Mergers and Acquisitions 1

1. Introduction to Mergers,
Acquisitions, & Other
Restructuring Activities

2. If you give a man a fish, you feed him for a day.
If you teach a man to fish, you feed him for a life time.
—Lao Tze

3. Success is a Personal Choice
We can choose to be successful by
• Setting goals,
• Having high expectations of ourselves,
• Never quitting,
• By not making excuses, and
• By accepting personal responsibility

4. Exhibit 1: Course Layout: Mergers,
Acquisitions, and Other
Restructuring Activities
Part IV: Deal
Structuring and
Financing
Part II: M&A Process
Part I: M&A
Environment
Ch. 11: Payment and
Legal Considerations
Ch. 7: Discounted
Cash Flow Valuation
Ch. 9: Financial
Modeling Basics
Ch. 6: M&A
Postclosing Integration
Ch. 4: Business and
Acquisition Plans
Ch. 5: Search through
Closing Activities
Part V: Alternative
Business and
Restructuring
Strategies
Ch. 12: Accounting &
Tax Considerations
Ch. 15: Business
Alliances
Ch. 16: Divestitures,
Spin-Offs, Split-Offs,
and Equity Carve-Outs
Ch. 17: Bankruptcy
and Liquidation
Ch. 2: Regulatory
Considerations
Ch. 1: Motivations for
M&A
Part III: M&A
Valuation and
Modeling
Ch. 3: Takeover
Tactics, Defenses, and
Corporate Governance
Ch. 13: Financing the
Deal
Ch. 8: Relative
Valuation
Methodologies
Ch. 18: Cross-Border
Transactions
Ch. 14: Applying
Financial Models to
Deal Structuring
Ch. 10: Private
Company Valuation

5. Course Learning Objectives
Students will learn
• What corporate restructuring is and why it occurs;
• Commonly used valuation techniques and how they are employed;
• How corporate restructuring creates/destroys value;
• Commonly used takeover tactics and defenses and when they should be
employed;
• A highly practical “planning based” approach to managing the M&A process;
• The challenges and solutions associated with each phase of the M&A process;
• The advantages and disadvantages of alternative M&A deal structures;
• How to apply financial models to value, structure and negotiate deals; and
• How to plan, structure, and manage JVs, partnerships, alliances, licensing
arrangements, equity partnerships, franchises, and minority investments

6. Current Chapter Learning Objectives
• Primary objective: What corporate restructuring is and why
it occurs
• Secondary objective: Provide students with an
understanding of
– M&A as a form of corporate restructuring
– Alternative ways of increasing shareholder value
– M&A activity in an historical context
– The primary motivations for M&A activity
– Key empirical findings
– Primary reasons some M&As fail to meet expectations

7. M&As as a Form of
Corporate Restructuring
• Restructuring Activity
– Corporate Restructuring
• Balance Sheet
• Assets Only
– Financial Restructuring
– Operational Restructuring
• Potential Strategy
– Redeploy Assets
• Mergers, Break-Ups, &
Spin-Offs
• Acquisitions, divestitures,
etc.
– Increase leverage to lower
cost of capital or as a takeover
defense; share repurchases
– Divestitures, widespread
employee reduction, or
reorganization

8. Alternative Ways of
Increasing Shareholder Value
• Solo venture (AKA “going it alone”
or “organic growth”)
• Partnering (Marketing/distribution
alliances, JVs, licensing,
franchising, and equity
investments)
• Mergers and acquisitions
• Minority investments in other firms
• Asset swaps
• Financial restructuring
• Operational restructuring

9. Discussion Questions
1. What factors do you believe are most likely to
impact senior management’s selection of one
strategy (e.g., solo venture, M&A) to increase
shareholder value over the alternatives? Be specific.
2. In your opinion, how might the conditions of the
business (e.g., profitability) and the economy affect
the choice the strategy?

10. Motivations for M&A
• Strategic realignment
– Technological change
– Deregulation
• Synergy
– Economies of scale/scope
– Cross-selling
• Diversification (Related/Unrelated)
• Financial considerations
– Acquirer believes target is
undervalued
– Booming stock market
– Falling interest rates
• Market power
• Ego/Hubris
• Tax considerations

