M&A: Financial Perspectives - Lecture 1 Notes

Mergers and Acquisitions: Financial Perspectives - Lecture 1

Importance of Corporate Restructuring

  • Corporate restructuring is a crucial instrument for macroeconomic renewal.
  • It is unavoidable; firms cannot simply "opt out" of it.
  • Corporate restructuring can be viewed from multiple perspectives:
    • Strategic
    • Legal
    • Taxation
    • Cultural
    • Psychological
    • Practical

Problem Setting

  • The course focuses on corporate restructuring decisions from a financial perspective, specifically shareholders’ interest.
  • The course begins with Mergers and Acquisitions (M&A) and then expands to other restructuring decisions.

Recent Corporate Restructuring Announcements Examples:

  • M&A: JetBlue acquired Spirit for 3.83.8 billion (July 28, 2022).
  • Divestment: Petrobras' Albacora divestment in Brazil is on hold (July 29, 2022).
  • Spin-off: EY plans to spin off its audit business (May 27, 2022).
  • Joint Venture: EU Commission cleared the joint venture by Evonik and ACC (July 29, 2022).
  • Strategic Alliance: ISS announced a strategic alliance with Zeeboat(TM) for maritime decarbonization projects (July 29, 2022).
  • Franchise: Wahlburgers plans to open more stores in Sydney (July 31, 2022).

Global M&A Deal Activity in Q3 2022

  • Decline in global M&A deal activity.
  • A graph shows deal value and deal count from Q1 2017 to Q3 2022.
  • Significant increase in M&A activities in 2021 due to low-interest rates.

M&A: A Controversial Topic

  • In Favor:
    • Critical to healthy expansion of business firms.
    • Increase value and efficiency.
    • Move resources to optimal uses.
  • Opposed:
    • No improvements subsequent to the acquisition.
    • Redistribution of wealth from employees and other stakeholders to shareholders.
    • Speculative activity.
  • Nationalistic Perspective: Kraft acquisition of Cadbury (worry of change in recipe).

Lecture Outline

  • Introduction to the course.
  • M&A terminology.
  • Strategic aspects of M&A.

Course Knowledge Objectives

  • Confidently use typical M&A-related terminology (e.g., tender, merger arbitrage, synergy).
  • Understand the motives for various corporate restructuring activities and realize that M&A might not be the best corporate restructuring alternative for all firms.
  • Understand the determinants of M&A waves (hot and cold markets) and assess the impact of macroeconomic shocks on deal volumes and structures.
  • Predict the shareholder wealth effects of various corporate restructuring activities.
  • Understand the determinants and shareholder wealth effects of M&A deal design aspects (financing with stock vs. cash, takeover devices).

Course Skills Objectives

  • Apply basic corporate valuation techniques.
  • Form and defend an opinion on whether a particular (recent) M&A deal “makes sense” and what criteria should be used for such judgment.
  • Critically evaluate research related to corporate restructuring.
  • Assume the role of M&A process participants (e.g., consultants, company CEOs) and evaluate M&A proposals from these different angles.

Course Delivery

  • Delivered through lectures (22 hours) covering theories, concepts, empirical evidence, and exercises.
  • Attendance is mandatory.
  • Prepare for each lecture by reading assigned reading materials.
  • Take notes during the lessons to help you focus.

Lecture Breakdown

  • Lecture 1: Overall introduction and foundation for further, more specialized lectures.
  • Lectures 2 to 5: Overview of theories and empirical findings regarding the timing, motives, and shareholder wealth effects of corporate M&A deals.
  • Lectures 6 to 7: Alternative forms of corporate restructuring e.g., divestitures, joint ventures, and alliances and their shareholder wealth effects.
  • Lectures 8 and 9: Corporate valuation techniques.
  • Lecture 10: Merger arbitrage techniques and their effects on stock prices.
  • Lecture 11: Revision of the material.
  • Marie Dutordoir teaches lectures 1 to 5, Paul Simpson teaches lectures 6 to 10.
  • Joint revision session (lecture 11).

Course Materials

  • Lecture sheets (Blackboard).
  • Lecture notes (your own).
  • Core text: Takeovers, restructuring, and corporate governance, 4th edition by Weston, Mitchell and Mulherin.
  • Case study: Inbev takeover (Blackboard).
  • All materials are relevant for the exam.

Academic Articles

  • Discussing academic results enables you to:
    • Critically evaluate any empirical evidence presented to you (underlying assumptions, methodology, findings).
    • See the bigger picture (what does recent top-notch research tell me about the decision I am about to take?).
    • Evaluate the practical implications of academic evidence (what does it mean for my business?).
    • Focus on key insights and implications, not on details.

Exam Information

  • On-campus, 2-hour exam at the end of the second semester.
  • 15 multiple-choice questions (30% of the exam mark).
  • 2 open questions (to be chosen from 3 open questions) (70% of the exam mark).
  • Exam questions change each year; use previous exams as a guideline only.
  • Give your opinion on something and justify it.

Summative Assessment

  • Non-marked.
  • Post on Blackboard by Tuesday, 9 am before each lecture.
  • General feedback in the next class.
  • Open and/or multiple-choice questions.

Questions

  • Preferred: Blackboard Discussion Board.
  • Online office hours: Thursdays, 9 to 10 am via Zoom (ID 7612764174).
  • In-person appointments: email marie.dutordoir@manchester.ac.uk.
  • Rules for in-person appointments:
    • Arrive on time (room 4.025 AMBS building).
    • Ten-minute slots, so have your questions prepared.
    • No replacement for attending lectures.
    • No additional “insider information” regarding exam can be obtained by booking appointments; all students are treated equally.

