M&A literature summary
Chapter 1
Theories of what causes mergers and acquisitions:
- Synergy: the value realized from the incremental cash flows generated by combining two
businesses. Types:
o Operating synergy:
Economies of scale: the reduction in average total costs for a firm producing a
single product for a given scale of plant because of the decline in average
fixed costs per unit as production increases
Economies of scope: the reduction in average total costs by producing
multiple products form a single location rather than from separate locations.
Can be production-related or overhead- and sales-related
o Financial synergy
- Diversification: buying firms beyond a company’s current lines of business. Product-market
matrix identifies a firm’s primary diversification options:
Conglomerates: firms that operate in a number of largely unrelated industries
- Strategic realignment
- Hubris: winner’s curse: overconfident CEO’s pay more than the target is worth
- Being undervalues: Q-ratio: the ratio of the market value of the acquirer’s stock to the
replacement cost of its assets. Firms can invest in new assets or obtain them by buying a
company with a market value less than what it would cost to replace the assets (Q-ratio<1)
- Managerialism: due to agency problem, manager wants to merge for his own interests
- Tax considerations
- Market power: reduce output or colluding
- Misevaluation
US M&As have clustered in waves (by industry and by time). Different explanations for that:
- Firms react to industry shocks
- Mangers use overvalued stock to buy the assets of lower-valued firms
Types of corporate restructuring:
- Operational restructuring: changing a firm’s asset structure
- Financial restructuring: changing a firm’s capital structure
Perspectives on the definition of mergers:
- A legal perspective: merger: combination of two or more firms, often comparable in size, in
which only one continues to exist legally. Types according to this perspective:
o Statutory or direct merger: one in which the acquiring or surviving company assumes
automatically the assets and liabilities of the target in accordance with the statues of
the state in which the combined companies will be incorporated
o Subsidiary merger: involves the target’s becoming a subsidiary of the parent
1
, o Statutory consolidation: not technically a merger, all legal entities that are
consolidated are dissolving during the formation of the new company
- An economic perspective: types:
o Horizontal: merging firms in the same industry
o Conglomerate: merging firms in different industries
o Vertical: merging firms on their positions in the corporate value chain
Acquisition: when a firm buys a controlling interest in another firm, a legal subsidiary of another firm,
or selected assets of another firm.
Leveraged buyout (LBO): the acquisition of a firm financed primarily by debt with the assets of the
acquired firm used to secure the debt. A management buyout (MBO) is an LBO in which the target
firm’s existing management remains with the firm after the buyout, often owning an equity stake in
the firm
Divestiture: the sale of all or substantially all of a company’ or product line to another party for cash
ro securities.
Spin-off: a transaction in which a parent creates a new legal subsidiary and distributes shares in the
subsidiary to its shareholders as a stock dividend, with the spun-off subsidiary now independent of the
parent.
Split-off: similar to a spin-off, but a split-off involves an offer to exchange parent stock for stock in the
parent firm’s subsidiary.
Equity carve-out: involves the parent issuing a portion of its stock or a subsidiary’s to the public
Takeover; when one firm assumes control of another. Can be friendly or hostile. A takeover usually
comes with a tender offer: a formal proposal to buy shares in another firm made directly to its
shareholders. Can be negotiated (friendly) or hostile too. Self-tender offers: when a firm seeks to
repurchase its stock. Purchase premium or acquisition premium: the excess of the offer price over the
target’s premerger share price
Employee stock ownership plans (ESOPs): trust funds that invest in the securities of the firm
sponsoring the plan.
Business alliances as alternatives to M&As:
- Joint ventures: business relationships formed by two or more parties to achieve common
objectives
- Strategic alliance: generally does not create a separate legal entity and may bee an agreement
to sell each firm’s products to the other’s customers or to co-develop a technology, product, or
process
- Minority investments: involving less than an controlling interest
- Licenses: enable firms to extend their brands to new products and markets by permitting
others to use their brand names or to gain access to a proprietary technology
- Franchise: a form of a license agreement granting a privilege to a dealer from a manufacturer
or franchise service organization to sell the franchiser’s products or services in a given area
Key participants in the M&A process:
- Acquirer
- Target firms
- Providers of specialized services:
o Investment banks
o Lawyers
o Accountants
o Proxy solicitors
2
, o Public relations personnel
- Regulators
- Institutional investors and lenders:
o Insurance pension, and mutual funds
o Commercial banks
o Hedge, private equity, and venture capital funds
o Sovereign wealth funds
o Angel investors
- Activist investors
- M&A arbitrageurs
Yin & Shanley (2008)
Mergers and acquisitions (M&As) and alliances are potential alternative choices for managers.
Three dimensions of industry conditions that are influential in such choices:
- Industry demands on firms to make significant commitment
- The environmental pressures for flexibility
- The limitation on firm choices stemming from individual concentration and institutional
conditions
Alliance: an agreement between two or more firms to jointly manage assets and achieve strategic
objectives. A joint venture (the creation of a separate jointly owned entity) is also a form of alliances
M&As: involve the combination of all of the assets of the participating firms under common
ownership
The fundamental difference between this is ownership: a merger or acquisition implies controlling
ownership interest, but an alliance or joint venture does not.
Typology of industry contexts:
The choice between M&As or alliances is complex and the context in which firms find themselves
have a lot of influence
Chapter 8 (excl. “Real option analysis)
Relative valuation: valuing assets based on how similar assets are valued in the market place.
