Advanced Program

MERGERS & ACQUISITIONS

MsC. Minh Ha Luong
 Course outline
Lecture Topic Readings
1 Introduction to M&A Chapter 1
2 Case study: Microsoft acquires Nokia in the ongoing smartphone wars
3 The Regulatory Environment of M&A Chapter 2
4 Case study: Regulators approve merger of American and US Airways to
create largest global carrier
5 Common Takeover Tactics and Antitakeover Defenses Chapter 3
6 Case study: Dell goes private amid a battle of the billionare titans
7 The M&A Process (10 phases) Chapter 4, 5
8 Case study: Facebook buys messaging startup WhatsApp for $21.8 bil
9 1st Midterm Test
10 Post-closing Integration Chapter 6
Case study: Has Procter & Gamble fully recovered from its 2005
11 acquisition of Gillette?
12 M&A valuation Chapter 7
13 Case study: Hewlett-Packard outbids Dell to acquire 3Par
14 Case study: The merger of Ha Tien 1 and Ha Tien 2
15 Alternative Exit and Restructuring Strategies Chapter 16
16 2nd Midterm Test and Course Review
 Objectives
On completion of this unit, students must archive:
• An analytical framework of major fields in a M&A deal including regulatory
environment of M&A, business valuation and structuring a deal
• Understanding the importance of due diligence in M&A process and applying to
analyse the components of DD activities
• Understanding how to make an effective M&A deal with synergy valuation and
applying these knowledge on creating the synergy value
• Understanding and applying the business valuation approaches in specific M&A case
• Understanding and distinguishing the differences among payment methods of the
deal
• The abilities in team work, presentation skills and critical thinking
 Assessment

• Participation: 10%
• Mid-term test 1: 15%
• Mid-term test 2: 15%
• Final exam: 60%
 Materials

• Lecturer’s handout
• Text book: Mergers, Acquisitions, and Other Restructuring
Activities, 8th Edition – Donald M. DePamphilis. Elsevier Inc, 2015.
• Readings (if available): will be provided before each lecture

Lecturer:
- Mrs. Minh-Ha Luong: halm@hvnh.edu.vn
MERGERS & ACQUISITIONS

CHAPTER 1

INTRODUCTION TO M&A
 Main content

1. Introduction

2. Definitions

3. Motivations of M&A

4. Transaction characteristics

5. History of M&A

6. Alternative takeover strategies

7. Participants in the M&A process

 1. Introduction
• Mergers and acquisitions (M&A) are complex, involving many parties.
• Mergers and acquisitions involve many issues, including
• Corporate governance.
• Form of payment.
• Legal and contractual issues.
• Regulatory approval.
• M&A analysis requires the application of tools to evaluate the M&A decision.

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 Example of a M&A:
AMR and U.S. Airways

November
July 2012 2012
• U.S. Airways
proposes • AMR and • Details of the
merger to U.S. Airways • U.S. Airways proposes
• AMR creditors merger are
bankrupt begin merger merger, with its worked out.
encourage AMR to
AMR. discussions. shareholders owning • Merger filed
merge with
30% of the new
another airline, with the FTC
company.
instead of under Hart-
emerging from September Scott-Rodino
April 2012
bankruptcy alone. 2012 Act.

February 2013
2. Mergers and acquisitions Definitions
Merger with Consolidation Acquisition

Company
Company
A
X

Company Company
C X
Company Company
B Y

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 Mergers and Acquisitions Definitions
• Merger: In a merger, the boards of directors for 2 companies approve the
combination and seek shareholders' approval. After the merger, the
acquired company ceases to exist and becomes part of the acquiring
company.

• Acquisition: In an acquisition, the acquiring company obtains the majority

stake in the acquired firm, which does not change its name or legal
structure.

• Consolidation: A consolidation creates a new company. Stockholders of

both companies must approve the consolidation, and subsequent to the
approval, they receive common equity shares in the new firm.
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 Mergers and Acquisitions Definitions
• Parties to the acquisitions:
• The target company (or target) is the company being acquired.
• The acquiring company (or acquirer) is the company acquiring the
target.
• Classified based on endorsement of parties’ management:
• A hostile takeover is when the target company board of directors
objects to a takeover offer.
• A friendly transaction is when the target company board of
directors endorses the merger or acquisition offer.

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 Mergers and Acquisitions Definitions
Classified by the relatedness of business activities of the parties to the
combination:
Type Characteristic Example

Horizontal merger Companies are in the same line of business, Walt Disney Company buys Lucasfilm
often competitors. (October 2012).

