1
Mergers, Acquisitions & Private Equity
Session 1: Introduction ........................................................................................................................................... 2
Slides .................................................................................................................................................................. 2
Notes ................................................................................................................................................................ 15
Article: Ahern, K.R. & Weston, (2007) .............................................................................................................. 18
Article: Martynova, M., & Renneboog, L. (2011) ............................................................................................. 22
Article: Alexandridis, G., Antypas, N., & Travlos, N. (2017) .............................................................................. 27
Session 2: Historical analysis & forecasting .......................................................................................................... 29
Chapters McKinsey ........................................................................................................................................... 29
Chapter 11: Calculating and Interpreting Results ........................................................................................ 29
Chapter 12: Using Multiples for Valuation................................................................................................... 39
Chapter 13: Performance Measurement ..................................................................................................... 45
Slides ................................................................................................................................................................ 52
Notes ................................................................................................................................................................ 66
Session 3: Valuation .............................................................................................................................................. 67
Slides ................................................................................................................................................................ 67
Notes ................................................................................................................................................................ 83
Article: Lilia Mukhlynina and Kjell G. Nyborg (2020) ........................................................................................ 85
Article: Bradley, M. & Jarrell, G.A. (2008) ........................................................................................................ 85
Article: Brotherson W.T, Eades D.E, Harris R.S. and R.C. Higgins (2013).......................................................... 88
Session 4: Multiples .............................................................................................................................................. 90
Slides ................................................................................................................................................................ 90
Notes .............................................................................................................................................................. 106
Article: Bhojrai, S. & Lee, C.M.C. (2002) ......................................................................................................... 107
Article: Holthausen, R.W. & Zmijewski, M.E. (2012) ...................................................................................... 107
Session 5: M&A process, estimating and valuing synergies, payment structuring and accounting for business
combinations ...................................................................................................................................................... 110
Slides .............................................................................................................................................................. 110
Notes .............................................................................................................................................................. 121
Session 6 – 7: Private equity and leveraged buyouts ......................................................................................... 124
Slides .............................................................................................................................................................. 124
Notes .............................................................................................................................................................. 138
Session 7 ............................................................................................................................................................. 139
Notes .............................................................................................................................................................. 139
, 2
Session 1: Introduction
Slides
What is M&A?
- M&A refers to the aspect of corporate strategy, corporate finance and management dealing with the
buying, selling and combining of different companies.
- Acquisitions: when one company takes over another and clearly establishes itself as the new owner.
From a legal point of view, the target company ceases to exist, and the buyer ‘swallows’ the business.
- Merger: when two firms agree to go forward as a single new company rather than remain separately
owned and operated. The firms are often of about the same size.
- A broader definition of M&A also includes the formation of joint ventures, strategic alliances and
divestments.
Traditional classification of different types of M&A:
- Horizontal: the acquisition of one company by another in the same industry/sector that has similar
operations.
o Example: Ahold acquiring Delhaize
o When:
▪ Increase market share, market access and power
▪ Improve performance of target (e.g. cost cutting)
▪ Realize economies of scale
▪ Remove excess capacity in the industry
▪ Eliminate a competitor
- Vertical: the acquisition of one company by another across the value chain such as acquiring a
supplier/customer.
o Example: VW acquiring battery producers
o When:
▪ Secure resources (upstream)
▪ Assure market (downstream)
▪ Reduce transaction cost
▪ Control the value chain
- Related: the acquisition of one company by another in a related industry.
o Example: CVS acquiring Aetna Insurance
o When:
▪ Acquire skills and technologies more quickly and/or at lower cost than could be built
in house
▪ Exploit cross sell opportunities
▪ To support an adaptive, visionary or shaping strategy
- Diversifying: the acquisition of one company by another in an industry/sector in which it doesn't
currently operate.
o Example: General Electric
o When:
▪ Exploit managerial capabilities
▪ Help targets to develop their business
▪ Exploit financing synergies
▪ You are already a conglomerate
▪ Increase firm size hence compensation
Example of horizontal merger: Ahold Delhaize
, 3
M&A activity comes in waves:
- 1895-1904: horizontal M&A to build market power
- 1925-1929: vertical M&A to control the value chain
- 1965-1970: diversifying M&A and conglomerates
- 1981-1987: rise of PE, large deals financed with high leverage/junk bonds in combination with trend
of de-conglomeration/focus/breakup
- 1993-2001: sector specific M&A activity driven by deregulation (e.g. banking, health care, defense)
followed by technology shifts (IT/internet), privatization and single European market
- 2004-2007: increased activity due to cross border transaction and globalization, further deregulation
(e.g. utilities), increased private equity activity combined with cheap acquisition funding
- 2013-...: mother of waves with significant contribution Asia, fueled by low interest rates, high equity
valuations, M&A as a driver of growth
Global M&A in 2023 at USD 3.2tn, slowdown of large deals:
Key drivers of M&A activity:
- Corporate clarity: companies will continue to realize the benefits of unlocking value and refocusing on
core assets through divestiture activity, including spin-offs and split-offs, further catalysed by
increased activist pressure.
