IFM Lecture: International Mergers & Acquisitions PDF

INTERNATIONAL MERGERS & ACQUISITIONS Tzvetomir Tzanov, Ph.D. Department of International Business UNWE  Overview ◼ How would you define M&A? ◼ Differences with other types of equity transactions (such as JV...

INTERNATIONAL MERGERS & ACQUISITIONS Tzvetomir Tzanov, Ph.D. Department of International Business UNWE  Overview ◼ How would you define M&A? ◼ Differences with other types of equity transactions (such as JV). ◼ Types of mergers; ◼ Merger practice – influences on theory; ◼ M&A efficiencies and synergy; ◼ Managing the process of a M&A deal; ◼ International M&A; ◼ Empirical evidence. © T.Tzanov, Ph.D, UNWE Historical background ◼ First mergers registered in Germany – mid 19th century (liquidation, assets salvage value); ◼ First merger wave in the U.S. – end of 19th-beginning 20th century – regulation. ◼ First international M&A – in the era of industrialization and colonial empires – second half of 19th century. ◼ Among the first IM&A – the acquisition of a chemical plant in Albany (U.S.) by the owners of Bayer (Germany). © T.Tzanov, Ph.D, UNWE  M&A definitions ◼ Definitions (purely national perspective): ◼ Acquisition – all assets and liabilities of a single or several companies is transferred to the acquirer. ◼ Merger – at least 2 companies merging into a newly established entity (consolidation), the whole property (assets and liabilities) transferred to the new company. (Bulgarian Commercial Law, Chapter 16, art. 262) ◼ Differences per countries, e.g.: France, Germany, UK, US. ◼ Harmonization attempts within the EU. ◼ Different nature of international M&A deals. © T.Tzanov, Ph.D, UNWE  M&A and regulation ◼ Differences per countries: - France (Loi N:66-537) – 3 types of mergers: - “fusion”; - “fusion-absorption”; - “fusion-scission” (merger – divestiture). - UK (Company Act) – “merger” and “amalgamation”. - Italy – “fusione”, the two basic forms. - Germany – 2 types of merger (Verschmelzung): ✓ merger (“Verschmelzung durch Neugruendung”); ✓ acquisition (“Verschmelzung durch Aufnahme”). ◼ Possibility to merge by entities corporate and physical personalities (sole trader). ◼ Attempts for harmonization within the EU: ▪ Third Council Directive №78/855; ▪ Subsequent regulations in line with Competitiveness policies, incl. the control of concentrations. © T.Tzanov, Ph.D, UNWE  M&A regulation within the EU ◼ Harmonization in the framework of Community’s Competitiveness policy (foundations Treaty of Paris, 1951; Treaty of Rome, est. the EC, 1957): ▪ Number of specific regulations, e.g.: Council Regulation on the control of concentrations No. 4064/89, amended with Regulation No. 1310/97, revised in Regulation No. 139/2004 on the control of concentrations between undertakings). ▪ Community dimension, thresholds: ◼ (a) in case the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5 000 million/ 2 500 million; ◼ (b) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million; ◼ all the undertakings concerned is more than EUR 100 million. ◼ Below above thresholds – national regulation of concentrations. ▪ Regulation of specific tax and accountancy issues (Directive № 434/90), Regulation No. 802/2004 for the application of Regulation No. 139. © T.Tzanov, Ph.D, UNWE Regulation of international M&As – within the EU ◼ Council Regulation No. 2157/2001 on the Statute for a European Company (SE – Societas Europaea) into force as of 8 october 2004. ◼ Four ways of forming a European Company: merger, formation of a holding company, formation of a joint subsidiary, or conversion of a public limited company previously formed under national law. Formation by merger is available only to public limited companies from different Member States. ◼ Minimum capital of EUR 120 000. ◼ The registered office of the SE - the place where it has its central administration, i.e. its true centre of operations. The SE can easily transfer its registered office within the Community without dissolving the company in one Member State in order to form a new one in another Member State. ◼ The SE must draw up annual accounts comprising the balance sheet, the profit and loss account and the notes to the accounts, and an annual report giving a fair view of the company's business and of its position; consolidated accounts may also be required. ◼ In tax matters, the SE is treated the same as any other multinational, i.e. it is subject to the tax regime of the national legislation applicable to the company and its subsidiaries. © T.Tzanov, Ph.D, UNWE  Scope and regulation in IFRS ◼ International Financial Reporting Standard 3 Business combinations (BC) ◼ A business combination is a transaction in which an acquirer obtains control of one or more businesses. ◼ Or bringing together of separate entities or businesses into one reporting entity (hence, mergers & acquisitions). ◼A business is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants. [IFRS 3.Appendix A]. ◼ A BC might be effected by the payment of cash, the issuance of equity instruments, incurring of liabilities, or involvement of other assets in exchange for the acquisition of the business. ◼ Obtaining the control over a subsidiary (parent – subsidiary) and hence, international deals in scope. © T.Tzanov, Ph.D, UNWE Merger practice – influences on theory ◼ Important characteristics: - Anglo-American perspective – prevalence of market efficiency and disciplining effects; - European (continental) – industrial clubs, national interest. ◼ Role of appropriate national regulations (even within the EU), e.g. employee participation, different types, etc. ◼ In reality mergers (consolidations by equals) don't happen very often. ◼ Usually one company will buy another even if the acquired firm is allowed to proclaim