Mergers and Acquisitions

Sris Chatterjee

FTCs Classification for Mergers

Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
Product Extension Mergers
Market Extension Mergers
Pure Conglomerates
[Joseph Bower: Not all M&As are alike, HBR 2001]

Macro-Economic Reasons Behind Takeover Activity

Deregulation

Global Competition & Markets

Financial Innovations and Financial Markets

Changes in Technology and Industry Conditions

[Jarrad Harford: What drives merger waves?, JFE 2005]

Micro-Economic or Firm-Level Rationale For Takeovers

Sustainable Competitive Advantage

[Harding and Rovit: Building deals on bedrock, HBR 2004]
Other variations of this theme include:
1. Global Consolidation (Mittal/Arcelor, NYSE/Euronext)
2. Strategic Entry into a new Market (Lenovo)
3. Acquisition of R&D (Pharmaceuticals)
4. Benefits of an Internal Capital Market (Korean Chaebol)

Reverse Takeover as an alternative to IPO

(NYSE/Archipelago)

Defensive Mergers/Managerial Entrenchment

Q: How can one public company get control of

another public company ?
Ans:
1.

Essentially, in one of three ways:

By completing a statutory merger

Important Concept: Merger of Equals

2.

By making a tender offer for the voting common stock of the target

3.

By purchasing the assets of the target company

Examples of MOE & Tender-Offer

MOE:
AOL/Time Warner
Daimler/Chrysler

Tender Offer:
DuPont/Conoco

3 Stages of Successful Acquisition

Identify a Suitable Target
Basic Discipline is Corporate Strategy
Benchmarks are ROIC, Shareholder Wealth Maximization, Earnings Stability
and Growth in EPS
Antitrust and other regulations are important

Valuation and Deal Structuring

Basic Discipline is Corporate Finance
Mode of Sale: Auction vs. Negotiation
Negotiation Skills may be Important

Integration/Rationalization of Process/Products
Basic Discipline is Operations Management
Corporate Culture and Leadership are Important

Important Issues from the Finance Perspective

Valuation
DCF models
Value Multiples such as Enterprise Value/EBITDA

Mode of Payment
Cash/Notes/Stock/Warrants/Earnouts/CVRs

Risk Arbitrage

Event Study/Abnormal Returns

Risk Management in M&A

Collars

Earnouts

Contingent Value Rights (CVR)

Lock-up Options

Break-up/Termination Fee

Modes of Payment: Some Examples

Mittal/Arcelor: Mix and Match (Offered on 19 May, 2006)

1 Mittal Steel share and 11.10 Euro in cash for 1 Arcelor Share, OR

17 Mittal Steel shares for every 12 Arcelor shares, OR

37.74 Euro in cash for each Arcelor share

Modes of Payment: Some Examples

AOL/Time Warner
1.5 shares of AOL/Time Warner for every share of Time
Warner
No Collars
____________________________________________________
Alcatel/Lucent
0.1952 Alcatel ADS for each share of Lucent common stock
(100 shares of Lucent common stock would get 19 Alcatel ADS
and cash in lieu of 0.52 Alcatel ADS)

Modes of Payment: Some Examples

P&G/Gillette

P&G paid 0.975 of its share for each Gillette share, an 18% premium.

P&G planned to buy back $18 - $22 billion worth of its stock over the
following year.

Modes of Payment: Some Examples

Fixed-Exchange Collars
The merger agreement between First Union Corp. and
BancFlorida Financial Corp. stated that each BancFlorida
share would receive 0.669 First Union share if First Unions
share price was between $41.875 and $44.875.
Each BancFlorida share would get $28 worth of shares if First
Union traded below $41.875 and $30 worth of shares if First
Union traded above $44.875.

Modes of Payment: Some Examples

Fixed-Payment Collars
The merger agreement between Banc One Corp. and First
Community Bancorp Inc. stated that each target share would
receive $31.96 worth of Banc One shares if Banc One share
price was between $47 and $51.
Each target share would get 0.68 share of Banc One if Banc One
traded below $47 and 0.6267 Banc One share if Banc One
traded above $51.

Takeover Defense

Poison Pills

Classified/Staggered Board

Unequal (Dual Class) Voting Rights