1、25,Corporate Financial Management 3e Emery Finnerty Stowe,Mergers and Acquisitions,Learning Objectives,Understand valid motives for merging. Explain why a corporate acquisition can be analyzed as a complex capital investment. Describe differences in the methods of acquisitions. Estimate the value of
2、 a potential acquisition using different methods. Explain the significance of paying for an acquisition with common stock.,Chapter Outline,25.1 What Is Special About a Merger? 25.2 Why Firms Merge 25.3 Technical Issues 25.4 Comparative Analysis of Mergers 25.5 Discounted-Cash-Flow Analysis 25.6 The
3、Medium of Payment 25.7 Merger Tactics 25.8 Leveraged Buyouts,Mergers and Acquisitions and The Principles of Finance,Self-Interested Behavior Look for profitable acquisitions. Two-Sided Transactions Acquisition requires a premium. Comparative Advantage Complentary comparative advantages are potential
4、ly valuable. Behavioral Principle Use comparable acquisitions for guidance. Valuable Ideas Innovations in securities and acquisition structure can be valuable.,Mergers and Acquisitions and The Principles of Finance,Incremental Benefits The net advantage of an acquisition is based on the incremental
5、after-tax cash flows. Risk-Return Trade-Off A merger may benefit bondholders at the expense of the stockholers. Diversification Diversification is a questionable motive for a conglomerate merger. Capital Market Efficiency The method of accounting does not affect shareholder benefits from an acquisit
6、ion. Time Value of Money Always take the time value of money into account.,Mergers and Consolidations,A merger involves a combination of two firms: the acquirer and the acquiree. The acquirer is the surviving firm and it absorbs all the assets and liabilities of the target firm. In a consolidation,
7、two or more firms combine to form a new entity.,When Do Mergers Create Value?,Mergers create value when the merging firms are worth more in combination than separately. The Net Advantage to Merging (NAM) is the net benefit to the acquirers shareholders.,When Do Mergers Create Value?,Suppose firm A b
8、uys firm B. Let VA = market value of acquirer A VB = market value of acquiree B VAB = market value of A and B in combination PB = premium offered by A to Bs shareholders E = expenses associated with the merger.NAM = VAB (VA + VB ) PB E,Net Advantage to Merging,Firm A, with a total market value of $8
9、0 million, is planning to acquire Firm B, which has a total market value of $30 million. The estimated value of the combined firm is $125 million. A premium of $10 million would have to be paid to firm Bs shareholders. Expenses of the merger will amount to $1 million. What is the Net Advantage to Me
10、rging?,Net Advantage to Merging,NAM = VAB (VA + VB ) PB E = $125 ($80 + $30) $10 $1 =$4 million Shareholders of Firm A will gain $4 million from the merger, after having paid a $10 million premium to firm Bs shareholders. The synergistic benefit of the merger is $4 million.,Types of Mergers,Horizont
11、al mergers Combination of two firms in the same line of business. Vertical mergers Integrating forward towards the consumer, or backwards towards the supplier, in a particular line of business. Conglomerate mergers Combination of firms in unrelated lines of business.,Valid Motives for Merging,Achiev
12、ing operating efficiencies Two firms have complementary resources. Most likely in horizontal and vertical mergers. Achieving economies of scale Two firms in the same line of business. Most likely in horizontal mergers. Economies of scale in production, distribution, or other phase of operations. Ope
13、rating efficiencies and economies of scale are the main source of synergy.,Valid Motives for Merging,Realize tax benefits One firm may not be able to use all of its tax deductions and tax credits due to tax loss carryforwards. Free up surplus cash Grow more quickly or more cheaply,Questionable Motiv
14、es for Merging,Diversification It is the main motive behind conglomerate mergers. Shareholders of acquirer will benefit from merger only if they could not achieve diversification on their own. Corporate versus personal diversification. Enhanced Earnings per Share A firm can increase its EPS by excha
15、nging its shares for those of another firm whose shares have a lower price-earnings ratio.,Questionable Motives for Merging,Financial synergy Small reduction in costs of issuing new securities due to economies of scale. Merger can reduce probability of bankruptcy. In this case, the bondholders gain
