Merger and Acquisition

By Stephen Ross, and Randolph Westerfield

MnA Group Member
Vrieska Wiranda
Astried Minang Nathalia
Jessica Pandean
Faisal
Baskoro Gautama
Fazatia Aidila
Amanda Meisa Putri
Steven Haryanto

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The Basic Forms of
Acquisition
Merger :
- One firm is acquired by
another
- Acquiring firm retains name
and acquired firm ceases to
exist
- Legally simple and not costly
- Must be approved by
stockholders of each firms
Consolidation :
- Same as merger, except that
an entirely new firm is created
- Both the acquiring firm and
the acquired firm terminate
their previous legal existence
and become part of the new
firm
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Acquisitions

A second way to acquire anther firm is to purchase the firms voting

stock in exchange for cash, shares of stock, or ther securities.

A Tender Offer is a public offer to buy shares of a target firm. It is made

by one firm directly to shareholders of another firm and is
communicated by public announcements such as newspaper
advertisements.
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Acquisition (contd)
Acquisition of Stock :
- No shareholders vote required
- Deal directly with
shareholders of target firm via
tender offer
- Resistance by target firms
management often makes
cost of acquisition higher than
cost of merger
Acquisition of Assets :
- The acquirer buy some or all
of target firms assets
- A formal vote of the target
shareholders is required in
acqquisition of assets
- Transferring title of individual
assets, which can be costly
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Acquisition (contd)

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Varieties of Takeover
- Takeover is term referring to the
transfer of control of a firm from
one group to another
- Proxy Contests occur when the
acquirer attempts to convince
shareholders to use their proxy
votes to install new management
that is open to takeover
- Going private means a small
group of investors purchases all
the equity shaares and it is
delisted from stock exchange
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Synergy
Is a rational reason for mergers
...when 1 + 1 = 3.not 2
...synergy = Vab - (Va + Vb)
Synergy increase cashflow to create value of aqcuisition
CF = Rev - Costs - Taxes - Capital Requirements
...source of sinergy fall into four basic categories
(revenue enhancement, cost reduction, tax gains,
Reduced capital requirements)
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Synergy (contd)
Synergistic gains shared?
In general, acquiring firm pays a premium for the
aqcuired. Gain will occur when the synergy were more
than the premium (vice versa)
Other motives for merger (besides synergy)?
For aqcuiring manager :
1. May receive higher compensation
2. Generally experience greater prestige and power

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Sources of Synergy
1. Revenue Enhancement
2. Cost Reduction
3. Tax Gains
4. Reduced Capital Requirements

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1. Revenue Enhancement
Combined firm may generate revenues than two separate
firms. Increase revenues can from :
Marketing Gains, Strategic Benefit, Market or Monopoly
Improved marketing can 1. Acquisitions promise Power,
be made at : a strategic benefit, One firm may acquire
1. Ineffective media like option of another to reduce
programming n investment competition -> prices can
advertasing effort opportunity be increased -> generate
2. A weak distribution 2. Beachhead to profits
network denote the strategic
3. An unbalanced benefits from
product mix entering new industry

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2. Cost Reduction
Combined firm may operate more efficiently than two
separate firms. It can increase operating efficiency in :
Economic of Scale,
Average cost of
production falls as
the level of
production increase

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2. Cost Reduction
Economics of Vertical Integration,
Purpose of vertical aqcuisition is to facilitate
coordination of closely related operating activities
Technology Transfer,
Complementary Resources,
Some firms acquire others to improve usage of existing
resources
Elimination of Inefficient Management,
A change in management can often increase firm value
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3. Tax Gains
The reduction may be a powerful incentive for some acquisitions. The reduction can
come from :
1. The use of tax
losses
A firm with profitable
division and an
unprofitable one will have
low tax bill because the
loss in one division
offsets the income in the
other. However, if the two
divisions are actually
separate companies, the
profitable firm will not be
able to use the losses of
the unprofitable one to
offset its income.
2. The use of unused 3. The use of surplus funds
debt capacity Consider a firm that has free
A merger leads to cash flow, after payment of all
- risk reduction, taxes sand after all positive NPV
- generating greater have been funded. In this
debt capacity, situation, the firm can either pay
- a larger tax shield dividends or buy back shares.
Investors pay lower taxes in a
share repurchase. (not a good
option for that purpos)
Instead, the firm might make
acquisitions with its excess
funds. No taxes are paid on
dividends remitted from the
acquired firms.
4. Reduced Capital Requirements