, 4
- Ongoing tech disruption: as the pace of technological change continues to increase, it's expected that
companies across all industries will focus on tech acquisitions as companies seek out these skills
externally rather than develop them in-house.
- Dry powder of private equity: private equity firms are ready to deploy record amounts of equity and
debt capital competing against strategic buyers.
- Capital allocation strategy: while many companies deployed much of their excess cash in share
repurchases and dividends, most companies will continue to engage in M&A to boost limited organic
growth opportunities.
- (Geo)political/macro-economic/regulatory uncertainty: uncertainties with respect to political- and
trade instability, possible economic downturn, inflation, data privacy, etc.
Theories on explaining M&A activity:
- Neoclassical theory: firms engage in M&A to create value (NPV > 0) from synergies: Value
Combination > Value Acquirer + Value Target Standalone
- Redistribution theories: value is extracted from stakeholders for example government, customers,
suppliers, employees etc. Due to market power, tax optimalization.
- Behavioural theories: M&A is a consequence of behavioural aspects such as overconfidence (hubris),
benefitting from short term market mispricing and agency problems (e.g. empire building).
Rational and irrational motives for M&A:
- Rational motives for M&A:
o Economy of scale/scope
o Increased market power
o Defensive motives
o Cross-selling opportunities
o Managerial synergies
o Taxation driven
o Diversification
o Acquiring (technological) capabilities
o Vertical integration
- Irrational motives for M&A:
o Manager hubris/overconfidence
o Herding behaviour
o Empire building
o Managers compensation
o Diversification
Example of economies of scale: Ahold Delhaize
Mergers, Acquisitions & Private Equity
Session 1: Introduction ........................................................................................................................................... 2
Slides .................................................................................................................................................................. 2
Notes ................................................................................................................................................................ 15
Article: Ahern, K.R. & Weston, (2007) .............................................................................................................. 18
Article: Martynova, M., & Renneboog, L. (2011) ............................................................................................. 22
Article: Alexandridis, G., Antypas, N., & Travlos, N. (2017) .............................................................................. 27
Session 2: Historical analysis & forecasting .......................................................................................................... 29
Chapters McKinsey ........................................................................................................................................... 29
Chapter 11: Calculating and Interpreting Results ........................................................................................ 29
Chapter 12: Using Multiples for Valuation................................................................................................... 39
Chapter 13: Performance Measurement ..................................................................................................... 45
Slides ................................................................................................................................................................ 52
Notes ................................................................................................................................................................ 66
Session 3: Valuation .............................................................................................................................................. 67
Slides ................................................................................................................................................................ 67
Notes ................................................................................................................................................................ 83
Article: Lilia Mukhlynina and Kjell G. Nyborg (2020) ........................................................................................ 85
Article: Bradley, M. & Jarrell, G.A. (2008) ........................................................................................................ 85
Article: Brotherson W.T, Eades D.E, Harris R.S. and R.C. Higgins (2013).......................................................... 88
Session 4: Multiples .............................................................................................................................................. 90
Slides ................................................................................................................................................................ 90
Notes .............................................................................................................................................................. 106
Article: Bhojrai, S. & Lee, C.M.C. (2002) ......................................................................................................... 107
Article: Holthausen, R.W. & Zmijewski, M.E. (2012) ...................................................................................... 107
Session 5: M&A process, estimating and valuing synergies, payment structuring and accounting for business
combinations ...................................................................................................................................................... 110
Slides .............................................................................................................................................................. 110
Notes .............................................................................................................................................................. 121
Session 6 – 7: Private equity and leveraged buyouts ......................................................................................... 124
Slides .............................................................................................................................................................. 124
Notes .............................................................................................................................................................. 138
Session 7 ............................................................................................................................................................. 139
Notes .............................................................................................................................................................. 139
, 2
Session 1: Introduction
Slides
What is M&A?
