Mergers and Acquisitions

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Mergers and Acquisitions

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Title: Mergers and Acquisitions

1
Mergers and Acquisitions

Arzac, Chapter 9

2
Mergers

many people including Warren Buffett have
expressed skepticism of the power of mergers
Many managements apparently were overexposed in
impressionable childhood years to the story in
which the imprisoned handsome prince is released
from a toads body by a kiss from a beautiful
princess. Consequently, they are certain their
managerial kiss will do wonders for the
profitability of Company T(arget) Investors can
always buy toads at the going price for toads. If
investors instead bankroll princesses who wish to
pay double for the right to kiss the toad, those
kisses had better pack some real dynamite. Weve
observed many kisses but very few miracles.
Nevertheless, many managerial princesses remain
serenely confident about the future potency of
their kisses even after their corporate
backyards are knee-deep in unresponsive toads We
have tried occasionally to buy toads at bargain
prices with results that have been chronicled in
past reports. Clearly our kisses fell flat. We
have done well with a couple of princes but
they were princes when purchased. At least our
kisses didnt turn them into toads. And, finally,
we have occasionally been quite successful in
purchasing fractional interests in easily
identifiable princes at toadlike prices.

3
MAs

changing forces driving mergers
technological change
globalization and freer trade
deregulation
economies of scale, scope, and technological
catch-up
change in industry organization
individual entrepreneurship
macroeconomic factors
Weston, Siu, and Johnson (2001)
mergers vs. tender offers
types

4
Changes in Ownership Structure

exchange offers
leverage recapitalizations
dual-class recapitalizations
share repurchases
LBOs, MBOs
ESOPS

5
Control of Decision Powers

compensation arrangements
proxy contest
premium buy-backs (greenmail)
takeover defenses
stakeholder relationships
ethics and reputation

6
Theories of Mergers

efficiency increases (restructuring)
operating synergies
financial synergy
information
hubris
agency problems

7
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8
Forms of Transaction

merger
acquisition
of assets
of stock
tax implications
legal implications

9
Form of Transaction

stock purchase
avoids tax at corporate level
acquirer can use NOL of target
sh of target taxed on capital gain
acquirer can not step-up basis of targets assets
for tax purposes
asset purchase
seller is subject to corporate taxes
buyer can step-up basis and amortize goodwill
over 15 years
buyer can not use NOLs of target
merger
forward merger
reverse subsidiary merger

10
Example 1

Assume the buyer acquires a debt-free target for
100 cash, the targets tax basis in the assets
is 40, the target shareholders basis in the
stock is 15, and the fair MV of the stock was
70 prior to the acquisition. Let the corporate
tax rate be 40, the personal tax rate on capital
gains be 20, and assume that all the gain to the
seller is classified as capital gain and the
buyers price in excess of the targets basis is
allocated to goodwill. Look at the proceeds to
the target using both a stock purchase and an
asset purchase.
Review Example 2 and 3 in the text.

11
Returns in MAs

Kaplan and Weisbach (1992), Servaes (1991), and
Mulherin and Boone (2000)
mergers in banking industry
Becher (2000) looked at because of increased
number of bank mergers that occurred around
industry deregulation
evidence that bank mergers created wealth
target returns
bidder returns

12
Value of Mergers

VC VA VT Synergies Cash
Premium PT VT
Premium pcm cash
Acquirers Gain Synergies Premium
Acquirers Gain Sellers Gain Synergies
pC VC / (n m)
or pC (VA VT Synergies Cash)/(n m)
where n of old shares of acquirer
and m of shares issued to target shareholders
Break-Even Synergies Premium mpA Cash VT
GainA Synergy - Premium

13
Accretion/Dilution Analysis

alternate way to look at the impact of the merger
to the shareholders of the acquirer
find pro-forma EPS for merged firm for year prior
to merger and then years after also
for share exchange, combine NI and divide by new
number of shares outstanding
if new EPS is gt EPS of acquirer, then there is
accretion if new EPS lt EPS of acquirer, then
there is dilution

14
Merger Analyses

terms of the merger
financing the merger
break-even synergies
financial model of the merger
accretion-dilution analysis
free cash-flow valuation
stress-testing and scenario analysis

15
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16
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17
Bs acquisition of T
B T
Pre-announcement stock price 30 22
Net income (million) 80 37.50
Shares outstanding (million) 40 15
EPS 2.00 2.50
P/E 15 8.8
Market value (million) 1200 330

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