Mergers & Acquisitions (and Divestitures) Prof. Ian GIDDY Stern School of Business New York University www.stern.nyu.edu/~igiddy/dakar

Mergers & Acquisitions (and Divestitures) Prof. Ian Giddy New York University

Mergers and Acquisitions Mergers & Acquisitions Divestitures Valuation Concept: Is a division or firm worth more within the company, or outside it?

The Gains From an Acquisition Gains from merger Synergies Control Top line Bottom line Financial restructuring Business Restructuring (M&A)

Goal of Acquisitions and Mergers Increase size - easy! Increase market value - much harder!

Goals of Acquisitions Rationale: Firm A should merge with Firm B if [Value of AB > Value of A + Value of B + Cost of transaction] Synergy Gain market power Discipline Taxes Financing

Goals of Acquisitions Rationale: Firm A should merge with Firm B if [Value of AB > Value of A + Value of B + Cost of transaction] Synergy Eg Martell takeover by Seagrams to match name and inventory with marketing capabilities Gain market power Eg Atlas merger with Varity. (Less important with open borders) Discipline Eg Telmex takeover by France Telecom & Southwestern Bell (Privatization) Eg RJR/Nabisco takeover by KKR (Hostile LBO) Taxes Eg income smoothing, use accumulated tax losses, amortize goodwill Financing Eg Korean groups acquire firms to give them better access to within-group financing than they might get in Korea's undeveloped capital market

Fallacies of Acquisitions Size (shareholders would rather have their money back, eg Vivendi Universal) Downstream/upstream integration (internal transfer at nonmarket prices, eg DuPont/Conoco, AOL/Time Warner) Diversification into unrelated industries (Kodak/Sterling Drug)

Who Gains What? Target firm shareholders? Bidding firm shareholders? Lawyers and bankers? Are there overall gains? Changes in corporate control increase the combined market value of assets of the bidding and target firms. The average is a 10.5% increase in total value.

The Price: Who Gets What?

Equity Valuation: Application to M&A Prof. Ian Giddy New York University

How Much Should We Pay? Applying the discounted cash flow approach, we need to know: 1. The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes 2. The rate at which to discount the cash flows (required rate of return) 3. The deadweight costs of making the acquisition (investment banks' fees, etc)

The Gains From an Acquisition Gains from merger Synergies Control Top line Bottom line Financial restructuring Business Restructuring (M&A)

Framework for Assessing Retructuring Opportunities Current Market Value Current market overpricing or underpricng Maximum restructuring opportunity 1 Total restructured value Company’s DCF value 2 5 Restructuring Framework Financial structure improvements Operating improvements (Eg Increase D/E) 3 4 Potential value with internal + external improvements Potential value with internal improvements Disposal/ Acquisition opportunities

Equity Valuation in Practice Estimating discount rate Estimating cash flows Application to Optika Application in M&A: Schirnding-Optika

Optika WACC: ReE/(D+E)+RdD/(D+E) Value: FCFF/(WACC-growth rate) CAPM: 7%+1(5.50%) Equity Value: Firm Value - Debt Value = 2278-250 = 2028 Debt cost (7%+1.5%)(1-.35)

Optika & Schirnding

Optika-Schirnding with Synergy

Optika-Schirnding with Synergy Case Study: Ashanti-Bogoso

Ipoh-Kelantan

Ashanti-Bogoso Merger

Steps in a Successful Merger and Acquisition Program - Step 1 and 2 1. Manage preacquisition phase Instruct staff on secrecy requirements Evaluate your own company Identify value-adding approach Understand industry structure, and strengthen core business Capitalize on economics of scale Exploit technology or skills transfer 2. Screen Candidates Identify knockout criteria Decide how to use investment banks Prioritize opportunities Look at public companies, divisions of companies, and privately held companies

Steps in a Successful Merger and Acquisition Program - Step 3 to 5 3. Value remaining candidates Know exactly how you will recoup the takeover premium Identify real synergies Decide on restructuring lan Decide on financial engineering opportunities 4. Negotiate Decide on maximum reservation price and stick to it Understand background and incentives of the other side Understand value that might be paid by a third party Establish negotiation strategy Conduct due diligence 5. Manage postmerger integration Move as quickly as possible Carefully manage the process

Conclusion

Contact Info Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 Ian.giddy@nyu.edu http://giddy.org