Mergers & Acquisitions

Basic Concepts

From a pure financial point of view, the M&A transactions need to create value for shareholders of both companies

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Creating Value through M&A

Value A + B

post-transaction

Value A

standalone

Value B

standalone> +

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Most Common Reason: synergies

Revenue Synergies Cost Synergies

Operating

Financing Tax

Non-operating

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But there are many other reasons

Growth

Market share / pricing power

Competitive advantage

Complementary resources

Improvement in management

Use of capital

Good reasons

Diversification

Management teams want to operate a bigger company

EPS accretion

Defence vs. hostile takeover

Imitating market trends

Doubtful

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Acquisitions paid in Cash

In a cash transaction, the acquirer pays a cash consideration in exchange for the shares of the target

The financial value creation for the buyers is measured as the NPV of the synergies vs. the premium being paid

For the selling shareholders, the value creation is the premium paid, the “control premium”

The control premium is the other side of the synergies. Once buyer has management control over the target, they will do whatever they have to do, which normally is linked to synergies

In cash acquisitions, the buyer needs FINANCING

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Financing Options

LOW

HIGH

HIGH

LOW

COST

RISK

CASH AVAILABLE

“HIGH YIELD” SHARES

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SENIOR DEBT HYBRIDS

Price isn’t Everything

Strategic rationale

Price

Timing

Financing

Execution

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Stock for Stock Transactions In a stock transaction, the target gets a share of the combined. They are still invested in the

business. Not in the same business, but in the combination of their business and that of the acquirer

Their resulting stake is the shares newly issued to the shareholders of the target divided but the new total number of shares (of the acquirer)

The “premium” is fictitious. The only thing that really matters is the exchange ratio, which determines the resulting stake in the combined.

–For instance, the premium could mean that the target gets 18% of the combined, instead of 16%, because its shares have been valued at a premium

–The only thing that matters, is that they own a 18% of the combined

All the shareholders of the combined company share the synergies (proportional to their ownership in the company), not only the acquirer

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Public M&A: Takeover Offers A public transaction is one where the target is publicly listed in the stock market

In a public transaction, acquirer normally needs to launch a public “Takeover Offer” for the target. Takeover offers are regulated by the Capital Markets Watchdog

In some public situations, there are majority shareholders that effectively have control over listed targets. These shareholder can lead negotiations and sign irrevocables ahead of the takeover announcement

However, the capital markets watchdog will make sure every shareholder gets the same treatment (not necessarily in a private transaction)

Takeover offers have a certain acceptance period. And the cquirer can inset conditions such as a minimum aggregated acceptance of X% (otherwise the offer is not valid)

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Takeovers: Friendly vs. Hostile In those situations where there are no controlling shareholders, management of the

target effectively call the shots (at least in the initial merger discussions)

They will discuss the terms of a potential offer with the acquirer, they may even facilitate certain information to help to improve the price, and then the acquirer will launch an offer that the management of the target will recommend to its shareholders. This is a friendly transaction

In some situations, the management of the target is not willing to support the offer of the acquirer, but they still go ahead. That is a hostile offer. Shareholders of the target can still accept the offer, no matter what management says

Hostile acquirers need to know very well the target, the industry, the geography

Management of the target may put in place a defence strategy, such as looking for a white-knight or launching a pac-man. In some situations there might be a owners-management conflict

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Types of Tender Offers Full & Voluntary

Partial

Compulsory

Squeeze-out

Competing offer

There is a certain acceptance period

And the acquirer can introduce conditions (ie, minimum acceptance threshold)

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Statutory Merger

For public companies (again, that is: listed companies), a merger with other company can be implemented through a AGM decision. That is called a statutory merger.

AGMs of both companies discuss the transaction and vote in favour or against. There are usually minimum quorums and qualified majorities in place (eg more than 50% of shares present and 2/3 vote in favour)

If both General Assemblies approve the transaction, it goes ahead without the need of a tender offer, and applies to 100% of the shares (unlike tender offers, where each shareholder may accept or reject the offer).

In a way, you can also do acquisitions through statutory process (no tender offer), even if the size of the targets is very different. They are acquisitions (one large company is buying a smaller one), but from a legal point of view they are structured as mergers. You need a strong shareholder support.

In specific situation where there is a potential conflict of interests, some of the shareholders may be prevented from voting

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Private Transactions

In a private transaction, the target is not listed

When you negotiate a private transaction, you engage into a private discussion with the different parties involved. When you reach an agreement, you sign a document, called SPA (“Share Purchase Agreement”)

The SPA includes a critical part: the “Reps and Warranties”. The seller represents and give assurance to the buyer around the target

In a private transaction, not all shareholders necessarily get same treatment

There are protection mechanisms for minority shareholders in the context of M&A, such as the tag-along

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Strategic and Financial Buyers Financial Buyers are pure financial investors, that usually have limited holding

periods of the assets (investment horizon of 4-5 years). Financial buyers need an exit plan

Most common type of financial buyers are Private Equity Firms. They tend to acquire businesses through a leverage acquisition strategy, which enhances the IRR if things go well

Financial buyers usually lack synergies, unless they have other investment in their portfolio that can be merged with the new target

Strategic buyers are those that are not financials, and their main feature is that they tend to acquire and integrate targets to achieve synergies

Strategics usually outbid financial buyers thank to the synergies. But financial buyers use leverage to improve their offers

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Financial Impacts

EPS impact (and DPS)

ROI

Value Creation vs premium

In stock for stock, transaction, the change in the combined, both from a quantitative (multiple) and from a qualitative perspective (equity story) matters.

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Structurally

Domestic vs. cross-borders

Politics and Dual heads

Tax neutrality for shareholders

Flowback

Flow-forward

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Some concepts around control

Why is control so important?

M&A valuation vs trading valuation

Corporate Governance in mergers

Control is not a fixed %ownership number

Take over-offer to go beyond certain threshold

All shareholders should be treated equally

Back-door control

Path to control

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