Due to economic of scale, mergers can reduce operating costs.It follows that
mergers can reduce capital requirements as well. Accountants typically divide
capital into two components: Fixed capital and working capital.
When two firms merge, the managers will likely find duplicate facilities. For
example. if both firms had their own headquarters, all executives in the merged
firm could be moved ito one headquarters building, allowing the other
headquarters to be sold. Some plants might be rebundant as well. Or two merging
firms in the same industry might consolidate their research and development,
permitting some R&D facilties to be sold.
The same goes for working capital. The inventory-to-sales ratio and the
cash-to-sales ratio often decrease as firm size increases. A merger permits these
economies of scale to be realized, allowing a reduction in working capital.

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Dubious Reasons for Acquisition
1. Earning Growth
An acquisition can create appearance of earning growth, perhaps fooling investors
into thinking that the firm is worth more than it really is.

2. Diversification
Diversification can produce gains to the acquiring firm only if one of two things is
true :
- Diversification decreases the unsystematic variability at lower costs than by
investors adjustment to personal portfolios.
- Diversification reduces risk and thereby increases debt capacity.
- Internal capital or labor allocations are better for diversified firms than would
be true otherwise
A Cost to Stockholders from Reduction in Risk
The Base Case

If merger generate no synergy,

Stockholder Firm A & B had no effect on their
value

Both Firms Have Debt

Coinsurance effect

Mergers usually help bondholders

Stockholders are hurt by the amount
that bondholders gain

Stockholders loss = Bondholders gain

The NPV of a Merger
Cash
NPV of a merger to acquirer = Synergy - Premium

Synergy = Value AB - (Value A + Value B)

Premium = Price paid for B - Value B

Common Stocks

Besides Cash, Common stock is one of the option to do

acquisition.
Common Stocks - The Calculation
Cash Vs Common Stocks

The Decision hinges on a few variables, with perhaps the most

important being the price of the bidders stock

Bidders Stock Price Cash Trade Stock-to-Stock Trade

Overvalued No Significant Differences More Preferable, True

Value is less than Cash
Trade

Undervalued More Preferable, No Less Preferable, True Value

sacrifice on current tends to be relatively higher
stockholder than Cash Trade
Friendly vs Hostile Takeovers

Friendly Takeovers - Approved by the targets BoD naturally

Cleanup Mergers - Acquirer does have the operationally control
over managers after the tender offers (offer made to
stockholders to buy at premium price; shares percentages may
vary) and recommend to obtain few remaining shares.
Street Sweep - Acquirer buys shares in the open market until
they gain the control

*In the end, all the scheme aims to a more values to the acquirer. In other terms, the acquirer
would do anything to gain control in order to bring value to them, I.e. hires a proxy solicitor,
changes in policies, management replacement.
Defensive Tactics
Dettering Takeovers Before Being in Play
Corporate Charters Golden Parachutes Poison Pill
The articles of Generous severance Theres no single
incorporation and packages provided to definition of poison pill
corporate bylaws management in the
governing a firm event of a takeover.
Example: supermajority
provision

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Defensive Tactics
Dettering Takeovers After Being in Play
Green Mail Standstill Agreement White Knight & White
Managers may arrange a The acquirer, for a fee, Squire
targeted repurchase to agress to limit its holdings A firm facing an unfriendly
forestall a takeover in the target. merger ofer might arrange
attempt. to be acquired by a friendly
suitor (white knight).
Management instead may
avoid any acquisition at all,
by invited a third party to
make a significant
investment in the firm.

