M&A

Question 1

What is the definition of Acquisition in M&A?

Answer 1

An acquirer (bidder) purchases part of or all of the target’s stock (stock acquisition) or assets (asset acquisition). The payment is called consideration and can be cash stock or mixture of both

Question 2

What is the definition of a typical merger?

Answer 2

In a typical merged the bidder acquires all of the assets and liabilities of the target

Question 3

What types of mergers are there?

Answer 3

1. Forward merger
2. Reverse merger
3. Consolidation
4. Forward Triangular Merger
5. Reverse Triangular merger

Question 4

What is a forward merger?

Answer 4

1) The target company merges with and into the buyer
2) The buyer absorbs all the target company’s assets, rights and liabilities
3) The target company ceases to exist as a separate entity

Question 5

What is a reverse merger?

Answer 5

1) A smaller private company acquires a larger publicly-listed company (hence gets lisiting)

Question 6

What is a consolidation?

Answer 6

1) Usually both companies cease to exist, and a new company is formed

Question 7

What is a Forward Triangular Merger?

Answer 7

1) When a company acquires a target company through a subsidiary, or shell company

Question 8

Reverse Triangular Merger

Answer 8

1) Acquiring company creates a subsidiary to purchase the target company
2) The target company then absorbs the subsidiary to create a new company
2a) Now totally absorbed into the Group/Holding

Question 9

What are the types of acquuisition?

Answer 9

1) Horizontal
2) Vertical
3) Conglomerate

Question 10

What is a horizontal acquisition?

Answer 10

1) Both forms are in the same industry
1a) E.g. acquiring a competitor, e.g. RBS acquired NatWest Bank

Question 11

Why would you perform a horizontal acquisition?

Answer 11

1) To drive market share and/or to obtain economies of scale

Question 12

What is a vertical acquisition?

Answer 12

1) Firms at different stages of the same industry

Question 13

Why would u perform a vertical acquisition?

Answer 13

1) To secure vital outlets for finished products or necessary sources of raw materials.

Question 14

What is a conglomerate acquisition?

Answer 14

1) Firms are not related to each other

Question 15

Why would you perform a conglomerate acquisition?

Answer 15

1) May lead to economies in provision of company wide services

Question 16

What is a merger wave?

Answer 16

1) A period of time in which more merger bids materialise than usual

Question 17

How many merger waves have there been?

Answer 17

There have been 6 merger waves since 1985

Question 18

What are the most common drivers of merger waves?

Answer 18

1) Positive stock market conditions
2) Technological change
3) Overcapacity

Question 19

What is the rationale for merger waves?

Answer 19

1) Company’s stock is overvalued (due to buoyant market conditions)
—> Management use this premium valuation to make acquisitions using stock
2) Economic or demographic stocks; build expertise through acquisitions

Question 20

What are some examples of M&A?

Answer 20

1) Vodafone and Mannesman
2) Delta Airlines
3) AT&T

Question 21

Tell me about Vodafones acquisition of Mannesman

Answer 21

1) Mannesman initially refused the bid
2) Vodafone addressed offer directly to the Mannesmann shareholders (53.7:1 ratio of shares)
3) When it became clear that the attempt at the hostile takeover might succeed, Mannesmann agreed to negotiate a friendly takeover

Final agreement:
4) Improved offer of 58.96 Voda to Mannesmann shares
5) Agreement also improved terms for integration and strategic development (staff retention)

Question 22

Tell me about Delta and Northwest Airlines merger

Answer 22

1) 2008
2) Merger created largest commercial airline in the world
3) Forecasted expectations
a) $200-$300 million per year in
profit enhancing synergies
b) Expanded network and flight
options
c) Complementary global fit
d) Increased customer loyalty
e) Strong cultural fit due to long-
term alliance
4) Huge back office savings

