公司金融-Mergers-and-Acquisitions
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3
Merger versus Consolidation
▪ Consolidation
▪ Entirely new firm is created from combination of existing firms
▪ Both the acquiring firm and the acquired firm terminate their legal existence and become part of the new company.
5
Acquisition of Assets
▪ A firm can be acquired by another through selling all of its assets. ▪ The acquired firm may not vanish since its “shell” may be retained. ▪ A formal vote of the target shareholders is needed.
15
A Cost to Stockholders
▪ The Base Case
▪ If two all-equity firms merge, e stockholders of both firms are indifferent to the merger.
• Cost Reduction
▫ Replacement of ineffective managers ▫ Economy of scale or scope
• Tax Gains
▫ Net operating losses ▫ Unused debt capacity
• Reduced capital requirements
▪ There is a diversification discount of 13%-15% for diversified firms.
14
A cost to stockholders: Overview
▪ Mergers may raise the value of bondholders but hurt shareholders’ value.
▪ Tender offer – public offer to buy shares ▪ Stock acquisition
▪ No stockholder vote required ▪ Can deal directly with stockholders, even if management is
25
10
17.5
25
No. of shares
100
100
140
140
Total earnings $100
$100
$200
$200
Total value
$2,500
$1,000
$3,500
$5,000
13
Two “Bad” Reasons for Mergers
▪ Diversification
Corporate Finance
Class 11 Mergers and Acquisitions Daniel Sungyeon Kim
Peking University HSBC Business School
1
The Basic Forms of Acquisitions
▪ There are three basic legal procedures that one firm can use to acquire another firm:
Warner announced that it would spin off AOL on
December 9, 2009).
4
Acquisition of Stock
▪ A firm can acquire another firm through purchasing voting shares of the firm’s stock
$0.60
Number of Shares 6 million
2 million
Stock Price
$10.00
$5.00
▪ The cost of equity of both firms is 15%. The merged firm is expected to grow at 5% per year without additional capital investments. GLD plans to offer 14.7 million cash to buy Stopper 11 Systems’ entire stock.
▪ Synergy is the source of benefit to stockholders. ▪ …but more than 50% of acquisitions do not create synergy.
7
Synergy
▪ Suppose firm A is considering acquiring firm B. ▪ The synergy from the acquisition is
▪ Bondholders gain from the merger because their debt is now “insured” by two firms, not just one.
▪ The gain to the bondholders is at the stockholders’ expense. ▪ It is a zero-sum game.
Synergy = VAB – (VA + VB) ▪ The synergy of an acquisition can be determined from the standard
discounted cash flow model:
ST DCFt
Synergy = (1 + r)t t= 1
decides to pay $60/ share. Suppose the synergy from the merger is $30/share, then the premium is $10/share, and the acquirer’s gain is $20/share.
10
An Exercise
unfriendly
▪ Classifications
▪ Horizontal – both firms are in the same industry ▪ Vertical – firms are in different stages of the production process ▪ Conglomerate – firms are unrelated
▪ A firm’s risk can be separated into two parts
▪ Systematic risk: cannot be diversified away ▪ Unsystematic risk: can, but…
▪ Shareholders who wish to diversify can accomplish this at much lower cost with one phone call to their broker than can management with a takeover.
12
Two “Bad” Reasons for Mergers
▪Earnings Growth
▪ If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth (i.e., an accounting illusion).
Before merger
Firm A after merger
Firm A
Firm B
The market The market is “smart” is “fooled”
EPS
$1.00
$1.00
$1.43
$1.43
Price/Share
$25.00
$10.00
$25.00
$35.71
P/E ratio
▪ GLD Corp. is investigating the possible acquisition of Stopper
Systems Inc. The following data are available:
GLD
Stopper Systems
EPS
$4.00
$2.20
Dividend Per Share $1.20
▪ Merger or Consolidation ▪ Acquisition of Stock ▪ Acquisition of Assets
2
Merger versus Consolidation
▪ Merger
▪ One firm is acquired by another ▪ Acquiring firm retains name and acquired firm ceases to exist ▪ Advantage – legally simple ▪ Disadvantage – must be approved by stockholders of both firms
Calculating Value
▪ Avoiding Mistakes
▪ Always use market values ▪ Estimate only incremental cash flows ▪ Use the correct discount rate ▪ Do not forget transactions costs
▪ Recent examples
▪ Washington Mutual was merged with JPMorgan Chase on September 25, 2008
▪ Northwest Airlines was merged with Delta Airlines on October 29, 2008 ▪ AirTran was merged with Southwest airlines on September 27, 2010.
• Duplicate facilities
9
How Is the Synergy Shared?
▪ Seller’s Gain=Premium = PB - VB.
▪ PB is the price paid for the target firm.
▪ Acquirer’s Gain = Synergy – Premium ▪ Acquirer’s Gain + Seller’s Gain = Synergy ▪ Example: if the stock of the target is selling for $50/share, the acquirer
where
ΔtC ΔFR t Δ eC v t Δ os T tt s a ΔxC eR a sp eq ittu a tsilr
8
Sources of Synergy
• Revenue Enhancement
▫ Marketing Gains ▫ Market or Monopoly Power
6
Synergy
▪The most important motivation for acquisitions is that synergy could be created.
▪Most acquisitions actually fail to create value for the acquirer.
▪ Two Examples
▪ JPMorgan and Chase were consolidated in 2000 and JPMorgan Chase was created.