16、at the expense of the stockholders due to the co-insurance effect.,Co-Insurance Effect,Firms A and B intend to merge in a conglomerate merger. The values of their debt and equity before the merger are given in the table. Note that Firm As debtholders will not be paid in full in the recessionary stat
17、e. Compute the values of the debt and equity after the merger.,Co-Insurance Effect,All dollar values are in millions.,Co-Insurance Effect,All dollar values are in millions.,Co-Insurance Effect,Total value of the debt increases by $2 million after the merger. The debtholders gain of $2 million comes
18、at the expense of the equityholders: The total value of the equity after the merger is less than the sum of the pre-merger values of the equity by $2 million. The combined cash flows of the two firms in the recessionary state are sufficient to service the debt in that state.,Methods of Acquisition,M
19、erger or consolidation In a merger, the acquirer absorbs the acquiree and emerges as the surviving firm. In a consolidation, a new business entity is created from the combination. Acquisition of stock Executed via a tender offer. Acquisition of assets Acquirer purchases only the assets. Acquirees li
20、abilities are not assumed.,Antitrust Considerations,A transaction must comply with Federal antitrust laws (The Clayton Act) State anti-takeover statutes Federal and state securities laws Corporate charter of each firm,Tax Considerations,In a tax-free acquisition, the selling shareholders are treated
21、 as having exchanged their old shares for similar new shares. Selling shareholders do not have to pay any taxes on the gain realized as a result of the exchange, until the shares are sold. Tax basis of each asset acquired is the same for the two firms.,Tax Considerations,In a taxable acquisition, th
22、e selling shareholders are treated as having sold their shares. Selling shareholders must pay taxes on the gain immediately. Acquirer can “step-up” the tax basis of the assets acquired to their fair market value.,Requirements for Tax-Free Treatment,Business Purpose Test Continuity of Business Test M
23、ode of Acquisition Test Medium of Payment Test,Accounting Considerations,Purchase Method One firm is identified as the acquirer. Purchase price, after adding the fair market value of the liabilities acquired, is allocated to the acquired assets. Excess of purchase price over fair market value of net
24、 assets acquired is recorded as goodwill. Pooling of Interests No longer available in the U.S.,Purchase Method Accounting,Suppose Vyquest issues $60 million of stock and pays Plasmine shareholders this amount for all of its stock. Further, Plasmines fixed assets have a book value of $40 million and
25、a fair market value of $50 million, its working capital has a book and fair market value of $10 million, and its debt has a book value of $15 million and a fair market value of $12 million.,Purchase Method Accounting,Vyquests fixed assets have a book value of $90 million, its working capital has a b
26、ook value of $20 million, and its debt has a book value of $35 million.Under the purchase method, prepare the combined balance sheet.,Purchase Method Accounting,Fair market value of Plasmines total assets = fair market value of fixed assets + working capital = $50 million + $10 million = $60 million
27、. Fair market value of its net assets = fair market value of assets - fair market value of debt = $60 million $12 million = $48 million.,Purchase Method Accounting,Goodwill = Price paid for Plasmine less fair market value of Plasmines net assets = $60 million $48 million = $12 million.,Purchase Meth
28、od Accounting,Valuing Corporate Acquisitions,Comparative analysis Infer the value from the prices paid for firms in comparable transactions. Provides an estimate of a “reasonable” price to pay. Discounted-cash-flow analysis Impact of acquisition on acquirers shareholder wealth, given the acquisition
29、 cost.,Comparative Analysis,Multiple of earnings paid Multiple of cash flow paid Multiple of EBIT paid Multiple of IBITDA paid Premium paid per share of target Multiple of replacement cost paid Price paid per unit of resource,Multiple of Earnings Paid,Purchase price per shareTargets fully diluted ea
30、rnings per share before extraordinary items,Multiple of Cash Flow Paid,Purchase price per shareTargets fully diluted cash flow per share before extraordinary items,Multiple of EBIT Paid,Aggregate purchase price of equity + Market value of debt assumedTargets EBIT before extraordinary items,Multiple
31、of EBITDA Paid,Aggregate purchase price of equity + Market value of debt assumedTargets earnings before interest, taxes, depreciation and amortization before extraordinary items,Multiple of Book Value Paid,Purchase price per shareTargets book value per common share,Premium Paid,Purchase price per sh
