Term
| Operational Restructuring |
|
Definition
| Impacts the firms profit lines |
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Term
|
Definition
| Impacts the firms capital structure. Debt equity mix or other financial items such as taxes |
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Term
|
Definition
| Purchase of another firms stock or assets either in part or full; acquired firm remains a legal entity (ie subsidiary) |
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Term
|
Definition
| Combination of two or more firms; one legally surviving firm |
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Term
|
Definition
| Firms in same industry. Similar product lines |
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Term
|
Definition
| Firms in completely different industries/ products |
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|
Term
|
Definition
| Firms at different stages of value chain |
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Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
| an offer to buy shares of a target company for cash and/ or exchange of securities |
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Term
| The difficulty of defining merger success |
|
Definition
From the standpoint of acquirer, target employees, local city officials, i bankers, shareholders
Target shareholders may win while acquirer shareholders lose.
Financial Definition: Successful mergers create value, in aggregate (think of shareholders) and for each key party (target and acquirer) |
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Term
| What is the average increase in economic value to merging firms in this sample? |
|
Definition
| 10% combined value increase |
|
|
Term
| What are the relative contributions to these merger gains from Tax savings? |
|
Definition
|
|
Term
| What are the relative contributions to these merger gains from revenue increases and cost savings? |
|
Definition
|
|
Term
| What are the relative contributions to these merger gains from investment cutbacks? |
|
Definition
|
|
Term
| What are the different Motives for M&A? |
|
Definition
Undervaluation: Acquirer is able to recognize a firm that is mispriced by the market
Diversification: Acquiring firm may reduce earnings volatility and risk
Operating synergy: Increase operating income (cost cutting), increase revenue growth, or both
Financial Synergy: lower cost of capital or greater cash flow
Control: acquire poorly managed firms and replace incumbent management
Managerial self interest: Bad motive- not to maximize stockholder wealth (acquirer shareholders only vote on significant acquisitions
Successful acquisitions are based on a detailed strategy that capitalizes on one or more of these motives |
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|
Term
M&A Motives
Undervaluation |
|
Definition
Acquirer has the capacity to identify mispricing- better information than public, or better analytical tools to digest information
Acquirer not only can identify opportunity but can access funds to capitalize- internal funds, access to capital markets
skill in execution- control premium cannot exceed market mispricing
Public markets are fairly efficient so odds of succes are better in private markets or less efficient foreign markets |
|
|
Term
M&A Motives
Diversification
Question: Can firms accomplish diversification more effectively than individual investors? |
|
Definition
Investors diversify their portfolios with minimal trading costs; firms incur significant transaction costs through diversifying acquisitions
Exception: Asian family owned firms |
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|
Term
M&A Motives
Operating synergy |
|
Definition
Economies of scale allow combined firm to be more cost efficient and profitable; horizontal integration
greater pricing power from reduced competition; horizontal integration
Combine different functional strengths; ie vertical integration along value chain
Faster growth in new or existing product markets |
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|
Term
M&A Motives
Financial synergy |
|
Definition
Tax Benefits: Acquire a firm that has some unused depreciation tax shields or net operating losses; different tax laws of acquirer
If markets are inneficient, acquire with excess cash (financial slack) acquires high growth, financially constrained target. Seen in M&A involving large acquirers and small targets; or public acquirers and private targets.
Debt capacity may increase if earnings and cash flows more stable, increasing tax benefit: lower cost of capital, greater CFs
Bad example: PE synergy, cost of capital synergy. WACC of firm is weighted average of WACC of individual units |
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Term
|
Definition
Motivation for many hostile takeovers
Success based on 1) Poor performance due to current management, not exogenous industry or market forces. 2) acquisition is followed by a value increasing change in management practices. 3)
arket prices for target reflects the status quo and does not impound the control premium
Bhide (1989) documents that hostile takeovers have lower ROE, past 5 year stock performance, and insider holdings than their peers. Also following takeovers management teams were replaced, non core assets were sold, leading firm to refocus on core strategies and improve operating performance |
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|
Term
M&A Motives
Managerial self interest |
|
Definition
Empire building- ceo want to be king
ego- in a control contest with multiple bids, nobody wants to back down- must win attitude, no matter at what cost
compensation or other side benefits- new ceo compensation may be based directly on size of new firm
Richard Roll (1986) "hubris hypothesis" of managerial overconfidence may explain much of the bidding process of acquirers |
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|
Term
|
Definition
|
|
Term
|
Definition
| Investing or structuring an affiliation outside the firm (acquisitions, JV, alliances, contractual agreements) |
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|
Term
| Reasons to pursue inorganic growth |
|
Definition
| 1) Maturing product lines. 2) Regulatory antitrust limits. 3) Value creation through integration- horizontal or vertical. 4) Acquisition of unique resources and capabilities - acquire intellectual creative talent, patents, specific skills. 5) Value creations through diversification- does not add value if only benefit is to reduce risk/ volatility of cash flows- may add value if it promotes knowledge transfer across divisions, reduces costs, creates efficient internal capital markets in the face of external financing constraints |
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|
Term
Transactions to accomplish inorganic growth
Contractual relationships |
|
Definition
a. Licensing agreements, comarketing agreements, codevelopment agreements, joint purchasing agreements, long term supply agreement
b. May result in more favorable pricing of supplies, increased market presence of certain products
c. Built on trust, long term relationship, two way exchange of information |
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|
Term
Transactions to accomplish inorganic growth
Strategic Alliance |
|
Definition
More complex than contractual relationship; often includes exchange of managerial talent, resources, capabilities.
