9/30/2021

PART 5:
MERGER AND ACQUISITION
QUYEN NGUYEN, PHD
FACULTY OF BANKING AND FINANCE
FOREIGN TRADE UNIVERSITY

DEFINITION
• ACQUISITION OF ONE COMPANY BY ANOTHER COMPANY
• GROWTH EXTERNAL STRATEGIES / ORGANIC STRATEGY
• AT A GIVEN POINT, A COMPANY CAN HAVE SEVERAL VALUATIONS,
DEPENDING ON THE POINT OF VIEW OF THE BUYER AND THE
SELLER AND THEIR EXPECTATIONS OF FUTURE PROFITS AND
SYNERGIES.
• THE ART OF NEGOTIATION CONSISTS OF ALLOCATING THE VALUE
OF THE ANTICIPATED SYNERGIES BETWEEN THE BUYER AND THE
SELLER AND IN FINDING AN EQUILIBRIUM.

1
 9/30/2021

DEFINITION

• ACQUISITIONS CAN BE PAID EITHER IN CASH OR IN SHARES. GENERALLY

SPEAKING, SHARE TRANSACTIONS PREDOMINATE WHEN CORPORATE
VALUATIONS ARE HIGH
• DIFFERENT TYPES OF INTEGRATION
• HORIZONTAL INTEGRATION
• VERTICAL INTEGRATION
• CONGLOMERATE INTEGRATION

MERGERS AND ACQUISITIONS WAVES

• IN 1960S CONGLOMERATES WERE ALL THE RAGE (SHARE
TRANSACTIONS).
• IN THE 1980S, MORE TRANSACTIONS WERE PAID IN
CASH. MANY OF THE BIG CONGLOMERATES FORMED IN
THE 1960S WERE BROKEN UP.
• IN THE 1990S AND 2000S, COMPANIES WITHIN THE SAME
SECTOR JOINED FORCED, GENERALLY IN SHARE
TRANSACTIONS.

2
 9/30/2021

MAIN MOTIVATIONS : SYNERGIES

ECONOMY OF SCALES, REVENUE OR OPERATIONAL
SYNERGIES

FINANCIAL SYNERGIES
COST SYNERGIES

MAIN MOTIVATIONS
 MANAGERIAL INEFFICIENCY
 MARKET INEFFICIENCY
 UNDERVALUATION OF ASSETS
 HUMAN FACTORS

3
 9/30/2021

MAIN MOTIVATIONS: OTHER REASONS

 DIVERSIFICATION
 WEALTH TRANSFER

AUCTION
IN THIS PROCEDURE, THE COMPANY IS OFFERED FOR
SALE UNDER A PREDETERMINED SCHEDULE TO
SEVERAL POTENTIAL BUYERS WHO ARE COMPETING
WITH EACH OTHER. THE OBJECTIVE IS TO CHOOSE THE
ONE OFFERING THE HIGHEST PRICE. BUT MORE
RESTRICTIVE FOR THE SELLER.

4
 9/30/2021

PROCEDURE
MEMORANDUM OF UNDERSTANDING OR LETTER OF INTENT
AGREEMENT IN PRINCIPLE
REPRESENTATIONS AND WARRANTIES (NO HIDDEN
LIABILITIES....)
EARNOUT CLAUSES (LINK A PORTION OF THE PURCHASE
PRICE TO THE COMPANY’S FUTURE PROFITS)
SHARE PURCHASE AGREEMENT
9

TAKING OVER A LISTED COMPANY

• LOCAL REGULATIONS AIM TO PROTECT MINORITY
SHAREHOLDERS IN ORDER TO DEVELOP FINANCIAL MARKETS.

• THEGOAL IS TO GUARANTEE A TRANSPARENT AND EQUAL

TREATMENT FOR ALL SHAREHOLDERS.

• EACH COUNTRY HAS REGULATIONS GOVERNING TAKEOVERS

OF LISTED COMPANIES.

10

10

5
 9/30/2021

TAKING OVER A LISTED COMPANY

STAKE-BUILDING
• INVESTORS IN A LISTED COMPANY SHOULD PUBLICLY DECLARE
WHEN THEY PASS CERTAIN THRESHOLDS IN THE CAPITAL OF
COMPANY.
• (THE FIRST ONE IS USUALLY 5%)
• IF THE ACQUIRER FAILS TO DECLARE THESES SHARES, VOTING
RIGHTS ARE LOST.

