1 / 26

Before you buy a firm: Analyze

Welcome to class of International Merger and Acquisition (M & A) by Dr. Satyendra Singh www.uwinnipeg.ca/~ssingh5. Before you buy a firm: Analyze. Products of the firm Bottom up (daily use products), Top down (like a firm, sector…) Financial health of the firm

nasya
Télécharger la présentation

Before you buy a firm: Analyze

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Welcome to class ofInternationalMerger and Acquisition (M & A)byDr. Satyendra Singhwww.uwinnipeg.ca/~ssingh5

  2. Before you buy a firm: Analyze • Products of the firm • Bottom up (daily use products), Top down (like a firm, sector…) • Financial health of the firm • Earning, Balance sheet, LP account… • Management of the firm • Reputation, can they take it to the next level • Geographical exposure • Local vs. international • Stock market valuation of the firm • P/E over time, EPS over time

  3. Logic of M&A • Value creation through synergy • Economies of Scale • Economies of Scope • Transferring competencies • Sharing infrastructure • Access to patents, Growth potential, Risk sharing • ↑Debt capacity, ↓cash flow variability • Combined cash flow > individual • If Market value < true value • Needs restructuring; inefficient management • Where is the value coming from?

  4. Value Creation: Financial Perspective • Price per share (Market, not book) • Growth, risk, market speculation (based on P/E)… • Earning per share • TTM (Tailing 12 months), Sales side vs buy side • P/E Ratio • If too ↓, suspicious. If too ↑, why? Why buy a company with high P/E  must have reason • Capital structure impacts P/E ratio  Leveraged • Everything being identical in the same industry, P/E should be about same • Check P/E from industry sector, FTSE 100 • Obtain justifiable values based on the ratios.

  5. Value Creation: Example 1 Post-merger Price per share = $80 EPS = $7 P/E = 11.4 Pre-merger Price per share = $75 EPS = $5 P/E = 15 P/E dropped following merger, so the value of the merger is coming from the current projects rather than its future growth potential

  6. Value Creation: Example 2 P/E 2012 2013 2014 2015 2016 2017 $100/$1 100/2 100/3 100/4 100/5 100/6 100 50 33.3 25 20 16.7 P/E = Price to earning per share ratio P/E = 100 is too high  needs justification P/E match industry level everything being equal Expect growth  100% increase in EPS  must continue If P/E drastically different  merger arbitrage Value  from future growth potential on sustainable basis

  7. Why M&As Fail • Premium paid (shares) > synergy/value • Expensive: Bankers, accountant and lawyers • Competitive bidders appear • Arbitrageurs can buy outstanding stocks and force price concession • Lengthening the acquisition process • So more expensive • As such cash acquisition is more risky • Acquirer takes all the risks • Stock acquisition – risk is shared

  8. Can we create synergy/close the gap? Firm A B Combined P $60 $20 Earning $50m $10m $60m # shares 10m 10m 15 (10+5) EPS $5 $1 P/E 12 20 $60m/#15m = $4/share Loss of $1 per share ($5-$4) (+$10 x 10m = $100m premium) Can we close the gap? A agreed to buy B’s share for $30 (ie pay premium of $10/share) ie. Half share of A for every share of B (.5A = B) ie, B’s 10m share are equivalent to A’s 5m shares, total being 15m shares

  9. PEG Ratio • It is PE Ratio divided by the annual forecast EPS growth percentage • If a firm is growing at 30% a year and has a P/E of 30, PEG would be 1. • PEG > 1  Share cost is high relative to growth expectation • PEG < 1  Share cost is fair relative to growth expectation ***PEG is not scientific***

  10. PEG Ratio

  11. Managerial Motives to M&A • Conflict of Interest • Managers like running large firms due to additional pay and prestige • Overconfidence • Hubris Hypotheses (HH)  pursue merger even if low value because they believe their ability to manage is great enough to succeed. • Main difference: • Managers destroy shareholders value for personal gain • As per HH, managers believe they’re doing the right thing for shareholders.

