Lecture_13&14_Mergers_and_Acquisitions.pdf - Lectures 13 14 15 Mergers Acquisitions Corporate Banking \u2013 Course 30173 Lucia Spotorno Today and the

Lecture_13&14_Mergers_and_Acquisitions.pdf - Lectures 13 14...

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Lectures # 13 & 14 & 15 Mergers & Acquisitions Corporate Banking – Course 30173 Lucia Spotorno
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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
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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
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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
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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
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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
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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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