Lecture 2: Markets and M&A

Question 1

Two main M&A activity a corporate can do?

Answer 1

1) expansionary M&A

2) restructuring M&A (e.g. spin-off, equity carve out)

Question 2

How to know that not overpaying a public target company?

Answer 2

Premium paid + transaction cost < NPV of synergies

Question 3

4 bad reasons for M&A

Answer 3

1) Top Management human nature: personal benefit (larger firm = larger perk); develop in area with press coverage/ where top mgmt. has personal interest (politics)/ where top mgmt. has a specific expertise; management hubris: overestimate synergies
2) Management entrenchment (prefers overpaying acquisitions rather than paying dividends)
3) Diversification (unrelated business)
3) Solely for increasing EPS (P/E game)

Question 4

Historical M&A waves

Answer 4

around 1900: rail road
1916-1929: vertical merger/conglomerates (ec. conditions)
1981-1989: boom, rising stock market, deregulation
1992-2000: economic recovery, internet, globalization
2003-2008: low rates, stock market rising

post Lehman: low rates underpricing risk

Question 5

4 types of M&A depending on transaction and type of payment

Answer 5

Stock / Cash payment

Asset / Equity purchase

Question 6

Staple financing

Answer 6

financing provided by seller’s bank (mostly in LBO case). Floor to min. leverage feasible on the asset and therefore a min. price

Question 7

Retainer

Answer 7

Fixed (monthly/yearly) amount advisor earns when hired for a mandate even though deal does not go through

Question 8

Fairness opinion

Answer 8

BoD ask to justify price company plans to pay.

Big adv.: being included in league table w. much less effort

Question 9

4 main tasks for an M&A bank

Answer 9

1) Valuation
2) Negotiations
3) Process management
4) Helping on financing

Question 10

How does information shared by seller and risk for seller in a sell-side process

Answer 10

Information shared increases and with it the risk

Question 11

Key elements Teaser, IM, Process Letter, VDD, data room

Answer 11

Teaser: short overview
IM: company, market overview
PL: communicate process steps and overall timeline to buyers, highlight what is required form them. Include contents of the written offer, detailed description of the funding sources; financing commitment letters; and (for the 2nd round) a market-up copy of the SPA.
VDD: financial/accounting matters but also for legal, tax, strategic and environmental topics
Data room: disclose large amounts of (mostly confidential) information on legal, operational, financial tax and further topics

Question 12

Pros/cons private negotiations vs. auction

Answer 12

Private: customizable, no reputational risk
Auction: loose competitive tension, risk that process never ends

Question 13

Dual track

Answer 13

Sale process (auction) and IPO parallel

Question 14

2 examples for revenue, cost and financial synergies

Answer 14

revenue: Pricing power, cross selling, distribution network
cost: IT, overlaps in plants, headquarter
financial: unused cash, unused debt capacity, tax benefits, cheaper access to financing

Question 15

Value synergies

Answer 15

Identify and quantify all types of synergies as well timing and cost. TV of synergies without growth. PV by discounting them with WACC of acquirer + risk premium (more risky than day-to-day business); or WACC and negative growth since you give away 100% yearly synergies to clients, employees etc. in medium to long-term

Question 16

“total net synergies” with listed target

Answer 16

• revenue, cost, financial syn.
• cost of implementation
• transaction costs
• any under/over-valuation of targets vs. its current MV
• certain about disposal post deal: diff. actual expected sale price of asset disposed (post tax) and its embedded value in total valuation of target by market

Question 17

Mixed offer how are synergies given to Target shareholders?

Answer 17

1) premium paid in cash part
2) sharing of remaining synergies (total synergies - premium paid) as Target shareholders become partial shareholders of pro-forma entitiy