Acquisitions, Vicestitures and Restructuring

• Mergers

  • Forms one economic unit from 2 ore more units

• Joint Venture

  • Combinaton of assets by at least 2 entities for specific purpose and time limitaion

• Other fomrs of collab

  
  

• Supplier Networt

  • Long term cooperative relationship

• Alliance

  • Informal Business relation

• Investments

  • A Stake, but no control

• Franchise

  • Contract for the use of Name

• Tender offer

  • Takeover via direct offer to target firm

• Pooling of interest

  • Combines financial statements of firms

• Divestiture

  • Sale of a segment of a company to a third party for cash/securites

• Equity carve-out

  • Parent-frim offers shares of the daughter for cash without loss of control

• Spin-Off

  • Shares of the daughter are distributed to the shareholder of the parents company- A new public company is created

It has the same propotional Equity ownership as the parent company

• Total Value increase

• Hubris

  • Buyers overpay the target firm

• Ageny problems

  • Managers make value decreasing mergers to increase size of the company. Merger does not have to increase shareholder value

• Efficiency increases

• operating and financial synergies

• Information asymmetries

  
  

• Financial Synergies

  • Lower costs of internal financing

  • Debt capacity can be greater and uses of tax shield

  • Economies of scale in flotation and transaction costs

• Information asymmetries (new infos are created, even if transaction is not completed

  • Sitting on a goldmine

  • kick in the pants

• Ne infos about target firm are revealed and shows that the firm is undervalued

• Following revaluation is permanent

Tender offer inspires firms management to implement a more efficient business strategy.

Investors receive immediate higher earnings, but lower future growth. Managers try to convince the manager that the increase are for real growth.

If both firms together are worth more than apart.

The Anncouncement of a merger would increase the market value from the target firm, therfore the value at this moment is overestimated. The Value Gain for the target firm are addiotional costs for the acquiring firm

If the stock price of the firm is increasing, the costs of paying with stocks will also increase

• Stock

  • In Gains the acquisitior will participates loss because his costs are higher than an cash payments and for losses he will gain because he payed a lower price. For the target firm it is the opposite

• Cash

  • Only the acquisitor will participate on gain or losses

1. Costs of acquistionts/new market value

2. 
   

The Manager has a better overview of his firm than outsiders, therefore he knows if his firm is over or undervalued.

• Pessimistic

  • A Pessimsitic investor would finance an acquisistion with stocks, because he thinks his firm is overvalued

• Optimistic

  • He would finance the ackquisition with cash, so the wealth would not be swapped to the mergerd firm

• 3 Days around the merger announcement. Day 0 is the announcment day

• A longer window with several day prior and after the announcement

• Combine

  • Immediate or longer observation, both observate positive returns

• Target

  • Immediate or longer observation, both observate positive returns. Longer Observation has higher returns

• Acquire

  • Immediate or longer observation, both observate negative returns. Longer Observation has even higher losses

• Overall value is increasing, but gains are mostly only on the target firm side

  • Mangers of acquiring firm are overestimating target firm and are willing to pay too much

  • Manager are followong their own interest, therfore they dont care if shareholder are loosing value as long the company size is increasing

  • Because the acquiring firm is much larger than the target firm but the money gain are equal for both, the relativ gain is for the acquiring firm much lower

Gains for target shareholder a higher in a tender offer than in mergers, because friendly mergers are often arranged at a lower price than an unfriendly offer

It is limited to mergers with stocks

• A Merger

• Stock Issue

The reaction fully reflects the information of the merger

• On a long term, studies report negative abnormal returns

• But we studies have difficulties to measure long-term abnormal returns. (Bad Model Problem)

  • Joint hypothesis for market efficiency and market equilibrium

They measure 5 Years abnormal buy and hold returns of acquiring firms, based on Size and Book-to-market ratio

• Acquiring firm is performing poorly, but the method of payment is relevant for the distribution

  
  

Stocks Merger are like issuing new stocks. Ther Study approves that stock Mergers were poor as firms issue stocks for other reasons

The likelihood to finance the merger with stocks increases, if the target firm has growth potential

If mergers create value for shareholder, gains should show up in cash flows.

