What are the 3 basic markets for M&A?
- Consumers: buy something good at an attractive price
- Producers: make something good, fast, and cheap
- Corporate Control: has next to nothing similar to the 2 above! (market for firms, striving to be more efficient)
What do you know about the market of corporate control?
- A mechanism for removing inefficient management
- Requires a degree of executive hubris: WE can run this better than THEY can
- …which means that, unlike consumers, M&A buyers should not want jewels, they look for GARBAGE! (‘rubbish’, if in UK)
- less downside risk –> room to improve a lot
What are the 6 M&A Waves?
1 1893-1904 Horizontal mergers
2 1919-1929 Vertical mergers
3 1955-1970 Diversified conglomerates
4 1974-1979 Hostile takeovers, Corporate raiders, Junk bonds
5 1993-2000 Cross-border, Mega-mergers, dot.com wave
6 2003-2008 Globalization, Shareholder activism, Private equity, LBO
7 ? 2014 -? Financial recovery, Consolidation, Corporate wealth
What are the (6) phases of M&A/Restructuring Carousel?
- Phase 1: booming economy, necessary/not sufficient; provides the necessary means (cash; stock appreciations; borrowing capacity)
- Phase 2: a random, eye-catching merger can ignite the game
- Phase 3: defensive routines lead to bursts of merger activity
- Phase 4: the merger explosion levels off as a result of negative effects on players
- Phase 5: anorexia management sets in (sell-offs, divestitures, demergers), usually accompanied/followed by a significant economic downturn
- Phase 6: the pool of potential targets is refilled
What are reasons why we might currently be in the 7th Wave of M&A?
– Record corporate profits, and large cash hoardings (esp. tech firms that benefitted from Covid restrictions)
– Record equity growth in US markets, resulting in huge increases in corporate valuations -> greater potential for stock swap deals
– Historically low interest rates for cash deals
– Large inventory of companies owned by private equity firms (nearly 18,000 according to the Private Equity Growth Capital Council
– Healthy stock market performance, new records in 2021
- Investment alternatives are not attractive
What are the 5 options among M&A?
- Alliance– Strategic, operational, marketing, financial
- “Toe-hold” - Buy a small, non-controlling interest in another firm
- Joint Venture– Contribute & combine assets into a “Newco” (i.e., original companies still exist)
- Merger – Blending of equity into a 3rd separate company (i.e., original companies no longer exist)
- Equity Acquisition – Buy and determine control
Name 6 motives for M&A + what the target firm should do in such a case
- Undervaluation –> Trade at a price below EV
- Diversification –> Not be in a horizontal business
- Operating Synergy –> Have opportunity for cost savings and/or higher growth
- Financial Synergy –> Provide tax benefits, or lack debt capacity, or cash availability
- Control –> Be poorly managed, underperforming
- Manager’s Interests –> Be a “trophy” that meets CEO ego needs
What is the moral hazard effect?
Moral hazard can exist when a party to a contract can take risks without having to suffer consequences. (when managers win even when Shareholders lose)
What is the M&A track record per industry?
- Firms that tend to do better delivering value:– Pharma; Energy; Financials; Broadcasting media; Telecom– Key concepts: Increasing returns to scale, excess capacity
- Those that often do worse:– Automobiles; Airlines; Print media; Non-food retail– Key concepts: macroeconomics, “hard” assets, inventories; survival
- Mostly mixed results:– Tech (intellectual); Mixed media; Non-financial services; Consumer goods; Grocery/markets– Key concepts: “soft” assets, competition, margins
Name a few M&A Successes
Disney/Pixar– a good complimentary fit; culturally sound
- Exxon/Mobil– successful, if not popular
- Vodafone/Mannesmann– Immediate large value creation; established industry dominance, but the real price (and value destruction) came years later
Name a few M&A disasters
- Benz/Chrysler– poor execution; cultural conflicts
- AOL/Time Warner– opportunistic action by executives; unraveled at huge loss after 10 years
- HP/Compaq– Egos gone wild; board conflicts, self-serving executives
Name 4 common causes for failure of M&A
- Neglect of Minimum Operating Scale and problems of control– especially relevant in conglomerate M&A
- Excess Premiums Paid – especially high when more (potential) bidders
- Over-Commitment – Sunk Cost attitudes– CEO has decision making powers, media attention is high; advisory pressure to close deal
- Failure to integrate AFTER the merger– production; logistics; R&D; marketing; personnel; organisational issues
Name 4 general trends of M&A failure
- M&A failure is correlated with size of the acquirer (big: worse); Exceptions: SME mergers, ‘mergers of equals’
- M&A failure is especially prevalent among listed firms
- 50 – 65 % of acquisitions are eventually divested again; thus, the M&A carousel
- Probability of failure not conditional on previous performance (regardless what BCG says)
