17
Corporate Development (Fach) / Mergers & Acquisition (Lektion)
Anzeige
- What is acquisition occurs when one company takes a controlling ownership interest in another firm (takeovers)
- what is a merger Combination of two firms in which all but one cease to exist - surviving combined organization continues under the name of the surviving company
- types of mergers Horizontal: between two competitors in same industry Vertical: two firms combine across the value chain: Backward (buy former supplier) Forward (buy former customer) Conglomerate: no strategic relatedness between acquiring firm and target
- Reasons for merger waves in the 21st century Globalization: global competition and lower trade barriers lead to more cross-border deals Strong cash flow: Good economy and demand from emerging economies enhanced consumption
- research on success and failure of M&As Acquisitions are much more prevelant than the merger of "equals" Bidder tends to be more profitable than target firm/ tends to grow faster Shares of bidder tend to be overvalued befor acquisition Focus-increasing acquisitions tend to achieve best results
- Strategy of a company to to M&A may imply... Organic (internal) growth External growth through: Vertical/Horizontal integration, Diversification, Divestment
- Barriers/problems in the course of M&As Hidden information leading to adverse selection Hidden action leading to moral hazard Winner's curse and hubris Transaction specificity and hold up alignment of managers and shareholders clash of cultures
- Principle of "Hidden information" Sellers may have private information regarding the assets to be sold Buyers have private information regarding the value they assign to these assets In general: One party is better informed about a relevant apsect of the transaction than the other party (asymmetc information) This aspect affects the wealth of the other party. This information problem exists before the contract is made (ex ante information problem)
- Remedies for hidden informatino Equalize access to information, e.g. via due diligence procedures Shift risk to the party with the better information, e.g. escrow accounts Organizational solutions, e.g. joint venture Market solutions, e.g. ‘dual track‘ approach
- Key points of "Hidden action" Period of time between signing and closing the deal Will managers lead company in the interest of buyer? In general: One party may take actions after the contract has been made that affects the wealth of the other party but are unknown to the other party (asymmetric information). This information problem arises the contract is made(ex post information problem). Leads to moral harzard
- Anzeige
- Remedies to "Hidden action" Contracutal arrangements: sanctions for post-contractual behavior (Investments of certain amount need approval, run operations "in the ordinary course of business" Increased observability: measures to improve informaiton on post-contractual behavior
- Remedies to "Hidden action" Contracutal arrangements: sanctions for post-contractual behavior (Investments of certain amount need approval, run operations "in the ordinary course of business" Increased observability: measures to improve informaiton on post-contractual behavior Incentive alignment: make part of the purchase price dependent on future performance Material adverse change clausel: Endogenous and exogenous risks
- What is Hubris? Managerial overconfidence as a potential explanation of the winner's curse is called "hubris"-hypothesis (exaggerated self-pride) Overconfidence: if tasks are difficult and with unsecure information Risk is often underestimated Differentiate overconfidence from optimism
- What is transaction specifity if an asset cannot be redeployed in another tranaction without reduction in value it is transaction specific
- what is hold up if one party is opportunistic it may try renegotiate the contract which is the threat of hold up
- Concept of free cash flow (Jensen 1986) Free Cash Flow: Chash flow in excess of that required to fund all projects having a positive net present value when discounted at the relevant cost of capital Conflict: Distribute free chash flow to shareholder or invest? Leveraged Buy-out (LBO) is explained as reaction to insufficient distribution of free chash flow
- How have private equity industries developed High incentives for management based on performance and focused on cash generation Close monitoring of management Financial leverage (debt financing etc.)