Merged firms experience asset productivity improvements. This leads to a higher operating cashflow relative to the industry.

There is an intercept of 1%, therefore the post merger operating performance is 1% better. The b slope gives us, how much the post merger would be affected if we pre merger perfomce will change by one unit

• Combining uncorrelated CF debt-equity ratio of merged firm is increased to offset the decreased volaitilty of return (Lewellen, 1971) (overall decresed risk/volatility)

• Internal capital reduce underinvestment problem, because external financing is not needed (Westen, 1970; Williamson, 1975)

• Internal Capital Market reduces underinvestment problem

• investing to much in poor segments (Scharfstein and Stein, 2000; Rajan et al. 2000)

• Ageny problem due to the misuse of cash (Jensen, 1986)

• Information asymmetry between central management and divisonal management. Valuation of diversication is better related segments than unrelated segments

Conglomerates are firms that are largely diversified in their invesments. The Discount is that the market value of the conglomerate is below, if the subsidary frims are evaluated single

• Relatedness of firms segment (discount is smaller for related segments)

• overinvestment (diversified firms invest more than single line firms)

• Inefficient internal capital market

They want to enhance the shareholder value

• Relatedness of business segments reduces probability of refocussing, while unprofitable and high overhead costs increase probability of refocussing

• abnormal return for refocussing annuncement nad positive relationship between abnormal returns and conglomerte discount

• Organisation Restructuring

• Ownership Restructuring

• New Shareholders (Carve-OUT) existing Shareholder (Spin-off)

• Split off

  • Shareholders of parent company are offered shares of the daughter in exchange for the sahres od the parent company

• Joint Venture

• Trade Sale

• LBO

• Market for corporate control

• Unlocking hidden value

• Improving Management Incentive

• Reduction of ageny costs, tax factors and bondholder wealth appropriation

• Assets are more valuable for alternative management team

• Buyers might be willing to pay to much

• Divison no longer has a strategic fit

  
  

• Segment or firm can acquire firm it self after a divestiture

• Creation of “Pure PLay”, investors can value mor easily

• Undiversified companies are easier to run

• Reduction in decision making authority

• Performance measurement of the management and use of equity based compensation

• Announcement of Spin-Offs creates high abnormal returns

• Announcement effect is higher for firms that are increasing their focus by divesting a divison and frims with high information asymmetries

• Long Run suprior performance of spun-off firms and their parents company

Because the returns are not significant, we could assume that the market reacted efficient on the announcements

It is a partial IPO where the parent firms sells a minority percentage of its daughter to the public stock market.

• Recevies Cash

• But also retains the control

• Combines restructuring and financing transactions

• Open question if it should increase efficiency or generate cash

• Announcement returns are mosty positiv, but not significant

• At the time of carve out, the operating performance of the daughter is better than comparable firms, but it will decrease to the indusrty norm again

  • But negative relationship between percentage of shares sold and operating performance and cash reserves of parent firm

There is a negative relationship.

• Supermajority

  • High percentage of shares is needed (80%)

• Staggered Board

  • Board is divided in groups and only one group is elected each year

• Waiting Period

  • Unwelcomed merger have to wait some years to complete merger

• Fair price

  • Price is calculated and merger has to pay this price

• Targeted repurchase

  • Firsm buys back its own stock from bidder with a premium

• Standstill agreement

  • Bidding firm agrees to limits its holding to other firms

• Exclusionary self-tender

  • A firms makes a tender offer for its own stock, but excludes targeted shareholders

• Going private

  • Stock is bought by a priavte group (mostly from an established management)

Going Private transactionsa are often leveraged financed

• Debt provides tax -> increase firm value

• LBO turns managers into owners

• Debt increases incentive because manager have to earn more than debt to obtain profit

• Golden parachute

  • Target firm provides top management an extensive compensation, if a takeover occurs. Manager could ne now less concered about the self and act in the interest of shareholder, or they enrich themselfs by the expenses of the shareholder

• Crown jewels

  • Firm sells major assets, when its faced with a takover bid

• Poison pill

  • Shareholder of target firm has the right to purchase shares of merged firm for a lower price. But it dilutes the shares so there is an wealth transfer from bidder to target