CHAP 1

INTRODUCTION to M&As
- In the fifth merger wave (the 1990s) there was a dramatic growth in the volume of deals in Europe • European and U.S. deal
volume was comparable. In the fourth wave (1980s) M&A was more of a U.S. phenomenon
- Dramatic growth in the fifth merger wave. Still deal volume is well below the United States and Europe. Partially caused by
deregulation in economies such as China, Japan, and Korea as well as dramatic growth in economies such as China and India
- New type of bidder became important in the fifth wave and the 2000s. Example: Mittal acquisitions of steel companies
across the world
Buyer: acquire, bidder
Seller: Acquirce/ Acquired company, target  Buyer have to pay a higher price to purchase another company?

Japan made up the largest market share: japan là developed country, M&A lớn nhất, low IR. Nên phải tìm kiếm cơ hội đầu tư
nước ngoài.
Organic vs M&A growth: mở từ đầu rồi đi lên từ đầu, MA faster, mua lại công ty cũ rồi expand nó ra
Trust: group has monopoly position  anti-trust law create (luật chống độc quyền – luật cạnh tranh công bằng)
Vi phạm luật này sẽ bị gov reject merger.

Vertical mergers are combinations of companies that have a buyer-seller relationship. .  create a relationship of customer
and producer  efficiency, reduce the cost
A horizontal merger is a merger or business consolidation that occurs between firms that operate in the same industry.
A conglomerate merger occurs when the companies are not competitors and do not have a buyer-seller relationship. 
diversification to reduce the risk
IPO ≠ LBO: chuyển 1 công ty tư nhân thành public, lbo di mua công ty bằng nợ vay và chuyển nó lại thành tư nhân.

RECENT TRENDS
- Growth of the emerging markets acquirers
- Growth of foreign sovereign fund investments
- Growth in the popularity of SPACs

FOREIGN SOVEREIGN WEALTH FUNDS

- Large pools of government-controlled capital
- Two of the largest are
 Abu Dhabi: $900 billion in assets. Abu Dhabi has 9% of world’s oil and 0.02% of world’s population • 2007 –
invested $7.5 billion in Citigroup
 Singapore: $300 billion in assets
- They have made large investments in Citigroup, Merrill Lynch, and UBS
- Investments have thus far been minority investments – not seeking control

SPECIAL PURPOSE ACQUISITION CORPORATIONS (SPACS)

- These are companies that are formed to acquire other companies
- They raise capital such as in an IPO
- The shareholders do not know at the time they invest what the acquisition target is going to be
- They are sometimes called “Blank Check Corporations”
 They are an alternative to private equity funds
 Approval of Deal: Shareholders get to vote to approve the proposed acquisition
 Disposition of Funds: Also the bulk of the money raised (i.e., 80%) has to be spent on the acquisition
 Time Frame: If they dont find a shareholder-approved deal within 1½ to 2 years, the money must be returned to investors
 Popularity: Used to be lowly regarded investments but recently have become quite popular
 Founders and Management Compensation: Management gets 20% of the company – and they invest little – this gives
management an incentive to do a deal – not necessarily the best deal – they do not get fee until a deal is done
Black Spade: blank jack com – com with no assets, listed their share on stock market
⟹ reverse take over: công ty nhỏ sát nhập công ty lớn

LEVERAGED BUYOUTS - where debt is used to take a public company private

Stock Market Valuation in the 1990s
- Helped provide some of the fuel for the deal frenzy in the fifth wave. Was more of a speculative bubble than the product of
good corporate management
- The high valuations made it more difficult for directors to challenge CEOs of companies whose stock rose rapidly. CEOs
often took credit for this even when they had little to do with it

TERMINOLOGY
Merger of Equals – two companies of equal size
- Usually one company ends up being the dominant one
- Example: Daimler merger of equals with Chrysler (1998). Here Daimler acquired Chrysler • Kerkorian sued and said not a
merger of equals but an acquisition and if so he wanted his premium. He lost this suit

Statutory merger – legal name given to mergers

- Specifically means that it is a merger pursuant to state laws in which the acquirer is incorporated
- The normal process is an agreed upon deal between the two companies

Subsidiary merger – a merger of two companies in which the target becomes a subsidiary
- Example: GM acquired EDS and made it a subsidiary and issued Class E shares. The same happened with Hughes Aircraft
(Class H shares)

Tender Offer – where a bidder makes an offer directly to the target company’s shareholders • Usually done in hostile deals
Consolidation – where two equal-sized companies combine and a whole new company is created • Example: Burroughs and
Sperry combined and formed Unysis

Advantages of subsidiary mergers: May allow the buyer to keep the target as a separate subsidiary corporation and insulate the
parent company from the target’s liabilities

