Page 54 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 25.l: Explain how price and payment method affect the
distribution of risks and benefits in M&A transactions. READING 25: MERGERS AND ACQUISITIONS

Effect of Price: Acquirer (Buyer) will want to pay the lowest possible price (the pre-merger value of the
target, V ), while the target (Seller) wants to receive the highest possible price (the pre-merger value of the MODULE 25.4: BID EVALUATION
T
target plus the expected synergies, V + S).
T
Effect of Payment Method
Cash offer: Acquirer assumes the risk and reward of the merger, while gain for the target shareholders is limited to the takeover premium.
• If synergies realized > expected (TP being fixed as expected), acquirer reaps the additional reward. If otherwise, acquirer’s gain evaporate!

Stock offer: Some of the risks and rewards and shared. Target’s shareholders become part owner of the acquiring company, if synergies exceed expectations both gain; otherwise both suffer!

What then determines method of payment? Confidence in the estimate of merger synergies: When very confident, acquirer will prefer to pay cash and
target will prefer to receive stock. The reverse is true!
LOS 25.m: Describe characteristics of M&A transactions that create value.

• Strong buyer: Acquirers that have exhibited strong performance (in terms of earnings and stock price growth) in the prior three years.
• Low premium: The acquirer pays a low takeover premium.
• Few bidders: The lower the number of bidders, the greater the acquirer’s future returns.
• Favorable market reaction: Positive market price reaction to the acquisition announcement is a favorable indicator for the acquirer.

LOS 25.n: Distinguish among equity carve-outs, spin-offs, split-offs, and liquidation.

Divestitures: Selling, liquidating, or spinning off a division or subsidiary to say an outside buyer (but also MBO’s exist). You receive cash and give up control of that portion!

Equity carve-outs: Carve out and create a new, independent company by giving an equity interest in a subsidiary to outside shareholders, often via public offering.
Subsidiary becomes a new legal entity whose management team and operations are separate from the parent company.

Spin-offs are like carve-outs, create a new independent company but NOT via public offering but distributed in proportionately to parent company’s shareholders.
Involved no cash injection as shares are simply distributed in proportion to current holding at parent level!

Split-offs allow shareholders to receive new shares of a division in exchange for a portion of their shares in the parent company. You give up a portion of your ownership in
the parent company to receive the new shares in the division.

Liquidations break up the firm and sell its asset piece by piece; most are associated with bankruptcy.

LOS 25.o: Explain common reasons for restructuring. Division no longer fits into management’s long-term strategy.
Lack of profitability.
Individual parts are worth more than the whole.
Infusion of cash.