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Introduction to Finance M&A:An Introduction

Introduction to Finance M&A:An Introduction. TAKE OVERS. Take Overs. Going Private. Acquistions. Mergers, Consolidations. Case of Value Destruction?. ATT and NCR ATT acquired NCR for $7.5 billion in 1991

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Introduction to Finance M&A:An Introduction

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  1. Introduction to FinanceM&A:An Introduction

  2. TAKE OVERS Take Overs Going Private Acquistions Mergers, Consolidations N. Takezawa (ICU) 2002

  3. Case of Value Destruction? • ATT and NCR • ATT acquired NCR for $7.5 billion in 1991 • Estimated loss for ATT shareholders is -13.3% x $34/share x 1.092 billion shares =-$4.9 billion • Then why did ATT acquire NCR? • ATT declared it would enter computer industry (1984 consent decree) • Market perceived NCR as a poor partner N. Takezawa (ICU) 2002

  4. Event Studies • The empirical evidence in the US tends to depict the following picture: • The target firm shareholders earn positive (abnormal) returns due to a merger agreement. This seems to be the case especially for tender offers. • On the other hands, the acquiring firm shareholders do not earn such positive returns. In some instances, they earn negative returns. N. Takezawa (ICU) 2002

  5. Cont. • It could be that positive performance (positive returns) is not realized in the short-term but in the long-term. • We need to look at the long-term performance of the firm. N. Takezawa (ICU) 2002

  6. We examine post-acquisition peformance for 50 of The largest US mergers between 1979 and mid 1984. Merged firms show significant improvements in asset productivity relative to their industries, leading to higher operating cash flow returns. This performance improvement is particularly strong for firms with highly overlapping businesses. Mergers do not lead to cuts in long-term capital and R&D investments. There is a strong positive relation between postmerger increases in operating cash flows and abnormal stock returns at merger announcements, indicating that expectations of economic improvements underlie the equity revaluations of the merging firms. Healy, Palepu, Ruback (1992) JFE. N. Takezawa (ICU) 2002

  7. Post-merger management • Although the market could react positively at the announcement of the merger, it remains to be seen whether the new management team can implement the merger plan effectively. • Recently, emphasis is placed on post-merger management/integration. N. Takezawa (ICU) 2002

  8. Empirical Evidence in Japan • Acquiring firm shareholders gain at announcement of the merger. On average there is 1.2% positive abnormal return and 5.4% return over the duration of the takeover. • Relationships with the Main bank seem to lead to such positive returns. • Main banks provide efficient monitoring? • Kang, Shivdasani, Yamada, J. Finance, 2001. N. Takezawa (ICU) 2002

  9. Classification • Horizontal Mergers: same industry (firms competing in the same line of business) • Vertical Mergers: merging of firms in related business - different steps of production (airline and travel agency) • Conglomerate Mergers: Firms not related to each other N. Takezawa (ICU) 2002

  10. Merger Activity in the US • 1890-1904: Merger for Monopoly. JP Morgan engineered US Steel. DuPont, American Tobacco, Eastman Kodak, etc. • Sherman Act 1890, Clayton Act 1914 • 1916-1929: Merger to Oligopoly • Post WWII to early 1970’s: Conglomerates • 1980’s: Market for corporate control. N. Takezawa (ICU) 2002

  11. N. Takezawa (ICU) 2002

  12. 1980’s • Leveraged Buy Outs – LBO • Borrow to acquire a company. • Management Buy Outs – MBO • Management bids to buy the company (or part of company). • Nabisco Case: the largest acquistion at the time ($25 billion US dollars) N. Takezawa (ICU) 2002

  13. The LBO • LBO approach allows for small groups of people such as management or a small “company” such as KKR to buy large corporations. • Places pressure on management. • Could this serve as a monitoring device, to make sure management is maximizing the value of the firm? N. Takezawa (ICU) 2002

  14. Restructuring and Governance in Japan • Kang and Shivdasani (JFE, 1997) Empirically examine 92 Japanese firms experiencing substantial decline in operating performance over the period 1986-1990. • Does the potential of becoming a takeover target force corporates to restructure in Japan? • What mechanism governs restructuring efforts in Japan according to Kang and Shivdasani? N. Takezawa (ICU) 2002

  15. Cont. • Reasons for performance decline: approx. 60% due to unfavorable FX rates. • Operational response: asset contraction actions 23% and layoffs 17.4%. Asset contraction activities include closing plants, asset sales, withdrawing from a line of business, etc. • Layoffs at 17.4% is still smaller than that for the US at 31.6%. N. Takezawa (ICU) 2002

  16. Cont. • “Firms with greater equity ownership by the main bank are more likely to engage in contraction policies by the use of asset sales, plant closures, and discontinuation of operations. In addition, greater ownership by the main bank also increases the probability of employee layoffs and the removal of outside directors from the board.” p.31 N. Takezawa (ICU) 2002

  17. RJR Nabisco • Oct. 28, 1988 CEO, Ross Johnson, formed a group to buy RJR Nabisco (MBO). Price at $75 per share (market price at about $56). • Four days later Kohlberg, Kravis, Roberts (KKR) made bid. $90 per share. • KKR bid at $109 and Johnson group at $112. N. Takezawa (ICU) 2002

  18. What makes for an attractive LBO Target? • Steady Growth. Relatively mature industry. • Relatively unaffected by business cycles. • Low CAPEX. Less R&D required. • Low debt level. • “Fixable” problems. Create value and then sell (break-up value). N. Takezawa (ICU) 2002

  19. Board “Requests” • Price (per share). • Possible future stake (equity) in company gains. • Stakeholders. Welfare of stakeholders (community) as its “fiduciary” duty. N. Takezawa (ICU) 2002

  20. KKR $109 ($81 in cash) Convertibles in about 25% of “new” equity Keep both the Tobacoo and Food divisions Guarantee severance payments and benefits for layoffs MBO $112 ($84 in cash) Convertibles into about 15% into “new” equity Keep only the Tobacoo division Give equity to 15,000 employees Comparing Bids N. Takezawa (ICU) 2002

  21. KKR Drexel Burnham Lambert Merrill Lynch Morgan Stanley Wassertein Perella MBO Shearson Lehman Brothers Salomon Banking Community N. Takezawa (ICU) 2002

  22. Bankers Trust Chase Mahn Citi Japanese Banks LOAN RJR KKR Shareholders Drexel Merrill MS Wasserstein N. Takezawa (ICU) 2002

  23. Boone Pickens, Mesa, and Cities: Take Over Defense • Mesa Petroleum (Boone Pickens) began buying shares of Cities Services. May 1982. • Cities Services responded by 1) increasing outstanding shares (issuing) and 2) bidding for Mesa (Pac Man defense). Firms bid for each other twice. • Gulf Oil bid for Cities Services thus rescuing Cities from Mesa (White Knight) • Eventually, Occidental took over Cities Services • Gulf was bought out by Chevron (Mesa again the in the bidding game) N. Takezawa (ICU) 2002

  24. Koito Case • Koito – large manufacturing firm in the Toyota “keiretsu.” • Boone Pickens purchase/acquires large percentage of Koito shares. • Pickens wants to be on Board since largest shareholder. N. Takezawa (ICU) 2002

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