Lectures # 13 & 14 & 15
Mergers & Acquisitions
Corporate Banking – Course 30173
Lucia Spotorno
Today and the Next two Lectures
Stowell: Chapter 4
Evaluating M&A
Cross-border transactions
The role of investment banks
Valuation:
Multiples valuation
Cash flow valuation
Introduction to Case 4
2
M&A Objectives and Considerations
Before entering into a transaction, companies typically compare the
costs, risks and benefits of an acquisition or merger with their
organic opportunity (a “Greenfield analysis”)
This buy versus build analysis is an important departure point for a
company as it begins to think about a transaction:
Is it better to build a brand, geographic coverage, distribution
network, installed base of products or services, and relationships,
or is it better to acquire them?
The inverse decision – whether to sell – is an analysis that asks
whether the benefits of continuing to operate an asset is a better
risk-adjusted option than monetizing the asset (for cash or stock of
the acquirer)
3
There is an never-ending debate on whether M&A creates or destroys
value for shareholders
Before undertaking an acquisition or merger, a strategic rationale should
be determined that results in a likely increase in shareholder value
A key component in determining if a transaction is strategically
justifiable is the analysis of synergies:
Synergies include cost synergies and revenue synergies
Easier to capture cost savings than to generate more revenue. Often,
you will find that one of the key objectives in an acquisition or merger
is to achieve cost savings through economies of scale (sharing central
services such as legal, accounting, finance, and executive
management) and reduction of redundant assets (real estate,
corporate jets, etc.)
McKinsey estimates that 88% of acquirers were able to capture at
least 70% of estimated cost savings, while only 50% of acquirers were
able to capture 70% of revenue synergies
4
Strategic Rationale, Control Premium &
Synergies
Strategic Rationale, Control Premium &
Synergies
In an acquisition, control premium is the percentage difference between
the price an acquirer will pay to purchase control of a target company
compared to the price for owning a minority share (non control) position
The purchase price premium (to the target’s current share price) in an
acquisition is determined based on consideration of synergies and
control premium:
Price premium = synergy effects + control premium
5
Key Parameters for Evaluating M&A
Opportunities
Strategic fit with business strategy of the acquirer
Management team and asset quality
Synergy potential
Ease of integration
Margins, earnings, return on invested capital (ROIC) and credit
ratings impact, and other financial attributes
Price/valuation
Regulatory risk
6
Principal Constituents in an M&A
Transaction
Shareholders are concerned about valuation, control, risk and tax
issues
Credit rating agencies focus on credit quality issues
Regulators must be persuaded that anti-trust, tax and securities laws
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