Chapter-1收购、兼并和重组课后题目

IntroductiontoMergers,Acquisitions,&OtherRestructuringActivitiesIfyougiveamanafish,youfeedhimforaday.Ifyouteachamantofish,youfeedhimforalifetime.—LaoTzeSuccessisaPersonalChoiceWecanchoosetobesuccessfulbySettinggoals,Havinghighexpectationsofourselves,Neverquitting,Bynotmakingexcuses,andByacceptingpersonalresponsibilityExhibit1:CourseLayout:Mergers,Acquisitions,andOtherRestructuringActivitiesPartIV:DealStructuringandFinancingPartII:M&AProcessPartI:M&AEnvironmentCh.11:PaymentandLegalConsiderationsCh.7:DiscountedCashFlowValuationCh.9:FinancialModelingTechniquesCh.6:M&APostclosingIntegrationCh.4:BusinessandAcquisitionPlansCh.5:SearchthroughClosingActivitiesPartV:AlternativeBusinessandRestructuringStrategiesCh.12:Accounting&TaxConsiderationsCh.15:BusinessAlliancesCh.16:Divestitures,Spin-Offs,Split-Offs,andEquityCarve-OutsCh.17:BankruptcyandLiquidationCh.2:RegulatoryConsiderationsCh.1:MotivationsforM&APartIII:M&AValuationandModelingCh.3:TakeoverTactics,Defenses,andCorporateGovernanceCh.13:FinancingtheDealCh.8:RelativeValuationMethodologiesCh.18:Cross-BorderTransactionsCh.14:ValuingHighlyLeveragedTransactionsCh.10:PrivateCompanyValuationCourseLearningObjectivesDefinewhatcorporaterestructuringisandwhyitoccursIdentifycommonlyusedvaluationtechniquesandhowtheyareemployedDescribehowcorporaterestructuringcreates/destroysvalueIdentifycommonlyusedtakeovertacticsanddefensesandwhentheyaremostappropriateDevelopahighlypractical“planningbased”approachtomanagingtheM&AprocessIdentifychallengesandsolutionsassociatedwitheachphaseoftheM&AprocessDescribeadvantagesanddisadvantagesofalternativeM&AdealstructuresDescribehowtoplan,structure,andmanageJVs,partnerships,alliances,licensingarrangements,equitypartnerships,franchises,andminorityinvestmentsCurrentChapterLearningObjectivesPrimaryobjective:WhatcorporaterestructuringisandwhyitoccursSecondaryobjective:Providestudentswithanunderstandingof M&AasaformofcorporaterestructuringAlternativewaysofincreasingshareholdervalueM&AactivityinanhistoricalcontextTheprimarymotivationsforM&AactivityKeyempiricalfindingsPrimaryreasonssomeM&AsfailtomeetexpectationsM&AsasaFormof

CorporateRestructuringRestructuringActivityCorporateRestructuringBalanceSheetAssetsOnlyFinancialRestructuringOperationalRestructuring PotentialStrategyRedeployAssetsMergers,Break-Ups,&Spin-OffsAcquisitions,divestitures,etc.Increaseleveragetolowercostofcapitalorasatakeoverdefense;sharerepurchasesDivestitures,widespreademployeereduction,orreorganizationAlternativeWaysof

