MERGERS AND

ACQUISITIONS
- ANOTHER LOOK

AEROEDU
 WHY ARE YOU HERE
To learn the basics of mergers and
acquisitions
To acquire knowledge about
specialist M&A firms
To know how to valuate a business
To learn how to control brand
considerations after a merger
To know the effects of mergers on
management
 AGENDA
What is a M&A?
Differentiating M & A
Common Ways of Business Valuation
How Do We Get Finance?
Specialist M&A Advisory Firms
What Motives Lie Behind?
Effects on Management
Brand Building or Brand Destroying?
Factors of the Merger Movement
Merger Waves
Cross Border M & A
Major M&As
 WHAT IS A M&A?
An aspect of corporate strategy, corporate
finance and strategic management.
Deals with buying, selling, combining of different
companies that can
Aid
Finance
Help
a growing company in a given industry grow
rapidly without having to create a new business
entity.
 ACQUISITION
Purchase of one company by another
company.

Company 1 Company 2

Newly Formed Company

TYPES OF ACQUISITIONS
Depending upon
Acquiree or merging is or isnt listed in
public markets.
How the communication is done and
received by the target.
 THE FIRST
CLASSIFICATION

ACQUISITION

PRIVATE (IF
PUBLIC (IF ACQUIREE NOT
ACQUIREE LISTED IN LISTED IN PUBLIC
PUBLIC MARKETS) MARKETS
 THE SECOND
CLASSIFICATION

