CONTEMPORARY ISSUES IN
FINANCE 2025 - PART 1
Chapter 1: Non-M&A growth strategies & divestitures.......................................................................... 4
1.1. Mergers & Acquisitions....................................................................................................................4
1.1.1 Value creation by M&A activities............................................................................................4
1.1.2. Horizontal M&A.................................................................................................................... 5
1.1.3. Vertical M&A.........................................................................................................................6
1.1.3.1. Impact on markets and competitors...............................................................................6
1.1.4. Conglomerate M&A............................................................................................................... 6
1.1.4.1. Types of Conglomerates................................................................................................ 7
1.2. Trends............................................................................................................................................... 7
1.2.1. M&A Waves............................................................................................................................7
1.2.2. Corporate profits & sustainable growth.................................................................................. 8
1.2.3. Strategic vs. financial acquirors.............................................................................................. 8
1.2.4. 2022-Present: Ukraine/China/Interest rate effects.................................................................. 9
1.3. Value destruction by M&As............................................................................................................. 9
1.3.1. Behavioral theories................................................................................................................. 9
1.3.1.1. Winner's Curse/Hubris (Roll, 1986).............................................................................. 9
1.3.1.2. Overvalued stock prices...............................................................................................10
1.4. Does M&A pay? (Empirical evidence).......................................................................................... 10
1.4.1. Event studies......................................................................................................................... 10
1.4.1.1. Raw returns..................................................................................................................11
1.4.1.2. Normal & Abnormal returns........................................................................................11
1.4.1.3. Mean adjusted return method...................................................................................... 11
1.4.1.4. Mean adjusted return method...................................................................................... 12
1.4.1.5. Market adjusted return method....................................................................................13
1.4.1.6. Cumulative Abnormal Returns....................................................................................13
1.4.1.7. Profit/loss in dollar terms (economic significance).....................................................13
1.4.1.8. Significance of results................................................................................................. 14
1.4.1.9. Summary: event study design choices.........................................................................15
1.4.1.10. M&A event study results:..........................................................................................15
1.4.2. Extended event studies: Long run performance....................................................................17
1.4.2.1. Accounting data based studies.....................................................................................18
1.4.2.2. Survey based studies....................................................................................................18
1.5. M&A value creation....................................................................................................................... 19
1.6. Alternative forms of growth........................................................................................................... 20
1.6.1. Corporate cooperation...........................................................................................................20
, 1.6.1.1. Joint venture:............................................................................................................... 20
1.6.1.2. Alliance:...................................................................................................................... 21
1.6.1.3. Licensing..................................................................................................................... 21
1.6.1.4. Franchising.................................................................................................................. 21
1.6.1.5. Minority investments...................................................................................................21
1.6.2. Summaries Growth strategies............................................................................................... 22
1.6.3. Growth strategies: divestitures..............................................................................................23
1.6.3.1. Asset sales – motives:..................................................................................................24
1.6.4.2. Spin-offs: examples..................................................................................................... 25
1.6.4.3. Carve-outs: examples.................................................................................................. 26
1.6.4.4. Split-up........................................................................................................................ 26
1.6.4.5. Tracking stocks............................................................................................................27
1.6.4.6. Divestitures and value creation: theory....................................................................... 28
1.6.4.7. Why divest?: Conglomerate discount..........................................................................28
1.6.4.8. Empirical evidence...................................................................................................... 29
Chapter 2: Financial restructuring.......................................................................................................... 32
2.1. Leveraged recap(italizations)..........................................................................................................32
2.1.1. Result 1: more tax deductable interest expenses...................................................................32
2.1.2. Result 2: change in ownership percentage of managers/insiders.........................................34
2.1.2.1. Option 1: Use loans to repurchase shares from non-insiders...................................... 34
2.1.2.2. Option 2: Use loans to pay cash dividends to non- insiders and stock dividends to
insiders......................................................................................................................................35
2.1.3. Leveraged recaps: empirical studies..................................................................................... 36
2.1.3.1. Post-recap performance............................................................................................... 36
2.1.3.2. Leveraged recaps: Financial crisis...............................................................................36
2.2. Dual-class stock recapitalization (DCR)........................................................................................ 38
2.2.1. Dual class vs. loyalty shares vs. golden shares..................................................................... 40
2.3. Exchange offer................................................................................................................................40
2.4. Financial distress............................................................................................................................ 41
2.4.1. Bankruptcy............................................................................................................................ 42
2.4.2. Costs of financial distress..................................................................................................... 42
2.4.2.1. Costs of financial distress: cross-industry................................................................... 43
2.4.2. Liquidation............................................................................................................................ 44
Chapter 3: Going private & LBO’s.......................................................................................................... 45
3.1. LBO’s..............................................................................................................................................45
