1 / 30

mergers and acquisitions http://www.dell.com/Learn/us/en/uscorp1/secure/acq-dell-silverlake

Chapter 23. mergers and acquisitions http://www.dell.com/Learn/us/en/uscorp1/secure/acq-dell-silverlake. Definition.

gusty
Download Presentation

mergers and acquisitions http://www.dell.com/Learn/us/en/uscorp1/secure/acq-dell-silverlake

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 23 mergers and acquisitionshttp://www.dell.com/Learn/us/en/uscorp1/secure/acq-dell-silverlake

  2. Definition • The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

  3. Business valuation The five most common ways to valuate a business are • asset valuation, • historical earnings valuation, • future maintainable earnings valuation, • relative valuation (comparable company & comparable transactions), • discounted cash flow (DCF) valuation

  4. Chapter Outline • The Legal Forms of Acquisitions • Accounting for Acquisitions • Gains from Acquisition • The Cost of an Acquisition • Defensive Tactics • Some Evidence on Acquisitions • Divestitures and Restructurings

  5. Legal Forms of Acquisitions • Merger or consolidation • Acquisition of stock • Acquisition of assets

  6. Merger versus Consolidation • Merger • One firm is acquired by another • Acquiring firm retains name and acquired firm ceases to exist • Consolidation • Entirely new firm is created from combination of existing firms

  7. Stock Acquisition (1) • A firm can be acquired by purchasing voting shares of the firm’s stock • Tender offer – public offer to buy shares • Circular bid – takeover bid communicated to shareholders by direct mail • Stock exchange bid – takeover bid communicated to shareholders through a stock exchange

  8. Stock Acquisition (2) • No stockholder vote required • Can deal directly with stockholders, even if management is unfriendly • May be delayed if some target shareholders hold out for more money – complete absorption requires a merger

  9. Acquisition Classifications • Horizontal – both firms are in the same industry • Vertical – firms are different stages of the production process • Conglomerate – firms are unrelated

  10. Takeovers • Control of a firm transfers from one group to another • Possible forms • Acquisition • Proxy contest • Going private (LBO vs. MBO)

  11. Alternatives to Merger • Strategic alliance = agreement between firms to cooperate in pursuit of a joint goal • Joint venture = an agreement between firms to create a separate, co-owned entity established to pursue a joint goal

  12. Accounting for Acquisitions • The Purchase Method • Assets of acquired firm are written up to fair market value • Goodwill is created – difference between purchase price and estimated fair market value of net assets

  13. Gains from Acquisition • Synergy • Revenue enhancement • Cost reductions • Tax gains

  14. Synergy • The whole is worth more than the sum of the parts • Synergies should create enough benefit to justify the cost

  15. Revenue Enhancement • Marketing gains • Advertising • Distribution network • Product mix • Strategic benefits • Market power

  16. Cost Reductions • Economies of scale • Ability to produce larger quantities while reducing the average per unit cost • Economies of vertical integration • Coordinate operations more effectively • Reduced search cost for suppliers or customers • Complimentary resources

  17. Taxes • Tax losses • Unused debt capacity • Surplus funds • Asset write-ups • ∆FA = ∆EBIT + ∆Depreciation - ∆ Tax - ∆Capital Requirements

  18. Reducing Capital Needs • Firms may be able to manage existing assets more effectively under one umbrella • Some assets may be sold if they are not needed in a combined firm

  19. Diversification • Diversification, in and of itself, is not a good reason for a merger • Stockholders can diversify their own portfolio cheaper than a firm can diversify by acquisition

  20. EPS Growth • Mergers may create the appearance of growth in earnings per share • If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth • In this case, the P/E ratio should fall because the combined market value should not change

  21. The Cost of Acquisition: Cash Acquisition • The NPV of a cash acquisition is • NPV = VB* – cash cost • Value of the combined firm is • VAB = VA + (VB* - cash cost) • VB* = VB + ∆V

  22. Valuation Formulas • 1. VA* = VA + VT + S - C • 2. Price per share = VA*/number of shares • 3. PT = price per share*number of shares + C (for stock and mixed offers) • 4. Target shareholders’ gain from transaction = PT - VT • 5. VA* - value of the new company • VA – value of the acquirer • VT – value of the target company • S – synergies • C – cash paid • PT – price paid for the target company • VT – pre-merger value of the target company • PT = price per share*number of shares

  23. The Cost of Acquisition: Stock Acquisition • Value of combined firm • VAB = VA + VB + V • Cost of acquisition • Depends on the number of shares given to the target stockholders • Depends on the price of the combined firm’s stock after the merger • A B • Price $20 $10 • # sh 25 10 • Market value 500 100

  24. Cash vs. Common Stock • Cash VB* = VB + ∆V = 100 +100 NPV = 200 -150 =50 VAB = VA + (VB* - cost) = 500+ 200 – 150 =550 Share price = 550/25 = 22 Stock acquisition VAB = VA + VB + V =700 $150 in stock A is 7.5 shares (25+7.5=32.5 sh) 700/32.5=21.54 a share Cost of acquisition is 7.5*21.54=161.55 NPV = 38.45

  25. Cash vs. Common Stock • Sharing rights • Taxes • Control

  26. Defensive Tactics(1) • Corporate charter • Establishes conditions that allow for a takeover • Supermajority voting requirement • Targeted repurchase (Greenmail) • Standstill agreements • Exclusionary offers • Poison pills • Share rights plans

  27. Defensive Tactics (2) • Leveraged buyouts (LBO) • Other defensive tactics • Golden parachutes • Crown jewels • White knight

  28. Evidence on Acquisitions • Shareholders of target companies tend to earn excess returns in a merger • Shareholders of target companies gain more in a tender offer than in a straight merger • Target firm managers have a tendency to oppose mergers, thus driving up the tender price

  29. More Evidence • Shareholders of bidding firms do not earn much excess return in either a tender offer or a straight merger • Anticipated gains from mergers may not be achieved • Bidding firms are generally larger, so it takes a larger dollar gain to get the same percentage gain • Management may not be acting in stockholders best interest • Takeover market may be competitive • Announcement may not contain new information about the bidding firm

  30. Divestitures and Restructurings • Divestiture = sale of assets, operations, or divisions to a third party • Equity carve-out • Spin-off • Split-up

More Related