Lesson 1 - M&A Strategy, Archetypes, and ESG

Question 1

Q1: Why is M&A risky?

Answer 1

Because of the capital outlay upfront, no time to learn and adjust. Especially compared to organic growth where you can put in capital over time and learn.

Question 2

Q: Which question should every M&A decision involve?

Answer 2

What is the best alternative?

Question 3

Q: Which 3 synergy categories are there?

Answer 3

1. Revenue enhancement
2. Cost Savings
3. New Growth Opportunities

Cost savings > revenue enhancements

Question 4

Q: Which 3 types of synergies can you get within revenue enhancement?

Answer 4

1. Increased market power and market share
2. Network externalities (more users, more value)
3. Leveraging market resources and capabilities

Question 5

Q: Which 4 types of synergies can you get within revenue enhancement?

Answer 5

1. Reduction of excess capacity
2. Scale economies in multiple departments (cost goes down)
3. Scope economies (spread cost out over more products).
4. Learning economies (can reduce costs)

Question 6

Q: Which 3 types of synergies can you get within New growth opportunities?

Answer 6

1. Creating new business models to compete
2. Creating new capabilities and resources
3. Creating new products, markets, processes

This is gaining importance in recent years, most companies acquire to improve their R&D profile

Question 7

Q: What 4 types of Horizontal Mergers are there?

Answer 7

1. Related products vs. unrelated products
2. In market (geographical) or out of market (less cost synergies)
3. Consolidation, roll ups
4. Acquisition of complementors (complementary products)

Question 8

Q: What is typically the objective for a vertical merger?

Answer 8

More control over access to resources, quality, innovation

Question 10

What are example of industry blurring vertical integration?

Answer 10

telecom buying media
banks buying insurance

Question 11

What are the risks of a vertical deal name 3

Answer 11

1. lack of market incentives
2. lack of economies of scale
3. antitrust regulation

Question 12

Q: How does PE create value?

Answer 12

operational improvement, leverage, multiple expansion

Question 13

What are some additional deal types (besides vertical/horizontal/conglomorate)

Answer 13

Acquihire (buying skilled professionals)
Killer acquisition (killing the target)

Question 14

Q: Name 5 characteristics of a deal where returns to buyers will likely be higher

Answer 14

1. Strategic Motivation
2. Negotiated price of private firms
3. Cash payment
4. Buy during cold M&A markets
5. Go hostile

Question 15

Q: Name 5 characteristics of a deal where returns to buyers will likely be lower

Answer 15

1. Opportunistic motivaton
2. Buy listed firm at auction
3. Stock payment
4. Buy during hot M&A markets
5. Negotiate with resistant target

Question 16

Q: What are the main takeways from Sirower-Weirens

Answer 16

• if return is negative at day one it is negative one year later
• the higher the premium, the worst the returns

Question 17

Q: What are the three big issues when it comes to realizing synergies

Answer 17

1. standalone shareprice already assumed improved performance (double counting)
2. Perpetuity of synergy is typically assumed (but technology is evolving)
3. Game theory: when making acquisitions you have to look at the biggest competitors

Question 18

Q: What does research say about the performance of divestments

Answer 18

Creates huge shareholder value