Introduction

Mergers, Acquisitions, and Corporate Restructurings

Professor Boris Nikolov
Tentative outline
 Introduction
 Agency conflicts
 Corporate governance
 M&A
 LBOs
 Bankruptcy
 Refocus
 Insider trading
 Project finance

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Guest speakers
 September 30th
 Loïc Rubat and Davy Marcolino, Senior Managers, PWC
 Valuation
 …TBD

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Course organization
 Lectures and case studies

 Class attendance
 Must have name tag at each class
 Be ACTIVE!!!
 Participation is mandatory
 Expect substantial amount of cold calling
 Objectives
 Learn to communicate and debate effectively your ideas

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Course organization
 Group assignments
 Must form groups
 The maximum number of students per group is 4
 The minimum number of students per group is 3!
 The optimal number of students per group is 4!
 You should keep the same group for all assignments

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Course organization
 Case reports
 We will discuss 5 cases
 Must be completed in groups
 Submit via Moodle in a pdf format (do NOT include Excel files)
on Monday before class starts, at the latest 2.15pm!
 Maximum length of 3 pages, with unlimited appendix containing
supporting exhibits
 All cases are part of the following course pack available on the
HBS website: https://hbsp.harvard.edu/import/1216360

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Course organization
 Case presentations
 Every group will present one case
 Need to submit presentation via e-mail to me in pdf format at least
1h before the class starts the day you are presenting

 Case discussions
 Every group will be assigned one case to discuss
 This case will be presented by another group
 The objective is to stimulate class discussion

 Evaluation
 You will be evaluated on both the quality of your
presentation/discussion input and your ability to communicate your
ideas to the audience

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Course organization
 Course evaluation
 There is no exam for the course during the regular exam
session
 Course grade = 0.20N1 + 0.50N2 + 0.20N3 + 0.10N4 where
 N1 is the grade for class participation
 N2 is the average grade of case study reports
 N3 is the grade for the case presentations
 N4 is the grade for case discussion

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Course organization
 Teaching assistant
 Madhushree Ayalasomayajula
 madhushree.ayalasomayajula@unil.ch

 Office hours: Thursday from 2pm to 4pm

 TA session
 How to structure and write the case reports
 Continued guidance and feedback on case reports

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Course organization
 Reference textbook for the course
 Donald De Pamphilis, Mergers, Acquisitions and Other Restructuring
Activities, AP / Elsevier, 8th-11th Ed.
 Note that this is a reference textbook. I do not require
that you buy this book as class notes are self-contained!
 All class material is on Moodle
 Moodle password: MACR24

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Course organization
 Course pre-requisite
 Valuation course, 1st year MSc in Finance

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Learning objectives
 Why do firms engage in mergers, acquisitions, and corporate
restructurings?
 Hostile takeovers and takeover defenses
 How to value an acquisition target
 Where do synergies come from? Are there any?
 How are deals financed?
 Contractual features of merger agreements
 What are the determinants of LBOs?
 Why do firms break up? Do conglomerates make sense?
 Recognize key principles of successful negotiations
 Work with a team to manage large workload in short time-period
 Gain confidence in presenting and defending ideas in front of large
audience

➢ Be able to identify, structure, and pitch an M&A or restructuring transaction

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Mergers are everywhere
 The case of Burger King
 1953: established
 1959: acquired by its Miami franchises
 1967: acquired by Pillsbury Inc.
 1988: acquired by Grand Metropolitan plc (UK)
 1997: merged with Guinness plc (UK): renamed Diageo
 2002: TPG-led consortium buys out Burger King from Diageo
 2006: TPG exits via IPO, listed on NYSE
 2010: 3G capital takes Burger King private again
 2014: Burger King mergers with Tim Hortons in an inversion deal,
now part of Restaurant Brands International, listed on TSX

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Le Temps, September 14th, 2020

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UBS finalise l’acquisition de Credit Suisse
Le premier groupe bancaire du pays a finalisé ce lundi
l’acquisition de sa concurrente Credit Suisse
ordonnée dans le cadre du plan de sauvetage de la
banque aux deux voiles décrété par la Confédération
en mars dernier

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Le Temps, June 12th, 2023
Largest merger transaction, 1998-2021

