Lecture'1:'

Introduc.on'to'Mergers'and'
Acquisi.ons
Interna'onal*Company*Law*
Prof.*Joseph*McCahery*

Road*Map*
Deni&ons)
M&A*waves*in*worlds*history*
How*does*M&A*process*create*value**alterna've*perspec'ves*

2*

Deni'ons*
1. MERGER*
Two*(or*more)*corpora'ons*come*together*to*form*one)new)en&ty.***
The*acquirer*assumes*all)assets)(that*can*legally*be*transferred)*and*all)liabili&es.*
*
*
They**are*nego&ated*deals.***
Very*likely*to*be*friendly.***
Closing*likely*to*take*5*months.*

3*

Deni'ons*
1. MERGER*
Mergers*require*the*approval)of)both)management)teams/boards)before*
stockholders*vote.***
Big)mergers)require*the*approval*of*the*acquirers)shareholders)if*stock*is*to*be*
issued.*
Some'mes*this*can*be*avoided*using*a*triangular*merger*(i.e.,*acquirer*creates*a*
whollyUowned*subsidiary*which*in*turn*makes*the*acquisi'on).**WhollyUowned*
subsidiaries*are*also*used*to*limit*poten'al*liability.**

They*are*notEtaxable)events*for*the*target*shareholders*(unless*they*later*sell).*
The*shareholders*of*the*combining*rms*oWen*remain*as*joint*owners*of*the*
combined*en'ty.*
4*

Deni'ons*
2. ACQUISITION*
One*rm*purchases*the*assets*or*shares*of*another*(target).*
The*shareholders*of*the*target*cease*to*be*owners*of*that*rm.*
The*target*becomes*a*subsidiary*of*the*acquirer.*
They*usually*take*the*form*of*a*public)tender)oering.*
A*successful*acquisi'on*oer*made*directly*to*a*rms*management*is*a*
friendly)takeover.*

5*

Deni'ons*
3. TAKEOVER*
Generic*term.**Includes*both*mergers*and*tender)oers.**The*bidder*in*a*
takeover*purchases*the*assets*or*shares*of*a*target*rm.*
In*a*hos&le)takeover,*the*bidder*makes*a*tender*oer*for*the*shares*of*the*
target*without)the)consent)of)its)management.*
They*oWen*involve*a*purchase*of*stock*through*a*tender)oer.*
Unlike*mergers,*hos'le*takeovers*do)not)squeezeEout)minority*shareholders.**This*
requires*a*cleanUup*(or*backUend)*merger*aWer*the*target*has*gained*control.**

6*

Deni'ons*
4. TENDER)OFFER*
The*bidder*makes*a*direct)oer)to*the*targets*shareholders*to*buy*their*shares*
at*the*oer)price)on*a*given*date.**
Cash*is*typically*oered.***
Avoids*registra'on*requirements*for*securi'es*and*li'ga'on*over*value*of*securi'es.*
Else,*they*are*called*exchange)oers.*

They*are*taxable)events)for*the*target*shareholders.*
The*bidder*is*typically*under)strong)pressure)to*complete*the*transac'on*
quickly*before*compe'ng*bidders*are*able*to*respond.***

7*

Acquisi'on*approaches*
a) Friendly)approach.)
Bidder*informally*approaches*target*with*a*view*towards*a*nego&ated)
transac&on.*
An*immediate*issue*is*whether*the*bidder*will*sign*a*stands&ll)agreement*
preven'ng*the*bidder*from*pursuing*the*target*except*on*a*friendly*basis.*

b) Bear)hug.)
Write*a*le[er)with)formal*acquisi'on*proposal)to*the*board*of*the*target.*
Used*if*the*friendly*approach*is*inappropriate*or*aWer*an*unsuccessful*friendly*
approach.*
The*company*is*put*into*play*U*riskUarbitrageurs*step*in.***

c) Hos&le)approach.)
Proxy*ghts**
Tender*oers*

8*

Acquisi'on*approaches*
! Proxy)Fights))types:)
Dissident*or*insurgent*group*seek*to)gain)board)representa&on)with*the*intent*
to*gain)control)(common*in*the*70s).*
Dissident*seek*control*to*reorganize)or)restructure)the*company*(merge*with*
other*company,*divest*assets*or*accept*tender*oer;*common*in*80s*&*90s).*
For*example,*Kerkorians*fought*against*Chrysler*to*force*it*to*distribute*cash*as*a*
dividend.*(Ul'mately,*Chrysler*was*acquired*by*DaimlerUBenz).***Similarly,*Icahn*
forced*RJR*to*split*its*food*and*tobacco*business.*

