ACF 7: Mergers & Acquisitions

Managerial motives to merge 1) Conflict of interest

Entrenched managers like running large companies (prestige + pay), knowing they are destroying SH wealth for personal gain

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Managerial motives to merge 2) Overconfidence in own ability

Pursue mergers that have a low chance of success + overpay target SH premium, believe they are helping increase SH wealth

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Types of M&A 1) Strategic acquisitions

synergy = larger combined value

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Types of M&A 2) Financial/ disciplinary acquisitions

discipline on managers who are doing a poor job (poses threat)

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Types of M&A 3) Conglomerate acquisitions (Since 2008)

Diversification benefits: 1) Risk reduction (less idiosyncratic risk) 2) Debt capacity increases = borrowing costs decreases (less chance of financial distress)

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Alternative M&A classifications: 1) Hostile takeover (tender offer/ proxy fight)

bid/ offer not approved by board of directors, so purchase large % of stock (at very high premium off SH) or persuade current SH = increase voting power = replace board of directors + CEO

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Alternative M&A classifications: 2) Friendly takeover

target company management + board of directors agree, then subject to SH approval

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M&A characteristics: Merger Waves

Mergers cluster at points in time/ certain industries due to 1) Industry shocks (post 2008 regulation increase) 2) Stock market bubbles/ overvaluation (SH will experience fall in wealth from takeovers)

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Economic Nationalism + Acquisitions

Governments prefer target companies to remain domestically owned for competitiveness (nationalist governments reactions affect outcome of merger + future foreign companies detracted from bidding)

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Economic Nationalism + Acquisitions: e.g. Broadcom acquiring Qualcomm

US Gov had previously praised Broadcom, however when blocked it from acquiring Qualcomm over fears that acquisition would drop R&D spending on 5G + US would lose competitive rivalry against foreign nations

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Gains from acquisition (developing world)

1) Synergy (combined value greater) 2) Revenue enhancement (market power/ strategy) 3) Cost reductions (economies of scale/ vertical integration) 4) Lower taxes 5) Reduced borrowing costs

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Gains from acquisition (developed world)

1) Synergy (combined value greater) 2) Lower taxes 3) Reduced borrowing costs

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M&A Winners: Target firm's SH

1) Get large premium on shares (>20%)

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M&A Losers: Acquiring firm's SH

1) Acquiring managers conflict of interest (larger size) 2) Overconfident managers overestimate gains = overpay 3) larger firm so smaller % distributed 4) Takeover announcement may give -ve signals if overconfident CEO's

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Private acquirers pay less compared to public acquirers due to...

1) Less agency issues (public managers have low % ownership + much more to gain from increasing size) 2) High-powered incentives at private (gains flow direct to parties) 3) Management collusions 4) Direct cash deals preferred (over shares)

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ACF 7: Mergers & Acquisitions

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