b. often includes equity investment (minority investment) |
|
|
Term
Transactions to accomplish inorganic growth
JV |
|
Definition
a. Creates a seperate entity in which both firms invest; could be a division of one of the firms, or an entirely new business; agreements may be as complex as merger agreements
b. Agreement between JV partners specifies investment rights, operational responsibilities, voting control, exit alternatives, and allocation of risks and rewards |
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|
Term
Transactions to accomplish inorganic growth
Minority investment |
|
Definition
a. Firm invests directly in counter party firm
b. If both firms mutually invest in each other, known as a cross shareholder agreement |
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|
Term
| Transactions to accomplish inorganic growth |
|
Definition
Contractual relationships, Strategic alliances, JV, Minority investment, M&A
Choice among those depends on timing, funding, trust, culture, and need for control
Research suggests that M&A, JV, alliances, and minority equity are profitable for targets, breakeven for the purchasers, and economically beneficial to the combined firms |
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Term
| Tips for building basic income statement and balance sheet projections |
|
Definition
First calculate entire income statement for a given year using the inputs provided by the case
Next carry over the retained earnings (net income minus dividends) to the balance sheet. Add this to the prior years retained earnings. Use case inputs to compute Net working capital line items on the balance sheet (receivables, payables, inventory)
Use case assumptions for maintaining a minimum cash balance
Finally calculate the amount of bank debt necessary to balance the sides of the balance sheet |
|
|
Term
| Generic form of Income Statement |
|
Definition
Sales or Revenue
less:COGS
equals:Gross income or gross profit
less: operating expense or selling and administrative expense
equals: Operating income or operating profit
less: depreciation
equals: EBIT
less: interest expense
equals: Income before taxes or earnings before taxes
less: taxes
Equals: Income after tax or earnings after taxes |
|
|
Term
| To find retained earnings |
|
Definition
Earnings after taxes
less: dividends
equals: retained earnings |
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|
Term
|
Definition
Cash and securities
+Accounts receivable
+Inventory
=Total current assets
Gross PP&E
-Accum Depreciation
+Net PPE
=long term assets
Add together for total assets |
|
|
Term
| Liabilities and Owners equity |
|
Definition
Accounts payable
+Wages Payable
=Current liabilities
Bank Notes
+ Long term debt
+ Common stock
+ Retained earnings
= total liabilities and owners equity |
|
|
Term
| general approach to projecting balance sheet entries |
|
Definition
Beginning account balances
plus: Change in account
equals: Ending account balances |
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|
Term
| Projecting accounts receivable |
|
Definition
Beginning accounts receivable
+Credit Sales
- Collections of accounts receivable
= ending accounts receivable |
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|
Term
|
Definition
Policy or historical practice could be to keep inventories equal to 60 days COGS or 50 days of sales so:
60 days x projected COGS per day
or
50 days x projected sales per day
or could use general relation of
Beginning inventory
+Purchases
-COGS
=ending inventory |
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|
Term
| How to estimate for interest expense on the pro forma income statement |
|
Definition
| If it is a 2009 projection then use the amount of debt from the 2008 balance sheet to estimate the interest expense for 2009. |
|
|
Term
|
Definition
|
|
Term
|
Definition
| =total debt/Ending total assets |
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|
Term
|
Definition
| =long term debt/ ending total assets |
|
|
Term
|
Definition
| =EBIT or EBITDA/Interest Payments |
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Term
|
Definition
| Targets assets are brought into the acquirers BS at cost basis not FMV. No goodwill is created. Merger had to meet stringent rules to qualify for this accounting treatement |
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Term
|
Definition
| Requires determination of new basis at FMV; Goodwill created in an acquisition is amortized against earnings over no longer than 40 years |
