TakeOvers
Basics of TakeOver
Valuing Business
Acquisition opportunity
Intrinsic Valuation
Relative Valuation
Contingent Claim Valuation
Key Points
Purchase of target firm by the acquirer/bidder
Target firm shareholders cease to be the owners of the firm
A merger is a combination of two business entities under common ownership
Merger & Acquisition differences in outcome unclear but are legally treated differently
Types of takeover 1
Type 1
Vertical Takeover - Target's industry buys or sells to the acquirer's industry .
Conglomerate Takeover - Target and acquirer in unrelated industries
Horizontal Takeover - Target and acquirer in the same industry
Type 2
Friendly Takeover - Approved by target management
Hostile Takeover - Typically not approved by target management
Reverse Takeover - A private company acquires a public company - Happens when private company regards it as an easier route to becoming publicly listed than doing a proper IPO.
Financing a takeover
Reasons for Takeover
Cash Bid
Scrip Bid
Pay’s cash to target shareholders for their shares.
Advantages – Since its easily and clearly understood by the target management, it improves the chance of a successful bid.
Disadvantages – Raising the necessary cash can be difficult. It’s is also possible for debt rating of bidder to go down if bonds are issued or money is borrowed and increased interest and financial distress costs.
The bidder issues new shares to swap them with target shares in a stock-swap transaction/share-exchange bid.
Advantages – Avoid strain on cash bidder, has relative tax advantage because cash acquisitions may create immediate tax liabilities for target shareholders. That is rather than selling the shares for cash, when shareholders of the target get their shares swapped for the bidder there won’t be a sale that would have otherwise created a tax liability if it were sold for cash.
Disadvantages – The SEO equity issue is an expensive way of raising capital. Other reasons - Negative signal that firm does not have strong balance sheet. Dilution of ownership of existing shareholders.
Stylised Facts
The target firm’s various legal and financial counterattacks, ensuring that capitulation is at the highest attainable price.
Competition among potential bidders, raising the final bid thus increasing the value of the company to the target shareholders and this loses the premium for the acquirer for the firm.
So, why does the target enjoy a larger announcement effect?
Market reactions to a takeover announcement - Target shareholders enjoy a gain (about +16%* over the three days around the announcement) in their stock price, whereas acquirer shareholders seem to lose (about -0.7%)
Waves cluster in a relatively small select number of industries - Takeover activity is often prompted by deregulation and by changes in technology or in the pattern of demand.
Takeover activities in “waves” with peaks of heavy activity followed by quiet troughs of few transactions in the takeover market.
Sensible
Dubious
Operating Synergies -
Bulk of economical meaning
comes from here
Lower costs and Higher revenue
Economies of scale (horizontal acquisitions) Or Economies of scope (vertical acquisitions) – efficiencies formed by variety, not volume.
Revenue synergies – New customer base.
Expertise or complementary resources
Replace poor existing management with ones who that can generate positive cash flows and positive returns
Market Power
Acquiring a major rival reduces price competition and increases profits, but these types of acquisitions are subject to regulation due to antitrust laws
Tax Saving
A conglomerate may have tax advantage over s single product firm because losses in one division can offset profits in another division
Diversification
Managerial Motives
Like a diversified portfolio, diversified firms can bear low systematic risk (idiosyncratic risk reduction), But shareholders can diversify themselves by purchasing in different companies, so they don’t need managers to diversify through costly takeovers.
Empire Building by mangers (agency costs), Overconfidence (hubris hypothesis) about being able to success manage all types of businesses.