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Mergers & Acquisitions
Rational for Spin off
• Its leads to enhanced focus, & reduced organizational complexity,
control loss & avoid negative Synergy.
• Eliminate Conglomerate discount the parent may have suffered
as diversified company.
• Increase transparency of both parents & the spun off business to
the stock market. Through separate financial reports of the two
firms to current shareholders
• Create new shareholder interest & allow access to new capital
Rational for Spin off
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• Allow shareholders increase flexibility in their portfolio decisions.
• Allow firm to create more efficient capital structures for constituent
business in conformity with the economic of those business.
Equity Crave off
• An equity crave off is the sale of minority or Majority voting control in
subsidiary by its parents to outside Investors.
• Parents use an equity carve out to test the waters & when the first
carve out is well received conduct further stages of the divesture
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Motives for Equity Crave off
• Increase the focus of the firm
• Improve autonomy of component business
• Improve the managerial incentive structure byrelating management performance directly toshareholder value
• It is not complete separation but partialdivestment
• Minimise the conglomerate discount throughthis enhanced visibility & increase information
M & A
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Date: September 2005
Price: $2.6B
When eBay’s leaders acquired VoIP business Skype for $2.6 billion
in 2005, the thinking was that enhanced communications
technology would help buyers and sellers better connect.
The outcome was less than spectacular, though, with few eBay
users (buyers, sellers, or shippers) having any real reason to
communicate in any way besides email.
eBay also changed the management team in charge of Skype a
reported four times during its four years with the e-commerce site,
before selling off 65% of the company to Silver Lake, Andreessen
Horowitz, and the Canada Pension Plan Investment Board in 2009
for $1.9 billion.
Daimler-Benz and Chrysler
Date: November 12, 1998
Price: $36B
Combining two of the biggest names in the car world in 1998 seemed like a sure
thing. Daimler bet heavily on the union, paying $36 billion to merge with Chrysler.
But leadership changes quickly created issues for the merged company. The
retirement of Chrysler CEO Bob Eaton led to Daimler taking majority control, and
soon after, other high-ranking Chrysler executives, including the president and vice-
chair, were forced out.
With Daimler in full control, it immediately began pouring resources into Chrysler,
but language and cultural differences and misjudged product launches saw Chrysler
losing market share quickly. A recession and continued poor sales spelled the end
of this once-promising union. In 2007, Daimler sold off 80% of Chrysler to Cerberus
Capital Management for $7 billion.
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• What went right or potential to success
• i. In 1998 when the merger happened, it displayed powerfuldemonstration of the globalization of the world economy.
• ii. Before the merger, Chrysler and Daimler-Benz wereessentially regional producers — Chrysler with the third-largestmarket share in North America, Daimler-Benz controlling theluxury market in Europe.
• The size of the conglomeration was huge. Largest industrial company in Germany, and in Europe as a whole with one of the biggest American corporations, creating a transnational giant with a work force of 410,000 and an annual output of over $130 billion.
• The fifth largest automaker wrt the number of
vehicles produced, ranking after GM, Ford, Toyota
and Volkswagen.
• If DaimlerChrysler were a country, it would rank 37th
in the world in terms of Gross Domestic Product, just
behind Austria, but well ahead of six other members
of the European Union — Greece, Portugal, Norway,
Denmark, Finland and Ireland.
• Daimler-Chrysler deal involved two highly profitable
companies, with combined net earnings of $5.7
billion in 1997.
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What went wrong??
Both the organisation’s had a different way operating from various perspective; highlighted here under. As per the case, a detailed analysis of these strikingly different styles was not studied beforehand.
Reasons for failures of Mergers & acquisitions
1. Unrealistic Price Paid for Target
2. Difficulties in cultural Integration
3. Diseconomies of scale
4. Overstated Synergies
5. Integration Difficulties
6. Inconsistent Strategy
7. Poor Business Fit
8. Inadequate Due Diligence
9. High Leverage
10.Board room Split
11.Regulatory Issues
12.HR Issues
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Unrealistic Price Paid for Target
The process of M&A involves valuation of the target
company and paying a price for taking over the
assets of the company.
Quite often, one finds that the price paid to the
target company is much more that what should
have been paid.
While the shareholders of the target company stand
benefited the shareholders of the acquirer end up on
the loosing side.
Difficulties in cultural Integration
Every merger involves combining of two or moredifferent entities.
These entities reflect corporate cultures, styles ofleadership, differing employee expectations andfunctional differences.