3.1.1. LBO’s vs Leveraged recap.................................................................................................... 45
3.1.2. LBO deal structure................................................................................................................ 46
3.1.3. LBO/MBO example: Wavell Corporation............................................................................ 46
3.2. Valuation of LBO companies......................................................................................................... 48
3.2.1. Capital Cash Flow (CCF) method.........................................................................................48
3.2.2. Valuation of LBO companies: example................................................................................ 49
1
, 3.3. LBO Stages.....................................................................................................................................51
3.4. Exit strategies................................................................................................................................. 52
3.4.1. Empirical studies (’80s samples).......................................................................................... 52
3.5. Value Creation in LBO’s.................................................................................................................53
3.5.1. Positive..................................................................................................................................53
3.5.2. Expropriation........................................................................................................................ 54
3.5.3. Post Buyout........................................................................................................................... 55
3.6. Optimism or misrepresentation (Trends)........................................................................................56
3.6.1. Trend to adjust EBITDA......................................................................................... 56
3.6.2. LBO waves.............................................................................................................57
3.6.3. Buyout Boom......................................................................................................... 57
3.6.4. Private Equity........................................................................................................58
3.6.5. Buyout boom: valuations & leverage..................................................................... 59
3.6.6. Buyout Bust............................................................................................................61
3.6.7. LBO post boom: lower risk?...................................................................................62
3.6.8. LBO debt (US):...................................................................................................... 63
Chapter 4: Share repurchases...................................................................................................................64
4.1. Repurchases & payout policy......................................................................................................... 64
4.1.1. Repurchases vs. dividends: US quoted companies............................................................... 64
4.1.2. Repurchases vs. dividends: UK quoted companies (FTSE 100).......................................... 65
4.1.3. Repurchases vs. LBO/Recap.................................................................................................65
4.1.4. Repurchase motives.............................................................................................................. 65
4.2. Fixed-price tender (FPT) offers...................................................................................................... 66
4.2.1. FPT Drivers of value creation............................................................................................... 67
4.3. Dutch auction repurchases (DAR)..................................................................................................67
4.3.1. Value creation:.......................................................................................................................67
4.4. Transferable put rights (TPR)......................................................................................................... 68
4.5. Open market repurchases (OMR)...................................................................................................69
4.5.1. Event studies......................................................................................................................... 69
4.6. Undervaluation model.................................................................................................................... 70
4.7. Repurchases vs. dividends.............................................................................................................. 71
4.7.1. Repurchases vs. dividends: empirical evidence.................................................................... 72
4.7.2. Motives of the dividend vs. repurchase choice..................................................................... 72
4.7.2.1. Repurchase motives: support stock price.................................................................... 73
4.7.2.2. Buyback boom.............................................................................................................73
4.7.2.3. Financial crisis: industry-specific drop in repurchases................................................74
4.7.2.3. Recession: general drop in repurchases.......................................................................74
4.7.3. US vs EU...............................................................................................................................74
4.8. Investment strategy example.......................................................................................................... 75
4.8.1. Investment strategy: bull market...........................................................................................76
4.8.2. Investment strategy: bear market.......................................................................................... 76
2
, Chapter 5: Investment strategies & merger arbitrage........................................................................... 77
5.1. Investment strategies...................................................................................................................... 77
5.2. Takeover targets..............................................................................................................................77
5.2.1. Detecting targets....................................................................................................................77
5.2.2. Event driven mutual funds: example.................................................................................... 79
5.3. Post-bid strategy: Merger arbitrage................................................................................................ 80
5.3.1. Merger arbitrage: risk-components....................................................................................... 80
5.3.2. Merger arbitrage: process......................................................................................................80
5.3.3. Merger arbitrage: strategies...................................................................................................81
5.3.4. Merger arbitrage: cash offer..................................................................................................81
5.3.5. Merger arbitrage: exchange offer..........................................................................................83
5.3.6. Merger arbitrage: combined offer......................................................................................... 84
5.3.7. Merger arbitrage: other offer types....................................................................................... 85
5.4. Merger arbitrage example: ABN Amro.......................................................................................... 85
5.5. Empirical evidence on merger arb performance.............................................................................87
5.5.1. Merger arbitrage funds & leverage....................................................................................... 87
5.5.1.1. Selling points............................................................................................................... 87
5.5.1.2. Merger arbitrage funds: problems with selling points.................................................88
5.5.1.2. Merger arbitrage funds: survivorship bias...................................................................89
5.5.1.3. Merger arbitrage funds: returns................................................................................... 90
5.5.1.4. Merger arbitrage funds: correlation with other assets................................................. 91
5.5.1.5. Merger arbitrage funds: betas in bear and bull markets.............................................. 91
5.5.1.6. Merger arbitrage funds during crises...........................................................................91
