Pcf (2) 4_mergers_and_acquisitions[2] ms

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Pcf (2) 4_mergers_and_acquisitions[2] ms

  1. 1. Mergers and Acquisitions
  2. 2. Mergers and AcquisitionsIn this lecture we will discuss possible motives for takeovers or mergers what is involved in a merger/takeover whether takeovers/mergers create value
  3. 3. Introduction Takeover Merger  ‘the combining of two business entities under common ownership’, Arnold, p865 In practice most business amalgamations are usually takeovers
  4. 4. 3 main types of business integration o horizontal takeovers (including cross- border takeovers) companies in similar lines of activity o vertical takeovers companies from different stages of the production line o backward o forward o conglomerate takeovers companies in different lines of activity
  5. 5. Some Major Takeovers (1988 - 2004)Year Bidder Target Value (£m) Type1988 BP Britoil 2,323 Vertical Back.1988 Nestlé Rowntree 2,666 Horizontal1995 Glaxo Welcome 9,150 Horizontal1995 Hanson Eastern 2,400 Conglomerate Electricity1996 Granada Forte 3,600 Horizontal2000 GlaxoWelcome SmithKline 38,600 Horizontal Beecham2002 National Grid Lattice 8,400 Horizontal Group2004 Morrisons Safeway 2,900 Horizontal
  6. 6. More Takeovers (2000 - 2010)Year Bidder Target Value Sh (£m) Value?2000 RBS NatWest 23,600 Yes2000 France Orange 25,000 No Telecom2001 Bank of Halifax 30,000 Yes Scotland then no2004 Santander Abbey 9,000 ?2007 RBS ABN AMRO 49,000 No2008 HBOS Lloyds 12,000 No2010 Kraft Cadbury 11,500 ?See Independent article on Studynet
  7. 7. Do mergers/takeovers createshareholder value? For the target company? For the acquiring company? ‘Indeed, mergers and acquisitions seldom live up to their promise of delivering strategic benefits, easy growth and a boost in the value of the acquirers shares. To be sure, some do work. According to academics, as many as 35 per cent do. But that still means more than 60 per cent of deals fall flat chasing the elusive goal reached by a minority.’ Independent Business, Jan 2009
  8. 8. Objectives of takeovers/mergers To increase wealth, i.e. generate positive NPVsthrough either:1. increasing incremental cash flowsor2. reducing the level of risk for existing cash flows (thus causing a reduction in the discount rate)
  9. 9. Motives for takeovers Economic justifications Financial motives Managerial motives
  10. 10. Economic justifications Synergistic effects i.e. value of combined entity is greater than the sum of the values of the individual entities• PV(A+B) = PV(A) + PV(B) + extra• market power• economies of scale• R&D• entry to new markets
  11. 11. Economic justifications Increase in market power  horizontal integration can reduce competition  vertical integration can ensure a final market or create barriers to entry  conglomerate mergers can involve cross-subsidisation
  12. 12. Economic justifications Economies of scale  linked to production  or through lowering the costs of inputs  improved communications and reduced bargaining costs  administration, R&D, purchasing through increased size
  13. 13. Economic justifications Research and development activities Entry to new markets/industries Particular expertise  customer service, billing procedures
  14. 14. Financial Justifications Financial synergy (lower costs of capital, reduced risk of bankruptcy) through diversification Bootstrapping - increasing EPS by acquiring companies with lower PE ratios than their own
  15. 15. Bootstrapping Firm A earnings = £1m, share capital 10m ordinary shares trading at £2 EPSA = 10p PEA ratio = 20 Firm B earnings = £1m, share capital 10m ordinary shares trading at £1 EPSB = 10p PEB ratio = 10
  16. 16. Bootstrappingo A acquires Bo The offer is 1 share of A for 2 shares of Bo Results in earnings of the group of £2m with issued share capital of 15m shareso EPS is thus 13.33p and if the market believes that the new entity has the same earnings potential and growth as Firm A, i.e. a PE ratio of 20, then the price of these shares should be:o PA/13.33 = 20, PA will be £2.67
  17. 17. Managerial Motives Managers may have different objectives from shareholders (Agency problem)  Empire building  Status  Power  Remuneration Hubris (Roll 1986)  excessive self-confidence/arrogance
  18. 18. Managerial Motives Can result in wealth being transferred from shareholders of the acquiring company to shareholders of the target
  19. 19. Takeover of Cadbury by KraftList the likely motives:
  20. 20. Financing Takeovers/Mergers Takeovers/mergers are open market transactions Amount to be paid is a matter of judgement Method of financing must be both attractive to target shareholders and acceptable to acquirer
  21. 21. Methods Cash Ordinary Shares in bidder firm Loan stocks of bidder firm Cash and ordinary shares tend to be the preferred methods Bidder will have to take into account the effect on capital structure Cash may have to be raised from a rights issue
  22. 22. Cash vs shares Cash: acquiring company’s shareholders retain same level of control over their company Shares: shareholders of the acquired company can maintain an interest through the combined entity
  23. 23. Cash Kraft and Cadbury  £8.40 a share  £11.5 bn  cash and shares  Kraft had to borrow £7 bn to finance the deal
  24. 24. Bid premium a substantial sum over the pre-bid share price of the target to make the offer attractive to the target shareholders ABN AMRO valued at 50bn euros Barclays bid 68 bn euros RBS paid 71 bn euros on average 30% to 50% of pre-bid value
  25. 25. Transaction costs Advisers’ fees Underwriters’ fees Arrangement fees Legal costs Accounting costs Stock exchange fees Public relations bills RBS and ABN – 660million euros
  26. 26. Stages of a bid Firm appoints advisers Identify a target Value the target Make approach to the target Notify shareholders Negotiation Recommendation to shareholders
  27. 27. Stages of a bid Initial offer is open for 21 days Revised offer open for 14 days after Maximum period for bid is 60 days
  28. 28. Regulation of Mergers in UK Competition Commission (formerly Monopolies and Mergers Commission)  a statutory body  reviews all activity that  accounts for +25% of market  or involves purchase of assets £70m+  concerned with the outcome of the merger/takeover Takeover Panel  a self-regulatory body  deal with conduct of the takeover/merger
  29. 29. Rules A 3% stake must be disclosed to the company A stake of over 30% triggers a bid  makes it difficult for another party to bid successfully A holding of 90% of the shares means the acquirer can force sale of remaining 10%
  30. 30. Takeovers - Some Defences Pre-bid defence Circulation of victim co. shareholders Profit announcements / forecasts Dividend increase announcements Revaluation of assets “White Knight” defence “Pac Man” defence “Poison Pill” defence
  31. 31. Are mergers/takeoverssuccessful?  Mergers/acquisitions are investments  Success should mean the generation of positive NPVs  Research  Acquisitions often fail to create value for the shareholders in the bidding company  Some researchers have found significant gains to S/ Hs of target firms  KPMG Report 1999 – 83% of cross border mergers failed to create value for shareholders in acquiring firm
  32. 32. Arnold’s ten golden rules Arnold, exhibit 23.25
  33. 33. Further readingArnold, G. Corporate Financial Management, Chapter 23Robbins, M. Independent Business Tuesday, 20 January 2009 Was ABN the worst takeover deal ever?
  34. 34. Kraft and Cadburys £11.5 billion
  35. 35. Unilever and Ben and Jerry’s $326million

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