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Chapter 1 Introduction To M A

This document provides an introduction to mergers, acquisitions, and other forms of corporate restructuring. It outlines the key motivations for mergers and acquisitions such as strategic realignment and synergy creation. However, empirical findings show that 50-80% of mergers and acquisitions fail to create value for bidder shareholders. Common reasons for failure include overpayment, slow integration, and poor strategic rationale. The document also discusses alternative strategies to mergers and acquisitions for increasing shareholder value.

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49 views17 pages

Chapter 1 Introduction To M A

This document provides an introduction to mergers, acquisitions, and other forms of corporate restructuring. It outlines the key motivations for mergers and acquisitions such as strategic realignment and synergy creation. However, empirical findings show that 50-80% of mergers and acquisitions fail to create value for bidder shareholders. Common reasons for failure include overpayment, slow integration, and poor strategic rationale. The document also discusses alternative strategies to mergers and acquisitions for increasing shareholder value.

Uploaded by

appu.sreeraj6580
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Introduction to Mergers,

Acquisitions, & Other


Restructuring Activities
Course Layout
M & A a n d O th e r
R e s t r u c t u r in g
A c t iv it ie s

M &A M & A P ro c e s s D eal A lt e r n a t iv e


E n v ir o n m e n t S t r u c t u r in g R e s t r u c t u r in g
S t r a t e g ie s

M o t iv a t io n s B u s in e s s & P u b lic & D iv e s t it u r e s ,


fo r M & A A c q u is it io n P la n s P r iv a t e C o m p a n y S p in - O ffs , &
V a lu a t io n C a rv e -O u ts

C om m on Takeover S e a rc h T h ro u g h F in a n c ia l B a n k ru p tc y &
T a c t ic s a n d C lo s in g A c t iv it ie s M o d e lin g L iq u id a t io n
D e fe n s e s T e c h n iq u e s

A lt e r n a t iv e
S tru c tu re s

T a x & A c c o u n t in g
Is s u e s
Course Learning Objectives
• Define what corporate restructuring is and why it occurs
• Identify commonly used valuation techniques
• Describe how corporate restructuring creates/destroys value
• Identify commonly used takeover tactics and defenses
• Develop a highly practical “planning based” approach to
managing the M&A process
• Identify challenges and solutions associated with each phase of
the M&A process
• Describe advantages and disadvantages of alternative M&A
deal structures
• Describe how to plan, structure, and manage JVs, partnerships,
alliances, licensing arrangements, equity partnerships,
franchises, and minority investments
Current Chapter Learning Objectives
• Primary objective: What corporate restructuring is
and why it occurs
• Secondary objective: Provide students with an
understanding of
– Commonly used M&A vocabulary
– M&A as only one of a number of strategic options
for increasing shareholder value
– M&A activity in an historical context
– The primary motivations for M&A activity
– Key empirical findings
Alternative Forms of Corporate
Restructuring
• Restructuring Activity • Potential Strategy
– Corporate Restructuring – Redeploy Assets
• Balance Sheet • Mergers, Break-Ups, &
Spin-Offs
• Assets Only • Acquisitions,
divestitures, etc.
– Financial Restructuring – Increase leverage to lower
(liabilities only) cost of capital or as a
takeover defense
– Operational Restructuring – Divestitures, widespread
employee reduction, or
reorganization
Building a Common Vocabulary

• Statutory Merger • Combination of 2 firms with


only one surviving

• Subsidiary Merger • Target becomes a subsidiary


of the parent
• Two or more firms merge to
• Consolidation
form a new company
• Purchase of a target firm,
• Acquisition controlling interest, or specific
target assets
• Buyout financed primarily by
• Leveraged Buyout debt
• One firm with investments in a
• Holding Company number of operating
companies
Alternative Ways of
Increasing Shareholder Value
• Solo venture (AKA “going it alone” or “organic growth”)
• Partnering (Marketing/distribution alliances, JVs,
licensing, franchising, and equity investments)
• Mergers and acquisitions
• Minority investments in other firms
• Asset swaps
• Financial restructuring
• Operational restructuring
Merger Waves
• Horizontal Consolidation (1897-1904)
• Increasing Concentration (1916-1929)
• The Conglomerate Era (1965-1969)
• The Retrenchment Era (1981-1989)
• Age of the Strategic Megamerger
(1992-2000)
Horizontal Consolidation (1897-1904)

• Spurred by
– Drive for efficiency,
– Lax enforcement of antitrust laws
– Westward migration, and
– Technological change
• Resulted in concentration in metals,
transportation, and mining industry
• M&A boom ended by 1904 stock market crash
and fraudulent financing
Increasing Concentration (1916-1929)

• Spurred by
– Entry of U.S. into WWI
– Post-war boom
• Boom ended with
– 1929 stock market crash
– Passage of Clayton Act which more
clearly defined monopolistic practices
The Conglomerate Era (1965-1969)
• Conglomerates employ financial engineering to boost
their share price
– High P/E firms acquired lower P/E target firms
– Combined firms’ share price increased if investors
applied the higher P/E to the combined firms’ EPS
– Number of high-growth, low P/E firms declined as
conglomerates bid up their prices
– Higher purchase price for target firms and increasing
leverage of conglomerates brought era to a close
The Retrenchment Era (1981-1989)

• Strategic U.S. buyers and foreign multinationals


dominated first half of decade
• Second half dominated by financial buyers
– Buyouts often financed by junk bonds
– Drexel Burnham provided market liquidity
• Era ended with bankruptcy of several large
LBOs and demise of Drexel Burnham
Age of the Strategic Megamerger
(1992-2000)
• Dollar volume of transactions reached record in each
year between 1995 and 2000
• Purchase prices reached record levels due to
– Soaring stock market
– Consolidation in many industries
– Technological innovation
– Benign antitrust policies
• Period ended with the collapse in global stock markets
and worldwide recession
Motivations for M&A
• Strategic realignment
– Technological change
– Deregulation
• Synergy
– Economies of scale/scope
– Cross-selling
• Diversification (Related/Unrelated)
• Financial considerations
– Acquirer believes target is undervalued
– Booming stock market
– Falling interest rates
• Market power
• Ego/Hubris
• Tax considerations
Empirical Findings
• Around transaction announcement date, abnormal
returns average
– 20% for target shareholders in “friendly” transactions;
30-35% in hostile transactions
– Bidders’ shareholders earn 2-3%
• 50-80% of M&As fail to outperform their industry peers or
earn their cost of capital during the 3-5 years following
closing
• No evidence that alternative strategies to M&As are likely
to be more successful
Primary Reasons for M&As Frequent
Failure to Meet Expectations
• Overpayment due to over-estimating
synergy

• Slow pace of integration

• Poor strategy
Things to Remember
• Motivations for acquisitions:
– Strategic realignment
– Synergy
– Diversification
– Financial considerations
– Hubris
• Common reasons M&As fail to meet expectations
– Overpayment due to overestimating synergy
– Slow pace of integration
– Poor strategy
• M&As typically reward target shareholders far more than bidder
shareholders
• Success rate of M&A not significantly different from alternative ways
of increasing shareholder value

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