2Mergersmany people including Warren Buffett have expressed skepticism of the power of mergers:Many managements apparently were overexposed in impressionable childhood years to the story in which the imprisoned handsome prince is released from a toad’s body by a kiss from a beautiful princess. Consequently, they are certain their managerial kiss will do wonders for the profitability of Company T(arget) … Investors can always buy toads at the going price for toads. If investors instead bankroll princesses who wish to pay double for the right to kiss the toad, those kisses had better pack some real dynamite. We’ve observed many kisses but very few miracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses – even after their corporate backyards are knee-deep in unresponsive toads… We have tried occasionally to buy toads at bargain prices with results that have been chronicled in past reports. Clearly our kisses fell flat. We have done well with a couple of princes – but they were princes when purchased. At least our kisses didn’t turn them into toads. And, finally, we have occasionally been quite successful in purchasing fractional interests in easily identifiable princes at toadlike prices.
3M&As changing forces driving mergers: mergers vs. tender offers types technological changeglobalization and freer tradederegulationeconomies of scale, scope, and technological catch-upchange in industry organizationindividual entrepreneurshipmacroeconomic factors** Weston, Siu, and Johnson (2001)mergers vs. tender offerstypes
4Changes in Ownership Structure exchange offersleverage recapitalizationsdual-class recapitalizationsshare repurchasesLBOs, MBOsESOPS
5Control of Decision Powers compensation arrangementsproxy contestpremium buy-backs (greenmail)takeover defensesstakeholder relationshipsethics and reputation
6Theories of Mergers efficiency increases (restructuring) operating synergiesfinancial synergyinformationhubrisagency problems
8Forms of Transaction merger acquisition tax implications of assetsof stocktax implicationslegal implications
9Form of Transaction stock purchase asset purchase merger avoids tax at corporate levelacquirer can use NOL of targetsh of target taxed on capital gainacquirer can not step-up basis of target’s assets for tax purposesasset purchaseseller is subject to corporate taxesbuyer can step-up basis and amortize goodwill over 15 yearsbuyer can not use NOLs of targetmergerforward mergerreverse subsidiary merger
10Example 1Assume the buyer acquires a debt-free target for $100 cash, the target’s tax basis in the assets is $40, the target shareholders’ basis in the stock is $15, and the fair MV of the stock was $70 prior to the acquisition. Let the corporate tax rate be 40%, the personal tax rate on capital gains be 20%, and assume that all the gain to the seller is classified as capital gain and the buyer’s price in excess of the target’s basis is allocated to goodwill. Look at the proceeds to the target using both a stock purchase and an asset purchase.Review Example 2 and 3 in the text.
11Returns in M&AsKaplan and Weisbach (1992), Servaes (1991), and Mulherin and Boone (2000)mergers in banking industryBecher (2000) – looked at because of increased number of bank mergers that occurred around industry deregulationevidence that bank mergers created wealthtarget returnsbidder returns
12Value of Mergers VC = VA + VT + Synergies – Cash Premium = PT – VT Premium = pc*m + cashAcquirer’s Gain = Synergies – PremiumAcquirer’s Gain + Seller’s Gain = SynergiespC = VC / (n + m)or pC = (VA + VT + Synergies – Cash)/(n + m)where n = # of old shares of acquirerand m = # of shares issued to target shareholdersBreak-Even Synergies = Premium = mpA + Cash – VTGainA = Synergy - Premium
13Accretion/Dilution Analysis alternate way to look at the impact of the merger to the shareholders of the acquirerfind pro-forma EPS for merged firm for year prior to merger and then years after alsofor share exchange, combine NI and divide by new number of shares outstandingif new EPS is > EPS of acquirer, then there is accretion if new EPS < EPS of acquirer, then there is dilution
14Merger Analyses terms of the merger financing the merger break-even synergiesfinancial model of the mergeraccretion-dilution analysisfree cash-flow valuationstress-testing and scenario analysis