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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
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