ACQUISITION AND DETERMINING THE VALUE OF A DEAL

Acquisition: usually one company is bigger than the other. When valuing deals, the smaller company is assumed to be the one
acquired and the source of the value placed on the deal

Pre-merger value of A = PVA = $100 million

Pre-merger Value of B = PVB = $75 million
Synergistic Gains = $75 million
 Value of new merged firm = PVAB = $250 million
 Combined value of individual firms = PVA + PVB = $175 million

FAIRNESS OPINIONS
-This is an opinion issued by a firm on the value of the company being acquired
-The evaluations are sometimes conducted by investment bankers
 This can create an issue of conflict of interest as they may have a stake in the deal: ➢Advisory fees ➢Financing fees
 Their opinion may be appended to the SEC filings
- To prevent this from being an issue, firm may want to hire an independent valuation firm

ASSET PURCHASES (Alternative to Stock Purchase)

Important Issue: Treatment of liabilities
- Note: Corporation could sell off all assets and then pay a liquidating dividend and dissolve the corporation
Liabilities: Must be satisfied

Liabilities and Acquisitions: Buyer assumes both the assets and liabilities of the seller
- Successor liability. Attempts to avoid such liabilities that may give rise to a lawsuit for a Fraudulent Conveyance of Assets

De Facto Merger: Another way the buyer may assume the seller’s liabilities unintentionally. This can occur where an asset
purchase is later treated like a merger
- Unions and Successor liability
- Unions may try to maintain the prior owner’s contract through the principle of successor liability
- New buyer may require renegotiation of union agreements as a precondition to an acquisition of a troubled seller

HOLDING COMPANIES
- Parent company owns sufficient stock in target to control target
- Usually can be achieved for less than 51%. May be as low as 10%
- An alternative to 100% acquisition
Advantages:
- Lower cost – do not have to buy 51% or 100%
- No control premium
- May get control without soliciting target shareholder approval

Disadvantages:
- Triple taxation of dividends
 If parent owns 80% or more dividends are exempt from taxation
 If own less than 80% then 80% of dividends are exempt from tax
- Easier to disassemble if Justice Department finds: - Antitrust - Anticompetitive Problems

INVESTMENT COMPANY ACT OF 1940

- Law requires the regulation and registration of investment companies with the SEC
- Law sets standards whereby mutual funds and investment vehicles operate
- It regulates: • Promotion • Reporting requirements • Pricing of securities • Allocation of assets within portfolio
- Type of investments that are exceptions to the Act: Treasury securities, Open-end vs closed-end investment companies

JOINT VENTURES
- Alternative to a merger or acquisition
- May allow the bidder to accomplish the goals it has in mind without incurring the costs of a complete acquisition of the
target
- These goals may be:
• Enter a new market • Develop a new product
• Lock up a source of supply • Preempt competitors from achieving a certain goal
- Biotech companies use modern drug development techniques
- Pharmaceutical companies are able to manufacture and market the new drugs while biotechnology companies develop
them – doing the R&D
- The pharmaceutical manufacturers may also provide the R&D capital

STRATEGIC ALLIANCES
Advantages:
- May be more flexible than joint ventures
- They come in wide varieties
- May enable companies to pursue goals without a large financial commitment
Disadvantages:
- Greater opportunities for opportunistic behavior by merger partners
- Could lose valued know-how

Common in the airline industry. International air carriers join their networks together so as to be able to offer many
destinations in a seamless manner. One flight can have different flight numbers – different ones used by each carrier

M&A PHASES
1. Initial access: The seller prepares the necessary documents and identifies the characteristics of the target for divestment or
raising new capital for the business; • The buyer screens & approaches the target company that satisfies investment criteria
2. Structuring the deal: How to conduct the transaction; buy existing equity capital or invest in new capital; enterprise
valuation and value of shares offered; ...
3. Agreement in principle: The two sides negotiate basic terms (not legally binding) as a basis for conducting transactions
after the due diligence process. MOU(ghi nhớ sơ bộ)
4. Due diligence (DD): a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its
assets and liabilities and evaluate its commercial potential, e.g. financial position, tax liability, business operations, etc
5. Purchase and sales contract: The two sides negotiate detailed terms and sign a formal sale and purchase contract
6. Implementation: Implement the necessary legal and compliance procedures to pay the transaction value and transfer
ownership of shares from the seller to the buyer.
CHAP 2
FUNDAMENTALS OF M&A
THE BASIC FORMS OF ACQUISITIONS
There are three basic legal procedures that one firm can use to acquire another firm:
- Merger or Consolidation.
- Acquisition of Stock.
- Acquisition of Assets.
Agency problem: 1. PA (type 1) 2.PP (type 2) đo bằng tỷ lệ sở hữu của cổ đông lớn.

