Lange samenvatting Mergers & Acquisitions
Lecture 1
Most of FDI (foreign direct investment) occurs through M&A:
Brown field Brownfield investment happens when a company purchases or leases an
existing facility.
Green field With greenfield investing, a company will build its own, brand new facilities
from the ground up.
The biggest part of M&A is happening in developed countries
Corporate restructuring in context:
Takeover in context:
omstreden
betwist
,Pros and cons of acquisition of stock or of assets:
1. Acquisition of stock equity = assets – liabilities.
Advantages
• No formal shareholder (or management) approval necessary
• All assets (tangible, intangible) are transferred
Disadvantages
• Buyer is liable for all unknown, undisclosed or contingent liabilities
• Integration difficult with less than 100% of stock
2. Acquisition of assets
Advantages
• No minority shareholders
• Only 50% of shareholders need to approve
• “cherry picking” for buyer; also no risk of liabilities (seller indemnification)
Disadvantages
• Consent from customers/suppliers for transferal of contracts
• Buyer loses net operating losses & tax credits; also some intangible assets
• Transfer taxes; documentation and legal fees
Pros and cons of a merger (fusie) vs. acquisitions (overname):
Advantages
•Transfer happens “automatically by rule of law”
•No minority shareholders (no “seller” can retain stock; ‘squeeze-out rule’)
•no transfer taxes
Disadvantages
•All liabilities assumed
•75% of shareholders (90% with consolidation) need to approve
•Without squeeze-out, dissenting shareholders can sue bidder
Definition of different mergers:
Statutory Merger = The complete absorption of the seller by the buyer. The buyer remains its identity
and seller ceases to exist
Consolidation = A merger in which an entirely new firm is created. (“merger of equals”) Both, the
buyer and the seller cease to exist
Subsidiary / (staged) Merger = Buyer first makes a stock or asset purchase and then
merges the acquired firm later
,M&A versus the alternatives (business alliances):
What are the alternative ways of increasing shareholder value (other than M&A)?
- Financial restructuring changes in a firms capital structure, such as share repurchases or
adding debt either to lower the company’s overall cost of capital or as part of an
antitakeover defense.
- Operational restructuring changes in the composition of a firms assets structure by
acquiring new businesses or by the outright or partial sale or spin-off of companies or
product lines.
- Solo venture going it alone or organic growth. Not merge with another country.
o More expensive and more risky, you are blamed, because there is no one else to
blame
- Partnering marketing/distribution alliances, joint ventures, licensing, franchising …
o Less risky. And blame is shared by all inventors.
Joint venture = business relationships formed by two or more separate
parties to achieve common objectives.
Strategic alliance = generally does not create a separate legal entity and may
be an agreement to sell each firms products to the others customers or to
co-develop a technology/product.
Minority investments in other firms investments involving less than a
controlling interest.
Such investments are frequently made in firms which have attractive
growth opportunities but lack the resources to pursue them
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 specialized form of a license agreement that grants a privilege
to a dealer from a manufacturer or franchise service organization to sell the
franchiser’s products or services in a given area.
Industry determinants of the ‘’merger versus alliance’’ decision
- Dimensions of industry environment:
o Industry requirements of commitment
o Environmental pressures for flexibility
o The limitations on firm choices stemming from industry concentration, regulatory
forces and other institutional conditions.
- Decision, in general: cost-benefit analysis (trade-off)
Example:
Not many innovations, technology is stable requirements for flexibility are low
Requirements for commitment how much you need to
invest to be successful
In the corner of each cell, the structural and institutional
constraints are mentioned.
,Lecture 2 Multiples
This week: first method of actual valuation is by using the multiple method = relative method
Next week: second method of actual valuation is by using the discounted cash flow method = intrinsi
Third week: the application of these two methods (excel)
Valuation: attaching a number to an asset
How?
1. Relative valuation = multiple valuation TODAY, 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
2. Intrinsic valuation (DCF) NEXT WEEK, relates the value of an asset to its intrinsic
characteristics: its capacity to generate cash flows and the risk in the cash flows
Disclaimer: valuation is a craft:
- Valuation is not a science
o Not one right way
o Often relies on subjective estimations
- However, valuation is also not an art
o Despite the above points, valuation is based on a number of principles and well
established theories
- Valuation is a craft
o Experience and skill are built over time you can become better over time at
valuating a company
Disclaimer 2: proper valuation is no easy task
,1: Relative valuation = multiple method
In relative valuation, the value of an asset is valued relative to the value of comparable assets based
on one characteristic (called the value indicator).
