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BE453 - Corporate Finance & Value Creation > L11: Special Topics - M&A > Flashcards

L11: Special Topics - M&A Flashcards

1
Q

What is the background to M&A?

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).
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2
Q

What are the common types of mergers?

A
  • Horizontal merger: between entities in the same industry
  • Vertical merger: between entities in a supply chain
  • Conglomerate (diversifying): between entities in unrelated industries
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3
Q

What are good reasons to do M&A?

A
  • Economies of scale and scope
  • Vertical integration
  • Expertise
  • Market power
  • Other efficiency gains (e.g. tax savings, special management, reduction of financing frictions)
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4
Q

What are bad reasons to do M&A?

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)

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5
Q

What characterises a private M&A?

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
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6
Q

What characterises a public M&A?

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
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7
Q

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

A

Usually around 30%.

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

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8
Q

What is a hostile takeover?

A

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

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9
Q

What steps are part of the takeover process and timeline?

A
  • 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
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10
Q

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

A

= 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
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11
Q

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

A
  • 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.
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12
Q

Why is a lower bid preferred (Manchester United)?

A
  • 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?
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13
Q

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

A
  • Origination
  • Preparation
  • Process
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14
Q

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

A
  • Help with pitchbooks to develop client relationships
  • Retrieve useful info and perform preliminary outside-in valuation and strategic considerations
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15
Q

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

A
  • Help with pitchbooks to develop client relationships
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16
Q

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

A
  • 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)
17
Q

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

A
  • 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)
18
Q

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

A
  • 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
19
Q

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

A
  • 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
20
Q

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

A

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

21
Q

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

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)

22
Q

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

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

BE453 - Corporate Finance & Value Creation (11 decks)

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