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Class 25 MA BSBA 2011 Legal DD (1)

# Class 25 MA BSBA 2011 Legal DD (1) - BSBA599 Mergers...

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BSBA599 – Mergers & Acquisitions Spring 2011 1 Prof. David Ravenscraft Kenan-Flagler Business School University of North Carolina Session 25: Legal and Due Diligence

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2 Acquisition Process STRATEGY - DOES THE MERGER CREATE VALUE? DEAL PROCESS- CAN THE BIDDER CAPTURE THE VALUE? HOW TO PREVENT INTEGRATION PROBLEMS FROM DESTROYING VALUE? -Strategic Planning Corp. Level Strategy Industry Analysis Acq. Strat. (Synergy) Merger Environment Stock Market Eval. -Origination or Sourcing Target Initiated (IB) -Pre-valuation analysis - Financing Decision -Tax & Accounting - Antitrust & Regulation -Initial Contact - Confidentiality Agreement - Prelim Due Diligence -Detailed Valuation -Deal Approval Pitch - Letter of Intent - Extensive Due Diligence -Negotiation -Starts with Due Diligence -Integration Manager & Teams -Integration Plan - Integration Speed, Autonomy, Assimilation -Focus on Problem Solving
M&A Synergies and Valuation

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Valuation Formula (Rappaport) Maximum Premium = Value of synergies created Maximum acceptable = purchase price Stand-alone value of the seller Value of the acquisition synergies + If synergy is a bad word, then so is M&A. M&A is all about synergy
Easy Valuation Example Three Firms in an Industry 2 Bidder and 1 Target Stand Alone Value of Target is \$700 Synergies for both bidders is \$600 Sources of Synergies equally divided between Reduced Excess Capacity, Economies of Scale, Capturing a new untapped market, and cross-selling to competitors customers What is the maximum you should pay?

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6 COMPETITIVE BIDDING FOR TARGET FIRM 2 800 900 800 50 50 -400 400 FIRM 1 900 400 -400 0 0 Values in matrix are in millions of dollars Assumption: Target worth \$700 million as a stand alone and \$600 million in synergies to the winning firm. \$400 million of those synergies comes from a competitive advantage the winning firm gains over the losing firms. (I.e., the \$400 million comes out of the losing firms profits.) High bid gets Win value - Bid value Low bid gets Lose value If bids are tied the firm gets the average of the high bid value and the low bid value FIRM 1 Win 1300 Lose -400 Odds 0.5 FIRM 2 Win 1300 Lose -400 Odds 0.5
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Class 25 MA BSBA 2011 Legal DD (1) - BSBA599 Mergers...

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