MERGERS, LBOS,

DIVESTITURES, AND
BUSINESS FAILURES
 WHAT ARE MERGERS, LBO, AND
DIVESTITURES?
• Mergers, LBOs, and Divestitures are some of the
most common forms of corporate restructuring.
• Corporate Restructuring is any activities
involving expansion or contraction of a firm’s
operations or changes in assets or financial
(Ownership) structures.
 MERGERS

• Mergers are the combination of two or more

firms, in which the resulting firm maintains the
identity of one of the firms, usually the larger
one.
 CONSOLIDATION

• Consolidations are similar to mergers the

difference is, consolidations combine two or
more firms to create a new firm rather than
maintain one of the firm’s identity.
 HOLDING COMPANY

• Holding companies are corporations that have

voting control of one or more other corporations.
Most companies require a holding company a
range from 10% to 20% of their shares of
common stock outstanding for them to have
voting control.
 ACQUIRING COMPANIES VS
TARGET COMPANIES
• Acquiring Companies are the companies who
are trying to acquire the other company in a
merger transaction.
• Target Companies are the companies that
acquiring companies are pursuing in a merger
transaction.
 FRIENDLY VS HOSTILE TAKEOVERS
• Friendly Takeovers is a merger transaction
endorsed by the target firm’s management, approved
by its stockholders, and easily consummated.
• Hostile Takeovers is a merger transaction that the
target firm’s management does not support, forcing
the acquiring company to try to gain control of the
firm by buying shares in the marketplace.
 STRATEGIC VS FINANCIAL MERGER

• Strategic Merger is a merger transaction

undertaken to achieve economies of scale.
• Financial Merger is a merger transaction
undertaken with the goal of restructuring the
acquired company to improve its cash flow and
unlock its unrealized value.
 MOTIVES FOR MERGING
• Growth or • Tax Considerations/ Tax
Diversification Loss Carryforward
• Synergy • Increased Ownership
• Fund Raising Liquidity

• Increased Managerial • Defense against

Skill or Technology Takeover
 TYPES OF MERGERS

• Horizontal Mergers – is when two or more

firms in the same industry engages in a merger
transactions
• Vertical Mergers – is when one company
merges with a company which is in its supply
chain
 TYPES OF MERGERS

• Congeneric Merger - A merger in which one

firm acquires another firm that is in the same
general industry but is neither in the same line
of business nor a supplier or customer.
• Conglomerate Merger - A merger combining
firms in unrelated businesses.
 LBO AND DIVESTITURES

• Leverage Buy Outs (LBOs) is an acquisition

technique involving the use of a large amount of
debt to purchase a firm.
• Divestitures is the selling of some of a firm’s
assets or operating unit for various strategic
reasons.
 LBO AND DIVESTITURES

• Operating Unit is a part of a business, such as a

plant, division, product line, or subsidiary, that
contributes to the actual operations of the firm.
• Spin-off is a form of divestiture in which an
operating unit becomes an independent company
through the issuance of shares in it, on a pro rata
basis, to the parent company’s shareholders.
 LBO AND DIVESTITURES

• Breakup value is the value of a firm measured as

the sum of the values of its operating units if each
were sold separately.
 MERGERS AND
ACQUISITION FINANCING
 M&A FINANCING

• M&A Financing involves raising funds to

finance the mergers and acquisitions
transactions.
• Companies can use Equity Financing, Debt
Financing, or Mixed Financing.
PAYMENT MODES FOR
M&A TRANSACTIONS
 STOCK SWAP

• Stock Swap is a type of equity financing that

uses equity (Stocks) as to acquire the shares of
the other company.
 EXAMPLE
GREEN ARCHER CORPORATION WANTS TO GAIN CONTROL OF
BLUE EAGLE CORPORATION.
• BLUE EAGLE CORP. HAS TOTAL EARNINGS BEFORE THE MERGER
OF $200K AND 50K OUTSTANDING SHARES. MEANWHILE, GREEN
ARCHER CORP. HAS TOTAL EARNINGS OF $500K AND 200K
OUTSANDING SHARES. IF BOTH SHARES COST $30 EACH,
• IS GREEN ARCHER CORP. CORRECT IN THINKING THIS MERGER
WILL BE BENEFICIAL FOR IT?
 USE OF DEBT AND PREFERRED
STOCKS
• A firm can also use debt financing and preferred
financing.
• Use of preferred financing could be
advantageous, because it lessens the possible
acquisition of voting control of the target
company
 DEFERRED PAYMENT PLAN (DPP)

