Module 1 Full Canvas

MODULE 1:
MERGERS AND ACQUISITIONS

RECENT M&A DEALS?
© Vlerick Business School

M&A DEFINITIONS
1. Merger or consolidation:
Merger: absorption of one firm by another
Consolidation: an entirely new firm is created
For both:
partners of (more or less) equal size
creates a new entity after major restructuring of activities
often reflected by change of name

M&A DEFINITIONS
2. Acquisition of stock
clearly dominant partner
company that is acquired (“target”) is integrated into existing
structure of the buying company (“bidder”)

M&A DEFINITIONS
3. Acquisition of assets
One firm can acquire another by buying all of its assets
No exchange of ownership
Choose which assets/liabilities to buy

M&A DEFINITIONS

M&A DEFINITIONS

M&A DEFINITIONS

M&A DEFINITIONS
Horizontal merger: bidder and target operate and compete
in the same kind of business activity

M&A DEFINITIONS
Vertical merger: bidder and target are in different stages of
production.
The buyer expands backward or forward

M&A DEFINITIONS
Conglomerate merger: bidder and target operate in
unrelated business activities

M&A MARKET IN INDIA

M&A MARKET IN INDIA

M&A MARKET IN INDIA

TOP 10 M&A (GLOBAL)

M&A MOTIVES
WHAT DRIVES M&A ACTIVITY?
Hubris? ≠ Agency problems

Advantages to being big

Brand A well-known brand is valuable
Economies of scope Ability to spread corporate costs, including
investment in systems development, risk
management
Economies of scale In both manufacturing and services
Cost of capital Easier to raise capital and at a lower cost
Financial synergies The diversification effect may allow for
transfer of cash amongst divisions, from
‘cash cows’ to ‘growth’ divisions
Ability to attract Larger companies are better able to attract
talent and afford high-priced, skilled professionals
Potential disadvantages of being big:

Overconfidence
Empire building
Prestige
Value-destroying M&As: difficulties to integrate


Market mania?

Overvaluation of stock? Or undervaluation?

Industry shocks?

Market power?

ANTITRUST AUTHORITIES
Government intervention to prevent firms from

reducing competition through M&As
US: Justice department + Federal Trade Commission
Europe: European Commission + local governments
India: Competition Commission of India (CCI) established in 2009
Examples:
Hostile bid on Aer Lingus by Ryanair
AT&T – Time Warner (2018)
HBO – Warner Bros – Turner
Redesign entertainment business
2012: Universal Music buys EMI from Citigroup (1.9 bio USD)
Antitrust? Market share:
Combination: 40%
Sony: 23%
Warner: 15%
31 © Vlerick Business School

Synergies?

SYNERGIES
SYNERGIES
Firm A is considering acquiring firm B.

V: value
Synergy = VAB - (VA + VB)

SYNERGIES
Where does synergy come from?
Refer to incremental values of the acquisition

Four categories:
Revenue enhancement
Cost reduction
Lower taxes
Lower capital requirements

SYNERGIES
Revenue enhancement come from:

marketing gains
strategic benefits
market power

SYNERGIES
Cost reduction:
Economy of scale
Economies of vertical integration
Technology transfer
Complementary resources
Elimination of inefficient management

SYNERGIES
Tax gains:
The use of tax losses: use the losses of the unprofitable firm to
offset the other firm’s income

SYNERGIES
Reduced Capital Requirements:

Fixed capital (e.g. headquarters buildings, plants, R&D)
Working capital: the inventory-to-sales ratio and the cash-to-sales
ratio often decrease as firm size increases

EXAMPLE: UBS  CREDIT SUISSE DEAL

Why was Credit Suisse hit so hard?
Tuesday (14/3): Credit Suisse published its annual report for 2022 saying the bank
had identified "material weaknesses" in controls over financial reporting and not yet
stemmed customer outflows.
Wednesday (15/3):
Thursday (16/3): In an attempt to shore up confidence in the country’s banking

sector, The Swiss National Bank was forced to provide an emergency $54B credit line
to Credit Suisse. Yet, this failed to give confidence.
UBS  CREDIT SUISSE DEAL
Deal value: $3.3 billion

Debt holders Credit Suisse: write down of $17bn
additional tier 1 bonds
Shareholders Credit Suisse: very low offer price
(10% compared to stock price 3 years before)
UBS: Estimated synergies of $10 billion