ACQUISITION

FRIENDLY HOSTILE
 CONFIDENTIALITY
BUBBLE
Quite normal for M&A deal
communication to take place in a so
called confidentiality bubble.
Here information flows are restricted
due to confidentiality agreements.
FRIENDLY ACQUISITIONS
Companies cooperate in
negotiations.
Synonymous to merger of equals.
 HOSTILE ACQUISITIONS
Takeover target unwilling to be
purchased.
It can also be if the acquiree
company has no prior knowledge of
offer.
Hostile takeovers do turn friendly in
the end. Most of the times.
For the above thing to happen, offer
is usually improved.
 REVERSE TAKEOVERS
Acquisition usually refers to purchase
of smaller firm by larger firm.
Sometimes, smaller firm acquire
management control of a larger /
longer established company.
Keep its name for combined entity.
Known as reverse takeover.
 REVERSE MERGER
Another type of acquisition.
Is a deal enabling a private company to become
a public company.
The deal enables private company by listing in a
short time period.
Occurs when a private company has strong
prospects and is eager to raise financing, buys a
publicly listed shell company.
Usually the public one is one with
No business
Limited assets
 SOME STATISTICS
Achieving acquisition successfully has
proven to be tough.
Various studies show 50% of them are
unsuccessful.
Process very complex, many dimensions
influence its outcome.
Variety of structures used in securing
asset control.
Different tax and regulatory implications
 THE ACQUISITION
PROCESS
Buyer buys shares of target company
Ownership control conveys effective control over
assets, but since company is going concern, liabilities
come as well.
Buyer buys assets of target company.
Cash target receives from sell-off is paid back to its
shareholders by
Dividend
Through liquidation
If buyer buys out entire assets, then target company
= empty shell.
Buyer often cherry picks his assets
 SOME OTHER TERMS
There are some other terms used as
well like:
Demergers
Spin-off
Spin-out
Sometimes used to indicate a
situation where one company splits
into two, generating a 2nd company
separately listed on a stock
exchange.
DIFFERENTIATING MERGERS AND
ACQUISITIONS
Both terms are often used
synonymously.
They mean slightly different things in
reality.
 ACQUISITIONS FIRST
When one company takes over
another, clearly establishes as its
new owner.
Legal View: target ceases to exist.
Buyer swallows target
Buyers stock continues to be traded.
 MERGERS NEXT
Happens when two firms agree to go forward as
a single new company rather than remain
separate.
Often precisely termed as merger of equals.
Firms are often of same size.
Both companies stock surrendered
New company stock put into place instead.
Example: 1999 merger of Glaxo Wellcome and
SmithKline Beecham, both firms ceased to exist
and a new firm GlaxoSmithKline was created.
 MERGERS IN PRACTICE
Actually the principle of mergers of equals dont really
happen.
Usually one company buys another.
Simply allow acquired firm to pronounce it as a merger,
though technically it is an acquisition.
Being purchased always portends negative
connotations.
Therefore, they term it as merger, makes takeover more
acceptable.
Example : takeover of Chrysler by Daimler-Benz in 1999.
Purchase deal also a merger -> friendly takeovers.
Hostile takeovers -> mainly acquisitions.
 COMMON WAYS OF BUSINESS
VALUATION
Asset Valuation
Historical Earnings Valuation
Future Maintainable Earnings
Valuation
Relative Valuation
Discounted Cash Flow Valuation
 ASSET VALUATION
Valuations are made for:
Excess or restricted cash
Other non-operating assets and liabilities
Lack of marketability discount
Control premium
Above or below market leases
Excess salaries in case private companies
Typical adjustments include:
Working capital adjustment
Deferred capital expenditures
Cost of goods sold adjustment
Non recurring professional fees and costs
Certain non operating income/expense items
 VALUATION OF INTANGIBLE
ASSETS
Can be made for intangible assets like:
Patents
Copyrights
Software
Trade secrets
Customer relationships
Uses either
Present value model
Estimating the costs to recreate it
Process time consuming and costly
Often necessary for financial reporting and intellectual property
transactions.
Stock markets give only an indirect value.
Can be regarded as difference between its market capitalization
and its book value.
 VALUATION OF MINING
PROJECTS
Process of determining the value of a mining
property.
Sometimes required for:
Initial Public Offers
Fairness opinions
Litigations
Mergers and acquisitions
Shareholder related matters
Fair market value is standard value.
CIMVal Standards are recognized standards for
mining project valuations.
 HISTORICAL EARNINGS
VALUATION
Uses EPS (Earnings Per Share) values
for valuation of stock.
Figures can be used for forecasting
performance by visiting free financial
sites such as Yahoo Finance.
 RELATIVE VALUATION
Generic term that refers to the notion of comparing asset price to
market value of similar assets.
Presumably spot pricing anomalies on securities market.
Compare certain financial ratios such as:
Price to book value
Price to earnings
EV/EBITDA
Mainly statistical and historical
Compare national or industry stock performance to economic and
market fundamentals like:
GDP growth
Interest rate
Inflation forecasts
Earnings growth
National equity index
 DISCOUNTED CASH FLOW
METHOD
Abbreviated as DCF
Uses concepts of time value of money
All future cash flows are estimated and discounted to
give their present values(PVs).
Sum of all future values, is net present value (NPV).
Widely used in investment finance, real estate
development, corporate financial management
Most commonly used method is exponential discounting.
Other methods are:
Hyperbolic discounting
Discount rate used is Weighted Average Cost of Capital
(WACC).
 METHODS OF PROJECT
APPRAISAL
Equity Approach
Flow To Equity Approach
Entity Approach
Adjusted Present Value Approach
Weighted Average Cost Of Capital
Approach
Total Cash Flow Approach
 SHORTCOMINGS OF DCF
Commercial banks have widely used DCF for construction projects.
These have following shortcomings:
Discount rate assumptions rely on market for competing investments,
rates change drastically over time.
Straight line assumptions generally based upon historic increases in
market rent but never factors in the cyclical nature of many real estate
markets.