EXAMPLE:
Applying Relative Valuation to your house value:
MVT =
market
value of
target
(your house value)
MVC = market value of the
comparable asset
(price of listed
house)
VIC = value indicator for comparable asset (m2 of listed house)
VIT = value indicator of target (m2 of your house)
Avg [(MVC / VIc)] = average multiple based on the comparable houses (€2250,- per m2)
Applying Relative Valuation to companies:
- MVT = market value of target company
- MVC = market value of the comparable company
- VIC = measure of value for comparable company
- VIT = measure of value for company T
- Avg [(MVC / VIc)] = average multiple (using a number of comparable companies)
Relative Valuation is used a lot in practice
- Most equity valuation on Wall Street are relative valuations
o Almost 85% of equity research reports are based upon a multiple and comparables
o More than 50% of all acquisition valuations are based upon multiples
o Rules of thumb based on multiples are not only common but are often the basis for
final valuation judgements
o The objective in many discounted cashflow valuations is to back-up a number that
has been obtained by using a multiple
, The essence of Relative Valuation
So… what do you need to do?
1. Identify comparable companies and obtain market values for these companies
2. Convert these market values into standardized values by dividing the value of the
comparable assets by some value indicator; this process creates one multiple per
comparable company, take the average of those
3. Multiply the value indicator of the company you are valuing (target) with the average
multiple calculated under step 2 to arrive at the market value
Step 1: Finding comparable companies
Two different approaches to find comparable companies:
1. Comparable company/industry method: find listed companies with similar:
o Profitability (ROE)
o Risk (beta)
o Growth rates
Tip: search for a company in the same industry
Note: a good way to test similarity is to regress the operating income of the
target on the operating income of the comparable company
(high R2 = high correlation = firms are comparable)
1. Recent comparable transaction method: same as the above with the restriction that the
comparable companies have been recently been acquired
Comparable Industry Method
Multiple target’s value indicator with the average multiple comparable firms:
MVT = market value of target firm
MVF = market value of firm F in target firm’s or comparable industry
VIF = measure of value for firm F in target firm’s or comparable industry
VIT = measure of value for company T
PRO:
- Primary advantage is the ease of use and availability of data
CONS:
- Presumes industry multiples are actually comparable and analysts’ projections are unbiased
o You rely on other peoples estimates
- Requires addition of purchase price premium
o (only shows the listed price, not the price of the firm you nee to pay to buy the firm)
Lecture 1
Most of FDI (foreign direct investment) occurs through M&A:
Brown field Brownfield investment happens when a company purchases or leases an
existing facility.
Green field With greenfield investing, a company will build its own, brand new facilities
from the ground up.
The biggest part of M&A is happening in developed countries
Corporate restructuring in context:
Takeover in context:
omstreden
betwist
,Pros and cons of acquisition of stock or of assets:
1. Acquisition of stock equity = assets – liabilities.
Advantages
• No formal shareholder (or management) approval necessary
• All assets (tangible, intangible) are transferred
Disadvantages
• Buyer is liable for all unknown, undisclosed or contingent liabilities
• Integration difficult with less than 100% of stock
2. Acquisition of assets
Advantages
• No minority shareholders
• Only 50% of shareholders need to approve
• “cherry picking” for buyer; also no risk of liabilities (seller indemnification)
Disadvantages
• Consent from customers/suppliers for transferal of contracts
• Buyer loses net operating losses & tax credits; also some intangible assets
• Transfer taxes; documentation and legal fees
Pros and cons of a merger (fusie) vs. acquisitions (overname):
Advantages
•Transfer happens “automatically by rule of law”
•No minority shareholders (no “seller” can retain stock; ‘squeeze-out rule’)
•no transfer taxes
Disadvantages
•All liabilities assumed
•75% of shareholders (90% with consolidation) need to approve
•Without squeeze-out, dissenting shareholders can sue bidder
Definition of different mergers:
Statutory Merger = The complete absorption of the seller by the buyer. The buyer remains its identity
and seller ceases to exist
Consolidation = A merger in which an entirely new firm is created. (“merger of equals”) Both, the
buyer and the seller cease to exist
Subsidiary / (staged) Merger = Buyer first makes a stock or asset purchase and then
merges the acquired firm later
,M&A versus the alternatives (business alliances):
What are the alternative ways of increasing shareholder value (other than M&A)?
- Financial restructuring changes in a firms capital structure, such as share repurchases or
adding debt either to lower the company’s overall cost of capital or as part of an
antitakeover defense.
- Operational restructuring changes in the composition of a firms assets structure by
acquiring new businesses or by the outright or partial sale or spin-off of companies or
product lines.