M&A PERFORMANCE
WHY IMPORTANT?  PRACTICE!!
Acquiring companies: info on investor preferences/expectations,
learn for future acquisitions
Hedge funds and other investors: detect abnormal returns that
can be exploited
Consulting companies: impact of strategic/financial decisions
(e.g., M&As, stock splits, dividend changes,…)
Government: impact of new regulation (e.g., banking regulation,
antitrust, disclosure of executive remuneration,…)
Securities and Exchange Commission (SEC): detect insider
trading

M&A PERFORMANCE: STOCK PRICE REACTIONS

METHODOLOGIES
1. Event studies
2. Long-term stock performance
3. Accounting performance
1. EVENT STUDIES
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EVENT STUDY METHODOLOGY
The purpose is to investigate the impact of an

event on the value or stock price of a company
Examples: Abnormal
return
M&As
Earnings announcements
Regulatory changes

An abnormal return: the difference between

the actual stock return (R) and the expected
return if the event had not occurred (E(R)).

Assumption: market
efficiency


How to estimate the expected return E(R)
Mean adjusted model: E[Rit] = average daily return for i

during estimation window
Market adjusted model: E[Rit] = Rmt
Market model (most used!)

CHOICE OF WINDOWS
Estimation window: [T0,T1]
Reasonably long but also need a clean period [T1 , T2]
Event window: [T2,T3]

Period around the announcement date
Capture price run-up
No confusing events ( event window shouldn’t be too long either)
CHOICE OF WINDOWS
Examples of M&A studies:
Estimation window Event window
Chang (1998) [-210,-11] [-1,0]

Cybo-ottone and Murgia (2000) [-270,-21] [-20,+20]
Campa and Hernando (2004) [-205,-6 ] [-1,+1]
Martynova and Renneboog (2006) [-300,-61] [-60,+60]
Luypaert and Huyghebaert (2013) [-250,-51] [-50,+50]

 Try different event windows: [-35,+5]
- Short versus long?

- Symmetric versus asymmetric?
UPS TRIED TO ACQUIRE TNT
On March 19, 2012, United Parcel Service (UPS)
announced its intention to acquire TNT Express (offer of
€9.5 per share). However, the deal fell through in
January 2013 after it was announced that UPS had failed
to obtain permission from the European Commission and
as such had been blocked on competition grounds.
In April 2015, FedEx announced its agreed intention to
buy TNT Express (offer of €8 per share). On January 8,
2016, the European Commission unconditionally
approved the acquisition by FedEx. The deal was
completed on May 25, 2016.
Source: Wikipedia

STOCK PRICE EVOLUTION TNT EXPRESS

HOW DO RIVALS
TYPICALLY REACT?
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RIVAL STOCK PRICE EFFECTS
Company Return Dollar impact

Lafarge 8.90% $2.02 billion
Holcim 6.86% $1.83 billion
CRH 4.04% $845 million
Cemex 3.63% $677 million
HeidelbergCement 3.40% $586 million

Positive externalities for rivals:

Collusion  increase market power
Future acquisition probability
Merger waves
Target stock price movements

Negative externalities for rivals:

Merging firms: efficiency improvements
Dominant player: intensified competition
Pre-emptive mergers

OTHER APPLICATIONS OF EVENT STUDIES
Analyst’s earnings forecasts

Rating announcements
Dot com name changes
Discrimination effects
Misbehaviour of managers

ANALYST’S EARNINGS FORECASTS
Source: Francis, J. and Soffer L., Journal of Accounting Research, Vol. 35, No. 2 (Autumn, 1997), pp. 193-211

RATING ANNOUNCEMENTS
Source: Hand, J.R.M., Holthausen, R.W. and Leftwich R.W., Journal of Finance, Vol. 47, No. 2 (1992), pp. 733-752

DOT COM NAME CHANGES
Source: Cooper, M.J., Dimitrov, O. and Raghavendra R., Journal of Finance, Vol. 56, No. 6 (2001), pp. 2371-2388

THE AGENCY COSTS OF MANAGERIAL INDISCRETIONS:
SEX, LIES, DRUGS AND FIRM VALUE (YORE, A)

2. LONG-TERM STOCK
PERFORMANCE
BUY AND HOLD ABNORMAL RETURNS (BHARS)

LONG-TERM STOCK PERFORMANCE

3. ACCOUNTING PERFORMANCE
LONG-TERM ACCOUNTING PERFORMANCE
Evaluating the succes of management decisions

by analyzing changes in operating performance
Measures of operating (accounting) performance
Compare performance with benchmark

performance

DETERMINANTS OF PERFORMANCE
DETERMINANTS OF M&A PROFITABILITY
When is most value being created?

