Lecture 1: Introduction, definitions and M&A vs. alternatives
Do mergers matter?
In all disciplines, there is research on M&A (management, economics, sociology, accounting).
M&A value comes in waves. 1998: targets value 4% of GDP US economy, in 2008 15%.
US started acquiring around 1970s and EU 1985
From 1991 onwards more EU M&A, reasons:
- Single currency: single goods market, fee movement in capital, so companies could be
traded easily.
- Increase in competition: more easy to buy companies.
- € dominated bonds: this made is easier to finance the deals.
- EU became more integrated: more access to potential targets.
FDI and M&A
Foreign direct investments: gain 10-100% control in
company abroad.
Most FDI occurs through M&A waves M&A FDI move
together.
Other important element FDI is Greenfield investment: start
own company abroad (China)
Big acquirers: EUR, Nort-America, Australia + Asia.
Targets: majority of targets where US, but became EU
developed regions. Trend is changing, more targets in China
and Asia do theories actually fit for China?
Network of global corporate control: almost 40% of control lies in
hand of 200 companies almost all financial companies.
Could have implications for financial stability.
- Could this endanger market competition? Can it operate like unified
thing?
- Conspiracy of world domination. Well0connectedness implication for
risk assessment?
Corporate restructuring: actions taken to
expand/contract firm’s basic
operations/fundamentally change it
asset/financial structure.
Financial: relies to capital structure of
company.
- Going public/private: initial publif
offering, leveraged buy-out,
management buy-out.
Operational: relies to asset part of
company.
- Joint venture/alliance
- Divesture: getting rid of part of the plants, for example.
- Takeover: part we zoom in.
1
, Friendly takeover: board/management agrees to
takeover.
- Acquisition assets/stock: all firms still exist.
- Merger
Statutory: complete absorption of seller by
buyer, buyer remains its identity and seller
ceases to exist 1 company taking over
other.
Consolidation: merger where entirely new
firm is created. Both buyer + seller cease to exist. shareholders new shares
in company.
Subsidiary: buyer first makes stock/asset purchase and then merges acquired
firm firm becomes controlled by another company.
Hostile takeover: they don’t, but still the other company wants wo buy the company.
Bying companies goes to shareholders.
Acquisition stock
Advantages Disadvantages
Easier; all assets are transferred. Buyer liable for all unknown things target company
might not disclosed.
No formal shareholder/management Integration could be difficult with <100% stock
approval necessary. not full control.
Acquisition assets
Advantages Disadvantages
No minority shareholders Intangible assets usually not transferred
operating losses.
Only 50% of shareholders need to approve More time consuming to acquier same customers
based on trust.
Cherry picking + seller indemnification: More documentation and legal fees difficult to
contractual agreement no risk of shitty transfer taxes.
liabilities
Merger/Acquisition
Advantages Disadvantages
Transfers happen ‘automatically, by rule of Hidden liability risk.
law’.
No minority shareholders (squeeze-out 75% (90% with consolidation) need to approve
rule; country dependent)
No transfer taxes Without squeeze-out, dissenting shareholders can
sue bidder.
Alternative ways of increasing shareholder value (other than M&A)?
Financial restructuring
Operational restructuring
Solo venture: going it alone/organic growth most control, you can choose
everything.
2
, Partnering: marketing/distribution alliances, JVs, licensing, franchising + equity
investments.
Minority investment in other firms: investing only 5% not much control.
Asset swaps:
Yin, X., & Shanley, M. (2008). Industry Determinants of the "Merger versus
Alliance
Looks at decisions between merger/alliances, factors influencing this choice:
1. Industry demands on firms to make a significant commitment.
2. Environmental pressures for flexibility
3. Limitations on firm choices stemming from industry concentration, regulatory forces
and institutional choice.
Authors proposed that industry environment matters: 3 different aspects decision is cost-
benefit analysis in terms of commitment,
flexibility and regulatory and institutional
forces.
1. Low need for flexibility, low
requirements for commitment, low
structural/institutional constraints.
Competitive market, companies don’t
have significant strategic assets.
M&A or alliance both won’t create
significant advantage, because of
fragmentation of the market and
fact that industry participants not called by strategic commitments or adaptions
as requirement for success.
2. High structural + institutional constraint: linked oligopolies. Indicates that there are
just few companies within industry strictly supervised (difficult to buy other
company), difficult entries. Persistent cooperative relationships are common.
Real estate brokers, dry-cleaners, book sellers industries where product/service
quality, personal attention/reputation are valuable, people less willing to shop
around.
Alliance to access reputation, location or other advantage.
