10/27/2015
Mergers and Acquisitions
Sessions 1 and 2 Fall 2015
Agenda Tuesday •
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Introduction to the course –
Syllabus
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Study guide
Instructions for first and second case –
Liberty Global/Cable & Wireless
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AB InBev/SABMiller
Lecture: Key concepts in M&A
Thursday •
Instructions for Musti & Mirri case with Summa Capital representatives
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Lecture: Strategic aspects in M&A
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Learning goals for the course 1. Understanding key M&A concepts 2. Using comparables-based and DCF valuation in M&A 3. How deals happen: strategy, process, negotiations 4. Leveraged buy-outs: The job-interview level LBO model 5. Awareness of main academic research findings on M&A 6. Ability to identify legal and accounting issues in M&A 7. Key principles of post-merger integration management
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Continuous course development •
This course evolves each time based on class feedback and current events
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Recent changes based on your feedback: -
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New cases every year based on current events Reduced workload of first strategic case. This year, second case is more acquisition model focused, as third case includes an LBO model General structure of first strategic case in random groups, quantitative case in free small groups, and bigger real-life case in free groups Reduced reading material & study guide to the reading material Class contribution points on top of, rather than included in case maximum
Message bearers: Volunteers?
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Some useful resources • Books – – – – –
DePamphilis: Mergers, Acquisitions, and Other Restructuring Activities Arzac: Valuation for Mergers, Buyouts, and Restructurings Bruner: Applied Mergers and Acquisitions McKinsey, Koller, Goedhart, Wessels: Valuation Fisher and Ury: Getting to Yes
• Websites – http://pages.stern.nyu.edu/~adamodar/ (lots of spreadsheets and valuation input data) – http://macabacus.com/ (how-to guides and spreadsheets) – http://dealbook.nytimes.com/ (M&A and private equity deals) – http://www.wallstreetoasis.com/ (for career gossip)
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Key concepts in M&A
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Topics for today Relation to course learning goals: Understanding key M&A concepts Case work: What exactly is happening in our cases? How are the transactions structured? – – – –
What are we buying? How are we paying? How is the transaction structured? Key percentages in ownership
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What are we buying? Acquisitions: – Purchase of stock or – Purchase of assets Some implications of the choice: – At which level is the deal decided? Management or shareholders? – Whose taxes are affected? The company’s or its shareholders? – Whose books will look different? The company’s or its shareholders? – Legal liabilities: What happens if the target gets sued later?
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Taxable transactions
Acquisition of stock shares of B
owners of A
owners of B cash (or other)
Company
Company
A
B
In Finland, tax-free to seller under the following conditions: Shares belong to a limited company’s intangible fixed assets (käyttöomaisuus) Seller owned at least 10% for at least one year Not applicable to real estate companies
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Taxable transactions
Acquisition of assets
owners of A
Company A
owners of B all / some of B’s assets and liabilities
cash (or other)
Company B
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How are we paying? •
Types of consideration (consideration=payment): – cash deals (generally by issuing debt) – stock deals (generally issue new equity) – asset swaps
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Some implications of the choice: – Some stock deals, i.e. reorganizations are tax-deferred to the seller – Implications on capital structure. Is the leverage sustainable? – What happens to earnings per share? Leverage decreases earnings and new stock increases the number of shares
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Tax-deferred transactions
Merger (Absorption type)
owners of A
new shares in A
Company A
owners of B
Company all of B’s assets and liabilities
B
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Mergers, tender offers, hostile transactions •
What is a merger? – Essentially a company law term: one firm or both cease to exist – Absorption (one firm ceases to exist), consolidation (both firms cease to exist), or subsidiary merger
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What is a tender offer? – A specific mechanism for acquiring a public company – With a public company, there may be no phone number to call. A buyer has to make an offer to the public. These offers are highly regulated
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What is a hostile transaction? – This term is often used vaguely to convey dissatisfaction by politicians or unions – Generally agreed definition: A hostile transaction is one opposed by the target’s management
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Key percentages in ownership* •
Minority protection – right to call e.g. for a new general meeting, extraordinary audit, extraordinary dividend Under 10% - obligation and right to sell shares in acquisition