Dissident*might*submit*a*shareholder*proposal*opposing*a*management*
proposal*(e.g.,*authoriza'on*of*common*stock,*an'takeover*charter*
amendment,*or*merger).*

9*

Acquisi'on*approaches*
! Proxy)Fights)
Have*been*replaced)by)tender)oers)as*the*main*mechanism*to*change)the)
control)of*a*corpora'on.*
Around*20*proxy*contests*per*year*in*the*US.*
Even*less*common*in*other*countries.*
Dissident*bears*en'rely*the*cost*of*waging*a*proxy*ght.*
Management*can*use*the*corporate*treasury*to*oppose*the*dissident*and*to*
conduct*li'ga'on.*
Dissident*only*gains*on*the*frac'on*of*the*stock*owned*(freeUrider*problem).*

Increasingly*proxy)ghts)are*used*in)conjunc&on*and*as*a*complement*to*
tender)oers.*
Gain*control*over*the*targets*BOD*and*approve*merger;*and/or*
Eliminate*takeover*defenses.*
10*

Road*Map*
Deni'ons*
M&A)waves)in)worlds)history)
How*does*M&A*process*create*value**alterna've*perspec'ves*

11*

First*three*US*merger*waves*(1890**1978)*

12*

Historic*overview*of*M&A*waves*
1. Merging)for)monopoly)(1890))1905))
2. Merging)for)oligopoly)(1920s))
3. Merging)for)growth)(1960s))
4. Acquisi&ons)and)divestures)(1980s))
5. Fihh)wave)(1990s))
6. Millennium)wave)(2000s))

13*

Historic*overview*of*M&A*waves*
1. )Merging)for)monopoly)(1890))1905))
Was*reached*during*a*period*of*massive)economic)expansion)*industrial*
produc'on*has*grown*by*100%*
This*wave*involved*~15%*of*all*economys*assets*in*the*US*
Simultaneous*consolida&on*of*producers*within*industries*(qualied*as*
Horizontal)consolida&on)*
By*mergers*about*71*oligopolis'c*industries*were*converted*into*(almost)*
monopolies)
WellUknown*examples:*American*Tobacco,*Eastman*Kodak,*DuPont,*General*
Electric**all*of*them*were*formed*through*the*series*of*consolida'ons*
As*a*result,*1800*companies*disappeared*during*consolida'ons*

14*

Historic*overview*of*M&A*waves*
2. )Merging)for)oligopoly)(1920s))
Emerged*aWer*the*First*World*War*
This*wave*involved*~7U9%*of*all*manufacturing*assets*and*employees*in*the*US*
Aected*by*an'trust*enforcement*(1890*Sherman*Act,*1914*Clayton*Act)*and*
public*concern*about*the*power*of*monopolies*across*industries*
As*a*result**forma'on*of*strong)compe&tors)for*exis'ng*monopolies*and*
further*development*of*oligopolis&c)market)
Main*trend**ver&cal)integra&on)
12*000*rms*disappeared*during*consolida'ons*
The*end*of*the*wave**1929**the*US*stock*market*crash*and*the*beginning*of*
the*Great*depression*

15*

Historic*overview*of*M&A*waves*
3. )Merging)for)growth)(1960s))
Arose*aWer*the*Second*World*War*
This*wave*involved*~10%*of*US*economy*assets*
1950s*CellerUKefauver*Amendments*have*'ghten*up*the*merger*regime*
As*a*result**small)mergers,*no*involvement*of*big)acquirers)
The*main*reason**to)achieve)growth*throughout*diversica'on*and*get*
access*to*new*product*markets*
Massive*strategic*shiW*in*the*business*composi'on*of*US*companies*in*the*
direc'on*of*greater)diversica&on)
The*end*of*the*wave**the*Oil*crisis*induced*by*OPEC*(1973)*

16*

Historic*overview*of*M&A*waves*
4. )Acquisi&ons)and)divestures)(middle)of)the)1980s))
Two*waves*in*one;*basically*two*types*of*corporate*restructuring*
The*emergence*of*hos&le)tender)oers)
Predatory*bustUup*takeovers:*raiders*made*bids*for*diversied*
underperforming*rms*to)focus)on)a)core)business)of*the*target*and*
dismantle*the*porpolio*by*selling)o)the)secondary)parts)of)the)business))
The*emergence*of*private*equity*rms,*which*started*to*use*leveraged)
buyouts)(LBOs),*management)buyouts)(MBOs)*and*going)private)approaches*

17*

Historic*overview*of*M&A*waves*
4. )Acquisi&ons)and)divestures)(middle)of)the)1980s))

