8) ALTERNATIVES TO M&A; CORPORATE RESTRUCTURING Flashcards
because empirical research is mixed as to whether MandA leads to shareholder value creation, what’s an alternative?
strategic alliances
What is deal design aimed to achieve?
1) create value
2) create long-term sustainable strategic advantage (Porters 5 forces idea)
3) avoid dilution (or unwanted concentration)
4) manage market signals
5) enhance governance and organisation structure
why is price super important when looking at deal design?
if you pay too much it’s a negative NPV investment!
Successful negotiations require info on ….. because……
strengths/weaknesses of the parties
–> need to come up with deal that is likely to be successful at the MIN cost
Bid strategy - Acquirer’s perspective
1) must pre-empt target’s reaction
2) expect target to evade
3) assess reaction of other stakeholders and rivals
4) create/seek out opportunities
5) be aware of being taken advantage of (behavioural economics, biases, human error stuff)
in terms of bid strategy, can the target be pre-emptive?
Yes, if they want to be taken over, can set themselves up to make it easy for a bid to work. (if don’t want to be taken over, can do defence tactics instead)
what factors influence the price?
1) friendly or hostile bid
2) form of payment
3) capital structure in post-merged entity
4) regulation and practicalities
5) deal financing
6) method of acquisition
other stakeholders that can influence deal design
employees, public opinion, customers, key contracts
other issues that can influence deal design
1) special statutes
2) existing shareholders (dispersion, concentration and toe-hold stakes, capital structure and constitution restrictions)
why are alternative forms of inorganic growth needed?
1) MandA may not meet expectations of managers and shareholders (overpayment, difficulty in post-merger integration)
2) MandA may not be feasible (regulatory limits, cost and financing limits)
3) MandA may not be desirable (value in remaining independent)
alternatives to MandA
strategic alliance between firms –> a middle ground between strict, arm’s lentgh independence and outright integration (MandA)
- cooperate on a project or specific business area through coordination of skills and resources
can alternatives to MandA still have similar objectives to it?
YES
1) shared resources and capabilities
2) cost reduction
3) risk reduction
4) market access
5) overarching goal again is to create value for shareholders
types of strategic alliances
2) marketing/distribution agreements
3) agreement to provide technical services
4) management contracts
7) joint ventures
1) supply/purchase agreements
locking in supply of various components of a project you don’t possess yourself
2) marketing/distribution agreements
working together to sell something or using existing channels/sales forces to sell the product
because MandA is RISKY AND FOREVER, how can firms access the resources and capabilities of other companies w/o MandA? 4 ways:
1) contractual relationship
2) other alliances
3) joint venture
4) minority stake
1) contractual relationship
least committed inorganic growth strategy –> partners agree to ongoing arrangement (eg to buy/sell) possibly with exclusivity but maintaining independence and distinction of activities and resources
examples of contractual relationships
a) licensing methods, technology, design processes, patents;
b) joint purchasing agreements;
c) franchises
2) other alliances
more serious than a contractual relationship as generally involves exchange or pooling of resources. Importantly:
1) organisations remain independent
alliances can be seen as
joining of forces and resources for a specified/indefinite period BUT with intention of working towards a common objective
3) join venture
creates a separate entity in which both parties invest subject to a JV agreement, specifying how and over what time period revenues, expenses assts and control of a single project are shared
4) minority stake
a direct investment by one partner in another.
for minority stakes, what must analysts determine?
if this is a financial investment, strategic position (part of another inorganic sharing resources and capabilities or a pre-bid stake)
3 ways to classify alliances
1) strategic intent
2) link or scale alliance
3) economic content classification
1) strategic intent
a. Exploratory: (learning alliances, to grow awareness, reduce info asymmetry) –> limited/0 exploitative intent
b. Exploitative: (business alliance, partners seek to grow revenues through coordinated sharing of RandC –> networks common)
c. Both: hybrid alliances (some combo - hard to define)
2) link or scale alliance
a. Inter-firm partnership linking different capabilities or
b. Inter-firm partnership growing common capabilities
3) economic content classification
a. Pre-competitive: firms in unrelated industries collaborating on new product/technology
b. Competitive: competitor firms in a strategic alliance
c. Pro-competitive: vertical value chain relationship (eg, strategic relationship with supplier)
d. Non-competitive: non-competitor firms in same industry but different markets
Was the Pixar and Disney alliance competitive?
