M&A Flashcards
What are rationales for a M&A?
- A good deal
*Underpriced target –> own stock overpriced –> pay with stocks
*Cheap means of payment –> interest rates low –> debt-finance deals
2.Value creation (1+1>2)
*Operating synergies (increase market power, economies of scale, complementary ressources, excess capacity)
*Financial synergies (cheaper or improved access to external financing –> might reduce cost of capital (because of diversification, less likelihood of financial distress, but part of benefit go to creditors), better use of internal funds, tax savings
*Better management (governance problems)
What are two methods of hostile merger/unsolicited bid? What are examples of decline in hostility?
- Buy a controlling stake (acquire need shares and come with a hard to reject price –> own shareholders decision if they will sell)
- Proxy fight (give votes to others –> acquire does not need to hold many shares)
Decline in hostility:
*Controlling shareholders
*Flip-in-poison pill: Other than bidder can buy at a discount –> acquirer’s (hostile) stake immediately diluted
What are means of payment? And how to choose how to pay?
*Cash
*Stock exchange ratio: #newly issued acquirer shares per target share
*Earn-out: payment contigent on performance milestones
*Contigent value rights, CVR
Use of cash: Does the buyer have cash or does the seller need it?
Holding value constant, more cash:
*less sensitive to synergies
*less sensitive to standalone value of acquirer and of target
(if pay with shares shareholders continue being owners)
Cash/stock mix: Risk allocation between acquirer and target shareholders –> pay cash if you think target is undervalued (why??!)
What do you know about M&A performance?
Stock market reaction:
Stock price of acquire goes down and target goes up –> Almost always expected that they are overpaying
2/3 fail (integration, overestimated synergiers, due diligence failed to highlight issues)
How does incentives for M&A differ between Germany and UK/US?
UK/US:
CEOs remunerated with stocks and stock options –> skew decision in favor of shareholders
+ personal benefits to executives with change of control of a company –> CEOs likely to personally profit from their firms being acquired.
What are M&A valuation methods?
Discounted cash flows (standalone value + syngergies), M&A specific methods (transaction multiples + transaction premix), trading multiples/comparable companies (=standalone value)
How do you estimate synergies using market data?
From no arbitrage condition –> solve for p, probability that the deal happens.
Combined value at offer day (=both firms market cap)=275
With prob. p, the value will be X (combined firm w. synergies)
With prob. 1-p, the value will be market cap. of october
Solve for X. Implied synergies = 321-205,5
DCF: How do you estimate synergies?
FCF:
* Estimate synergies effect on EBIT (=operating profit) (e.g., revenue and cost synergies + potential opportunity costs)
*Any savings in CAPX or changes in NWC?
+Estimate TV
Discount with WACC
=total synergies
+add stand-alone value of target (market cap.)
How to target firm using transaction multiples? What do bid ratio’s ignore?
*Select recent M&A deals: similar industry, size etc.
e.g., EV/EBITDA
Deal EV = Acquisition payment (=E) + deal’s target debt - cash
Deal EV/Deal target’s EBITDA
Target EV = EV/EBITDA_average * Target’s EBITDA
Target equity = Target EV - net debt
Value per share = Target equity/number of shares
Also: EV/sales, Bid=p/EPS, Bid=p/Book value. However the last two are already value per share.
Bid ratio’s ignore debt’s effect on cost of equity
Using transaction mutiples, which comparables should you use and what are potential issues?
Trade-off between statistical accuracy and comparability
Potential criteria: Timing, attitude, status etc.
Eliminate withdrawn offers? Winner’s curse: if you win, end up overpaying?
If different leverage, use EV/x ratio’s
Using transaction premia, how to estimate value per share? What should you remember?
*Select recent M&A deals
*Obtain undisturbed stock price (has to be relatively close to announce date) + obtain deal price per share paid by the acquirer
*Calculate deal premium
*Take average
Value per share = Target’s undisturbed stock price * (1+average premium)
This ignore debt’s effect on cost of capital.
How is the deal EV calculated?
Deal EV = Acquisition payment (=E) + deal target’s debt - cash