IncreasingShareholderValueSoloventure(AKA“goingitalone”or“organicgrowth”)Partnering(Marketing/distributionalliances,JVs,licensing,franchising,andequityinvestments)MergersandacquisitionsMinorityinvestmentsinotherfirmsAssetswapsFinancialrestructuringOperationalrestructuringDiscussionQuestionsWhatfactorsdoyoubelievearemostlikelytoimpactseniormanagement’sselectionofonestrategy(e.g.,soloventure,M&A)toincreaseshareholdervalueoverthealternatives?Bespecific.Inyouropinion,howmighttheconditionsofthebusiness(e.g.,profitability)andtheeconomyaffectthechoicethestrategy?MotivationsforM&AStrategicrealignmentTechnologicalchangeDeregulationSynergyEconomiesofscale/scopeCross-sellingDiversification(Related/Unrelated)FinancialconsiderationsAcquirerbelievestargetisundervaluedBoomingstockmarketFallinginterestratesMarketpowerEgo/HubrisTaxconsiderationsIllustratingEconomiesofScalePeriod1:FirmA(Pre-merger)Assumptions:Price=$4perunitofoutputsoldVariablecosts=$2.75perunitofoutputFixedcosts=$1,000,000FirmAisproducing1,000,000unitsofoutputperyearFirmAisproducingat50%ofplantcapacityProfit=pricexquantity–variablecosts–fixedcosts =$4x1,000,000-$2.75x1,000,000-$1,000,000=$250,000Profitmargin(%)1=$250,000/$4,000,000=6.25%Fixedcostsperunit=$1,000,000/1,000,000=$1Period2:FirmA(Post-merger)Assumptions:FirmAacquiresFirmBwhichisproducing500,000unitsofthesameproductperyearFirmAclosesFirmB’splantandtransfersproductiontoFirmA’splantPrice=$4perunitofoutputsoldVariablecosts=$2.75perunitofoutputFixedcosts=$1,000,000Profit=pricexquantity–variablecosts–fixedcosts =$4x1,500,000-$2.75x1,500,000-$1,000,000 =$6,000,000-$4,125,000-$1,000,000 =$875,000Profitmargin(%)2=$875,000/$6,000,000=14.58%Fixedcostsperunit=$1,000,000/1.500,000=$.67KeyPoint:Profitmarginimprovementisduetospreadingfixedcostsovermoreunitsofoutput.1Marginperunitsold=$4.00-$2.75-$1.00=$.252Marginperunitssold=$4.00-$2.75-$.67=$.58IllustratingEconomiesofScopePre-Merger:FirmA’sdataprocessingcentersupports5manufacturingfacilitiesFirmB’sdataprocessingcentersupports3manufacturingfacilitiesPost-Merger:FirmA’sandFirmB’sdataprocessingcentersarecombinedintoasingleoperationtosupportall8manufacturingfacilitiesBycombiningthecenters,FirmAisabletoachievethefollowingannualpre-taxsavings:Directlaborcosts=$840,000.Telecommunicationexpenses=$275,000Leasedspaceexpenses=$675,000General&administrativeexpenses=$230,000KeyPoint:Costsavingsduetoexpandingthescopeofasinglecentertosupportall8manufacturingfacilitiesofthecombinedfirms.EmpiricalFindingsAbnormal(orexcess)financialreturnsarethoseearnedbyacquirerandtargetshareholdersaboveorbelowwhatwouldhavebeenearnedwithoutatakeover.Aroundtransactionannouncementdate,abnormalreturns:1

Fortargetshareholdersaveraged25.1%duringthe2000sascomparedto18.5%duringthe1990s Foracquirershareholdersgenerallypositiveaveragingabout1-1.5%However,zerotoslightlynegativeforacquirershareholdersfordealsinvolvinglargepublicfirmsandthoseusingstocktopayforthedeal1Positiveabnormalreturnstoacquirershareholdersoftenaresituationalandincludethefollowing:TargetisaprivatefirmorasubsidiaryofanotherfirmTheacquirerisrelativelysmall(largefirmmanagementmaybemorepronetohubris)ThetargetissmallrelativetotheacquirerCashratherthanequityisusedtofinancethetransactionTransactionoccursearlyintheM&AcycleNoevidencethatalternativestrategies(e.g.,soloventures,alliances)toM&Asarelikelytobemoresuccessful1TheseconclusionsarebasedonrecentstudiesusinglargesamplesoverlengthytimeperiodsinvolvingU.S.,foreign,andcross-borderdeals(includingpublicandprivatefirms).SeeJ.Netter,M.Stegemoller,andM.Wintoki,2011ImplicationsofDataScreensonMergerandAcquisitionAnalysis:ALargeSampleStudyofMergersandAcquisitions,ReviewofFinancialStudies

242316-2357andJ.Ellis,S.B.Moeller,F.P.Schlingemann,andR.M.Stulz,2011Globalization,Governance,andtheReturnstoCross-BorderAcquisitions,NBERWorkingPaperNo.16676.PrimaryReasonsSomeM&AsFail

toMeetExpectationsOverpaymentduetoover-estimatingsynergySlowpaceofintegrationPoorstrategyDiscussionQuestionsDiscusswhetheryoubelievecurrentconditionsintheU.S.andglobalmarketsareconducivetohighlevelsofM&Aactivity?Bespecific.Ofthefactorspotentiallycontributingtocurrentconditions,whichdoyouconsidermostimportantandwhy?SpeculateaboutwhatyoubelievewillhappentothenumberofM&AsoverthenextseveralyearsintheU.S.?Globally?Defendyourarguments.Application:XeroxBuysACS

In2010,Xerox,aslowergrowing,cyclicalanofficeequipmentmanufacturer,acquiredAffiliatedComputerSystems(ACS)for$6.4billion.Withannualsalesofabout$6.5billion,ACShandlespaper-basedtaskssuchasbillingandclaimsprocessingforgovernmentsandprivatecompanies.Withaboutone-fourthofACS’revenuederivedfromthehealthcareandgovernmentsectorsthroughlong-termcontracts,theacquisitiongivesXeroxagreaterpenetrationintomarketswhichshouldbenefitfromthe2009governmentstimulusspendingand2010healthcarelegislation.Thereislittlecustomeroverlapbetweenthetwofirms.Thesaleofservicestendstobemorestableandoffershighermarginsthanproductcompanies. PreviousXeroxeffortstomovebeyondsellingprinters,copiers,andsuppliesandintoservicesachievedlimitedsuccessduelargelytopoormanagementexecution.Whilesomeprogressinshiftingawayfromthefirm’sdependenceonprintersandcopiersaleswasevident,thepacewasfartooslow.Xeroxwaslookingforawaytoacceleratetransitioningfromaproductdrivencompanytoonewhoserevenuesweremoredependentonthedeliveryofbusinessservices. Morethantwo-thirdsofACS’revenuecomesfromtheoperationofclientbackofficeoperationssuchasaccounting,humanresources,claimsmanagement,andotheroutsourcingservices,withtherestcomingfromprovidingtechnologyconsultingservices.ACSwouldalsotripleXerox’sservicerevenuesto$10billion.XeroxchosetorunACSasaseparatestandalonebusiness.