- M&A refers to the aspect of corporate strategy, corporate finance and management dealing with the
buying, selling and combining of different companies.
- Acquisitions: when one company takes over another and clearly establishes itself as the new owner.
From a legal point of view, the target company ceases to exist, and the buyer ‘swallows’ the business.
- Merger: when two firms agree to go forward as a single new company rather than remain separately
owned and operated. The firms are often of about the same size.
- A broader definition of M&A also includes the formation of joint ventures, strategic alliances and
divestments.
Traditional classification of different types of M&A:
- Horizontal: the acquisition of one company by another in the same industry/sector that has similar
operations.
o Example: Ahold acquiring Delhaize
o When:
▪ Increase market share, market access and power
▪ Improve performance of target (e.g. cost cutting)
▪ Realize economies of scale
▪ Remove excess capacity in the industry
▪ Eliminate a competitor
- Vertical: the acquisition of one company by another across the value chain such as acquiring a
supplier/customer.
o Example: VW acquiring battery producers
o When:
▪ Secure resources (upstream)
▪ Assure market (downstream)
▪ Reduce transaction cost
▪ Control the value chain
- Related: the acquisition of one company by another in a related industry.
o Example: CVS acquiring Aetna Insurance
o When:
▪ Acquire skills and technologies more quickly and/or at lower cost than could be built
in house
▪ Exploit cross sell opportunities
▪ To support an adaptive, visionary or shaping strategy
- Diversifying: the acquisition of one company by another in an industry/sector in which it doesn't
currently operate.
o Example: General Electric
o When:
▪ Exploit managerial capabilities
▪ Help targets to develop their business
▪ Exploit financing synergies
▪ You are already a conglomerate
▪ Increase firm size hence compensation
Example of horizontal merger: Ahold Delhaize
, 3
M&A activity comes in waves:
- 1895-1904: horizontal M&A to build market power
- 1925-1929: vertical M&A to control the value chain
- 1965-1970: diversifying M&A and conglomerates
- 1981-1987: rise of PE, large deals financed with high leverage/junk bonds in combination with trend
of de-conglomeration/focus/breakup
- 1993-2001: sector specific M&A activity driven by deregulation (e.g. banking, health care, defense)
followed by technology shifts (IT/internet), privatization and single European market
- 2004-2007: increased activity due to cross border transaction and globalization, further deregulation
(e.g. utilities), increased private equity activity combined with cheap acquisition funding
- 2013-...: mother of waves with significant contribution Asia, fueled by low interest rates, high equity
valuations, M&A as a driver of growth
Global M&A in 2023 at USD 3.2tn, slowdown of large deals:
Key drivers of M&A activity:
- Corporate clarity: companies will continue to realize the benefits of unlocking value and refocusing on
core assets through divestiture activity, including spin-offs and split-offs, further catalysed by
increased activist pressure.
, 4
- Ongoing tech disruption: as the pace of technological change continues to increase, it's expected that
companies across all industries will focus on tech acquisitions as companies seek out these skills
externally rather than develop them in-house.
- Dry powder of private equity: private equity firms are ready to deploy record amounts of equity and
debt capital competing against strategic buyers.
- Capital allocation strategy: while many companies deployed much of their excess cash in share
repurchases and dividends, most companies will continue to engage in M&A to boost limited organic
growth opportunities.
- (Geo)political/macro-economic/regulatory uncertainty: uncertainties with respect to political- and
trade instability, possible economic downturn, inflation, data privacy, etc.
Theories on explaining M&A activity:
- Neoclassical theory: firms engage in M&A to create value (NPV > 0) from synergies: Value
Combination > Value Acquirer + Value Target Standalone
- Redistribution theories: value is extracted from stakeholders for example government, customers,
suppliers, employees etc. Due to market power, tax optimalization.
- Behavioural theories: M&A is a consequence of behavioural aspects such as overconfidence (hubris),
benefitting from short term market mispricing and agency problems (e.g. empire building).
Rational and irrational motives for M&A:
- Rational motives for M&A:
o Economy of scale/scope
o Increased market power
o Defensive motives
o Cross-selling opportunities
o Managerial synergies
o Taxation driven
o Diversification
o Acquiring (technological) capabilities
o Vertical integration
- Irrational motives for M&A:
o Manager hubris/overconfidence
o Herding behaviour
o Empire building
o Managers compensation
o Diversification
Example of economies of scale: Ahold Delhaize
