M&A and Investment Banking

M&A and Investment Banking Lecture 3.1 – Mergers & Acquisitions

Mergers & Acquisitions • Introduction to M&A • Global M&A Waves • EMEA M&A Market • M&A in the Emerging Markets

FirmGrowth & Range of Transactions • Organic Growth • (i.e.: investing in technology, new products, new people) • Bolt-on Acquisitions • (i.e.: within the realm of a company’s existing operations) • Alliances and Joint Ventures • Strategic Acquisitions Organic Internal Investment: “make” Merger or Acquisition Diversify or Expand the Business Minority Investment Inorganic Outbound Joint Venture Strategic Alliance Inbound JV Contractual Relationship Business Strategy Sale of Minority Interest Spin-off Carve-out Restructure, Redeploy Assets, or Exit from Business Split-off Tracking Stock LBO/go private Divest Third-party Sale Liquidate Financial Restructuring Total Source: Bruner, Perella, 2004. Applied Mergers and Acquisitions. Wiley Finance: Ch. 6

M&A Strategic Objectives • Economies of Scale • In an acquisition of one company and a competitor, economies of scale can be achieved where the acquisition results in lower average manufacturing costs or by elimination of redundancies in the organization • Time to Market • A variant on economies of scale is extending a product line and/or enhancing a particular business function - for example, sales and marketing • Combination of Customer and Supplier • A company buys a supplier, or a supplier acquires a customer; e.g. in order to reduce the risk of dependence on an outside supplier or to eliminate the risk of price gouging • Product Line Diversification • Diversify a business into other areas to change its risk profile • Defensive Acquisitions • The acquirer may be facing a severe downturn in its business, and the acquisition will alleviate the cause of the severe downturn • New and Better Management • An acquirer may think it can enhance the value of an acquired business by replacing its management • Acquisition of a Control Premium • The rationale is based on the belief that the public trading markets misprice publicly held stocks because the value of the stock in the market is that of the individual holder who is not in a control position. Bidders may bid for companies simply to capture the control premium inherent in the stock, which they then can cash out by selling the control premium to another purchaser

Global M&A Waves “Mergers are an integral part of market capitalism and we have had a continuous wave of merger activity […] since the evolution of the industrial economy in the latter part of the 19th Century.” (Lipton, 2006) M&A Waves Global M&A Historical Trends Overview Source: Thomson SDC from 1980 through 1995; Dealogic, from 1996 through 2012; Lipton, 2006. Merger Waves in the 19th, 20th and 21st Centuries Note: M&A volumes refer to announced deals.

M&A: Have we hit the bottom? US CEO Confidence Index US Non-Financial Corporate Sector: Cash/Total Assets 12-month Forward P/E – S&P 500 US 10-year Treasury yield vs. Aggregate Corporate Bond yield Source: Bloomberg, Credit Suisse/IDC, Datastream

EMEA M&A Activity Overview ‘01 – ‘14 YTD M&A Volume by Financing Source ($bn) Source: Thomson Reuters as at 20 August 2014

EMEA M&A Activity Overview (Cont’d) ‘01 – ‘14 YTD M&A Volume Domestic vs. Cross-border Transactions ($bn) ‘01 – ‘14 YTD M&A Volume Friendly vs. Hostile Transactions ($bn) Source: Thomson Reuters as at 20 August 2014

EMEA Recent Key Trends Observed

Southern Europe(1)M&A Activity - Overview ‘01 – ‘14 YTD M&A Volume by Financing Source ($bn) Source: Thomson Reuters as at 20 August 2014 Notes: (1) Including: Greece, Italy, Portugal and Spain

Southern Europe(1)M&AActivity - Overview (Cont’d) ‘01 – ‘14 YTD M&A Volume Domestic vs. Cross-border Transactions ($bn) ‘01 – ’14 YTD M&A Volume Public vs Private Transactions ($bn) Source: Thomson Reuters as at 20 August 2014 Notes: (1) Including: Greece, Italy, Portugal and Spain