20%
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Affiliate – proportional share of profit and assets consolidated
30%
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Mandatory bid -- Obligation to offer for the remaining shares in acquisition
50%+1
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Majority ownership – key decision making, board composition etc. Fully consolidated in income and balance sheets
67%
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2/3 majority – often required in key AGM voting
90%
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Buyer’s right and obligation to claim for the remaining shares in an acquisition “squeeze out”
10%
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* International variation applies to the percentages
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Some more M&A slang you need to know • •
• • • • • •
White knight: friendly third party who buys firm (instead of hostile party) Premium over market: when buying a publicly listed company, the valuation discussion is driven by % over current market price Risk “arbitrage”: hedge fund strategy for stock of takeover targets Earn-out clause: contingent payments dependent on post-deal events Representations and warranties: key promises of fact included in final contract Golden handcuffs: continuity of management Toehold: flagging rules allow you to get started on buying a publicly listed company in secret Break-up fee: negotiations may entail financial commitment
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Strategic concepts in M&A
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Topics for today Relation to course learning goals: How deals happen—strategy Case work: Do our cases fit any of the archetypes of acquisition models? Motives for M&A – Different types of synergies: revenue, cost, assets, financing – Managerial motives – The Five Types of Successful Acquisitions
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Why should I approach an M&A case from a strategic perspective? I like numbers. Do I need to do this? – The complexities involved are not always quantifiable (although we will try to do that) – Career perspective: boardroom and media contexts call for big-picture verbal argumentation. It is often difficult to persuade people with Excel
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How should I approach an M&A case from a strategic perspective? Ask annoyingly detailed questions to figure out how the two companies are supposed to make more cash together than apart. Some of the most popular ones: • Can we do this ourselves instead of buying somebody else? • Why would our customers buy more things from us together than apart? How much? • Hypothetically, who would be the best type of owner for this particular business? • In practice, how would we go about integrating the business? -
What would we change in the production/service processes? Would that save money? How much? Culture: Can We work together with Them? Will we end up hating each other? Do we already hate each other? Who would do this in practice? What would they be doing otherwise?
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Synergies as motives for M&A To create shareholder value added, the two companies should be worth more together than apart. From an NPV perspective, this can happen through higher cash flows or lower discount rate. Types of synergies – Revenue side synergies: we can sell more together than apart • Market power • Complementary distribution channels
– Cost side synergies: our total costs will be lower together • Eliminate duplicate functions in HQ or personnel • Reorganize production
– Asset synergies: our balance sheet can be cut • Real estate, inventory
– Financing synergies • Lower discount rates through use of debt?
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Revenue synergies are risky
Source: McKinsey Quarterly (2004) 21
Cost synergies are (somewhat) more solid
Source: McKinsey Quarterly (2004) 22
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Managerial motivations for M&A • • • •
We know acquirers that average acquirer shareholder value effects of M&A tend to +/- zero We also know that average total acquirer+target shareholder value effects are positive Puzzle: Why do acquirers pursue deals? Possible answers: – Management overconfidence (hubris): we are better than average, so who cares about averages. – Agency problems: conflict of interest between managers and owners
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The five types of successful acquisitions (by McKinsey & Co) 1. 2. 3. 4.
Improve the target company’s performance Consolidate to remove excess capacity from the industry Accelerate market access for the target’s (or buyer’s) products Get skills or technologies faster or at lower cost than they can be built 5. Pick winners early and help them develop their businesses
McKinsey Quarterly, 2010
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Four types of possible, but harder M&A strategies 1. 2. 3. 4.
Roll-up of fragmented industry Consolidate to lessen price competition Transformational (”visionary”) mergers Buy cheap
McKinsey Quarterly, 2010
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An M&A strategy matrix (HQ perspective)
Strategic fit • •
We are the best owner
Hold
Expand
Divest
Divest (possibly expand first)
Amount of business linkage Ability to create value at group level
Somebody else is the best owner
Low
High Business value potential • Market growth • Competitive position • Development options
Source: Kalle Heikkinen
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