M&A Flashcards
What is the definition of Acquisition in M&A?
An acquirer (bidder) purchases part of or all of the target’s stock (stock acquisition) or assets (asset acquisition). The payment is called consideration and can be cash stock or mixture of both
What is the definition of a typical merger?
In a typical merged the bidder acquires all of the assets and liabilities of the target
What types of mergers are there?
- Forward merger
- Reverse merger
- Consolidation
- Forward Triangular Merger
- Reverse Triangular merger
What is a forward merger?
1) The target company merges with and into the buyer
2) The buyer absorbs all the target company’s assets, rights and liabilities
3) The target company ceases to exist as a separate entity
What is a reverse merger?
1) A smaller private company acquires a larger publicly-listed company (hence gets lisiting)
What is a consolidation?
1) Usually both companies cease to exist, and a new company is formed
What is a Forward Triangular Merger?
1) When a company acquires a target company through a subsidiary, or shell company
Reverse Triangular Merger
1) Acquiring company creates a subsidiary to purchase the target company
2) The target company then absorbs the subsidiary to create a new company
2a) Now totally absorbed into the Group/Holding
What are the types of acquuisition?
1) Horizontal
2) Vertical
3) Conglomerate
What is a horizontal acquisition?
1) Both forms are in the same industry
1a) E.g. acquiring a competitor, e.g. RBS acquired NatWest Bank
Why would you perform a horizontal acquisition?
1) To drive market share and/or to obtain economies of scale
What is a vertical acquisition?
1) Firms at different stages of the same industry
Why would u perform a vertical acquisition?
1) To secure vital outlets for finished products or necessary sources of raw materials.
What is a conglomerate acquisition?
1) Firms are not related to each other
Why would you perform a conglomerate acquisition?
1) May lead to economies in provision of company wide services
What is a merger wave?
1) A period of time in which more merger bids materialise than usual
How many merger waves have there been?
There have been 6 merger waves since 1985
What are the most common drivers of merger waves?
1) Positive stock market conditions
2) Technological change
3) Overcapacity
What is the rationale for merger waves?
1) Company’s stock is overvalued (due to buoyant market conditions)
—> Management use this premium valuation to make acquisitions using stock
2) Economic or demographic stocks; build expertise through acquisitions
What are some examples of M&A?
1) Vodafone and Mannesman
2) Delta Airlines
3) AT&T
Tell me about Vodafones acquisition of Mannesman
1) Mannesman initially refused the bid
2) Vodafone addressed offer directly to the Mannesmann shareholders (53.7:1 ratio of shares)
3) When it became clear that the attempt at the hostile takeover might succeed, Mannesmann agreed to negotiate a friendly takeover
Final agreement:
4) Improved offer of 58.96 Voda to Mannesmann shares
5) Agreement also improved terms for integration and strategic development (staff retention)
Tell me about Delta and Northwest Airlines merger
1) 2008
2) Merger created largest commercial airline in the world
3) Forecasted expectations
a) $200-$300 million per year in
profit enhancing synergies
b) Expanded network and flight
options
c) Complementary global fit
d) Increased customer loyalty
e) Strong cultural fit due to long-
term alliance
4) Huge back office savings
Tell me about AT&T and Time Warner
1) Merge to combine premium media content of Warner with AT&T subscriber base
2) AT&T expected 3bln in annual costs savings within 3 years
3) Justice department tried to block merger due to decreased competition. AT&T argued it would increase competition
Describe the role of an IB in sell-side M&A
1) Comprehensive valuation
2) Merger consequence analysis
3) Select buyer list
4) Set guidelines for range of acceptable bids
5) Evaluate offers received
6) Guide negotiations for disposal price
7) Offer a ‘fairness’ opinion
7a) IB has vested interest to get
job done
Describe the process of hiring the Investment Bank
1) Bidder and target hire separate IBs through beauty parades
2) To win mandate IBs usually prepare pitch books
3) IBs have retainer fees, non- refundable
4) IBs have success fees, contingent upon the successful completion of the deal
What is included in the pitch book of IBs to win mandate?
1) prior experience in the industry of transaction
2) Give price estimates
3) Set possible timetables
Describe the process of valuation
1) Comprehensive valuation includes
1a) Initial analysis of strategic alternatives, eg IPO, disposal, recapitalisation
1b) If sale is preferred option, IB will advise on:
1b.1) Value maximisation, speed of execution and certainty of outcome
2) Merger consequence analysis
3) Valuation helps set the price expectations
3a) select the buyer list and type of scale
Describe methods of valuation
1) Comparable companies analysis
2) Precedent transactions analysis
3) DCF Analysis
4) Leveraged Buyout analysis
What types of bidders are there?
1) Strategic
2) Financial
What do strategic bidders look for?
They focus on benefits from synergies. There is lower competition for bid but tend to pay higher premium.
What do financial bidders look for?
They focus on cash flows and undertake restructuring.
How do you define the number of bidders?
Depends on the size of the target and concentration of the industry
How does the number of bidders affect the bidding process?
Well, you can decide to have a negotiated sale to a single bidder, or have an auction.
