Mergers and Acquisitions. Overview

Transcription

1 Mergers and Acquisitions Overview 1

2 How do companies grow? 74,000 acquisitions between 1996 and ,151 acquisitions between 2005 and 2008 In 2003 alone there were 8,385 acquisitions 2

3 Most acquisitions fail Acquiring companies: Share prices of companies that announce acquisitions decline by about 0.34% to 1% in the 10 days after the announcement Target companies: Stock prices rise by about 30% Daimler - Chrsyler merger?? Intel s acquisition of DSP Communications?? On the other hand. The story of Cisco. 3

4 Mergers: Absorption of one firm by another Acquiring firm buys all the assets, liabilities and franchises of the acquired firm Acquired firm ceases to exist Stockholders of both firms must approve the merger Example: In June 2006, Anadarko Petroleum Corp (AP) acquired all the outstanding common stock of Kerr-McGee Corp, an oil and gas exploration and production company, via tender offer, for $70.5 in cash per share or a total value of $ bil. The transaction had been subject to shareholder and regulatory approvals. 4

5 Subsidiary Merger: Target company becomes a subsidiary or part of subsidiary of acquirer. Example: In 2005, Targa Resources Inc (TR), an entity backed by EM Warburg Pincus LLC, acquired the midstream natural gas business of Dynegy Inc, a wholesaler of natural gas products, for $2.445 bil in cash. The transaction was subject to regulatory approval. 5

6 Consolidation: Merger results in a new corporation. Exxon and Mobil 6

7 Takeovers Acquisitions Proxy Control Merger or Consolidation Acquisition of Stock Acquisition of Assets Going Private

8 Proxy What is a proxy? When shareholders are required to vote, they are sent a document that provides material facts concerning the vote The shareholders send back a written authorization casting their vote or permitting the firm's management, to cast a vote on their behalf. Proxy contest- A proxy contest occurs when the acquiring firm attempts to convince shareholders to use their proxy votes to install new management that is open to the takeover. 8

9 Types of Mergers Horizontal Mergers: Combination of erstwhile competitors (e.g., Exxon + Mobil = Exxon Mobil)--- greatest scrutiny from FTC. Vertical Mergers: Combination of upstream and downstream companies (e.g., Merck + Medco). Conglomerate Mergers: Mergers across industries (or industry segments) (e.g., Phillip Morris + Kraft) 9

10 Acquisition Acquisition of stock: Example: US In 2005 Norsk Hydro ASA acquired all the outstanding common stock of Spinnaker Exploration Co, a provider of oil and gas exploration and production services, for $65.5 in cash per share, or a total value of $2.448 bil. The largest seller in the transaction was Warburg Pincus Ventures. The transaction was subject to customary conditions and regulatory approvals. Purchase the firm s voting stock in exchange for cash, shares or other securities Tender offers Public offer to buy shares of a target firm Public announcements General mailings 10

11 Acquisition of assets: Example: Eni SpA, through its Eni Petroleum Co unit, acquired the production, development and exploration assets, located in the Gulf of Mexico, of Dominion Resources Inc, an electric and gas utility and holding company, for $4.757 bil. The transaction had been subject to regulatory approvals. Example: US - Norway state-owned StatoilHydro ASA acquired a 32.5% stake in Marcellus shale property (MS) of Chesapeake Energy Corp (CE), an oil and gas exploration and production company, for $3.375 bil. On completion, MS was operated as a joint venture. Originally, in September 2008, CE announced that it was seeking a buyer for its undisclosed minority stake in its MS unit. 11

12 Leveraged Buy-Out (LBO) Buy out a company s assets using debt New firm s capital structure is primarily debt RJR Nabisco Use the combined firm s assets to borrow Use the opportunity to create value via leverage Types of LBOs: Management buyout (MBO) Employee buyout(ebo) Restructuring 12

13 Reasons for M&A Synergy = V AB - (V A + V B ) (P + E) P = Premium paid, E = Transaction Expenses 13

14 Sources of Synergy Strategic Benefits Integration: Vertical or horizontal Expansion DuPont Conoco merger supply of oil for DuPont P&G s acquisition of Charmin Paper integrate paper products GE Hughes aircraft merger technology transfer Phillips and Getty Oil led to more efficient management being put in place HP- Compaq merger was driven by the goal of reducing redundancies in resources 14

15 Tax Gains In the U.S. tax law permits tax loss carryforwards A firms with NOL this year can get refunds of income taxes paid in the last 3 years This benefit can be carried forward for 15 years M&A can result in tax gains over and above this T1_tax_gains.xls Diversification U.S. Steel s acquisition of Marathon Oil 15

