What is an acquisition?
- You buy 100% of shares
- Both acquire and targets keep their legal entity
What is a merger?
A legal absorption of the target entity (A+T =A)
Or eventually the creation of a new company (A+T = New)
Pros of Acquisition
Retain limited liability of subsidiaries
Pros of Mergers
Tax Gains if losses and gains offset
Friendly Bid
Acquirer and target management teams are on the same page
Hostile Bid Methods
- Buy a controlling stake (hard to refuse offer)
- Proxy Fight (nominate possible directors at the board of directors)
Toehold
Purchase an initial stake in the open stock market
(you buy 5 or 10% as a first step)
Anti-take overs methods
- Poison Pill : If a hostile acquirer reaches 20% of shares, the other shareholders get options to buy new shares at a big discount) - the acquirer is diluted
- Staggered Board: A fraction of the board is renewed each years, so take multiple years to gain control of the board
Price Premium
% above recent stock price
Rational for M&A 1 : “Good Deal”
Underpriced target
Rational for M&A 2 : “Value Creation”
- Cost reduction (overlapping assets, buyer power…)
- Revenue Growth (Complementary assets…)
Methods to evaluate M&As : Transaction Multiples
Look at similar deals in recent years
For each deal, compute its target enterprise value (What the acquirer paid for the target entity + target’s Debt - Cash at the time of acquisition)
For each deal, look at its target EV/EBITDA
Methods to evaluate M&As : Public Takeover Premium
Select recent acquisitions of publicly traded companies so you can observe the target stock price before acquisition
What percent of mergers fail?
66.6%
