26/10/2022

MERGER AND
AQUISITION
Dr. Quyen Do Nguyen
quyendn@ftu.edu.vn

M&A ENVIRONMENT (CHAP 1, 2-SS, 3)

M&A PROCESS (CHAP 4,5,6)

M&A VALUATION AND MODELING (CHAP 7,8,9, 10-SS)

DEAL STRUCTING AND FINANCING (CHAP 13)

ALTERNATIVE BIZ & RESTRUCTURING STRATEGIES (CHAP 15&16)

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§ Donald M. Depamphilis
(2019) Mergers,
Acquisitions, and Other
Restructuring Activities_ An
Integrated Approach to
Process, Tools, Cases, and
Solutions, 10E.

Course Layout: Mergers, Acquisitions,

and Other
Restructuring Activities

Part I: M&A Part II: M&A Process Part III: M&A Part IV: Deal Part V: Alternative
Environment Valuation and Structuring and Business and
Modeling Financing Restructuring
Strategies

Ch. 1: Motivations for Ch. 4: Business and Ch. 7: Discounted Ch. 11: Payment and Ch. 15: Business
M&A Acquisition Plans Cash Flow Valuation Legal Considerations Alliances

Ch. 2: Regulatory Ch. 5: Search through Ch. 8: Relative Ch. 12: Accounting & Ch. 16: Divestitures,
Considerations Closing Activities Valuation Tax Considerations Spin-Offs, Split-Offs,
Methodologies and Equity Carve-Outs

Ch. 3: Takeover Ch. 6: M&A Ch. 9: Financial Ch. 13: Financing the Ch. 17: Bankruptcy
Tactics, Defenses, and Postclosing Integration Modeling Basics Deal and Liquidation
Corporate Governance

Ch. 10: Private Ch. 14: Applying Ch. 18: Cross-Border

Company Valuation Financial Models to Transactions
Deal Structuring

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EVALUATION

FORM %

Participation Class participation 10%

Mid-term exam Group essay and 30%

presentation

Final exam Multiple choice questions 60%

+/& Exercises
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If you give a man a fish, you feed him for a day.

If you teach a man to fish, you feed him for a lifetime.

—Lao Tze

We can choose to be successful by

§ Setting goals,

§ Having high expectations of ourselves,

§ Never quitting,

§ By not making excuses, and

§ By accepting personal responsibility

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Students will learn

§ What corporate restructuring is and why it occurs;
§ Commonly used valuation techniques and how they are employed;
§ How corporate restructuring creates/destroys value;
§ Commonly used takeover tactics and defenses and when they should be
employed;
§ A highly practical “planning based” approach to managing the M&A process;
§ The challenges and solutions associated with each phase of the M&A process;
§ The advantages and disadvantages of alternative M&A deal structures;
§ How to apply financial models to value, structure and negotiate deals; and
§ How to plan, structure, and manage JVs, partnerships, alliances, licensing
arrangements, equity partnerships, franchises, and minority investments

§ Primary objective: What corporate restructuring is

and why it occurs
§ Secondary objective: Provide students with an
understanding of
§ M&A as a form of corporate restructuring
§ Alternative ways of increasing shareholder value
§ M&A activity in an historical context
§ The primary motivations for M&A activity
§ Key empirical findings
§ Primary reasons some M&As fail to meet
expectations

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§ Restructuring Activity § Potential Strategy

§ Corporate Restructuring § Redeploy Assets
§ Balance Sheet § Mergers, Break-Ups, & Spin-Offs
§ Acquisitions, divestitures, etc.
§ Assets Only
§ Increase leverage to lower
cost of capital or as a
§ Financial Restructuring takeover defense; share
repurchases
§ Divestitures, widespread
employee reduction, or
§ Operational Restructuring reorganization

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§ Solo venture (AKA “going it alone”

or “organic growth”)
§ Partnering (Marketing/distribution
alliances, JVs, licensing, franchising,
and equity investments)
§ Mergers and acquisitions
§ Minority investments in other firms
§ Asset swaps
§ Financial restructuring
§ Operational restructuring

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1. What factors do you believe are most

likely to impact senior management’s
selection of one strategy (e.g., solo
venture, M&A) to increase shareholder
value over the alternatives? Be specific.
2. In your opinion, how might the conditions
of the business (e.g., profitability) and the
economy affect the choice the strategy?

