Introduction to Finance M

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Introduction to FinanceMAAn Introduction
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TAKE OVERS
Take Overs
Going Private
Acquistions
Mergers, Consolidations
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Case of Value Destruction?

• ATT and NCR
• ATT acquired NCR for 7.5 billion in 1991
• Estimated loss for ATT shareholders is
  -13.3 x 34/share x 1.092 billion shares
  -4.9 billion
• Then why did ATT acquire NCR?
• ATT declared it would enter computer industry
  (1984 consent decree)
• Market perceived NCR as a poor partner

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Event Studies

• The empirical evidence in the US tends to depict
  the following picture
• The target firm shareholders earn positive
  (abnormal) returns due to a merger agreement.
  This seems to be the case especially for tender
  offers.
• On the other hands, the acquiring firm
  shareholders do not earn such positive returns.
  In some instances, they earn negative returns.

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Cont.

• It could be that positive performance (positive
  returns) is not realized in the short-term but in
  the long-term.
• We need to look at the long-term performance of
  the firm.

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We examine post-acquisition peformance for 50
of The largest US mergers between 1979 and mid
1984. Merged firms show significant improvements
in asset productivity relative to their
industries, leading to higher operating cash flow
returns. This performance improvement is
particularly strong for firms with highly
overlapping businesses. Mergers do not lead to
cuts in long-term capital and RD investments.
There is a strong positive relation between
postmerger increases in operating cash flows and
abnormal stock returns at merger
announcements, indicating that expectations of
economic improvements underlie the equity
revaluations of the merging firms. Healy,
Palepu, Ruback (1992) JFE.
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Post-merger management

• Although the market could react positively at the
  announcement of the merger, it remains to be seen
  whether the new management team can implement the
  merger plan effectively.
• Recently, emphasis is placed on post-merger
  management/integration.

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Empirical Evidence in Japan

• Acquiring firm shareholders gain at announcement
  of the merger. On average there is 1.2 positive
  abnormal return and 5.4 return over the duration
  of the takeover.
• Relationships with the Main bank seem to lead to
  such positive returns.
• Main banks provide efficient monitoring?
• Kang, Shivdasani, Yamada, J. Finance, 2001.

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Classification

• Horizontal Mergers same industry (firms
  competing in the same line of business)
• Vertical Mergers merging of firms in related
  business - different steps of production (airline
  and travel agency)
• Conglomerate Mergers Firms not related to each
  other

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Merger Activity in the US

• 1890-1904 Merger for Monopoly. JP Morgan
  engineered US Steel. DuPont, American Tobacco,
  Eastman Kodak, etc.
• Sherman Act 1890, Clayton Act 1914
• 1916-1929 Merger to Oligopoly
• Post WWII to early 1970s Conglomerates
• 1980s Market for corporate control.

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1980s

• Leveraged Buy Outs LBO
• Borrow to acquire a company.
• Management Buy Outs MBO
• Management bids to buy the company (or part of
  company).
• Nabisco Case the largest acquistion at the time
  (25 billion US dollars)

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The LBO

• LBO approach allows for small groups of people
  such as management or a small company such as
  KKR to buy large corporations.
• Places pressure on management.
• Could this serve as a monitoring device, to make
  sure management is maximizing the value of the
  firm?

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Restructuring and Governance in Japan

• Kang and Shivdasani (JFE, 1997) Empirically
  examine 92 Japanese firms experiencing
  substantial decline in operating performance over
  the period 1986-1990.
• Does the potential of becoming a takeover target
  force corporates to restructure in Japan?
• What mechanism governs restructuring efforts in
  Japan according to Kang and Shivdasani?

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Cont.

• Reasons for performance decline approx. 60 due
  to unfavorable FX rates.
• Operational response asset contraction actions
  23 and layoffs 17.4. Asset contraction
  activities include closing plants, asset sales,
  withdrawing from a line of business, etc.
• Layoffs at 17.4 is still smaller than that for
  the US at 31.6.

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Cont.

• Firms with greater equity ownership by the main
  bank are more likely to engage in contraction
  policies by the use of asset sales, plant
  closures, and discontinuation of operations. In
  addition, greater ownership by the main bank also
  increases the probability of employee layoffs and
  the removal of outside directors from the board.
  p.31

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RJR Nabisco

• Oct. 28, 1988 CEO, Ross Johnson, formed a group
  to buy RJR Nabisco (MBO). Price at 75 per share
  (market price at about 56).
• Four days later Kohlberg, Kravis, Roberts (KKR)
  made bid. 90 per share.
• KKR bid at 109 and Johnson group at 112.

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What makes for an attractive LBO Target?

• Steady Growth. Relatively mature industry.
• Relatively unaffected by business cycles.
• Low CAPEX. Less RD required.
• Low debt level.
• Fixable problems. Create value and then sell
  (break-up value).

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Board Requests

• Price (per share).
• Possible future stake (equity) in company gains.
• Stakeholders. Welfare of stakeholders (community)
  as its fiduciary duty.

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Comparing Bids

• KKR
• 109 (81 in cash)
• Convertibles in about 25 of new equity
• Keep both the Tobacoo and Food divisions
• Guarantee severance payments and benefits for
  layoffs

• MBO
• 112 (84 in cash)
• Convertibles into about 15 into new equity
• Keep only the Tobacoo division
• Give equity to 15,000 employees

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Banking Community

• KKR
• Drexel Burnham Lambert
• Merrill Lynch
• Morgan Stanley
• Wassertein Perella

• MBO
• Shearson Lehman Brothers
• Salomon

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Bankers Trust Chase Mahn Citi Japanese Banks
LOAN
RJR
KKR
Shareholders
Drexel Merrill MS Wasserstein
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Boone Pickens, Mesa, and Cities Take Over Defense

• Mesa Petroleum (Boone Pickens) began buying
  shares of Cities Services. May 1982.
• Cities Services responded by 1) increasing
  outstanding shares (issuing) and 2) bidding for
  Mesa (Pac Man defense). Firms bid for each other
  twice.
• Gulf Oil bid for Cities Services thus rescuing
  Cities from Mesa (White Knight)
• Eventually, Occidental took over Cities Services
• Gulf was bought out by Chevron (Mesa again the in
  the bidding game)

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Koito Case

• Koito large manufacturing firm in the Toyota
  keiretsu.
• Boone Pickens purchase/acquires large percentage
  of Koito shares.
• Pickens wants to be on Board since largest
  shareholder.