DiscussionQuestions: 1. WhatalternativestobuyingACSdoyouthinkXeroxcouldhaveconsidered? 2. Whydoyouthinktheychoseamergerstrategy?(Hint:Considerthe advantagesanddisadvantagesofalternativeimplementationstrategies.) 3. SpeculateastoXerox’sprimarymotivationsforacquiringACS? 4. HowmightthedecisiontomanageACSasaseparatebusinessaffectrealizingthefull valueofthetransaction?Whatotherfactorscouldlimittherealizationofsynergy?

RememberingthePast“Thosewhodonotrememberthepastarecondemnedtoreliveit.”AlexisDeTocquevilleMergerWaves1

(BoomPeriods)HorizontalConsolidation(1897-1904)IncreasingConcentration(1916-1929)TheConglomerateEra(1965-1969)TheRetrenchmentEra(1981-1989)AgeofStrategicMegamerger(1992-2000)AgeofCrossBorderandHorizontalMegamergers(2003-2007)1Periodscharacterizedbyrobustincreasesinthenumberandvalueoftransactions.CausesandSignificance

ofM&AWavesFactorscontributingtoincreasingM&Aactivity:Shocks(e.g.,technologicalchange,deregulation,andescalatingcommodityprices)AmpleliquidityandlowcostofcapitalOvervaluationofacquirersharepricesrelativetotargetsharepricesImprovingbusinessconfidenceWhyitisimportanttoanticipateM&Awaves:Financialmarketsrewardfirmspursuingpromising(oftenundervalued)opportunitiesearlyonandpenalizethosethatfollowlaterinthecycle.Acquisitionsmadeearlyinthewaveoftenearnsubstantiallyhigherfinancialreturnsthanthosemadelaterinthecycle.HorizontalConsolidation(1897-1904)SpurredbyDriveforefficiency,LaxenforcementofantitrustlawsWestwardmigration,andTechnologicalchangeResultedinconcentrationinmetals,transportation,andminingindustryM&Aboomendedby1904stockmarketcrashandfraudulentfinancingIncreasingConcentration(1916-1929)SpurredbyEntryofU.S.intoWWIPost-warboomBoomendedwith1929stockmarketcrashPassageofClaytonActwhichmoreclearlydefinedmonopolisticpracticesTheConglomerateEra(1965-1969)ConglomeratesbuyearningsstreamstoboosttheirsharepriceOvervaluedfirmsacquiredundervaluedhighgrowthfirmsNumberofhigh-growthundervaluedfirmsdeclinedasconglomeratesbiduptheirpricesHigherpurchasepricefortargetfirmsandincreasingleverageofconglomeratesbroughteratoacloseTheRetrenchmentEra(1981-1989)StrategicU.S.buyersandforeignmultinationalsdominatedfirsthalfofdecadeSecondhalfdominatedbyfinancialbuyersBuyoutsoftenfinancedbyjunkbondsDrexelBurnhamprovidedmarketliquidityEraendedwithbankruptcyofseverallargeLBOsanddemiseofDrexelBurnham(MichaelMilken)AgeofStrategicMegamerger

(1992-2000)Dollarvolumeoftransactionsreachedrecordineachyearbetween1995and20001PurchasepricesreachedrecordlevelsduetoSoaringstockmarketConsolidationinmanyindustriesTechnologicalinnovationBenignantitrustpoliciesPeriodendedwiththecollapseinglobalstockmarketsandworldwiderecession1ThecumulativedollarvalueofM&AsduringthisperiodintheU.S.was$6.5trillion,With$3.5trilliontakingplaceinthelasttwoyears.AgeofCrossBorderand

HorizontalMegamergers(2003–2007)Averagemergerlargerthanin1980sand1990s,mostlyhorizontal,andcrossborderConcentratedinbanking,telecommunications,utilities,healthcare,andcommodities(e.g.,oil,gas,andmetals)SpurredbyContinuedglobalizationtoachieveeconomiesofscaleandscope;Ongoingderegulation;Lowinterestrates;Increasingequityprices,andExpectationsofcontinuedhighcommoditypricesPeriodendedwithglobalcreditmarketmeltdownand2008-2009recessionDebtF