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Vade mecum – M&A

 1+1 = 3
 Merger v Acquisition – Distinction blurred
 Synergy – revenue enhancement and cost savings
 Staff reductions
 EOS
 Acquiring new technology
 Improved market reach and industry visibility
 Varieties
 Horizontal – direct; same product & market
 Vertical - customer + company; supplier + company
 Market extension - same product, diff markets
 Product Extension - diff but related products in same market
 Conglomeration - no common biz areas
 Acquisitions
 A buys B with – cash, stock or a combination of the two
 Reverse Merger – pvt reverse merges into the public to become a publicly listed co
 Valuation Methods
 Comparison Ratios – P/E Ratio, Enterprise-Value-to-Sales Ratio
 Replacement Cost
 DCF Analysis – Future FCFs (Operating Profit + Dep + Amort – Capital Expenditure –
Cash taxes – Change in WC) are discounted at WACC
 Synergy Premium – price over and above what the seller is really wirth
 (PreM Value of Both Firms + Synergy)/PostM No. of Shares = PreM Stock Price
 What to look out for?
 Reasonable Purchase Price
 Cash v Stock Transactions – less discipline in the latter
 Sensible Appetite
 The Process
 Tender Offer
 Target Company – options
 Accept terms
 Negotiate
 Poison Pill – flip-in or Flip-over
 Find a White Knight
 Closing the Deal
 Some transaction
• Cash for Stock – taxable
• Stock for Stock – non-taxable
 Break ups – De mergers
 Advantages – raise additional equity funds; boost company’s valuations; less internal
competition for corporate funds; clearer financial info of separated entity
 Disadvantages – costlier credit, difficult to figure on major indexes
 Restructuring Methods

Epili Sagar ©
Vade mecum – M&A
 Sell-Offs – subsidiary sold off
 Equity Carve-Outs – to boost SH value
 Parent makes the subsidiary public through an IPO
 A new public-listed company is thus created but parent keeps a controlling stake
 Works well when subsidiary was performing well – adds to SH value for the parent
 Spin Offs – subsidiary becomes independent entity.
 Parent distributes shares of subsidiary to shareholders as stock dividend
 Works well when subsidiary is healthy – unlocks hidden SH Value
 Tracking Stocks
 Issued by publicly listed company to track the performance of one segment
 Good because parent has control over its segment and still comes to know how
people value its segment
 Can use the enhanced stock value of segment to make acquisition
 Class b stocks
 Why Fail?
 Flawed Intentions – executive ego; fear of globalisation
 Synergies – Product; Markets; Cultures (very imp.)
 More importance on COST CUTTING – loss of focus on Revenue generation - a -2-3%
beating of revenue growth can offset 50% failure in Costs
 Cost savings are hardly as sure as they appear
 5% drop in earnings – 15% drop in share prices
 McKinsey on DEALS THAT CREATE VALUE
 Expansionist deals (new geograpic regions; new distribution channels) preferred to
Transformist (new lines of business or remove chunks of a healthy portfolio)
 Acquisitions prefered - even though there is the winners curse
 Joint Ventures and Alliances create LEAST value – few immediate synergies, limit
company’s strategic options; sap the attention of managers
 Acquisition – 2.55 jump in acquirer market cap
 Better deal opportunities – for growing or fragmented industry
 Underperformer with well-conceived deal can boost share prices more

Epili Sagar ©

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