Mergers and Acquisitions

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Mergers and Acquisitions
Chapter 30
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Mergers and Acquisitions

• Terminology (??)
• Motive for mergers (??? ??)
• NPV of mergers (??? NPV)
• Cash offer vs. stock offer (?? vs. ????)
• Defensive Tactics (?? ??)
• Performance (??)

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Terminology

• A merger refers to the absorption of one firm by
  another. The acquiring firms (bidders) retains
  its name and its identity.
• A consolidation is the same as a merger except
  that an entirely new firm is created.
• Tender offer is a public offer to buy shares of a
  target firm. It is made by one firm directly to
  the shareholders of another firm.
• Leveraged buy out (LBO) Going private
  transaction (i.e., make a public company private)
  financed with large amounts of debt.
• Golden Parachutes Compensation to the target
  firm's managers for a loss of jobs following a
  change of control. (?????)
• Poison Pill A right to buy shares in the merged
  firm at a bargain price. The right is granted to
  the target firm's shareholders, contingent on
  another firm acquiring control. (????)

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Synergy from an acquisition

• Definition The difference between the value of
  the combined firm and the sum of the values of
  the firms as separate entities
• Synergy VAB (VA VB)
• VAB (VA VB) Synergy

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Sources of Synergy from Acquisitions

• Revenue enhancement possibly from an improvement
  of marketing, strategic benefits, and the
  increase of market power.
• Cost reduction (????)
• Economies of scale Reduction of the average cost
  by increasing the size.
• Economies of vertical integration Make
  coordination of closely related operating
  activities easier (e.g., Airlines companies
  purchase hotels and car-rental companies)
• Complementary resources make better use of
  existing resources.
• Elimination of inefficient management (market for
  corporate control)
• Tax gains (????)
• The use of tax losses from net operating losses
• The use of unused debt capacity
• Lower the cost of capital The cost of issuing
  securities are subject to economies of scale.

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Other Theories of Mergers

• Free Cash Flow Hypothesis (?? ????)
• Some observers consider mergers as a
  symptom of agency problems rather than as a
  solution. Managers are motivated to increase the
  size of their firm.
• Signaling (????)
• When a firm receives a tender offer, this
  conveys information to the market that a bidder
  sees value in the firm greater than its market
  price. The target shares are undervalued and the
  offer prompts the market to revalue shares.
• Winners curse and Hubris (??? ??)
• When there are many bidders or competitors
  for an object of highly uncertain value, a wide
  range of bids is likely to result. The highest
  bidder will typically pay in excess of the
  expected value. The winning bidder is cursed in
  the sense that its bid exceeds the value. The
  higher valuation of the bidders resulted from
  hubris. Roll (1986) hypothesized that managers
  committed errors of over-optimism in evaluating
  merger opportunities due to hubris.

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NPV of a Merger

• Definition
• NPV of a merger to acquirer Synergy
  Premium
• Total value of the firm after a merger between A
  and B. Synergy VAB (VA VB) Premium
  Payment VB

A
B
Synergy
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Defensive Tactics

• Repurchase or Standstill Agreement
• Repurchase the stocks from the bidder at premium
  (Greenmail)
• Standstill agreement the bidding firm agrees to
  limit its holdings of another firm.
• Exclusionary Self Tenders
• Tender offer at premium excluding some targeted
  shareholders (dilute the value of non-tendering
  shares)
• Going Private and Leveraged Buyouts (LBO)
• Going Private the publicly owned stock in a firm
  is purchased by a private group. As a
  consequence, the company is not public company
  anymore.
• LBO Going private transaction financed with
  large amounts of debt.

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Defensive Tactics Anti-takeover amendments

• Super-majority amendments require shareholder
  approval by at least two-thirds vote and
  sometimes as much as 90 of the voting power for
  all transactions involving change of control.
• Fair-price amendments A fair price is paid for
  all purchased shares. The fair price if commonly
  defined as the highest price paid by the bidder
  during a specified period. It defends against
  two-tier tender offers.
• Staggered boards Staggered, or classified,
  boards of directors delay effective transfer of
  control in a takeover. For example, a nine-member
  board might be divided into three classes, with
  only three members standing for election to a
  three-year term each year. Thus, a new majority
  shareholder would have to wait at least two
  annual meetings to gain control of the board of
  directors.

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Some Evidence on Merger

• Jensen and Ruback (1983 JFE) The market for
  corporate control the arena where in which
  different management teams compete for the rights
  to manage corporate resources.
• Evidence
• The shareholders of target companies in
  successful takeovers achieve large positive
  abnormal returns (20 - 30)
• The shareholders of bidding firms experience
  small or zero abnormal returns (0 - 4)
• The shareholders of both target and bidding firms
  of unsuccessful takeovers experience small
  negative abnormal returns.
• Combined values of firms increase by an average
  of 8.4, or even larger recently.
• Actions that prevent firms from being taken over,
  hurt shareholders.
• Actions that make is less likely that management
  opposes a takeover, do not hurt shareholders.

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Cash vs. Stock Acquisition

• Loughran and Vijh (1997 JF)
• Companies that made cash acquisitions did better
  than benchmark firms after acquisition
• Companies that made stock acquisition did
  considerably worse than a benchmark.
• Cumulative Access Returns (From Table VII)
• AD (announcement date, ???), ED (effective date,
  ???)