MERGERS and ACQUISITION.pdf

MERGERS & ACQUISITIONS Chapter 19 Alex Tajirian, 1997 Mergers & Acquisitions 19-2 OUTLINE # Types of Takeovers # Valid vs. Dubious Reasons for Takeovers # Valuation and Payment Methods of Takeovers # LBOs # Divestitures and Spin-offs # Performance Evidence from Past Takeovers Alex Tajirian, 1997 Mergers & Acquisitions 19-3 1.0 TYPES OF TAKEOVERS 1.1 ACQUISITIONS 1.1.1 Merger or Consolidation # Two firms are combined into a new entity. ! Usually cheaper than other forms ! Shareholders of each company must approve it. 1.1.2 Acquisition of Stock # Starts with an offer from the acquiring firm (tender offer). ? If a shareholder chooses to accept offer, then that shareholder tenders his/her shares by exchanging them for cash and/or securities. ? Note. No shareholders' meeting is necessary. 1.1.3 Acquisition of Assets Alex Tajirian, 1997 Mergers & Acquisitions 19-4 1.2 PROXY CONTEST/FIGHT 1.3 GOING PRIVATE (LBO) When all the equity of a public firm is purchased by a small group of investors. 1.4 Management Buy Out (MBO) Alex Tajirian, 1997 Mergers & Acquisitions 19-5 2.0 WHY ACQUIRE ? 2.1 VALID REASONS If company A wants to buy company B, then NPV of purchase must be > 0. NPV = Gain - Cost > 0 Gain = PVAB - (PVA + PVB) = Value of Synergy i.e. PV of combined company AB must be greater than PV of each separate. Suppose it is a cash purchase, then Cost = cash - PVB Thus, NPV = [PVAB - (PVA + PVB )] - [(cost - PVB)] = gain - cost 2.2 DUBIOUS REASONS Diversification Alex Tajirian, 1997 Mergers & Acquisitions 19-6 Example NPV of merger = ? Given: PVA = $100, PVB = 50. Suppose there are $25 cost saving. B is bought for $ 65. Solution: Gain = PVAB - (PVA + PVB) = cost savings = $25 Cost = cash - PVB = 65 - 50 = 15 ? NPV = gain - cost = 25 - 15 = 10 Alex Tajirian, 1997 Mergers & Acquisitions 19-7 )CF ' )R & )Cost & )Tax & )Capital Requirements 3.0 VALUATION 3.1 SOURCES OF CFs # Increase Revenues ! Increased market power --monopoly ! Gains from better marketing efforts ! Strate