Question 23

Tell me about AT&T and Time Warner

Answer 23

1) Merge to combine premium media content of Warner with AT&T subscriber base
2) AT&T expected 3bln in annual costs savings within 3 years
3) Justice department tried to block merger due to decreased competition. AT&T argued it would increase competition

Question 24

Describe the role of an IB in sell-side M&A

Answer 24

1) Comprehensive valuation
2) Merger consequence analysis
3) Select buyer list
4) Set guidelines for range of acceptable bids
5) Evaluate offers received
6) Guide negotiations for disposal price
7) Offer a ‘fairness’ opinion
7a) IB has vested interest to get
job done

Question 25

Describe the process of hiring the Investment Bank

Answer 25

1) Bidder and target hire separate IBs through beauty parades 2) To win mandate IBs usually prepare pitch books 3) IBs have retainer fees, non- refundable 4) IBs have success fees, contingent upon the successful completion of the deal

Question 26

What is included in the pitch book of IBs to win mandate?

Answer 26

1) prior experience in the industry of transaction 2) Give price estimates 3) Set possible timetables

Question 27

Describe the process of valuation

Answer 27

1) Comprehensive valuation includes 1a) Initial analysis of strategic alternatives, eg IPO, disposal, recapitalisation 1b) If sale is preferred option, IB will advise on: 1b.1) Value maximisation, speed of execution and certainty of outcome 2) Merger consequence analysis 3) Valuation helps set the price expectations 3a) select the buyer list and type of scale

Question 28

Describe methods of valuation

Answer 28

1) Comparable companies analysis 2) Precedent transactions analysis 3) DCF Analysis 4) Leveraged Buyout analysis

Question 29

What types of bidders are there?

Answer 29

1) Strategic 2) Financial

Question 30

What do strategic bidders look for?

Answer 30

They focus on benefits from synergies. There is lower competition for bid but tend to pay higher premium.

Question 31

What do financial bidders look for?

Answer 31

They focus on cash flows and undertake restructuring.

Question 32

How do you define the number of bidders?

Answer 32

Depends on the size of the target and concentration of the industry

Question 33

How does the number of bidders affect the bidding process?

Answer 33

Well, you can decide to have a negotiated sale to a single bidder, or have an auction.

Question 34

Describe the Bidder Confidentiality & Confidential Information Memorandum process

Answer 34

1) Once sale process is chosen, distribute the teaser (brief description of target but not by name) 2) Confidential Information Memorandum (CIM) 2a) Prepared by the IB 2b) Contains detailed description of the target 3) Recipients of the CIM sign a BCA 3a) Prepared by legal adviser of the target 3b) Includes NDA

Question 35

Describe the bidding process after the CIM

Answer 35

1) Bidders may request additional info 2) Preliminary bid is usually expressed in range of values 3) Once additional info is provided, bidders submit final bids 4) After that, single bidder chosen and final negotiations undertaken

Question 36

Describe the Definitive Sale or Merger Agreement (DSA/DMA)

Answer 36

1) Document that regulates the transaction, containing info such as: 1a) Purchase price, timing, consideration and what happens if merger is terminated

Question 37

Describe some options in the DMA or DSA

Answer 37

1) Material Adverse Change clause, sets conditions where bidder can withdraw from deal 2) Fiduciary Out: target includes contract clause that allows to change mind of sale to party. EG New and better bid comes in 3) Break-up fee: Amount paid by target to bidder if deal not concluded

Question 38

Describe the fairness opinion in M&A

Answer 38

1) Before the target signs DSA or DSA, BoD usually requires fairness opinion 2) Certification on value of the deal provided by financial advisor

Question 39

What happens once signing the DMA/DSA?

Answer 39

1) Secure approval from Target's shareholders 2) Source approval from antitrust authorities or competetion commission 3) Arrange financing for the deal

Question 40

What are motives for M&A on the buy side?