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§ Strategic realignment
§ Technological change
§ Deregulation
§ Synergy
§ Economies of scale/scope
§ Cross-selling
§ Diversification (Related/Unrelated)
§ Financial considerations
§ Acquirer believes target is undervalued
§ Booming stock market
§ Falling interest rates
§ Market power
§ Ego/Hubris
§ Tax considerations

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Period 1: Firm A (Pre-merger) Period 2: Firm A (Post-merger)

Assumptions: Assumptions:
§ Price = $4 per unit of output sold § Firm A acquires Firm B which is producing 500,000 units of the
same product per year
§ Variable costs = $2.75 per unit of output
§ Firm A closes Firm B’s plant and transfers production to Firm A’s
§ Fixed costs = $1,000,000 plant

§ Firm A is producing 1,000,000 units of output per year § Price = $4 per unit of output sold

§ Firm A is producing at 50% of plant capacity § Variable costs = $2.75 per unit of output
§ Fixed costs = $1,000,000

Profit = price x quantity – variable costs Profit = price x quantity – variable costs

– fixed costs – fixed costs

= $4 x 1,000,000 - $2.75 x 1,000,000 = $4 x 1,500,000 - $2.75 x 1,500,000

- $1,000,000 - $1,000,000

= $250,000 = $6,000,000 - $4,125,000 - $1,000,000

= $875,000

Profit margin (%)1 = $250,000 / $4,000,000 = 6.25% Profit margin (%)2 = $875,000 / $6,000,000 = 14.58%

Fixed costs per unit = $1,000,000/1,000,000 = $1 Fixed costs per unit = $1,000,000/1.500,000 = $.67

Key Point: Profit margin improvement is due to spreading fixed costs over more units of output.
1Margin per unit sold = $4.00 - $2.75 - $1.00 = $.25
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Margin per units sold = $4.00 - $2.75 - $.67 = $.58

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Pre-Merger: Post-Merger:

§ Firm A’s data processing center § Firm A’s and Firm B’s data
supports 5 manufacturing facilities processing centers are combined
into a single operation to support
§ Firm B’s data processing center all 8 manufacturing facilities
supports 3 manufacturing facilities
§ By combining the centers, Firm A
is able to achieve the following
annual pre-tax savings:
§ Direct labor costs = $840,000.
§ Telecommunication expenses =
$275,000
§ Leased space expenses =
$675,000
§ General & administrative
expenses = $230,000

Key Point: Cost savings due to expanding the scope of a single center to
support all 8 manufacturing facilities of the combined firms.
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§ Abnormal (or excess) financial returns are those earned by acquirer and target
shareholders above or below what would have been earned without a takeover.
§ Around transaction announcement date, abnormal returns:1
§ For target shareholders averaged 25.1% during the 2000s as compared to 18.5%
during the 1990s
§ For acquirer shareholders generally positive averaging about 1-1.5%
§ However, zero to slightly negative for acquirer shareholders for deals involving large
public firms and those using stock to pay for the deal1
§ Positive abnormal returns to acquirer shareholders often are situational and include the
following:
§ Target is a private firm or a subsidiary of another firm
§ The acquirer is relatively small (large firm management may be more prone to hubris)
§ The target is small relative to the acquirer
§ Cash rather than equity is used to finance the transaction
§ Transaction occurs early in the M&A cycle
§ No evidence that alternative strategies (e.g., solo ventures, alliances) to M&As are likely
to be more successful

1These conclusions are based on recent studies using large samples over lengthy time periods involving U.S., foreign, and cross-border deals
(including public and private firms). See J. Netter, M. Stegemoller, and M. Wintoki, 2011 Implications of Data Screens on Merger and Acquisition
Analysis: A Large Sample Study of Mergers and Acquisitions, Review of Financial Studies 24 2316-2357 and J. Ellis, S. B. Moeller, F.P. Schlingemann, and
R.M. Stulz, 2011 Globalization, Governance, and the Returns to Cross-Border Acquisitions, NBER Working Paper No. 16676.

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§ Overpayment due to over-estimating synergy

§ Slow pace of integration

§ Poor strategy

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1. Discuss whether you believe current

conditions in the U.S. and global markets are
conducive to high levels of M&A activity? Be
specific.
2. Of the factors potentially contributing to
current conditions, which do you consider
most important and why?
3. Speculate about what you believe will
happen to the number of M&As over the next
several years in the U.S.? Globally? Defend
your arguments.

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In 2010, Xerox, a slower growing, cyclical an office equipment manufacturer, acquired Affiliated
Computer Systems (ACS) for $6.4 billion. With annual sales of about $6.5 billion, ACS handles paper-
based tasks such as billing and claims processing for governments and private companies. With
about one-fourth of ACS’ revenue derived from the healthcare and government sectors through long-
term contracts, the acquisition gives Xerox a greater penetration into markets which should benefit
from the 2009 government stimulus spending and 2010 healthcare legislation. There is little
customer overlap between the two firms. The sale of services tends to be more stable and offers
higher margins than product companies.
Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into services
achieved limited success due largely to poor management execution. While some progress in
shifting away from the firm’s dependence on printers and copier sales was evident, the pace was far
too slow. Xerox was looking for a way to accelerate transitioning from a product driven company to
one whose revenues were more dependent on the delivery of business services.
More than two-thirds of ACS’ revenue comes from the operation of client back office operations
such as accounting, human resources, claims management, and other outsourcing services, with the
rest coming from providing technology consulting services. ACS would also triple Xerox’s service
revenues to $10 billion. Xerox chose to run ACS as a separate standalone business.

