L11: Special Topics - M&A

Question 1

What is the background to M&A?

Answer 1

• M&A form a critical part of the market for corporate control.
• In an M&A, corporate control passes from the target to its acquirer.
• Most acquirers pay an acquisition premium (purchase price is above prevailing market price).

Question 2

What are the common types of mergers?

Answer 2

• Horizontal merger: between entities in the same industry
• Vertical merger: between entities in a supply chain
• Conglomerate (diversifying): between entities in unrelated industries

Question 3

What are good reasons to do M&A?

Answer 3

• Economies of scale and scope
• Vertical integration
• Expertise
• Market power
• Other efficiency gains (e.g. tax savings, special management, reduction of financing frictions)

Question 4

What are bad reasons to do M&A?

Answer 4

Conflict of interest
- Empire building (private benefit of CEO)
- Entrenchment (keep job because complicated puzzle)
- Informed trading by manager (LBO)

Overconfidence (hold onto in-the-money stock options tend to do more M&As)

Question 5

What characterises a private M&A?

Answer 5

• Shareholder and management in control and have the ability to deliver company
• No current value; absolute value, PV of future value (no share price)
• No or limited public information
• Significant due diligence
• Flexible on earn-outs, contingent payments
• Flexible process (bilateral or auction many buyers)
• Representations and warranties protect post closing

Question 6

What characterises a public M&A?

Answer 6

• Board in control; fiduciary duties
• Existing market; absolute value relative to share price
• Public documentation and scrutiny
• Usually less due diligence than in private processes
• Less/no room to use contingent payments
• Well defined process post signing
• Representations and warranties lapse at closing

Question 7

What is the public M&A premia usually at and what has in been in 2022 and 2023?

Answer 7

Usually around 30%.

Much higher in 2022/2023. Investors are willing to pay more due to multiples, assessment of increase.

Question 8

What is a hostile takeover?

Answer 8

Unfriendly, want board to recommend offer to shareholders (shareholders are seeking guidance, should we accept this offer?). Not common in Nordic markets.

Question 9

What steps are part of the takeover process and timeline?

Answer 9

• Preparation
• Approach
• Announcement
• Offer document
• Acceptance period: 3-13 weeks from announcement
• Settlement. End of acceptance period.
• Minority squeeze out: up to one year after announcement

Question 10

What can we say about the case study regarding Swedish Match?

Answer 10

= Recommended cash offer for Swedish Match for SEK161bn (USD16bn) by Philip Morris

• Some situations: We think you are vulnerable, what is your game plan if you are approached?
• Swedish Match had prudent board; thought through intrinsic value, what their response to bidder was going to be.
• Signal: Conny (Swedish Match board member) responded to the phone call “go back and re-do your valuation” instead of signaling that the offer was good. No one has ever bid their best as a first offer.
• Bid speculation in Wall Street Journal is reliable → good source, take great pride, leakages are detrimental

Question 11

What can we say about the case study regarding the public timeline?

Answer 11

• Philip Morris first came with the offer in October 2021
• GS recommended the board to recommend their shareholders to take the offer
• Activist investors starting to disclose that they had accumulated enough shares of target company (Elliot Mgmt disclosed 10%), had bought shares way above price, bidder in problem. Force bidders to increase price. Wanted GS to change recommendation.
• Largest cash offer ever, largest takeover in 20 years
• ESG criteria meant tobacco were off limits → Nordic investors could not own stock → This transaction has triggered companies to look over their ESG policies.

Question 12

Why is a lower bid preferred (Manchester United)?

Answer 12

• Price important, but set of conditions super relevant (governmental regulations, what is certainty that conditions are met). Funding - Equity, debt? Have you secured the finance for the transaction? Bank can walk away!
• Current investigation: under which circumstances can the back walk away?

Question 13

What 3 parts of the M&A process is a junior banker involved in?

Answer 13

• Origination
• Preparation
• Process

Question 14

What are typical junior banker responsibilities in the origination phase on the buy side?

Answer 14

• Help with pitchbooks to develop client relationships
• Retrieve useful info and perform preliminary outside-in valuation and strategic considerations

Question 15

What are typical junior banker responsibilities in the origination phase on the sell side?

Answer 15

• Help with pitchbooks to develop client relationships

Question 16

What are typical junior banker responsibilities in the preparation phase on the buy side?

Answer 16

• Continue outside-in analysis to diligence target performance, positioning, sector, peers and regulation
• Help with docs for potential internal approvals needed (e.g. investment committees)

Question 17

What are typical junior banker responsibilities in the preparation phase on the sell side?

Answer 17

• Assist in preparing information to cover diligence areas and populate VDR
• Build financial model to provide views on value expectations
• Coordinate technical advisors to prepare sell-side reports (if any)

Question 18

What are typical junior banker responsibilities in the process phase on the buy side?

Answer 18

• Coordinate the technical advisors diligence (VDR accesses, Q&A tracker, scheduling and attending of expert calls and site visits)
• Update tracking of process with timeline
• Build financial model and valuation analysis
• Help with docs for potential internal approvals needed and offer letter

Question 19

What are typical junior banker responsibilities in the process phase on the sell side?

Answer 19

• Facilitate interaction with buyer such as management presentations, expert calls and site visits
• Manage replies to Q&A from buyer
• Update tracking of process with timeline
• Help preparing documents on offer assessment

Question 20

In what way is governance via takeover is subject to a free-riding problem?

Answer 20

You stay until after an outside intervention to get a capital gain (if everybody does this there will be no tender)

Question 21

In what way is there a hold-up problem in M&A?

Answer 21

Some owners not allowing the deal to go through unless they are given a larger fraction (even if it is value creating for both parties)

Question 22

In what ways are there agency issues in M&A?

Answer 22

The deal strategy.
- Emphasizing the downside of rejecting the deal
- Managers may take on deals that are not the best, because if they don’t and the company fails shortly after, they will look like a fool