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Introduction to Finance M&A:An Introduction

Introduction to Finance M&A:An Introduction. TAKE OVERS. Take Overs. Going Private. Acquistions. Mergers, Consolidations. Case of Value Destruction?. ATT and NCR ATT acquired NCR for $7.5 billion in 1991

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Introduction to Finance M&A:An Introduction

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  1. Introduction to FinanceM&A:An Introduction

  2. TAKE OVERS Take Overs Going Private Acquistions Mergers, Consolidations N. Takezawa (ICU) 2001

  3. Case of Value Destruction? • ATT and NCR • ATT acquired NCR for $7.5 billion in 1991 • Estimated loss for ATT shareholders is -13.3% x $34/share x 1.092 billion shares =-$4.9 billion • Then why did ATT acquire NCR? • ATT declared it would enter computer industry (1984 consent decree) • Market perceived NCR as a poor partner N. Takezawa (ICU) 2001

  4. Classification • Horizontal Mergers: same industry (firms competing in the same line of business) • Vertical Mergers: merging of firms in related business - different steps of production (airline and travel agency) • Conglomerate Mergers: Firms not related to each other N. Takezawa (ICU) 2001

  5. Merger Activity in the US • 1890-1904: Merger for Monopoly. JP Morgan engineered US Steel. DuPont, American Tobacco, Eastman Kodak, etc. • Sherman Act 1890, Clayton Act 1914 • 1916-1929: Merger to Oligopoly • Post WWII to early 1970’s: Conglomerates • 1980’s: Market for corporate control. N. Takezawa (ICU) 2001

  6. N. Takezawa (ICU) 2001

  7. 1980’s • Leveraged Buy Outs – LBO • Borrow to acquire a company. • Management Buy Outs – MBO • Management bids to buy the company (or part of company). • Nabisco Case: the largest acquistion at the time ($25 billion US dollars) N. Takezawa (ICU) 2001

  8. The LBO • LBO approach allows for small groups of people such as management or a small “company” such as KKR to buy large corporations. • Places pressure on management. • Could this serve as a monitoring device, to make sure management is maximizing the value of the firm? N. Takezawa (ICU) 2001

  9. Restructuring and Governance in Japan • Kang and Shivdasani (JFE, 1997) Empirically examine 92 Japanese experiencing substantial decline in operating performance over the period 1986-1990. • Does the potential of becoming a takeover target force corporates to restructure in Japan? • What mechanism governs restructuring efforts in Japan according to Kang and Shivdasani? N. Takezawa (ICU) 2001

  10. Cont. • Reasons for performance decline: approx. 60% due to unfavorable FX rates (Table2) • Operational response: asset contraction actions 23% and layoffs 17.4%. Asset contraction activities include closing plants, asset sales, withdrawing from a line of business, etc. • Layoffs at 17.4% is still smaller than that for the US at 31.6%. N. Takezawa (ICU) 2001

  11. Cont. • “Firms with greater equity ownership by the main bank are more likely to engage in contraction policies by the use of asset sales, plant closures, and discontinuation of operations. In addition, greater ownership by the main bank also increases the probability of employee layoffs and the removal of outside directors from the board.” p.31 N. Takezawa (ICU) 2001

  12. RJR Nabisco • Oct. 28, 1988 CEO, Ross Johnson, formed a group to buy RJR Nabisco (MBO). Price at $75 per share (market price at about $56). • Four days later Kohlberg, Kravis, Roberts (KKR) made bid. $90 per share. • KKR bid at $109 and Johnson group at $112. N. Takezawa (ICU) 2001

  13. What makes for an attractive LBO Target? • Steady Growth. Relatively mature industry. • Relatively unaffected by business cycles. • Low CAPEX. Less R&D required. • Low debt level. • “Fixable” problems. Create value and then sell (break-up value). N. Takezawa (ICU) 2001

  14. Board “Requests” • Price (per share). • Possible future stake (equity) in company gains. • Stakeholders. Welfare of stakeholders (community) as its “fiduciary” duty. N. Takezawa (ICU) 2001

  15. KKR $109 ($81 in cash) Convertibles in about 25% of “new” equity Keep both the Tobacoo and Food divisions Guarantee severance payments and benefits for layoffs MBO $112 ($84 in cash) Convertibles into about 15% into “new” equity Keep only the Tobacoo division Give equity to 15,000 employees Comparing Bids N. Takezawa (ICU) 2001

  16. KKR Drexel Burnham Lambert Merrill Lynch Morgan Stanley Wassertein Perella MBO Shearson Lehman Brothers Salomon Banking Community N. Takezawa (ICU) 2001

  17. Bankers Trust Chase Mahn Citi Japanese Banks LOAN RJR KKR Shareholders Drexel Merrill MS Wasserstein JUNK BONDS (Bridge Loan) N. Takezawa (ICU) 2001

  18. Boone Pickens, Mesa, and Cities: Take Over Defense • Mesa Petroleum (Boone Pickens) began buying shares of Cities Services. May 1982. • Cities Services responded by 1) increasing outstanding shares (issuing) and 2) bidding for Mesa (Pac Man defense). Firms bid for each other twice. • Gulf Oil bid for Cities Services thus rescuing Cities from Mesa (White Knight) • Eventually, Occidental took over Cities Services • Gulf was bought out by Chevron (Mesa again the in the bidding game) N. Takezawa (ICU) 2001

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