mna strategies Flashcards
What is Misvaluation Hubris
Misvaluation Hubris occurs when a company overestimates the value of an acquisition target due to managerial overconfidence, bias, or reliance on misvalued market signals. It often leads to overpaying for the target, resulting in value destruction for the acquiring company’s sharehold
Q: What is Empire-Building
A: Empire-building occurs when managers pursue acquisitions to increase the size and scope of their company, enhancing their own power, prestige, or compensation, often at the expense of shareholder value.
Q: What is Entrenchment
A: Entrenchment refers to actions taken by managers to solidify their position and reduce the likelihood of being replaced, often by making the company larger or more complex, which can prioritize managerial self-preservation over shareholder value.
Does acquisition create value for the buying co, the target co, both combined
target co: yes
buying co: on average stock falls
combined; value creation but in a very disproportionate way. (often excellent returns or terrible returns)
2 ways MNA creates value
1) synergies
2) better management/better strategy; effects coming from a change in control (no link to the combined asset)
2 main type of synergies
1)operating synergies
2)financial synergies
3 types of operating synergies
Revenue Synergies:
– More pricing power due to more market power, merger to enter new segments / new
geographic areas, merger to leverage customer relationships / distribution networks / brands to
increase product offerings and volume…
Cost or Operating Synergies:
– Economies of scale, vertical integration, savings in purchasing / marketing / administration / IT /
R&D / sales force utilization / …
– Easier to quantify (“headcount”) → reasons for bad press.
(often the most meaningful and appreciated as they are easy to forecast)
Asset Synergies:
– Eliminate inefficiencies (rationalize capacity, divest non-core assets, new management), exploit
complementary resources.
3 types of financial synergies
Tax Benefits:
– Target has tax deductions that it cannot use because of insufficient taxable income. Merger in
order to exploit them. Depends on jurisdiction though.
▪ Asset write-ups:
– Under some accounting standards, book value of PPE and other depreciable assets is evaluated at
the time of the merger which can lead to a write-up, i.e., additional depreciation tax shields going
forward. (Note: not the same as goodwill which does generally not lead to tax savings).
▪ Debt capacity / cost of financing:
– Imperfectly correlated cash flows between bidder and target can create more stable (i.e.,
diversified) cash flows that can increase debt capacity / lower cost of financing.
– Larger size can create economies of scale in financing (e.g., better market-access).
▪ Excess cash:
– Target generates excess cash and bidder is a “cash junkie” with difficult access to finance.
Combine firms to cross-subsidize i.e., create “internal capital market”.
why is it difficult to assess if synergies are realized or not? what is the best but imperfect way to do so?
as an outside investor we dont have acces to all operation levels data.
best ways in the long run is to look at stock price fluctuation and profit margins
give 1 example of where value creation arises from asset management firm MNA
the increased size allows the firm to achieve a higher level of specialization and thus efficiency (value creation) as they no longer need to supervise multiple divisions/sector
accretive vs dilutive mergers
does one work better than another
accretive buyer buys a firm with a lower PE so it looks like the firm got cheaper (lowers PE)
dilutive, the buyer buys a firm with higher pe.
no statistical difference in performance, the market is not fooled.
pe valuation is the result of growth/moat/quality. so unless one of these factor improve the market will make the weighted average of the firm’s PE + synergies valuation
Q: Why are mergers between a “no growth” buyer and a “high growth” target often a bad reason empirically?
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- Overpayment for Growth: Buyers often pay inflated prices for high-growth targets, eroding shareholder value if growth fails to justify the premium.
- Market Entry: High-growth industries attract competitors, diluting the acquired company’s growth potential.
- Better Reasons in Low-Growth Firms: Mergers in low-growth industries focus on cost synergies and consolidation, which provide more predictable value.
- M&A for Mature Industries: In mature industries, M&A may be the only viable growth strategy, making cost-driven or efficiency-focused mergers more rational.
why do cash only mna deals perform better
when using equity (shares to buy) we usually need to offer more than the fair value (higher % of the buyer’s co) as the price fluctuates. since there is a risk for the acquired firm they ask for more to compensate. + Usually at the announcement of a mna the acquiring firm stock price falls. (again need to offer a bigger % of your equity)
other MNA mistake
“Winners curse”:
– Winning bidder is the one most likely to have overvalued the target,
i.e., winning bidder is likely to overpay.
▪ Hubris / overconfidence:
– Management of buyer is overconfident in its own abilities and
engages in too much / too large M&A.
▪ Empire building:
– CEO pay is positively related to firm size. Grow the firm!
– Potentially in areas where the CEO has expertise and is hard to
replace. Creates entrenchment and value destruction.
explain the negative correlation between deal size and performance in mergers and acquisitions
you might need to pay a higher premium as you probably have more shareholders to convince
Integration Challenges:
Large-scale mergers require integrating complex operations, systems, and cultures.
The bigger the target, the harder it is to achieve seamless integration, leading to inefficiencies and cost overruns.
higher risk of complication or cost following conditions with regulatory authorities.
Bigger deals often require significant borrowing, increasing the acquirer’s leverage and financial risk.
This can strain the acquiring company’s balance sheet and negatively impact its stock performance.
Higher Risk and impact of Corporate culture clash