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|
Term
| Why did FASB eliminate pooling method and modify purchase method? |
|
Definition
| Because it is difficult to evaluate and compare financials across companies |
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Term
| Purchase accounting after 2001 |
|
Definition
One company is Buyer and purchase price is assigned to identifiable assets and liabilities of target. excess of price paid is allocated to the following categories: Tangible depreciable assets, identifiable assets with definite lives like patents and copyrights, intangible assets with indefinite lives like trademarks and gov granted licenses, and goodwill= purchase price-targets net asset value
Intangibles with definite lives are amortized while intangibles with indefinite lives and goodwill are not |
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|
Term
| How are indefinite lived intangibles distinguished from goodwill? |
|
Definition
| They arise from contractual rights and could be separated from the target and sold, licensed, rented, or exchanged |
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|
Term
| What to do with goodwill? |
|
Definition
Now must be allocated across the firms reporting units and tested annually for impairment
Indefinite lived intangibles also tested for impairment but on an individual asset basis rather than a reporting unit basis |
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|
Term
| As of 2009 "Acquisition method" |
|
Definition
| Took effect Jan 1, 2009. More thorough reporting, more consistent with international financial reporting standards. Require more info about fair value of assets acquired and liabilities assumed. Acquisition costs must now be seperated from the purchase price and expensed seperately. New rules especially have impact on contingent liabilities whose payments depend on the outcome of future events |
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|
Term
| Steps in Accretion/ Dilution analysis |
|
Definition
1. Calculate acquirer's forecasted EPS
2. Calculate merged firm's forecasted EPS influenced by a. Target earnings. b. Method of payment (shares->denominator; cash-> numerator through increase interest expense or decrease interest income on excess cash). c. Amount paid (new asset basis for depreciation; no more goodwill depreciation)
3. Compare the change. a. Is it accretive or dilutive? b. Analyze each year for several years out |
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|
Term
|
Definition
| = (Acq NI + Targ NI + Synergy(1-T) - Interest (1-T) - Dep(1-T))/ Merged Shares |
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|
Term
| Two ways to evaluate synergy |
|
Definition
1. Start with stand alone value of target using target's risk and corresponding cost of capital, then add value of synergies using risk of those synergies discounted at appropriate rate.
2. Value the combined firm all at once using the combined risk and corresponding weighted discounted rate. |
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|
Term
|
Definition
| Value of debt + Value of equity |
|
|
Term
|
Definition
(value of debt- value of excess cash) + value of equity
=net debt + equity |
|
|
Term
|
Definition
residual value of firm...intrinsic value of common stock
= equity shares outstanding*current stock price |
|
|
Term
|
Definition
FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment
Represent value of flows available to euity holders after debt and preferred claims have been met |
|
|
Term
| Enterprise Value or FCFF= |
|
Definition
| = Equity Value + Net Debt |
|
|
Term
|
Definition
| =Short term debt + Long term debt + Minority Interest + Preferred stock + Leases - Cash and Cash equivalents |
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|
Term
| Methods used to Estimate Value |
|
Definition
1. Accounting Book Value
2. Liquidation Value
3. Replacement value
4. current market value
5. Trading multiples
6. Transactions Multiples
7. DCF valuation
8. Option Valuation
9. Private Equity VC |
|
|
Term
|
Definition
the amount recorded on financial statements as the value
Historical rather than forward looking
Influenced by particular accounting methods |
|
|
Term
|
Definition
sums of value from selling all of firms assets
Doesn't include value as a going concern, may be innapropriate if it would induce fire sale prices.