18*

Historic*overview*of*M&A*waves*
5. )1990s)wave)
Globaliza&on*of*product,*services*and*capital*markets*
Priva&za&on*of*public*sector*enterprises*
Changes*in*government*policy*regarding*an'trust*enforcement*and*defense*
procurement*
Emergence*of*shareholder)ac&vism)
Restructuring*of*mature*industries*(automobiles,*food*and*banking)*
Consolida&on*of*fragmented*industries*by*nancial)and)strategic)buyers)
Convergence*of*technologies*(the*rise*of*dotEcom)bubble)*
New*suprana'onal*trading)blocs*(WTO,*NAFTA,*etc.),*which*lowered*trading*
and*capital*mobility*barriers*and*increased*the*opportuni'es*for*corporate*
growth*(especially*for*mul'na'onal*enterprises)*
19*

Historic*overview*of*M&A*waves*
6. )Millennium)wave)(2000s))
Exhausted*by*the*crash*of*1990s,*strategic*buyers*were*replaced*by*private)
equity*acquirers*
As*a*result**a)new)boom)of)LBOs)*according*to*good*economic*environment*
with*excessive*liquidity*and*low*interest*rates*
New*important*player*in*the*M&A*market**Hedge)funds)
Main*strategies:*shareholder*ac'vism;*aracking*rms*making*takeover*bids*
and*forcing*them*to*drop*their*bids*
Shareholder)ac&vism)became*a*more*important*factor*in*managements*
acquisi'on*and*dives'ture*decisions*

20*

Historic*overview*of*M&A*waves*
Value)end)number)of)European)M&A)transac&ons)announced)

21*

Historic*overview*of*M&A*waves*
Global)M&A)Ac&vity:)2000)

22*

Historic*overview*of*M&A*waves*
Global)M&A)Ac&vity:)2002)

23*

Historic*overview*of*M&A*waves*
Global)M&A)Ac&vity:)2007)

24*

Historic*overview*of*M&A*waves*
Global)M&A)Ac&vity:)2009)

25*

Road*Map*
Deni'ons*
M&A*waves*in*worlds*history*
How)does)M&A)process)create)value))alterna&ve)perspec&ves)

26*

Alterna've*perspec'ves*
Economic)
Strategy)
Finance)theory)
Managerial)
Organiza&onal)

27*

Economic*perspec've*
! Economy*of*scale*and*economy*of*scope*
! Economy*of*learning*
! Transac'on*cost*economies*and*ver'cal*integra'on*
! Industry*analysis*of*compe''on*
! Game*theory*and*compe''ve*moves*

28*

Economic*perspec've*
! Economy)of)scale)and)economy)of)scope)
Fixed*vs*variable*costs**average*cost*of*produc'on*falls*when*xed*costs*are*
spread*over*a*larger*volume*
Merging*rms*jointly*produce*and*sell*a*larger*volume*of*their*product*than*
each*on*its*own**that*creates*an*opportunity*for*scale*economies*
Once*the*rm*passes*a*minimum*ecient*scale*(MES),*there*are*no*further*eciency*
gains.*It*may*lead*to*diseconomies*of*scale,*caused*by*organiza'onal*control.*

Economy*of*scope*can*be*reached*by*product*diversica'on.**
The*use*of*the*same*brand,*marke'ng*channels*and*logis'cs*chains*reduces*costs,*
thereby*increases*prots*
Selling*two*(or*more)*complementary*products*increases*sales*
*
29*

Economic*perspec've*
! Economy)of)learning)
Through*the*learning*process*rms*can*reduce*costs*of*producing*the*same*
volume*of*output*
Considering*seasonality*(produc'on*schedules*),*minimizing*wasteful*use*of*materials,*
teamwork*and*organiza'onal*improvement*

M&A*enable*rms*to*keep*the*learning*curve*(or*make*it*more*steep)*by*
using*any*valuable*informa'on*or*technologies*from*acquired*rm*
Using*patents*of*acquired*rms*
Considering*cultural*dierences*or*other*specics*during*expansion*into*new*markets*

It*is*easier*and*more*eec've*to*buy*the*another*company*and*get*all*
targets*knowledge*instantly*instead*of*developing*everything*by*your*own*

30*

Economic*perspec've*
! Transac&on)cost)economies)and)ver&cal)integra&on)
Both*the*market*rela'onship*between*buyer*and*seller*and*ver'cal*
integra'on*generate*costs*for*both*par'es,*but*the*dierence*in*costs*consists*
of:*
Required*return*(by*seller)*
Cost*of*contrac'ng*
Cost*of*monitoring*contract*compliance*
Enforcement*cost*(in*case*of*breach)*
These*costs*are*caused*by*the*informa&on)asymmetry**
Ver'cal*integra'on*allows*to*get*rid*of*this*problem,*thereby*reducing*costs*

