Mergers & Acquisitions

Transcription

1 Mergers & Acquisitions

2 Topics Covered Sensible Motives for Mergers Some Dubious Reasons for Mergers Estimating Merger Gains and Costs The Mechanics of a Merger Proxy Fights, Takeovers, and the Market for Corporate Control Mergers and the Economy

3 Types of Mergers Horizontal mergers Combinations of two firms in the same industry (Bank of New York and Mellon Financial Corporation, 2007) Vertical mergers Involves companies at different stages of production Forward integration: Boise Cascade (paper manufacturer) acquire Office Max (office products distributor), 2003 Backward integration: TomTom (maker of car navigation devices) acquire Tele Atlas (digital map data), 2008 Conglomerate mergers Involves companies in unrelated line of businesses MIG (financial services) acquire Olympic Airlines (Travel & Leisure), 2009

4 M&A Around the World ( ) Deals Horizontal mergers 41.7% Vertical mergers 4% Conglomerate mergers 54.3% Cross border 21.7% Please see, Gugler, Mueller, Yurtoglu and Zulehner (2003)

5 Sensible Reasons for Mergers Economies of Scale A larger firm may be able to reduce its per unit cost by using excess capacity or spreading fixed costs across more units.

6 Sensible Reasons for Mergers Economies of Vertical Integration Control over suppliers may reduce costs. Over integration can cause the opposite effect. S Pre-integration (less efficient) S Company S S S S S Post-integration (more efficient) Company S

7 Sensible Reasons for Mergers Combining Complementary Resources The two firms have complementary resources - each has what the other needs. Merging may results in each firm filling in the missing pieces of their firm with pieces from the other firm. Firm A Firm B

8 Sensible Reasons for Mergers Mergers as a Use for Surplus Funds If your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds. Firms with a surplus of cash and a shortage of good investment opportunities often turn to mergers financed by cash. Such firms often find themselves targeted for takeover by other firms that propose to redeploy the cash for them. Example: the early 1980s many cash-rich oil companies found themselves threatened by takeover.

9 Sensible Reasons for Mergers Eliminating Inefficiencies There are firms with unexploited opportunities to cut costs and increase sales and earnings (poor management). Such firms are natural candidates for acquisition by other firms with better management. A merger is not the only way to improve management, but sometimes it is the only simple and practical way.

10 Sensible Reasons for Mergers Industry Consolidation The biggest opportunities to improve efficiency seem to come in industries with too many firms and too much capacity. The banking industry is an example. The US entered the 1980s with far too many banks, largely as a result of outdated restrictions on interstate banking. As these restrictions eroded and communications and technology improved, hundreds of small banks were swept up into regional or super-regional banks.

11 Bank of America Family Tree

12 Dubious Reasons for Mergers Diversification Investors should not pay a premium for diversification since they can do it themselves. The trouble with this argument is that diversification is easier and cheaper for the stockholders than for the corporation.

13 Dubious Reasons for Mergers Increasing EPS: The Bootstrap Game Acquiring Firm has high P/E ratio Selling firm has low P/E ratio After merger, acquiring firm has short term EPS rise Long term, acquirer will have slower than normal EPS growth due to share dilution

14 Dubious Reasons for Mergers Increasing EPS: The Bootstrap Game World Enterprises (before merger) Muck and Slurry World Enterprises (after buying Muck and Slurry) EPS $ 2.00 $ 2.00 $ 2.67 Price per share $ $ $ P/E Ratio Number of shares 100, , ,000 Total earnings $ 200,000 $ 200,000 $ 400,000 Total market value $ 4,000,000 $ 2,000,000 $ 6,000,000 Current earnings per dollar invested in stock $ 0.05 $ 0.10 $ 0.067

15 Dubious Reasons for Mergers

16 Lower Financing Costs When two firms merge, the combined company (AB) can borrow at lower interest rates than either firm could separately. In part this is true! While the two firms are separate, they do not guarantee each other s debt. But after the merger each firm effectively does guarantee the other s debt. Because these mutual guarantees make the debt less risky, lenders demand a lower interest rate. Does the lower interest rate mean a net gain to the merger? Not necessarily! Although AB s shareholders do gain from the lower interest rate, they lose by having to guarantee each other s debt.