Appropriate in bankruptcy
Requires appraisal experts |
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|
Term
|
Definition
= estimates the cost to replace the firms individual assets today
doesnt account for growth opportunities or intangibles
may introduce subjectivity |
|
|
Term
|
Definition
number of securities outstanding* price
provides a floor for more comprehensive valuation |
|
|
Term
|
Definition
|
|
Term
|
Definition
Relatively consistent with industries
How does company's operating and financial profile compare to that of its peers with respect to growth prospects, operating margins, capital structure, product mix
Rarely find a pure play |
|
|
Term
| Transactions or deal multiples |
|
Definition
Multiple for completed deals
reflect the premium paid by succesful buyers |
|
|
Term
|
Definition
DCF provide a cash flow present value
Theoretical intrinsic value of company |
|
|
Term
|
Definition
Identify significant real asset options in the target firm
Use option valuation techniques to estimate firms value |
|
|
Term
|
Definition
| often avoids DCF and instead focuses on timing of entry/exit, financing rounds, and multiples of entry exit |
|
|
Term
|
Definition
| done to find range of likely value for the target |
|
|
Term
|
Definition
| explore how conclusions change with respect to change in one of the models assumptions |
|
|
Term
|
Definition
Net operating income(1-T) + Depreciation and amortization - changes in NWC - CapEx
= (NOI or EBIT) (1-T) + D - change in NWC - CapEx |
|
|
Term
|
Definition
| = Required cash + A/R + Inv - A/P |
|
|
Term
|
Definition
|
|
Term
Multiples approach to TV
Vt= |
|
Definition
|
|
Term
| Operating working capital= |
|
Definition
| Operating current assets- Non interest bearing current liabilities |
|
|
Term
| Operating current assets includes and excludes |
|
Definition
Includes: A/R, inventory, other operating CA like required cash, prepaid expense
Excludes: cash, marketable securities |
|
|
Term
| Non interest bearing liabilities includes exludes: |
|
Definition
Includes: A/P, other operating CL like taxes payable
Excludes: short term sources of funding like short term debt, the current portion of long term debt, and dividends payable |
|
|
Term
| Firm characteristics to consider when selecting comparables |
|
Definition
Business characteristics (eg products and product mix; geographical markets; customer profile)
Financial characteristics (size in terms of revenues and operating income; profitability; leverage) |
|
|
Term
| Identifying valuation benchmarks when using Comps |
|
Definition
determined by industry growth and phase
Common and widely used ratios like Enterprise val/rev, enterprise val/EBITDA, Equity P/E, etc
or industry specific benchmarks |
|
|
Term
| Main regulatory bodies of Antitrust laws |
|
Definition
| Department of Justice, Federal Trade Commission, and industry agencies |
|
|
Term
|
Definition
Section 1: prohibits mergers that would create monopoly
section 2: directed against firms that have already become dominant in the view of the government |
|
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Term
|
Definition
made price discrimination between customers illegal (unless bulk) and tying of contracts illegal
Made it illegal for company to acquire stock of another company if competition would be effected |
|
|
Term
| Federal Trade commission act of 1914 |
|
Definition
|
|
Term
| Hart Scott Rodino Act of 1976 |
|
Definition
Requires pre merger notification for firms of a specified size
info submitted to Doj and FTC to determine legality
Requires a waiting period of 30 days mergers and 15 days tender offers
Target firm must file within 15 days of the bidder filing
Agencies may request an extension of additional time to analyze
FTC currently reviews about 4% of deals and challnges about 2% |
|
|
Term
| Cross Elasticity of Demand= |
|
Definition
=% change in quantity demanded of good B/% change in price of good A
CE=0 no relationship
CE>1 elastic (substitutes in convergent market)
CE<1 inelestic (subs in separate markets) |
|
|
Term
| Herfindahl-Hirschman Index HHi= |
|
Definition
=sum of all ((Sales or output of firm i/total sales or output of market)*100)^2
00 indicates pure competition, 10000 monopoly
HHI<1500 unconcentrated market, no challenge
1500HHI>2500 Market highly concentrated challeng likely |
|
|
Term
| Target net assets acquired |
|
Definition
| Purchase price- Book equity |
|
|
Term
| Securities and Exchange act of 1934 |
|
Definition
Regulates exchanges and securities traded in public markets; includes insider trading laws
Firms with >$100M in assets and more than 50 shareholders are covered
Required filings: 10k, 10Q, 8K,(must be filed within 15 days of a major event. Proxy Solicitations-issued to shareholders prior to their vote. |
|
|
Term
|
Definition
Regulates Tender offers
-Buyers must file within 10 days of acquiring 5% or more of any public firm
-Buyer must disclose if the purpose of the share purchase is to mount a takeover of target and must reveal its business plan for the target
-Buyer offer to purchase shares must be open for 20 days before shares may be purchased
-All target shareholders must be treated equally (eg. on a prorated basis if offer is over subscribed)
-Shareholders may withdraw previously tendered shares any time while the offer remains open
-If another bid arrives during, the target must be given an additional 10 days to consider the alternative
-Cash offers are subject to the same anti fraud and registration requirements as stock offers |
|
|
Term
| Disclosure principles for M&A |
|
Definition
| Firms have a duty to update prevailing market expectations. Frims must disclose events that are material and likely. |
|
|
Term
| Policies firms can adopt a policy for disclosing information |
|
Definition
"No Comment"- can say this but they cant deny existence of merger talks
"Commit and Disclose"- They must either keep info secret so no leaks occur or fully disclose info. Some firms avoid writing letter of intent to avoid being compelled to make an earlier disclosure; most of the time when we see the press release about a deal, the legally binding definitive agreement for the transaction has been signed by both sides.