32、are Targets share price pre-mergerTargets share price pre-merger,Multiple of Replacement Cost Paid,Aggregate purchase price of equity + Market value of debt assumedReplacement cost of targets assets,Price Paid per Unit of Resource,Aggregate purchase price of equity + Market value of debt assumedNumb
33、er of units of resource target owns,Discounted-Cash-Flow Analysis,An acquisition is a special type of capital budgeting decision. Two approaches: Weighted average cost of capital approach Adjusted present value approach,Acquisition Analysis,The Acer Co. is considering acquiring Ballard Inc. by purch
34、asing all of its outstanding stock at a premium of $7 per share over its current market price. Acer has already determined that it would not step-up the tax basis of Ballards assets. Details of the acquisition are given in the speaker notes. Evaluate the acquisition using the WACC method. What is th
35、e maximum price per share Acer can pay for Ballards stock?,Net Investment in Ballards Equity,Present Value of Ballards Debt,Since the PV of Ballards debt to Acer is less than the cost of retiring the debt at its face value of $40 million, Acer should assume the debt.,Net Acquisition Cost (NAC),Net A
36、cquisition Cost (NAC) = Net investment in equity+ PV of assumed debt = $137,000,000 + $36,467,158 = $173,467,158,Annual CFAT,Annual CFAT = = Annual unleveraged cash flow+ annual after-tax operating economies = $28,000,000 + $3,000,000 = $31,000,000,Weighted Average Cost of Capital,NPV of Acquisition
37、,Where NAC = net acquisition cost CFATt = unleveraged incremental cash flow in period t TVN = terminal cash flow WACC = weighted average cost of capital,NPV of Acquisition,= $37,126,305,NPV of Acquisition Using the WACC Approach,The NPV of the acquisition to Acer, at a purchase price of $27 per shar
38、e, is $37,126,305. If Acer pays $34 per share, the NPV of the acquisition is zero. Maximum price per share = $34,The Medium of Payment,Acquisitions can be paid for in cash, in stock, in debt, or in some combination. To receive tax-free treatment, at least 50% of the purchase price must be paid in st
39、ock.,Common Stock Acquisition,In stock-for-stock transactions, it is customary to negotiate an exchange ratio.,Common Stock Acquisition,The Acer Co. is considering acquiring Ballard Inc. by issuing new Acer shares and giving them to the shareholders of Ballard in exchange for their shares. Acer has
40、already determined that it would not step-up the tax basis of Ballards assets. Details of the acquisition are given in the speaker notes. What is the maximum number of shares Acer can offer for Ballards stock?,Common Stock Acquisition,Recall that we found the value of Ballard to Acer in the NPV anal
41、ysis. To find the break-even exchange ratio, set that value equal to the value of the percentage of the new firm that we give to the shareholders of Ballard.,Common Stock Acquisition,Suppose that Acer has 2,500,000 shares outstanding at a current price of $80. That makes Acer a $200,000,000 firm. Wi
42、th the acquisition of Ballard, it becomes a $372,126,305 firm.,Common Stock Acquisition,The biggest slice of the combined firm that “old” shareholders of Acer can be expected to give away is 46.25%:,Common Stock Acquisition,A break-even exchange would be to issue x new shares such that,x = 2,151,578
43、.81 shares,Both parties would make money with a 1 for 1 exchange.,Merger Tactics,Merger Requires approval of target management Tender offer Made directly to targets stockholders Can bypass target management Can be executed quickly Must be open for at least 20 days Can be made for enough shares to ga
44、in effective control of target Subject to regulation through the Williams Act amendments to the Securities Exchange Act of 1934,Merger Tactics,Proxy contests Initiated by individuals who oppose incumbent management Dissidents solicit shareholders proxies to vote their shares Expensive and time consu
45、ming,Anticipatory Defensive Tactics,Dual class recapitalization ESOPs Poison pills Staggered election of directors Supermajority voting / fair price provisions,Responsive Defensive Tactics,Asset purchases / sales Litigation “Pac-Man” defense Leveraged recapitalization Share repurchase / sale Standstill agreement,Leveraged Buyouts (LBOs),Acquisition is financed principally by borrowing. Debt is secured by a lien on the assets. Operating cash flow from assets is used to service the debt. LBOs often take the firm private.,
