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  1. 1. Jeffrey TimmermansGlobal Financial JournalismWeek 10: Mergers & Acquisitions (& IPOs & Trade)Thursday, 25 April, 13
  2. 2. Types of M&A✤ Merger: companies join as “equals”✤ Acquisition: one company buys another✤ Take private: all shares in a listed company are purchased fromshareholders (typically by a private equity firm) and the company isrestructured as a private entity before re-listing✤ Joint venture: two companies form another venture✤ Reverse takeover: purchase of a listed company by a private companyThursday, 25 April, 13
  3. 3. Global M&A activity 2004-2012Source: MergermarketThursday, 25 April, 13
  4. 4. Global Private Equity ActivitySource: MergermarketThursday, 25 April, 13
  5. 5. The M&A process✤ Initiated by acquirer, target, private equity firm, or investment bank✤ Mandate of investment banks as advisors✤ Due diligence/valuation process✤ Possible emergence of rival bid✤ Shareholders of target vote on deal / regulatory approval✤ Unification of operations/possible mass firingsThursday, 25 April, 13
  6. 6. Questions to ask✤ What’s the value of the deal?✤ Who’s buying what for whatamount from whom?✤ Is it a hostile bid?✤ The reasons for the deal – howit “fits.”✤ How buyer is paying: cash,stock, debt, or a combination?✤ What seller will do withmoney?✤ Effect on companies’ revenue,earnings?✤ Is there a large amount of debtat the target that will beassumed by the acquirer?Thursday, 25 April, 13
  7. 7. More questions✤ Are there regulatory or otherlegal concerns?✤ Antitrust issues? Politicalissues?✤ Who will run the new entity?Changes?✤ What happens to employees?Transfers? Layoffs?✤ What are the fees the banks/advisors are getting?✤ When is the deal expected toclose?✤ How did the market react to theannouncement of the deal?Thursday, 25 April, 13
  8. 8. Sourcing in M&A✤ Investment banks (advisors and rivals)✤ Management consultants✤ Institutional shareholders in target (& acquirer)✤ Shareholder activists✤ David Webb (HK)✤ Institutional Shareholder Services (US)Thursday, 25 April, 13
  9. 9. Valuations✤ Cash Deals: Exclude all assumed debt, multiply price-per-share offeredby buyer by number of outstanding shares of target.✤ ABC offers $1 per XYZ share x 100m XYZ shares = $100M✤ Stock Deals: Multiply exchange ratio offered by Buyer’s trading price.ABC offers 0.64 of its shares for each XYZ share:✤ 0.64 x ABC trading price $2.00 = $1.28/Share for XYZ shareholders✤ Total Value: $1.28 x XYZ outstanding shares 1.0B = $1.28BThursday, 25 April, 13
  10. 10. Initial Public OfferingsThursday, 25 April, 13
  11. 11. Initial Public Offerings✤ The sale of shares in a private (unlisted) company to institutionaland/or retail investors✤ A primary equity deal✤ Results in the listing of company on one or more stock exchanges✤ So those shares can trade on the secondary market✤ Is an “exit strategy” for private equity firms that acquired a (formerly)public companyThursday, 25 April, 13
  12. 12. The IPO process✤ Intention to list (announced bycompany)✤ Underwriter (investment bank)mandate✤ Pricing range✤ Strategic investors✤ Subscription levels✤ Final pricing✤ ListingThursday, 25 April, 13
  13. 13. Intention to list✤ Amount of cash to be raised✤ Which market it will list✤ Number of shares to be issued✤ Percentage of the company’sshare capital to be listed✤ Relative sizes of theinstitutional and retail tranches✤ What the company does✤ Names, phone numbers of keyexecutivesThursday, 25 April, 13
  14. 14. Indicative price range✤ Once mandated, theunderwriters will start“building the book” for the deal✤ Will sound out institutionalinvestors on interest at arange of prices✤ Will distribute preliminaryterm sheets✤ Check earlier reported detailsfor changes✤ Compare price range to rivals✤ Is there a “greenshoe,” oroverallotment option?Thursday, 25 April, 13
  15. 15. Subscriptions✤ Underwriters will usually try to ensure excess demand for thenumber of shares on offer, or oversubscription✤ If investors apply to buy 100 million shares, but only 10 million are onoffer, then the IPO is 10-times subscribed or covered (and 9-timesoversubscribed)✤ Excess demand at subscription stage typically results in sharp pricerise once shares start trading on the marketThursday, 25 April, 13
  16. 16. TradeThursday, 25 April, 13