11. Illustrating Economies of Scale
Period 1: Firm A (Pre-merger)
Assumptions:
• Price = $4 per unit of output sold
• Variable costs = $2.75 per unit of output
• Fixed costs = $1,000,000
• Firm A is producing 1,000,000 units of output per year
• Firm A is producing at 50% of plant capacity
Profit = price x quantity – variable costs
– fixed costs
= $4 x 1,000,000 - $2.75 x 1,000,000
- $1,000,000
= $250,000
Profit margin (%)1 = $250,000/$4,000,000 = 6.25%
Fixed costs per unit = $1,000,000/1,000,000 = $1
Period 2: Firm A (Post-merger)
Assumptions:
• Firm A acquires Firm B which is producing 500,000
units of the same product per year
• Firm A closes Firm B’s plant and transfers production
to Firm A’s plant
• Price = $4 per unit of output sold
• Variable costs = $2.75 per unit of output
• Fixed costs = $1,000,000
Profit = price x quantity – variable costs
– fixed costs
= $4 x 1,500,000 - $2.75 x 1,500,000
- $1,000,000
= $6,000,000 - $4,125,000 - $1,000,000
= $875,000
Profit margin (%)2 = $875,000/$6,000,000 = 14.58%
Fixed costs per unit = $1,000,000/1.500,000 = $.67
Key Point: Profit margin improvement is due to spreading fixed costs over more units of output. Profit margin
improvement from economies of scale highest in industries with highest fixed costs.
1Margin per unit sold = $4.00 - $2.75 - $1.00 = $.25
2Margin per unit sold = $4.00 - $2.75 - $.67 = $.58. Note this illustration does not reflect any costs incurred in closing Firm B’s plant.

12. Illustrating Economies of Scope
Pre-Merger:
• Firm A’s data processing center
supports 5 manufacturing
facilities
• Firm B’s data processing center
supports 3 manufacturing
facilities
Post-Merger:
• Firm A’s and Firm B’s data
processing centers are combined
into a single operation to support
all 8 manufacturing facilities
• By combining the centers, Firm A
is able to achieve the following
annual pre-tax savings:
– Direct labor costs = $840,000.
– Telecommunication expenses
= $275,000
– Leased space expenses =
$675,000
– General & administrative
expenses = $230,000
Key Point: Cost savings due to expanding the scope of a single center to
support all 8 manufacturing facilities of the combined firms.

13. Empirical Findings
• Abnormal (or excess) financial returns are those earned by acquirer and target
shareholders above or below what would have been earned without a takeover.
• Around transaction announcement date, abnormal returns:1
– For target shareholders averaged 25.1% during the 2000s as compared to
18.5% during the 1990s
– For acquirer shareholders generally positive averaging about 1-1.5%
– However, zero to slightly negative for acquirer shareholders for deals involving
large public firms and those using stock to pay for the deal
• Positive abnormal returns to acquirer shareholders often are situational and include
the following:
– Target is a private firm or a subsidiary of another firm
– The acquirer is relatively small (large firm management may be more prone to
hubris)
– The target is small relative to the acquirer
– Cash rather than equity is used to finance the transaction
– Transaction occurs early in the M&A cycle
• No evidence that alternative strategies (e.g., solo ventures, alliances) to M&As are
likely to be more successful
1These conclusions are based on recent studies using large samples over lengthy time periods involving U.S., foreign, and cross-border deals (including
public and private firms). See J. Netter, M. Stegemoller, and M. Wintoki, 2011 Implications of Data Screens on Merger and Acquisition Analysis: A Large
Sample Study of Mergers and Acquisitions, Review of Financial Studies 24 2316-2357 and J. Ellis, S. B. Moeller, F.P. Schlingemann, and R.M. Stulz, 2011
Globalization, Governance, and the Returns to Cross-Border Acquisitions, NBER Working Paper No. 16676.

14. Primary Reasons Some M&As Fail
to Meet Expectations
• Overpayment due to
over-estimating
synergy
• Slow pace of
integration
• Poor strategy

15. Discussion Questions
1. Discuss whether you believe current conditions in
the U.S. and global markets are conducive to high
levels of M&A activity? Be specific.
2. Of the factors potentially contributing to current
conditions, which do you consider most important
and why?
3. Speculate about what you believe will happen to the
number of M&As over the next several years in the
U.S.? Globally? Defend your arguments.

16. Application: Xerox Buys ACS
In 2010, Xerox, traditionally a slow growing, cyclical office equipment manufacturer, acquired Affiliated
Computer Systems (ACS) for $6.4 billion. With annual sales of about $6.5 billion, ACS handles paper-based
tasks such as billing and claims processing for governments and private companies. With about one-fourth
of ACS revenue derived from the healthcare and government sectors through long-term contracts, the
acquisition gives Xerox a greater penetration into markets which should benefit from the 2009 government
stimulus spending and 2010 healthcare legislation. There is little customer overlap between the two firms.
Service firms tend to offer more stable and higher margin revenue streams than product companies.
Previous Xerox efforts to move beyond selling printers, copiers and supplies and into services achieved
limited success due largely to poor management execution. While some progress in shifting away from the
firm’s dependence on mature printers and copier sales was evident, the pace was far too slow. Xerox was
looking for a way to accelerate transitioning from a product driven company to one whose revenues were
more dependent on the delivery of business services.
More than two-thirds of ACS’ revenue comes from the operation of client back office operations such as
accounting, human resources, claims management, and other outsourcing services, with the rest coming
from providing technology consulting services. ACS would also triple Xerox’s service revenues to $10
billion. Xerox chose to run ACS as a separate standalone business.
Discussion Questions:
1. What alternatives to buying ACS do you think Xerox could have considered?
2. Why do you think they chose a merger strategy? (Consider the advantages and disadvantages of
alternative strategies.)
3. Speculate as to Xerox’s primary motivations for acquiring ACS?
4. How might the decision to manage ACS as a separate business affect realizing the full value of the
transaction? What other factors could impact the ability to realize synergy?