"Abstain or disclose"- Firms and their insiders must abstain from trading the shares or fully disclose the information. |
|
|
Term
|
Definition
| a "presumption that in making a business decision the directors or a corporation acted on an informed basis, in good faith and in honest belief that the action taken was in the best interest of the company. However, this presumption is lost if a director has a personal interest in the transaction (eg. insider such as the CEO); in this case, votes should be made only by disinterested directors. |
|
|
Term
| Smith vs. Van Gorkum 1985 |
|
Definition
| Target directors should make best efforts to inform themselves of fairness of offers (eg. obtain a fairness opinion), decisions should not be tainted by self-interest and directors should treat all bidders fairly |
|
|
Term
| Unocal vs. Mesa Petroleum 1985 |
|
Definition
| Target directors have the right to take defensive actions in order to preserve the target company |
|
|
Term
| Revlon vs. Pantry Pride 1986 |
|
Definition
| If target directors decide to pursue a sale of their company (ie. change in corporate control), then they must attempt to maximize shareholder value, and may not take defensive steps to thwart hostile bidders |
|
|
Term
| Paramount communications vs. Time 1990 |
|
Definition
| The supreme court of delaware decided that stock for stock deal doesn't constitute a change in corporate control; therefore, target directors may accept a lower stock offer if they believe it would produce superior long term value |
|
|
Term
| Paramount Communications vs. QVC Network 1993 |
|
Definition
| Even without a technical change in control trigger, target directors must still attempt to maximize the offer that they recommend |
|
|
Term
| Defense tactics work by influencing... |
|
Definition
| 1) speed of closures, 2) costs to the buyer, and/or 3)perceptions of certainty for the investor |
|
|
Term
| How can defense tactics create shareholder value |
|
Definition
While often controversial they can create shareholder value by giving the target time to respond, and negotiating power to secure a higher valued deal in the event that they do sell.
For target managers who believe the firm would perform better as an independent, takeover defenses give management time and protection to pursue and realize value creating internal strategies |
|
|
Term
| Governance structure in takeovers |
|
Definition
Whether the defense tactics create or destroy value or the seller depends largely on the target firms governance structure.
Firms with strong governance structures and well aligned managerial incentives use defense tactics to secure a better offer or put in place a higher valued strategy for their shareholders
Firms with weak governance structures often use defense tactics to entrench poorly performing managers |
|
|
Term
|
Definition
[P(S)(Intrinsic Value-Price-Transaction costs)]-[(1-P(S))Transaction Costs]
P(S)= probability of successful takeover
Bidders should attack if payoffs to bidding are > 0 |
|
|
Term
|
Definition
1. Purchase shares directly in open market
2. Offer directly to target board with or without a public announcement of the offer.
3. "Tender offer" directly to shareholders
4. Challenge the target's defenses through litigation |
|
|
Term
| Target defense strategies |
|
Definition
The basic idea of takeover defense is to reduce the acquirer's payoffs to bidding (recall the equation on the previous page) by:
1. Reducing probability of a bidders success
2. Decreasing perception of the intrinsic value of target
3. Raising the price paid
4. Increasing transactions costs |
|
|
Term
|
Definition
| defenses put in place in advance of an actual offer; aimed at discouraging attack by all bidders; they do not discriminate among potential bidders |
|
|
Term
|
Definition
| including features in a definitive agreement with one bidder that are intended to make it more costly for a competing bidder to enter |
|
|
Term
|
Definition
| direct responses to a specific hostile bidder or the characteristics of a specific bid |
|
|
Term
| Types of proactive defenses |
|
Definition
1. Charter amendments
2. Reincorporation
3. Golden Parachutes
4. ESOPs and Labor Agreements
5. Poison Puts
6. Poison Pills: The ultimate takeover defense |
|
|
Term
|
Definition
Changes to the firms corporate charter that limit an attackers ability to take over the firm
Obtained only through shareholder vote
Four main types:
1. Classified or staggered board
2. supermajority provision- specifies that change of control events must be approved by an extra large majority of votes
3. Fair price provision- specifies that all selling shareholders must receive same price in a takeover bid
4. Dual class recapitalizations- creates two classes of stock with different voting rights |
|
|
Term
|
Definition
Some states have stronger anti takeover laws on the books so one defense is becoming incorporated in those states.