Discussion Questions:
1. What alternatives to buying ACS do you think Xerox could have considered?
2. Why do you think they chose a merger strategy? (Hint: Consider the
advantages and disadvantages of alternative implementation strategies.)
3. Speculate as to Xerox’s primary motivations for acquiring ACS?
4. How might the decision to manage ACS as a separate business affect realizing the full value
of the transaction? What other factors could limit the realization of synergy?

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“Those who do not remember the past

are condemned to relive it.”
Alexis De Tocqueville

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§ Horizontal Consolidation (1897-

1904)
§ Increasing Concentration (1916-
1929)
§ The Conglomerate Era (1965-
1969)
§ The Retrenchment Era (1981-1989)
§ Age of Strategic Megamerger
(1992-2000)
§ Age of Cross Border and
Horizontal Megamergers (2003-
2007)

1Periods characterized by robust increases in the number and value of transactions.

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§ Factors contributing to increasing M&A activity:

§ Shocks (e.g., technological change, deregulation, and
escalating commodity prices)
§ Ample liquidity and low cost of capital
§ Overvaluation of acquirer share prices relative to target
share prices
§ Improving business confidence
§ Why it is important to anticipate M&A waves:
§ Financial markets reward firms pursuing promising (often
undervalued) opportunities early on and penalize those that
follow later in the cycle.
§ Acquisitions made early in the wave often earn substantially
higher financial returns than those made later in the cycle.

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§ Spurred by
§ Drive for efficiency,
§ Lax enforcement of antitrust laws
§ Westward migration, and
§ Technological change

§ Resulted in concentration in metals,

transportation, and mining industry
§ M&A boom ended by 1904 stock market
crash and fraudulent financing

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§ Spurred by
§ Entry of U.S. into WWI
§ Post-war boom

§ Boom ended with

§ 1929 stock market crash
§ Passage of Clayton Act which more clearly defined monopolistic
practices

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§ Conglomerates buy earnings streams to boost

their share price
§ Overvalued firms acquired undervalued high growth firms
§ Number of high-growth undervalued firms declined as conglomerates
bid up their prices
§ Higher purchase price for target firms and increasing leverage of
conglomerates brought era to a close

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§ Strategic U.S. buyers and foreign multinationals

dominated first half of decade
§ Second half dominated by financial buyers
§ Buyouts often financed by junk bonds
§ Drexel Burnham provided market liquidity

§ Era ended with bankruptcy of several large

LBOs and demise of Drexel Burnham (Michael
Milken)

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§ Dollar volume of transactions reached record in each

1
year between 1995 and 2000
§ Purchase prices reached record levels due to
§ Soaring stock market
§ Consolidation in many industries
§ Technological innovation
§ Benign antitrust policies
§ Period
ended with the collapse in global stock markets
and worldwide recession

1The cumulative dollar value of M&As during this period in the U.S. was $6.5 trillion, With $3.5 trillion
taking place in the last two years.
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§ Average merger larger than in 1980s and 1990s, mostly

horizontal, and cross border
§ Concentrated in banking, telecommunications, utilities,
healthcare, and commodities (e.g., oil, gas, and metals)
§ Spurred by
§ Continued globalization to achieve economies of scale
and scope;
§ Ongoing deregulation;
§ Low interest rates;
§ Increasing equity prices, and
§ Expectations of continued high commodity prices
§ Period ended with global credit market meltdown and
2008-2009 recession
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Low Interest Foreign

Rates & Declining Banks & Investors
Investment Banks: Hedge Funds
Risk Aversion Buy Highest
Repackage & Create:
Drive Increasing Rated Debt
--Sub-Prime Underwrite --Collateralized
--Mortgage Debt Obligations
Mortgage Lending
Backed (CDOs)
--LBO Financing &
--High Yield --Collateralized Hedge
Other Highly Funds
Bonds Loan Obligations
Leveraged
CLOs) Buy Lower
Transactions
Rated debt

Investment Banks Lend to Hedge Funds

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§ Similarities
§ Occurred during periods of sustained high economic
growth
§ Low or declining interest rates
§ Rising stock market
§ Differences
§ Emergence of new technology (e.g., railroads,
Internet)
§ Industry focus
§ Type of transaction (e.g., horizontal, vertical,
conglomerate, strategic, or financial)

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1. What can senior management learn by

studying historical merger waves?
2. What can government policy makers learn by
studying historical merger waves?
3. What can investors learn by studying
historical merger waves?

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§ Motivations for acquisitions:

§ Strategic realignment
§ Synergy
§ Diversification
§ Financial considerations
§ Hubris
§ Common reasons M&As fail to meet expectations
§ Overpayment due to overestimating synergy
§ Slow pace of integration
§ Poor strategy
§ M&As typically reward target shareholders far more than bidder
shareholders
§ Success rate of M&A not significantly different from alternative
ways of increasing shareholder value

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