1. Mergers & Acquisitions (and Divestitures)
Prof. Ian GIDDY
Stern School of Business
New York University

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

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

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

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

6. 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

7. 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

8. 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)

9. 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.

10. The Price: Who Gets What?

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

12. 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)

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

14. 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

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

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

17. Optika & Schirnding

18. Optika-Schirnding with Synergy

19. Optika-Schirnding with Synergy
Case Study: Ashanti-Bogoso

20. Ipoh-Kelantan

21. Ashanti-Bogoso Merger

22. 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

23. 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

24. Conclusion

26. Contact Info
Ian H. Giddy
NYU Stern School of Business
Tel ; Fax