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Mergers and Acquisitions

Mergers and Acquisitions. Activity, Rationale, and Negotiation. Merger Waves or Activity. Five Major Merger Waves in U.S.: Late 1800s (consolidations in basic industries) 1920s (stock market boom fueled consolidations) 1960s (conglomerate mergers) 1980s (use of junk bonds in LBOs & MBOs)

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Mergers and Acquisitions

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  1. Mergers and Acquisitions Activity, Rationale, and Negotiation RW Melicher

  2. Merger Waves or Activity Five Major Merger Waves in U.S.: • Late 1800s (consolidations in basic industries) • 1920s (stock market boom fueled consolidations) • 1960s (conglomerate mergers) • 1980s (use of junk bonds in LBOs & MBOs) • Late 1990s to Today (strategic alliances)

  3. Explanations of M&A Activity • Hubris (managerial psychology—urge to merger is driven by pride & perceived power) • Market Manias (role of mass behavior--market bubbles, merger fads, “deal frenzy,” etc.) • Overvaluation of Stocks (information asymmetry) • Agency Costs & Governance Problems (corrective M&A activity to reduce managerial self-interests) • Competitive Positioning & Industry Shocks (monopolistic powers & changes in demand)

  4. Rationale for Mergers • Synergy • Tax Considerations • Purchase of Assets below Replacement Costs • Diversification • Managers’ Personal Incentives • Breakup Value

  5. Types of Mergers • Horizontal (combining of firms in same line of business) • Vertical (merging with suppliers, producers, or customers) • Congeneric (combining of related firms but not direct competitors) • Conglomerate (combining unrelated firms) • Financial (focus on restructuring & breakup values)

  6. Friendly Vs. Hostile Takeovers • Mergers may be between equals, but more likely there is an acquirer and a target • Friendly Merger (BODs and CEOs of both firms desire to merge in order to share potential synergies) • Hostile Takeover (occurs when a target resists a takeover attempt often resulting in the acquirer making a “tender offer” directly to the target’s shareholders)

  7. Form of Payment & Financing • Cash Offers (occur in majority of transactions & are dominant in smaller acquisitions) • Stock Offers (occur more frequently in larger transactions and stock offers occur more frequently when stock prices are relatively high) • Stock tends to be used when a deal is friendly, the buyer’s stock price is buoyant, ownership is not concentrated, & deals are larger in size • Cash tends to be used in tender offers where deals typically are hostile

  8. Negotiating the Deal • Friendly Merger Negotiation (one where potential synergy benefits are expected by combining the two firms) • A successful friendly merger is often the result of sharing synergy benefits • Understanding the other party’s point of view is important in getting the deal done

  9. Negotiating the Deal (cont’d) • Both parties should establish a range of values for the target firm (using DCF and relative valuation methods) • Establish an “opening” or “asking” price and a “walk-away” or “reservation” price • Negotiations are more likely to be successful if there is a “Zone of Potential Agreement” (ZOPA) where the range of prices overlap

  10. Negotiating the Deal (cont’d) • Hostile Merger Negotiation (occurs when the target firm resists the merger) • Direct negotiations cease & acquirer turns directly to target’s stockholders requesting they “tender” their shares at a specific price • A “Tender Offer” involves the offering of a “Control Premium” to the target’s stockholders • “Transactions” Multiples may reflect both friendly mergers & hostile takeovers that use tender offers

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