• The acquiring firm agrees to make a specified

initial payment of cash or stock. If it can maintain
or increase earnings to pay additional
compensation.
 EXAMPLE
C CORP HAS ANNUAL PROFITS OF $475K, $550K, $650K, AND $500K
IN THE PAST 4 YEARS RESPECTIVELY. AFTER A HOSTILE TAKEOVER,
W CORP GOT IT EARLY THIS YEAR IT HAD A BASE-EARNING OF
$400K.
AT THE TIME OF THE TAKEOVER, C CORP’S SHAREHOLDERS WERE
GIVEN 300K W CORP. STOCKS. IF THE MARKET VALUE OF W CORP'S
STOCK IS $30 PER SHARE ITS P/E RATIO IS 8, AND IT HAD NO
CHANGE IN SHARE PRICE,
HOW MANY ADDITIONAL SHARES SHOULD IT GIVE C COMPANY'S
SHAREHOLDERS?
 CASH

• THE PRICE TO BE OFFERED USUALLY DEPENDS

ON THE VALUE OF THE FIRM. THEREFORE, IT IS
IMPORTANT THAT THE FIRM IS EVALUATED
FIRST BEFORE THE ACQUIRING COMPANY
DECIDES ON A SPECIFIC PURCHASE PRICE.
 EXAMPLE
• THRIVE INC. IS ANALYZING THE ACQUISITION OF KING LTD. FOR
$1M. KING LTD. HAS AN EXPECTED CASH FLOW OF $100K PER
ANNUM FOR THE NEXT 5 YEARS, AND $150K FOR THE NEXT 15
YEARS AFTER THAT.
• KING LTD. ALSO HAS A TAX LOSS CARRY FORWARD AMOUNTING
TO $50K THAT CAN BE USED IMMEDIATELY BY THRIVE INC. UPON
TAKING OVER. ASSUMING A 40% TAX RATE IT WILL SHIELD THAT
PERCENTAGE OF PROFITS FROM TAXES ONCE THE MERGER IS
DONE,
• A SYNERGISTIC BENEFIT OF $10K ADDITION TO THE CASH FLOW
PER ANNUM WILL BE CREATED AS WELL.
 PURCHASE PRICE

• For M&A knowing the purchase price of an

enterprise is crucial. We have to know how to
estimate the value of a company.
• A way to know the Total Value of an Enterprise is
by using the EBITDA Multiple.
 EBITDA MULTIPLE

• A financial ratio that compares a company’s

Enterprise Value to its annual EBITDA (can be
either a historical figure or a forecast/estimate).
This multiple is used to determine the value of a
company and compare it to the value of other,
similar businesses.
 EBITDA MULTIPLE

𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒
𝐸𝐵𝐼𝑇𝐷𝐴 𝑀𝑈𝐿𝑇𝐼𝑃𝐿𝐸 =
𝐸𝐵𝐼𝑇𝐷𝐴
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒
= ሺ𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 + 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡
 EXAMPLE

• ABC Wholesale Corp has a Market Cap of $69.3B as

of March 1, 2018, a cash balance of $0.3B, and debt of
$1.4B as of December 31, 2017. For the full year of
2017, its EBITDA was reported at $5.04B and the
current analyst consensus estimate for 2018 EBITDA
is $5.5B. Find the historical and forward-looking
multiples.
 PURCHASE PRICE AND TEV/
TRANSACTION VALUE

• For example, a potential buyer has proposed a

transaction value, or TEV, of $30 million based on
their expectation of EBITDA of $5 million. Such a
transaction implies an EBITDA multiple of 6 times.
 Balance Sheet (000)
Assets Liabilities
Cash ₱1,000 Debt ₱10,000

Operating Assets ₱35,000 Operating ₱15,000

Liabilities
Total Asset ₱36,000 Total Liabilities ₱25,000

Shareholders ₱11,000
Equity
TOTAL L&E ₱36,000
 BUSINESS FAILURES

• Is an unfortunate event that causes a firm to cease its

operations.
• Insolvency is a type of business failure wherein a
firm is unable to pay its liabilities as they come due
• Bankruptcy is when the stated value of its liabilities
exceeds the fair market value of its assets
 MAJOR CAUSES OF BUSINESS
FAILURES
• No Market Demand. • Ignoring its product reviews.
• Ran out of cash. • Lack of Leadership.
• Products Causing Interface • Lack of Focus.
Fatigue • Failure Change .
• Not the right team to run the • Poor Marketing.
firm
• Impatient.
• Outcompeted.
THE END