Announcement of these types of moves are met with mildly negative share price reaction since they have the potential to entrench managers.
Limitation- state laws can be in direct conflict with federal regulations |
|
|
Term
|
Definition
| Generous severance payments to target management in the event of a change of control event. Dont require a shareholder vote. |
|
|
Term
| ESOPs and Labor Agreements |
|
Definition
| Deploying retirement funds into the firm's own shares creates a large block of insider ownership; the CEO acts as the trustee of the ESOP in voting the unvested ESOP shares against an unsolicited offer. Agreements with the labor union may put a union representative on the target's board |
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|
Term
|
Definition
Rights given to bondholders that give them the right to redeem their bonds at a premium price in the event of a change of control event
Deters bids by forcing the bidder to arrange alternative financing and to pay a premium for the firms outstanding debt. |
|
|
Term
|
Definition
| Since the first poison pill in 1982, no pill had ever been triggered by any hostile bidder until 2009. A combination poison pill/ staggered board defense is particularly powerful since the pill isnt then subject to being rapidly overturned in a proxy fight. Since the board has the power to rescind the pill, it encourages the bidders to negotiate with the board |
|
|
Term
| Mechanics of the Poison Pill |
|
Definition
Shareholder Right to obtain common shares at a nominal cost upon the occurance of a triggered event
a triggered event is the acquisition of a certain number of shares without prior consent of the target's board
An interested person is not allowed to exercise this right
The board may redeem the shareholder rights at anytime prior to a triggering event and for 10 days after a negligible price |
|
|
Term
|
Definition
| a flip over provision entitlesthe holders of the rights to purchase common shares of the merged company at the exercise price- these apply after the interested party has gained voting control and attempts to merge the target into the buying firm. |
|
|
Term
|
Definition
| A flip in provision entitles the holders of the rights exercise price which is a discount to the stock price |
|
|
Term
|
Definition
| an offer that the target board chooses to exempt from the plan; thus boards have discretion to declare given a given offer as friendly (ie. qualified) or hostile (subject to the poison pill) |
|
|
Term
|
Definition
| requires that only a majority of 'continuing directors' (those in office when pill was adapted) can redeem the rights after a change of control- so that even if a board was replaced in a proxy battle, the new board wouldn't have the authority to redeem the rights |
|
|
Term
|
Definition
| is one that 'dissolves' upon receipt of a very high bid (a specified premium above the current share price); this is intended to remove the possibility of a board holding out against an offer that shareholders would almost certainly endorse |
|
|
Term
|
Definition
1. Termination fees
2. Toehold stakes
3. Asset Lockups
4. Stock Lockups |
|
|
Term
|
Definition
A significant payment to an unsuccesful bidder (about 3.5% of deal value on average)
They act to encourage bidders to incur bidding costs
They deter "nuisance" bids just a small amount above the original offer
They dont appear to be management entrenchment devices since deals with termination fees are more likely to be consummated and with plum takeover premiums that are about 4% higher than deals without termination fees |
|
|
Term
|
Definition
| Allowing the friendly bidder to acquire target shares, possibly in excess of the poison pill trigger |
|
|
Term
|
Definition
Agreement to sell certain key assets (crown jewels) to the friendly bidder in the event that a competitor succesfully acquirers the target
These defenses have virtually disappeared as they have tended not to survive judicial scrutiny |
|
|
Term
|
Definition
| Agreement to sell the friendly bidder additional shares of the target in the event the competitor wins the bidding |
|
|
Term
|
Definition
1. Litigation
2. Regulatory and or legislative protection
3. Counter tender offer
4. Financial restructuring
5. Asset Restructuring
6. Alternative buyers
7. Going private transactions/LBOs/MBOs
8. Greenmail |
|
|
Term
|
Definition
Raises transactions costs for the buyer and delays the deal. Possible claims include:
a) Violation of sect 13d- by not promptly disclosing a share interest >5%
b) Failure to comply with tender offer disclosure requirements
c) Use of inside information and or breach of confidentiality agreements
d) a purchase program that is equivalent to a tender offer eg. a buyer who approaches a number of key target shareholders with individual offers
e) violation of antitrust laws or rules of regulated industies |
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Term
| Regulatory and or legislative protection |
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Definition
Successfully lobbying state legislators to enact anti takeover laws that are favorable to the target firm
Succesful lobbying regulatory agencies such as the federal communications commission to prevent a merger |
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Term
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Definition
A target makes its own bid for the potential acquirer
Rarely used since target firms are generally much smaller than acquirers and lack the financial capacity to bid for their attacker
This requires arguing that the merger is strategically sound, but that target management should retain control |
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Term
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Definition
These can be either reactive or proactive:
-Aimed at either increasing insider ownership, financial monitoring/disipline, and share price of the target firm. Examples:
1) Share repurchase- a "self tender" that increases leverage and ROE for the target; often a way to use up excess target cash that the bidder is counting on acquiring in the deal
2) Leveraged Recap- borring heavily and using the proceeds to pay out a special dividend to or repurchase shares from target shareholders. |
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Term
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Definition
-These can either be proactive or reactive
-Dispose of assets through divestiture, spin off, or complete liquidation
-May alter the atractiveness of the target to the buyer. eg a crown jewel asset sale
-May increase target share price by deploying unused assets to their highest valued owner
-May provide cash to fund other defenses, such as special dividends, share repurchases, or greenmail |
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Term
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Definition
-"White Knight"- a friendly buyer that is willing to outbid the hostile acquirer
