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Mergers and Acquisitions
Lecture 1
Vikram Singh Sankhala
Forms of Restructuring
• Expansion
• Sell offs
• Corporate control
• Changes in Ownership structure
Expansion
• Mergers and Acquisitions
• Tender Offers
• Joint Ventures
Sell - offs
• Spin – offs
• Split - offs
• Split – ups
• Divestitures
• Equity Carve outs
Corporate Control
• Premium Buy Backs
• Standstill agreements
• Antitakeover Amendments
• Proxy Contests
Changes in Ownership Structure
• Exchange Offers
• Share Repurchases
• Goingt Private
• Leveraged Buyouts
Mergers and AcquisitionsMergers and Acquisitions
MergerMerger
A transaction where two firms agree to integrate theirA tran...
Horizontal Merger
• A horizontal Merger involves two firms
operating in the same kind of Business
Activity.
• Thus a merge...
Vertical Merger
• Vertical Mergers involve different stages of
Production Operations.
• Oil Industry – production, refinin...
Conglomerate Merger
• Involves Firms engaged in unrelated type
of Business Activities.
• Three types of Conglomerate Merge...
Product Extension Mergers
• Broaden the Product lines of the firm
Geographic Market Extension
Merger
• Involves two firms whose operations had
been conducted in non overlapping
Geographic ...
Pure Conglomerate Merger
• Involves unrelated Business Activities that
would not qualify as either product
extension or ma...
Tender Offers
• One party – generally a corporation
seeking controlling interest in another
corporation – asks the stockho...
Bear Hug
• A company mails a letter to the directors of the
takeover target announcing the acquisition
proposal and requir...
White Knight
– The target firm may seek to elicit an offer from
a partner it considers more desirable – a
white knight
Joint Ventures
• Involve the intersection of only a small
fraction of the activities of the companies
involved and usually...
Sell offs
• Spin offs
• Divestitures
Spin offs
• A spin off creates a new legal company
• Its shares are distributed on a pro rata
basis to existing shareholde...
Split off
• A variation on the spin offs is the Split offs.
• A portion of the existing shareholders
receives stock in a s...
Split up
• Still a variation in the spin off is the split
up.
• The entire firm is broken into a series of
spin offs so th...
Divestiture
• The sale of a portion of the firm to an
outside third party.
• Cash or equivalent consideration is
received ...
Carve Out
• An equity carve out involves the sale of a
a portion of the firm via an equity offering
to outsiders.
• New sh...
Corporate Control
• Premium buy backs
• Standstill agreements
• Anti takeover amendments
• Proxy contest
Premium buy backs
• Represent the repurchase of a substantial
stock holder’s interest at a premium above
the market price ...
Standstill agreement
• Voluntary contract in which the stockholder who
is bought out agrees not to make further
attempts t...
Anti Takeover Amendments
• Changes to the corporate bye laws to
make an acquisition of the company more
difficult or expen...
Examples
• Supermajority voting provisions requiring a
high percentage of stockholders to
approve a merger.
Staggered terms for Directors
• These can delay the change of control for
a number of years.
Golden Parachutes
• These award large termination payments
to existing management if the control of
the firm is changed an...
Proxy contest
• An outside group seeks to obtain
representation on the firm’s board of
Directors.
• The outsiders are refe...
Changes in ownership structure
• Exchange offers
• Share Repurchase
• Going Private
Exchange offers
• Exchange of debt or preferred stock for
common stock
• Or common stock for more senior claims
Share Repurchase
• Corporation buys back some fraction of its
outstanding shares of common stock.
• Tender offers may be m...
Going Private
• The entire equity interest in a previously
public corporation is purchased by a small
group of investors.
...
LBO
• When financing from third parties involves
substantial borrowing by the private
company, such transactions are refer...
Issues raised by Restructuring
• Are they good or bad for the economic
health of the3 nation.
• Do they divert energies of...
Issues raised by Restructuring
• Why has such heightened economic
activity been a Phenomenon of the last
twenty years.
Early Merger Movements
• All of the Merger movements occurred
when the economy experience3de
sustained high rates of growt...
• Mergers represent resource allocation and
reallocation processes in the economy.
• Firms respond to new investment and p...
1895-1904 Merger Movement
• Consisted mainly of horizontal mergers
• Resulted in high concentration in many
industries inc...
• Downturn in 1901
• Declined further by 1903 when the
economy went into recession.