Sometimes leads to overvaluation of assets
Powerful method of valuation though not devoid of shortcomings
Merely a mechanical tool, makes it subject to axiom of garbage in
garbage out
small changes in input can lead to large changes in company
value.
To avoid we can use simple annuity.
 THE VALUATION
PROFESSIONALS
Professionals who do business valuations use a
combination of some of them.
Information in balance sheet or income
statement is obtained using the following
accounting measures:
Notice to Reader
Review Engagement
Audit
Accurate business valuation most important
aspect of M&A.
Major impact on value of business sold for.
 HOW DO WE GET
FINANCE?
We can differentiate mergers and
acquisitions by the way they are
financed.
Various methods of financing include:
Cash
Stock
 THINK STRATEGIC!!!!
With pure cash deals, no doubt on
real bid value.
Contingency of share payment
removed.,
Cash offer preempts competitors.
 TAXES
Should be evaluated with counsel of
Competent tax advisors
Competent accounting advisors
 CASH V/S SHARES
With a share deal, buyers capital structure
might be affected and control of new
company modified.
If issuance of shares necessary,
shareholders might prevent capital increase.
Risk removed with cash transaction.
In cash deal, balance sheet of buyer will be
modified, liquidity ratios might decrease.
In stock transactions, lower profitability
ratios might show.
 THE CASH DEAL
If buyer pays cash, there are 3 main financing
options:
Cash on Hand: consumes financial slack. May
decrease debt rating. No major transaction costs,
Issue of debt: consumes financial slack. May
decrease debt rating. Increases cost of debt.
Transaction costs include underwriting or closing
costs of 1% to 3% of face value.
Issue of stock: increases financial slack, may improve
debt rating, reduce cost of debt, transaction costs
include fees for preparation of proxy statement, an
extraordinary shareholder meeting, registration.
 THE STOCK DEAL
If buyer pays with stock:
Issue of Stock
Shares in Treasury: increases financial
slack, improve debt rating, reduce cost
of debt, transaction costs include
brokerage fees if shares repurchased in
market otherwise no major costs.
 LETS GENERALIZE
Stock will create flexibility.
Transaction costs also to be
considered but tend to have greater
impact.
Remember:
Buyers tend to offer stock when they believe their
shares are overvalued and cash when undervalued.
 SPECIALIST M&A
ADVISORY FIRMS
Provided usually by
Full service investment banks
Recently, specialized M&A firms have
emerged.
Sometimes referred to as Transition
Companies.
Assisting business referred to as
companies in transition.
 WHAT MOTIVES LIE
BEHIND?
Economy of scale
Economy of scope
Cross selling
Synergy
Taxation
Geographical or other diversifications
Resource transfer
Vertical integration
Absorption of similar businesses under single management.
Managers hubris
Empire building
Managers compensation.
 ECONOMY OF SCALE
Combined company can often reduce
its fixed costs
Can remove duplicate departments
Lower company costs
Increase profit margins.
 ECONOMY OF SCOPE
Relates to efficiencies primarily
associated with demand side
changes
Increasing/decreasing scope of
marketing and distribution
 INCREASED MARKET
SHARE
Assumes that buyer will be absorbing
a major competitor.
Thus increase revenue/market share
to set prices.
 SYNERGY
Managerial economics such as
increased opportunity of managerial
specializations.
Purchasing economies due to
increased order size and associated
bulk buying discounts.
 CROSS SELLING
A bank buying a stock broking firm
Manufacturer acquiring and selling
complementary products.
 TAXATION
Profitable company can buy a loss
maker to use targets loss as their
advantage by reducing their tax
liability.
But there are certain regulations to
follow.
 GEOGRAPHICAL
DIVERSIFICATION
Designed to smooth company
earnings
Smoothens stock price
Gives conservative investors more
confidence
But does not always deliver value to
shareholders.
 RESOURCE TRANSFER
Resources unevenly distributed
across firms.
Can create value by
Overcoming information asymmetry
Combining scarce resources
 VERTICAL INTEGRATION
Occurs when an upstream firm
merges with a downstream firm.
One reason is externality problem.
Common example is double
marginalization
 EFFECTS ON
MANAGEMENT
M&A according to some studies
destroy leadership continuity in
target companies.
Target companies lose 21% of their
executives each year following an
acquisition.
BRAND CONSIDERATIONS
M&As often create brand problems.
4 different approaches:
Keep one name and discontinue other. Ex: United Airlines and Continental
Airlines Merger.
Keep one name and demote other: Caterpillar Inc. keeping Bucyrus
International.
Keep both names and use together: Pricewaterhouse Coopers.
Discard both legacy names and adopt new one:
merger of Bell Atlantic and GTE which became Verizon Communications. This
merger was successful.
Merger of Yellow Freight and Roadway Corporation which became YRC Worldwide.
This merger was partially successful, brand value lost.
Factors range from political to tactical.
Ego as well as rational factors drive choice.
Rational factors : brand value, costs involved with changing
brands.
THE MERGER MOVEMENT
Predominantly a US phenomenon.
Short run factors: desire to keep
prices high,
Long run factors: reduction of
transportation and production costs.
 MERGER WAVES
PERIOD NAME FACET
1897 1904 FIRST WAVE HORIZONTAL MERGERS
1916 1929 SECOND WAVE VERTICAL MERGERS
1965 1969 THIRD WAVE DIVERSIFIED
CONGLOMERATE
MERGERS
1981 1989 FOURTH WAVE CONGENERIC
MERGERS; HOSTILE
TAKEOVERS;
CORPORATE RAIDING
1992 2000 FIFTH WAVE CROSS BORDER
MERGERS
2003 2008 SIXTH WAVE SHAREHOLDER
ACTIVISM, LEVERAGED
BUYOUTS, PRIVATE
EQUITY
 CROSS BORDER M&AS
Large M&A deals cause domestic
currency of target corporation to
appreciate by 1%
Rise of globalization increased the
necessity for MAIC trust accounts
and securities cleaning services.
In 1997 alone there were 2333 cross
border M&A transactions, with a total
of approx. $298 billion.
 MAJOR M&AS
RANK YEAR PURCHASE PURCHASE TRANSACTI
R RD ON VALUE
(IN MIL.
USD)
1 2008 INBEV INC. ANHEUSER- 52000
BUSCH
COMPANIES
INC.
2 2004 JP MORGAN BANK ONE 58761
CHASE & CO CORP
3 2002 PFIZER INC. PHARMACIA 59515
CORPORATI
ON
4 2000 SPIN-OFF: 59974
NORTEL
NETWORKS
CORPORATI
ON
QUESTIONS?
 BIBLIOGRAPHY
www.en.wikipedia.org
THANK YOU