Answer 40

1) Value release, target can be acquired for less than true value 2) Value creation, value of combined entities is greater than sum of individual parts, due to synergies Other motives: 3) Managerial motives 4) Diversification

Question 41

Describe the Sources of Synergy

Answer 41

Difference between cash flows at date (t) of the combined firm and the sum of the cash flows of the two separate firms

Question 42

What are the categories of synergy sources?

Answer 42

1) Revenue enhancement 2) Cost reduction 3) Lower taxes 4) Lower capital requirements

Question 43

How do you calculate Delta: CF?

Answer 43

Delta Rev minus Delta Costs minus Delta Taxes minus delta Capital Requirements

Question 44

What are some downsides of M&A Motives

Answer 44

1) Agency problems can arise, eg target company managers may lose jobs 2) If diversification is only motive, NPV will be zero 2a) shareholders can diversify their own portfolio's

Question 45

What are the categories of takeover defenses?

Answer 45

1) Rejection 2) Corporate charter and by-law amendments (requires shareholder approval) 3) Financial techniques 4) Structural and strategic decisions

Question 46

Describe some Corporate Charter or By-Law amendments in takeover defences

Answer 46

1) Staggered board (directors serve max three years, eg only renew one third each year) 2) Set Minimum acceptable price 3) Supermajority vote 4) In US: reincorporate into state with more restrictive takeover laws

Question 47

Describe some financial defences for takeovers

Answer 47

1) Poison pill, shareholders have option to buy additional shares, to dilute acquirer shares. Usually at discount 2) Golden parachute, lucrative severance packages 3) Issue debt to pau a special dividend, or pursue a share buyback. 4) Sell of some assets "crown jewels"

Question 48

Describe some of the advantages of issuing special dividend or pursuing a share buyback

Answer 48

1) May lead to stock price increases 2) Give management more voting power 3) Reduce cash on the balance sheet to pay out dividends. Make takeover less attractive

Question 49

Describe some of the advantages for crown jewel defence.

Answer 49

1) A firm might be interested in a special division, and might scare them off. Downside is that it can hurt existing shareholders

Question 50

Describe structural and strategic actions against takeovers

Answer 50

1) Seek a white knight, more compatible buyer that will pay higher price and keep jobs etc 2) Seek a white squire, third party to make significant investment 3) A management buyout, management become white knight 4) Buy business that competes with buyer and create antitrust conflict 5) Pac-man defence, counterattack by the target

Question 51

Provide an example of Pac-Man defence

Answer 51

in 2013, Men's Wearhouse turned the tables on Jos. A. Bank acquiring JAB for 1.8 billion. In this case it was a signal that it was a good idea for them to merge.

Question 52

Describe the role of investment banks in more complex m&a

Answer 52

1) Certification effect 2) Servaes and Zenner 2a) Transaction costs hypothesis, IBs can analyse acquisitions at lower costs 2b) Asymmetric info hypothesis: IBs reduce information asymmetries between the two parties 3) Contracting cost hypothesis 3a) IBs reduce agency costs in the acquiring firm.

Question 53

What are some of the findings on the three hypotheses by Servaes and Zenner?

Answer 53

1) Acquirers are more likely to use IB when management have little acquisition experience and when acquisition is complex 2) Acquirers more likely to use IB when target operates in many industries 3) Acquirers more likely to use IB when target is public and have lower insider ownership

Question 54

Describe some benefits of using Commercial Banks in M&A

Answer 54

1) Certification holds for acquirers 2) Acquirers more likely to use CBs if prior lending relationship. Implicit or explicit promise

Question 55

What are the two hypotheses from Rau?

Answer 55

1) Superior deal hypothesis. Top tier IBs should earn higher excess returns. IB market share is dependent on performance of acquirer in M&A 2) Deal completion hypothesis: market share of IB depends on number of completed deals

Question 56

Findings from RAU?

Answer 56

1) Both hypotheses hold 2) Number of completed deals by IB in previous year positively related to banks share in following years 3) Banks market share not related to performance of acquirers post acquisition. I.E. get the deal done