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C5. M&A - Coggle Diagram
C5. M&A
M&A definition
- companies are transferred or combined
- M&A are complex, involving many parties and issues : corporate governance ; form of payment ; legal issues ; contractual issues ; regulatory approval
- Merger (hợp nhất) : A + B => C
In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company
- Acquisition (sáp nhập) : X + Y => X
The acquiring company obtains the majority stake, asset in the acquired firm
Phân loại M&A activity
On forms of integration (hội nhập) and type of merger
- Consolidation: Two or more firms terminate their legal existence and combine into a new corporate identity
- Subsidiary merger: Acquired firm maintains its own former identity
- Statutory merger: Acquired firm is consolidated into acquiring firm with no further separate identity
On endorsement of parties’ management
- A hostile takeover is when the target company board of directors objects to a takeover offer
- A friendly transaction is when the target company board of directors endorses the M&A offer
By the relatedness of business activity of the parties to the combination
- Horizontal merger : Companies are in the same line of business, often competitors
- Vertical merger : Companies are in the same line of production (e.g., supplier–customer)
- Conglomerate merger : Companies are in unrelated lines of business
Motivation
Buyer's Motivations
creating value
Synergy (gt cộng hưởng): make a corporate combination more profitable than the profit of individual firm -> 1+1 = 3
- economies of scale (lợi thế kinh tế nhờ quy mô)
- cross-product selling (bán chéo)
- resource complementarity (nguồn lực bổ sung)
- managerial synergy
- financial synergy
Growth : sometimes it can be cheaper, quicker and less risky for an acquirer to merge with a competitor (external growth) than to achieve growth internally (organic growth)
Increasing market power : Horizontal or vertical integration to increase strength in the industry. Market power is a benefit often pursued in horizontal mergers
Acquiring unique capabilities or resource : patents, technology, trademarks, or raw materials
Unlocking hidden value : improve management, reorganize structure, or liquidations
Undervalued share :revaluation of shares because of new information generated during the merger negotiation
dubious motive
(động cơ mơ hồ, kg rõ ràng)
Diversification
- Company engage in M&A in order to diversify their businesses & help lower earnings volatility
Bootstrapping earnings : occurs when a company's EPS increases as a result of the merger transaction, not due to economic benefits of the business combination
- The shares of the acquirer trade as a higher P/E ratio than shares of the target
- The acquirer's P/E does not fall after the merger
Managers’ personal incentive
- Enjoy higher compensation and perks
- More prestigious to run a larger firm
- Decrease their personal employment risk
Tax consideration : A company may acquire a target that is carrying significant accumulated tax losses so that it can reduce its own tax liablilities
-
Seller's Motivations
- Owners and managers sell as part of their retirement and estate planning, or as a strategy to other business ambitions
- Another reason is the recurring need for expansion capital when the public markets are either not desirable or unavailable
- Large companies divest businesses that do not fit into their strategic plans
- Sales are forced by VC as an exist strategy
Characteristic
Form of the Transaction
stock purchase : the acquirer provides cash, stock, or combination of cash and stock in exchange for the stock of the target firm
- A stock purchase needs shareholder approval
asset purchase : the acquirer buys the assets of the target firm, paying the target firm directly
- An asset purchase may not need shareholder approval
Method of Payment
cash
- Cash offering may be cash from existing acquirer balances or from a debt issue
securities
- Target shareholders receive shares of common stock, preferred stock of the acquirer
- The exchange ratio determines the number of securities received in exchange for a share of target stock
-
Factors influencing method of payment:
- Sharing of risk among the acquirer and target shareholders
- Signaling by the acquiring firm
- Capital structure of the acquiring firm
-
Strategic Planning
- The strategic needs and preferences of management determine the initial selection criterion (tiêu chí) of targets
- The key to evaluating an acquisition candidate is an understanding of the acquirer’s business strategy and of reactions to the deal among shareholders
ensure a successful M&A journey
- Internal capabilities: The process of assessing and integrating of a target company should be carried by a business development team
- Strategic goals and alignment: It is very important to evaluate a company’s strategic and financial goals - determining if they can be achieved faster or more easily via organic growth or an acquisition
- Selection criteria: should be based on post-acquisition market share, cost reduction and synergy opportunities. Flexibility should be maintained as criteria in one industry may not apply to another
- Target selection: The target selection process needs to be carried out quickly keeping in mind that it should be explicit and transparent
fee for IB
Retainer Fee: IB require a non-refundable retainer fee, called an upfront fee, work fee or an engagement fee (phí cam kết), which increases with the size of the transaction, but not in direct proportion (tỉ lệ)
Success Fee (backend fee) paid upon a successful closing. It always the most significant component of the total compensation
The confidentiality agreement, which is to protect sellers against the misuse of confidential information provided to potential buyers, contain :
- Confidentiality provisions to protect the seller against the business risks of disclosure or misuse of information by competitors
- Standstill provisions to protect the seller against unsolicited takeover attempts by bidders
-> Types of information bidders require include financial, legal, technical and human resource materials
-> The target may, through IB and legal counsel, provide bidding guidelines that govern the substance, timing and manner of offers
Sell-side M&A