- Solo venture going it alone or organic growth. Not merge with another country.
o More expensive and more risky, you are blamed, because there is no one else to
blame
- Partnering marketing/distribution alliances, joint ventures, licensing, franchising …
o Less risky. And blame is shared by all inventors.
Joint venture = business relationships formed by two or more separate
parties to achieve common objectives.
Strategic alliance = generally does not create a separate legal entity and may
be an agreement to sell each firms products to the others customers or to
co-develop a technology/product.
Minority investments in other firms investments involving less than a
controlling interest.
Such investments are frequently made in firms which have attractive
growth opportunities but lack the resources to pursue them
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 specialized form of a license agreement that grants a privilege
to a dealer from a manufacturer or franchise service organization to sell the
franchiser’s products or services in a given area.
Industry determinants of the ‘’merger versus alliance’’ decision
- Dimensions of industry environment:
o Industry requirements of commitment
o Environmental pressures for flexibility
o The limitations on firm choices stemming from industry concentration, regulatory
forces and other institutional conditions.
- Decision, in general: cost-benefit analysis (trade-off)
Example:
Not many innovations, technology is stable requirements for flexibility are low
Requirements for commitment how much you need to
invest to be successful
In the corner of each cell, the structural and institutional
constraints are mentioned.
,Lecture 2 Multiples
This week: first method of actual valuation is by using the multiple method = relative method
Next week: second method of actual valuation is by using the discounted cash flow method = intrinsi
Third week: the application of these two methods (excel)
Valuation: attaching a number to an asset
How?
1. Relative valuation = multiple valuation TODAY, 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
2. Intrinsic valuation (DCF) NEXT WEEK, relates the value of an asset to its intrinsic
characteristics: its capacity to generate cash flows and the risk in the cash flows
Disclaimer: valuation is a craft:
- Valuation is not a science
o Not one right way
o Often relies on subjective estimations
- However, valuation is also not an art
o Despite the above points, valuation is based on a number of principles and well
established theories
- Valuation is a craft
o Experience and skill are built over time you can become better over time at
valuating a company
Disclaimer 2: proper valuation is no easy task
,1: Relative valuation = multiple method
In relative valuation, the value of an asset is valued relative to the value of comparable assets based
on one characteristic (called the value indicator).
EXAMPLE:
Applying Relative Valuation to your house value:
MVT =
market
value of
target
(your house value)
MVC = market value of the
comparable asset
(price of listed
house)
VIC = value indicator for comparable asset (m2 of listed house)
VIT = value indicator of target (m2 of your house)
Avg [(MVC / VIc)] = average multiple based on the comparable houses (€2250,- per m2)
Applying Relative Valuation to companies:
- MVT = market value of target company
- MVC = market value of the comparable company
- VIC = measure of value for comparable company
- VIT = measure of value for company T
- Avg [(MVC / VIc)] = average multiple (using a number of comparable companies)
Relative Valuation is used a lot in practice
- Most equity valuation on Wall Street are relative valuations
o Almost 85% of equity research reports are based upon a multiple and comparables
o More than 50% of all acquisition valuations are based upon multiples
o Rules of thumb based on multiples are not only common but are often the basis for
final valuation judgements
o The objective in many discounted cashflow valuations is to back-up a number that
has been obtained by using a multiple
, The essence of Relative Valuation
So… what do you need to do?
1. Identify comparable companies and obtain market values for these companies
2. Convert these market values into standardized values by dividing the value of the
comparable assets by some value indicator; this process creates one multiple per
comparable company, take the average of those
3. Multiply the value indicator of the company you are valuing (target) with the average
multiple calculated under step 2 to arrive at the market value
Step 1: Finding comparable companies
Two different approaches to find comparable companies:
1. Comparable company/industry method: find listed companies with similar:
o Profitability (ROE)
o Risk (beta)
o Growth rates
Tip: search for a company in the same industry
Note: a good way to test similarity is to regress the operating income of the
target on the operating income of the comparable company
(high R2 = high correlation = firms are comparable)
1. Recent comparable transaction method: same as the above with the restriction that the
comparable companies have been recently been acquired
Comparable Industry Method
Multiple target’s value indicator with the average multiple comparable firms:
MVT = market value of target firm
MVF = market value of firm F in target firm’s or comparable industry
VIF = measure of value for firm F in target firm’s or comparable industry
VIT = measure of value for company T
PRO:
- Primary advantage is the ease of use and availability of data
CONS:
- Presumes industry multiples are actually comparable and analysts’ projections are unbiased
o You rely on other peoples estimates
- Requires addition of purchase price premium
o (only shows the listed price, not the price of the firm you nee to pay to buy the firm)