31*

Economic*perspec've*
! Industry)analysis)of)compe&&on)
Porters*ve*forces*model*of*compe''on*

32*

Economic*perspec've*
! Industry)analysis)of)compe&&on)
Determinants*of*strength*of*the*ve*compe''ve*forces)

33*

Economic*perspec've*
! Game)theory)and)compe&&ve)moves)
a) Simultaneous*acquisi'on*game*(duopoly)*
Firm%B%

Firm%A%

Each*rm*arempts*to*an'cipate*the*ac'ons*and*reac'ons*of*its*compe'tor*

The*op'mal*outcome*depends*on*the*compe'tors*turn*

Prisoners*dilemma:*rms*incen'ves*for*the*expansion*ruins*their*
individual*and*collec've*values*

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Economic*perspec've*
! Game)theory)and)compe&&ve)moves)
b) Sequen'al*acquisi'on*game*

Firm%B%

Firm%A%

Firm%B%

Firm%B%

35*

Economic*perspec've*
Focus)
External*to*rm,*on*compe'tors*
Various*market*structures,*e.g.*

Major)elements)
Compe''on*based*on*cost*and*
perceived*benets*

monopoly*and*how*rms*compete*

Scale*and*scope*economies*

in*each*

Rela've*transac'on*cost*as*

Ver'cal*integra'on*

determinant*of*market*versus*
hierarchies*
Mergers*driven*by*above*
Hypercompe''on*and*short*
compe''ve*advantage*period*

36*

Strategy*perspec've*
! Generic)compe&&ve)strategies)(by)M.)Porter):)
Cost*leadership*
Dieren'ated*product*
Segment/niche*play*

! ResourceEbased)view)of)compe&&ve)strategy)
Firms*compete*on*the*basis*of*their*resources*and*capabili&es)
Firms*are*able*to*manage*their*business*environment,*they*are*not*
constrained*by*external*forces*and*have*unlimited)degrees)of)freedom)

37*

Strategy*perspec've*
! ResourceEbased)view)of)compe&&ve)strategy)
Organiza'onal*resources*of*a*rm*
What*resources*does*the*rm*have?*

Tangible*

Physical*assets,*e.g.*
factory,*machinery*
Financial*resources,*
e.g.*free*cash*ow,*
access*to*capital*

Intangible*

Human*

Intellectual*property,*
e.g.*patent*

Skills,**
Commitment,*morale*

Reputa'on,*brand*
R&D,*design*facili'es*

Flexibility,*crea'vity*
Team*spirit,*culture*
38*

Strategy*perspec've*
! ResourceEbased)view)of)compe&&ve)strategy)
Organiza'onal*capabili'es*of*a*rm*

39*

Strategy*perspec've*
Focus)
External**
How*to*achieve*sustainable*
compe''ve*advantage*
Firms*resources*and*capabili'es*
(R&C)*
How*rms*develop*these*

Major)elements)
Compe''ve*advantage*result*of*
superior*R&C*
Sustainable*advantage*rests*on*R&C*
resistant*to*imita'on*and*replica'on*
R&C*path*dependent*on*and*part*of*
rms*evolu'on*
Mergers*a*means*to*acquire*R&C*

40*

Finance*theory*perspec've*
Focus)
Internal*to*rm*
Shareholders,*creditors*and*
managers*in*a*nexus*of*contracts*
Diusion*of*rm*ownership*
Agency*conicts*and*costs*
Corporate*governance*
Market*and*corporate*control*
Real*op'ons*

Major)elements)
Managers*agents*of*equity*and*debt*
holders*
Managers*interests*diverge*from*
principal*interests*
Mergers*mo'vated*by*managerial*
interests*
Managers*monitored*and*controlled*
by*corporate*governance*
Real*op'ons*framework*for*
exploratory*acquisi'ons*

41*

Managerial*perspec've*
Focus)

Major)elements)

Internal*to*rm*

Hos'le*takeovers*

Managerial*u'lity*

Incen'ves*to*align*managerial*and*

Control*loss*due*to*mergers*

shareholder*interests*
Takeover*defenses*
Managerial*incen'ves*in*takeover*
context*

42*

Organiza'onal*perspec've*
Focus)
Internal*to*merging*rms*
Poli'cal*processes,*cultures*

Major)elements)
Acquisi'on*decisions*not*always*
ra'onal*

Conicts*among*groups*

Dilu'on*of*acquisi'on*quality*

M&A*as*change*process*

PostUmerger*integra'on*problems*
Organiza'onal*learning*perspec'ves*
and*impediments*to*learning*

43*