16 Strategic Planning for M&A Begins with a discussion between the board of directors and management Elements to consider: Internal: Mission and vision statements XOM: We are the world's largest publicly traded international oil and gas company, providing energy that helps underpin growing economies and improve living standards around the world We are committed to meeting the world's growing demand for energy in an economically, environmentally and socially responsible manner. Core competencies and assets Culture 16

17 External elements: Business environment scenarios Customers product, price, service and quality Competitors Suppliers contracts and bargaining power Alliances affiliations with customers and suppliers Checklist of items: Physical asset Financial assets Intellectual assets / Organizational assets Risks 17

18 Define Acquisition Objectives Primary objectives: Horizontal/vertical integration Geographic expansion (regional/national/international) Other Other objectives/issues: Accretive to earnings Synergies Form of consideration Accounting, tax, legal and regulatory Cultural (e.g., management and employees) 18

19 Steps in the Sale Process Preparation Phase Marketing Phase Candidate Investigation Valuation Descriptive Memorandum Candidate Analysis Selecting a Marketing Strategy Approaching Potential Candidates Candidate(s) Due Diligence Final Agreement Phase Solicitation of Proposals Analysis of Proposal(s) Negotiations Closing 19

20 M&A Intermediaries Business brokers Accountants Lawyers Consultants Business valuation firms Commercial banks Investment banks 20

21 Financial Advisory Services Sale Engagement Value company Assist in selecting sale strategy Assist in identifying potential purchasers Contact potential purchasers Assist in evaluating offers Assist in responding to offers Assist in negotiations with potential purchasers Assist in negotiating ancillary agreements Fairness Opinion 21

22 Financing the Acquisition Financing sources: Internal Capital Private placements of debt or equity Public offerings of debt or equity Seller notes 22

23 Due Diligence Due diligence is the process of identifying and confirming or disconfirming the business reasons for the proposed M&A transaction. Several functions are involved in due diligence: Strategy, finance, legal, marketing, operations, human resources, and internal audit services. 23

24 The Due Diligence Process Interview management Collect company/industry information Understand drivers of business Build financial models Valuation Assessment of post-acquisition Operation Plans 24

25 Why Due Diligence? Guard against the Winner s Curse: Groucho Marx: I would never join a club that would have me for a member. Woody Allen (paraphrase): I would never marry a woman who would accept me as a husband.. M&A Analogy: I will not do an acquisition that other potential buyers have passed on. 25

26 Most major sales and acquisitions (especially in energy) either implicitly or explicitly involve auctions. The winners curse says that in an auction, since the most optimistic bidder usually wins, the winning bidder tends to be overly optimistic and may thus overvalue the auctioned property. 26

27 A rigorous due diligence in valuation (and financing) is needed to allow management to account for the winners curse. In other words, management must ask, How big must be the shareholder value-add from the acquisition, before it makes sense to take the investment? 27

28 Target firms resistance Provisions in the corporate charter: Boards classified vs not Voting supermajority vs not Golden Parachutes Poison pills Peoplesoft (PS) s poison pill (2005) Once a bidder acquired 20% of their shares, all shareholders except the acquirer could buy more shares from the corporation at half price. PS had 400 million shares outstanding so if a bidder acquired 80 million shares, each existing shareholder (except the bider) could buy 16 more shares for every share held 28

29 If all shareholders exercised the right PS would have to issue 0.8 x 400 x 16 = 5.12 billion shares The total number of shares outstanding = = 5.52 illion Stock price would drop to half because the existing shareholders can buy at half price Hence the bidder s proportion of the firm s onwership will drop to 80 million / 5.52 billion = 1.45% Greenmail In 1986 Ashland Oil Ince, a large independent oil refiner had 28 million shares outstanding. The firm s share price closed at on April 1, On April 2, the board decided to buy 2.6 million shares from the Belzberg family of Canada so as to prevent the family from taking over the firm. The same day, the board also authorized the firm to repurchase 7.5 million shares and to set up an ESOP funded with 5.3 million shares. 29

30 Regulatory considerations Antitrust: Some businesses need clearance from the Federal Trade Commission or the Dept of Justice (DOJ) Hart-Scott-Rodino (HSR) Act of 1976 Parties to a transaction are required to furnish certain information about themselves to the FTC and the DOJ Information on the nature of the business and the revenues based on the industry classification of the firms This information is used to determine if the deal could unleash anticompetitive forces Some mergers are exempt from the HSR Act (small asset size, little voting control) Horizontal mergers use the Herfindahl-Hirschman Index (HHI) to determine postmerger share of the new entity 30

31 Planning is important While planning may take up only 20% of the M&A process it requires 80% of the energy involved Strategic planning: Hiring the right advisors Doing the research Studying the regulatory factors 31

32 Global Environment of Business Case discussion: HBR article The Dubious Logic of Global Megamergers (Ghemawat and Ghadar) 32