Mergers Acquisitions and Divestitures Prof Ian GIDDY Stern

Mergers & Acquisitions (and Divestitures) Prof. Ian GIDDY Stern School of Business New York University www. stern. nyu. edu/~igiddy/dakar

Mergers and Acquisitions l Mergers & Acquisitions l Divestitures l Valuation Concept: Is a division or firm worth more within the company, or outside it? Copyright © 2003 Ian H. Giddy M&A 3

The Gains From an Acquisition Gains from merger Synergies Top line Copyright © 2003 Ian H. Giddy Control Bottom line Financial restructuring Business Restructuring (M&A) M&A 4

Goal of Acquisitions and Mergers l Increase size - easy! l Increase market value - much harder! Copyright © 2003 Ian H. Giddy M&A 5

Goals of Acquisitions Rationale: Firm A should merge with Firm B if [Value of AB > Value of A + Value of B + Cost of transaction] l Synergy l Gain market power l Discipline l Taxes l Financing Copyright © 2003 Ian H. Giddy M&A 6

Fallacies of Acquisitions Size (shareholders would rather have their money back, eg Vivendi Universal) l Downstream/upstream integration (internal transfer at nonmarket prices, eg Du. Pont/Conoco, AOL/Time Warner) l Diversification into unrelated industries (Kodak/Sterling Drug) l Copyright © 2003 Ian H. Giddy M&A 8

Who Gains What? Target firm shareholders? l Bidding firm shareholders? l Lawyers and bankers? l Are there overall gains? l Changes in corporate control increase the combined market value of assets of the bidding and target firms. The average is a 10. 5% increase in total value. Copyright © 2003 Ian H. Giddy M&A 9

The Price: Who Gets What? Copyright © 2003 Ian H. Giddy M&A 10

Equity Valuation: Application to M&A Prof. Ian Giddy New York University

How Much Should We Pay? Applying the discounted cash flow approach, we need to know: 1. The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes 2. The rate at which to discount the cash flows (required rate of return) 3. The deadweight costs of making the acquisition (investment banks' fees, etc) Copyright © 2003 Ian H. Giddy M&A 12

The Gains From an Acquisition Gains from merger Synergies Top line Copyright © 2003 Ian H. Giddy Bottom line Control Financial restructuring Business Restructuring (M&A) M&A 13

Equity Valuation in Practice Estimating discount rate l Estimating cash flows l Application to Optika l Application in M&A: Schirnding-Optika l Copyright © 2003 Ian H. Giddy M&A 15

Optika WACC: Re. E/(D+E)+Rd. D/(D+E) Value: FCFF/(WACC-growth rate) Equity Value: Firm Value - Debt Value = 2278 -250 = 2028 Copyright © 2003 Ian H. Giddy CAPM: 7%+1(5. 50%) Debt cost (7%+1. 5%)(1 -. 35) M&A 16

Optika & Schirnding Copyright © 2003 Ian H. Giddy M&A 17

Optika-Schirnding with Synergy Copyright © 2003 Ian H. Giddy M&A 18

Optika-Schirnding with Synergy Case Study: Ashanti-Bogoso Copyright © 2003 Ian H. Giddy M&A 19

Ipoh-Kelantan Copyright © 2003 Ian H. Giddy M&A 20

Steps in a Successful Merger and Acquisition Program - Step 1 and 2 1. Manage preacquisition phase l l l Instruct staff on secrecy requirements Evaluate your own company Identify value-adding approach Understand industry structure, and strengthen core business Capitalize on economics of scale Exploit technology or skills transfer 2. Screen Candidates l l Identify knockout criteria Decide how to use investment banks Prioritize opportunities Look at public companies, divisions of companies, and privately held companies Copyright © 2003 Ian H. Giddy M&A 22

Steps in a Successful Merger and Acquisition Program - Step 3 to 5 3. Value remaining candidates l l Know exactly how you will recoup the takeover premium Identify real synergies Decide on restructuring lan Decide on financial engineering opportunities 4. Negotiate l l l Decide on maximum reservation price and stick to it Understand background and incentives of the other side Understand value that might be paid by a third party Establish negotiation strategy Conduct due diligence 5. Manage postmerger integration l l Move as quickly as possible Carefully manage the process Copyright © 2003 Ian H. Giddy M&A 23

Conclusion

Copyright © 2003 Ian H. Giddy M&A 25

Contact Info Ian H. Giddy NYU Stern School of Business Tel 212 -998 -0426; Fax 212 -995 -4233 Ian. giddy@nyu. edu http: //giddy. org Copyright © 2003 Ian H. Giddy M&A 26