Vertical merger Companies are in the same line of Google acquired Motorola Mobility Holdings
production (e.g., supplier–customer). (June 2012).

Conglomerate merger Companies are in unrelated lines of Berkshire Hathaway acquires Lubrizol
business. (2011).

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 3. Motives for merger
• Synergy
• Growth
Creating Value • Increasing market power
• Acquiring unique capabilities or resources
• Unlocking hidden value

• Exploiting market imperfections

• Overcoming adverse government policy
Cross-Border
Mergers • Technology transfer
• Product differentiation
• Following clients

• Diversification
• Bootstrapping earnings
Dubious Motives • Managers’ personal incentives
• Tax considerations

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 Example: Bootstrapping earnings
Bootstrapping earnings is the increase in earnings per share as a result of a merger, combined with the
market’s use of the pre-merger P/E to value post-merger EPS.

Assumptions:
• Exchange ratio: One share of Company One for two shares of Company Two
• Market applies pre-merger P/E of Company One to post-merger earnings.

Company One
Company One Company Two Post-Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 $1.20
P/E 20 10 20
Price per share $20 $10 $24
Market value of stock $2,000 million $500 million $3,000 million

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 Example: Bootstrapping earnings
  $100 $50
Weighted P/ E=  ( $150 ) (
  ×  20   + 
$150 )
  ×  10 = 16.67
Assumptions:
• Exchange ratio: One share of Company One for two shares of Company Two
• Market applies weighted average P/E to the post-merger company.
Company One
Company One Company Two Post-Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 $1.20
P/E 20 10 16.67
Price per share $20 $10 $20
Market value of stock $2,000 million $500 million $2,500 million

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 Motives and the Industry’s Life Cycle
• The motives for a merger are influenced, in part, by the industry’s
stage in its life cycle.
• Factors include
• Need for capital.
• Need for resources.
• Degree of competition and the number of competitors.
• Growth opportunities (organic vs. external).
• Opportunities for synergy.

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Mergers and the Industry Life Cycle
Industry Life
Cycle Stage Industry Description Motives for Merger Types of Mergers
Pioneering  Industry exhibits  Younger, smaller companies may sell  Conglomerate
development substantial themselves to larger companies in  Horizontal
development costs mature or declining industries and look
and has low, but for ways to enter into a new growth
slowly increasing, industry.
sales growth.  Young companies may look to merge
with companies that allow them to
pool management and capital
resources.
Rapid  Industry exhibits  Explosive growth in sales may require  Conglomerate
accelerating high profit margins large capital requirements to expand  Horizontal
growth caused by few existing capacity.
participants in the
market.

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Mergers and the Industry Life Cycle
Industry Life
Cycle Stage Industry Description Motives for Merger Types of Mergers
Mature  Industry  Mergers may be undertaken to achieve  Horizontal
growth experiences a drop economies of scale, savings, and  Vertical
in the entry of new operational efficiencies.
competitors, but
growth potential
remains.
Stabilization  Industry faces  Mergers may be undertaken to achieve  Horizontal
and market increasing economies of scale in research,
maturity competition and production, and marketing to match
capacity the low cost and price performance of
constraints. other companies (domestic and
foreign).
 Large companies may acquire smaller
companies to improve management
and provide a broader financial base.

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Mergers and the Industry Life Cycle
Industry Life
Cycle Stage Industry Description Motives for Merger Types of Mergers
Deceleration  Industry faces  Horizontal mergers may be undertaken  Horizontal
of growth and overcapacity and to ensure survival.  Vertical
decline eroding profit  Vertical mergers may be carried out to  Conglomerate
margins. increase efficiency and profit margins.
 Companies in related industries may
merge to exploit synergy.
 Companies in this industry may acquire
companies in young industries.

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 4. Transaction characteristics

Form of the • Stock purchase

Transaction • Asset purchase

• Cash
Method of • Securities
Payment
• Combination of cash and securities

Attitude of • Hostile
Management • Friendly

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 Form of an Acquisition
• In a stock purchase, the acquirer provides cash, stock, or combination
of cash and stock in exchange for the stock of the target firm.
• A stock purchase needs shareholder approval.
• Target shareholders are taxed on any gain.
• Acquirer assumes target’s liabilities.
• In an asset purchase, the acquirer buys the assets of the target firm,
paying the target firm directly.
• An asset purchase may not need shareholder approval.
• Acquirer likely avoids assumption of liabilities.

