Matching Pairs M and V 3Online version mergers and valuations by alex kellett 1 Merger Cycle 1 2 Why TAPP 3 3rd wave: Subprime aka 4 Gearing ratio 5 Merger cycle 4 6 Merger cycle 3 signature event 7 Merger success: selling company 8 Merger Cycle 2 9 Merger cycle 3 10 Merger cycle 4 signature event 11 Merger Monday 12 Merger phase 1 13 Qualitatives 14 A 25% phase 4 APP 15 Event studies 16 Merger Success: Dealmakers, bankers, advisers etc. 17 White Knight 18 Merger phase 2 19 Revenue synergies 20 Merger Phase 4 21 Merger cycle 1 signature event 22 Merger Phase 3 23 Merger Cycle 2 signature event 24 Epstein 25 Merger success from the perspective of continuing major shareholders 26 MergVal CF and synergies remain constant/increase very gradually during an M&A cycle but share price may triple. It better illustrates the importance of anticipatory purchase premium on APP (financial >%) Universal Banking (Travelers/Citicorp). led to repeal of US Glass-Steagall Law. (Deregulation spurred merger activity) Commercial banks chasing IP profit and prestige. Facebook and LinkedIn IPOs Financial Times: 13.01.2014. 'The date it is safe to do mergers again'. 3 major acquisitions announced on this date. typically allows subsidiary company to run their own operations (preserves subsidiary structure). They agree to limit their role to providing financing and developmental support as needed. (15% conglom discount) 5 year min ownership position. reflects primacy of the party putting up risk capital: RMT: a) returns vs cost of capital. b) The deficit (APP) vs the pv of conservatively and independently determined NRS. RJR Nabisco Acquisition Netscape and Worldnet IPOs Late cycle deals often over 100% APP until: increasing failures; declining target quality + reduced merger financing cause exhaustion peak Financing more available as overall M&A vol grows. APP = 20-35% Countrywide financial acquisition evaluated on a cash flow effect basis only (as with all syn). % of long term debt to total capital. The after tax cost of equity is 2-2.5 times that of debt. WACC Merger boom legitimised, laggards criticised. Catch up deals. APP% quickly over 50%. Share prices of target are always expected to increase following a serious bidder's EOI. This usually corresponds to a near-exact matching decline in the share price of acquirer (pay control premium) RMT. narrow self-interest. close as many deals as possible (deal flow and financial volume). No fee unless deals close; only min legal and no financial liability for value-destructive merger advice. December 2011-19: Megaboom economy still perceived as in recession by many. A few 1-2 year cash paybook deals. APP 10-18% qualitative. Only one subject: Chase/Bank one merger evaluators who solely rely on subjective criteria 1996-00: Dot Com 1 1982-90: LBO may be equiv to 3x the financial APP as the comparable %APP consummated in Phase 1 reflecting the synergy vs premium principles of modern best practice merger valuation (VG and IVE) Sellers seek to maximise the pv of cash equivalent returns over the period at which the board deems the company eligible to entertain offers (eg 6 months). (AMS: bidders + rounds) 2002-08: Subprime