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State of the M&A market

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State of the M&A market

Source: Berk and DeMarzo

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Historical perspective

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M&A markets around the world
 Largest M&A markets in absolute dollars
 U.S. $1.4 trillion
 China $500bn
 U.K. $184bn
 Canada/Germany $110bn
 From: Thomson Reuters M&A 2017 Review

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M&A markets around the world

M&A activity and labor regulation

 EPL: Employment Protection Legislation
 Sample: OECD countries, 1985-2007
 Source: Dessaint, Golubor, and Volpin, 2017, Journal of Financial Economics

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Current trends affecting the market
 Record corporate cash holdings – $2.0-5.0 trillion
 Lots of “dry powder” in PE funds – $1.4 trillion
 Record low borrowing costs for large secure borrowers
(AAA ~3.5%) (BBB ~4.0%), although rates are now
increasing again!
 Major shocks in certain industries (e.g. oil)
 Historically high equity valuations
 U.S. tax changes

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Some more facts
 25% of deals and growing are cross-border
 20-25% are PE deals
 2-3% of deals are hostile
 90% of deals above $100m are litigated
 50% of target CEOs are not retained
 5-6% of the combined workforce laid off
 30% chance a Fortune 1000 company will engage in M&A
in any given year

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Types of mergers

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Does M&A pay? Short-run

Average cumulative abnormal returns to targets and initial bidders

 Sample: U.S. , 1980-2005
 Source: Betton, Eckbo, Thorburn, 2008
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Does M&A pay? Long-run

Long-term performance of acquirers relative to a benchmark (3 years)

 Sample: U.S. , 1980-2009 (9,854 deals)
 Source: Duchin and Schmidt 2013, Journal of Financial Economics

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Does M&A pay?
 Study after study shows that while targets gain
substantially from the premium, ~50% of deals fail to
create value for acquirers
 Yet firms continue to spend trillions on deals
 Why?

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How to succeed in M&A?
 Take this class!

 There is only one way to create value as a buyer

 Buy something for less than it’s worth (to you!)
 Target selection (strategy), due diligence (accounting/law),
valuation/pricing (finance), structuring and financing (finance,
law), integration (operations, management)

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How to succeed in M&A?

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Parties involved
 Bidder(s)/acquirer
 Target
 Seller (parent, private shareholders)
 Financial advisors
 Lenders/investors
 Due diligence accountants, Lawyers
 PR consultants, HR/Pension consultants
 Market participants (arbitrageurs, activists)
 Regulators (competition, securities)

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Financial advisors
 Financial advisor role
 Gives general financial advice
 Drafts some, coordinates all documentation
 Controls other advisors and the client/directors
 Advises on target valuation and deal pricing
 Manages overall strategic direction of the offer
 Lends its good name to the transaction
 Financial advisors often also help with financing (underwriting
equity issues, arranging bridge or long-term borrowing)
 But single line “boutique” advisors gaining in popularity
 Financial advisor role differs depending on whether
representing the bidder or target
 Which mandate do you think is more desirable?

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Advising the buyer
 Finding acquisition opportunities, e.g. identifying an acquisition target
 Evaluating the target from the bidder’s strategic and other perspectives;
valuing the target; providing a “fairness” opinion
 Devising appropriate financing structure for the deal, covering offer price,
method of payment and sources of finance
 Advising the client on negotiating tactics and strategies or, in some cases,
negotiating deals
 Collecting information about potential rival bidders
 Profiling the target shareholders to ‘sell’ the bid effectively; helping the
bidder with presentations and ‘road shows’
 Gathering feedback from the stock market about the attitudes of financial
institutions to the bid and its terms
 Identifying potential ‘showstoppers’, such as antitrust investigation and
helping prepare the bidder’s case in any regulatory investigations
 Helping prepare offer document, profit forecast, circulars to shareholders
and press releases, and ensuring their accuracy

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Advising the target
 Valuing the target and its component businesses to negotiate a
higher offer price; providing a “fairness opinion”
 Helping the target and its accountants prepare profit forecasts
 Arranging buyers for any divestment or management buyout of
target assets
 Getting feedback concerning the offer and the likelihood of it
being accepted
 Negotiating with the bidder and its team
 If the bid is hostile or unsolicited
 Crafting effective bid resistance strategies
 Finding white knights