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 Method of Payment
• Cash offering
Merger Transactions, 2005
• Cash offering may be cash from existing acquirer
balances or from a debt issue.
• Securities offering Cash only

• Target shareholders receive shares of common Stock only

stock, preferred stock, or debt of the acquirer.
Cash and
• The exchange ratio determines the number of securities
securities received in exchange for a share of
target stock. Other
securities
• Factors influencing method of payment:
• Sharing of risk among the acquirer and target
shareholders.
• Signaling by the acquiring firm.
• Capital structure of the acquiring firm.
Based on data from Mergerstat Review, 2006. FactSet
Mergerstat, LLC (www.mergerstat.com).

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 Mindset of Managers
Friendly merger: Offer made through the target’s board Hostile merger: Offer made directly to the target
of directors shareholders

Approach target management. Types

• Bear hug
• Tender offer
Enter into merger discussions. • Proxy fight

Perform due diligence.

Enter into a definitive merger agreement.

Shareholders and regulators approve.

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 Hostile vs. Friendly mergers
• The classification of a merger as friendly or hostile is from the
perspective of the board of directors of the target company.
• A friendly merger is one in which the board negotiates and accepts an
offer.
• A hostile merger is one in which the board of the target firm attempts
to prevent the merger offer from being successful.

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 5. History of M&A (M&A waves)
• The First Wave (1897 - 1904): Horizontal Consolidation
• The Second Wave (1916 - 1929): Increasing Concentration
• The Third Wave (1965 - 1969): The Conglomerate Era
• The Fourth Wave (1981 - 1989): The Retrenchment Era
• The Fifth Wave (1992 - 1999): The Age of the Strategic Megamerger
• The Sixth Wave (2003 - 2008): The Rebirth of Leverage

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6. Alternative takeover strategies
 7. Participants in the M&A process
 Providers of Specialized Services: Investment Banks, Lawyers,
Accountants, Proxy Solicitors, Public Relations Firms
 Regulators
 Institutional Investors and Lenders:
• Insurance, Pension, and Mutual Funds
• Commercial Banks
• Hedge, Private Equity, and Venture Capital Funds
• Sovereign Wealth Funds
• Angel Investors
 Activist Investors
• Mutual Funds and Pension Funds
• Hedge Funds and Private Equity Firms 28
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 M&A IN VIETNAM

• History of M&A waves in Vietnam

• Characteristics of M&A activities in Vietnam emerging market
• Motives in Vietnam’s M&A transactions
 History of Vietnam’s M&A activity

• Begin in early 1990 (e.g: Da Lan – Colgate Palmolive; P/S –

Unilever…)
• Could be divided to some periods:
• 1990 – 2004
• 2005 – 2007
• 2007 – 2011
• 2012 – present
 Characteristics of Vietnam’s M&A activity

1. Most of deals are under $5 million

2. Most of buyers are foreigners
3. Large proportion of successful deals
4. Most of deals are friendly takeover

Source: Vuong, Q. H., Tran, T. D., & Nguyen, T. C. H. (2009). M&A Market in Vietnam's Transition Economy. Journal
of Economic Policy and Research, 5(1), 1-54.
 Motives in Vietnam’s M&A deals

• Entering potential markets in Vietnam

• The completion of regulatory framework:
• Implementation of many Laws including Enterprise Law 2005, Foreign Direct
Investment Law 2006, Law on Securities 2006, Law on Competition 2004, Law
on credit institutions 2010, etc.
• The development of Vietnam’s economy and securities market
 Characteristics of Vietnam’s M&A activity

The dataset comprises of 252 entries for four categories of M&A :

• Foreign firms acquiring foreign firms;
• (B) foreign firms acquiring Vietnamese firms;
• (C) Vietnamese firms acquiring foreign firms;
• (D) Vietnamese firms acquiring Vietnamese firms.
 Motives in Vietnam’s M&A deals

Source: Vuong, Q. H., Tran, T. D., & Nguyen, T. C. H. (2009). M&A Market in Vietnam's Transition Economy. Journal of Economic
Policy and Research, 5(1), 1-54.
 Motives in Vietnam’s M&A deals

Source: Vuong, Q. H., Tran, T. D., & Nguyen, T. C. H. (2009). M&A Market in Vietnam's Transition Economy. Journal of Economic
Policy and Research, 5(1), 1-54.
 Motives in Vietnam’s M&A deals

Source: Vuong, Q. H., Tran, T. D., & Nguyen, T. C. H. (2009). M&A Market in Vietnam's Transition Economy. Journal of Economic
Policy and Research, 5(1), 1-54.
 M&A in Vietnam

• 3 stages:
 Before 2005

 2005 – 2013

 2014 - now
CHAPTER SUMMARY

1. Introduction

2. Definitions

3. Motivations of M&A

4. Transaction characteristics

5. History of M&A

6. Participants in the M&A process