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Mergers & Acquisitions
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– Financial transactions aimed at controlling undervalued assets
– Target industry is very different from acquirer core business
– Primary objective: provide only enough cash flow for debt repayment
– Sell non-core assets, or most parts of the business, even liquidate the company- Corporate raider = a financier who makes a practice of making hostile takeover
bids for companies, either to control their policies or to resell them for a profit
– Known to use junk bonds to finance transactions
– Long term: bankruptcies, legal issues, scaled back operations
Read more: http://www.nytimes.com/1996/06/30/business/where-oh-where-have-all-the-corporate-raiders-gone.html
M&A in the 1980s
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Yes, corporate level tool (what businesses should the firm be in?)
Used to redefine competitive scope, when other alternatives are not feasible
Expand (diversify) or contract (divest)
“If you can’t build it, buy it”
Also, No, they can be speculative
Strategic?
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*value of most deals is undisclosed
M&A as GROWTH engine
Alphabet 220, 2001–present, > $30b*
Apple 99, 1988–present, >$11b*
Facebook 70, 2005–present, > $24b*
Qualcomm 43, 1997– 2017
M&A as EXIT strategyAcquisitions represent potential exit of founders or target company owners
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A+B=AB
Two companies join to form one single (new) company
Equal size and stature
Name change is typical
In practice, friendly mergers are the exception, not the rule
Merger
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1998, Daimler-Benz + Chrysler = DaimlerChrysler, $36b
1998, Travelers Group + Citicorp = Citigroup Inc, $140b
1999, Exxon + Mobil = Exxon Mobil Corp, $81b
2000, AOL + Time Warner = AOL Time Warner, $165b
2000, Glaxo Wellcome PLC + SmithKline Beecham = GlaxoSmithKline plc, $75.7b
2005, Royal Dutch Petroleum + Dutch Shell Transport & Trading = Royal Dutch Shell, $74.5b
(in)Famous mergers
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A ≥ b = Ab
One firm buys another
Target ceases to exist (becomes a subsidiary)
Typically larger business buys smaller one
Acquisition
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TAKEOVER: an acquisition where the target firm did not solicit the bid
Acquiring company often buys majority stake and becomes responsible for operations, holdings and debt
When the target is a publicly traded company, the acquiring company makes an offer for all of the target’s outstanding shares.
HOSTILE TAKEOVER: accomplished by going directly to the company's shareholders or fighting to replace management to get the acquisition approved
Acquisition
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2000, Vodafone ≥ Mannesman, $181b
2001, Comcast ≥ AT&T Broadband, $72b
2003, Pfizer ≥ Pharmacia, $60b
2004, JP Morgan Chase ≥ Bank One, $58b
2006, AT&T ≥ BellSouth, $86b
2009, Pfizer ≥ Wyeth, $68b
2018, Bayer ≥ Monsanto, $63b
Largest known acquisitions
>$525,000,000,000
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100+acquisitions Since 1998
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A form of corporate restructuring, leads to consolidation
Two companies together > value than separate
Many firms have no option but to merge, acquire, or be acquired
Enable successful firms to grow faster than competition
Lead to extinction of weak companies
Among the most powerful and versatile growth tools
What are the typical sectors of M&A activity?
Why important?
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US M&A deal value by sector (2000–2015)
Source: IMAA
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Also importantbecause you will likelybe involved in one, as employee,founder, buyer, etc.
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Increase market power / reduce competitive balance of industry / achieve economies of scale
Reshape competitive scope / avoid excessive competition / reduce dependence on too few markets / stabilize earnings and boost investor confidence / spread risk
Enter new markets / overcome entry barriers / speed to market
Adding product lines / avoid cost + risk of new product development
Reasons for M&A
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Tax savings, when profitable co. merges with, or acquires a money-loser
Learn / develop new capabilities / competencies
Transform corporate identity / reputation
Increase distribution reach / cross-sell products or services
Reasons for M&A…
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Conglomerate: unrelated businesses
Horizontal: target is in the same industry
Facebook ≥ Instagram (same industry, similar product stages)
Vertical: target is supplier/distributor
Live Nation + Ticketmaster (manage artists, produce shows, sell tix)
Market extension: same products, separate geographical markets
Product extension: related products, same market.
