1、Types of mergersMerger analysisRole of investment bankersCorporate alliances,LBOs,divestitures,and holding companies,CHAPTER 21Mergers,LBOs,Divestitures,and Holding Companies,Synergy:Value of the whole exceeds sum of the parts.Could arise from:Operating economiesFinancial economiesDifferential manag
2、ement efficiencyIncreased market powerTaxes(use accumulated losses),Why do mergers occur?,Break-up value:Assets would be more valuable if sold to some other company.,DiversificationPurchase of assets at below replacement costGet bigger using debt-financed mergers to help fight off takeovers,What are
3、 some questionable reasons for mergers?,Five Largest completed and proposed mergers,as of January 2000,BuyerAmerica OnlineVodafone AirTouchMCI WorldComExxonBell Atlantic,TargetTime WarnerMannesmannSprintMobilGTE,Value$160.0 billion 148.6 billion 128.9 billion 85.2 billion 85.0 billion,Friendly merge
4、r:The merger is supported by the managements of both firms.,Differentiate between hostile and friendly mergers,Hostile merger:Target firms management resists the merger.Acquirer must go directly to the target firms stockholders try to get 51%to tender their shares.Often,mergers that start out hostil
5、e end up as friendly when offer price is raised.,Access to new markets and technologiesMultiple parties share risks and expenses Rivals can often work together harmoniouslyAntitrust laws can shelter cooperative R&D activities,Reasons why alliances can make more sense than acquisitions,Net sales$60.0
6、$90.0$112.5$127.5Cost of goods sold(60%)36.0 54.0 67.5 76.5Selling/admin.expenses 4.5 6.0 7.5 9.0Interest expense 3.0 4.5 4.5 6.0EBT$16.5$25.5$33.0$36.0Taxes(40%)6.6 10.2 13.2 14.4Net income$9.9$15.3$19.8$21.6Retentions 0.0 7.5 6.0 4.5Cash flow$9.9$7.8$13.8$17.1,Merger Analysis(In Millions),2001 200
7、2 2003 2004,Cash Flow Statements after Merger Occurs,Estimated cash flows are residuals which belong to acquirers shareholders.They are riskier than the typical capital budgeting cash flows.Because fixed interest charges are deducted,this increases the volatility of the residual cash flows.,Conceptu
8、ally,what is the appropriate discount rate to apply to targetscash flows?,(More.),Because the cash flows are risky equity flows,they should be discounted using the cost of equity rather than the WACC.The cash flows reflect the targets business risk,not the acquiring companys.However,the merger will
9、affect the targets leverage and tax rate,hence its financial risk.,Terminal Value Calculation,1.First,find the new discount rate:ks(Target)=kRF+(kM kRF)bTarget=9%+(4%)1.3=14.2%.2.Terminal value=$221.0 million.,(2004 Cash flow)(1+g)ks g,$17.1(1.06)0.142 0.06,Net Cash Flow Stream Used in Valuation Cal
10、culation(In Millions),2001 2002 2003 2004,Annual cash flow$9.9$7.8$13.8$17.1Terminal value 221.0Net cash flow$9.9$7.8$13.8$238.1,Value=+=$163.9 million.,$9.9(1.142)1,$7.8(1.142)2,$13.8(1.142)3,$238.1(1.142)4,No.The input estimates would be different,and different synergies would lead to different ca
11、sh flow forecasts.Also,a different financing mix or tax rate would change the discount rate.,Would another acquiring company obtain the same value?,Target firm has 10 million shares outstanding at a price P0 of$9.00 per share.What should the offeringprice be?,Maximum price=$16.39/share.Range=$9 to$1
12、6.39/share.,Value of Acquisition Shares Outstanding,$163.9 million10 million,The offer could range from$9 to$16.39 per share.At$9 all the merger benefits would go to the acquirers shareholders.At$16.39,all value added would go to the targets shareholders.See graph on the next slide.,0,510 15 20,Chan
13、ge in ShareholdersWealth,Acquirer,Target,Bargaining Range=Synergy,Price Paid for Target,$9.00,$16.39,Points About Graph,Nothing magic about crossover price.Actual price would be determined by bargaining.Higher if target is in better bargaining position,lower if acquirer is.If target is good fit for
14、many acquirers,other firms will come in,price will be bid up.If not,could be close to$9.,(More.),Acquirer might want to make high“preemptive”bid to ward off other bidders,or low bid and then plan to go up.Strategy.Do targets managers have 51%of stock and want to remain in control?What kind of person
15、al deal will targets managers get?,The evidence strongly suggests:Acquisitions do create value as a result of economies of scale,other synergies,and/or better management.Shareholders of target firms reap most of the benefits,i.e.,move to right in merger graph(Slide 21-17),because of competitive bids.,Do mergers really create value?,Arranging mergersAssisting in defensive tacticsEstablishing a fair valueFinancing mergersRisk arbitrage,Functions of Investment Bankers in Mergers,
