Deals, value and stakeholders Flashcards
What occurs in the Pre-purchase (ex-ante) phase of a M&A deal?
Decisions are made on if the firm should undertake M&A.
Planning strategic goals / objecties
Searching fr potential counter-parties
Screening and filtering out unsuitable counter-parties
Informal/ initial contact with counter-party.
Need to estimate future values of cash flows the M&A will generate.
Need positive synergies to continue with deal.
Explain what occurs in the purchase (in medias ras) phase of a M&A deal.
Assuming identified counter-party is interested:
Privately discuss terms of deal
Plan to see how the deal can be financed
Due diligence
Valuation modelling
Explain what occurs in the post-purchase (ex-post) phase of a M&A deal.
Lengthy process of integrating the two companies.
Redundancies
New information systems (HR platforms/ databases)
Dealing with customers, suppliers and business partners.
Identifying different Key performance indicators.
What is Net Present Value (NPV) used for?
It is the most appropriate technique to bring future values of expected cash flows to the present.
It involves discounting future cash flows to account for risk and uncertainty.
What is the calculation for NPV?
CFt / (1+r) ^t
CFt= Cash flow at time (t)
r= Discount rate (cost of capital)
t= time period (from t=0
T= terminal time or end of the projects lifespan
What are the 2 methods of payment generally used for most M+A deals?
All cash deal: Acquirer pays cash (including premium) to target shareholders in exchange for their shares.
All stocks deal: bidder issues new shares and swaps them for target shareholders in exchange for their sales.
What are the metrics used to measure gains from merging?
Sales growth
Return on assets
Return on equity
These reflect improvements in profitability as a result of mergers + acquisitions- measured after deal is completed and has had time for synergies to manifest.
What are the 2 important indicators of shareholder wealth?
Customer Abnormal returns (CARs) at announcement of deal
Buy-and-Hold returns (BHARs) in the long run
Explain the benchmark problem when measuring shareholder wealth.
Evaluating the success of a deal involves determining whether the merger created incremental shareholder wealth.
Therefore, we need to measure how much value the merger added beyond what would have occurred had the two firms continued operating separately.
Comparing the pre and post merger performance can be hard and misleading:
Synergies: Cost savings, increased revenue, economies of scale
Integration costs: Costs of combining operations, cultural clashes, inefficiencies during transition.
Changes in competitive positioning: A greater market power, new products, altered dynamics.
Changes in the economy
What are the solutions for the benchmark issue?
Performance forecasting:
Using pre-dal information to estimate based on expected change in market conditions. However is reliant on quality and reliability of analyst forecasting.
Control sample:
Matching firms to comparable peers to infer what growth would have been. Characteristics such as CAPM Beta.
However finding perfectly comparable firms is difficult, as no two firms are identical in terms of size, strategy or operations
What are the 4 steps in performing an event study?
- Identify event window
- Estimate expected returns, using Capital Asset Pricing Model (CAPM)
- Calculate Abnormal Returns (ARs)
- Calculate Cumulative Abnormal Returns (CARs).
Explain identifying an event window in the 4 steps of performing an event study.
Days before during and after the M+A, announcement. This window captures both the markets anticipation of the event and the reaction to the event.
Explain estimating expected returns, using CAPM in the 4 steps of performing an event study.
Capital asset pricing model:
The expected return of a stock (E(ri)) is determined by is systematic risk (Beta) relative to the market:
E(ri) = rf + Beta i [E(rm) -rf]
rf= Risk-free rate (treasury bills)
Beta i = Measures its sensitivity to he market movements
E(rm)= Expected return on the market portfolio
E(ri) Expected return on stock i
Explain calculating abnormal returns in the 4 steps of performing an event study.
ARt= Rt - E(ri)
ARt= Abnormal return on day t
Rt= Actual return on stock i on day t
E(ri)= Expected return on stock i based on CAPM
Explain cumulative abnormal returns (CARs) in the 4 steps of performing an event study.
Sum the abnormal returns over the days in the event window.
CAR= Sum of ARt
What are a list of ethical considerations in M+A?
Relocation or production overseas
Elimination of duplication
Different customer base targeted
Impact on staff morale and job security
Impacts on communities and natural resources
Executive bonuses vs workforce reductions
Explain the ethical consideration of relocation of production overseas in an M+A deal.
Many firms can achieve cost savings by mobving production to countries with lower wages or less stringent labour regulations.
The ethical issue is that there could be potential exploitation of foreign labour, job losses in the home country.
Explain the ethical consideration elimination of duplication in a M+A deal.
Elimination of duplicated operations such as administrative functions or production facilities to reduce costs.
The ethical issue- leads to redundancies
Explain the ethical consideration of different customer bases being target in a M+A deal
M+A deals can result in a shift in brand identity and customer focus, which may alienate loyal customers of the pre-merger firm.
Failing to communicate post-merger can lead to loss of trust and dissatisfaction among customers and other stakeholders.
Explain the ethical consideration- Impact on staff morale and job security in a M+A deal
A lack of communication and transparency during the restructuring process can create anxiety and decrease productivity.
Ethical management involves clear communication, counselling staff and maintaining employee dignity during transitions.
Explain the ethical consideration- Impacts on communities and natural resources in M+A deals
large scale relocations or changes in production processes may affect local communities and deplete natural resources.
Corporations have a responsibility to consider environment and social impact to their operations and engage in CSR.
Explain the ethical consideration- Executive bonuses vs workforce reductions in M+A deals
Senior executives often receive large bonuses or incentives for successfully completing M+A deals, even when the process results in significant layoffs or pay-cuts for lower-level employees.
This creates a conflict of interest where the executives will prioritise themselves.
What are the pros and cons of Acquistions on stakeholders ?
Pros: They benefit society and stakeholders by creating more efficient markets and improving managerial performance.
Cons: Acquisitions externalise costs to non-investor stakeholders and reduce innovative stakeholder practices (redundancies, reduced charitable donations to local communities, lost customers due to impaired service)
Who are the most important stakeholders in the pre merge phase?
Top management- Responsible for strategic decisions , due diligence, and negotiations.
Owner/ shareholders- Owners of the target and acquiring firms have significant influence through voting right and shareholder meetings.
The focus is on valuation, negotiation and strategic fit. Stakeholder influence is concentrated in the hands of top management and owners.
Who are the most important stakeholders during the deal announcement phase of an M+A deal?
Investment banks- Act as financial advisors, aiming to maximise transaction fees and facilitate deal completion.
Customers- React to potential changes in products, services and pricing.
Who are the most important stakeholders in the post-merger phase of a M+A deal?
Employees- Influence integration success through their morale, productivity and cultural adaptation.
Suppliers- May renegotiate contracts or seek new partnerships based on perceived stability and strategic fit.
Regulators- Ensure compliance with competition laws and assess potential monopolistic behaviours.