Group products → more consumers
Types of M&A
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M&A Process
Image: Ritchie Hogg
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Inadequate evaluation of target → ‘winner’s curse:’ acquirer overpays for target
Large debt of target → difficult to manage cash flows
Too large → managing bureaucracy reduces innovation and flexibility
Overly diversified → lack of expertise in managing unrelated business
Inability to achieve synergy → expected benefits are unrealized
Potential problems
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What is the source of most M&A problems?
Integration difficultiesCorporate culture
Technology
International issues
Morale & productivity
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Financial analysis — review historical financial statements, projections, etc.
Technology/Intellectual property — extent and quality of assets (patents, etc.)
Customers/Sales — largest segments, concentration, sales pipeline
Strategic fit with acquiring firm — integration, complementarity, etc.
Employee/Management issues — quality of mgmt and employee base (bios, labor disputes, HR issues)
Litigation — pending, threatened, settled, arbitration, regulatory proceedings
Tax issues — carryforwards, etc.
Antitrust and regulatory issues
Insurance — key policies, general liability, intellectual property, health, etc.
Read more: https://www.forbes.com/sites/allbusiness/2014/12/19/20-key-due-diligence-activities-in-a-merger-and-acquisition-transaction/#338ee3f64bfc
M&A due diligence
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Downsizing: wholesale reduction of employees
Downscoping: selectively divesting or closing non-core business. Reduce scope of operations. Leads to better focus.
Leverage Buyout: buy firm assets in order to take firm private
Restructuring
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Restructuring outcomes
Downsizing
Downscoping
Leveraged buyout
Reduced labor costs
Loss of human capital
Lower performance
Reduced debt costs
Strategic control
High debt costs
Higher performance
Higher risk
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How to keep your job after an acquisition?
Source: Javad Ahmad & Rajiv Ramanathan
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Beer
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Food & Convenience Goods
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Auto
Source: The Economic Times Delhi, Jul 22, 2010, Page: 33
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Defense
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Banking
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Airlines
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Federal Trade Commission [FTC.GOV] regulates antitrust issues:
“Many mergers benefit competition and consumers by allowing firms to operate more efficiently. But some mergers change market dynamics in ways that can lead to higher prices, fewer or lower-quality goods or services, or less innovation.”
Oligopolies
Loss of competition
Loss of innovation
Loss of consumer value
Effects of Consolidation
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Disruptors
Valued at >$1.75b
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2013: $1.3 million2016: $325,000 – $750,000
2017: $241,0002019: <$200k
2020: debt restructuring req’d
Cost of NYC taxi medallion
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2003Most automakers invest nothing or minimally in electric vehicles.
G.M. announces that it will not renew leases on its EV1 cars saying it can no longer supply parts to repair the vehicles and that it plans to reclaim the cars by the end of 2004.
Tesla founded.
2005On February 16, electric vehicle enthusiasts begin a "Don't Crush" vigil to stop G.M. from demolishing 78 impounded EV1s in Burbank, California. The vigil ends twenty-eight days later when G.M. removes the cars from the facility. In the film "Who Killed the Electric Car" G.M. spokesman Dave Barthmuss states that the EV1s are to be recycled, not just crushed.
2006Tesla Motors publicly unveils the ultra-sporty Tesla Roadster at the San Francisco International Auto Show in November. The first production Roadsters will be sold in 2008 with a base price listing of $98,950.
2021Most automakers have electric offerings and plan on shifting fleets to mostly electric.
Electric car
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Space
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Business Broker: https://www.businessbroker.net/business-directory.aspx
Biz Sale (FSBO): http://www.bizsale.com/
BusinessesForSale: https://us.businessesforsale.com/
Fancy buying or selling a business?
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M&A Magazine: https://www.themiddlemarket.com/
Follow along
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