Intro to Mergers & Acquisitions PDF

Corporate & Entrepreneurial Finance Intro to Mergers & Acquisitions Building Competence. Crossing Borders. Prof. Dr. Mehdi Mostowfi [email protected] Content and Objectives Content Objectives Course Syllabus 1. Knowing the terms “mergers...

Corporate & Entrepreneurial Finance Intro to Mergers & Acquisitions Building Competence. Crossing Borders. Prof. Dr. Mehdi Mostowfi [email protected] Content and Objectives Content Objectives Course Syllabus 1. Knowing the terms “mergers and acquisitions” and being familiar with the Definition and Types of different types of transactions M&A Transactions 2. Basic understanding of the historic M&A Market and Players development of the M&A market 3. Knowing the main players and their roles Motives for M&A in the M&A market Transactions, Challenges and risks 4. Understanding the rationale and the main challenges/risks of M&A transactions 2 Contents 1 Definition and Types 2 M&A Market and Players 3 Motives for M&A Transactions, Challenges and Risks 3 Definition Two companies agree to join together and to merge into a single legal entity. The remaining single entity may be one of the two companies or a new entity in which both companies merge in. Merger Sometimes the term “Merger” is also used for so-called Mergers of Equals which are technically not necessary Mergers (but Acquisitions) Acquisition is the purchase of the share capital (or the entire Acquisition assets) of one company by another. Both companies continue to exist as legal entities. The terms are often used in combination and/or synonymously 4 M&A and other Related but Different Conceptual Pairs Mergers vs See Slide 4 Acquisitions Asset Deal vs … concerns the legal structuring of an M&A transaction (see Share Deal following slide) … concerns the way the purchase price is paid: Cash Deal Cash Deal: in cash vs Share-for-Share Deal Share-for-Share Deal: by shares of the acquiring company Buyer(s)/seller(s) might also agree on a combination of both. 5 Legal Structure of M&A Transactions: Share vs Asset Deal Object of Purchase = Shares or LLC Equity Interests The legal entity owning the business/operations of the target company remains unchanged Share Deal All assets and liabilities of the company automatically are transferred with the target company to the buyer in an economic sense Object of Purchase = Assets, Liabilities, Contracts, and Employees of a business Asset Deal The legal entity owning the business/operations of the target company changes Only those assets, liabilities, and contracts mentioned explicitly in the asste purchase contract transfer to the buyer Choice of legal structure has a number of tax/legal implications. Economically, the same result can be reached by both options. 6 Types of M&A Transactions Types of M&A Horizontal Vertical Conglomerate Buyout Forward Backward integration integration Strategic M&A Financial M&A 7 Contents 1 Definition and Types 2 M&A Market and Players 3 Motives for M&A Transactions, Challenges and Risks 8 M&A Market Overview (1/2) Announced Deal Volume & Stock Market Development 6’000.0 6000 Volumes announced M&A Transactions in bn USD 5’000.0 5000 4’000.0 4000 Index in Points 3’000.0 3000 2’000.0 2000 1’000.0 1000 0.0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Volume Announced S&P 500 Quelle: imaa (1985-1997) & Bloomberg (1998-2021) 9 M&A Market Overview (2/2) Announced vs Completed Transactions 6’000 5’000 Globale M&A Volumina in Mrd. USD 4’000 3’000 2’000 1’000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Volume completed Volume announced Quelle: Bloomberg 10 M&A Players and Advisors M&A Bankers ((Investment Bank)) Management M&A Lawyers Buyers/Sellers Consultants Auditors Tax Advisors 11 Due Diligence Areas Commercial/Business/Market Due Diligence Financial Due Diligence Tax Due Diligence Legal Due Diligence Technical Due Diligence Environmental Due Diligence Organisational/HR Due Diligence (if not covered by Commercial and/or Legal DD) 12 Contents 1 Definition and Types 2 M&A Market and Players 3 Motives for M&A Transactions, Challenges and Risks 13  Rationale for M&A Transactions Motives of M&A Transactions: Overview Elimination of Economics of Target Managerial Synergies inefficient vertical undervaluation motives management integration  Revenue  Enhancing the  Share price  Capture value  Power, higher synergies products or and/or agreed potential of remuneration  Cost synergies increasing the purchase price companies or perks operating lower than which are  Manifestation  Financial margin by market value poorly run synergies of agency expanding the  Result of  One of the problems value chain market main motives  Principal inefficiencies for buyout benefit: better coordination and reduced transaction costs 14 Types and Sources of Synergies Revenue synergies: - Cross-selling - Increased market/bargaining power towards customers and distribution channels - Access to new geographic regions (entering new geographic markets) - Know how transfer/exchange (especially in the context of R&D activities) Cost synergies: - Economies of scale - Increased market/bargaining power towards suppliers - Reduction of “overhead costs” - Increased efficiency in R&D activities Financial synergies: Reduction of cost of capital through - Risk diversification - “Internal capital market effects” 15 Dubious Rationale of Internal Capital Market Effects Idea vs Reality: Illustrated using the BCG Matrix High Market Growth «Question Marks» «Stars» boost growth SBU 2 SBU 2 «Poor Dogs» «Cash Cows» Cash flows SBU 3 SBU 1 Low Low Relative Market Share High Idea: Use cash flows generated by «Cash Cows» to finance «Question Marks» Reality: Cash flows from «Cash Cows» are often used to finance «Poor Dogs» 16 Challenges/Risks of M&A Transactions Execution risks (buyer’s perspective) Referral to Competition Commission: Acquisition may be blocked Likelihood of not detecting significant risk factors in the due diligence Large acquisition premium (in public takeovers) if bid contested - premium up to 50% not uncommon High valuation/price due to competition in auction processes Generally: Risk of overpaying (“winner’s curse”) Other difficulties Cultural problems (post-merger integration) Exchange rate risk (cross-border mergers) Complex taxation and legal issues 17