If the merger is implemented in a way that does notdeal sensitively with the companies’ people and theirdifferent corporate cultures, the process may turn outto be disaster.
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Diseconomies of scale
• Opposite of economies of scale
• Diffusion of control
• Complexities of monitoring
• Ineffectiveness of communications
Overstated Synergies
• Mergers and acquisitions are looked upon as an
important instrument of creating synergies
through increased revenue, reduced costs,
reduction in net working capital and
improvement in the investment intensity.
Overestimation of these can lead to failure of
mergers
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Integration Difficulties
Companies very often face integration difficulties, i.e.the combined entity has to adapt to a new set ofchallengers given the changed circumstances.
To do this, the company prepares plans tointegrate the operations of the combining entities.
If the information available on related issues isinadequate or inaccurate integration becomesdifficult.
Inconsistent Strategy
Mergers and acquisitions that are driven by
sound business strategies are the ones that
succeed.
Entities that fail to assess the strategic benefits
of mergers face failure. It is therefore important
to understand the strategic intent.
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Poor Business Fit
Inconsistent Strategy services of the merging entities
do not naturally fit into the acquirer’s overall business
plan. This delays efficient and effective integration
and causes failure.
High Leverage
One of the most crucial elements of an effective
acquisition strategy is planning how one intents
to finance the deal through an ideal capital
structure.
The acquirer may decide to acquire the target
through cash. To pay the price of acquisition, the
acquirer may borrow heavily from the market.
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Boardroom Split
• When a merger is planned, it is crucial to
evaluate the composition of the boardroom and
compatibility of the directors.
• Specific personality clashes between executive
in the two companies are also very common.
This may prove to be a major problem, slowing
down or preventing integration of the entries.
Regulatory Issues• The entire process of merger requires legal approvals.
• If any of the stakeholders are not in favour of the
merger, they might create legal obstacles and slow
down the entire process.
• This results in regulatory delays and increase the risk
of deterioration of the business.
• While evaluating a merger proposal, care should be
taken to ensure that regulatory hassles do not crop up.
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HR Issues
A merger or acquisition is identified with job
losses, restructuring and the imposition of a
new corporate culture and identity.
This can create uncertainty, anxiety and
resentment among the company’s employees.
These HR issue are crucial to the success of
M&As
Question 01
Firm “A “going to take over firm “B”
Firm “A” estimated that combined entity will have synergy benefit of Rs. 3000 forever.
i) If Firm “B” is will to acquire for Rs 27 per share cash what is the NPV of the merger.
ii) What will the price per share of the merged firm after above (i)
(iii) What is the Merger premium
(iv) Suppose Firm “B” is agreeable to merger by an exchange of stock, if “A” offers three of itsshares for every one of “B” Shares. What will be MPS of merge firm
(v) What is the NPV of the merger assuming the conditions in (iv)
(vi) What is the best for firm B, what is the exchange ratio to B, theshareholders are indifferent between two options
Firm A Firm B
Shares outstanding 1,500 900
MPS Rs.34 Rs. 24
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What is a Hostile Takeover?
A hostile takeover, in mergers and acquisitions (M&A), is
the acquisition of a company (called the target company)
by the other company (called the acquirer) by going directly
to the target company’s shareholders (a tender offer) or
through a proxy vote. The difference between a hostile and
friendly takeover is that in a hostile takeover, the target
company’s board of directors do not approve of the
transaction.
Hostile takeover bid tactics
01.Tender offer to the company's shareholders.
A tender offer is a bid to buy a controlling share of the target's stock at a
fixed price. The price is usually set above the current market price in order
to allow the sellers a premium as added incentive to sell their shares.
02. proxy fight
replace board members who are not in favor of the takeover with new
board members who would vote for the takeover. This is done by
convincing shareholders that a change is management is needed and that
the board members who would be appointed by the would-be acquirer are
just what the doctor ordered.
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Pre bide defences
• Pre bid defences can be divided in to two
• Internal defences
• External defences
Internal Defences
Action Result
Improve operational efficiency & reduce cost Improved EPS, Higher share
price firm value
Improve strategic focus by restructuring ,
divestment, Demerger, Equity Crave out
Improved EPS, Higher firm
value, Asset stripping by bidder
difficult
Change ownership Structure i.e Dual class
shares, high gearing, share buy back, poison
pill
Control by bidder difficult,
scope for LBO
Change management structure or incentive.
i.e golden parachute
Predator control delayed & bid
cost increased
Cultivating organizational constituencies.
