Introduction to M&A Flashcards
(41 cards)
What is the purpose of Mergers and Acquisitions
Creation of shareholder value
Bottom Line: If the firm cannot earn a return on its investment alternatives in the excess of the firm’s cost of capital then it should “return” the money to the firm’s shareholders
Organic vs. External Investment Opportunities
Organic: doing it on their own
External: another player in the market (at times does not have the expertise or IP to do so)
Ex. Microsoft and Activision
What influences a company to pay back shareholders or you make a purchase:
Growth of the company (market share, cash flow)
Growth will increase the value of the company (the acquirer)
Define Acquisition
Acquisition - one company buys (acquires) a controlling interest in another company
Define Merger
Merger (legal definition) - is the same as an acquisition except that an entirely new firm is created. Both the acquiring firm and the acquired firm terminate their previous legal existence
Be careful; companies and investment bankers will use the term “merger” as a marketing term when one company is taking over another to appease the board, executives and shareholders (and sometimes politicians) of the target company (i.e., “merger of equals)
Define activist investor
Activist Investor - investor who requests (or demands) that changes be made to corporate strategy and/or board of directors. If not, there could be trouble. Ex. consider Carl Icahan and Bill Ackman
Shorting the stock - expecting it to decrease
How to bring up a stock price - ex. Announcements on social media
Define Hostile takeover
Hostile Takeover - an acquisition not approved or agreed to by the target’s board of directors
Define a white knight
White knight - a person or company who agrees a friendly takeover of a target company who has had a hostile takeover
Define going private
Going Private - a single shareholder or a small group of investors acquires all of the shares of a public company
Ex. Twitter (now X) went from public to private. Why → opportunity to restructure, less requirements in terms of reporting, frees management from public scrutiny (less compliance and more effort on improving competitive positioning)
Cons of going private - sources of capital - ex. PE firms might be aggressive in voicing opinions
Define a leveraged buyout along with the advantages and disadvantages
Leveraged Buyout - stock or assets of the target are purchased mostly with borrowed money, typically secured by a target’s own asset base
Borrowed money to fund the acquisition of another company. Ex. Hilton Hotels. Blackstone bought Hilton in 2007 – helped them expand into international geographies. Assets of the company are usually offered as the collateral for the loan. PE companies use this to acquire companies, build the companies again and sell them for a profit. BC Partners acquired PetSmart
Advantages - increased control, financial gains, opportunity to survive
Disadvantages - reduced morale, risk of bankruptcy, layoffs
Controversial point – putting a lot of debt on the company. Paying cash, increasing the leverage/debt and looking for ways to increase efficiency
Define management buyout
Management Buyout - existing management leads a buy-out with an equity sponsor providing the financing
Define roll-up
Roll-up - acquisition of several companies in an industry, typically for stock with the intention of creating critical mass and “IPOing” the new entity
Better positioned to enjoy economies of scale by becoming more efficient (ex. Oil company combined with a drilling company and waste management). Expand geographic coverage, reduction in marginal costs, gain access to new markets
Waste Management inc who purchased small local truck haulers. Ex. a company could acquirer a number of small, independent automotive shops, dental clinic acquiring several small dental offices and suppliers. New way to enter a market
Cost advantages with increase in production
Define dissenters’ rights
Dissenters’ rights - rights that shareholders may have who did not vote in favor of the merger to require a court to determine the fair value of their shares which value may be greater or less than the merger consideration; don’t see this too often
Define proxy contest tender offer
Proxy Contest Tender Offer - a solicitation of shareholder votes by someone other than management (dissidents or insurgents) for some corporate action; see this more often
Ask other shareholders to vote on their behalf as a proxy (solicit shareholder votes)
Define tender offer
Tender offer - offer by one company directly to the shareholders of another company to purchase shares
Define synergies
Synergy - value created by combining two companies
Hoping the share price increases due to the synergistic effect of the deal - ex. Combined talent, combined technology, cost reduction, increased revenues
Also can be negative synergy - ex. Clash of corporate cultures and different leadership styles
Cost synergies (ex. Reduced overhead, consolidation of facilities)
Revenue synergies (ex. Expanded geographic reach, market positioning
Operational synergies (shared expertise, R&D capabilities to accelerate innovation)
Strategic synergies (ex. Elimination of a competitor)
Ex. big tech company acquires a small software company - industry professionals with young innovative thinkers
Define Acquisition premium
Acquisition premium - amount paid to target shareholders that is greater than the pre-offer value/share price. % premiums can vary widely for Canadian public deals ≈ 30 to 40%
Ex. AcquireCo makes a bid for $14/share which is a 40% premium; TargetCo at $10/share
Why would a company want to acquire 100% of another company
More control → synergies
Goodwill
Consolidation for lower cost of capital
Who runs things in a M&A play
Shareholder control the company but it is managed by the board of directors
What can shareholders propose
Shareholders can propose resolutions on a variety of topics; however, shareholder voting rights are generally limited to:
Amendments to the articles of incorporation
Election of the board of directors
Sale of all (or substantially all) of corporate assets
Issuance of shares greater than 25%
Who are some of the key players in M&A
Shareholders (vote on proposed deal)
Board of Directors (deal disclosures, approval, offer documents)
Legal counsel (advising on structure, timing, regulatory filings)
Investment bankers (provide financial and strategic advice to purchasers, target companies, and sellers; facilitation of deal)
Activist investors (influence on M&A strategy or decisions and push for changes)
Institutional investors (significant voting power for deal, influence terms)
Arbitrage investors (arbs)
What do arbitrage investors do?
Arbitrage investors (arbs)
Long TargetCo and Short AcquireCo
Try to take advantage of prices in different markets, similar products different risk
Buy the shares at a lower price and wait for the premium
Will that $10 of AcquireCo, go up to the $14 Acquisition premium when the merger is announced
Will go close
(1) Deal uncertainty – regulation, competitors, market conditions, shareholders
When do shareholders get their $14 – couple months, we need shareholder approval first and then need to pass regulation, market conditions, etc.
How does the timing difference impact the price - (2) time value of money
It will not get to the full $14
go into more depth around the BoD role in M&A
Board of Directors
The management of the corporation is vested in the board of directors
This legal construct results in separation of ownership and control and may result in agency costs
Shareholders are the principals and managers are the agents
Shareholders want to maximize the value of the company
However, the interests of management may not be perfectly signed with that of the shareholders
