by Seagrams to match name and inventory with marketing capabilities l Gain market power Eg Atlas merger with Varity. (Less important with open borders) l Discipline Eg Telmex takeover by France Telecom & Southwestern Bell (Privatization) Eg RJR/Nabisco takeover by KKR (Hostile LBO) l Taxes Eg income smoothing, use accumulated tax losses, amortize goodwill l Financing Eg Korean groups acquire firms to give them better access to within-group financing than they might get in Korea's undeveloped capital market
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  • Copyright 2003 Ian H. Giddy M&A 8 Fallacies of Acquisitions l Size (shareholders would rather have their money back, eg Vivendi Universal) l Downstream/upstream integration (internal transfer at nonmarket prices, eg DuPont/Conoco, AOL/Time Warner) l Diversification into unrelated industries (Kodak/Sterling Drug)
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  • Copyright 2003 Ian H. Giddy M&A 9 Who Gains What? l Target firm shareholders? l Bidding firm shareholders? l Lawyers and bankers? l Are there overall gains? Changes in corporate control increase the combined market value of assets of the bidding and target firms. The average is a 10.5% increase in total value.
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  • Copyright 2003 Ian H. Giddy M&A 10 The Price: Who Gets What?
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  • Equity Valuation: Application to M&A Prof. Ian Giddy New York University
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  • Copyright 2003 Ian H. Giddy M&A 12 How Much Should We Pay? Applying the discounted cash flow approach, we need to know: 1.The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes 2.The rate at which to discount the cash flows (required rate of return) 3.The deadweight costs of making the acquisition (investment banks' fees, etc)
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  • Copyright 2003 Ian H. Giddy M&A 13 The Gains From an Acquisition Gains from merger SynergiesControl Top lineFinancial restructuring Business Restructuring (M&A) Bottom line
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  • Copyright 2003 Ian H. Giddy M&A 14 Framework for Assessing Retructuring Opportunities Restructuring Framework 1 2 Current Market Value 3 Total restructured value Potential value with internal + external improvements Potential value with internal improvements Companys DCF value Maximum restructuring opportunity Financial structure improvements 4 Disposal/ Acquisition opportunities Operating improvements Current market overpricing or underpricng 5 (Eg Increase D/E)
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  • Copyright 2003 Ian H. Giddy M&A 15 Equity Valuation in Practice l Estimating discount rate l Estimating cash flows l Application to Optika l Application in M&A: Schirnding-Optika
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  • Copyright 2003 Ian H. Giddy M&A 16 Optika CAPM: 7%+1(5.50%) Debt cost (7%+1.5%)(1-.35) WACC: ReE/(D+E)+RdD/(D+E) Value: FCFF/(WACC-growth rate) Equity Value: Firm Value - Debt Value = 2278-250 = 2028
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  • Copyright 2003 Ian H. Giddy M&A 17 Optika & Schirnding
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  • Copyright 2003 Ian H. Giddy M&A 18 Optika-Schirnding with Synergy
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  • Copyright 2003 Ian H. Giddy M&A 19 Optika-Schirnding with Synergy Case Study: Ashanti-Bogoso
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  • Copyright 2003 Ian H. Giddy M&A 20 Ipoh-Kelantan
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  • Copyright 2003 Ian H. Giddy M&A 21 Ashanti-Bogoso Merger AshantiBogoso Ashanti-Bogoso
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  • Copyright 2003 Ian H. Giddy M&A 22 1. Manage preacquisition phase l Instruct staff on secrecy requirements l Evaluate your own company l Identify value-adding approach Understand industry structure, and strengthen core business Capitalize on economics of scale Exploit technology or skills transfer 2. Screen Candidates l Identify knockout criteria l Decide how to use investment banks l Prioritize opportunities l Look at public companies, divisions of companies, and privately held companies Steps in a Successful Merger and Acquisition Program - Step 1 and 2
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  • Copyright 2003 Ian H. Giddy M&A 23 Steps in a Successful Merger and Acquisition Program - Step 3 to 5 3. Value remaining candidates l Know exactly how you will recoup the takeover premium l Identify real synergies l Decide on restructuring lan l Decide on financial engineering opportunities 4. Negotiate l Decide on maximum reservation price and stick to it l Understand background and incentives of the other side l Understand value that might be paid by a third party l Establish negotiation strategy l Conduct due diligence 5. Manage postmerger integration l Move as quickly as possible l Carefully manage the process
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  • Conclusion
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  • Copyright 2003 Ian H. Giddy M&A 25
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  • Copyright 2003 Ian H. Giddy M&A 26 Contact Info Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 Ian.giddy@nyu.edu http://giddy.org

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