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Defensive Tactics
Dettering Takeovers After Being in Play
Recapitalizaton & Exclusionary Self Assets Restructurings
Repurchases Tenders A firm may sell off
Leveraged capitalization Firm makes a tender existing assets or buy a
and share repurchase offer for a given amount new one to avoid
fend off takeovers in a of its own stock while takeover.
number of ways. excluding targeted
stockholder.

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Do Mergers Add Value?
Abnormal retrun : the difference between an actual stock return and the return on a
market index.
Gain & Loss to Merger
Gain & Loss to Acquiring Firms
(Both Acquired & Acquiring Firms)
Time Period
Abnormal Percentage Aggregate Dollar Gain or Abnormal Aggregate Dollar Gain
Return Loss Percentage Return or Loss

1980-2001 1.35% - 79 illion USD 1.10% - 220 billion USD

1980-1990 2.41 12 billion USD 0.64 - 4 billion USD

1991-2001 1.04 - 90 illion USD 1.20 - 216 billion USD

1998-2001 0.29 - 134 illion USD 0.69 - 240 billion USD 26

Do Mergers Add Value?
Returns to Bidders

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Do Mergers Add Value?
Target Companies
Mergers benefit the First,
targets stockholders. managers may say that the premium creates a
This conclusion leads to resistance will induce the
at least two implications. bidder to raise its offer.
These arguments could
be true in certain
situations, but they may
also provide cover for
managers who are simply
scared of losing their jobs
after acquisition
Second,
hurdle for the acquiring
company. Even in a
merger with true
synergies, the acquiring
stockholders will lose if
the premium exceeds the
dollar value of these
synergies.
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Do Mergers Add Value?
The Managers VS The Stockholders
Managers of Bidding Firms
Agency theory for mergers :
Managers frequently receive
bonuses for acquiring other
companies. Managers are
disposed to look favorably on
acquisitions, perhaps even
ones with a negative NPV.
Managers of Target Firms
takeovers are beneficial to the
targets stockholders. However, if
managers may be fired after their
firms are acquired, they may
resist these takeovers
managers who cannot avoid
takeover may bargain with the
bidder, getting a good deal for
themselves at the expense of
their shareholders
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The Tax
Forms of
Acquisitions
Tax-Free Transaction
The selling shareholders
are considered to have
exchanged their old
shares for new ones of
equal value, and they
have experienced no
capital gains or loses. The
asset are not revalued
Taxable Transaction
The shareholders of
acquired firm are
considered to have sold
their shares, and they
realized capital gains or
losses will be taxed. in a
taxable transaction, the
appraised value of the
assets of the selling firm
may be revalued
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The Tax
Forms of
Acquisitions

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29.11 Accounting for
Acquisition

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29.12 Going Private & Leveraged
Buyouts (1)
Definition
Going private: private group buys stock of publicly traded
company and takes the stock off the market. Shareholders
are forced to accept cash for their shares.
LBO: The cash offer is financed with large amount of debt.

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29.12 Going Private & Leveraged
Buyouts (2)
Value creation source:
Extra debt provides tax reduction
Increased efficiency
Alignment of management vs shareholder
Reduction of free cash flow (to pay debt interest)

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29.12 Going Private & Leveraged
Buyouts (3)
Examples:
HCA (1989-1992, 2007-2011)
In 1989, son of HCA founder took HCA pivate in a $5.1 billion LBO, then took it public again
in 1991 and gained 800%. Also in 2007, a consortium bought HCA for $33 billion (but only
put up $5.3 billion as equity and borrowed the rest). In 2010, HCA paid $4.3 billion dividend
to LBO investors. In 2011, went public again, LBO investors got $1 billion in IPO and still
had $11 billion in HCA stock.
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29.13 Divestitures
Sale. Examples: AIG menjual Asian Unit AIA 2010 HKSE $20,51b
Spin-off. xamples: Indosat spin-off dari Telkom (di-IPO 1994),
Indosat spin-off terhadap StarOne (2011).
Carve-out. Examples: ConocoPhillips (2012)
hulu/produksi+hilir/marketing: Phillips66.
Tracking stocks. Examples: Disney & go.com.

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