Mergers & Acquisitions

Table of Contents

1.  Introduction  2

2.  Course Summary  2

3.  Are M As value enhancing  6

4.  Practical Example: Disney acquires Pixar  7

4.1.  Company Profile Disney  8

4.2.  Company Profile Pixar  8

4.3.  Aims and objectives  8

4.4.  The acquisition sequence  10

4.5.  Wealth Effects  11

4.6.  Any other issue of importance  13

  Bibliography  15

  Appendix  

Table: Calculation  CAR A  

  Calculation Dollar Gain B  

  Chart Disney (6 months) C  

  Chart Pixar (6 months) C  

  Final Paper M A Hannes Mungenast Page  1

1. Introduction

This paper is the final paper for the course “Mergers & Acquisitions”. In chapter 2,

I will give a summary of the most important aspects of the course. In chapter 3, I will

deal with the question, whether M&As are value enhancing. Finally, I will describe a practical example of a M&A, namely Disney’s acquisition of Pixar.

2. Course Summary

The course started with a definition of the terminologies. Generally, M&As refer to traditional mergers and acquisitions, takeovers, corporate restructuring, corporate control and changes in the ownership structure of companies in general. We focused on traditional mergers and acquisitions. It is usually distinguished between mergers and tender offers respectively:

Mergers are negotiated deals between the members of the two boards of the compa- nies, while tender offers are direct offers to the shareholders of the target company (the company, which makes the offer is called bidder) and is usually hostile. These offers can either be conditional (bidder requires a minimum amount of shares) or un- conditional and restricted (bidder says a maximum amount of shares he is willing to buy) or unrestricted. It could be a two-tier offer, where the bidder first buys a bit more than 50% of the target company to get control and buys the rest later on. Another possibility is a three-piece suitor, which is similar to a two-tier-offer, however, before buying 50%, the bidder just buys a few shares to get a toehold (this first step was just taken by the Nasdaq in order to the London Stock Exchange and may result in a three-piece suitor).

Final Paper M&A

M&As are generally made because of strategic and financial objectives and are driven by several forces, which usually work together. Technology (e.g. internet), globalization (e.g. WTO, EU) and deregulations (e.g. liberalisation in European postal markets) may be the most important ones. Mergers can be horizontal, vertical or conglomerate. Horizontal mergers occur between companies in the same business activity, in order to reach synergies and economies of scale and scope. As these kinds of mergers could result in a loss of competition, governmental antitrust regula- tions have to be considered. Vertical mergers occur between companies in different stages of production, like for example the acquisition of a supplier. These kinds of mergers happen due to increasing information and transaction efficiency, as informa- tion can flow quicker within a company after a merger and no time for contracting is being wasted any more. Conglomerate mergers are mergers between companies in unrelated types of businesses.

There are lots of regulations and laws concerning M&As. Several regulations which set the rights for minority shareholders exist, as they are considered to be the weak part in any M&A. Other regulations regulate insider trading (i.e. trades based on in- formation that is not available for the general public) or disclosure requirements (i.e. when announcements have to be made). Another important point is antitrust policy. M&As can lead to a loss in competition (governments measure this using the HHI or the concentration ratio) and may in the end lead in a prohibition for certain M&As. These issues are usually very delicate as M&As can also be a sign of a competitive process and leading to more efficiency, lower costs and therefore in the end to lower prices for consumers. The management of the target company has the right to fight against takeovers from other companies; however, in the case that they can not pre- vent it, they have the legal duty to get the best price (fiduciary duty).

Managers have to consider that M&As are just one way to grow and it is not always the best one. So, it depends on the situation whether a M&A is a good strategy. The most important part of creating a strategy (for both a general strategy and a M&A strategy) may be the awareness of a constantly changing environment, which should therefore be monitored continuously to identify external opportunities and threats. This includes an analysis of the industry, competitors, suppliers, customers and sub- stitute products. A good strategy takes the interests of stakeholders, the company’s culture and the company’s capabilities and limitations (their strengths and weak- nesses) into account. The strategy is also influenced by the organizational structure of the company. This is especially important for M&As as the acquired company must Final Paper M&A

fit to the buyer’s company. Two companies with very different kinds of structures are very difficult to integrate.

