Escolar Documentos
Profissional Documentos
Cultura Documentos
CORPORATE FINANCE
Laurence Booth W. Sean Cleary
Prepared by
Ken Hartviksen
CHAPTER 15
Mergers and Acquisitions
Lecture Agenda
Learning Objectives
Important Terms
Types of Takeovers
Securities Legislation
Friendly versus hostile takeovers
Motivations for Mergers and Acquisitions
Valuation Issues
Accounting for Acquisitions
Summary and Conclusions
Concept Review Questions
CHAPTER 15 Mergers and Acquisitions
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Learning Objectives
1.
2.
3.
4.
5.
6.
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Acquisition
Amalgamation
Arbs
Asset purchase
Break fee
Cash transaction
Confidentiality agreement
Conglomerate merger
Creeping takeovers
Cross-border
(international) M&A
Data room
Defensive tactic
Due diligence
Extension M&A
Fair market value
Fairness opinion
Friendly acquisition
Geographic roll-up
Going private
transaction/issuer bid
Goodwill
Horizontal merger
Hostile takeover
Letter of intent
Management buyouts
(MBOs)/leveraged buyouts
(LBOs)
Merger
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No-shop clause
Offering memorandum
Over-capacity M&A
Proactive models
Purchase method
Selling the crown jewels
Share transaction
Shareholders rights
plan/poison pill
Synergy
Takeover
Tender
Tender offer
Vertical merger
White knight
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Types of Takeovers
General Guidelines
Takeover
Acquisition
Merger
Amalgamation
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Types of Takeovers
How the Deal is Financed
Cash Transaction
The receipt of cash for shares by shareholders in the
target company.
Share Transaction
The offer by an acquiring company of shares or a
combination of cash and shares to the target
companys shareholders.
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Exempt Takeovers
Private companies are generally exempt from
provincial securities legislation.
Public companies that have few shareholders
in one province may be subject to takeover
laws of another province where the majority
of shareholders reside.
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Creeping Takeovers
The 5% Rule
The 5% rule
Normal course tender offer is not required as
long as no more than 5% of the outstanding
shares are purchased through the exchange
over a one-year period of time.
This allows creeping takeovers where the
company acquires the target over a long
period of time.
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Securities Legislation
Critical Shareholder Percentages
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Securities Legislation
Critical Shareholder Percentages Continued
3. 50.1%: Control
4. 66.7%: Amalgamation
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Friendly Acquisition
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Friendly Acquisitions
The Friendly Takeover Process
1. Normally starts when the target voluntarily puts itself into play.
Tax planning
Legal structures
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Friendly Acquisition
15-1 FIGURE
Friendly Acquisition
Information
memorandum
Confidentiality
agreement
Sign letter
of intent
Main due
diligence
Ratified
Final sale
agreement
Approach
target
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Friendly Takeovers
Structuring the Acquisition
Give the target firm cash to retire debt and restructure financing
Acquiring firm will have a new asset base to maximize CCA
deductions
Permit escape from some contingent liabilities (usually excluding
claims resulting from environmental lawsuits and control orders that
cannot severed from the assets involved)
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Hostile Takeovers
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Hostile Takeovers
The Typical Process
The typical hostile takeover process:
1.
2.
3.
4.
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Hostile Takeovers
Capital Market Reactions and Other Dynamics
Market clues to the potential outcome of a hostile takeover
attempt:
1.
2.
3.
The offer price is fair and the deal will likely go through
4.
A bad sign for the acquirer because shareholders are reluctant to sell.
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Hostile Takeovers
Defensive Tactics
Shareholders Rights Plan
White Knight
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2. Vertical
3. Conglomerate
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[ 15-1]
V VAT -(VA VT )
Where:
VT
VA - T
VA
=
=
=
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Operating Synergies
1. Economies of Scale
2. Economies of Scope
3. Complementary Strengths
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Efficiency Increases
New management team will be more efficient and
add more value than what the target now has.
The combined firm can make use of unused
production/sales/marketing channel capacity
Financing Synergy
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Tax Benefits
Use them before they lapse or expire (loss carry-back, carryforward provisions)
Use of deduction in a higher tax bracket to obtain a large tax shield
Use of deductions to offset taxable income (non-operating capital
losses offsetting taxable capital gains that the target firm was
unable to use)
New firm will have operating income to make full use of available
CCA.
Strategic Realignments
Permits new strategies that were not feasible for prior to the
acquisition because of the acquisition of new management
skills, connections to markets or people, and new
products/services.
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Valuation Issues
What is Fair Market Value?
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Valuation Issues
Valuation Framework
15-2 FIGURE
Demand
Supply
P
S1
B1
P*
Q
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Valuation Issues
Types of Acquirers
Determining fair market value depends on the perspective of the
acquirer. Some acquirers are more likely to be able to realize
synergies than others and those with the greatest ability to generate
synergies are the ones who can justify higher prices.
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Proactive Models
A valuation method to determine what a target firms
value should be based on future values of cash flow
and earnings
1. Discounted cash flow (DCF) models
CHAPTER 15 Mergers and Acquisitions
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Reactive Approaches
Valuation Using Multiples
1.
2.
3.
4.
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Reactive Approaches
Liquidation Valuation
1.
2.
3.
This approach values the firm based on existing assets and is not
forward looking.
CHAPTER 15 Mergers and Acquisitions
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[ 15-2]
Free cash flow to equity net income / non cash items (amortization,
deferred taxes, etc.) / changes in net working capital (not including cash
and marketable securities ) net capital expenditures
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[ 15-3]
CF
CFt
CF1
CF2
V0
...
(1 k )1 (1 k ) 2
(1 k ) t 1 (1 k ) t
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[ 15-4]
V0
CF1
kg
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Valuation Issues
Valuation Framework
15-3 FIGURE
Time Period
Ct
VT
V0
t
T
(1 k )
t 1 (1 k )
Terminal
Value
Discount Rate
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[ 15-5]
CFt
VT
V0
t
(1 k )T
t 1 (1 k )
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Valuation Issues
The Acquisition Decision and Risks that Must be Managed
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Valuation Issues
The Effect of an Acquisition on Earnings per Share
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CICA in Canada
Financial Accounting Standards Board (FASB) in the U.S.
and
Internal Accounting Standards Board (IASB)
CHAPTER 15 Mergers and Acquisitions
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Book
Values
are not
relevant.
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Copyright
Copyright 2007 John Wiley & Sons Canada, Ltd. All rights reserved.
Reproduction or translation of this work beyond that permitted by
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from the use of the information contained herein.
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