Southern Europe(1)M&A- Key Themes • Higher uncertainty due to political / financial instability, resulting in sharper decline of M&A activity • However, M&A activity will be driven by: • Domestic consolidation to better deal with worsened economic climate especially in the financial institutions sector (e.g. cajas de ahorro cold mergers, NBG proposed merger with Alpha Bank) • Banks increasing focus on core business and disposal of non-core assets • Large corporates seeking geographical diversification due to domestic macro concerns (e.g. Telefonica in Brazil, Santander in UK, Brazil and Mexico, BBVA in Turkey) • Privatizations back on the agenda: Greece (€50bn privatization programme over 5/7 years); Spain (e.g. AENA, lotteries etc.); Italy? • Market volatility making IPO exits for sponsors more difficult/uncertain and sale to trade/PE buyers more frequent (e.g. Moncler, Rhiag, Mivisa) • Family owned companies evaluating trade-offs of independence vs being part of larger group when assessing whether they can remain competitive at global level and continue to growth (e.g. Bulgari) • On the other hand, however: • Increased weight of inbound cross-border acquisitions (especially in 2011) may lead to higher levels of protectionism (e.g. Parmalat, Edison) • Bank financing remains tight, making PE acquisitions more complex Notes: (1) Including: Greece, Italy, Portugal and Spain

Italy M&A Activity - Overview ‘01 – ‘14 YTD M&A Volume by Financing Source ($bn) Source: Thomson Reuters as at 20 August 2014

Italy M&A Activity - Overview (Cont’d) ‘01 – ‘14 YTD M&A Volume Domestic vs. Cross-border Transactions ($bn) ‘01 – ‘14 YTD M&A Volume Public vs Private Transactions ($bn) Source: Thomson Reuters as at 20 August 2014

Italy M&A - Key Themes • Italy M&A activity expected to grow, notwithstanding difficult economic backdrop • Corporate activity mainly driven by need to restructure / deleverage • Finmeccanica disposals; Enel / Enersis restructuring; FonSai; FI / CNH • PE activity expected to gain pace as market conditions stabilise • Exits: Sisal (Apax/Permira/Clessidra); Cerved (Bain/Clessidra) • Family-owned businesses more open to PE support to navigate difficult environment • Buy side appetite remains high as buyers try to pick opportunities • Emerging markets buyers actively looking for targets providing brand/technology/distribution • On-going deleveraging of the Italian Government balance sheet • SACE, Fintecna and Simest

Emerging Markets M&AActivity - Overview ‘01 – ‘14 YTD M&A Volume by Financing Source ($bn) Source: Thomson Reuters as at 20 August 2014

Emerging Markets M&A Activity – Overview (Cont’d) ‘01 – ‘14 YTD M&A Volume Domestic vs. Cross-border Transactions ($bn) ‘01 – ‘14 YTD M&A Volume Friendly vs Hostile Transactions ($bn) Source: Thomson Reuters as at 20 August 2014

Developed vs. Emerging Markets Deals Breakdown Developed Market Acquirers of Emerging Market Targets by Emerging by Developed Developed Market Acquirers of Emerging Market Targets by Developed by Emerging Source: KPMG, March 2014. The Emerging Markets International Acquisition Tracker (EMIAT)

Emerging Giants’ Approach to M&A Source: Nirmalya Kumar, 2009. How Emerging Giants Are Rewriting the Rules of M&A. Harvard Business Review

M&A and Investment Banking Lesson 3.2 – M&A Regulatory Context

M&A Regulatory Context • Corporate Governance • Tender Offer Rules • Bankruptcy Procedures

M&A Approval Process Signing of Merger Agreement Closing • Board of Directors • Shareholder General Meeting • Regulatory Approval (e.g. Antitrust) • Shareholder Approval • Proxy Voting Source: Miller, E.L.J., 2008. Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. Wiley, Ch.1

Corporate Governance in M&AFiduciary Duties of the Board of Directors (US) • First Standard of Review: Business Judgment Rule • Duty of Loyalty: directors are required to make decisions in the interest of shareholders and avoid conflicts with other parties (US case: Guth vs. Loft) • Duty of Care: directors have to be well informed and diligent in considering all aspects of issues before them, including relevant materials and the opinions of advisers (US case: Smith vs. Van Gorkom) • Second Standard of Review: Enhanced Scrutiny • In certain instances (such as hostile tender offers and auctions) some business problems may warrant a higher level of scrutiny - two tests (US case: Unocal Corporation vs. Mesa Petroleum Co.) • Third Standard of Review: Entire Fairness • The highest level of court intervention occurs when an actual conflict of interest affects a majority of directors approving a transaction. The directors must show that the challenged action was entirely fair to the corporation and its shareholders: fair in terms of fair dealing and fair price (US case: Weinberger v. UOP Inc.) • The possible need to establish entire fairness motivates boards to obtain fairness opinions from competent outside experts

Corporate Governance in M&AFiduciary Duties of the Board of Directors (Italy) • Duty of managing the company with diligence and to be properly informed • Directors’ duty to disclose their interests in individual transactions • Duty to pursue the company’s purposes • Business Judgment Rule : In general, directors cannot be held liable for losses or damages resulting from business decisions when such decisions do not also constitute a violation of any of the directors’ obligations.

