Mergers & Acquisitions Lecture 4 Flashcards
Which 2 sources of synergies are there?
- Revenue enhancement synergies > more risky to realise and therefore need to be discounted at a higher rate (CoE)
- Cost saving synergies > generally more certain, so discounted using the WACC
Give the formula for levering/relevering betas
asset beta = equity beta / (1 + D/E * (1-taxrate))
What are the 3 phases in a SPAC?
- IPO
- Target search and deal rationale
- Approval / closing
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Total of 18-27 months
What are the reasons SPACs boomed in 2020?
- SPACs offer pricing certainty in an uncertain market
- Widened public-private valuation gap allowed private companies to capitalise on this
- More dry powder available than ever before, and SPACs provide exit opportunities
- Private companies have remained private for longer. Due to the decrease in public companies and increase in dry powder, the pool of companies available for SPACs have increased
Pros and Cons of de-SPAC transactions
+ High amount of upfront proceeds relative to IPO
+ Potentially more certain alternative to becoming public than an IPO due to deal pricing is less susceptible to market swings
+ Large pool of capital already available anchors investment
+ Engagement with SPACs simultaneously to IPO provides credible listing back-up plan
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– Dilution from SPAC structure devalues target shareholders rollover equity
–Capital raising fees to be borne by the merged entity, minimising savings of forgoing IPO gross spread
–Negotiations over relative value and other deal terms with partner
– Will have to comply with same public company requirements as with a regular IPO
What are the explicit fees and implicit fees?
Explicit fees: (to be paid by the target company)
1. Underwriting fees
2. PIPE fees
3. Merger fees
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Implicit costs: related to warrants > possible dilution
What is the difference between a split-off and a divestiture?
- No cash is generated from the spin-off
- The spun-off unit becomes an independent entity with its own management
- Spin-offs can be tax free (tax deferred), while in divestitures the company has to pay capital gains taxes
When is a spin-off tax free?
- Both the parent and the subsidiary have been in active operations for at least 5 years prior to the spin off distribution date.
- The parent company had control of the subsidiary before the spin off and gives up this control after the spin off. > Spun off shares have to represent at least 80% of the outstanding value of the unit, and the parent company must not be able to maintain effective control with the remaining shares (i.e., the subsidiary has to become independent of the parent company).
- There must be a business reason for the spin off, and the objective cannot be purely distribution of profits. Legitimate business reasons are usually defined widely to include giving managers a stake in ownership of the unit, complying with anti-trust laws and enhancing access to capital markets.
Note on spin-off
A spin-off is kind of the opposite of an M&A. When a company spins-off, there’s more information available on both companies. This is also the opposite of the ‘internal capital markets’ argument in favour of M&A.
What is an equity carve-out? When is it used? What happens to the proceeds?
Equity carveout: a firm separates out assets or a division, creates shares with claims on these assets and sell them to the public.
- Unlike spinoffs, equity carveouts bring cash inflows to the firm.
The parent usually retains control of the carveout unit (usually, it sells maximum of 20% of the unit to public).
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Equity carveouts are used for divisions that have both high growth opportunities and significant investment needs.
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Proceeds from an equity carveout can go to either the carveout unit/subsidiary or the parent. If proceeds go to the parent, the parent is taxed on the difference between the proceeds and the BV of the unit that was carved out.
Why does a company first perform an equity carve-out and then a spin-off?
Spin-offs are usually preceded by equity-carveouts; the cash is retained in the subsidiary; since parent owns 80% of the carved-out unit, the later spin-off can still qualify as tax-free.
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Chat: one advantage of this approach is that it can allow the parent company to realize some value from its subsidiary while still retaining a controlling interest in the subsidiary. By selling a portion of the subsidiary’s equity to the public, the parent company can raise capital that can be used to fund its own operations or other investments. At the same time, the parent company can maintain control over the subsidiary and continue to benefit from its operations.
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Another advantage of this approach is that it can help to establish a market value for the subsidiary prior to the spin-off. By selling a portion of the subsidiary’s equity to the public, the market can assign a value to the subsidiary based on its operations and financial performance. This can help to establish a fair exchange ratio for the spin-off, which is the ratio at which shares of the new company will be distributed to the parent company’s existing shareholders.
What is a corporate tax inversion, and how is it structured?
A tax inversion involves an agreement between corporations in two countries. A corporation (“the inverter”) in one economy often merges with a corporation (“the new foreign parent company”) that is headquartered in a lower-tax economy.
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The underlying financial transactions typically involve an exchange of shares and an agreement to designate the lower-tax economy as the legal residence of the combined entity.
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There is usually no change in the geographical allocation of headquarter functions.
Remember on tax inversions…
- It is a big source of cross-border M&A
- It is one example of ‘financial synergies’, which is one of the 8 motives for M&A
What is the motive of the new international tax agreement?
The new tax agreement was motivated by disparities in corporate tax incomes of countries: firms managed to move income to subsidiaries in lower tax jurisdictions via transfer payments or via tax inversions rather than paying taxes in the country where the revenues were realised.
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The international tax agreement is expected to have a dampening effect on cross-border M&A activity!