-"White Squire"- a friendly buyer that acquirers a large block of target stock (often preferred shares), but does not take control of the target; the "white squire" often receives a seat on the board and generous dividends in exchange for voting their acquired shares with management in opposition to the takeover bid |
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Term
| Going Private transactions/LBOs/MBOs |
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Definition
| Creates target value by providing debt tax shields, eliminates regulatory costs faced by public firms, and creates incentives for improving operating efficiency |
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Term
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Definition
-A targeted repurchase of shares at a premium price; the repurchase offer goes only to the potential acquirer to purchase their toehold shares and is generally accompanied by a standstill agreement where the potential acquirer agrees not to purchase any more target shares or to otherwise engage in change of control activity aimed at the target for a specified time period.
-Of dubious ethical value, this defense is often criticized by shareholders who dont receive the offer since the cash to pay the premium price to the corporate raider comes from the value of the remaining shares.
-Firms sometimes adopt anti-greenmail charter amendments that prohibit their managers from engaging in targeted repurchases without majority approval by the non-participating shareholders
-Greenmail payments are upheld in some state courts (eg. Delaware) and viewed as a breach of the boards fiduciary duty in others (eg. California) |
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Term
| What kind of firms does private equity focus on? |
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Definition
Firms with predictable cash flow.
VC focuses on high growth start ups that tend to be more volatile |
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Term
| Private equity exit percentages |
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Definition
14% exit IPO
24% secondary buyout
38% strategic buyers
6% bankrupt |
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Term
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Definition
| Transformation of public company into privately held firm |
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Term
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Definition
| purchase of a company by small investor group using high percentage of debt financing |
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Term
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Definition
| an LBO executed mainly by the firm's managers |
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Term
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Definition
-Investors are outside financial group and/or managers or executives of company
-Results in significant increase of equity share ownership by managers |
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Term
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Definition
| Need to get best price for buyout |
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Term
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Definition
| entertain competing bids from other firms |
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Term
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Definition
-Financial buyer purchases company using high level of debt financing
-Financial buyer may replace top management
-New management improves operations
-Financial buyer makes public offering of improved firm |
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Term
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Definition
GP: General Partners- Managers
LP: Limited Partners- Provide funds
ex. Hedge funds, fund of funds, university endowments, insurance companies, Pensions, wealthy individuals |
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Term
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Definition
-Management fees- 2% funds under management
-Carried interest-20% to GP's of money from selling |
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Term
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Definition
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Term
| How do PE firms create value? |
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Definition
Cost of Capital change through cheaper financing
interest tax shield
Operating Improvements |
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Term
| Huntsman corporation buyout by Apollo Management, announced July 3, 2007 |
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Definition
-$10.0 billion EV
-Agreement contained a $325mm RTF(3.25%); no financing condition; target S.P. permitted if debt financing available (but ambiguous wording)
-Weak credit market conditions; poor target performance
-Courts ordered Apollo to "specifically perform" the transaction
-Bidder and the financing banks eventually terminated agreement and under a settlement agreement, paid $750mm in dages and purchased $250mm in target's convertible senior notes |
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Term
Valuation of LBOs
Key issue |
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Definition
leverage ratio changes over time
-basic DCF method: must recalculate WACC to reflect leverage changes |
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Term
Valuation of LBOs
Adjusted Present Value APV |
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Definition
-Free Cash flow is calculated as in DCF method
-Interest Tax shield is calculated as actual tax rate times interest expense
-FCF discounted at cost of equity of an unlevered firm
-TS discounted at the before tax cost of debt
Many firms use IRR analysis to compare investment return vs. hurdle |
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Term
| When to file for Chapter 11 |
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Definition
| If more valuable as an ongoing concern |
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Term
| When to file for chapter 7 |
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Definition
| If liquidation value exceeds PV(FCFs) |
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Term
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Definition
1) "Automatic Stay"-prevents secured creditors from seizing firm's collateral
2) Firm may continue operation while attempting to restructure
3) Firm may obtain new debt financing- "DIP"- debtor in possession
4) "Absolute Priority" rule- value must be distributed according to the legal priorities (seniority) of all stakeholders |
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Term
| Alternative plans that creditors may propose in reorganizations must: |
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Definition
-must satisfy "best interest of creditors" test:
-every claimholder receives value greater than or equal to what they would receive in liquidation.
