Summary
contemporary issues in finance
,Table of contents
1 Non-M&A growth strategies & divestitures ________________________________________ 4
1.1 Benefits of M&A _____________________________________________________________________ 4
1.2 Horizontal M&A _____________________________________________________________________ 5
1.3 Vertical M&A ________________________________________________________________________ 5
1.4 Conglomerate ______________________________________________________________________ 6
1.5 History of M&A ______________________________________________________________________ 7
1.6 Value destruction by M&A’s __________________________________________________________ 8
1.6.1 Behavioral theories _________________________________________________________________________ 8
1.7 Is M&A worth it?_____________________________________________________________________ 9
1.7.1 Event studies ______________________________________________________________________________ 9
1.7.2 Accounting studies ________________________________________________________________________ 13
1.7.3 Surveys based studies _____________________________________________________________________ 14
1.7.4 M&A value creation ________________________________________________________________________ 14
1.8 Alternative forms of growth _________________________________________________________ 15
1.8.1 Corporate Cooperation ____________________________________________________________________ 15
1.8.2 Licensing _________________________________________________________________________________ 16
1.8.3 Franchising _______________________________________________________________________________ 16
1.8.4 Minority investments ______________________________________________________________________ 16
1.9 Growth strategies __________________________________________________________________ 17
1.9.1 Divestitures _______________________________________________________________________________ 17
2 Financial restructuring __________________________________________________________ 21
2.1 Financial and strategic value creation_______________________________________________ 21
2.2 Leveraged recapitalization _________________________________________________________ 21
2.2.1 Result 1 __________________________________________________________________________________ 21
2.2.2 Result 2 __________________________________________________________________________________ 25
2.2.3 Leveraged recaps: empirical studies ________________________________________________________ 27
2.3 Dual-class stock recapitalization (DCR) _____________________________________________ 28
2.4 Exchange offer _____________________________________________________________________ 30
2.5 Absolute Pricing Rule (APR) _________________________________________________________ 30
2.6 Financial distress __________________________________________________________________ 31
2.6.1 Bankruptcy _______________________________________________________________________________ 31
2.6.2 Costs of financial distress __________________________________________________________________ 32
2.6.3 Liquidations ______________________________________________________________________________ 35
3 Going private & LBOs ____________________________________________________________ 36
3.1 Going private ______________________________________________________________________ 36
3.1.1 LBO vs. Leveraged recap ___________________________________________________________________ 36
3.1.2 LBO deal structure ________________________________________________________________________ 37
2
, 3.1.3 Valuation of LBO companies _______________________________________________________________ 39
3.1.4 LBO stages _______________________________________________________________________________ 42
3.1.5 Attractive LBO targets______________________________________________________________________ 42
3.2 Exit strategies______________________________________________________________________ 43
3.3 Empirical studies __________________________________________________________________ 43
3.4 Value creation in LBOs _____________________________________________________________ 43
3.4.1 Positive value creation _____________________________________________________________________ 43
3.4.2 Value creation through expropriation ________________________________________________________ 44
3.4.3 Value creation in LBOs: post buyout _________________________________________________________ 45
3.4.4 Optimism or misrepresentation ____________________________________________________________ 45
3.5 LBO waves _________________________________________________________________________ 46
4 Share repurchases ______________________________________________________________ 49
4.1 Repurchases_______________________________________________________________________ 49
4.1.1 Repurchases vs. LBO/recap ________________________________________________________________ 50
4.1.2 Repurchase motives _______________________________________________________________________ 50
4.2 Fixed-price tender (FPT) offers ______________________________________________________ 51
4.3 Dutch auction repurchases (DAR) ___________________________________________________ 52
4.4 Transferable put rights (TPR) ________________________________________________________ 53
4.5 Open market repurchases (OMR) ___________________________________________________ 54
4.6 Event studies ______________________________________________________________________ 54
4.6.1 Event studies (‘90s) ________________________________________________________________________ 55
4.6.2 Event studies (‘00s) ________________________________________________________________________ 56
4.7 Undervaluation model _____________________________________________________________ 56
4.8 Repurchases vs. dividends _________________________________________________________ 57
4.8.1 Empirical evidence ________________________________________________________________________ 58
4.8.2 Motives of the dividend vs. repurchase choice _______________________________________________ 58
4.9 Alternative use of dividend funds ___________________________________________________ 59
4.10 Buyback boom _____________________________________________________________________ 60
5 Investment strategies & merger arbitrage ________________________________________ 61
5.1 Investment strategies ______________________________________________________________ 61
5.1.1 Detecting targets __________________________________________________________________________ 61
5.2 Post-bid strategy ___________________________________________________________________ 62
5.2.1 Merger arbitrage ___________________________________________________________________________ 62
5.3 Merger arbitrage funds _____________________________________________________________ 69
5.3.1 Merger arbitrage funds and leverage ________________________________________________________ 69
5.3.2 Selling points _____________________________________________________________________________ 70
5.3.3 Problems with selling points ________________________________________________________________ 70
5.3.4 Merger arbitrage funds _____________________________________________________________________ 70
3
, 1 Non-M&A growth strategies & divestitures
First we need to understand what Mergers & Acquisitions entails.