MERGER VERSUS CONSOLIDATION

Merger: One firm is acquired by another. Acquiring firm retains name and acquired firm ceases to exist.
Consolidation: Similar to a merger, except an entirely new firm is created from the combination of existing firms.
Advantage: legally simple.
Disadvantage: must be approved by stockholders of both firms.

ACQUISITIONS
A firm can be acquired by another firm or individual(s) who purchases voting shares of the firm’s stock.
Tender offer: public offer to buy shares.
Stock acquisition
- No stockholder vote is required (u can accumulate the stock on market, need time, money and ìnavorable price
or purchase the stock)
- 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.
Asset acquisition - Acquire most or all of the assets (not liabilities) of a selling firm. Không cần mua stock có thể
mua asset của công ty để mua được công ty.
Classifications
- Horizontal: both firms are in the same industry.
- Vertical: firms are in different stages of the production process. Forward: merge with a customer or distribution,
backward: merge w a supplier
- Conglomerate: firms are unrelated.

VARIETIES OF TAKEOVERS
Proxy contest: tranh giành uỷ quyền (adv: less cost, disadv: high probability of being betrayed
Takeovers: an act of assuming control of sth, especially the buying out of 1 company by another.

SYNERGY - cộng hưởng (positive value added to revenue created by a transaction)

Motivations for Acquisitions
- In efficient markets, M&A should only occur when two firms are worth more combined than as separate entitie
- Concept of "Synergy" - the whole is worth more than the sum of the parts (2 + 2 = 5!)
- Some mergers create synergies because the acquiring firm can either cut costs or use the combined assets more effectively
- This is generally a good reason for a merger
- Examine whether the synergies create enough benefit to justify the cost paid

Most acquisitions fail to create value for the acquirer. The main reason why they do not lies in failures to integrate
two companies after a merger.
- Intellectual capital often walks out the door when acquisitions are not handled carefully.
- Traditionally, acquisitions deliver value when they allow for scale economies or market power, better products
and services in the market, or learning from the new firms.
- Firm A is contemplating acquiring Firm B. The synergy from the acquisition is
Synergy=V AB−(V A +V B)
- The synergy of an acquisition can be determined from the standard discounted cash flow model:
T
∆CF t
Synergy=∑ t
t=1 (1+ R)
∆ CF = Incremental cash flow là dòng tiền tăng thêm ròng – giá trị của merge, dìng tiền của synergy
Value added ⟹ PV , ∆ CF = CFpost-mergers – CFpremerger
Synergy is the pPV of the incremental cash flows the acquision expects to generate.
∆ CF t=∆ Revt −∆Costs t −∆ Taxest −∆Capital requirements t
Sources of synergy
- Revenue Enhancement
- Cost Reduction: Replacement of ineffective managers, economy of scale or scope.
- Tax Gains: Net operating losses, Unused debt capacity, Use of surplus funds
- Reduced Capital Requirements.

CALCULATING VALUE
Avoiding Mistakes.
- Do not ignore market values.
- Estimate only incremental cash flows.
- Use the correct discount rate.
- Do not forget transactions costs.

TWO FINANCIAL SIDE EFFECTS OF ACQUISITIONS

Earnings Growth: 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 (that is, an accounting illusion)
Diversification: Shareholders who wish to diversify can accomplish this at much lower cost with one phone call to
their broker than can management with a takeover.

A COST TO STOCKHOLDERS FROM REDUCTION IN RISK

The Base Case: If two all-equity firms merge, there is no transfer of synergies to bondholders, but if…
Both Firms Have Debt: The value of the levered shareholder’s call option falls.
- How Can Shareholders Reduce their Losses from the Coinsurance Effect? Retire debt premerger and/or increase
postmerger debt usage.
The NPV of a Merger: Typically, a firm would use NPV analysis when making acquisitions. The analysis is
straightforward with a cash offer, but it gets complicated when the consideration is stock.

CASH ACQUISITION
- The NPV of a cash acquisition is: NPV = (VA + ∆ V ¿ - Cash cost = VB* - Cash cost
- Value of the combined firm is: VAB = VA + (VB* - Cash cost)
- Often, the entire NPV goes to the target firm
- Remember that a zero-NPV investment may also be desirable.
Pros: quick and simpler transaction. The price is fixed. Anti-dilution (suy giảm cổ phiếu)
Cons: cash-out. Tax consequence.
Cổ đông của công ty đi mua sẽ hưởng hết synergy. Cũng như chịu toàn bộ rủi ro. Cash acq – bear all the risk, take
all the gains

STOCK ACQUISITION
- Value of combined firm: VAB = VA + VB + ∆ V
- Cost of acquisition
o Depends on the number of shares given to the target stockholders.
 o Depends on the price of the combined firm’s stock after the merger.
Pro: Tax advantage (deferral) – if they dont sell the share they dont pay tax. Risk will be shared bwt acquirer and
acquirces. No cash-out
Cons: the price is not fixed. Dilution. Gains are shared