Describe the Bidder Confidentiality & Confidential Information Memorandum process
1) Once sale process is chosen, distribute the teaser (brief description of target but not by name)
2) Confidential Information Memorandum (CIM)
2a) Prepared by the IB
2b) Contains detailed description of the target
3) Recipients of the CIM sign a BCA
3a) Prepared by legal adviser of the target
3b) Includes NDA
Describe the bidding process after the CIM
1) Bidders may request additional info
2) Preliminary bid is usually expressed in range of values
3) Once additional info is provided, bidders submit final bids
4) After that, single bidder chosen and final negotiations undertaken
Describe the Definitive Sale or Merger Agreement (DSA/DMA)
1) Document that regulates the transaction, containing info such as:
1a) Purchase price, timing, consideration and what happens if merger is terminated
Describe some options in the DMA or DSA
1) Material Adverse Change clause, sets conditions where bidder can withdraw from deal
2) Fiduciary Out: target includes contract clause that allows to change mind of sale to party. EG New and better bid comes in
3) Break-up fee:
Amount paid by target to bidder if deal not concluded
Describe the fairness opinion in M&A
1) Before the target signs DSA or DSA, BoD usually requires fairness opinion
2) Certification on value of the deal provided by financial advisor
What happens once signing the DMA/DSA?
1) Secure approval from Target’s shareholders
2) Source approval from antitrust authorities or competetion commission
3) Arrange financing for the deal
What are motives for M&A on the buy side?
1) Value release, target can be acquired for less than true value
2) Value creation, value of combined entities is greater than sum of individual parts, due to synergies
Other motives:
3) Managerial motives
4) Diversification
Describe the Sources of Synergy
Difference between cash flows at date (t) of the combined firm and the sum of the cash flows of the two separate firms
What are the categories of synergy sources?
1) Revenue enhancement
2) Cost reduction
3) Lower taxes
4) Lower capital requirements
How do you calculate Delta: CF?
Delta Rev minus Delta Costs minus Delta Taxes minus delta Capital Requirements
What are some downsides of M&A Motives
1) Agency problems can arise, eg target company managers may lose jobs
2) If diversification is only motive, NPV will be zero
2a) shareholders can diversify their own portfolio’s
What are the categories of takeover defenses?
1) Rejection
2) Corporate charter and by-law amendments (requires shareholder approval)
3) Financial techniques
4) Structural and strategic decisions
Describe some Corporate Charter or By-Law amendments in takeover defences
1) Staggered board (directors serve max three years, eg only renew one third each year)
2) Set Minimum acceptable price
3) Supermajority vote
4) In US: reincorporate into state with more restrictive takeover laws
Describe some financial defences for takeovers
1) Poison pill, shareholders have option to buy additional shares, to dilute acquirer shares. Usually at discount
2) Golden parachute, lucrative severance packages
3) Issue debt to pau a special dividend, or pursue a share buyback.
4) Sell of some assets “crown jewels”
Describe some of the advantages of issuing special dividend or pursuing a share buyback
1) May lead to stock price increases
2) Give management more voting power
3) Reduce cash on the balance sheet to pay out dividends. Make takeover less attractive
Describe some of the advantages for crown jewel defence.
1) A firm might be interested in a special division, and might scare them off.
Downside is that it can hurt existing shareholders
Describe structural and strategic actions against takeovers
1) Seek a white knight, more compatible buyer that will pay higher price and keep jobs etc
2) Seek a white squire, third party to make significant investment
3) A management buyout, management become white knight
4) Buy business that competes with buyer and create antitrust conflict
5) Pac-man defence, counterattack by the target
Provide an example of Pac-Man defence
in 2013, Men’s Wearhouse turned the tables on Jos. A. Bank acquiring JAB for 1.8 billion.
In this case it was a signal that it was a good idea for them to merge.
Describe the role of investment banks in more complex m&a
1) Certification effect
2) Servaes and Zenner
2a) Transaction costs hypothesis, IBs can analyse acquisitions at lower costs
2b) Asymmetric info hypothesis: IBs reduce information asymmetries between the two parties
3) Contracting cost hypothesis
3a) IBs reduce agency costs in the acquiring firm.
What are some of the findings on the three hypotheses by Servaes and Zenner?
1) Acquirers are more likely to use IB when management have little acquisition experience and when acquisition is complex
2) Acquirers more likely to use IB when target operates in many industries
3) Acquirers more likely to use IB when target is public and have lower insider ownership
Describe some benefits of using Commercial Banks in M&A
1) Certification holds for acquirers
2) Acquirers more likely to use CBs if prior lending relationship. Implicit or explicit promise
What are the two hypotheses from Rau?
1) Superior deal hypothesis. Top tier IBs should earn higher excess returns. IB market share is dependent on performance of acquirer in M&A
2) Deal completion hypothesis: market share of IB depends on number of completed deals
Findings from RAU?
1) Both hypotheses hold
2) Number of completed deals by IB in previous year positively related to banks share in following years
3) Banks market share not related to performance of acquirers post acquisition. I.E. get the deal done
