wk 5 - M&A continued Flashcards
How many phases in an M&A deal - what are they
3:
- Pre-purchase (ex-ante)
- Purchase (in medias res)
- Post Purchase (ex-post)w
What occurs in the Pre-purchase process of an M&A deal
Decide whether to initiate deal process
Complete search and screen steps
Deal is only justified if there’s +ve synergies
Massive investment for risky payoff
Need to estimate future cashflows
How do you estimate the value of an M&A deal
Net Present Value (NPV)
- Involves discounting future cash flows to account for risk / uncertainty
- Discount Rate = Cost of Capital / Weighted Avg Cost of Capital / Hurdle Rate
What is the formula for
NPV = [Cashflow / (1+ i)^t ] - initial investment
where:
i=Required return or discount rate
t=Number of time periods
NPV = Cashflow divided by [(1 + discount rate) to the power of no. of periods], minus initial investment
When t = 0 (the present) the discount factor is 1
What happens in the ex-ante phase of an M&A deal
- Decide IF the firm should undertake M&A
- Planning goals / objectives
Searching for potential counterparties - Screening and filtering out unsuitable counterparties
- Informal / initial contact with counterparty
What occurs in the in medias res phase of an M&A deal
- Assuming identified counterparty is interested
- Privately discussing terms of deal (negotiations)
- Exchange ratio (Stock)
- Valuation modelling
- Due Dillegence
- Planning how the deal will be Financed
What occurs in the ex-post phase of an M&A deal
Assuming deal went through
- Integrate companies
- Redundancies
- Informational Systems (intranets/HR platforms)
- Dealing with employee retention / exits
- Identifying KPI’s (key performance indicators)
What should happen when NPV is +ve
The discounted cash inflows are greater than the discounted cash outflows - pull the trigger
What are the methods of payments in a M&A
All Cash Deal:
- Acquirer pays cash (incl. Premium) to target shareholders in exchange for their shares
- Premium will be some amount per-share over current share price
All Stock Deal:
- Bidder issues new shares and swaps them for target shares
- Stock price of merged firm should exceed pre-merger price of acquirer
How can funds be raised for an M&A deal
Debt issue
Share Issues
What metrics can be used to measure gains from merging
- Sales Growth
- Return on Assets
- Return on Equity
- Shareholder Wealth
How does Shareholder Wealth reflect value creation
Underlying Theory:
- Share price reflects present value of all cashflows
Look at abnormal returns - excess of what is expected
Relates to Efficient Market Hypothesis - Prices adjust quickly to reflect new information
What is the Shareholder Wealth Benchmark Problem
Merged firm (A+B) is not the same as both more than the pre-deal (A and B)
▪ Post-deal performance may not be comparable to pre-deal performance
▪ Problem because we need to measure incremental shareholder value in excess of
expected standalone performance
What are solutions to the Benchmark Problem
Performance forecasting
- using pre-deal information to estimate based on expected change in the market conditions
- Reliant on quality and reliability of analyst forecasts
What are CARs
Cumulative Abnormal Returns
- Obtained by performing event study by cumulating abnormal returns around M&A announcement
- Using CAPM Beta to obtain ‘normal’ (Expected) returns