No –> was a 10 year partnership to make 5 films
2 types of joint ventures
1) equity joint venture
2) non-equity joint venture
1) equity joint venture: features
a. 2 or more distinct firms invest in the venture and participate in the venture’s management
b. Venture is a distinct legal entity
c. Financing from the parents funds the JV operations and signals commitment from the parent to each other
2) non-equity joint venture
a. Distinct firms contribute resources but no equity investment
b. No separate entity
farm in farm out arrangements
Owner (farmor) agrees to transfer some % interest to a third party (farmee) if the farmee meets pre-specified exploration commitment
o The ‘consideration’ is paid in the form of services rendered
o The owner ‘farms out’ their rights and the party with the exploration rights has ‘farmed in’ to the lease
what serves as a precursor to a joint venture?
farm in /farm out arrangements
advantages of strategic alliances - 6 things
1) companies maintain independence of management
2) can maintain primary focus
3) access to RandC outside their company
4) risk management, particularly in RandD ventures
5) less costly
6) more flexibility than MandA
disadvantages of strategic alliances
still corporate risk
1) trust
2) relationship status
3) corporate activity of the partner
4) competition with existing businesses (problematic in competitive partner alliances)
differentiating between whether to do MandA or alliance?
1) feasibility
2) agreement - esp regarding value (info assymetry can lead to differences in firm valuation that can’t be mediated)
3) indigestibility (integration problems)
4) flexibility –> get real options from this, independence may be valuable
what’s the opposite of an acquisition?
divestment
divestiture/asset sale
sale of specific assets or a division of the firm to another entity. in some contexts can also refer to the sale of interests (called ‘sell offs’) –> ownership transfers to buyer, seller raises cash
carve out
public offer of partial interest in subsidiary in exchange for cash (partial divestment)
- parent floats subsidiary, separate entity formed but still have some control (sells a minority stake in subsidiary)
tracking stock
issue of a separate class of parent company shares, designed to track the performance of a certain business or division
spin-off
pro-rata distribution of subsidiary shares creating new independent firm, separately listed, traded and valued
(opposite of a merger) - ‘floating off a subsidiary from parent’
4 types of corporate restructuring
1) divestiture/asset sale
2) carve out
3) tracking stock
4) spin-off
what does a carve out create
new firm with some autonomy
- unlike spinoff, parent usually retains control of the carved-out subsidiary
- a popular precursor to full divestiture (testing the waters)
for tracking stock, what do parent shareholders receive
paret forms a separate subsidiary, issues new class of parent’s shares (not cash) to track the subsidiary and retain majority control of the divested business
what’s a way to test the waters when looking at corporate restructuring?
carve out
is cash raise in a spin off?
no
primary vs secondary carveouts
primary: child receives cash from sale
secondary: parent raises cash through sale of stake in child
equity carveouts are attractive to
private equity firms - gives them exposure to a business, they can have solid interest w/o taking control
what does tracking stock allow for?
separating out of reporting for part of a business in such a way it can be independently looked at and then issue stock which tracks against the performance of that part of the business
what’s the motivation behind a tracking stock?
more transparency around the subsidiary, provides investors with greater range of investments in the firm - used more for private companies
rationale for divestiture 8 reasons
divested division is
1) underperforming
2) no longer a strategic fit
3) would help parent be more focused
4) to raise cash (parent in $ distress)
5) unwanted asset from prior MandA
6) better valued as stand-alone entity
7) better strategic fit (thus more valuable to) another firm
8) could represent sale of ‘crown jewels’ in takeover defence
why do parent firms avoid/delay divestiture?
1) inertia (need to get around to but never do)
2) fear of stigma (admission of failure)
3) perception of a contribution
what behavioural biases explain why parent firms avoid/delay divestiture?
1) confirmation bias
2) sunk-cost fallacy (want to keep spending to make it work - don’t want to cut losses bc they’ve spent so much already)
3) anchoring and adjustment