  12. Period: Major M & A Activities

  13. Types of Takeover… • Takeover • Transfer of ownership from 1 firm to another • Merger • Combination of 2 firms into 1 legal entity • Similar-sized firms are combined • So are their names • One may be of the parents’ or a combination • DaimerChrysler • SIRIUS XM • Both shareholders approve the transaction

  14. Types of Takeover • Acquisitions • Purchase of 1 firm by another • Larger firm buys smaller firmer, which becomes a subsidiary • Kraft foods buys Cadbury • Amalgamation • Merger that requires a fairness opinion by an independent expert on the value of the firm’s shares when public minority exists • Consolidation • An entirely new form is created

  15. Types of M&A Activities • Related • Vertical • Supplier or customers • Horizontal • Competitors • Product extension • Complementary products • Market extension • Complimentary markets • Unrelated • Conglomerate • Everything else

  16. Friendly Takeover • Target firm is willing to be taken over • Investment bank to prepare tender offer to management • Can be initiated by acquirer • Both parties structure the deal to their mutual satisfaction; eg, • Capital gain • Acquirer use target as asset for tax deductions • Graceful exit  environmental lawsuits • Agree on initial purchase price; pay later

  17. Friendly Acquisition Process

  18. Hostile Takeover • Transactions bypass the management • Management is opposed to the deal • Acquirer already accumulated 20% of Target’s stock • So, tender offer is made directly to shareholders

  19. Hostile Takeover: Defense Tactics • Shareholders Rights Plan • Poison Pills • Dilute the share by offering more shares and by giving discount (50%) to Target’s shareholders, making it expensive for Acquirer • Selling Key Assets • Sell the assets that Acquiring firm is interested • Pay large dividends to remove excess cash from Target’s balance sheet • White Knight • Seek out friendly acquirer

  20. Critical Shareholder % • 10% early warning • Acquisitor is accumulating a position-- toehold • 20% takeover bid • Not allowed further, must tender bid, open to all • 50.1% control (Simple majority) • Can replace board and control management • 66.7% amalgamation • Shareholders approve amalgamation proposal • 90% minority squeeze out • Minority shareholders are forced to tender their shares  to avoid frustration

  21. Regulatory approval • All mergers must be approved by regulators • In the USA, all mergers over $60m must be approved by the government before the proposed takeover occurs • EU Commission has similar process • Emerging markets • More strict due to colonization

  22. Merger Arbitrage • Once a tender offer is announced, the uncertainty about whether the takeover will succeed adds volatility to the stock price • This uncertainty creates an opportunity for investors to speculate on the outcome of the deal • It creates volatility • Market share price > offer price (may be more bid) • Market share price = offer price (deal is likely) • Little trade in shares (deal may not go through) • Significant trade in shares (deal is likely)

  23. Merger Arbitrage Example Firm A Price per share = $30 # shares = 10m Market Capital = $300m Firm B (Target) Price per share = $50 # Share = 1m Market Capital = $50m A is acquiring B for $60m in A’s Share (A needs 2m more shares @ $30/share  $60m) ie. 2 shares of A for every share of B (2A = B) Suppose due to volatility, share for B is trading at $55 So buy 1 share of B  $55 (exchange it for $60) Short sell 2 share of A  $60 Net gain $5

  24. Leverage: Impact of Capital Structure on P/E, Assets Firm A Invested $100 K Not borrowed, so no liability # shares = 10,000 COGS (50%) = -$50K Depreciation = -$20K Operating Income (Pre-tax) = $30K Tax (30%) = -$9K Interest = 0 Earning after tax = $21 K EPS = $2.10 Analyst  P/E should be 10 So, market share price = $21 Market capitalization = $210 K But A put $100 K Equity + Liability = $210 K + $0 Total Assets (iemkt value of equity) = $210 K Firm B Invested only $10 K Borrowed $100 K @ 5% (ie $5K) # shares = 10,000 COGS (50%) = -$50K Depreciation = -$20 Operation Income (Pre-tax) = $30K Non-operating Income = $2K Total Operating Income = $32K Tax (30%) = -$8.1K Interest paid = $5 K Earning after tax = $18.9 K EPS = $1.89 Analyst  P/E should be 10 So, market share price = $18.90 Market capitalization = $189 K But B put only $10 K Equity + Liability = $189 K + $100K Total Assets = $289 K Ie. $279K assets + $10K cash = $289K By borrowing you’ll ↑ assets

  25. Impact of M&A on Goodwill Goodwill = Price paid – MV of Target firm Equity = $1,250 – (MV of target assets – MV of target Liabilities) = $1,250 – ($2,200 - $1,050) = $100

More Related