pcf (2) 4_mergers_and_acquisitions[2] ms
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Mergers and Acquisitions
Mergers and Acquisitions
In this lecture we will discuss possible motives for takeovers or
mergers what is involved in a
merger/takeover whether takeovers/mergers create
value
Introduction
Takeover Merger
‘the combining of two business entities under common ownership’, Arnold, p865
In practice most business amalgamations are usually takeovers
3 main types of business integration
o horizontal takeovers (including cross-border takeovers)
companies in similar lines of activityo vertical takeovers
companies from different stages of the production line
o backwardo forward
o conglomerate takeoverscompanies in different lines of activity
Some Major Takeovers(1988 - 2004)
Year Bidder Target Value (£m) Type
1988 BP Britoil 2,323 Vertical Back.
1988 Nestlé Rowntree 2,666 Horizontal
1995 Glaxo Welcome 9,150 Horizontal
1995 Hanson Eastern Electricity
2,400 Conglomerate
1996 Granada Forte 3,600 Horizontal
2000 GlaxoWelcome SmithKlineBeecham
38,600 Horizontal
2002 National Grid Lattice Group
8,400 Horizontal
2004 Morrisons Safeway 2,900 Horizontal
More Takeovers(2000 - 2010)
Year Bidder Target Value (£m)
ShValue?
2000 RBS NatWest 23,600 Yes
2000 France Telecom
Orange 25,000 No
2001 Bank of Scotland
Halifax 30,000 Yes then no
2004 Santander Abbey 9,000 ?
2007 RBS ABN AMRO 49,000 No
2008 HBOS Lloyds 12,000 No
2010 Kraft Cadbury 11,500 ?
See Independent article on Studynet
Do mergers/takeovers create shareholder value?
For the target company? For the acquiring company? ‘Indeed, mergers and acquisitions seldom
live up to their promise of delivering strategic benefits, easy growth and a boost in the value of the acquirer's shares. To be sure, some do work. According to academics, as many as 35 per cent do. But that still means more than 60 per cent of deals fall flat chasing the elusive goal reached by a minority.’
Independent Business, Jan 2009
Objectives of takeovers/mergers
To increase wealth, i.e. generate positive NPVs
through either:1. increasing incremental cash flowsor2. reducing the level of risk for existing
cash flows (thus causing a reduction in the discount rate)
Motives for takeovers
Economic justifications Financial motives Managerial motives
Economic justifications
Synergistic effects i.e. value of combined entity is greater than the sum of the values of the individual entities
• PV(A+B) = PV(A) + PV(B) + extra
• market power• economies of scale• R & D
• entry to new markets
Economic justifications
Increase in market power horizontal integration can reduce
competition vertical integration can ensure a final
market or create barriers to entry conglomerate mergers can involve
cross-subsidisation
Economic justifications
Economies of scale linked to production or through lowering the costs of inputs improved communications and reduced
bargaining costs administration, R&D, purchasing
through increased size
Economic justifications
Research and development activities
Entry to new markets/industries
Particular expertise customer service, billing procedures
Financial Justifications
Financial synergy (lower costs of capital, reduced risk of bankruptcy) through diversification
Bootstrapping - increasing EPS by acquiring companies with lower PE ratios than their own
Bootstrapping
Firm A earnings = £1m, share capital 10m ordinary shares trading at £2EPSA = 10p PEA ratio = 20
Firm B earnings = £1m, share capital 10m ordinary shares trading at £1
EPSB = 10p PEB ratio = 10
Bootstrappingo A acquires B o The offer is 1 share of A for 2 shares of Bo Results in earnings of the group of £2m
with issued share capital of 15m shareso EPS is thus 13.33p and if the market
believes that the new entity has the same earnings potential and growth as Firm A, i.e. a PE ratio of 20, then the price of these shares should be:
o PA/13.33 = 20, PA will be £2.67
Managerial Motives
Managers may have different objectives from shareholders (Agency problem) Empire building Status Power Remuneration
Hubris (Roll 1986) excessive self-confidence/arrogance
Managerial Motives
Can result in wealth being transferred from shareholders of the acquiring company to shareholders of the target
Takeover of Cadbury by Kraft
List the likely motives:
Financing Takeovers/Mergers
Takeovers/mergers are open market transactions
Amount to be paid is a matter of judgement
Method of financing must be both attractive to target shareholders and acceptable to acquirer
Methods
Cash Ordinary Shares in bidder firm Loan stocks of bidder firm Cash and ordinary shares tend to be
the preferred methods
Bidder will have to take into account the effect on capital structure
Cash may have to be raised from a rights issue
Cash vs shares
Cash: acquiring company’s shareholders retain same level of control over their company
Shares: shareholders of the acquired company can maintain an interest through the combined entity
Cash
Kraft and Cadbury £8.40 a share £11.5 bn cash and shares Kraft had to borrow £7 bn to finance the
deal
Bid premium
a substantial sum over the pre-bid share price of the target to make the offer attractive to the target shareholders
ABN AMRO valued at 50bn eurosBarclays bid 68 bn eurosRBS paid 71 bn euros
on average 30% to 50% of pre-bid value
Transaction costs
Advisers’ fees Underwriters’ fees Arrangement fees Legal costs Accounting costs Stock exchange fees Public relations bills RBS and ABN – 660million euros
Stages of a bid
Firm appoints advisers Identify a target Value the target Make approach to the target Notify shareholders Negotiation Recommendation to shareholders
Stages of a bid
Initial offer is open for 21 days Revised offer open for 14 days after Maximum period for bid is 60 days
Regulation of Mergers in UK
Competition Commission (formerly Monopolies and Mergers Commission) a statutory body reviews all activity that
accounts for +25% of market or involves purchase of assets £70m+
concerned with the outcome of the merger/takeover
Takeover Panel a self-regulatory body deal with conduct of the takeover/merger
Rules
A 3% stake must be disclosed to the company
A stake of over 30% triggers a bid makes it difficult for another party to
bid successfully A holding of 90% of the shares
means the acquirer can force sale of remaining 10%
Takeovers - Some Defences
Pre-bid defence Circulation of victim co. shareholders Profit announcements / forecasts Dividend increase announcements Revaluation of assets “White Knight” defence “Pac Man” defence “Poison Pill” defence
Are mergers/takeovers successful?
Mergers/acquisitions are investments Success should mean the generation of positive
NPVs Research
Acquisitions often fail to create value for the shareholders in the bidding company
Some researchers have found significant gains to S/Hs of target firms
KPMG Report 1999 – 83% of cross border mergers failed to create value for shareholders in acquiring firm
Arnold’s ten golden rules
Arnold, exhibit 23.25
Further reading
Arnold, G. Corporate Financial Management, Chapter 23
Robbins, M. Independent Business Tuesday, 20 January 2009 Was ABN the worst takeover deal ever?
Kraft and Cadburys
£11.5 billion
Unilever and Ben and Jerry’s
$326million