3
Chapter 1
Theories of what causes mergers and acquisitions:
- Synergy: the value realized from the incremental cash flows generated by combining two
businesses. Types:
o Operating synergy:
Economies of scale: the reduction in average total costs for a firm producing a
single product for a given scale of plant because of the decline in average
fixed costs per unit as production increases
Economies of scope: the reduction in average total costs by producing
multiple products form a single location rather than from separate locations.
Can be production-related or overhead- and sales-related
o Financial synergy
- Diversification: buying firms beyond a company’s current lines of business. Product-market
matrix identifies a firm’s primary diversification options:
Conglomerates: firms that operate in a number of largely unrelated industries
- Strategic realignment
- Hubris: winner’s curse: overconfident CEO’s pay more than the target is worth
- Being undervalues: Q-ratio: the ratio of the market value of the acquirer’s stock to the
replacement cost of its assets. Firms can invest in new assets or obtain them by buying a
company with a market value less than what it would cost to replace the assets (Q-ratio<1)
- Managerialism: due to agency problem, manager wants to merge for his own interests
- Tax considerations
- Market power: reduce output or colluding
- Misevaluation
US M&As have clustered in waves (by industry and by time). Different explanations for that:
- Firms react to industry shocks
- Mangers use overvalued stock to buy the assets of lower-valued firms
Types of corporate restructuring:
- Operational restructuring: changing a firm’s asset structure
- Financial restructuring: changing a firm’s capital structure
Perspectives on the definition of mergers:
- A legal perspective: merger: combination of two or more firms, often comparable in size, in
which only one continues to exist legally. Types according to this perspective:
o Statutory or direct merger: one in which the acquiring or surviving company assumes
automatically the assets and liabilities of the target in accordance with the statues of
the state in which the combined companies will be incorporated
o Subsidiary merger: involves the target’s becoming a subsidiary of the parent
1
, o Statutory consolidation: not technically a merger, all legal entities that are
consolidated are dissolving during the formation of the new company
- An economic perspective: types:
o Horizontal: merging firms in the same industry
o Conglomerate: merging firms in different industries
o Vertical: merging firms on their positions in the corporate value chain
Acquisition: when a firm buys a controlling interest in another firm, a legal subsidiary of another firm,
or selected assets of another firm.
Leveraged buyout (LBO): the acquisition of a firm financed primarily by debt with the assets of the
acquired firm used to secure the debt. A management buyout (MBO) is an LBO in which the target
firm’s existing management remains with the firm after the buyout, often owning an equity stake in
the firm
Divestiture: the sale of all or substantially all of a company’ or product line to another party for cash
ro securities.
Spin-off: a transaction in which a parent creates a new legal subsidiary and distributes shares in the
subsidiary to its shareholders as a stock dividend, with the spun-off subsidiary now independent of the
parent.
Split-off: similar to a spin-off, but a split-off involves an offer to exchange parent stock for stock in the
parent firm’s subsidiary.
Equity carve-out: involves the parent issuing a portion of its stock or a subsidiary’s to the public
Takeover; when one firm assumes control of another. Can be friendly or hostile. A takeover usually
comes with a tender offer: a formal proposal to buy shares in another firm made directly to its
shareholders. Can be negotiated (friendly) or hostile too. Self-tender offers: when a firm seeks to
repurchase its stock. Purchase premium or acquisition premium: the excess of the offer price over the
target’s premerger share price
Employee stock ownership plans (ESOPs): trust funds that invest in the securities of the firm
sponsoring the plan.
Business alliances as alternatives to M&As:
- Joint ventures: business relationships formed by two or more parties to achieve common
objectives
- Strategic alliance: generally does not create a separate legal entity and may bee an agreement
to sell each firm’s products to the other’s customers or to co-develop a technology, product, or
process
- Minority investments: involving less than an controlling interest
- Licenses: enable firms to extend their brands to new products and markets by permitting
others to use their brand names or to gain access to a proprietary technology
- Franchise: a form of a license agreement granting a privilege to a dealer from a manufacturer
or franchise service organization to sell the franchiser’s products or services in a given area
Key participants in the M&A process:
- Acquirer
- Target firms
- Providers of specialized services:
o Investment banks
o Lawyers
o Accountants
o Proxy solicitors
2
, o Public relations personnel
- Regulators
- Institutional investors and lenders:
o Insurance pension, and mutual funds
o Commercial banks
o Hedge, private equity, and venture capital funds
o Sovereign wealth funds
o Angel investors
- Activist investors
- M&A arbitrageurs
Yin & Shanley (2008)
Mergers and acquisitions (M&As) and alliances are potential alternative choices for managers.
Three dimensions of industry conditions that are influential in such choices:
- Industry demands on firms to make significant commitment
- The environmental pressures for flexibility
- The limitation on firm choices stemming from individual concentration and institutional
conditions
Alliance: an agreement between two or more firms to jointly manage assets and achieve strategic
objectives. A joint venture (the creation of a separate jointly owned entity) is also a form of alliances
M&As: involve the combination of all of the assets of the participating firms under common
ownership
The fundamental difference between this is ownership: a merger or acquisition implies controlling
ownership interest, but an alliance or joint venture does not.
Typology of industry contexts:
The choice between M&As or alliances is complex and the context in which firms find themselves
have a lot of influence
Chapter 8 (excl. “Real option analysis)
Relative valuation: valuing assets based on how similar assets are valued in the market place.
3