• Major changes in econmic infrastruct...
• Completion of trans continental railroad
system
• The advent of Electricity
• Increased use of coal
• Development of Nat...
Economies of Scale
• Production
• Administration
• Marketing
Reasons for success
• Astute Business Leadership
• Rapid Technological and Managerial
improvement
• Development of New Pro...
Reasons for Failure
• Lack of efforts to realize economies of
scale by modernizing plant and equipment
• Increase in Overh...
The 1922-1929 Merger movement
• Began with the upturn in Business Activity
in 1922.
• Ended with the severe economic
slowd...
• A large proportion of the mergers
represented product extension mergers as
in the cases of IBM, General foods and
Allied...
Motivational factors of these
mergers
Major developments in
• Transportation
• Communication
• Merchandising
The 1940-47 Merger Movement
• Second world war and early post war
years were accompanied by rapid growth
of economy and an...
Motivations
• Government Regulation
• Tax policies
• Circumvent price controls and allocations
1967-1969
• Merger activity reached its highest level.
• Booming economy
• After 1969, economy slowed down
• So did the nu...
• Largest single category of firms was from
the aerospace industry
• This industry was subject to wide
fluctuations in tot...
Merger Trends since 1976
• Following recession in 1974-75, the US
economy entered into a long period of
expansion during w...
• Involved consolidation within the industry
• Product extension
• Market extension and
• Pure conglomerate acquisitions
•...
Effects on Concentration
• Macro – Concentration
• Micro - Concentration
Macro Concentration
• High rates of divestitures is one of the
reasons why not affected aggregate
concentration in the eco...
Micro Concentration
• Historically the measure has been the
share of the four largest firms of industry
sales, assets, emp...
• Concentration has stayed relatively
constant during 1960s and 1970s.
Risk Arbitrage in M&A Activity
• Arbitrageurs take advantage of temporary
price discrepancies between Markets.
• Buying th...
• By taking a position in the stock of target
firms, risk arbitrageurs are , in effect,
betting that the merger will be su...
• Information is the principal raw material inj
the arbitrage business
• Arbitrageurs have in some cases
attempted to anti...
The End
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M&A

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Transcript of "M&A"

  1. 1. Mergers and Acquisitions Lecture 1 Vikram Singh Sankhala
  2. 2. Forms of Restructuring • Expansion • Sell offs • Corporate control • Changes in Ownership structure
  3. 3. Expansion • Mergers and Acquisitions • Tender Offers • Joint Ventures
  4. 4. Sell - offs • Spin – offs • Split - offs • Split – ups • Divestitures • Equity Carve outs
  5. 5. Corporate Control • Premium Buy Backs • Standstill agreements • Antitakeover Amendments • Proxy Contests
  6. 6. Changes in Ownership Structure • Exchange Offers • Share Repurchases • Goingt Private • Leveraged Buyouts
  7. 7. Mergers and AcquisitionsMergers and Acquisitions MergerMerger A transaction where two firms agree to integrate theirA transaction where two firms agree to integrate their operations on a relatively coequal basis because theyoperations on a relatively coequal basis because they have resources and capabilities that together mayhave resources and capabilities that together may create a stronger competitive advantagecreate a stronger competitive advantage AcquisitionAcquisition A transaction where one firm buys another firmA transaction where one firm buys another firm with the intent of more effectively using a corewith the intent of more effectively using a core competence by making the acquired firm acompetence by making the acquired firm a subsidiary within its portfolio of businessessubsidiary within its portfolio of businesses TakeoverTakeover An acquisition where the target firm did not solicitAn acquisition where the target firm did not solicit the bid of the acquiring firmthe bid of the acquiring firm
  8. 8. Horizontal Merger • A horizontal Merger involves two firms operating in the same kind of Business Activity. • Thus a merger between two steel firms would represent a Horizontal Merger.
  9. 9. Vertical Merger • Vertical Mergers involve different stages of Production Operations. • Oil Industry – production, refining, marketing. • Pharmaceutical Drugs – Development, Production and Marketing.
  10. 10. Conglomerate Merger • Involves Firms engaged in unrelated type of Business Activities. • Three types of Conglomerate Mergers
  11. 11. Product Extension Mergers • Broaden the Product lines of the firm
  12. 12. Geographic Market Extension Merger • Involves two firms whose operations had been conducted in non overlapping Geographic areas.
