Professional Documents
Culture Documents
Mergers, Acquisitions,
& Other Restructuring
Activities
Part I: M&A
Environment
Part V: Alternative
Business and
Restructuring
Strategies
Ch. 7: Discounted
Cash Flow Valuation
Ch. 2: Regulatory
Considerations
Ch. 8: Relative
Valuation
Methodologies
Ch. 3: Takeover
Tactics, Defenses, and
Corporate Governance
Ch. 6: M&A
Postclosing Integration
Ch. 9: Financial
Modeling Techniques
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
7
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
8
Discussion Questions
1. What factors do you believe are most likely to
impact senior managements 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?
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
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Assumptions:
Assumptions:
Profit margin (%)1 = $250,000 / $4,000,000 = 6.25% Profit margin (%)2 = $875,000 / $6,000,000 = 14.58%
Fixed costs per unit = $1,000,000/1.500,000 = $.67
Fixed costs per unit = $1,000,000/1,000,000 = $1
Key Point: Profit margin improvement is due to spreading fixed costs over more units of output.
Margin per unit sold = $4.00 - $2.75 - $1.00 = $.25
Margin per units sold = $4.00 - $2.75 - $.67 = $.58
1
2
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Post-Merger:
Key Point: Cost savings due to expanding the scope of a single center to
support all 8 manufacturing facilities of the combined firms.
12
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 1
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
These 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.
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14
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.
15
17
Merger Waves1
(Boom Periods)
18
21
Low
LowInterest
Interest
Rates
Rates&&Declining
Declining
Risk
Aversion
Risk Aversion
Drive
DriveIncreasing
Increasing
--Sub-Prime
--Sub-Prime
Mortgage
MortgageLending
Lending
--LBO
Financing
--LBO Financing&&
Other
OtherHighly
Highly
Leveraged
Leveraged
Transactions
Transactions
Investment
InvestmentBanks:
Banks:
Repackage
Repackage &&
Underwrite
Underwrite
--Mortgage
--Mortgage
Backed
Backed
--High
--HighYield
Yield
Bonds
Bonds
Banks
Banks&&
Hedge
HedgeFunds
Funds
Create:
Create:
--Collateralized
--Collateralized
Debt
DebtObligations
Obligations
(CDOs)
(CDOs)
--Collateralized
--Collateralized
Loan
LoanObligations
Obligations
CLOs)
CLOs)
Foreign
Foreign
Investors
Investors
Buy
BuyHighest
Highest
Rated
RatedDebt
Debt
Hedge
Hedge
Funds
Funds
Buy
BuyLower
Lower
Rated
Rateddebt
debt
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Discussion Questions
28
Things to Remember