Union Actions, Workforce
Useful alliance against bidder
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External Defences
Action Result
Cultivating shareholders & investors. e.g. Use
investor relations advisers inform about
company performances, prospects & polices
Ensure loyalty & support
during bid of key shareholders
Inform analysts about company strategy,
financing policies & investor programs
Share undervaluation risk
reduces & bid cost increase
Accept social responsibility to improve social
image
Public hostility or predator
roused
Make strategic defence investment: i.e. JV Predator control block
Monitor the share register for unusual share
purchases, force disclosure or identity of
buyers
Early warning signal about
possible predators
Post offer defences
Defence Purpose
First response & pre emption letter Attack bid logic & price. Advice target
share holders not to accept
Defence document Praise own performances & prospects;
deride bid price & logic.
Profit report/ forecast Report or forecast improved profits for
past & current year to make offer look
cheap
Promise higher future dividends Increase return of the shareholders;
weaken predators promise of superior
returns
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Post offer defences
Defence Purpose
Asset revaluation Revalue properties, intangible assets
& brands
Regulatory appeal Lobby antitrust/ regulatory authorities
to block bid
Share support campaign Look for white knight or white squire
Acquisition or divestment Buy a business to make target bigger
or incompatible with bidder, sell crown
jewels, organise management buy out
Unions/ workforce Enlist to lobby regulators or politicians
& attack bidders plans for target
Customers/ Suppliers Enlist to lobby antitrust authorities
Defensive Tactics • Target firm managers frequently resist take over attempts
• Corporate takeovers can sometimes hostile one business acquires control over a public company against the consent of existing management or its board of directors. ( Hostile takeover)
Defenses against a Hostile Takeover
01. Poison pill:
Making the stocks of the target company less attractive by allowing currentshareholders of the target company purchase shares at a discount. It willincrease the number of shares the acquirer company needs to obtain.
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There are two types of poison pills:
i. A “flip-in” permits shareholders, except for the acquirer, to purchase
additional shares at a discount. This provides investors with instantaneous
profits. Using this type of poison pill also dilutes shares held by the acquiring
company, making the takeover attempt more expensive and more difficult.
ii. A “flip-over” enables stockholders to purchase the acquirer’s shares after
the merger at a discounted rate. For example, a shareholder may gain the
right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one
rate.
2.Crown jewels defense:
Selling the most valuable parts of the company in the event of a
hostile takeover. It will make the target company less attractive and
deter a hostile takeover.
3. Golden parachute:
An employment contract that guarantees extensive benefits to key
management if they were removed from the company.
4. Pac-Man defense:
The target company purchasing shares of the acquiring company and
attempting a takeover of their own.
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5. Greenmail
Greenmail is the practice of buying a voting stake in a company with the threat ofa hostile takeover to force the target company to buy back the stake at apremium. In the area of mergers and acquisitions, the greenmail payment ismade in an attempt to stop the takeover bid. The target company is forced torepurchase the stock at a substantial premium to the takeover.
6. White knight & while square
A white squire is an individual or company that buys a large enough stake in thetarget company to prevent that company from being taken over by a blackknight. In other words, a white squire purchases enough shares in a targetcompany to prevent a hostile takeover.
White knight vs while square
purchases a majority stake in the company while a white squire purchases aminority stake in the company. Therefore, in a white-squire situation, the targetcompany is able to remain independent.
What is a White Knight?
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• A white knight is a company or an individual that
acquires a target company that is close to being
taken over by a black knight. A white knight
takeover is the preferred option to a hostile
takeover by the black knight as white knights
make a ‘friendly acquisition‘ by generally
preserving the current management team, making
better acquisition terms, and maintaining the core
business operations.
White Squire
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What is a White Squire?
A white squire is an individual or company that
buys a large enough stake in the target company
to prevent that company from being taken over by
a black knight. In other words, a white squire
purchases enough shares in a target company to
prevent a hostile takeover
Example of a White Squire1. Company A receives a bid offer from Company B.
In finance, Company A would be called the “Target Company” and
Company B would be called the “acquirer Company.
• 2. Company A rejects the offer from Company B
• 3. Despite the rejection of their offer, Company B proceeds with a
tender offer (purchasing shares of Company A at a premium
price) to acquire a controlling interest in Company A.
By continuing to pursue an acquisition despite getting their offer
declined by Company A, Company B would be attempting a hostile
takeover of Company A. Company B would be referred to as a black
knight.
• 4. A friendly investor sees the hostile takeover attempt by Company B and
decides to step in and help Company A. The friendly investor purchases
shares in Company A to prevent them from being acquired by Company
B.