Seller hire IB and its team of trained professionals (“sell-side advisor”) to ensure that key objectives are met and a favorable result is achieved. Sell-side advisor seeks to achieve the optimal mix of value maximization, speed of execution (thi hành), and certainty of completion among other deal-specific considerations for the selling party
Auctions is a staged process whereby a target is marketed to multiple prospective buyers (“buyers” or “bidders”)
- broad auction
- targeted auction
Organization and Preparation
- Identify Seller Objectives and Determine Appropriate Sale Process
- Perform Sell-Side Advisor Due Diligence and Preliminary Valuation Analysis
- Select Buyer Universe
- Prepare Marketing Materials
- Prepare Confidentiality Agreement
First Round
- Contact Prospective Buyers
- Negotiate and Execute Confidentiality Agreements with Interested Parties
- Distribute Confidential Information Memorandum and Initial Bid Procedures Letter
- Prepare Management Presentation
- Set up Data Room
- Prepare Stapled Financing Package (if applicable)
- Receive Initial Bids and Select Buyers to Proceed to Second Round
Second Round
- Conduct Management Presentations
- Facilitate Site Visits
- Provide Data Room Access
- Distribute Final Bid Procedures Letter and Draft Definitive Agreement
- Receive Final Bids
Negotiation
- Evaluate Final Bids
- Negotiate with Preferred Buyer(s)
- Select Winning Bidder
- Render Fairness Opinion (if required)
- Receive Board Approval and Execute Definitive Agreement
Closing
- Obtain Necessary Approvals
- Financing and Closing
Negotiated Sale
- While auctions were prevalent as a sell-side mechanism during the LBO boom of the mid-2000s, a substantial portion of M&A activity is conducted through negotiated transactions. In contrast to an auction, a negotiated sale centers on a direct dialogue with a single prospective buyer
Buy-side M&A
Facilitates a company’s ability to continuously grow, evolve, and re-focus in accordance with ever-changing market conditions, industry trends, and shareholder demands
- Buyer motivation
- Acquisition Strategies
- Form of Financing
- Deal Structure
- Buy-Side Valuation
- Consequences Analysis
Valuation & Financing
- The valuation process involves a self-evaluation by the acquiring firms and the valuation of the acquisition candidates
- The self-evaluation phase estimates the value of the acquiring firm and examines how it is affected by each of the various scenarios
- After identifying a suitable candidate, the acquirer undertakes the target’s valuation to determine what price to offer
- The valuation techniques are used only in determining the price range reference for the target company. Equally important, a risk analysis should be performed
Valuation Techniques
(còn nữa, xem slide :explode:)
DCF method (1)
The comparable transaction analysis (2)
(Precedent transactions analysis)
The comparable company approach (3)
Target stock price history analysis (4)
The M&A multiples technique (5)
Gross revenue multiplier (price to sales ratio) (6)
The multiple of earnings per share method (7)
LBO analysis (8)
The leveraged recapitalization method (9)
The breakup valuation technique (10)
The book value approach (11)
Liquidation analysis (12)
Financing
(còn nữa, xem slide :explode:)
Methods use to finance M&A activities of company
- using available cash
- obtaining a new or amended credit facility
- obtaining mezzanine debt financing
- exchanging stock
- raising equity financing
- accessing public debt financing
- obtaining a bridge facility
- utilizing vendor takeback financing
- negotiating earn-outs
Takeover Defense
are intended to either prevent the transaction from taking place or to increase the offer
Pre-offer defense mechanisms are triggered by changes in control, generally making the target less attractive
- Poison Pill: This gives the current shareholders of the target company a right to purchase additional shares of the new entity at a discount
- Poison Put: This gives a right to the existing bondholders of the target entity to ask for immediate redemption of their debt
- States with Restrictive Takeover Laws: Companies would like to be incorporated in the countries which have restrictive takeover laws as it would be very cumbersome for the acquirer to fulfil the requirements
- Staggered Board of Directors: Only a part of BOD can be changed every year
- Restricted Voting Rights: A provision can be added that if the stake of one of the shareholders crosses a threshold percentage, that shareholder will lose his voting rights
- Supermajority Voting Provision for Mergers: A provision can be included where a majority of (e.g. more than 51%) is required to approve a takeover
- Fair Price Amendment: This provision restricts the takeover to happen unless the shareholders are being paid a “fair price” for their shares
- Golden Parachutes: Compensation agreements can be made between the target company and the top-level management for lucrative cash pay-outs in case they leave the company following an acquisition
Post-offer defense mechanisms tend to address ownership of shares and reduce the hostile acquirer’s power gained from its ownership interest in the target
- Just Say “NO” Defence: The target company can make a public announcement addressing the shareholders why the offer is not in the shareholder’s best interest
- Litigation: File a lawsuit against the acquirer claiming that some law will be violated if this acquisition takes place
- Greenmail: Some amount is paid to the acquirer to terminate the takeover offer. In some cases, the target company purchase the shares from the acquirer at a premium following an agreement that the acquirer will not make another takeover attempt
- Share Repurchase: The target company can submit a tender offer for its own shares which will compete with the bid offered by the acquirer
- Pac-Man Defence: The target makes a counter offer to acquire the acquirer
- Levered Recapitalisation (tái vốn hóa): The target company takes up large amount of debt just to make significant changes in the capital structure and make the acquisition less attractive for the acquirer
- Crown Jewel Defence: The target entity might sell of the subsidiary or the asset that was the major reason behind the offer made by the acquirer
- White Knight Defence: The target company invites a friendly third party with a good strategic fit to get acquired
- White Squire Defence: The target company invites a friendly third party, but this time to acquire a minority stake in the entity, just to block the hostile acquirer from gaining enough shares to complete the merger