-May deviate from absolute priority rule
-Bankruptcy judge must approve the final reorganizational plan |
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Term
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Definition
Bankruptcy judge must approve final
Must be approved by 2/3+ in value and 50%+ in number of creditors in each impaired class.
If all classes approve then call this a consensual reorg; if not then plan may still be approved by a judge through a cram down
Process can take many months |
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Term
| "prepackaged" bankruptcy filing: |
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Definition
| firm simultaneously files for bankruptcy and submits a plan or reorganization that has been previously negotiated with claimholders |
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Term
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Definition
submit to the bankruptcy court an asset purchase agreement between selling firm and prospective buyer
-if approved by court any remaining unpaid claims after sale are cleared
-Court typically requires a competitive bidding process; original "stalking horse" bidder receives termination fee if not the winning bidder |
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Term
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Definition
If liquidation value of firm's assets exceeds value of firm as an ongoing concern, then file for chapter 7 bankruptcy (some firms start out in chapter 11, then move to chapter 7)
-sell oiff all assets pay creditors according to their priority status
-If anything left over, pay to equity holders (usually $0) |
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Term
| Payment priorities in liquidation |
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Definition
Cash from sale of assets (not pledged as security/ collaterall for any debt)
-fees and expenses of bankruptcy proceedings
-Wages due to workers
-Taxes due
Cash from assets secured as collateral
-Pay secured debt eg. mortgage claims
Remaining cash
-Apply to claims of general creditors (x% to each)
-Subordinated debt gives x% to senior debt first
-Residual claimants: equity holders |
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Term
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Definition
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Term
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Definition
| (E/E+D)ke + (D/D+E)kd(1-T) |
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Term
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Definition
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Term
| Advantages of stock purchase |
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Definition
Avoid taxable transaction for target shareholder
Less documentation needed |
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Term
| Disadvantages of stock purchases |
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Definition
Risk of unknown liabilities
-take on baggage that may pop up down the road
ex. abspestos purchases |
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Term
| Advantages of asset purchases |
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Definition
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Term
| Disadvantages of asset purchases |
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Definition
-Buyer can not bring on any operating losses or tax advantages
-licenses, franchises, pattens arent allowed to be transfered |
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Term
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Definition
| cant have asset purchase that looks like stock purchase but gets rid of liabilities |
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Term
| Characteristics of a cash deal |
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Definition
-Target shareholders exchange shares for cash payment
-Typically results in a taxable transaction |
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Term
| Characteristics of a stock deal |
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Definition
-Firms negotiate a ratio of acquirer shares to exchange for target
-Market risk high- target shareholders lose if acquirer stock value falls |
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Term
| Characteristics of a Stock with collar deal |
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Definition
- 25% of stock deals use collars to decrease risk
Many types of collars:
-specify dollar amount
-Fixed dollar amount within a max and min
- fixed stock ratio within a max and min |
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Term
| What are some implications for buyer shareholders of using stock to finance a deal? |
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Definition
| Dilutes ownership claim of old stockholders. Div payments must increased to keep unchanged. |
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Term
| What are some implications of using cash or debt to finance a deal? |
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Definition
Increase leverage of firm- reducing cash or more debt added
Reduce future financial flexibility, less cash |
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