Dr. P.V. Viswanath

 

pviswanath@pace.edu

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  Courses/ Mergers and Acquisitions (EDHEC)  
   
 
 
 

Learning Objectives

 
 
 

Introduction (Bruner, Chapters 3 and 4):

Topics:

  • Classification of different kinds of mergers – vertical, horizontal and conglomerate
  • Are mergers generally profitable? To whom? To acquirers? To targets?
  • Drivers of Profitability (p. 54)
  • Explanations of M&A activity (p. 75)
    • Hubris
    • Market Manias
    • Overvaluation of Stocks and the Asymmetry of Information
    • Agency Costs and the Correction of Governance Problems
    • Monopoly, Competitive Behavior and Rent-Seeking Behavior
    • Industry Shocks
  • Creative Destruction (p. 84)

Terms:

  • Vertical merger
  • Horizontal merger
  • Conglomerate Merger
  • Takeover premium
  • Poison pill/ Shareholder rights plans
  • Greenmail
  • Supermajority Provisions
  • Dual Capitalizations

Questions:

  • What’s the rationale for the Section 13(d) requirement if an entity acquires 5% or more of a company’s shares, it must make that information public?
  • What’s the rationale for the requirement that bidder wait 20 days before completing purchase of the shares?
  • What are some reasons for the existence of a takeover premium?
  • Are Insider Trading Laws necessary? What is the rationale for them? Do you agree?
  • What form do anti-takeover laws take?
  • Enumerate some anti-takeover defenses?


Strategy
(Bruner, Chapter 6):

Topics:

  • SWOT Analysis with focus on coming up with rationales for merger
  • Porter Analysis with focus on coming up with rationales for merger
  • Shapiro Analysis with focus on coming up with rationales for merger
  • Strategic Maps
  • Growth-Share Matrices
  • Kauppi’s list
  • Organic and Inorganic Growth
    • Motives for Inorganic Growth (p. 139 ff.)
      • Maturing Product Line
      • Regulatory or Antitrust Limits
      • Value creation through horizontal and Vertical Integration
      • Value Creation through Diversification
    • Transactions for Inorganic Growth (cf. also Exhibit 6.10)
      • Contractual Relationships
      • Strategic Alliances
      • Joint Venture
      • Minority Investment
    • Framework for Choosing a path for Inorganic Growth(p. 165)

Terms:

  • organic growth
  • inorganic growth
  • synergy
  • Information asymmetry
  • Internal Capital Markets
  • Agency Costs
  • Monopsony

Questions:

  • Why is growth a questionable rationale for a merger? What sort of growth is desirable and what sort of growth is not?
  • Why might CEOs push for mergers even when they are not good for shareholders?
  • What is the difference between organic growth and inorganic growth?
  • What are arguments for and against using mergers to acquire resources?
  • Is there a difference between a merger that has the objective of obtaining physical resources, such as raw materials, land, talent, R&D versus one that has the objective of obtaining financial resources? Why?
  • What are some arguments for and against mergers that are intended to achieve diversification
  • What, according to Shapiro, are some indicators of a project that has positive NPV?
  • What lessons can we draw from Shapiro’s analysis in looking for successful merger candidates?
  • What, according to Porter, are the characteristics to look for, in choosing an industry to enter?
  • What lessons can you infer for a successful merger strategy?

 

Valuation (Bruner, Chapter 9):

Topics:

  • Valuation using multiples
  • DCF Valuation

Terms:

  • Free Cash flow to equity
  • Free Cash flow to the firm
  • Terminal Value
  • Unlevered Beta
  • Levered Beta
  • WACC
  • Synthetic Bond Ratings


Questions:

  • How do you measure free cashflows to equity?
  • How do you measure free cashflows to the firm?
  • How do you value equity as the present value of FCFE?
  • How do you value the firm as the present value of FCFF?
  • What is the riskfree rate?
  • What is the risk premium?
  • What is the main underpinning of the CAPM?
  • How do you measure the market risk premium?
  • How do you measure a firm’s beta?
  • What are the determinants of a firm’s beta?
  • How do you compute a firm’s cost of debt?
  • When is using relative valuation preferable to using DCF valuation?

