Introduction to Mergers, Acquisitions,

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Introduction to Mergers, Acquisitions, Other
Restructuring Activities

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Course Layout
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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 MA process
• Identify challenges and solutions associated with
  each phase of the MA process
• Describe advantages and disadvantages of
  alternative MA deal structures
• Describe how to plan, structure, and manage JVs,
  partnerships, alliances, licensing arrangements,
  equity partnerships, franchises, and minority
  investments

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Current Chapter Learning Objectives

• Primary objective What corporate restructuring
  is and why it occurs
• Secondary objective Provide students with an
  understanding of
• Commonly used MA vocabulary
• MA as only one of a number of strategic options
  for increasing shareholder value
• MA activity in an historical context
• The primary motivations for MA activity
• Key empirical findings

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Alternative Forms of Corporate Restructuring

• Restructuring Activity
• Corporate Restructuring
• Balance Sheet
• Assets Only
• Financial Restructuring (liabilities only)
• Operational Restructuring

• Potential Strategy
• Redeploy Assets
• Mergers, Break-Ups, Spin-Offs
• Acquisitions, divestitures, etc.
• Increase leverage to lower cost of capital or as
  a takeover defense
• Divestitures, widespread employee reduction, or
  reorganization

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Building a Common Vocabulary

• Combination of 2 firms with only one surviving
• Target becomes a subsidiary of the parent
• Two or more firms merge to form a new company
• Purchase of a target firm, controlling interest,
  or specific target assets
• Buyout financed primarily by debt
• One firm with investments in a number of
  operating companies

• Statutory Merger
• Subsidiary Merger
• Consolidation
• Acquisition
• Leveraged Buyout
• Holding Company

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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

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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)

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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
• MA boom ended by 1904 stock market crash and
  fraudulent financing

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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

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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

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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

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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

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Motivations for MA

• 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

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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 MAs 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 MAs
  are likely to be more successful

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Primary Reasons for MAs Frequent Failure to Meet
Expectations

• Overpayment due to over-estimating synergy
• Slow pace of integration
• Poor strategy

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Things to Remember

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