Introduction to Mergers,

Acquisitions, & Other

Restructuring Activities
 Course Layout
M & A a n d O th e r
R e s t r u c t u r in g
A c t iv it ie s

M &A M & A P ro c e s s D eal A lt e r n a t iv e

E n v ir o n m e n t S t r u c t u r in g R e s t r u c t u r in g
S t r a t e g ie s

M o t iv a t io n s B u s in e s s & P u b lic & D iv e s t it u r e s ,

fo r M & A A c q u is it io n P la n s P r iv a t e C o m p a n y S p in - O ffs , &
V a lu a t io n C a rv e -O u ts

C om m on Takeover S e a rc h T h ro u g h F in a n c ia l B a n k ru p tc y &
T a c t ic s a n d C lo s in g A c t iv it ie s M o d e lin g L iq u id a t io n
D e fe n s e s T e c h n iq u e s

A lt e r n a t iv e
S tru c tu re s

T a x & A c c o u n t in g
Is s u e s
 Course Learning Objectives
• Define what corporate restructuring is and why it occurs
• Identify commonly used valuation techniques
• Describe how corporate restructuring creates/destroys value
• Identify commonly used takeover tactics and defenses
• Develop a highly practical “planning based” approach to
managing the M&A process
• Identify challenges and solutions associated with each phase of
the M&A process
• Describe advantages and disadvantages of alternative M&A
deal structures
• Describe how to plan, structure, and manage JVs, partnerships,
alliances, licensing arrangements, equity partnerships,
franchises, and minority investments
 Current Chapter Learning Objectives
• Primary objective: What corporate restructuring is
and why it occurs
• Secondary objective: Provide students with an
understanding of
– Commonly used M&A vocabulary
– M&A as only one of a number of strategic options
for increasing shareholder value
– M&A activity in an historical context
– The primary motivations for M&A activity
– Key empirical findings
 Alternative Forms of Corporate
Restructuring
• Restructuring Activity
– Corporate Restructuring
• Balance Sheet
• Assets Only
– Financial Restructuring
(liabilities only)
– Operational Restructuring
• Potential Strategy
– Redeploy Assets
• Mergers, Break-Ups, &
Spin-Offs
• Acquisitions,
divestitures, etc.
– Increase leverage to lower
cost of capital or as a
takeover defense
– Divestitures, widespread
employee reduction, or
reorganization
 Building a Common Vocabulary

• Statutory Merger • Combination of 2 firms with

only one surviving

• Subsidiary Merger • Target becomes a subsidiary

of the parent
• Two or more firms merge to
• Consolidation
form a new company
• Purchase of a target firm,
• Acquisition controlling interest, or specific
target assets
• Buyout financed primarily by
• Leveraged Buyout debt
• One firm with investments in a
• Holding Company number of operating
companies
 Alternative Ways of
Increasing Shareholder Value
• Solo venture (AKA “going it alone” or “organic growth”)
• Partnering (Marketing/distribution alliances, JVs,
licensing, franchising, and equity investments)
• Mergers and acquisitions
• Minority investments in other firms
• Asset swaps
• Financial restructuring
• Operational restructuring
 Merger Waves
• Horizontal Consolidation (1897-1904)
• Increasing Concentration (1916-1929)
• The Conglomerate Era (1965-1969)
• The Retrenchment Era (1981-1989)
• Age of the Strategic Megamerger
(1992-2000)
 Horizontal Consolidation (1897-1904)

• Spurred by
– Drive for efficiency,
– Lax enforcement of antitrust laws
– Westward migration, and
– Technological change
• Resulted in concentration in metals,
transportation, and mining industry
• M&A boom ended by 1904 stock market crash
and fraudulent financing
Increasing Concentration (1916-1929)

• Spurred by
– Entry of U.S. into WWI
– Post-war boom
• Boom ended with
– 1929 stock market crash
– Passage of Clayton Act which more
clearly defined monopolistic practices
 The Conglomerate Era (1965-1969)
• Conglomerates employ financial engineering to boost
their share price
– High P/E firms acquired lower P/E target firms
– Combined firms’ share price increased if investors
applied the higher P/E to the combined firms’ EPS
– Number of high-growth, low P/E firms declined as
conglomerates bid up their prices
– Higher purchase price for target firms and increasing
leverage of conglomerates brought era to a close
 The Retrenchment Era (1981-1989)

• Strategic U.S. buyers and foreign multinationals

dominated first half of decade
• Second half dominated by financial buyers
– Buyouts often financed by junk bonds
– Drexel Burnham provided market liquidity
• Era ended with bankruptcy of several large
LBOs and demise of Drexel Burnham
 Age of the Strategic Megamerger
(1992-2000)
• Dollar volume of transactions reached record in each
year between 1995 and 2000
• Purchase prices reached record levels due to
– Soaring stock market
– Consolidation in many industries
– Technological innovation
– Benign antitrust policies
• Period ended with the collapse in global stock markets
and worldwide recession
 Motivations for M&A
• Strategic realignment
– Technological change
– Deregulation
• Synergy
– Economies of scale/scope
– Cross-selling
• Diversification (Related/Unrelated)
• Financial considerations
– Acquirer believes target is undervalued
– Booming stock market
– Falling interest rates
• Market power
• Ego/Hubris
• Tax considerations
 Empirical Findings
• Around transaction announcement date, abnormal
returns average
– 20% for target shareholders in “friendly” transactions;
30-35% in hostile transactions
– Bidders’ shareholders earn 2-3%
• 50-80% of M&As fail to outperform their industry peers or
earn their cost of capital during the 3-5 years following
closing
• No evidence that alternative strategies to M&As are likely
to be more successful
 Primary Reasons for M&As Frequent
Failure to Meet Expectations
• Overpayment due to over-estimating
synergy

• Slow pace of integration

• Poor strategy
 Things to Remember
• Motivations for acquisitions:
– Strategic realignment
– Synergy
– Diversification
– Financial considerations
– Hubris
• Common reasons M&As fail to meet expectations
– Overpayment due to overestimating synergy
– Slow pace of integration
– Poor strategy
• M&As typically reward target shareholders far more than bidder
shareholders
• Success rate of M&A not significantly different from alternative ways
of increasing shareholder value