INTRODUCTION

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• Students are able to consider the factors of Merger and Acquisition,
analyze its impacts toward organization, and do the valuation analyses of
company's value in M&A transaction
• Materi
1. Introduction
2. Merger Strategy
3. Antitakeover Measures
4. Takeover Tactics
5. Leveraged Buyouts
6. Valuation
7. Corporate Restructuring
8. Restructuring in Bankruptcy
• Students are able to explain the basic concept of mergers, acquisitions,
and corporate restructurings; types of mergers; the reasons to do
mergers; and mergers procedures
• Materi
• Recent M & A Transactions
• Terminology
• Types of Mergers
• Merger Consideration
• Merger Professionals
• Leveraged Buyouts
• Corporate Restructuring
• Merger Negotiations
 • Materi (lanjutan)
• Deal Structure: Asset versus Entity Deals
• Merger Agreement
• Merger Approval Procedures
• Deal Closing
• Short-Form Merger
• Freeze-outs and the Treatment of Minority Shareholders
• Reverse Mergers
1. RECENT M&A TRANSACTIONS
 Top 7 Worldwide M & As by Value of Transaction
Value of Target Name Target Acquirer Name Acquirer
Year Transact Nation Nation
ion
($mio)
2000 202,785 Mannesmann AG Germany Vodafone Air Touch UK
PLC
2001 164,746 Time Warner USA America Online USA
2014 130,298 Verizon Wireless Inc. USA Verizon Commu-
nications Inc.
2008 107,649 Philip Morris Int. Inc. Switzerland Shareholders Switzerland

2007 98,189 ABN-AMRO Holding Netherlands RFS Holdings BV Netherlands

NV
2000 89,167 Warner-Lambert Co. USA Pfizer Inc. USA
1999 78,945 Mobil Corp. USA Exxon Corp. USA
 RECENT M&A TRENDS
• The pace of mergers and acquisitions picked up in the early 2000s. The
economic slowdown and recession in the USA and elsewhere in 2001
brought an end to the fifth merger wave.
• Both European and US M&A volume began to rise in 2003 and by 2006-
2007 had reached levels comparable to the peaks of the fifth wave.
However, by 2008 the effects of the global recession and the subprime
crisis began to take hold. The recession caused potential acquirer to reign
in their acquisition-oriented expansion plans. Deals were increasingly
cancelled.
• Deal volume in most regions of the world generally tended to follow the
patterns in the USA and Europe.
2. TERMINOLOGY
3. TYPES OF MERGERS
4. MERGER CONSIDERATION
5. MERGER PROFESSIONALS
6. LEVERAGED BUYOUTS
7. CORPORATE RESTRUCTURING
8. MERGER NEGOTIATIONS
9. DEAL STRUCTURE: ASSET VERSUS ENTITY
DEALS
10. MERGER AGREEMENT
11. MERGER APPROVAL PROCEDURES
12. DEAL CLOSING
13. SHORT FORM MERGER
14. FREEZE-OUTS AND THE TREATMENT OF
MINORITY SHAREHOLDERS
15. REVERSE MERGERS
1.1. Real Assets versus Financial Assets
The material wealth a society is determined by the productive capacity of
its economy, that is the goods and services its members can create. This
capacity is a function of the real assets of the economy. Real assets
generate net income to the economy. Example: land, buildings, machines,
technology, inventory.

