Lecture 1 Flashcards
Name some catalysts for M&A activity in 2021?
Capital chasing deals, disruptive technology, executive confidence, and stock value increasing
What is a merger?
- Represents the absorption of another company by another
- One company cease to exist as a separate entity
- Usually, the smaller of the two which is merged into the larger
What is an acquisition?
Purchase of some portion of one company by another. May refer to (i) the purchase of assets from another company, (ii) the purchase of a definable segment of another entity, such as a subsidiary, or (iii) the purchase of an entire company (merger)
Is value created?
• Assuming it is a zero-sum game (excl. deal expenses) there are winners and losers
o Academic research concludes that failure rate of mergers and acquisitions stands between 70% and 90% (from the buyers perspective)
Name 14 Motives for M&A
- Synergies (top line / costs)
- Growth
- Size / market share / market consolidation / market power
- Diversification ( geographic / business line)
- Reduce / eliminate competition
- Financial factors
- Talent
- Succession plans
- Management incentives
- Shareholders structure issues
- Disruptions, innovation and R&D
- Tax motives
- Investment and divestment periods (PE / VCs)
- Transactions imposed by regulators
What is a synergy?
• A synergy occurs when the whole of the combined company will be worth more than the sum of its parts, by either reduce costs or increase revenues e.g. A + B < AB
What is reverse synergy?
• A reverse synergy occurs when the parts are worth more separately A + B > A
Name different four types of synergies
- Revenue synergies: Cross-selling of products, expanding market share, higher prices from reduced competition
- Cost synergies: economies of scale in research and development, procurement, manufacturing, sales and marketing, distribution, and administration
- Asset synergies: asset redundancy (e.g. divesting in an asset)
- Financial synergies: losses carryforward, lower cost of capital
How do you calculate synergies?
A synergy occurs when the net acquisition value (NAV) is positive and provides a premium to shareholders of the acquirer
NAV = Vab - [Va + V b] - Premium - acquisition Expense
What are the options to grow?
• Companies can grow either by making investments internally (i.e. organic growth) or by accessing the necessary resources externally (i.e. external growth) • What are the options to grow? o Build – Internal development o Borrow – Licenses and alliances o Buy – M&A
What is market power?
The ability to set price in excess of marginal cost. Many companies use horizontal and vertical integration to increase market power
What is horizontal integration?
Horizontal integration refers to the acquisition or merger of rivals
What is vertical integration?
Vertical integration refers to the acquisition or merger of companies that have a supplier-client/ distributer relationship
How can M&A help industry disruption, Innovation and R&D?
If a company can’t cost-effectively create capabilities needed to sustain its future success, internally, it may seek to acquire them elsewhere.
For example, a company may engage in M&A activity in order to acquire specific competencies or resources it lacks, such as a strong research department, intellectual capital, or creative talent
Name the most common diversification strategy
- Geographical & Product
- Diversification is many times communicated as one of the motives behind a merger
- The diversification motivation is challenged because many academics and practitioners consider that diversification should be done by investors and not by the management of companies
Is tax a reason for M&A?
Yes, it is possible for an acquirer to benefit from merging with a target that has accumulated a large amount of tax losses. Instead of carrying the tax losses forward, the merged company would use the tax losses to lower its tax liability
what is the value creation mantra?
Value is created through synergies in M&A. The trade-off between value creation and the dark side of M&A
Dark side of M&A (3)
- Self serving managerial reasons ( job protection, empire building, and financial compensation)
- Pursuit of wrong incentives (EPS momentum, size/growth, and short-term market pressures)
- Social pressure and biases ( herd behavior, overcommitment to M&A, path dependency)
Limitations to the value creation mantra (4)
o Are all shareholders equal? Who should the board be serving too and what does it mean to add value from the management perspective?
o What is the cost of not doing M&A? Are there cases in which not doing M&A can have a greater cost than doing a value destructive M&A?
o Public vs. private deals
o Mature industries, disrupted industries, power/value shifts
What is a horizontal merger?
one in which the merging companies are in the same kind of business, usually as competitors. One of the great motivators behind horizontal mergers is the pursuit of economies of scale, which are savings achieved through the consolidation of operations and elimination of duplicate resources. A common reason for horizontal mergers is to increase market power, because the merger results in a reduction of the number of industry competitors and an increase in the size of the acquiring company
What is a vertical merger?
The acquirer buys another company in the same production chain, for example, a supplier or a distributor. In addition to cost savings, a vertical merger may provide greater control over the production process in terms of quality or procurement of resources or greater control over the distribution of the acquirer’s finished goods. If the acquirer purchases a target that is ahead of it in the value chain (a supplier), it is called backward integration
Conglomerate merger
When an acquirer purchases another company that is unrelated to its core business, it may be called a conglomerate merger. The concept of company-level diversification was commonly used as a rationale for inter-industry mergers during this period. By investing in companies from a variety of industries, companies hoped to reduce the volatility of the conglomerate’s total cash flows