3
FINANCE 2025 - PART 1
Chapter 1: Non-M&A growth strategies & divestitures.......................................................................... 4
1.1. Mergers & Acquisitions....................................................................................................................4
1.1.1 Value creation by M&A activities............................................................................................4
1.1.2. Horizontal M&A.................................................................................................................... 5
1.1.3. Vertical M&A.........................................................................................................................6
1.1.3.1. Impact on markets and competitors...............................................................................6
1.1.4. Conglomerate M&A............................................................................................................... 6
1.1.4.1. Types of Conglomerates................................................................................................ 7
1.2. Trends............................................................................................................................................... 7
1.2.1. M&A Waves............................................................................................................................7
1.2.2. Corporate profits & sustainable growth.................................................................................. 8
1.2.3. Strategic vs. financial acquirors.............................................................................................. 8
1.2.4. 2022-Present: Ukraine/China/Interest rate effects.................................................................. 9
1.3. Value destruction by M&As............................................................................................................. 9
1.3.1. Behavioral theories................................................................................................................. 9
1.3.1.1. Winner's Curse/Hubris (Roll, 1986).............................................................................. 9
1.3.1.2. Overvalued stock prices...............................................................................................10
1.4. Does M&A pay? (Empirical evidence).......................................................................................... 10
1.4.1. Event studies......................................................................................................................... 10
1.4.1.1. Raw returns..................................................................................................................11
1.4.1.2. Normal & Abnormal returns........................................................................................11
1.4.1.3. Mean adjusted return method...................................................................................... 11
1.4.1.4. Mean adjusted return method...................................................................................... 12
1.4.1.5. Market adjusted return method....................................................................................13
1.4.1.6. Cumulative Abnormal Returns....................................................................................13
1.4.1.7. Profit/loss in dollar terms (economic significance).....................................................13
1.4.1.8. Significance of results................................................................................................. 14
1.4.1.9. Summary: event study design choices.........................................................................15
1.4.1.10. M&A event study results:..........................................................................................15
1.4.2. Extended event studies: Long run performance....................................................................17
1.4.2.1. Accounting data based studies.....................................................................................18
1.4.2.2. Survey based studies....................................................................................................18
1.5. M&A value creation....................................................................................................................... 19
1.6. Alternative forms of growth........................................................................................................... 20
1.6.1. Corporate cooperation...........................................................................................................20
, 1.6.1.1. Joint venture:............................................................................................................... 20
1.6.1.2. Alliance:...................................................................................................................... 21
1.6.1.3. Licensing..................................................................................................................... 21
1.6.1.4. Franchising.................................................................................................................. 21
1.6.1.5. Minority investments...................................................................................................21
1.6.2. Summaries Growth strategies............................................................................................... 22
1.6.3. Growth strategies: divestitures..............................................................................................23
1.6.3.1. Asset sales – motives:..................................................................................................24
1.6.4.2. Spin-offs: examples..................................................................................................... 25
1.6.4.3. Carve-outs: examples.................................................................................................. 26
1.6.4.4. Split-up........................................................................................................................ 26
1.6.4.5. Tracking stocks............................................................................................................27
1.6.4.6. Divestitures and value creation: theory....................................................................... 28
1.6.4.7. Why divest?: Conglomerate discount..........................................................................28
1.6.4.8. Empirical evidence...................................................................................................... 29
Chapter 2: Financial restructuring.......................................................................................................... 32
2.1. Leveraged recap(italizations)..........................................................................................................32
2.1.1. Result 1: more tax deductable interest expenses...................................................................32
2.1.2. Result 2: change in ownership percentage of managers/insiders.........................................34
2.1.2.1. Option 1: Use loans to repurchase shares from non-insiders...................................... 34
2.1.2.2. Option 2: Use loans to pay cash dividends to non- insiders and stock dividends to
insiders......................................................................................................................................35
2.1.3. Leveraged recaps: empirical studies..................................................................................... 36
2.1.3.1. Post-recap performance............................................................................................... 36
2.1.3.2. Leveraged recaps: Financial crisis...............................................................................36
2.2. Dual-class stock recapitalization (DCR)........................................................................................ 38
2.2.1. Dual class vs. loyalty shares vs. golden shares..................................................................... 40
2.3. Exchange offer................................................................................................................................40
2.4. Financial distress............................................................................................................................ 41
2.4.1. Bankruptcy............................................................................................................................ 42
2.4.2. Costs of financial distress..................................................................................................... 42
2.4.2.1. Costs of financial distress: cross-industry................................................................... 43
2.4.2. Liquidation............................................................................................................................ 44
Chapter 3: Going private & LBO’s.......................................................................................................... 45
3.1. LBO’s..............................................................................................................................................45