  17. 17. What do these countries have incommon?✤ China✤ Morocco✤ Sri Lanka✤ Colombia✤ Lesotho✤ India✤ Turkey✤ Bangladesh✤ Cambodia✤ MexicoThursday, 25 April, 13
  18. 18. And the answer is....✤ All ten countries supplyclothing to U.S. discountclothing retailer Old Navy✤ Old Navy sources its productsfrom around 50 countries✤ Men’s T-shirt for US$3.99✤ Old Navy sold US$1.51 billionin merchandise in 3Q 2012Photo:BooneNCMagazineSources: Gap Inc. 10-Q filing, Old Navy Web siteThursday, 25 April, 13
  19. 19. Source: WTO secretariatVolume of monthly exports, 1998-2009Thursday, 25 April, 13
  20. 20. Absolute advantage“The producer that requires a smaller quantity of inputs toproduce a good is said to have an absolute advantage inproducing that good.”– N. Gregory Mankiw,Principles of EconomicsThursday, 25 April, 13
  21. 21. Comparative advantage“The producer who gives up less of other goods to produce [aparticular good] has the smaller opportunity cost ofproducing [that particular good] and is said to have acomparative advantage in producing it.”– N. Gregory Mankiw,Principles of EconomicsThursday, 25 April, 13
  22. 22. Free trade: winners✤ Domestic consumers in importing countries✤ Domestic producers in exporting countriesThursday, 25 April, 13
  23. 23. Free trade: losers✤ Domestic consumers in exporting countries✤ Domestic producers in importing countriesThursday, 25 April, 13
  24. 24. Other benefits of trade✤ Overall economic well-being increases✤ But not for everyone✤ Variety of available goods increases✤ Increased competition✤ Enhanced flow of ideasThursday, 25 April, 13
  25. 25. Arguments against trade✤ Eliminates jobs✤ Endangers national security✤ Harms developing industries✤ Unfair competition (dumping)Thursday, 25 April, 13
  26. 26. Government trade policies✤ Trade barriers✤ Trade subsidies✤ Free-trade agreements (to lower barriers & subsidies)✤ Global (e.g. World Trade Organization negotiations)✤ Multi-lateral (e.g. North American Free Trade Agreement, Trans-Pacific Partnership)Thursday, 25 April, 13
  27. 27. Trade barriers: the obvious ones✤ Tariffs✤ Licenses✤ Quotas✤ Subsidies✤ Content requirements✤ EmbargoThursday, 25 April, 13
  28. 28. Trade subsidies✤ The U.S. paid domestic farmers $245.2 billion in subsidies from1995-2009, including $15.4 billion in 2009✤ 10% of farmers received 74% of subsidies✤ Corn subsidies totaled $73.8 billion (1995-2009)✤ The E.U.’s Common Agricultural Policy costs €55 billion per year, oraround 40% of the total E.U. budgetSources: Environmental Working Group, European UnionThursday, 25 April, 13
  29. 29. Trade barriers: the less obvious✤ “Quality” requirements✤ Health concerns✤ Packaging✤ Labeling✤ Other product standards✤ Dense bureaucracyThursday, 25 April, 13
  30. 30. Trade terminology✤ Trade surplus = exports > imports✤ Trade deficit = imports > exports✤ Deficits and surpluses “widen” or “narrow” as they move fartherfrom or closer to zeroThursday, 25 April, 13
  31. 31. Trade: a zero-sum game✤ One country’s trade surplus is another country’s trade deficit✤ If China exports a T-shirt to the U.S., the value of that T-shirt iscounted as a credit (addition) to China’s trade balance and as a debit(subtraction) to the U.S. trade balanceThursday, 25 April, 13
  32. 32. BEIJING (MarketWatch) — China’s trade surplus narrowed in February,but exports performed far better than expected — a positive signal forboth China and the world economy.However, economists say that Chinese data in January and February areusually volatile due to the Lunar New Year holiday, and often warn againstreading too much into strong trade figures for these months.China’s February trade surplus declined to $15.25 billion from $29.15billion in January, according to figures released Friday, but economistspolled earlier had expected a $16.0 billion deficit.Though China has a large trade surplus with the outside world, it iscommon for the country to run deficits in the early part of the year, partlybecause factories close and workers return home for the Lunar New Year.China trade surplus narrows, but exports risingMarch 07, 2013|Aaron BackSource: MarketWatchWriting about tradeThursday, 25 April, 13
  33. 33. Trade & Currencies✤ Trade surpluses tend to lead to stronger currencies✤ Trade deficits tend to lead to weaker currenciesThursday, 25 April, 13