17. Remembering the Past
“Those who do not remember the past are
condemned to relive it.”
Alexis De Tocqueville

18. Merger Waves1
(Boom Periods)
• Horizontal Consolidation (1897-
1904)
• Increasing Concentration (1916-
1929)
• The Conglomerate Era (1965-1969)
• The Retrenchment Era (1981-1989)
• Age of Strategic Megamerger
(1992-2000)
• Age of Cross Border and Horizontal
Megamergers (2003-2007)
1Periods characterized by robust increases in the number and value of transactions.

19. Causes and Significance
of M&A Waves
• Factors contributing to increasing M&A activity:
– Shocks (e.g., technological change, deregulation, and escalating
commodity prices)
– Ample liquidity and low cost of capital
– Overvaluation of acquirer share prices relative to target share prices
– Improving business confidence
• Why it is important to anticipate M&A waves:
– Financial markets reward firms pursuing promising (often undervalued)
opportunities early on and penalize those that follow later in the cycle.
– Acquisitions made early in the wave often earn substantially higher
financial returns than those made later in the cycle.

20. Horizontal Consolidation (1897-1904)
• Spurred by
– Drive for efficiency,
– Lax enforcement of antitrust laws
– Westward migration, and
– Technological change
• Resulted in concentration in metals,
transportation, and mining industry
• M&A boom ended by 1904 stock market crash
and fraudulent financing

21. Increasing Concentration (1916-1929)
• Spurred by
– Entry of U.S. into WWI
– Post-war boom
• Boom ended with
– 1929 stock market crash
– Passage of Clayton Act which more clearly
defined monopolistic practices

22. The Conglomerate Era (1965-1969)
• Conglomerates buy earnings streams to boost their
share price
– Overvalued conglomerate firms acquired
undervalued high growth firms
– Number of high-growth undervalued firms
declined as conglomerates bid up their prices
– Higher purchase price for target firms and
increasing leverage of conglomerates brought era
to a close

23. Age of Strategic Megamerger
(1992-2000)
• Dollar volume of transactions reached record in each year
between 1995 and 20001
• Purchase prices reached record levels due to
– Soaring stock market
– Consolidation in many industries
– Technological innovation
– Benign antitrust policies
• Period ended with the collapse in global stock markets and
worldwide recession
1The cumulative dollar value of M&As during this period in the U.S. was $6.5 trillion, With $3.5 trillion
taking place in the last two years.

24. Debt Financed 2003-2007 M&A Boom
Low Interest
Rates & Declining
Risk Aversion
Drive Increasing
--Sub-Prime
Mortgage Lending
--LBO Financing &
Other Highly
Leveraged
Transactions
Investment Banks:
Repackage &
Underwrite
--Mortgage
Backed
--High Yield
Bonds
Banks &
Hedge Funds
Create:
--Collateralized
Debt Obligations
(CDOs)
--Collateralized
Loan Obligations
CLOs)
Foreign
Investors
Buy Highest
Rated Debt
Hedge
Funds
Buy Lower
Rated debt
Investment Banks Lend to Hedge Funds

25. Similarities and Differences
Among Merger Waves
• Similarities
– Occurred during periods of sustained high economic
growth
– Low or declining interest rates
– Rising stock market
• Differences
– Emergence of new technology (e.g., railroads, Internet)
– Industry focus
– Type of transaction (e.g., horizontal, vertical,
conglomerate, strategic, or financial)

26. Discussion Questions
1. What can a firm’s senior management learn by
studying historical merger waves?
2. What can government policy makers learn by
studying historical merger waves?
3. What can investors learn by studying historical
merger waves?

27. Quick Quiz
Which of the following are generally considered restructuring
activities?
a. A merger
b. An acquisition
c. A divestiture
d. A consolidation
e. All of the above

28. Things to Remember
• Motivations for acquisitions:
– Strategic realignment
– Synergy
– Diversification
– Financial considerations
– Hubris
• Common reasons M&As fail to meet expectations
– Overpayment due to overestimating synergy
– Slow pace of integration
– Poor strategy
• M&As typically reward target shareholders far more than bidder
shareholders; however, in certain circumstances bidder shareholders
frequently earn significant positive abnormal returns
• Success rate of M&A not significantly different from alternative ways of
increasing shareholder value