Diversifying versus focusing deal?
Large or small targets?
Cross-border or domestic deals?
Cash versus stock payment?
Serial or occasional acquirers?
Public or private targets?

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WHEN IS MOST VALUE BEING CREATED?
Diversifying versus focusing deal?

78
Large or small targets?

79
Cross-border or domestic deals?
WHY?
- Cultural distance
- Integration difficulties

80
Cash or stock payment?
WHY?
- Cash signals confidence in
M&A synergy potential
- Equity signals overvaluation
Only true for public targets,

not for private targets!!!
WHY?
81
Serial or occasional acquirers?

82
Public or private targets?
WHY?
- Higher information asymmetry
- Liquidity discount
- Fewer interested bidders
- More bargaining power

83
”TIMING IS KEY”
MERGER WAVES

ACQUIRER RETURNS INSIDE/OUTSIDE WAVES
Reasons?
- Reduced monitoring
- Lower penalties for
bad decisions
- Herding behaviour
- Excess cash
- Higher offer prices
Source: Duchin and Schmidt (2013), Riding the merger wave: Uncertainty, reduced monitoring, and
bad acquisitions, Journal of Financial Economics.
Within waves, earlier acquisitions produce higher bidder returns, than

the later acquisitions in the wave
Source: Goel and Thakor (2010), Review of Financial Studies

“CEO, CFO,THE BOARD AND INTERNAL M&A TEAM DETERMINE
M&A SUCCESS…”
IT’S ABOUT THE CEO, NOT THE FIRM…
Journal of Corporate Finance, 2013

DO NOT BUY FIRMS WITH A NARCISTIC CEO
The narcissism indicator is estimated using the proportions of first-person singular

(I, me, my, mine, myself) to total first-person pronouns (I, me, my, mine, myself,
we, us, our, ours, ourselves) in CEO speech

BOARD OF DIRECTORS
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BOARD CHARACTERISTIC IMPACT ON ACQUIRER RETURNS
BOARD SIZE NO IMPACT
FOREIGN DIRECTORS NO IMPACT
GENDER DIVERSITY MARGINALLY POSITIVE
AGE DIVERSITY MARGINALLY POSITIVE
INDEPENDENT DIRECTORS STRONGLY POSITIVE
CEO DUALITY NEGATIVE (IN DIVERSIFYING M&A)
THE ROLE OF INTERNAL M&A TEAMS

“…BUT THE RIGHT ADVISORS CAN HELP THEM”
Yes!
THANK YOU FOR YOUR ATTENTION!
Questions?

To do after this session
Read the case: “Anheuser-Busch - Inbev”

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MODULE 1:

MERGERS AND ACQUISITIONS

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

Hubris? ≠ Agency problems

© Vlerick Business School

Advantages to being big

Potential disadvantages of being big:

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

Overvaluation of stock? Or undervaluation?

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

Government intervention to prevent firms from

31 © Vlerick Business School

© Vlerick Business School

Firm A is considering acquiring firm B.

© Vlerick Business School

Where does synergy come from?

Refer to incremental values of the acquisition

© Vlerick Business School

Revenue enhancement come from:

© Vlerick Business School

© Vlerick Business School

© Vlerick Business School

Reduced Capital Requirements:

© Vlerick Business School

© Vlerick Business School

Thursday (16/3): In an attempt to shore up confidence in the country’s banking

Deal value: $3.3 billion

42 © Vlerick Business School

44 © Vlerick Business School

© Vlerick Business School

2. Long-term stock performance

The purpose is to investigate the impact of an

© Vlerick Business School

An abnormal return: the difference between

© Vlerick Business School

50 © Vlerick Business School

51 © Vlerick Business School

Mean adjusted model: E[Rit] = average daily return for i

52 © Vlerick Business School

Estimation window: [T0,T1]

Reasonably long but also need a clean period [T1 , T2]

Event window: [T2,T3]

Chang (1998) [-210,-11] [-1,0]

Campa and Hernando (2004) [-205,-6 ] [-1,+1]

Martynova and Renneboog (2006) [-300,-61] [-60,+60]

Luypaert and Huyghebaert (2013) [-250,-51] [-50,+50]

- Short versus long?