1. MERGERS & ACQUISITIONS Prepared by: BRENDA PALAD

2. WHAT YOU NEED TO KNOW IN M&A? a.Does the merger add value? b.Does the justification for the merger proposed by management make sense? c.Which company (Acquirer (A) or Target (T)) captures the value created by the merger (if any). d.How will the takeover defenses employed by the target firm affect the likelihood of the merger succeeding e.What are the valuation methods for M&A? f.What financing strategies are used in M&A? LEARNING GUIDE

3.  What is M& A?  Is there a difference between the two?  What are the categories of M&A activities? MERGERS & ACQUISITIONS

4.  FORMS OF INTEGRATION A.Statutory Merger B.Subsidiary Merger C.Consolidation Merger  TYPES OF MERGER A.Horizontal B.Vertical C.Conglomerate CATEGORIES OF M& A

5.  SYNERGY  Achieving more rapid growth  Increased Market Power  Gaining Access to unique capabilities  Diversification  Bootstrapping EPS  Tax Benefits  Unlocking hidden value REASONS WHY COMPANIES ENGAGE IN M& A

6.  Achieving international business goals -Taking advantage of market inefficiencies -Working around disadvantageous govt policies -Use of technology in new markets -Product differentiation -Provide support to existing multinational clients REASONS WHY COMPANIES ENGAGE IN M& A

7.  A way of packaging the combined earnings from two companies after a merger so that the merger generates an increase in the earnings per share of the acquirer, even when no real economic gains have been achieved.  BOOTSTRAPPING EPS –occurs when a high growth prospects firm (high P/E) acquires a low growth prospects firm (low P/E) in stock transaction BOOTSTRAPPING

8. 1.Pioneer/Development Phase 2.Rapid growth phase 3.Mature Growth phase 4.Stabilization Phase 5.Decline Phase MERGER MOTIVATIONS AND TYPES OF MERGERS BASED ON INDUSTRY LIFE CYCLE

9.  Stock purchase  Asset Purchase FORMS OF ACQUISITION

10.  Securities Offering  Cash Offering METHODS OF PAYMENT

11. 1. Distribution between risk and reward for the acquirer and target shareholders. Risks are borne by the acquirer. 2.Relative valuations of companies involved 3.Changes in capital structure if debt - it increases financial leverage if stock - it dilutes ownership interests of shareholders FACTORS TO CONSIDER IN MODES OF PAYMENT

12. 1.Friendly merger offers - approach target companies management - negotiate methods of payment - terms of the transaction - due diligence - preparation of definitive merger agreements 2. Hostile takeover – when target management is not supporting the deal, acquiring company propose directly to the BOD, called BEAR HUG. ATTITUDE OF TARGET MANAGEMENT

13.  If Bear Hug is unsuccessful, acquiring company approach the target shareholders using two methods: 1.Tender Offer 2. Proxy Battle ATTITUDE OF TARGET COMPANIES

14. 1.PRE-OFFER a. Poison Pill – gives current shareholders the right to purchase additional shares of stocks at extremely attractive prices (discount to current MV) which causes dilution and effectively increases the cost to potential acquirer. a.Flip in pill – target shareholders buy shares at a discount b. Flip over pill – target shareholders have the right to buy Acquirer shares at a discount DEFENSE MECHANISM

15. B.Poison Put C.States with restrictive takeover laws D.Staggered Board E.Restricted voting rights F.Super Majority voting provisions for mergers G.Fair price amendment H.Golden Parachutes DEFENSE MECHANISM

16. A.Just say “NO” B.Litigation C.Greenmail D.Share Repurchase E.Leveraged recapitalization F.Crown jewel defense G.Pac-Man Defense H.White Knight Defense I.White Squire Defense POST OFFER DEFENSE MECHANISM

17.  ANTI-TRUST LAWS  What is the purpose?  Why such laws are created? LAWS & REGULATIONS

18.  Measure of market power for determining potential anti-trust violations. P. 310  FORMULA - HHI = ∑ (MS1 x 100)² IF HHI is less than 1000, the industry is considered competitive and anti-trust is unlikely IF HHI is 1000-1800 industry is moderately concentrated IF HHI is more than 100 merger is likely to be challenged IF HHI is more than 1800, highly concentrated industry  POST MERGER-HHI=(MS X 100)ⁿ X no. of remaining  firms + (0.10 x 100) ² HERFINDAHL-HIRSCHMANN INDEX

19.  DCF analysis  Comparable Company Analysis  Comparable Transaction Analysis VALUATION

20.  Post merger value of an Acquirer V AT = V A + VT + S - C Gains Accrued to the Acquirer Gains A = S - TP = S - (Pt - Vt) TP = takeover premium PT = price paid for the target Vt = pre-merger value of the target POST MERGER VALUE

21.  ON STOCK OFFER Pt = (N x Pat) N = number of new shares that target receives Pat = price per share of combined firm after merger announcement POST MERGER VALUE

22.  Cash offer  Stock offer ANALYZING EFFECT OF THE PAYMENT METHODS

23.  What is a convertible security?  What is a conversion ratio? A conversion Price?  What is a straight bond value?  What is meant by a convertible’s floor value?  What are the advantages and disadvantages of convertibles to issuers? To investors?  How do convertibles reduce agency costs? OTHER FORMS OF FINANCING - HYBRID SECURITIES & LBOs

24.  What is a LBO?  What actions do companies typically take to meet the large debt burdens resulting from LBOs?  How do LBOs typically affect bondholders? LEVERAGED BUYOUTS

25.  Divestitures  Equity carve outs  Spin offs  Split offs  Liquidation WAYS A FIRM CAN REDUCE ITS SIZE

26.  Division no longer fits into management long-term strategy  Lack of profitability  Individual parts are worth more than the whole  Infusion of cash REASONS FOR DIVESTITURES