Financial assets are the means by which individuals in well-developed

economies hold their claims on real assets. Financial assets are the
allocation of income or wealth among investors. Example: bank accounts,
corporate stocks, bonds
 1.2. Taxonomy of Financial Assets
• Three broad types of financial assets:
• 1. Fixed income or debt securities
– Promise either a fixed stream of income or a stream of income
determined according to a specified formula.
• 2. Equity
– Represents an ownership share in a corporation
• 3. Derivative securities
– Their values derive from the prices of other assets, such as stock or
bond prices. Example: options and futures contracts
 1.3. Financial Markets and the Economy
• The Informational Role of Financial Markets
– The stock market encourages allocation of capital to those firms that
appear at the time to have the best prospects.
• Consumption Timing
– The financial markets allow individuals to separate decisions
concerning current consumption from constraints that otherwise
would be imposed by current earnings.
• Allocation of Risk
– Capital markets allow the risk that is inherent to all investments to be
borne by the investors most willing to bear that risk
• Separation of Ownership and Management
– Financial assets and the ability to buy and sell those assets in the
financial markets allow for easy separation of ownership and
management.
– Agency problems: potential conflicts of interest between managers
and shareholders because managers, who are hired as agents of
shareholders, may pursue their own interests.
• Corporate Governance and Corporate Ethics
– There must be an acceptable level of transparency that allow investors
to make well-informed decisions. If firms can mislead the public about
their prospects, then much can go wrong.
 1.4. The Investment Process
• Saving, Investing and Safe Investing
– Saving: not spending all of current income on consumptions. Investing:
is choosing what assets to hold. May choose to invest in safe assets,
risky assets or combination of both.
– Portfolio: collection of investment assets
– Constructing portfolio decides on the asset allocation and security
selection.
– Asset allocation: choose among broad asset classes.
– Security selection: choose which particular securites to hold within
each asset class.
– Top down approach versus bottom up approach.
– Security analysis: the valuation of particular securities that might be
included in the portfolio.
 1.5. Markets Are Competitive
• The Risk-Return Trade-Off
– Higher risk assets priced to offer higher expected returns than lower-
risk assets
– Diversification: many assets are held in the portfolio that the exposure
to any particular asset is limited.
– Modern Portfolio Theory developed by Harry Markowitz and William
Sharpe: the effect of diversification on portfolio risk, the implications
for the proper measurement of risk, and the risk-return relationship
 1.6. The Players
• Three major players: Firms => net borrowers, Households => net savers,
Governments => can be borrowers or lenders
• Financial intermediaries
– Bring lenders and borrowers together. Include: banks, investment
companies, insurance companies, credit unions.
– Advantages of financial intermediaries:
• By pooling the resources of many small investors, able to lend
considerable sums to large borrowers.
• By lending to many borrowers, intermediaries achieve significant
diversification, so that they can accept loans that individually
might be too risky
• Intermediaries build expertise through the volume of business
they do and can use economies of scale and scope to assess and
monitor risk
• Efficient Markets
– Financial markets process all relevant information about securities
quickly and efficiently, that the security prices usually reflects all the
information available to investors concerning the value of the security.
– Passive management calls for holding highly diversified portfolios
without spending effort or other resources attempting to improve
investment performance through security analysis
– Active management is the attempt to improve performance either by
identifying mispriced securities or by timing the performance of broad
asset classes
• Investment bankers
– Advise the issuing corporation on the price of the securities issued,
appropriate interest rates in the primary market as well as In the
secondary market.
 1.7. Recent Trends
• Globalization
– Increasingly efficient communication technology and the dismantling
of regulatory constraints
• Securitization
– Loans that have been securitized into pass-through arrangements
include student loans, home equity loans, credit card loans, and debt
of firms.
• Financial Engineering
– The use of mathematical models and computer-based trading
technology to synthesize new financial products
• Computer Networks
– The internet and other advances in computer networking have
transformed many sectors of the economy