11

11

DEFENSIVE MEASURE
• IN M&A TRANSACTIONS, A DEFENSE MECHANISM (ALSO KNOWN AS A DEFENSE
STRATEGY) IS ANY SET OF PROCEDURES THAT ARE EMPLOYED BY A TARGET COMPANY
TO PREVENT A HOSTILE TAKEOVER.

• A HOSTILE TAKEOVER IS A TYPE OF ACQUISITION IN WHICH A BIDDER TAKES OVER A

TARGET COMPANY WITHOUT THE CONSENT, AND AGAINST THE WISHES, OF THE
MANAGEMENT OR BOARD OF DIRECTORS OF THE TARGET. HOSTILE TAKEOVERS ARE
EXECUTED THROUGH THE ACQUISITION OF A CONTROLLING INTEREST IN THE TARGET
COMPANY BY A BIDDER.

12

12

6
 9/30/2021

PRE-OFFER DEFENSE MECHANISM

IT IS PRIMARILY USED TO EITHER MAKE THE COMPANY’S SHARES LESS ATTRACTIVE FOR
A POTENTIAL BIDDER (E.G., INCREASE THE OVERALL ACQUISITION COSTS) OR SET
RESTRICTIONS IN CORPORATE GOVERNANCE TO LIMIT THE BENEFITS TO THE
POTENTIAL BIDDER.

• POISON PILL
• POISON PUT
• GOLDEN PARACHUTES
• SUPERMA JORITY PROVISIONS
13

13

POST-OFFER DEFENSE MECHANISM

POST-OFFER DEFENSE MECHANISMS ARE EMPLOYED WHEN A TARGET COMPANY
RECEIVES A BID FOR A HOSTILE TAKEOVER.

• GREENMAIL DEFENSE
• CROWN JEWEL DEFENSE
• PAC-MAN DEFENSE
• WHITE KNIGHT DEFENSE

14

14

7
 9/30/2021

FINANCIAL ASPECTS OF MERGER

• GAIN = V (A+B) – V(A) – V(B)

• VALUE CREATION = GAIN – CONTROL PREMIUM – OPERATIONAL
COSTS
• CONTROL PREMIUM = P(B) – V(B)
=> VALUE CREATION : V(A+B) –V(A) – P(B) – OPERATIONAL COSTS

15

15

DIFFERENT PAYMENT

• IN SHARES/ CASH
⇒ IF THE BUYER (A) PAY FOR THE ACQUISITION IN SHARES, THE
SHAREHOLDERS’ EQUITY OF A IS INCREASED BY THE
SHAREHOLDERS OF B.
⇒ IF A PURCHASES B FOR CASH, THE VALUE OF A’S
SHAREHOLDERS’ EQUITY DOES NOT CHANGE (IF NO SYNERGY)

16

16

8
 9/30/2021

DIFFERENT PAYMENT
• IN SHARES/ CASH
=> IN CASH ACQUISITION, SHAREHOLDERS OF THE ACQUIRING
COMPANY ALONE ASSUME THE COMBINATION EXECUTION RISKS.
=> IN AN ALL-SHARE TRANSACTION, THE RISKS ARE SHARED BY
THE TWO GROUPS OF SHAREHOLDERS.

17

17

THE MECHANICS OF ALL-SHARE

TRANSACTIONS
• RELATIVE VALUE RATIO: THE RATIO OF SHAREHOLDERS’
EQUITY VALUE OF COMPANY A TO SHAREHOLDERS’ EQUITY
VALUE OF COMPANY B;
=> THE RATIO DETERMINES WHO WILL OWN HOW MUCH OF THE
COMPANY. THIS RATIO WILL DEFINE THE POWER EACH
SHAREHOLDER WILL WIELD AFTER TRANSACTION.

18

18

9
 9/30/2021

THE MECHANICS OF ALL-SHARE

TRANSACTIONS

A (acquirer)

A (acquirer)

19

19

THE MECHANICS OF ALL-SHARE

TRANSACTIONS
• EXCHANGE RATIO
= RELATIVE VALUE RATIO *(PRE MERGER NUMBER OF A
SHARES/PRE MERGER NUMBER OF B SHARES)

20

20

10