Securities Law and Takeover Regulation Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 27

Securities Law and Takeover Regulation (Cont’d) Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 27

International Comparison of Securities Law and M&A • Reasonable similarity in corporate disclosure obligations and shareholder rights • One important difference is in employee rights • In the European Union, employees retain protections against layoffs and restructurings • In the U.S., there are few such protections • Other important difference is in treatment of minority shareholders in a takeover • In the U.S., the standard practice is to conduct a two-step strategy in which the buyer acquires voting control, and then completes a full merger with the target through a freeze-out of remaining target shareholders (typically this leaves the minority with shares in the buyer, or other securities) • The EU and UK require a full mandatory bid which leaves no minority (these countries prohibit a two-step transaction) • A different approach is defined also for the takeover defense measures • The target in the U.S. is permitted a wide range of evasive maneuvers including asset sales, recapitalization, and restructuring • In the EU and UK, a target may seek alternative bids from other firms, but otherwise may take no other actions to frustrate the bid Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 27

Disclosure Thresholds under Italian Law • Under Italian law, different disclosure thresholds apply for actual and potential shareholdings and consolidated long positions in Italian listed companies • Disclosure needs to be provided to Consob (Italian Stock Exchange regulator) and the issuer within 5 business days after reaching, exceeding or falling below the relevant threshold, as applicable • The review of the relevant scenario with the support of a legal counsel is advisable Relevant Disclosure Thresholds Actual Shareholdings (“PartecipazioniRilevanti”) • Ownership of the company’s share capital represented by voting shares • Shareholders are required to disclose shareholdings when exceed 2% or when reach or exceed 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 66.6%, 75%, 90% and 95% of the company’s voting share capital • Disclosure is required also when shareholdings are reduced below the thresholds indicated above Potential Shareholdings (“PartecipazioniPotenziali”) • Potential ownership of the company’s share capital represented by financial instruments or agreements that give the holder, upon his exclusive initiative by virtue of a legally binding agreement, the unconditional right, or the discretion, to purchase the underlying shares (instruments / agreements with physical delivery) • Disclosure required when potential holding reaches, exceeds or falls below the 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% thresholds Consolidated Long Position (“PosizioneLungaComplessiva”) • Consolidated long position is equal to the sum of: i) actual shareholdings, ii) potential shareholdings (instruments / agreements physically settled) and iii) all cash settled derivatives (to the extent underlying shares represent more than 2% of the company voting capital) • Disclosure required when potential holding exceeds or falls below the 10%, 20%, 30%, and 50% thresholds

Disclosure Thresholds under Italian Law (Cont’d) Internal Dealing Disclosure Requirements • Additional disclosure requirements exist for “relevant parties” under the internal dealing regulation • The definition of “relevant parties” includes, among others, a shareholder holding 10% or more of the voting share capital of a listed company and any shareholder deemed in control of the company, irrespective of its voting shares ownership • “Relevant” parties are required to disclose to Consob any acquisition, sale, subscription or swap of shares or financial instruments linked to shares (e.g. derivative instruments, convertible bonds) within the 15th day of the month following the one when shares were bought, sold, subscribed or swapped, as applicable

Tender Offer Rules in Italy Method and Types of Takeover in Italy: • A voluntary public takeover offer is the most frequent, whereby a bidder offers to acquire all the target's securities that are not already held by that bidder. Alternatively, subject to certain conditions, the takeover offer may be aimed at purchasing at least 60% of the target's securities with voting power • A bidder can also acquire a controlling interest in the target company. Once the bidder has purchased more than 30% of the target's securities, a mandatory public offer must be made to acquire all of the target's remaining securities • The mandatory public offer rules do not apply if voting power is below 30% after an acquisition, although other rules, such as the requirement to declare substantial shareholdings, do apply Source: Legislative decree no. 58 of 24 February 1998 – Consolidated Law on Finance (Testounicodelledisposizioni in materia di intermediazionefinanziaria) and Consob Regulation concerning the regulation of issuers