Cash or stock
Considerations when choosing between cash and stock.
- In an overvalued (bubble) market better to pay with shares as all parties share in the burden of a stock price
correction (especially so if u think ur shares are more valued than the targets)
- The more confident u are of the value to be created by the synergistic benefits the more u will be inclined to pay
w cash because target stockholders don’t participate in stock price appreciation.
o Sharing gains: target stockholders do not participate in stock price appreciation with a cash acquisition.-
o Taxes: cash acquisitions are generally taxable.
o Control: cash acquisitions do not dilute control.
o Capital structure: if paying w cash from a debt issue
Friendly versus Hostile Takeovers
- In a friendly merger, both companies’ managements are receptive
- In a hostile merger, the acquiring firm attempts to gain control of the target without their approval.
• Tender offer. • Proxy fight.

THE COST OF AN ACQUISITION

NPV = - Cost + PV. Cost thành cash/stock cost estimate by exchange/swap cost.
- The net incremental gain

Should A acquire B – consider the NPV higher than 0 so they should purchase.
Consider NPV of stock/cash acq to choose the higher
Swap ratio: 1 share của acquiree đổi được bao nhiêu share của acquirer

DEFENSIVE TACTICS (Preventive measure)

- Corporate charter. - Poison pills (share rights plans).
o Classified board (that is, staggered elections). - Targeted repurchase (also called “greenmail”).
o Supermajority voting requirement. - Standstill agreements.
- Golden parachutes. - Leveraged buyouts.

More (Colorful) Terms

- Crown jewel. - Scorched earth policy. - Fair price provision.
- White knight. - Shark repellent. - Dual class capitalization.
- White squire. - Bear hug. - Countertender offer.

Have Mergers Added Value?

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
Shareholders of bidding firms earn a small excess return in a tender offer, but none in 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.
THE TAX FORMS OF ACQUISITIONS
If it is a taxable acquisition, selling shareholders need to figure their cost basis and pay taxes on any capital gains. If
it is not a taxable event, shareholders are deemed to have exchanged their old shares for new ones of equivalent
value.

ACCOUNTING FOR ACQUISITIONS

Purchase Method.
- Assets of the acquired firm are reported at their fair market value.
- Any excess payment above the fair market value is reported as “goodwill.”
- Historically, goodwill was amortized. Now it remains on the books until it is deemed “impaired.”

GOING PRIVATE AND LEVERAGED BUYOUTS

- The existing management buys the firm from the shareholders and takes it private.
- If it is financed with a lot of debt, it is a leveraged buyout (LBO).
- The extra debt provides a tax deduction for the new owners, while at the same time turning the previous
managers into owners.
- This reduces the agency costs of equity.

DIVESTITURES
- Divestiture: company sells a piece of itself to another company.
- Spin-off: company creates a new company out of a subsidiary and distributes the shares of the new company to
the parent company’s stockholders.
- Equity carve-out: company creates a new company out of a subsidiary and then sells a minority interest to the
public through an IPO.
- Tracking stock: company creates a separate stock to track the performance of a division.

Cash cost 37m

Stock cost
Value of target to the acquirer = Value of the target firm + PV of the incremental CF
= 27m + 1.3m : 11% = 38.81m
Equity cost = 35% (62m + 38.81m) = 35.28m
Vp

NPV = Market value of Target + Synergistic Benefits – Acquisition cost

Synergy = 1.3m / 0.11 = 143000
NPV cash = 38.81 – 37 = 1.81m
NPV stock = 38.81 – 35.2835 = 3.5m
 stock purchase

CASE FB ACQUIRED WHATSAPP

ABT the deal

2.
3. The acquiree company: whatsapp: - why did they acquired whatsapp when they already have messenger
- wa very small
2 founder của whatsapp không muốn advertisement, muốn dùng app phải trả phí thường niên mà không bị quảng cáo. 2013
millions sign up per day
WA become a verb in netherlands – its popularity, just like google become a verb
Vì sao lại chọn WA,
i. very condense ownership. If u can convince 2 founder u can acquire company.
4, fb users went down 2010-2013 mà renvenue from quảng cáo  they want to expand market to other regions, where WA are
popular ⟹ they offer acquired to WA. At first WA denied, they didnt want to lose business philosophy, after 2-3 years, họ
không kiếm được nhiều lợi nhuận và dưới pressure của FB, họ đồng ý bán. FB promised that they acquired but they can run
their business as a unit độc lập, subsidiary
Supplementary – complementary – congeneric
4.2 motive: increase the user base of FB.

5. when FB acquired they offer 2 ways

- after search in price, sau khi WA manager thành FB manager họ vẫn nhận thêm 1 phần của FB  tiền tổng tăng.
 win win deal, after merger cả 2 đều higher revenue