What is Financial Engineering?

1. What is Financial Engineering? • The creative application of financial technology to solve financial problems or create financial opportunities. This is done in order to maximize profits using different combinations of equity, futures, options, fixed income, swaps. • They apply theoretical finance and computer modeling skills to make pricing, hedging, trading and portfolio management decisions.

2. Financial Engineers are prepared for careers in:

3. MERGERS Is a combination of two corporations in which only one corporation survives and the merged corporation goes out of existence. A Merger differs from Consolidation. A + B = A => MERGER A + B = C => CONSOLIDATION

4. MERGERS Merger activity is an example of ‘integration’ taking place within industries. This can be: • horizontal merger, occurs when two competitors in the same industry combine, • vertical merger, are combinations of companies that have a buyer-seller relationship, • conglomerate merger, occurs when the companies are not competitors and do not have a buyer-seller relationship.

5. MERGERS Firms are sometimes keen to merge when: • they can make savings from being bigger • this is known as gaining ‘economies of scale’ • they can compete with larger firms or eliminate competition • they can spread production over a larger range of products or services

6. MERGERS Merger Financing : • All cash • All securities • A combination of cash and securities Merger professionals : • Investment bankers, attorneys, accountants, and valuation experts.

7. MERGERS Leverage Buyouts (LBO) The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

8. MERGERS Merger approval procedures : • Special committees of the board of directors • Fairness opinions • Voting approval

9. MERGERS OTHERS • Short term Merger • Asset selloffs • Reverse Mergers • Freezeouts and the treatment of minority shareholders • Special Purchase Acquisition Vehicles (SPAC)

10. HOLDING COMPANIES Rather than a merger or an acquisition, the acquiring company may choose to purchase only a portion of the target’s stock and act as a holding company, which is a company that owns sufficient stock to have a controlling interest in the target.

11. HOLDING COMPANIES Advantages : • Lower cost • No control premium • Control with fractional ownership • Approval not required Disadvantages : • Multiple taxation • Antitrust issues • Lack of 100% ownership

12. HISTORY of MERGERS • MERGER WAVES Five periods of high merger activity, often called merger waves. These periods were characterized by cyclic activity, that is, high levels of mergers followed by periods of relatively fewer deals. This condition have taken place in USA history, begun at 1897 till the early 1990s

13. HISTORY of MERGERS What causes merger waves? Research has showed that merger waves tend to be caused by a combination of the economic, regulatory, and technological shocks. M&A is a faster form of expansion than internal growth.

14. HISTORY of MERGERS FIRST WAVE, 1897 – 1904 The first merger wave occurred after the Depression of 1883, peaked between 1898 and 1902, and ended in 1904. This waves were greatly influenced by the technological growth of US into a major industrial economy.

15. HISTORY of MERGERS The first merger wave included many horizontal combinations and the consolidations of several industries. Mergers by types, 1895 – 1904

16. HISTORY of MERGERS SECOND WAVE, 1916 – 1929 During this second period, the American economy continued to develop, primarily because of the post – World War I economic boom. Between 1926 – 1930, a total of 4.600 mergers took place, and from 1919 – 1930, 12.000 manufacturing, mining, public utility, and banking firms disappeared. During 1921 – 1933, $13 billion in assets were acquired through mergers. The second wave included mainly horizontal deals but also many vertical transactions.

17. HISTORY of MERGERS THIRD WAVE, 1965 – 1969 The third wave was the conglomerate era, which refers to the acquisition of companies in different industries.

18. HISTORY of MERGERS FOURTH WAVE, 1984 – 1989 The fourth wave was unique in that it featured the appearance of the corporate raider, who often used the junk bond market to finance highly transactions such as the LBO. When the junk bond market collapsed toward the end of the 1980s and the economy moved into a recession, it appeared that the hectic pace of M&A activity had come to an end.

19. HISTORY of MERGERS FITFH WAVE, 1992s This period featured even larger megamergers that the transactions of the 1980s. In addition, the deals of the fifth merger wave were a worldwide phenomenon, with a large volume of mergers taking place in Europe and Asia. Most of them were strategic mergers that involved companies seeking to expand into new markets or to take advantage of perceived synergies.

20. HISTORY of MERGERS The Early 2000s After a slowdown in the early 2000s, the M&A business picked up steam again and became a truly globalized. New potential targets and bidders came on the market as a result of increased privatizations – especially in Eastern Europe, Asia and Central and South America.

21. CASE STUDY