M&A Terminology

  • Merger:
    • Negotiated deals.
    • Mutuality of negotiations.
    • Mostly friendly.
  • Tender Offer:
    • Offer made directly to a firm’s shareholders to buy their shares for a given price.
    • Hostile when the offer is made without the approval of the board.
  • Acquisition:
    • All of the above. Basically any deal.
  • Corporate Restructuring:
    • Changes to improve firms’ operations, policies, and strategies.

Types of Mergers

  • Horizontal Mergers:
    • Between firms in the same business activity.
    • Rationale:
      • Economies of scale and scope.
      • Synergies.
    • Government regulation due to potential anticompetitive effects.

Types of Mergers

  • Vertical Mergers:
    • Combinations between firms at different stages.
    • Rationale:
      • Improve information
      • Lower transaction costs.
      • Reduce lock-up problems
    • Can create a loss in economic discipline like contractual cost, negotiation cost, time loss, etc.

Vertical Mergers

  • As markets became more sophisticated and globalized, traditional justifications for vertical mergers fell away.
  • However, a growing number of companies, especially in IT, are reverting to more vertically integrated structures.
  • Reasons for the rebound of vertical integration include:
    • Simplicity: customers want well-integrated products (e.g., Apple).
    • Efficiency: reducing transaction costs (e.g., Tesla).
    • Build a relationship with customers (e.g., Amazon and Netflix).
    • Need for speed (e.g., Zara).
    • Geopolitical uncertainty and the environment (e.g., Ferrero, Ikea, Disney).

Vertical Mergers

  • Antitrust authorities are no longer considering vertical mergers as benign and are increasingly wary of competition concerns.
  • e.g., New Vertical Merger Guidelines released by the US Department of Justice on June 30, 2020.
  • Example: The Facebook-Giphy blocked merger in 2020.

Types of Mergers

  • Conglomerate Mergers:
    • Firms in unrelated business activities.
    • Rationale:
      • Diversification.
      • “Good managers can manage anything.”
    • Some successful examples of diversification include Apple and Amazon.
    • Unsuccessful examples include Harley Davidson’s fragrance, Virgin Cola, and Google Glass.

Strategic Aspects of M&A

  • Nature of Strategy:
    • Defines the long-term plans, policies, and culture of an organization.
    • Strategic planning is a dynamic process that requires inputs from all segments of the organization.
    • Acquisition and restructuring policies and decisions should be part of the company's overall strategic plans and processes.
    • Ultimate responsibility for strategic planning resides in the top executive group.

Corporate Restructuring - Strategic Aspects

  • Examples of companies and their strategies were given during this lecture.
    • Low cost airfare → No meals, quick turnaround.
    • Made-to-order computers → Supplier system, online ordering.
    • Online retailing → Low inventory, no retail facilities.
    • Convenient/predictable coffee experience → Many products, good locations.
    • Rural area department stores → Low prices, inventory controls.

Strategic Aspects of M&A

  • Classic Successful Strategies:
    • Low-Cost Leadership: Create a sustainable cost advantage over competitors.
    • Differentiation: Distinguish the firm through innovation, product quality.
    • Focus or Specialization: Find and dominate a market niche.
    • Don’t get stuck in the middle!

Corporate Strategic Planning

  • The three key steps in corporate strategic planning include the development of:
    • A mission or vision
    • A set of strategic objectives
    • A set of tactics

Strategic Aspects - Setting Strategy

  • Setting strategy begins with the definition of a mission or vision i.e., a statement describing the main objectives of the organization
  • Examples of mission statements:
    • “To entertain the world”
    • “To give people the power to build community and bring the world closer together”
    • “We're empowering communities to use energy efficiently, supporting households in need and helping to build skills for a bright future.”
    • “To reimagine the way the world moves for the better”
    • “To create a better everyday life for the many people”
    • “We will be recognized globally for the excellence of our people, research, learning and innovation, and for the benefits we bring to society and the environment.”

Translating Vision into Objectives

  • The mission or vision then needs to be translated into strategic objectives, i.e., very generic goals
  • For example, Ikea’s strategic objective (or “business idea”) is:
    • “To offer a wide range of well-designed, functional home furnishings at prices so low that as many people as possible will be able to afford them”

Strategy Implementation - Tactics

  • Tactics are specific actions to implement the strategy, for example
    • Expand the firm through organic or inorganic growth
    • Divest segments of the firm
    • Cooperate with other firms through licensing agreements

Analytical Tools for Strategic Planning

  • SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats
  • BCG’s Experience Curve Analysis: Cost per unit declines exponentially as cumulative production increases.
  • BCG’s Product Life Cycle Concept: Development, growth, maturity, decline.

BCG's Growth-Share Matrix

  • A four-cell matrix is displayed with the following factors:
    • STARS: High Industry Growth Rate & High Relative Market Share.
    • QUESTION MARKS: High Industry Growth Rate & Low Relative Market Share.
    • CASH COWS: Low Industry Growth Rate & High Relative Market Share.
    • DOGS: Low Industry Growth Rate & Low Relative Market Share.

Porter’s Five-Factor Model

  • Economic attractiveness of industry depends on:
    • Barriers to entry.
    • Customer power.
    • Supplier power.
    • Threat of substitutes.
    • Rivalry conduct.

Conclusion

  • Introduction to the course and its learning goals.
  • Foundations for future lectures by discussing key M&A terminology and drivers.
  • M&A should be rooted in sound corporate strategy.
  • Next week: the timing of M&A (overview of M&A waves through history) and the theoretical motives for M&A.

Assignment Questions

  • Elon Musk's acquisition of Twitter:
    1. What type of deal is this: horizontal, vertical, or conglomerate?
    2. What was Elon Musk’s motivation for this deal? (Consult media sources).
    3. How do you think Tesla’s and Twitter’s shareholders reacted to this deal?
    4. Apply Porter’s five-factor model to the social media industry.