Professional Documents
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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
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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
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