Lecture 1
M&A
About?
Two firms merging
• Shareholder capitalism:
o Shareholder value
o Conflict of interests
• Market success and failure
Concerns regulators and communities, competitors
Maximizing shareholder value
Generating more profits of firms
By increasing share prices more value to shareholder
6 historical waves: how, why and when?
Discussion about classical theories
What tends to happen? Why firms do m&as? What are the common causes for failure?
What are the alternatives? Joint ventures, strategic alliances.
At least 50% of the time m&a fails.
Create value or destroy value?
M&a is now the 2nd largest expenditure by top 500 global firms
The 1st largest expenditure is “share buyback”: A share buyback is when companies pay
shareholders to buy back their own shares, cancel them and, ultimately, reduce share
capital. While fewer shares remain in circulation, shareholders get both a larger stake
in the company and a higher return on future dividends
Agency theory: information asymmetry Agency theory is a principle that is used to
explain and resolve issues in the relationship between business principals and their
agents. Most commonly, that relationship is the one between shareholders, as
principals, and company executives, as agents
Behavioural concepts
Moral hazard
Economists assume asymmetrical information
Why do agents know more about the business than the principal?
,Because they are the ones who know what is happening
FOMO
The market for corporate control: companies/firms, who are trying to be more efficient
they try to ban “bad” firms out of the market
Financial architecture
3 basic Markets:
• consumers: (demand) buy something good at an attractive price. Maximize our
value
• producers: (supply) make their products faster, good and cheap
• corporate control: a concept by Henry Manne mechanism to remove inefficient
management. Executive hubris (confidence/arrogance) I can do this better than
you. M&A buyers they don’t look for jewels, they look for RUBBISH. It will be
cheaper to buy, but value can be created from it (you have room to improve).
Trends:
Acquiring firm’s price: upward trend
Target firms’ prices: downward trend.
Time of merger announcement: target firms price Increase. Why? Because of the
premium. The acquire firm has to offer a price higher than the market price.
Otherwise, they could just buy the shares.
On average the acquirer has a decrease on the returns. On the other hand, the seller
has an increase on the returns
,Seminar 01
Value chain
Inbound logistics, operations, outbound logistics, marketing and sales, service
The six historical merger waves
1: 1893-1904 – Horizontal mergers
2: 1919-1929 – Vertical mergers
3: 1974-1989 – Diversified conglomerates
4: 1955-1970 – hostile takeovers, corporate raiders, junk bonds
5: 1993-2000 – Cross-border, mega-mergers, dot.com wave
6: 2003-2008 – Globalization, shareholder activism, private equity, LBO
7: 2014- ? - Financial recovery, consolidation, corporate wealth
The corporate M&A/Restructuring Carousel
Phase 1: booming economy, necessary/not sufficient; provides the necessary means
cash; stock appreciations; borrowing capacity) firms have a lot of profit suddenly
someone as to pull the trigger.
Phase 2: a random, eye-catching merger can ignite the game
Phase 3: minimax-regret and defensive routines lead to bursts of merger activity
(everybody follows in the industry)
Phase 4: the merger explosion levels off as a result of negative effects on players (some
buyers buy something just to be a buyer)
Phase 5: anorexia management sets in (selloffs, divestitures, demergers; lay-offs) now
we have a lot to sale
Phase 6: the pool with targets is refilled.
, Are we in the 7th wave?
The conditions are there.
• Record corporate profits, and large cash hoardings (esp. tech firms that
benefitted from Covid restrictions)
• Record equity growth in US markets, resulting in huge increases in corporate
valuations -> greater potential for stock swap deals
• Historically low interest rates for cash deals
• Large inventory of companies owned by private equity firms (nearly 18,000
according to the Private Equity Growth Capital Council
• Healthy stock market performance, new records in 2021
• Since 2019 there is an explosive wage of mergers, slowdown in 2020 than a
record in 2021
• Investment alternatives are not attractive
Historically low interest (real terms: negative) rates
Weak debt (bond) market and tighter credit
If firms do not buy someone else, they tend to do share buy-backs
When you dominate the market segment, why invest in innovation, R&D
when you can buy others that do?
• But also, a lot of deals that never consummate -Test the waters, signal the
market, tweak the share price…or just bad deals to begin with
Does the resulting concentration of market power require more rigorous and/or
revised regulation?
For some areas yes but we want to keep competition
Can forced break ups result in better value creation or income distribution?
Sometimes a break-up can be good. Sometimes when a firm has a lot of business units
a break-up can mean faster innovation.