Tender Offer Rules in Italy: Mandatory Public Offer • Mandatory Public Offer Triggers: • A public offer must be made by any person who has acquired securities of an Italian listed company whereby it: • Increases its voting power to more than 30% of the target's securities • Holds more than 30%, but less than 50%, of the target's securities and increases its voting power by more than 3% over a twelve-month period • If certain conditions for offers concur at least 60% of each class of the securities of the target are not met (see next slide “voluntary public offers”) • Exemptions from Mandatory Offers: • One or more security holders collectively exercise the majority voting rights at an ordinary shareholders’ meeting of the target • The threshold is exceeded because of the transfer of securities among related entities • The threshold is exceeded as a consequence of the exercise of pre-emptive or conversion rights • The threshold is exceeded as a result of subscribing capital increases after notifying both CONSOB and the market that these are aimed at rescuing a company in financial crisis • The triggering threshold is exceeded as a result of mergers or demergers, approved by the shareholders of the target company on the basis of actual, justified industrial needs • The 30% threshold is exceeded by no more than 3% and the acquirer undertakes to sell the excess shareholding within 12 months without exercising voting rights on the excess securities Source: Legislative decree no. 58 of 24 February 1998 – Consolidated Law on Finance (Testounicodelledisposizioni in materia di intermediazionefinanziaria) and Consob Regulation concerning the regulation of issuers

Tender Offer Rules in Italy: Voluntary Public Offer • Additional Exemption from Mandatory Offers • In addition to the exemptions from mandatory offers,the acquisition of more than 30% of the target's securities with voting power does not trigger the obligation to launch a mandatory public offer if that threshold is exceeded as a result of a public offer launched on 60% or more of the securities of each existing class of securities with voting power of the target company (offertapubblicadiacquistopreventiva) and other conditions are met: • The majority of the target company security holders have approved the public offer (excluding the bidder and security holders who hold an absolute or relative majority holding greater than 10% and persons acting in concert with the bidder) • The bidder (directly or indirectly and persons acting in concert) has not acquired a stake representing more than 1% of the target company in the preceding 12 months (including securities acquired under forward contracts maturing at a later date) • CONSOB confirms that a mandatory public offer need not be made after receiving satisfactory evidence of compliance with the two preceding conditions Source: Legislative decree no. 58 of 24 February 1998 – Consolidated Law on Finance (Testounicodelledisposizioni in materia di intermediazionefinanziaria) and Consob Regulation concerning the regulation of issuers

Tender Offer Rules in Italy: Eliminating the Minority after a Takeover • The Right of Sell-out • This right is available to security holders where the bidder following a bid for all of the target company’s securities acquires not less than 95% of them. Under these circumstances and at the request of any security holder, the bidder must acquire his/her securities at a fair price • This right is also available to the holders of a company’s securities where a person holds more than 90% of the relevant securities and the same person has not floated the minimum amount of the same securities on a regulated market to ensure their regular trading, within 90 days of the end of the time allowed for acceptance of the bid. The security holders can require all the persons holding more than 90% of the relevant securities to purchase their securities at a fair price • Where the target company has issued more than one class of securities, the right of sellout can be exercised only in the class in respect of which the applicable 95% or 90% threshold has been reached • The price shall take the same form as the consideration offered in the bid or shall be in cash at the request of the security holder where: • the offer was mandatory; or • the offer was voluntary and the bidder reached or passed the threshold of 90% of the target company securities as a consequence of that offer • In any other circumstance, the price shall be set by CONSOB which will take into account the securities prices over the last six months and the consideration offered in the takeover bid Source: Legislative decree no. 58 of 24 February 1998 – Consolidated Law on Finance (Testounicodelledisposizioni in materia di intermediazionefinanziaria) and Consob Regulation concerning the regulation of issuers

Tender Offer Rules in Italy: Eliminating the Minority after a Takeover (Cont’d) • The Right of Squeeze-out • This right is available to the bidder following a bid made for all of the securities of the target company and the bidder has acquired not less than 95% of them. The bidder has the right to require all the holders of the remaining securities of the target company to sell him/her those securities at a fair price • Where the target company has issued more than one class of securities, the right of sell-out can be exercised only in the class in which the 95% threshold has been reached • If the bidder wishes to exercise the right of squeeze-out he/she shall do so within three months of the end of the time allowed for acceptance of the bid and disclose in the offer document his/her intention to exercise that right • The price shall take the same form as the consideration offered in the bid or shall be in cash at the request of the security holder where: • The offer was mandatory; or • The offer was voluntary and the bidder reached or passed the threshold of 90% of the target company securities as a consequence of that offer • In any other circumstance, the price shall be set by CONSOB which will take into account the securities prices over the last six months and the consideration offered in the takeover bid Source: Legislative decree no. 58 of 24 February 1998 – Consolidated Law on Finance (Testounicodelledisposizioni in materia di intermediazionefinanziaria) and Consob Regulation concerning the regulation of issuers

