📈Corporate Strategy and Valuation Unit 8 – Mergers & Acquisitions: Strategic Alliances

What's the Deal with M&A?

• Mergers and acquisitions (M&A) involve combining two or more companies into a single entity
• M&A transactions can be friendly or hostile, depending on the target company's receptiveness to the deal
• Mergers typically involve two companies of similar size joining forces to create a new, larger company
• Acquisitions occur when a larger company purchases a smaller one, often to expand its market share or acquire new technology
• M&A deals can be financed through cash, stock, or a combination of both
• The goal of M&A is to create synergies, which are benefits that arise from combining two companies (cost savings, increased revenue)
• M&A activity tends to increase during periods of economic growth and decrease during recessions

Types of M&A: Pick Your Flavor

• Horizontal mergers involve two companies in the same industry and at the same stage of production (Exxon and Mobil)
  • Aim to increase market share, reduce competition, and achieve economies of scale
• Vertical mergers occur between companies at different stages of the supply chain (Amazon acquiring Whole Foods)
  • Seek to control the entire production process and reduce costs
• Conglomerate mergers involve companies in unrelated industries (Berkshire Hathaway acquiring GEICO)
  • Aim to diversify risk and enter new markets
• Concentric mergers occur between companies with similar products or services (Facebook acquiring Instagram)
  • Seek to expand product offerings and customer base
• Reverse mergers allow private companies to go public without an initial public offering (IPO)
  • Involve a private company merging with a publicly-traded shell company

Why Companies Go Shopping

• Increase market share and reduce competition by acquiring rivals
• Achieve economies of scale by combining resources and reducing costs
• Diversify product offerings and enter new markets
• Acquire new technology, intellectual property, or talent
• Improve financial performance by boosting revenue or reducing expenses
• Respond to industry consolidation and remain competitive
• Take advantage of favorable market conditions or undervalued assets
• Enhance bargaining power with suppliers and customers

Finding the Perfect Match

• Identify strategic objectives and criteria for potential targets
• Conduct thorough due diligence to assess financial, legal, and operational risks
  • Review financial statements, contracts, and legal documents
  • Analyze market trends, competitive landscape, and customer base
• Evaluate cultural fit and compatibility of management teams
• Consider potential synergies and integration challenges
• Assess the target company's growth potential and future prospects
• Determine the appropriate valuation and deal structure
• Engage in negotiations and secure necessary approvals (board of directors, shareholders, regulators)

Sealing the Deal: M&A Process

• Develop an acquisition strategy aligned with corporate objectives
• Identify and screen potential targets based on criteria
• Approach target company and express interest in a deal
• Sign a non-disclosure agreement (NDA) to protect confidential information
• Conduct due diligence to assess risks and opportunities
• Negotiate deal terms, including price, payment method, and contingencies
• Obtain necessary approvals from stakeholders and regulators
• Draft and execute definitive agreements (merger agreement, purchase agreement)
• Close the deal and begin integration process
  • Combine operations, systems, and cultures
  • Realize synergies and monitor post-merger performance

Show Me the Money: Valuation Basics

• Determine the fair market value of the target company
• Use discounted cash flow (DCF) analysis to estimate future cash flows and present value
  • Project future cash flows based on growth assumptions
  • Discount cash flows to present value using weighted average cost of capital (WACC)
• Apply comparable company analysis using multiples (P/E ratio, EV/EBITDA)
• Consider asset-based valuation for companies with significant tangible assets
• Account for synergies and potential cost savings in valuation
• Negotiate purchase price based on valuation and deal structure
• Determine appropriate payment method (cash, stock, or combination)

When Things Go South: M&A Risks

• Overpaying for the target company due to inaccurate valuation or bidding war
• Failing to achieve expected synergies or cost savings
• Encountering unexpected liabilities or legal issues during due diligence
• Struggling to integrate different corporate cultures and management styles
• Losing key employees or customers during the transition
• Facing regulatory hurdles or antitrust concerns
• Dealing with economic downturns or industry disruptions
• Realizing the expected benefits take longer than anticipated to materialize

Real-World M&A Case Studies

• AOL and Time Warner (2000) - $164 billion merger that failed due to cultural differences and market changes
• Daimler-Benz and Chrysler (1998) - $36 billion merger that ended in divorce due to cultural clashes and operational challenges
• Disney and Pixar (2006) - $7.4 billion acquisition that succeeded due to shared vision and complementary strengths
• Facebook and WhatsApp (2014) - $19 billion acquisition that expanded Facebook's global reach and user base
• Amazon and Whole Foods (2017) - $13.7 billion acquisition that marked Amazon's entry into the grocery industry
• Microsoft and LinkedIn (2016) - $26.2 billion acquisition that bolstered Microsoft's cloud and enterprise offerings
• Verizon and AOL (2015) - $4.4 billion acquisition that aimed to enhance Verizon's digital media and advertising capabilities