M&A
About?
Two firms merging
• Shareholder capitalism:
o Shareholder value
o Conflict of interests
• Market success and failure
Concerns regulators and communities, competitors
Maximizing shareholder value
Generating more profits of firms
By increasing share prices more value to shareholder
6 historical waves: how, why and when?
Discussion about classical theories
What tends to happen? Why firms do m&as? What are the common causes for failure?
What are the alternatives? Joint ventures, strategic alliances.
At least 50% of the time m&a fails.
Create value or destroy value?
M&a is now the 2nd largest expenditure by top 500 global firms
The 1st largest expenditure is “share buyback”: A share buyback is when companies pay
shareholders to buy back their own shares, cancel them and, ultimately, reduce share
capital. While fewer shares remain in circulation, shareholders get both a larger stake
in the company and a higher return on future dividends
Agency theory: information asymmetry Agency theory is a principle that is used to
explain and resolve issues in the relationship between business principals and their
agents. Most commonly, that relationship is the one between shareholders, as
principals, and company executives, as agents
Behavioural concepts
Moral hazard
Economists assume asymmetrical information
Why do agents know more about the business than the principal?
,Because they are the ones who know what is happening
FOMO
The market for corporate control: companies/firms, who are trying to be more efficient
they try to ban “bad” firms out of the market
Financial architecture
3 basic Markets:
• consumers: (demand) buy something good at an attractive price. Maximize our
value
• producers: (supply) make their products faster, good and cheap
• corporate control: a concept by Henry Manne mechanism to remove inefficient
management. Executive hubris (confidence/arrogance) I can do this better than
you. M&A buyers they don’t look for jewels, they look for RUBBISH. It will be
cheaper to buy, but value can be created from it (you have room to improve).
Trends:
Acquiring firm’s price: upward trend
Target firms’ prices: downward trend.
Time of merger announcement: target firms price Increase. Why? Because of the
premium. The acquire firm has to offer a price higher than the market price.
Otherwise, they could just buy the shares.
On average the acquirer has a decrease on the returns. On the other hand, the seller
has an increase on the returns
,Seminar 01
Value chain
Inbound logistics, operations, outbound logistics, marketing and sales, service
The six historical merger waves
1: 1893-1904 – Horizontal mergers
2: 1919-1929 – Vertical mergers
3: 1974-1989 – Diversified conglomerates
4: 1955-1970 – hostile takeovers, corporate raiders, junk bonds
5: 1993-2000 – Cross-border, mega-mergers, dot.com wave
6: 2003-2008 – Globalization, shareholder activism, private equity, LBO
7: 2014- ? - Financial recovery, consolidation, corporate wealth
The corporate M&A/Restructuring Carousel
Phase 1: booming economy, necessary/not sufficient; provides the necessary means
cash; stock appreciations; borrowing capacity) firms have a lot of profit suddenly
someone as to pull the trigger.
Phase 2: a random, eye-catching merger can ignite the game
Phase 3: minimax-regret and defensive routines lead to bursts of merger activity
(everybody follows in the industry)
Phase 4: the merger explosion levels off as a result of negative effects on players (some
buyers buy something just to be a buyer)
Phase 5: anorexia management sets in (selloffs, divestitures, demergers; lay-offs) now
we have a lot to sale
Phase 6: the pool with targets is refilled.
, Are we in the 7th wave?
The conditions are there.
• Record corporate profits, and large cash hoardings (esp. tech firms that
benefitted from Covid restrictions)
• Record equity growth in US markets, resulting in huge increases in corporate
valuations -> greater potential for stock swap deals
• Historically low interest rates for cash deals
• Large inventory of companies owned by private equity firms (nearly 18,000
according to the Private Equity Growth Capital Council
• Healthy stock market performance, new records in 2021
• Since 2019 there is an explosive wage of mergers, slowdown in 2020 than a
record in 2021
• Investment alternatives are not attractive
Historically low interest (real terms: negative) rates
Weak debt (bond) market and tighter credit
If firms do not buy someone else, they tend to do share buy-backs
When you dominate the market segment, why invest in innovation, R&D
when you can buy others that do?
• But also, a lot of deals that never consummate -Test the waters, signal the
market, tweak the share price…or just bad deals to begin with
Does the resulting concentration of market power require more rigorous and/or
revised regulation?
For some areas yes but we want to keep competition
Can forced break ups result in better value creation or income distribution?
Sometimes a break-up can be good. Sometimes when a firm has a lot of business units
a break-up can mean faster innovation.
