Mergers and Acquisitions Study Notes

Topic One

1. Identify M & A Motives

Economies of scale and synergies
Horizontal - Symbion Health/Primary
Vertical – Toll/Patrick
Diversification
Product and channel -ASX/SFE
Georgraphic –Woolworths/Foodland NZ
Growth
Secure undervalued assets
Realise core competencies – AMP demerger
Avoid public markets scrutiny – Veda, Rebel Sport
Defence – Acquisition of a competitor
Capital Markets Scale

2. Understand the Research phase of M & A and the role of the adviser

Research Undertaken prior to M & A activities
Strategic Direction
1. Industry
2. Geography
3. Competitive Environment
4. Competencies Required
Indentify the Target
Commercial Considerations
1. Strategic Fit
2. Availability
3. Management
Financial Considerations
1. Values vs Price
2. Earning and Returns
3. Funding
4. Synergies

Research Undertaken Once Target has been Identified
If Target is a willing vendor – Due Dilligence
If Target is not so willing and confidentiality is important research is done via
Annual reports Newspapers Market Research
Broker Reports Internet
ASX information ASIC Searches

What’s the adviser doing
Stratgic Advice
Executition advice
Valuation advice
Negotiations
3. Distinguish between public company and private treaty transactions

A Public company transaction is the change in control of a public company e.g. are takeover, schemes, demergers – highly regulated Corps, Takeover Panel, ASX etc.

A Private Treaty Transactions involves a division of a public company or a private company. E.g. Acquisitions, divestments, joint ventures – Less regulated, contract law, misleading and desceptive behaviour (Corps)

4. Identify the regulatory framework

Eggleston Priciples form the basis of the policy in the Corps Act s 602

Identity of bidder must be known Disclosure
Reasonable time to consider proposal Time Period
Sufficient information to assess proposal Disclosure
Equal opportunity to participate Common Offer
Efficient, competitive and informed market Concept of control Takeover Panel

5. Identify different public company transaction alternatives
Creep - Corps act s611 item 9 Buy Backs
Dual Listed Structures Underwriting/ Capital Raisings
Demergers Board Spills
Joint Ventures

Type
Description
Takeovers Chapter 6
Off Market most common
Unsolicited – Unfriendly
Bidder chooses minimum acceptance
Scheme of arrangements (S410 – S414)
Driven by target
Voting 75% by value – 50% by no. of each class
Requires Court approval
Selective Capital Reduction (s256B)
Streamlined mechanism to deal with minority shareholders
75% Vote
Shareholders Approval (611)
Most common in new share issues

Topic Two
Valuation Methodologies
Valuation Framework
Value of a minority interest in an unlisted company - discount for lack of marketability
Value of minority share if the company is listed - Share Price
Value of 100% share if the business - Add premium for control
Value to an acquirer that can obtain synergy benefits or special value - add for special value, unique to acqurier

Compare advantages and disadvantages of methodologies
DCF
Adv
Useful when cash flows are lumpy in the short term
Value of firm is projected on future results rather than assets
Disadv
May understate value of balance sheet assets
Discounted the valuation basedon the level of risk, a business seen as riskier typically receives a lower valuation that one which more stable
Projection are not guarantee – future events can cause income or earning projections to be completely irrelevant.
Lack of comparable information

Capitalisation Approaches
Adv
A simple approach that arrives at an easily determined value
Values can be benchmarked against other transactions and organizations
Does not rely on projections, but on an average of results from the recent past
Useful for