17 Estimating Merger Gains Questions Is there an overall economic gain to the merger? Do the terms of the merger make the company and its shareholders better off? PV(AB) > PV(A) + PV(B) There is an economic gain only if the two firms are worth more together than apart

18 Estimating Merger Gains and Costs Gain PV AB (PV A PV B ) PV AB Cost Cash paid PV B NPV gain cos t PV AB (cash PV B )

19 Example: Firm A has a value of 200M, and B has a value of 50M. Two firms merge creating 25M in synergies. Firm A buys B with cash for 65M. What is the merger cost to firm A s stockholders? PV PV PV A B Gain AB PV PV A AB PV B 25 Gain 275M Cost Cash paid PV M B

20 Example (cont d) What is the merger gain to firm A s stockholders? The NPV to firm A s stockholders will be the difference between the gain and the cost. NPV A Gain Cost M NPV A wealth with merger - (PV AB Cash) (275 65) M PV A wealth without merger

21 Merger is Financed by Stock Cost Cost NP AB target firm shareholde rs receive of the combined firms xpv AB PV B PV B target firm shareholde rs receive N shares the fraction x of the combined firms

22 Accounting for a Merger Accounting for the merger of A Corp and B Corp assuming that A Corp pays $18 million for B Corp. Initial Balance Sheets A Corporation B Corporation NWC D NWC 1 0 D FA E FA 9 10 E Balance Sheet of AB corporation NWC D FA E Goodwill

23 Takeover Methods Tools Used To Acquire Companies Proxy Contest Tender Offer Acquisition Merger Leveraged Buy-Out Manageme nt Buy-Out

24 Takeover Defenses

25 Anti-takeover Devices Greenmail (Management offer to buy him out, at a substantial bonus over the market price of the stock) Example: Bass brothers acquired 9.9% of Texaco (1984). Texaco s management paid the Bass brothers $137 million premium over the market price or $55 per share - $35 market price of the stock poison pills or shareholder rights plans (the plans usually take the form of rights issued to shareholders. Pills give shareholders the ability to purchase shares from, or sell shares back to, the target company (the flip-in pill) and/or the potential acquirer (the flip-over pill)

26 Other Anti-takeover Devices white knight (third party who agrees to buy a significant portion of stock to keep it out of the acquirer s hands) New class of shareholder with unequal voting rights Crown Jewel strategy (the target company would sell the most valuable assets) I will eat you before you eat me pacman defence (example: Bendix - Martin Marietta (1982))

27 Winners and Losers in the Merger Game Stock Market Reaction to Merger Announcements The average 3-day CAR for acquirer and target firms combined is 1.8% (AMS) The average 3-day CAR for target firms is 16% (AMS) The average 3-day CAR for acquirer firms is -0.7% (AMS) Target firm shareholders also do better when there is no equity financing (AMS) The losers were mainly the largest acquirers; the stockholders of the other acquirers appeared to gain (MSS) Mergers seem to create value for shareholders overall, but the target firm shareholders are clearly winners in merger transactions Please see, Andrade, Mitchell and Stafford (2001) JEP (AMS) and Moeller, Schlingemann and Stulz (2004) JFE (MSS)

28 Winners and Losers in the Merger Game (cont d) Long-Term Abnormal Returns Long-term event studies measuring negative abnormal returns over the three to five years following merger completion Serious methodological concerns with the long-term event studies (for example, crosssectional correlation of ARs)

29 Winners and Losers in the Merger Game (cont d) Pre- and Post-Merger Profitability Healy, Palepu and Ruback (1992) find that merged firms experience improvements in asset productivity, leading to higher operating cash flows relative to their industry median. Operating performance (cash flow to sales) is strong relative to industry benchmarks prior to the merger, and improves slightly subsequent to the merger transaction (AMS). On average, there is an improvement in operating performance following the merger (AMS).

30 Empirical Features of Merger Activity Mergers occur in waves Within a wave, mergers strongly cluster by industry Often prompted by deregulation and by changes in technology (for example, deregulation of telecoms and banking in the 1990s led to a spate of mergers in both industries)

31 Recent Mergers

32 Mergers ( )

33 Web Resources