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M&As

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 AT&T has used almost every restructuring
method in the last 20 years!
 1984 antitrust break up: split-up using spinoffs
 Shareholders receive 1 share of each “Baby Bell” for
every 10 AT&T shares
SBC Southwestern Bell

http://www-inst.eecs.berkeley.edu/~eegsa/images/pactel.gif

Spinoff
http://www.acm.org/sigchi/chi97/ap/logos/nynex.jpg

ameritech.jpg (2588 octets)

 AT&T Capital
 1993 $107.5 million public offering of 14%
 1996 $2.2 billion asset sale to an investor group

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 AT&T has used almost every restructuring
method in the last 20 years!
 1995-6 Split-up
 Lucent: $3 billion carve-out in 18% IPO, followed by
spinoff (.324 shares Lucent for each AT&T)
 NCR: spinoff (0.0625 NCR shares per AT&T)
 Universal Card: asset sale for $3.5 billion to
Citicorp
Carve-out, Lucent Technologies, Bell Labs Innovations

Spinoff

http://www.acm.org/sigchi/chi97/ap/logos/ncr.jpg

Spinoff

Asset sale
Universal Card
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 AT&T has used almost every restructuring
method in the last 20 years!
 AT&T Wireless
 Tracking stock representing 15.6% interest was sold
in IPO for $10.6 billion
 Later, exchange offer gave shareholders choice of
AT&T or AT&T Wireless stock
 Last, spinoff executed in which .32 wireless shares
were distributed to AT&T holders
 AT&T Broadband
 10/00 – AT&T announces it will divest unit
 7/01 – Comcast makes unsolicited bid, forcing
AT&T into an auction
 12/01 – Comcast declared auction winner
Dollar value of U.S. divestitures
($ Millions)

750.000
700.000
650.000
600.000
550.000
500.000
450.000
400.000
350.000
300.000
250.000
200.000
150.000
100.000
50.000
0
89

97

06

14
85
86
87
88

90
91
92
93
94
95
96

98
99
00
01
02
03
04
05

07
08
09
10
11
12
13

15
16
Source: Thomson Securities Financial Data

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Dollar value of European divestitures
($ Millions)

800.000
750.000
700.000
650.000
600.000
550.000
500.000
450.000
400.000
350.000
300.000
250.000
200.000
150.000
100.000
50.000
0
89

92

95

11

14
85
86
87
88

90
91

93
94

96
97
98
99
00
01
02
03
04
05
06
07
08
09
10

12
13

15
16
Source: Thomson Financial Securities Data

39
Dollar value of Asian divestitures
($ Millions)

600.000
550.000
500.000
450.000
400.000
350.000
300.000
250.000
200.000
150.000
100.000
50.000
0
00
01
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99

02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
Source: Thomson Financial Securities Data

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 U.S. M&A vs. divestitures
14.000

12.000

10.000
Total Number

8.000

6.000

4.000

2.000

0
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 00 02 04 06 08 10 12 14 16
Divestitures M&A

Sources: Mergerstat Review

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U.S. Spin-offs
($ Millions)

250.000

200.000

150.000

100.000

50.000

0
90

98

03

11
85
86
87
88
89

91
92
93
94
95
96
97

99
00
01
02

04
05
06
07
08
09
10

12
13
14
15
16
Source: Thomson Financial Securities Data

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Conglomerate discount

Source: Khorana et al., Journal of Applied Corporate Finance, 2011

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Corporate restructuring
 What is corporate restructuring?
 Corporation as a nexus of contracts
 Define restructuring as the process by which firms change the
terms of the contracts
 “Recontracting”

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Corporate restructuring
 Why do firms restructure?
 Poor performance or financial distress
 Change in strategy or corporate policy
 Information gap between insiders and outsiders

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Corporate restructuring
 How do corporations create value by restructuring the
firm’s financial claims and contracts?
 Restructuring affects market value because of various market
frictions and institutional rigidities
 Transaction costs
 Taxes
 Agency conflicts
 Information disparity between insiders and outsiders

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Corporate restructuring
 What kind of restructuring is most appropriate for
dealing with a given problem?
 What determinants favor one restructuring alternative vs.
another?
 Private reorganization vs. chapter 11
 Spin-off vs. targeted stock

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Corporate restructuring
 How does the restructuring affect the distribution of
value among firm’s claimholders?
 Value creation vs. transfer of value

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