Bankruptcy Procedures in Italy: The Ordinary Bankruptcy Proceedings (Fallimento) • Voluntary or Involuntary (by creditors or public prosecutors) petition for bankruptcy • After the filing of a bankruptcy petition, a debtor loses control over its assets (debtor-not-inpossessionproceeding) and a bankruptcy court-appointed receiver administers the proceeding under the supervision of the bankruptcy court, which also appoints a creditors’ committee (consisting of three to five creditors) • An Ordinary Bankruptcy Proceeding terminates with the distribution to the creditors of the proceeds derived from liquidated bankruptcy estate assets and proceeds from any legal actions, according to the order of priority imposed by law: • Secured claims (e.g., claims secured by a pledge or mortgage) • Administrative claims (e.g., claims due for the management of the bankruptcy and the continuation of the enterprise) • Priority claims (e.g., claims for salaries, social security contributions and taxes) • Unsecured claims • Subordinated claims (e.g., equity and certain intercompany loans) • Alternative: ConcordatoFallimentare. Can beproposed at any time by any party-in-interest, except for the debtor. May encompass any kind of transaction to effectuate the liquidation of a debtor (e.g., debt-equity swap, sale of assets, business assignments) • Special Liquidation Procedure for Financial Institution and Insurance Companies: Compulsory Administrative Liquidation Source: Manganelli, P., 2010. The Evolution of the Italian and U.S. Bankruptcy Systems—A Comparative Analysis. Journal Of Business & Technology Law

Bankruptcy Procedures in Italy:Extraordinary Administration • Can only be filed by an insolvent company meeting the specific requirements provided by Italian law (either by Prodi-bis Law or by the Marzano Law) • Debtor not-in-possession proceeding: one or more extraordinary commissioners are appointed by the Ministry of Economic Development to administer the proceeding and manage the company’s business under the supervision of a designated judge and the Ministry • The extraordinary commissioner must file a reorganization plan to be implemented either through a financial restructuring or an assets sale • The extraordinary commissioner may also propose a composition (similar to a plan of reorganization) with creditors (i.e.: Concordato) • Creditors are divided into classes, subject to different treatments and to cram-down • The Concordato may expressly contemplate, among other things, mergers, business assignments, debt-equity swap transactions, and issuance of securities for the reorganization of the debtor business • This instrument has been successfully used and modeled upon the Parmalat case for the first time Source: Manganelli, P., 2010. The Evolution of the Italian and U.S. Bankruptcy Systems—A Comparative Analysis. Journal Of Business & Technology Law

Bankruptcy Procedures in the US • Chapter 7: Court-supervised liquidation proceeding (similar to Italian Fallimento) • Chapter 11: debtor-in-possession proceeding for the reorganization of commercial enterprises and repayment of creditors through a court-approved plan of reorganization • Chapter 15: rules for cross-border insolvency proceedings • Chapter 11 • Designed to preserve the going-concern value of business and allow a debtor to continue its business while restructuring its debt and/or operations • Financial institutions are not eligible to file for Chapter 11 and are usually liquidated through other federal or state wind-up laws • In Chapter 11, a debtor remains as a debtor in possession and continues to manage its own business in the ordinary course, provided that any transaction made outside of the ordinary course of business, any major settlement, or any payment on a pre-petition claim must be approved by the bankruptcy court. A trustee is generally not appointed • A debtor in possession in Chapter 11 ultimately seeks to confirm a plan of reorganization • Prepackaged Plan of Reorganization: a potential debtor proposes, negotiates, and solicits votes on a reorganization plan before the filing of a Chapter 11 petition Source: Manganelli, P., 2010. The Evolution of the Italian and U.S. Bankruptcy Systems—A Comparative Analysis. Journal Of Business & Technology Law

Resources • Bower, J. L., 2001. Not All M&A Are Alike - and That Matters. Harvard Business Review, March, p. 93 • Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 36, 26-29 • Fleuriet, 2008. Investment banking explained, McGraw-Hill: chapters 14, 15 • KPMG, March 2013. The Emerging Markets International Acquisition Tracker (EMIAT) • Kumar, N. ,2009. How Emerging Giants Are Rewriting the Rules of M&A. Harvard Business Review • Liaw, 2011. The Business of Investment Banking: A Comprehensive Overview, Wiley: chapter 7 • Lipton, M., 2006. Merger Waves in the 19th, 20th and 21st Centuries. The Davies Lecture, Osgoode Hall Law School, York University • Miller, E.L.J., 2008. Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. Wiley

M&A and Investment Banking