3.1.1. LBO’s vs Leveraged recap.................................................................................................... 45
3.1.2. LBO deal structure................................................................................................................ 46
3.1.3. LBO/MBO example: Wavell Corporation............................................................................ 46
3.2. Valuation of LBO companies......................................................................................................... 48
3.2.1. Capital Cash Flow (CCF) method.........................................................................................48
3.2.2. Valuation of LBO companies: example................................................................................ 49
1
, 3.3. LBO Stages.....................................................................................................................................51
3.4. Exit strategies................................................................................................................................. 52
3.4.1. Empirical studies (’80s samples).......................................................................................... 52
3.5. Value Creation in LBO’s.................................................................................................................53
3.5.1. Positive..................................................................................................................................53
3.5.2. Expropriation........................................................................................................................ 54
3.5.3. Post Buyout........................................................................................................................... 55
3.6. Optimism or misrepresentation (Trends)........................................................................................56
3.6.1. Trend to adjust EBITDA......................................................................................... 56
3.6.2. LBO waves.............................................................................................................57
3.6.3. Buyout Boom......................................................................................................... 57
3.6.4. Private Equity........................................................................................................58
3.6.5. Buyout boom: valuations & leverage..................................................................... 59
3.6.6. Buyout Bust............................................................................................................61
3.6.7. LBO post boom: lower risk?...................................................................................62
3.6.8. LBO debt (US):...................................................................................................... 63
Chapter 4: Share repurchases...................................................................................................................64
4.1. Repurchases & payout policy......................................................................................................... 64
4.1.1. Repurchases vs. dividends: US quoted companies............................................................... 64
4.1.2. Repurchases vs. dividends: UK quoted companies (FTSE 100).......................................... 65
4.1.3. Repurchases vs. LBO/Recap.................................................................................................65
4.1.4. Repurchase motives.............................................................................................................. 65
4.2. Fixed-price tender (FPT) offers...................................................................................................... 66
4.2.1. FPT Drivers of value creation............................................................................................... 67
4.3. Dutch auction repurchases (DAR)..................................................................................................67
4.3.1. Value creation:.......................................................................................................................67
4.4. Transferable put rights (TPR)......................................................................................................... 68
4.5. Open market repurchases (OMR)...................................................................................................69
4.5.1. Event studies......................................................................................................................... 69
4.6. Undervaluation model.................................................................................................................... 70
4.7. Repurchases vs. dividends.............................................................................................................. 71
4.7.1. Repurchases vs. dividends: empirical evidence.................................................................... 72
4.7.2. Motives of the dividend vs. repurchase choice..................................................................... 72
4.7.2.1. Repurchase motives: support stock price.................................................................... 73
4.7.2.2. Buyback boom.............................................................................................................73
4.7.2.3. Financial crisis: industry-specific drop in repurchases................................................74
4.7.2.3. Recession: general drop in repurchases.......................................................................74
4.7.3. US vs EU...............................................................................................................................74
4.8. Investment strategy example.......................................................................................................... 75
4.8.1. Investment strategy: bull market...........................................................................................76
4.8.2. Investment strategy: bear market.......................................................................................... 76
2
, Chapter 5: Investment strategies & merger arbitrage........................................................................... 77
5.1. Investment strategies...................................................................................................................... 77
5.2. Takeover targets..............................................................................................................................77
5.2.1. Detecting targets....................................................................................................................77
5.2.2. Event driven mutual funds: example.................................................................................... 79
5.3. Post-bid strategy: Merger arbitrage................................................................................................ 80
5.3.1. Merger arbitrage: risk-components....................................................................................... 80
5.3.2. Merger arbitrage: process......................................................................................................80
5.3.3. Merger arbitrage: strategies...................................................................................................81
5.3.4. Merger arbitrage: cash offer..................................................................................................81
5.3.5. Merger arbitrage: exchange offer..........................................................................................83
5.3.6. Merger arbitrage: combined offer......................................................................................... 84
5.3.7. Merger arbitrage: other offer types....................................................................................... 85
5.4. Merger arbitrage example: ABN Amro.......................................................................................... 85
5.5. Empirical evidence on merger arb performance.............................................................................87
5.5.1. Merger arbitrage funds & leverage....................................................................................... 87
5.5.1.1. Selling points............................................................................................................... 87
5.5.1.2. Merger arbitrage funds: problems with selling points.................................................88
5.5.1.2. Merger arbitrage funds: survivorship bias...................................................................89
5.5.1.3. Merger arbitrage funds: returns................................................................................... 90
5.5.1.4. Merger arbitrage funds: correlation with other assets................................................. 91
5.5.1.5. Merger arbitrage funds: betas in bear and bull markets.............................................. 91
5.5.1.6. Merger arbitrage funds during crises...........................................................................91
3