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Incentives for the White Squire
A white squire is used to help the target company prevent a hostile takeover.
The target company must incentivize the white squire to stand on its side of the
target and not end up selling its shares to the black knight (thus aiding the
hostile takeover attempt).
White Squire vs. White Knight
• A white squire and a white knight are similar in thatboth are involved in preventing a hostile takeoverattempt. However, the differentiating point is that awhite knight purchases a majority interest while awhite squire purchases a partial interest in the targetcompany.
• White squires are preferred over white knights. A whiteknight purchases a majority stake in the companywhile a white squire purchases a minority stake in thecompany. Therefore, in a white-squire situation, thetarget company is able to remain independent.
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Due Diligence
What is Due Diligence
• Due diligence is a process of verification, investigation, oraudit of a potential deal or investment opportunity to confirmall facts, financial information, and to verify anything else thatwas brought up during an M&A deal or investment process.
• Due diligence refers to the research done before entering intoan agreement or a financial transaction with another party.
• Due diligence can also refer to the investigation a sellerperforms on a buyer that might include whether the buyer hasadequate resources to complete the purchase.
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• To investigate into the Affairs of Business as a prudent business person
• To confirm all material facts related to the Business
• To assess the Risks and Opportunities of a proposed transaction.
• To reduce the Risk of post-transaction unpleasant surprises
• To confirm that the business is what it appears.
Why Due Diligence is Important for M&A….??
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From a buyer’s perspective
Due diligence allows the buyer to feel more comfortable that his or herexpectations regarding the transaction are correct. In mergers andacquisitions (M&A), purchasing a business without doing due diligencesubstantially increases the risk to the purchaser.
From a seller’s perspective
Due diligence is conducted to provide the purchaser with trust. However,due diligence may also benefit the seller, as going through the rigorousfinancial examination may, in fact, reveal that the fair market value of theseller is more than what was initially thought to be the case. Therefore, it isnot uncommon for sellers to prepare due diligence reports themselves priorto potential transactions.
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Reasons For Due Diligence
• To confirm and verify information that was brought up during the deal or
investment process
• To identify potential defects in the deal or investment opportunity and thus
avoid a bad business transaction
• To obtain information that would be useful in valuing the deal
• To make sure that the deal or investment opportunity complies with the
investment or deal criteria
Other Objective of Due Diligence
To determine compliance with relevant laws and disclose any regulatory restrictions on the proposed transaction
To evaluate the condition of the physical plant and equipment; as well as other tangible and intangible Assets
To ascertain the appropriate purchase price & and the method of payment.
To determine details that may be relevant to the drafting of the acquisition agreement,
To discover liabilities or risks that may be deal-breakers
To analyze any potential antitrust issues that may prohibit the proposed M&A
To evaluate the legal and financial risks of the transaction
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Due Diligence Activities in an M&A Transaction
• Target Company Overview
• Financials
• Technology/Patents
• Strategic Fit
• Target Customer Base
• Management/Workforce
• Legal Issues
• Information Technology
• Corporate Matters
• Environmental Issues
Types of due diligence
Accounting due diligence
▪ Review of financial statements and management accounts
▪ Review of significant accounting policies and
▪ compliance with relevant Generally Accepted AccountingPrinciples (GAAP)
▪ Historical revenue and cost trends
▪ Consistency between historical results, versus budget and forecast
▪ Historical and anticipated capital expenditure and working capitallevels
▪ Review of debt covenants and terms of other debt-like instruments
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Financial due diligence
• Basis for future business plan
• Valuation
• Deal financing
• Market dynamics and customer attractiveness
• Industry structure and dynamics
• Distribution channel dynamics
• Business plan review
• Quality of assets
Tax due diligence
• Assessment of tax impact arising from “change in control”
• Assessment of historical tax exposures
• Identifying tax saving opportunities
• Assessment of current tax position
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Legal due diligence
• Liabilities and potential risks
• Competition authority implications
• Transaction mechanics, execution and closing
Deal Strategy Validation
Value Driver Identification
Identifying black holes
Valuation
Identifying
Deals
Evaluating
DealsExecuting
Deals
Making
Deals
Successful
Harvesting
Deals
• Structuring and Negotiating issues
• Matters to be included in Shareholders / other
agreement
• Representation and warranties / indemnities
involved
• Design tax efficient structures for acquisitions
and disposals
• Planning exit strategies
When does Due Diligence become relevant?
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