M&A is not preferred due to supervision + cooperative relationships.
3. High requirements for flexibility + low structural/institutional constraints: value is
obtained from investment in industry fast-changing industry.
Research-intensive, knowledge-based industries: biotech industry
Alliance more common flexibility desirable to accommodate unexpected
industry developments. You have to keep up with competitors.
4. High requirements for flexibility + high structural/institutional constraints
Venture capital industry: lot of uncertainty continual innovation to adjust to
technological + economic changes.
3
, Alliance more common to maintain flexibility when industry changes.
5. High requirements for commitment you need to invest a lot, but stable
sales/customer/technology, low uncertainty. Potential for economies of scale/scope.
Price competition large, cost advantages needed to achieve competitive position.
Commodity-type industry: agricultural, autoparts.
M&A because of the importance of scale + scope. Also, low institutional
constraints + low need for flexibility.
6. High commitment, high structural/institutional constraints, low flexibility.
Mature manufacturing industries as steel, automobiles, tabacco.
High structural/intuitional constraints implies that there are limitations to link
firms via M&A highly concentrated industry, scrutiny of regulators high
costs of M&A more alliances.
7. High commitment high flexibility, low structural/institutional constraints. Capital-
intensive, innovation, deregulation.
Entertainment, motion pictures strong potential for economies of scale/scope.
Firms face conflicting demands between need for commitment + flexibility
look to other forms both M&A + alliance (Talpa, but also little video makers).
8. High everything: same as 7, but now more costs due to constraints more alliances.
Semiconductor/pharmaceutical industries.
Joint ventures more likely than alliances in industries with high commitment requirements
Lecture 2: Multiples valuation
Valuation as a discipline
Valuation is not a science no right way, relies on subjective estimations of future
developments.
Valuation is not an art because based on principles and well established theories.
Valuation is a craft (ambacht) experience and skill are built over time.
Good valuation = combination right
numbers + right story otherwise
numbers don’t mean much.
Relative valuation: estimates the value of
an asset by looking at the pricing of
'comparable' assets relative to a common
variable like earnings, cash flows, book
value or sales
- Compare company with same
industry, growth rate and risks.
- Relative to the value of a
comparable assets, based on one characteristic (value indicator).
- M2 is value indicator house
MVT= (MVC / VIC) x VIT
4
Do mergers matter?
In all disciplines, there is research on M&A (management, economics, sociology, accounting).
M&A value comes in waves. 1998: targets value 4% of GDP US economy, in 2008 15%.
US started acquiring around 1970s and EU 1985
From 1991 onwards more EU M&A, reasons:
- Single currency: single goods market, fee movement in capital, so companies could be
traded easily.
- Increase in competition: more easy to buy companies.
- € dominated bonds: this made is easier to finance the deals.
- EU became more integrated: more access to potential targets.
FDI and M&A
Foreign direct investments: gain 10-100% control in
company abroad.
Most FDI occurs through M&A waves M&A FDI move
together.
Other important element FDI is Greenfield investment: start
own company abroad (China)
Big acquirers: EUR, Nort-America, Australia + Asia.
Targets: majority of targets where US, but became EU
developed regions. Trend is changing, more targets in China
and Asia do theories actually fit for China?
Network of global corporate control: almost 40% of control lies in
hand of 200 companies almost all financial companies.
Could have implications for financial stability.
- Could this endanger market competition? Can it operate like unified
thing?
- Conspiracy of world domination. Well0connectedness implication for
risk assessment?
Corporate restructuring: actions taken to
expand/contract firm’s basic
operations/fundamentally change it
asset/financial structure.
Financial: relies to capital structure of
company.
- Going public/private: initial publif
offering, leveraged buy-out,
management buy-out.
Operational: relies to asset part of
company.
- Joint venture/alliance
- Divesture: getting rid of part of the plants, for example.
- Takeover: part we zoom in.
1
, Friendly takeover: board/management agrees to
takeover.
- Acquisition assets/stock: all firms still exist.
- Merger
Statutory: complete absorption of seller by
buyer, buyer remains its identity and seller
ceases to exist 1 company taking over
other.
Consolidation: merger where entirely new
firm is created. Both buyer + seller cease to exist. shareholders new shares
in company.
Subsidiary: buyer first makes stock/asset purchase and then merges acquired
firm firm becomes controlled by another company.
Hostile takeover: they don’t, but still the other company wants wo buy the company.
Bying companies goes to shareholders.
Acquisition stock
Advantages Disadvantages
Easier; all assets are transferred. Buyer liable for all unknown things target company
might not disclosed.
