ACF213214 Finance I Finance II Lecture 17 Learning

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ACF-213/214 Finance I / Finance II Lecture 17

ACF-213/214 Finance I / Finance II Lecture 17

Learning Outcome Understand the nature and implications of alternative long-term financing decisions

Learning Outcome Understand the nature and implications of alternative long-term financing decisions

Topics Covered Sensible Motives for Mergers Some Dubious Reasons for Mergers Estimating Merger Gains

Topics Covered Sensible Motives for Mergers Some Dubious Reasons for Mergers Estimating Merger Gains and Costs The Mechanics of a Merger Proxy Fights, Takeovers, and the Market for Corporate Control Merger Waves and Merger Profitability

Topics Covered Leveraged Buyouts The Private-Equity Market Fusion and Fission in Corporate Finance Bankruptcy

Topics Covered Leveraged Buyouts The Private-Equity Market Fusion and Fission in Corporate Finance Bankruptcy

Topics Covered Financial Markets and Institutions Ownership, Control, and Governance Do These Differences Matter?

Topics Covered Financial Markets and Institutions Ownership, Control, and Governance Do These Differences Matter?

Table 31. 1 Some Important Merger Announcements in 2017

Table 31. 1 Some Important Merger Announcements in 2017

Figure 31. 1 The Number of Mergers Involving U. S. Companies, 1985– 2017

Figure 31. 1 The Number of Mergers Involving U. S. Companies, 1985– 2017

Sensible Motives for Mergers Horizontal Merger Vertical merger One that takes place between two

Sensible Motives for Mergers Horizontal Merger Vertical merger One that takes place between two firms in the same line of business Involves companies at different stages of production Conglomerate merger Involves companies in unrelated lines of business

Sensible Motives for Mergers Continued Economies of Scale A larger firm may be able

Sensible Motives for Mergers Continued Economies of Scale A larger firm may be able to reduce its per-unit cost by using excess capacity or spreading fixed costs across more units Economies of Vertical Integration Control over suppliers “may” reduce costs. Overintegration cause the opposite effect Complementary Resources Merging may result in each firm filling in the “missing pieces” of its firm with pieces from the other firm.

Sensible Motives for Mergers Continued 2 Surplus Funds If your firm is in a

Sensible Motives for Mergers Continued 2 Surplus Funds If your firm is in a mature industry with few, if any, positive-NPV projects available, acquisition may be the best use of your funds Eliminating Inefficiencies Poor management may waste money, make poor decisions, conduct improper risk/return investments, and harm the value of the company. Sometimes, the only way to remedy the situation is to change management.

Sensible Motives for Mergers Concluded Industry Consolidation The biggest opportunities to improve efficiency seem

Sensible Motives for Mergers Concluded Industry Consolidation The biggest opportunities to improve efficiency seem to come in industries with too many firms and too much capacity. These conditions often trigger a wave of mergers and acquisitions, which then force companies to cut capacity and employment and release capital for reinvestment elsewhere in the economy.

Figure 31. 2 Part of Bank of America’s Family Tree Note: Ironically, MBNA was

Figure 31. 2 Part of Bank of America’s Family Tree Note: Ironically, MBNA was once owned by a previous version of Bank of America, which sold it in an IPO.

Some Dubious Reasons for Mergers Diversification is easier and cheaper for the stockholder than

Some Dubious Reasons for Mergers Diversification is easier and cheaper for the stockholder than for the corporation. There is little evidence that investors pay a premium for diversified firms. Increasing Earnings per Share: The Bootstrap Game Acquiring firm has high P/E ratio Selling firm has low P/E ratio (due to low number of shares) After merger, acquiring firm has short-term EPS rise Long term, acquirer will have slower than normal EPS growth due to share dilution

Table 31. 2 Impact of Merger on Market Value and Earnings Per Share of

Table 31. 2 Impact of Merger on Market Value and Earnings Per Share of World Enterprises

Figure 31. 3 Effects of Merger on Earnings Growth

Figure 31. 3 Effects of Merger on Earnings Growth

Estimating Merger Gains and Costs Questions Is there an overall economic gain to the

Estimating Merger Gains and Costs Questions Is there an overall economic gain to the merger? Do the terms of the merger make the company and its shareholders better off?

Estimating Merger Gains and Costs Continued

Estimating Merger Gains and Costs Continued

Estimating Merger Gains and Costs Continued 2 Example: Two firms merge, creating $25 million

Estimating Merger Gains and Costs Continued 2 Example: Two firms merge, creating $25 million in synergies. If A buys B for $65 million, the cost is $15 million.

Estimating Merger Gains and Costs Concluded Example: The NPV to A will be the

Estimating Merger Gains and Costs Concluded Example: The NPV to A will be the difference between the gain and the cost.

Right and Wrong Ways to Estimate the Benefits of Mergers Estimated net gain =

Right and Wrong Ways to Estimate the Benefits of Mergers Estimated net gain = DCF valuation of target, including merger benefits – cash required for acquisition Ask why the two firms should be worth more together than apart. You add value only if you can generate additional economic rents.

Table 31. 3 Accounting for the Merger

Table 31. 3 Accounting for the Merger

Table 31. 4 Possible Tax Consequences

Table 31. 4 Possible Tax Consequences

Proxy Fights, Takeovers, and the Market for Corporate Control Proxy Contests A proxy is

Proxy Fights, Takeovers, and the Market for Corporate Control Proxy Contests A proxy is the right to vote another shareholder’s shares Dissident shareholders attempt to obtain enough proxies to elect their own slate to the BOD Takeovers Alternative to a proxy fight Tender offer directly to the shareholders If successful, new owner is free to make any management changes

Table 31. 5 A Summary of Takeover Defenses

Table 31. 5 A Summary of Takeover Defenses

Takeover Defenses White knight: Friendly potential acquirer sought by a target company threatened by

Takeover Defenses White knight: Friendly potential acquirer sought by a target company threatened by an unwelcome suitor. Shark repellent: Amendments to a company charter made to forestall takeover attempts. Poison pill: Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.

