Fusiones y

Adquisiciones
Luis Llanos
Oficina 610, Beuchef 851
lllanos@uchile.cl
 La Metodología de este Curso

Enfoque pragmático

Basado en el mundo como es

Revisión de las técnicas formales de análisis

estratégico Aplicación de casos

Énfasis en la comunicación efectiva

Un proceso de planificación exitoso nace de la discusión

de diferentes puntos de vista
Los alumnos auto-estimularse a expresar sus opiniones

Mucho trabajo
 Que veremos en este curso

Rol de las fusiones y adquisiciones

Estrategia de las organizaciones como agentes de cambio
Transformación de negocios, motivaciones, implicancias,
limitaciones y diferentes participantes

Conceptos principales
Relacionados con una transacción de transferencia de control
corporativo
Aplicar marcos de análisis y herramientas relacionados con un
proceso de M&A
Analizar y formular recomendaciones que habiliten opciones de
creación de valor mediante la transferencia de control en su
negocio
Tener una comprensión del panorama corporativo de hoy y como lo
afecta el mercado de control corporativo
Libro Guía
 Course Layout
Course Layout: M&A

Part I: M&A Part II: M&A Part III: M&A Part IV: Deal Part V:
Environment Process Valuation & Structuring Alternative
Modeling & Financing
Strategies
Motivations for Business & Public Company Payment & Business
M&A Valuation Legal
Acquisition Considerations Alliances
Plans
Regulatory Search through Private Accounting & Divestitures,
Considerations Closing Company Tax Spin-Offs
Activities Valuation Considerations & Carve-
Outs
Takeover Tactics M&A Integration Financial Financing Bankruptcy &
and Defenses Modeling Liquidation
Technique Strategies
s

Cross-Border

Transactions
“Corporate finance is all about
valuation”
- Stuart Myers
 Current Lecture Learning Objectives

Por qué ocurren las transacciones de M&A

Opciones para la reestructuración de negocios
Las fusiones y adquisiciones como una forma de
reestructuración corporativa

Formas alternativas de aumentar el valor de los accionistas

Actividad de fusiones y adquisiciones en un contexto histórico
Las principales motivaciones para la actividad de fusiones y
adquisiciones

Hallazgos empíricos clave

Razones principales de por qué algunas M&A no cumplen con
las expectativas

Implicancias del M&A para la sociedad

 M&A as a Form of Corporate
Restructuring
Restructuring Activity Potential Strategy
Corporate
Restructuring Redeploy Assets
Balance Sheet Mergers, Break-Ups, & Spin-Offs

Assets Only Acquisitions, divestitures, etc

Financial Restructuring Increase leverage

Lower cost of capital
Operational
Takeover defense
Restructuring
Divestitures,
widespread employee
reduction, or
reorganization
Recent Activity in Global Strategic M&A
Pretty Woman (1990) – Official Trailer
 Increasing Shareholder Value

Alternative Ways

Solo Venture (AKA “going it alone” or “organic growth”)

Partnering (Marketing/distribution alliances, JVs, licensing,

franchising, and equity investments)
Mergers and acquisitions

Minority investments in other firms

Asset swaps

Financial restructuring

Operational restructuring
 Discussion Questions

1. What factors do you believe are most likely to impact senior

management´s selection of one strategy (e.g., solo venture,
M&A) to increase shareholder value over the alternatives?

2. In your opinion, how might the conditions of the business (e.g.,

profitability) and the economy affect the choice of the strategy?
“Those who do not remember
the past are condemned to
relieve it”
- Alexis De Tocqueville
 Merger Waves (Boom Periods)

Technolog
The Age of y and
Horizontal Conglomerate Strategic Knowledge
Consolidation Era Megamerger Driven
1916-1929 1981-1989 2003-2007

1897-1904 1965-1969 1992-2000

Increasing The Age of Cross
Concentration Retrenchment Border and
Era Horizontal
Megamergers
 Causes and Significance of
M&A Waves
Factors contributing to merger waves
Shocks (e.g., technological change, deregulation,
and escalating commodity prices

Ample liquidity and low cost of capital

Overvaluation of acquirer share prices relative to

target share prices

Why it is important to anticipate M&A waves

Financial markets reward firms pursuing
promising opportunities early on and penalize
those that follow later in the cycle
Acquisitions made early in the wave often
earn substantially higher financial returns tan
those made later in the cycle
 Horizontal Consolidation (1897-1904)

Spurred by
Drive for efficiency
Tax enforcement of antitrust laws
Westward migration
Technological change

Resulted in concentration in
metals, transportation, and mining
industry

M&A boom ended by 1904 stock market

crash and fraudulent financing
 Increasing Concentration (1916-1929)

Spurred by
Entry of U.S. into WWI
Post-war boom

Boom ended with

1929 stock market crash

Passage of Clayton Act which more clearly
defined monopolistic practices
 The Conglomerate Era (1965-1969)

Conglomerates buy earnings stream boost their share price

Overvalued firms acquired undervalued high growth firms

Number of high growth undervalued firms declined

as conglomerates bid up their prices

Higher purchase price for target firms and increasing

leverage of conglomerates brought era to a close
 The Retrenchment Era (1981-1989)

Strategic U.S. buyers and foreign

multinationals dominated first half of decade

Second half dominated by financial buyers

Buyouts often financed by junk bonds

Drexel Burnham provided market liquidity

Era ended with bankruptcy of several large

LBOs and demise of Drexel Burnham
 Age of Strategic Megamerger
(1992-2000)

