L11: Special Topics - M&A Flashcards
What is the background to M&A?
- 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).
What are the common types of mergers?
- Horizontal merger: between entities in the same industry
- Vertical merger: between entities in a supply chain
- Conglomerate (diversifying): between entities in unrelated industries
What are good reasons to do M&A?
- Economies of scale and scope
- Vertical integration
- Expertise
- Market power
- Other efficiency gains (e.g. tax savings, special management, reduction of financing frictions)
What are bad reasons to do M&A?
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)
What characterises a private M&A?
- 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
What characterises a public M&A?
- 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
What is the public M&A premia usually at and what has in been in 2022 and 2023?
Usually around 30%.
Much higher in 2022/2023. Investors are willing to pay more due to multiples, assessment of increase.
What is a hostile takeover?
Unfriendly, want board to recommend offer to shareholders (shareholders are seeking guidance, should we accept this offer?). Not common in Nordic markets.
What steps are part of the takeover process and timeline?
- 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
What can we say about the case study regarding Swedish Match?
= 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
What can we say about the case study regarding the public timeline?
- 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.
Why is a lower bid preferred (Manchester United)?
- 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?
What 3 parts of the M&A process is a junior banker involved in?
- Origination
- Preparation
- Process
What are typical junior banker responsibilities in the origination phase on the buy side?
- Help with pitchbooks to develop client relationships
- Retrieve useful info and perform preliminary outside-in valuation and strategic considerations
What are typical junior banker responsibilities in the origination phase on the sell side?
- Help with pitchbooks to develop client relationships
What are typical junior banker responsibilities in the preparation phase on the buy side?
- 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)
What are typical junior banker responsibilities in the preparation phase on the sell side?
- 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)
What are typical junior banker responsibilities in the process phase on the buy side?
- 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
What are typical junior banker responsibilities in the process phase on the sell side?
- 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
In what way is governance via takeover is subject to a free-riding problem?
You stay until after an outside intervention to get a capital gain (if everybody does this there will be no tender)
In what way is there a hold-up problem in M&A?
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)
In what ways are there agency issues in M&A?
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