▪ A merger is a union of 2 partners of more or less equal size; thorough restructuring of a new entity;
often with a new name.
E.g. Dow Chemical Co. and DuPont Co. -> DowDuPont, Ahold and Delhaize -> Ahold Delhaize
▪ An acquisition means the process of obtaining other entities, in good faith or by hostile takeover.
The goal is to generate value by looking for synergies: Positive Net Present Value (NPV1) Transaction.
“Synergy is a term widely used in business to explain an acquisition that otherwise makes no sense.”
~ Warren Buffet
1.1 Benefits of M&A
Traditionally implemented due to economies of scale, but M&A today knows a wider definition of synergy
gains:
1. Economies of scale
a. Cost Reduction in production, administrative expenses and R&D
b. Increased market power
2. Economies of scope
a. Wider range of products
b. Complementarities (improving/emphasizing each other)
3. Technological benefits
a. Buying existing technology and/or patents
b. Buying R&D capacity and know-how: R&D is expensive and takes a long time without the
certainty that it will pay off, therefore this would also make the deal more expensive
4. Attract new skills
a. Management
b. Highly qualified personnel
5. Client relationships
a. “Follow the client”
b. One-stop shopping solutions: Already having clients who buy your product in one area, so
this way you can expand within your existing client pool.
6. Globalisation
a. Growth in foreign markets
b. Delocalised production; possible benefit of low wages and low regulation
7. Diversification
a. Reduce risk in uncertain times.
b. Note: not welcomed by investors, as they can easily diversify themselves and aren’t sure the
company will be efficient enough in every area
Even though a merger or acquisition might look promising for future expansion, the differences between
companies might be to big of an obstacle to overcome. E.g. Dow and DuPont separated after internal conflicts,
Ahold went in the merger as the larger partner and now as a result Delhaize has less power, PSA group and
FCA, both car manufacturers, merged into Stellantis and are competing for the same clients.
1
NAW : Netto Actuele Waarde
4
contemporary issues in finance
,Table of contents
1 Non-M&A growth strategies & divestitures ________________________________________ 4
1.1 Benefits of M&A _____________________________________________________________________ 4
1.2 Horizontal M&A _____________________________________________________________________ 5
1.3 Vertical M&A ________________________________________________________________________ 5
1.4 Conglomerate ______________________________________________________________________ 6
1.5 History of M&A ______________________________________________________________________ 7
1.6 Value destruction by M&A’s __________________________________________________________ 8
1.6.1 Behavioral theories _________________________________________________________________________ 8
1.7 Is M&A worth it?_____________________________________________________________________ 9
1.7.1 Event studies ______________________________________________________________________________ 9
1.7.2 Accounting studies ________________________________________________________________________ 13
1.7.3 Surveys based studies _____________________________________________________________________ 14
1.7.4 M&A value creation ________________________________________________________________________ 14
1.8 Alternative forms of growth _________________________________________________________ 15
1.8.1 Corporate Cooperation ____________________________________________________________________ 15
1.8.2 Licensing _________________________________________________________________________________ 16
1.8.3 Franchising _______________________________________________________________________________ 16
1.8.4 Minority investments ______________________________________________________________________ 16
1.9 Growth strategies __________________________________________________________________ 17
1.9.1 Divestitures _______________________________________________________________________________ 17
2 Financial restructuring __________________________________________________________ 21
2.1 Financial and strategic value creation_______________________________________________ 21
2.2 Leveraged recapitalization _________________________________________________________ 21
2.2.1 Result 1 __________________________________________________________________________________ 21
2.2.2 Result 2 __________________________________________________________________________________ 25
2.2.3 Leveraged recaps: empirical studies ________________________________________________________ 27
2.3 Dual-class stock recapitalization (DCR) _____________________________________________ 28
2.4 Exchange offer _____________________________________________________________________ 30
2.5 Absolute Pricing Rule (APR) _________________________________________________________ 30
2.6 Financial distress __________________________________________________________________ 31
2.6.1 Bankruptcy _______________________________________________________________________________ 31
2.6.2 Costs of financial distress __________________________________________________________________ 32
2.6.3 Liquidations ______________________________________________________________________________ 35
3 Going private & LBOs ____________________________________________________________ 36
3.1 Going private ______________________________________________________________________ 36
3.1.1 LBO vs. Leveraged recap ___________________________________________________________________ 36
3.1.2 LBO deal structure ________________________________________________________________________ 37
2
, 3.1.3 Valuation of LBO companies _______________________________________________________________ 39