Several reasons for M&As exist. Managers assume better efficiency through econo- mies of scale (a decline of average costs when producing more), economies of scope (e.g. using the waste of one product as the input for another product), organization capital (i.e. the ability to produce at lower costs), organization reputation and human capital resources. In general, M&As are useful, when the two companies together are performing better than the two companies on their own (2 + 2 = 5). This is usually reached through synergies, like increased efficiency, as mentioned above. Other points could be better growth opportunities, a reduction in the variability of cash flows or tax advantages.

Mergers tend to happen in waves. At the beginning of the 20 th century, in the first movement, mainly horizontal mergers occurred, as a result of the completion of the American market (i.e. completion of railroads) and the use of electricity. The second movement, between World War I and II, the third movement of conglomerate merg- ers in the 60s, the deal decade in the 80s were followed by the period of strategic mergers from 1992 to 2000. In that time the economy was very strong and the stock markets literally skyrocketed (until the stock bubble popped). This made it cheap for companies to acquire other companies as shares are a common mean of payment in M&As (higher share prices and therefore a higher Tobin’s q makes it cheap for com- panies to do acquisitions). In addition, the environment changed rapidly, notably technology (e.g. information technology), globalization and deregulation. Generally it can be said that mergers happen in times with fundamental changes in the environ- ment and the existence of some economic factors (e.g. rising share prices, low inter- est rates).

Lots of empirical test of M&A performance have been undertaken, which I will deal with in chapter 3.

As a result of globalization and technology (technology is portable and can be trans- ferred to other countries easily) more and more international takeovers take place. This is because companies want to combine complementary capabilities, find new markets and achieve critical mass. The US is regarded as an attractive market in terms of political and economic factors and therefore lots of foreign companies invest in US-companies. On the other hand, also many US-firms acquire foreign companies. Final Paper M&A

In cross boarder M&As exchange rates play an important role and managing risks concerning this topic is essential. An interesting point is that foreign bidders pay higher premiums than domestic bidders and are therefore advantageous for the shareholders of the target company.

Not all M&As are welcome and therefore targets developed methods of preventing M&As or just to raise the price. Some financial characteristics like low q-ratio, good cash flows or low P/EPS ratios can make companies attractive for other companies. As a reply they could for example decrease excess cash (as excess cash is a signal of bad management; Free Cash Flow Hypothesis) and increase dividends. Other de- fences include corporate restructuring like buying other companies to create antitrust problems for the bidder or selling parts of the company – in which the bidder is espe- cially interested (“selling off crown jewels”) – to somebody else. Other defence tactics include greenmailing (target offers the bidder a good price for repurchasing its own shares), the Pac Man defence (target bids for bidder’s shares), the search for a white knight (i.e. another company which is willing to buy the target and is favoured by the target), Poison Pills or golden parachutes (i.e. giving the board a large sum in the case the company is being bought). Furthermore, the company could set up a consti- tution, which makes it harder for the bidder to acquire this particular company. This for instance can include supermajority requirements (e.g. 80% of all votes are needed to change control in the company), fair-price amendments (in order to protect against two-tier offers, so that the bidder has to offer a “fair” price for the rest of the shares once he got control) or classified boards (e.g. just one third of the board is elected every year and thus the buyer needs time to get control over the target).

After a M&A it is essential to bring the two companies together, which is a challenge for management. Like for every other investment a M&A is favourable if it has a posi- tive net present value. To reach this, it is important for management not to overpay (see winner’s curse) and to integrate the acquired company. To be favourable the equation has to be 2 + 2 = 5 and therefore the two companies have to be related in some way to reach that. In addition, the post-merger phase is the most important part of any M&A, especially different company cultures can lead to problems. Therefore the acquirer has to be willing to use its best managers for the integration of the target, but also have to take care of the remaining employees of the target company.

Final Paper M&A