  13. 13. Pure Conglomerate Merger • Involves unrelated Business Activities that would not qualify as either product extension or market extension mergers.
  14. 14. Tender Offers • One party – generally a corporation seeking controlling interest in another corporation – asks the stockholders of the firm it is seeking to control to submit, or tender their shares in the firm.
  15. 15. Bear Hug • A company mails a letter to the directors of the takeover target announcing the acquisition proposal and requiring the directors to make a quick decision on the bid. • If approval cannot be obtained, the acquiring company can appeal directly to the stockholders by means of a tender offer, unless the management and directors of the target firm hold enough stock to retain control.
  16. 16. White Knight – The target firm may seek to elicit an offer from a partner it considers more desirable – a white knight
  17. 17. Joint Ventures • Involve the intersection of only a small fraction of the activities of the companies involved and usually for a limited duration of ten to fifteen years or less
  18. 18. Sell offs • Spin offs • Divestitures
  19. 19. Spin offs • A spin off creates a new legal company • Its shares are distributed on a pro rata basis to existing shareholders of the parent company. • Existing shareholders have the same proportion of ownership in the new entity as in the original one.
  20. 20. Split off • A variation on the spin offs is the Split offs. • A portion of the existing shareholders receives stock in a subsidiary in exchange for parent company stock.
  21. 21. Split up • Still a variation in the spin off is the split up. • The entire firm is broken into a series of spin offs so that the parent no longer exists and only the new offspring survive.
  22. 22. Divestiture • The sale of a portion of the firm to an outside third party. • Cash or equivalent consideration is received by the diveswting firm. • Typically the buyer is an existing firm, so that no new legal entity results.
  23. 23. Carve Out • An equity carve out involves the sale of a a portion of the firm via an equity offering to outsiders. • New shares of equity are sold to outsiders which gives them ownership of a portion of the previously existing firm. • A new legal entity is created.
  24. 24. Corporate Control • Premium buy backs • Standstill agreements • Anti takeover amendments • Proxy contest
  25. 25. Premium buy backs • Represent the repurchase of a substantial stock holder’s interest at a premium above the market price ( called greenmail)
  26. 26. Standstill agreement • Voluntary contract in which the stockholder who is bought out agrees not to make further attempts to take over the company in the future. • When a standstill agreement is made without a buyback, the substantial stockholder simply agrees not to increase his or her ownership which presumably would put him or her in an effective control position.
  27. 27. Anti Takeover Amendments • Changes to the corporate bye laws to make an acquisition of the company more difficult or expensive.
  28. 28. Examples • Supermajority voting provisions requiring a high percentage of stockholders to approve a merger.
  29. 29. Staggered terms for Directors • These can delay the change of control for a number of years.
  30. 30. Golden Parachutes • These award large termination payments to existing management if the control of the firm is changed and management is terminated.
  31. 31. Proxy contest • An outside group seeks to obtain representation on the firm’s board of Directors. • The outsiders are referred to as dissidents or insurgents • The insiders are incumbents or existing board of directors. • Proxy contests are often regarded as directed against the existing management.
  32. 32. Changes in ownership structure • Exchange offers • Share Repurchase • Going Private
  33. 33. Exchange offers • Exchange of debt or preferred stock for common stock • Or common stock for more senior claims
  34. 34. Share Repurchase • Corporation buys back some fraction of its outstanding shares of common stock. • Tender offers may be made for share Repurchase
  35. 35. Going Private • The entire equity interest in a previously public corporation is purchased by a small group of investors. • When the transaction is initiated by the members of the incumbent management, it is referred to as management buy out (MBO).
  36. 36. LBO • When financing from third parties involves substantial borrowing by the private company, such transactions are referred to as Leveraged Buy outs (LBOs)
  37. 37. Issues raised by Restructuring • Are they good or bad for the economic health of the3 nation. • Do they divert energies of the managers from bona fide econmic activity to financial manipulation. • Do they use up Financial resources which otherwise would be employed in ‘real’ investment activities.
  38. 38. Issues raised by Restructuring • Why has such heightened economic activity been a Phenomenon of the last twenty years.