3.1.4 LBO stages _______________________________________________________________________________ 42
3.1.5 Attractive LBO targets______________________________________________________________________ 42
3.2 Exit strategies______________________________________________________________________ 43
3.3 Empirical studies __________________________________________________________________ 43
3.4 Value creation in LBOs _____________________________________________________________ 43
3.4.1 Positive value creation _____________________________________________________________________ 43
3.4.2 Value creation through expropriation ________________________________________________________ 44
3.4.3 Value creation in LBOs: post buyout _________________________________________________________ 45
3.4.4 Optimism or misrepresentation ____________________________________________________________ 45
3.5 LBO waves _________________________________________________________________________ 46
4 Share repurchases ______________________________________________________________ 49
4.1 Repurchases_______________________________________________________________________ 49
4.1.1 Repurchases vs. LBO/recap ________________________________________________________________ 50
4.1.2 Repurchase motives _______________________________________________________________________ 50
4.2 Fixed-price tender (FPT) offers ______________________________________________________ 51
4.3 Dutch auction repurchases (DAR) ___________________________________________________ 52
4.4 Transferable put rights (TPR) ________________________________________________________ 53
4.5 Open market repurchases (OMR) ___________________________________________________ 54
4.6 Event studies ______________________________________________________________________ 54
4.6.1 Event studies (‘90s) ________________________________________________________________________ 55
4.6.2 Event studies (‘00s) ________________________________________________________________________ 56
4.7 Undervaluation model _____________________________________________________________ 56
4.8 Repurchases vs. dividends _________________________________________________________ 57
4.8.1 Empirical evidence ________________________________________________________________________ 58
4.8.2 Motives of the dividend vs. repurchase choice _______________________________________________ 58
4.9 Alternative use of dividend funds ___________________________________________________ 59
4.10 Buyback boom _____________________________________________________________________ 60
5 Investment strategies & merger arbitrage ________________________________________ 61
5.1 Investment strategies ______________________________________________________________ 61
5.1.1 Detecting targets __________________________________________________________________________ 61
5.2 Post-bid strategy ___________________________________________________________________ 62
5.2.1 Merger arbitrage ___________________________________________________________________________ 62
5.3 Merger arbitrage funds _____________________________________________________________ 69
5.3.1 Merger arbitrage funds and leverage ________________________________________________________ 69
5.3.2 Selling points _____________________________________________________________________________ 70
5.3.3 Problems with selling points ________________________________________________________________ 70
5.3.4 Merger arbitrage funds _____________________________________________________________________ 70
3
, 1 Non-M&A growth strategies & divestitures
First we need to understand what Mergers & Acquisitions entails.
▪ A merger is a union of 2 partners of more or less equal size; thorough restructuring of a new entity;
often with a new name.
E.g. Dow Chemical Co. and DuPont Co. -> DowDuPont, Ahold and Delhaize -> Ahold Delhaize
▪ An acquisition means the process of obtaining other entities, in good faith or by hostile takeover.
The goal is to generate value by looking for synergies: Positive Net Present Value (NPV1) Transaction.
“Synergy is a term widely used in business to explain an acquisition that otherwise makes no sense.”
~ Warren Buffet
1.1 Benefits of M&A
Traditionally implemented due to economies of scale, but M&A today knows a wider definition of synergy
gains:
1. Economies of scale
a. Cost Reduction in production, administrative expenses and R&D
b. Increased market power
2. Economies of scope
a. Wider range of products
b. Complementarities (improving/emphasizing each other)
3. Technological benefits
a. Buying existing technology and/or patents
b. Buying R&D capacity and know-how: R&D is expensive and takes a long time without the
certainty that it will pay off, therefore this would also make the deal more expensive
4. Attract new skills
a. Management
b. Highly qualified personnel
5. Client relationships
a. “Follow the client”
b. One-stop shopping solutions: Already having clients who buy your product in one area, so
this way you can expand within your existing client pool.
6. Globalisation
a. Growth in foreign markets
b. Delocalised production; possible benefit of low wages and low regulation
7. Diversification
a. Reduce risk in uncertain times.
b. Note: not welcomed by investors, as they can easily diversify themselves and aren’t sure the
company will be efficient enough in every area
Even though a merger or acquisition might look promising for future expansion, the differences between
companies might be to big of an obstacle to overcome. E.g. Dow and DuPont separated after internal conflicts,
Ahold went in the merger as the larger partner and now as a result Delhaize has less power, PSA group and
FCA, both car manufacturers, merged into Stellantis and are competing for the same clients.
1
NAW : Netto Actuele Waarde
4