▪ AOL and Time Warner was consolidated in 2001 and AOL
Time Warner was created. (On May 28, 2009, Time
Merger versus Consolidation
▪ Consolidation
▪ Entirely new firm is created from combination of existing firms
▪ Both the acquiring firm and the acquired firm terminate their legal existence and become part of the new company.
5
Acquisition of Assets
▪ A firm can be acquired by another through selling all of its assets. ▪ The acquired firm may not vanish since its “shell” may be retained. ▪ A formal vote of the target shareholders is needed.
15
A Cost to Stockholders
▪ The Base Case
▪ If two all-equity firms merge, e stockholders of both firms are indifferent to the merger.
• Cost Reduction
▫ Replacement of ineffective managers ▫ Economy of scale or scope
• Tax Gains
▫ Net operating losses ▫ Unused debt capacity
• Reduced capital requirements
▪ There is a diversification discount of 13%-15% for diversified firms.
14
A cost to stockholders: Overview
▪ Mergers may raise the value of bondholders but hurt shareholders’ value.
▪ Tender offer – public offer to buy shares ▪ Stock acquisition
▪ No stockholder vote required ▪ Can deal directly with stockholders, even if management is
25
10
17.5
25
No. of shares
100
100
140
140
Total earnings $100
$100
$200
$200
Total value
$2,500
$1,000
$3,500
$5,000
13
Two “Bad” Reasons for Mergers
▪ Diversification
Corporate Finance
Class 11 Mergers and Acquisitions Daniel Sungyeon Kim
Peking University HSBC Business School
1
The Basic Forms of Acquisitions
▪ There are three basic legal procedures that one firm can use to acquire another firm:
Warner announced that it would spin off AOL on
December 9, 2009).
4
Acquisition of Stock
▪ A firm can acquire another firm through purchasing voting shares of the firm’s stock
$0.60
Number of Shares 6 million
2 million
Stock Price
$10.00
$5.00
▪ The cost of equity of both firms is 15%. The merged firm is expected to grow at 5% per year without additional capital investments. GLD plans to offer 14.7 million cash to buy Stopper 11 Systems’ entire stock.
▪ Synergy is the source of benefit to stockholders. ▪ …but more than 50% of acquisitions do not create synergy.
7
Synergy
▪ Suppose firm A is considering acquiring firm B. ▪ The synergy from the acquisition is
▪ Bondholders gain from the merger because their debt is now “insured” by two firms, not just one.
▪ The gain to the bondholders is at the stockholders’ expense. ▪ It is a zero-sum game.
Synergy = VAB – (VA + VB) ▪ The synergy of an acquisition can be determined from the standard
discounted cash flow model:
ST DCFt
Synergy = (1 + r)t t= 1
decides to pay $60/ share. Suppose the synergy from the merger is $30/share, then the premium is $10/share, and the acquirer’s gain is $20/share.
10
An Exercise
unfriendly
▪ Classifications
▪ Horizontal – both firms are in the same industry ▪ Vertical – firms are in different stages of the production process ▪ Conglomerate – firms are unrelated
▪ A firm’s risk can be separated into two parts
▪ Systematic risk: cannot be diversified away ▪ Unsystematic risk: can, but…
▪ Shareholders who wish to diversify can accomplish this at much lower cost with one phone call to their broker than can management with a takeover.
12
Two “Bad” Reasons for Mergers
▪Earnings Growth
▪ If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth (i.e., an accounting illusion).
Before merger
Firm A after merger
Firm A
Firm B
The market The market is “smart” is “fooled”
EPS
$1.00
$1.00
$1.43
$1.43
Price/Share
$25.00
$10.00
$25.00
$35.71
P/E ratio
▪ GLD Corp. is investigating the possible acquisition of Stopper
Systems Inc. The following data are available:
GLD
Stopper Systems
EPS
$4.00
$2.20
Dividend Per Share $1.20
▪ Merger or Consolidation ▪ Acquisition of Stock ▪ Acquisition of Assets
2
Merger versus Consolidation
▪ Merger
▪ One firm is acquired by another ▪ Acquiring firm retains name and acquired firm ceases to exist ▪ Advantage – legally simple ▪ Disadvantage – must be approved by stockholders of both firms
Calculating Value
▪ Avoiding Mistakes
▪ Always use market values ▪ Estimate only incremental cash flows ▪ Use the correct discount rate ▪ Do not forget transactions costs
▪ Recent examples
▪ Washington Mutual was merged with JPMorgan Chase on September 25, 2008
▪ Northwest Airlines was merged with Delta Airlines on October 29, 2008 ▪ AirTran was merged with Southwest airlines on September 27, 2010.
• Duplicate facilities
9
How Is the Synergy Shared?
▪ Seller’s Gain=Premium = PB - VB.
▪ PB is the price paid for the target firm.
▪ Acquirer’s Gain = Synergy – Premium ▪ Acquirer’s Gain + Seller’s Gain = Synergy ▪ Example: if the stock of the target is selling for $50/share, the acquirer
where
ΔtC ΔFR t Δ eC v t Δ os T tt s a ΔxC eR a sp eq ittu a tsilr
8
Sources of Synergy
• Revenue Enhancement
▫ Marketing Gains ▫ Market or Monopoly Power
6
Synergy
▪The most important motivation for acquisitions is that synergy could be created.
▪Most acquisitions actually fail to create value for the acquirer.
▪ Two Examples
▪ JPMorgan and Chase were consolidated in 2000 and JPMorgan Chase was created.
▪ AOL and Time Warner was consolidated in 2001 and AOL
Time Warner was created. (On May 28, 2009, Time