Mergers & Acquisitions
Kurs "Mergers & Acquisitions" im Herbstsemester 2014/15 an der Universität Freiburg
Kurs "Mergers & Acquisitions" im Herbstsemester 2014/15 an der Universität Freiburg
Kartei Details
Karten | 127 |
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Sprache | English |
Kategorie | Finanzen |
Stufe | Universität |
Erstellt / Aktualisiert | 29.12.2014 / 29.12.2014 |
Weblink |
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Components of the value of a firm (4/6)
EV of all equity financed firm
+ PV of tax shields
+ PV of other benefits from leverage
+ PV of benefits from control change
+ PV of benefits from M&A
+ PV of benefits from changes in strategy, policy, structure...
- PV of costs of financial distress
= EV of an leveraged firm
► Share price after LR (if liquidity is used to repurchase shares)
Dual class recaps (DCRs)
- Create second class of stock with limited voting right
- Preferential claim on CFs
- E.g.
- Class A: 100 shares, 1 vote, 50% interest, 100/110 CF claim
- Class B: 10 shares, 10 votes, 50% interest, 10/110 CF claim
- Reasons:
- Consolidate control (e.g. founding family)
- Complex operations → superior understanding
- Problem: Mgmt entrenchment (but higher dividends)
2. Exchange offers
= Dept exchange
- Right or option to exchange existing obligations for different class
- E.g.
- Dept ⇔ Common stock
- Preffered stock ⇔ Common Stock
- Dept ⇔ Preffered stock
- Empirical evidence:
- Leverage to equity: Negative
- Equity to leverage: Positive
- Reasons:
- To improve on the terms and conditions of the existing bonds (due to financial distress)
- To improve liquidity position by extending the maturity
- Often distressed firms avoiding bankruptcy
4. Financial engineering
- Use of calls, puts, swaps, forwards and futures to influence payoff of intended takeover
- Reason:
- Limit financial exposure of business and investors
5. Liquidation an take-over bust-ups (2)
Involuntary
- Bankruptcy
- "Worth more dead than alive"
- Creditors force firm to liqudate
Voluntary
- Shareholders receive more if firm is being sold
- Threat of bust-up acquisitions (Hostile takeover and buyer liquidates firm)
6. MBO/LBO
MBO
Acquisition where a company's existing managers acquire a large part or all of the company from either the parent company or from the private owners
LBO
- Acquisition by small group of investors using large portion (around 2/3) of dept finance
- Equity comes from financial sponsor (or mgmt)
- ROE upon exit (through sale or IPO)
- High leverage to increase ROE
- Tax savings (DTS)
- CF used to pay down dept and increase equity
- Improve target's financial performance
► Characteristics of a good LBO candidate (6/8)
- Strong cash flows
- Low capex requirements
- Leading and defensible market position
- Growth opportunities (stable industry)
- Efficiency enhancement opportunities
- Proven management team
- Strong asset base
- (Low valuation in the stock market)
► Sources of gain of LBO (5)
1. Tax benefits
- DTS
- Asset step-up
2. Mgmt incentives and agency cost effects
- Alignment of manager /shareholder interests
- Lower agency costs of FCF (CF committed to debt)
- Financial sponsor will monitor mgmt
- Debt causes pressure to improvements
3. Wealth transfer
- From existing bondholders to shareholders
- From current employees to new investors
- From government (taxes) to LBO premiums (But: Profitability+, Net benefit?)
4. Asymmetric information and underpricing
- Mgmt has more information than shareholders
- Believe that company will be worth more than paid
5. Other efficiency considerations
- E.g. projects do not have to be justified by board of directors
- No disclosure of information necessary
► Possibilities to generate return from LBO (4 scenarios)
1'000 investment, 500 FCF
Scenario I:
- 750 debt, 250 equity, debt repayment (equity +500), no growth in EV, sale price 1'000, IRR=24.6%, Cash return 3x
Scenario II:
- 750 debt, 250 equity, no debt repayment, equity +500, 50% growth in EV, sale price 1'500, IRR=24.6%, Cash return 3x
Scenario III:
- 75% equity, completely debt repayment and growth in EV, sale price 1'500, IRR=14.9%, Cash return 2x
Scenario IV:
- 25% equity, constant interest payment, increase debt and growth in EV, sale price 1'500, IRR=28.3%, Cash return 3.5x
⇒ IV > I = II > III
Possibilities for growth in LBO (3/4)
- Increasing firm's size
- Operational improvements
- Repositioning to other segments
- + Organic growth rate and profitability
Exit strategies in M&A (3)
- Sale to a strategic buyer
- IPO
- Dividend recap (no exit strategy but monetization, debt+, extra dividend)
I. Introduction
Topics:
- Basic terminology
- Types of mergers
- Risk arbitrage
- Importance of M&A and recent deals
- Merger outlook
- Legal framework
Definition of merger (3)
- Negotiated deal
- Mostly friendly parties
- Mutually agreeable decision to combine companies
Tender offer (3)
- Direct offer to shareholders to tender (sell) their shares at a specified price
- Obtaining >50% of shares (Approval required)
- Friendly or hostile
Types of tender offers (4)
- Conditional or unconditional
- e.g. min. 50% interest
- Restricted or unrestricted
- e.g. 70%, "any-or-all"
- Contested offer
- Two-tier offer or three-piece suitor: e.g.
- Initial toehold
- 1st tier for cash (to obtain >50% interest)
- 2nd tier at a lower value (often paid in dept securities)
Problem of minority shareholders (2)
If buyout not completed:
- Freeze-in problem
- Possible legal actions
Solution: Minority squeeze-out
Types of mergers (3)
- Horizontal
- Vertical
- Conglomerate
Horizontal merger (3)
- Same kind of business
- Benefits from economies of scale and synergies
- Government regulation due to fear of monopoly power
Vertical merger (2)
- Firms of different stage of production/operation
- Benefits from information- and transaction efficiency (e.g. inventory, production, prices, procurement)
Conglomerate merger + 3 types
- Firms in unrelated type of business
- 3 types:
- Product extension
- Geographic market extension
- Pure conglomerate mergers
Types of conglomerates (4)
- Investment companies (e.g. Mutual funds)
- Diversify PF risk
- Financial conglomerates
- Provide funds
- Managerial conglomerates
- Control operating decisions
- Concentric companies
- Related business
Legal types of mergers (3)
- Statutory merger
- Basic form
- Requires legal procedures (e.g. percentage of vote from shareholders, board approval)
- A+B=A, A+B=B or A+B=C
- Short-form merger
- Streamlined legal procedures
- No shareholder approval required
- Typically interest >90%
- Holding company
- Subsidiaries as seperate legal entities
- Holding has controlling interest 25-50%
Risk arbitrage in M&A (3) + Annual return for risk arbitrageur
- Buying stock of takeover targets after public announcement and holding shares until deal is closed
- Bet that deal will be completed
- Bear deal risk
Existing shareholders can hold their shares until deal is closed to receive the offered price or they can sell their shares to a risk arbitrageur. His annual return would be:
\(r=(1+{Offered Price-Actual Price \over Actual Price})^{365 \over Days}-1\)
II. Empirical Results on M&A Activities
Topics:
- Historical development
- Merger waves
- Factors motivating & driving merger waves
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