Synergies (Bruner, Chapter 11)

Topics:

  • Using a Valuation framework to assess synergies
  • Sources of synergies in place
  • Synergistic effects on WACC
  • Real Option synergies
  • Valuing Synergies

Terms:

  • Revenue enhancement synergies
  • Cost reduction synergies
  • Asset Reduction Synergies
  • Tax Reduction Synergies
  • Financial Synergies
  • Real Option Synergies
  • Exit Option Synergies
  • Options to Defer
  • Options to alter Operating Scale
  • Options to Switch

Questions:

  • What are potential sources of cost reduction synergies?
  • What are some of the sources of revenue enhancement synergies?
  • How would you estimate the value of synergies?

Deal Design (Bruner, Chapter 18)

Topics:

  • Factors to consider in deal design

Terms

  • Accounting Dilution
  • Economic Dilution
  • Earnouts
  • Contingent value rights
  • Caps
  • Collars
  • Floors
  • Puts
  • Golden parachutes
  • Warranties

Questions:

  • What are the elements to be kept in mind in designing the merger deal?
  • What is the difference between accounting dilution and economic dilution? Which is more important and why?

 

Risk Management (Bruner, Chapter 22 and 23)

Topics:

  • Contingent Payments in M&A (pages 610 ff.)
  • Sources of Transaction Risk
  • Types of risk management
  • Analyzing and valuing collars

 

Terms:

  • Exit clauses
  • Termination fees
  • Lockup option
  • Staged Investing


Questions

  • What are the different sources of transaction risk in a merger?
  • How can you manage risk before the announcement of the deal?
  • How can you manage risk after the deal is announced?
  • How do you manage residual risk that exists after the consummation of the deal?

Hostile Takeovers (Bruner, Chapter 32, 33)

Topics:

  • Profiles of hostile takeover targets
  • Role of the arbitrageur in a hostile takeover
  • Analyzing arbitrage spreads
  • Coercive tender offers
  • Takeover attack tactics (pp. 831 ff.)
  • Takeover defenses (pp. 833 ff.)

Terms:

  • White knights: A friendly potential acquirer that is sought by the target to fend off a less-welcome acquirer.
  • White squires: a white knight who buys less than a majority interest.
  • Arbitrageurs: investors who take positions in the acquirer and the target simultaneously with a view to betting on the likelihood of the deal going through.
  • bear hug: a very large initial bid by an acquirer to discourage the target from resisting.
  • crown jewels: desirable assets of a target that might be sold in order to discourage a hostile acquirer from proceeding.
  • staggered boards: a board of directors where only some of the board comes up for election at any given time. This makes it difficult for a hostile acquirer to control the firm even after it has acquired the target.
  • supermajority provisions: a requirement that more than a majority of shares have to vote in favor of a change of control event.
  • Poison puts: A covenant allowing a bondholder to demand repayment if there is a hostile takeover.
  • Poison pills: the right given to a company's shareholders to acquire additional shareholders for a very small consideration in the event of a hostile takeover attempt. This forces the intending acquirer to obtain much more than a majority of shares to force a change of control.
  • Topping or breakup agreements: A form of breakup fee that is paid to an intending buyer if his bid is topped by another eventually successful bidder.


Questions

  • What are the reasons why a bidder may attempt a hostile takeover?
  • What is the profile of a typical target in a hostile bid?
  • When a target successfully rejects a bidder, the target’s share price falls but to a price level higher than prevailed ex ante. Why does the price not fall all the way to the pre-attempt value?
  • What tactics were used by Campeau in its bid to acquire Allied?
    • Highly confident letters
    • Bridge loan by investment bank: attempt to postpone financing until the acquisition has been completed, at which point, the purchase price can be potentially financed by the assets of the target itself.
    • bear hug
    • cram down paper: undesirable securities such as junk bonds that minority shareholders would be forced to accept
    • two-tier offer
    • Dividend ploy: an offer to pay a dividend to Allied's shareholders after the takeover, payable out of Allied funds.
    • Street sweep
  • What tactics were used by Allied in its attempt to avoid being taken over by Campeau?
    • Breakup fees
    • Poison pill defense: the automatic exchange of shares for $67 worth of bonds to every shareholder but the attacker
    • Greenmail