the action as a “merger of equals”, while technically it is an acquisition. ◼ Being bought out often carries negative connotations. ◼ E.g. Daimler-Chrysler. ◼ Good examples: GlaxoSmithKline. ◼ Hence, the category “mergers and acquisitions” consists mainly of acquiring the control over other companies – about 97% of the sample in consideration (Buckley & Ghauri). © T.Tzanov, Ph.D, UNWE  Types of mergers (1) ◼ Classification of the Federal Trade Commission adopted worldwide: ◼ Horizontal mergers – within the same industry or at the same stage of production (often competitors). Data for the U.S. and form Europe - over 50% of all reported M&A horizontal in nature (between 40 and 70% in different periods, about 2/3 in the 90s 20th century, Meier, Schier, 2000); ◼ Vertical – vertical integration in a supply chain/value added chain (e.g. manufacturer-distributor, supplier-manufacturer). Backward vertical integration – control over subsidiaries supplying inputs used in production. Forward (distribution, retail centers, etc.); ◼ Conglomerate – combination of firms in different industries, strategically unrelated firms (widespread in the 60s following the development of portfolio and risk diversification theories, resulting in almost ¼ of deals for that period. Yet in the 90s less than 1/10 of all operations, Meier, Schier, 2000). © T.Tzanov, Ph.D, UNWE  Types of mergers (2) ◼ From the point of view of strategic approach and management &shareholders’ involvement: ◼ Friendly; ◼ Hostile or “takeovers” – directly approaching stockholders of the target company without the consent of its management. ◼ Defensive tactics. ◼ From financing the deal perspective – LBOs (“leveraged buy- outs”) the investor acquires a controlling stake in the target where a significant percentage of the purchase price is financed through leverage (borrowing). Different approaches: ◼ MBOs (“management buy-outs”) – by the own managers of the company who mobilize own and debt resources; ◼ MBIs (“management buy-in”) or BIMBO (“buy-in management buy-out”). © T.Tzanov, Ph.D, UNWE  Defensive tactics (Brief overview) ◼ Supermajority – a high percentage of shares (typically 80%) needed to approve a merger; ◼ Poison pill – existing shareholders are issued rights that, in case there is a significant purchase of a raider, they are offered to purchase additional stock at a bargain price. ◼ White knight – refers to friendly acquirer of the target firm in a hostile takeover attempt. ◼ Crown jewel - the most valuable unit(s) of a corporation in terms of profitability, asset value, future prospects, etc. ◼ Defense by creating anti-takeover clauses which compels the sale of their crown jewels if a hostile takeover occurs. ◼ Golden parachutes – generous payoffs if the managers lose their jobs as a result of a takeover. © T.Tzanov, Ph.D, UNWE  Importance of cross-border deals ◼ International transactions intensively undertaken by MNCs since second half of the 1980s (Cooke; Haspeslagh, Jemison). Evidence on cross-border deals from the 60s and 70s though – mainly U.S. and European companies. ◼ Nowadays major proportion of aggregated FDI worldwide generated by international M&A activity (WIR, UNCTAD; Globerman & Shapiro). ◼ As of end of 20th century international M&As are declared by practitioners as “the preferred form of internationalization”, as a “major tool for corporate expansion of the modern MNC”. ◼ Fluctuations pre- and post-COVID-19 pandemic, nowadays. ◼ Hence, IM&As studies – integral part not only of International financial management but of International business studies as well (Dunning). ◼ Overall – same financial and strategic considerations. © T.Tzanov, Ph.D, UNWE  Measuring efficiency (1) ◼ Gain only if the two are worth more together, than apart: G = VА+В – (VА + VВ), G – gain, if positive, economic justification; VА+В – value of the combined entity; VА , VВ – value of А and respectively В before the transaction. VА = NА. pА, и VВ = NВ. pВ, whereas, NА , NВ – number of shares in А and В; pА , pВ – price per share in A and B. Alternatives to market capitalization – DCF interpretation. ◼ G = synergies. © T.Tzanov, Ph.D, UNWE  Efficiency and synergies ◼ Operational synergies – undoubted microeconomic effects (Röller, Stennek, Verboven). ◼ Firm level efficiency – operational synergies: 1. Rationalization – relocation and optimization (redundancies); 2. Economies of scale and scope – minimizing average costs in a LT perspective; 3. Technological transfer; 4. Optimization of production factors usage; 5. Management efficiency. ❑ Financial synergies: 1. Access to free cash flows; 2. Tax effects – minimizing corporate taxes due (doubtful); 3. Cheaper credit resources. © T.Tzanov, Ph.D, UNWE M&As efficiency gains – conclusions ◼ Between ½ and ¾ of M&A samples in consideration – transactions are not reaching the expected efficiency gains. ◼ Importance of managerial factors, such as: ◼ Strategic planning; ◼ Strategic relatedness – better results when companies are related – similar or complementary activities (Fowler, Schmidt); ◼ Organizational issues – HR, integration, organizational culture, communication (Devine); ◼ Importance of managing the whole process of a given transaction (Haspeslagh & Jemison): ◼ Preparation; ◼ Transaction conclusion; ◼ Integration. © T.Tzanov, Ph.D, UNWE  The process of a M&A deal Activities: Strategic concept Negotiations Org.-legal integration Selection of partners Due diligence (legal and Integration policies Preliminary evaluation financial) Plan for integration Preparation Transaction Integration Enterprise valuation HR integration Leadership structure Risk assessment Preparation for negotiations Deal conclusion Change management Control © T.Tzanov, Ph.D, UNWE Thank you for your attention!