2. ASSET CLASSES AND FINANCIAL
INSTRUMENTS
 2.1. The Money Market
• Treasury Bills
• Certificates of Deposits => time deposit with a bank
• Commercial Paper => companies issued short-term unsecured debt notes
• Bankers’ Acceptances => an order to a bank by customer to pay a sum of
money at future date
• Eurodollars => dollar denominated deposits at foreign banks
• Repos and Reverses => short term borrowing
• Federal Funds => banks maintain deposits at Federal Reserve bank
• Brokers’Calls Market Instruments => broker borrow fund from a bank
agreeing to repay the bank immediately if the bank requests it
• The LIBOR Market => the rate at which large banks in London are willing to
lend money among themselves
• Yields on Money Market Instruments => promise greater than default-free
T bills
 2.2. The Bond Market
• Treasury Notes and Bonds => US government borrows funds
• Inflation-Protected Treasury Bonds => bonds that are linked to an index of
the cost of living
• Federal Agency Debt =>government agencies issued securities to finance
their activities
• International Bonds => borrow abroad and buy bonds from foreign issuers
• Municipal Bonds => issued by state and local governments
• Corporate Bonds => private firms borrow money directly from the public
• Mortgages and Mortgage-Backed Securities => an ownership claim in a
pool of mortgages or an obligation that is secured by such a pool. These
claims represent securitization of mortgage loans
 2.3. Equity Securities
• Common Stock as Ownership Shares => ownership shares in a corporation
• Characteristics of Common Stock => residual claim and limited liability
features
• Stock Market Listings
• Preferred Stock => has features similar to both equity and debt
• Depository Receipts => certificates traded in US markets that represent
ownership in shares of a foreign company
 2.4. Stock and Bond Market Indexes
• Stock Market Indexes
• Dow Jones Averages
• Standard and Poor’s Indexes
• Other US Market-Value Indexes
• Equally Weighted Indexes
• Foreign and International Stock Market Indexes
• Bond Market Indicators
 2.5. Derivative Markets
• Options
– Call option: gives its holder the right to purchase an asset for a
specified price (exercise or strike price) on or before a specified
expiration date
– Put option: gives its holder the right to sell an asset for a specified
exercise price on or before a specified expiration date
• Future Contracts
– Calls for delivery of an asset at a specified delivery or maturity date for
an agreed-upon price, called the futures price, to be paid at contract
maturity. The long position is held by the trader who commits to
purchasing the asset on the delivery date. Short position commits to
delivering the asset at contract maturity.
3. HOW SECURITIES ARE TRADED
 3.1. How Firms Issue Securities
• Primary market => new issues of stocks, bonds, or other securities
marketed to the public by the investment bankers
– IPO (Initial Public Offerings) => stocks issued by a formerly privately
owned company that is going public for the first time
– Seasoned equity offerings => offered by companies that already have
floated equity
• Secondary market => trading of already issued securities among investors
• Investment Banking => marketing of public offerings of both stocks and
bonds
• Shelf registration => allows firms to register securities and gradually sell
them to the public for 2 years following the initial registration.
• Private placements => sells directly to a small group of institutional or
wealthy investors
 3.2. How Securities Are Traded
• Types of Markets:
– Direct Search Markets
– Brokered Markets
– Dealer Markets
– Auction Markets
• Types of Orders:
– Market Orders
– Price-Contingent Orders
• Trading Mechanisms:
– Dealer Markets
– Electronic Communication Networks
– Specialist Markets
 3.3. Buying on Margin
• Margin => the portion of the purchase price contributed by the investor,
the remainder is borrowed from the broker. The brokers in turn borrow
money from banks at the call money rate to finance these purchases, they
then charge their clients that rate

• Margin = Equity in account/Value of stock

 3.4. Short Sales
• Short Sales => sell first and then buy the shares
• Short sales => allows investors to profit from a decline in a security’s price
 SUMMARY
Introduction covers the topics of:
1. The investment Environment
2. Asset Classes and Financial Insttruments
3. How Securities are Traded
The Investment Environment covers: real assets versus financial assets,
taxonomy of financial assets, financial market and the economy, the
investment process, market are competitive, the players, and recent
trends.
Asset Classes and Financial Instruments covers: the money market, the bond
market, equity securities, stock and bond market indexes, and derivative
markets.
How securities are traded covers: how firms issue securities, how securities
are traded, buying on margin, and short sales.