No formal shareholder/management Integration could be difficult with <100% stock
approval necessary. not full control.
Acquisition assets
Advantages Disadvantages
No minority shareholders Intangible assets usually not transferred
operating losses.
Only 50% of shareholders need to approve More time consuming to acquier same customers
based on trust.
Cherry picking + seller indemnification: More documentation and legal fees difficult to
contractual agreement no risk of shitty transfer taxes.
liabilities
Merger/Acquisition
Advantages Disadvantages
Transfers happen ‘automatically, by rule of Hidden liability risk.
law’.
No minority shareholders (squeeze-out 75% (90% with consolidation) need to approve
rule; country dependent)
No transfer taxes Without squeeze-out, dissenting shareholders can
sue bidder.
Alternative ways of increasing shareholder value (other than M&A)?
Financial restructuring
Operational restructuring
Solo venture: going it alone/organic growth most control, you can choose
everything.
2
, Partnering: marketing/distribution alliances, JVs, licensing, franchising + equity
investments.
Minority investment in other firms: investing only 5% not much control.
Asset swaps:
Yin, X., & Shanley, M. (2008). Industry Determinants of the "Merger versus
Alliance
Looks at decisions between merger/alliances, factors influencing this choice:
1. Industry demands on firms to make a significant commitment.
2. Environmental pressures for flexibility
3. Limitations on firm choices stemming from industry concentration, regulatory forces
and institutional choice.
Authors proposed that industry environment matters: 3 different aspects decision is cost-
benefit analysis in terms of commitment,
flexibility and regulatory and institutional
forces.
1. Low need for flexibility, low
requirements for commitment, low
structural/institutional constraints.
Competitive market, companies don’t
have significant strategic assets.
M&A or alliance both won’t create
significant advantage, because of
fragmentation of the market and
fact that industry participants not called by strategic commitments or adaptions
as requirement for success.
2. High structural + institutional constraint: linked oligopolies. Indicates that there are
just few companies within industry strictly supervised (difficult to buy other
company), difficult entries. Persistent cooperative relationships are common.
Real estate brokers, dry-cleaners, book sellers industries where product/service
quality, personal attention/reputation are valuable, people less willing to shop
around.
Alliance to access reputation, location or other advantage.
M&A is not preferred due to supervision + cooperative relationships.
3. High requirements for flexibility + low structural/institutional constraints: value is
obtained from investment in industry fast-changing industry.
Research-intensive, knowledge-based industries: biotech industry
Alliance more common flexibility desirable to accommodate unexpected
industry developments. You have to keep up with competitors.
4. High requirements for flexibility + high structural/institutional constraints
Venture capital industry: lot of uncertainty continual innovation to adjust to
technological + economic changes.
3
, Alliance more common to maintain flexibility when industry changes.
5. High requirements for commitment you need to invest a lot, but stable
sales/customer/technology, low uncertainty. Potential for economies of scale/scope.
Price competition large, cost advantages needed to achieve competitive position.
Commodity-type industry: agricultural, autoparts.
M&A because of the importance of scale + scope. Also, low institutional
constraints + low need for flexibility.
6. High commitment, high structural/institutional constraints, low flexibility.
Mature manufacturing industries as steel, automobiles, tabacco.
High structural/intuitional constraints implies that there are limitations to link
firms via M&A highly concentrated industry, scrutiny of regulators high
costs of M&A more alliances.
7. High commitment high flexibility, low structural/institutional constraints. Capital-
intensive, innovation, deregulation.
Entertainment, motion pictures strong potential for economies of scale/scope.
Firms face conflicting demands between need for commitment + flexibility
look to other forms both M&A + alliance (Talpa, but also little video makers).
8. High everything: same as 7, but now more costs due to constraints more alliances.
Semiconductor/pharmaceutical industries.
Joint ventures more likely than alliances in industries with high commitment requirements
Lecture 2: Multiples valuation
Valuation as a discipline
Valuation is not a science no right way, relies on subjective estimations of future
developments.
Valuation is not an art because based on principles and well established theories.
Valuation is a craft (ambacht) experience and skill are built over time.
Good valuation = combination right
numbers + right story otherwise
numbers don’t mean much.
Relative valuation: estimates the value of
an asset by looking at the pricing of
'comparable' assets relative to a common
variable like earnings, cash flows, book
value or sales
- Compare company with same
industry, growth rate and risks.
- Relative to the value of a
comparable assets, based on one characteristic (value indicator).
- M2 is value indicator house
MVT= (MVC / VIC) x VIT
4