Table 32. 1 Some Recent Leveraged Buyouts Values in $ billions

Table 32. 1 Some Recent Leveraged Buyouts Values in $ billions

Leveraged Buyouts Unique Features of LBOs Large portion of buyout financed by debt Shares

Leveraged Buyouts Unique Features of LBOs Large portion of buyout financed by debt Shares of the LBO no longer trade on the open market

Barbarians at the Gate? Potential Sources of Value in LBOs Junk bond market Leverage

Barbarians at the Gate? Potential Sources of Value in LBOs Junk bond market Leverage Other and taxes stakeholders Leverage and incentives Leveraged LBOs restructurings and leveraged restructurings

Leveraged Restructurings The difference between leveraged buyouts and ordinary acquisitions 1. A large fraction

Leveraged Restructurings The difference between leveraged buyouts and ordinary acquisitions 1. A large fraction of the purchase price is debt financed. 2. The LBO goes private, and its share is no longer traded on the open market.

LBOs and Leveraged Restructurings The three main characteristics of LBOs: 1. High debt 2.

LBOs and Leveraged Restructurings The three main characteristics of LBOs: 1. High debt 2. Incentives 3. Private ownership

Figure 32. 1 Private-Equity Partnerships

Figure 32. 1 Private-Equity Partnerships

Table 32. 2 Blackstone Group Portfolio holdings in December 2017

Table 32. 2 Blackstone Group Portfolio holdings in December 2017

Table 32. 3 Conglomerates The largest conglomerates of 1979

Table 32. 3 Conglomerates The largest conglomerates of 1979

Table 32. 4 Private-Equity Fund versus Public Conglomerate

Table 32. 4 Private-Equity Fund versus Public Conglomerate

Figure 32. 2 The Effects of AT&T’s Antitrust Settlement

Figure 32. 2 The Effects of AT&T’s Antitrust Settlement

Spin-Offs, Carve-Outs, and Privatization Spin-off: New independent company created by detaching part of a

Spin-Offs, Carve-Outs, and Privatization Spin-off: New independent company created by detaching part of a parent company’s assets and operations. Carve-out: Similar to spin-off, except that shares in the new company are not given to existing shareholders but sold in a public offering. Privatization: The sale of a government-owned company to private investors.

Table 32. 5 Some Notable Recent Spinoffs

Table 32. 5 Some Notable Recent Spinoffs

Privatization and Nationalization Motives for Privatization 1. Increased efficiency 2. Share ownership 3. Revenue

Privatization and Nationalization Motives for Privatization 1. Increased efficiency 2. Share ownership 3. Revenue for the government

Table 32. 6 The Largest Nonfinancial Bankruptcies

Table 32. 6 The Largest Nonfinancial Bankruptcies

Bankruptcy Chapter 7 Chapter 11 Workouts Alternative Bankruptcy Procedures

Bankruptcy Chapter 7 Chapter 11 Workouts Alternative Bankruptcy Procedures

Figure 33. 1 Financial Claims The value of the financial claims on firms in

Figure 33. 1 Financial Claims The value of the financial claims on firms in 2016 as a percentage of GDP

Figure 33. 2 Household Portfolio 1995– 2016, as a percentage of GDP Allocation

Figure 33. 2 Household Portfolio 1995– 2016, as a percentage of GDP Allocation

Figure 33. 3 Financial Institutions’ Portfolio Allocations 1995– 2016, as a percentage of GDP

Figure 33. 3 Financial Institutions’ Portfolio Allocations 1995– 2016, as a percentage of GDP

Figure 33. 4 Nonfinancial Corporations’ Portfolio Allocations 1995– 2016, as a percentage of GDP

Figure 33. 4 Nonfinancial Corporations’ Portfolio Allocations 1995– 2016, as a percentage of GDP

Ownership, Control, and Governance Ownership and Control in Japan Keiretsu Abenomics Tokyo Stock Exchange

Ownership, Control, and Governance Ownership and Control in Japan Keiretsu Abenomics Tokyo Stock Exchange Corporate Governance Code of 2015 Ownership and Control in Germany Banks Deutsche Bank Daimler AG example

Figure 33. 5 (a) Ownership of Daimler. Benz, 1990

Figure 33. 5 (a) Ownership of Daimler. Benz, 1990

Figure 33. 5 (b) Ownership of Daimler, 2014

Figure 33. 5 (b) Ownership of Daimler, 2014

European Boards of Directors Codetermination Aufsichtsrat Vorstand Conseil de surveillance Directoire

European Boards of Directors Codetermination Aufsichtsrat Vorstand Conseil de surveillance Directoire

Figure 33. 6 (a) Whose Company Is It? The views of 378 managers from

Figure 33. 6 (a) Whose Company Is It? The views of 378 managers from five countries.

Figure 33. 6 (b) Which Is More Important—Job Security for Employees or Shareholder Dividends?

Figure 33. 6 (b) Which Is More Important—Job Security for Employees or Shareholder Dividends? The views of 399 managers from five countries.

Figure 33. 7 Average Percentage of Equity Owned by Largest Shareholders

Figure 33. 7 Average Percentage of Equity Owned by Largest Shareholders

Figure 33. 8 Share Ownership in 2012 of the French Luxury Goods Company LVMH

Figure 33. 8 Share Ownership in 2012 of the French Luxury Goods Company LVMH

Table 33. 1 Voting Control The value of control-block votes as a proportion of

Table 33. 1 Voting Control The value of control-block votes as a proportion of the total firm value.