  39. 39. Early Merger Movements • All of the Merger movements occurred when the economy experience3de sustained high rates of growth and coincided with particular developments in Business Environments
  40. 40. • Mergers represent resource allocation and reallocation processes in the economy. • Firms respond to new investment and profit activities arising out of changes in economic conditions and technological innovations impacting industries. • Mergers rather than internal growth may sometimes expedite the adjustment process and in some cases be more efficient in terms of resource utilization.
  41. 41. 1895-1904 Merger Movement • Consisted mainly of horizontal mergers • Resulted in high concentration in many industries including heavy manufacturing industries. • Period of rapid economic expansion. • Movement peaked in 1899 and almost ended in 1903
  42. 42. • Downturn in 1901 • Declined further by 1903 when the economy went into recession. • Major changes in econmic infrastructure and production technologies.
  43. 43. • Completion of trans continental railroad system • The advent of Electricity • Increased use of coal • Development of National Economic market • Transformation of regional firms into national firms
  44. 44. Economies of Scale • Production • Administration • Marketing
  45. 45. Reasons for success • Astute Business Leadership • Rapid Technological and Managerial improvement • Development of New Products • Entry into new sub division of Industry • Promotion of Quality Brandnames • Commercial exploitation of Research
  46. 46. Reasons for Failure • Lack of efforts to realize economies of scale by modernizing plant and equipment • Increase in Overhead Costs • Lack of flexibility due to large size. • Inadequate supply of talent to manage a large group of plants.
  47. 47. The 1922-1929 Merger movement • Began with the upturn in Business Activity in 1922. • Ended with the severe economic slowdown in 1929. • Public utilities and Banking companies were most active. • About 60 per cent of the mergers occurred in the still fragmented food processing, chemicals and Mining sectors.
  48. 48. • A large proportion of the mergers represented product extension mergers as in the cases of IBM, General foods and Allied Chemical • Market extension mergers in food retailing, department stores, motion picture theaters • Vertical Mergers in the mining and metals industries
  49. 49. Motivational factors of these mergers Major developments in • Transportation • Communication • Merchandising
  50. 50. The 1940-47 Merger Movement • Second world war and early post war years were accompanied by rapid growth of economy and an upsurge in merger activity. • Not very significant changes in Technological and Business environments • Merger movement was much smaller than the previuos ones
  51. 51. Motivations • Government Regulation • Tax policies • Circumvent price controls and allocations
  52. 52. 1967-1969 • Merger activity reached its highest level. • Booming economy • After 1969, economy slowed down • So did the number of mergers • Most acquirers were small or medium sized firms • Diversification Strategy
  53. 53. • Largest single category of firms was from the aerospace industry • This industry was subject to wide fluctuations in total market demand and • Abrupt and major shifts in product mix
  54. 54. Merger Trends since 1976 • Following recession in 1974-75, the US economy entered into a long period of expansion during which M&As trended upwards • Have been concentrated in Service Industries as Commercial and Investment Banking, Finance, insurance, wholesale, retail, broadcasting healthcare and in the natural resources area.
  55. 55. • Involved consolidation within the industry • Product extension • Market extension and • Pure conglomerate acquisitions • Divestitures became a substantial portion of acquisition activity.
  56. 56. Effects on Concentration • Macro – Concentration • Micro - Concentration
  57. 57. Macro Concentration • High rates of divestitures is one of the reasons why not affected aggregate concentration in the economy. • Share of assets of the largest 200 US Corporations to the assets of all non financial corporations.
  58. 58. Micro Concentration • Historically the measure has been the share of the four largest firms of industry sales, assets, employment or the value added in Manufacturing • When the four firm concentration ratio exceeds 40 per cent, one view holds that competition in the Industry may be diminished to some extent
  59. 59. • Concentration has stayed relatively constant during 1960s and 1970s.
  60. 60. Risk Arbitrage in M&A Activity • Arbitrageurs take advantage of temporary price discrepancies between Markets. • Buying the stock of takeover targets after a merger is publicly announced and holding the stock until the deal is officially consummated. • Purchases at a discount to its eventual value at the close of the merger.
  61. 61. • By taking a position in the stock of target firms, risk arbitrageurs are , in effect, betting that the merger will be successful • Traditionally arbitrageurs have responded to announced takeover bids. • They evaluate the offer and assess its probability of success relative to the value of the target
  62. 62. • Information is the principal raw material inj the arbitrage business • Arbitrageurs have in some cases attempted to anticipate takeover bids to establish their stock position in advance of any public announcement, thus increasing their potential return.
  63. 63. The End
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