Corporate Mergers and Acquisitions Overview

Mergers and Acquisitions (M&A)

• A period of heightened activity in M&A is called a merger wave
• Merger waves occur due to various factors, such as acquirer opportunism, high capital liquidity, and valuation waves.
• Factors behind M&A, that are commonly debated, include acquirer opportunism, high capital liquidity, and valuation waves.
• Strategic motives often involve market expansion, diversification, and gaining a competitive edge.
• Synergistic motives aim for cost savings, revenue enhancement, and improved efficiency.
• Managerial motives involve empire-building and personal gain.
• Financial motives include improving financial performance, accessing new capital, and leveraging tax benefits.
• Dubious reasons include managerial ego, unrealistic synergy expectations, and overconfidence leading to acquisitions that may not be sound strategically.

M&A Waves

• Different waves are described from 1890 to 2001
• Wave 1: 1890s-1903 – coinciding with economic expansion, industrialization, and technological advancements
• Wave 2: 1910-1929 – economic recovery after the market crash, with an emphasis on anti-trust policies
• Wave 3: 1950-1973 – economic recovery after WWII and with a tightening of anti-trust regimes
• Wave 4: 1981-1989 – economic recovery after recession. A wave in financial deregulation
• Wave 5: 1993-2001 – economic and financial markets boom, globalisation, technological innovation, and deregulation
• Merger waves are linked to industry-specific events, financing conditions, and strategic interactions.

Types of Mergers

• Horizontal mergers: Involve companies operating in the same industry and stage of production. Aims to increase market share, economies of scale and reduce competition.
• Vertical mergers: Involve companies at different stages of the production process (e.g., a manufacturer and a supplier). Targets to secure supply chains, reduce costs, and improve coordination.
• Conglomerate mergers: Involve companies from unrelated industries. The goal is often diversification, risk reduction, exploration of new markets, and leveraging shared resources.

Corporate Restructuring

• Two main types of acquirers, strategic and financial
• Strategic acquirers are other companies, or competitors, that aim to integrate the target company and its operations with their own
• Financial acquirers (often Private Equity Firms) are investors who buy and operate acquired targets, looking to generate a return on their investment, through operations and exit strategies
• Restructuring is the action of changing a firm's basic operations or financial structure.

Post-Integration Audit

• This stage of an M&A activity evaluates if the transaction fulfilled its objectives and promises
• Possible reasons for overlooking post-acquisition audits include the uniqueness of each deal, past learning lying in individual experiences and the difficulty in transferring experiences from one deal to another
• A significant audit should follow the acquisition and follow up
• Identifying reasons for success or failure in the acquisition are significant

Value Creation & Synergies

• Cost Reduction: This is through economies of scale and the removal of redundancies.
• Operational Efficiencies: This involves economies of scope and improved coordination in the production process. This can increase revenues and profits.
• Managerial Efficiencies: This involves more effective managerial changes and personnel, and thus more effective management.
• Revenue Enhancement: Increased market power and improved business processes, such as better ways to achieve customer satisfaction and distribution
• Tax Savings: Depending on tax legislation of the countries involved, this may increase tax deductibles.
• Market Power: The ability to keep prices above the market value, which leads to collusive synergies.

Competitive Strategies and Capabilities

• Cost Leadership: The target company aims to be the lowest-cost producer in the industry.
• Differentiation: The target firm creates unique products or services for a particular market segment/niche.
• Focus/Niche: The target focuses on a specific market segment (a particular niche) with unique needs and preferences.

Agency Theory

• A conflict of interest arises between the interests of the owners of the company (shareholders) and the managers who control the daily activities or operations
• This conflict may prevent managers from acting in the best interest of shareholders
• Managers may overvalue the price they will pay, or overlook potential risks.
• Short-term profit maximization can lead to poor decision-making in the longer term
• Monitoring mechanisms or agency costs can align management incentives and shareholder value

Event Study Methodology

• A statistical method to assess the impact of a specific event on a company's value, such as an M&A transaction, by monitoring stock prices
• This considers differences between the actual performance of a company and its expected return.
• This will demonstrate if there was a change in value caused by the M&A transaction.
• The event study looks at financial data either before, at, or after a specific transaction to demonstrate if there was a positive reaction from the market.
• Abnormal returns are calculated by deducting expected return from a company's actual return

Factors Affecting M&A Success

• Valuation and Due Diligence - This is important for making informed decisions
• Deal Structuring - It also helps to avoid legal and regulatory issues (e.g., regulatory review of the deal).
• Integration - the manner in which the two companies combine
• Financing - It also helps in ensuring the financial viability of the deal.
• Post-Acquisition Strategy - It helps to identify ways to make sure the company is on target after the transaction
• Financial Risk Management - It helps to mitigate financial risks (e.g., balance debt levels with cash flow projections)
• Operational Risk Management - Maintaining efficiency of the newly combined company
• Marketing and Diversification - it helps to understand how to build the brand, and understand and target customers, post-merger.
• Market-based risks - external economic factors, and their effect on market valuations
• Management-based risks - internal managerial, and strategic problems, which hinder long-term success of the transaction.

Payment Methods

• Cash: Provides instant liquidity to the target company and certainty of payment but can be subject to immediate tax liability
• Stock: offers lower immediate tax liabilities for target shareholders, but the price is dependent on post-acquisition performance of the firm
• Loan stock: offers tax deductibility to the bidder
• Convertible loan stock: is subject to a predetermined conversion rate
• Deferred payment: is subject to performance criteria after a specific period.