Dollar volume of transactions reached record in each

year
between 1995 and 2000

Purchase Price reached record levels due to

Soaring stock market

Consolidation in many industries

Technological innovation

Benign antitrust policies

Period ended with the collapse in global

stock markets and worldwide recession
 Age of Cross Border and Horizontal
Megamergers (2003-
2007)
Average merger larger than in 1980s and 1990s,
mostly horizontal, and cross border
Concentrated in banking, telecommunications, utilities,
healthcare, and commodities (e.g., oil, gas, and
metals) [Enel-Endesa 2007]
Spurred by
Continued globalization to achieve economies of scale and scope
Ongoing deregulation
Low interest rates
Increasing equity prices
Expectations of
continued high
commodity prices

Period ended with global credit market meltdown

and 2008-2009 recession
 Debt Financed 2003-2007
M&A Boom

Foreign
Low Interest Investors
Banks & Buy
Rates & Declining
Hedge Funds Highest
Risk Aversion Investment Create: Rated
Drive Increasing Banks: --Collateralized Debt
--Sub-Prime Repackage & Debt
Mortgage Underwrite Obligations
Lending --Mortgage (CDOs)
--LBO Financing Backed Hedge
--Collateralized
& --High Yield Funds
Loan
Other Highly Bonds Buy Lower
Obligations
Leveraged Rated
CLOs)
Transaction debt
s
Investment Banks Lend to Hedge
Funds
 The Tech Wave
The big five technology firms have spent
billions buying rivals in recent years.

Over the past 12 months they have

amassed $180bn in pre-tax profits,
equivalent to roughly a tenth of all profits
generated by American publicly-traded
companies.
 Similarities and Differences Among
Merger Waves
Similarities

Occurred during periods of sustained high

economic growth

Low or declining interest rates

Rising stock market

Differences
Emergence of new technology (e.g., railroads, Internet)

Industry focus
Type of transaction (e.g., horizontal, vertical, conglomerate,
strategic, or financial)
 Discussion Questions

1. What can we learn by studying historical merger

waves?

2. What can government policy makers learn by

studying historical merger waves?

3. What can investors learn by studying historical

merger waves?
 Motivations for M&A

Strategic realignment Market power

Technological change
Deregulation

Synergy Tax considerations

Economies of scale/scope
Cross-selling
Ego/Hubris (arrogancia)
Diversification

Financial consideration
Acquirer believes target is undervalued
Booming stock market
Falling interest rates
 Empirical Findings
Around transaction announcement date, abnormal returns
average
20% for target shareholders in “friendly” transactions; 30-35%
in hostile transactions

Bidders´ shareholders on average earn zero to slightly

negative returns

Positive abnormal returns to bidders often are

situational and
include the following:
Target is a private firm or a subsidiary of another firm
The acquirer is relatively small
The target is small relative to the acquirer
Cash rather tan equity is used to finance the transaction
Transaction occurs early in the M&A cycle

No evidence that alternative strategies (e.g., solo ventures, alliances)

to M&As are likely to be more successful
 Primary Reasons Some M&As Fail to
Meet Expectations

Overpayment due to over-estimating synergy

Slow pace of integration

Poor strategy
 Discussion Questions

1. Discuss whether you believe current conditions in

the global markets are conducive to high levels of
M&A activity? In Chile?

2. Of the factors potentially contributing to current

conditions, which do you consider most important
and why?

3. Speculate about what you believe will happen

to the number of M&As over the next several years
Globally? Defend your argument
 Things to Remember

Motivations for acquisitions

Strategic realignment
Synergy
Diversification
Financial considerations
Hubris

Common reasons M&As fail to meet expectations

Overpayment due to overestimating synergy
Slow pace of integration
Poor strategy

M&As typically reward target shareholders far more tan

bidder shareholders

Success rate of M&A not significantly different from alternative ways of

increasing shareholder value
 Application: Xerox Buys ACS

In late 2009, Xerox, traditionally an office equipment manufacturer, acquired Affiliated Computer Systems
(ACS) for $6.4 billion. With annual sales of about $6.5 billion, ACS handles paper-based tasks such as
billing and claims processing for governments and private companies. With about one-fourth of ACS’
revenue derived from the healthcare and government sectors through long-term contracts, the acquisition
gives Xerox a greater penetration into markets which should benefit from the 2009 government stimulus
spending and 2010 healthcare legislation. There is little customer overlap between the two firms.

Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into services achieved
limited success due largely to poor management execution. While some progress in shifting away from the
firm’s dependence on printers and copier sales was evident, the pace was far too slow. Xerox was looking for
a way to accelerate transitioning from a product driven company to one whose revenues were more
dependent on the delivery of business services.

More than two-thirds of ACS’ revenue comes from the operation of client back office operations such as
accounting, human resources, claims management, and other outsourcing services, with the rest coming
from providing technology consulting services. ACS would also triple Xerox’s service revenues to $10 billion.
Xerox chose to run ACS as a separate standalone business.
 Application: Xerox Buys AC
1. What alternatives to a merger do you think they could
have considered?

2. Why do you think they chose a merger strategy? (Hint:

Consider the advantages and disadvantages of
alternative implementations strategies)

3. How are Xerox and ACS similar and how are they different?
In what way will their similarities and differences help or hurt
the long-term success of the merger

4. How might the decision to manage ACS as a separate

business affect realizing the full value of the transaction?
 World´s Largest M&A Deals in 2019

Chevron agreed to acquire Anadarko Petroleum in a transaction valued at $47.5 billion,

including equity and debt. Under the agreement, Chevron will acquire all of the outstanding
shares of Anadarko for $65 a share — a 37% premium to closing price. Anadarko shareholders
will receive a mixture of cash and stock.

Chevron is the second-largest US energy company behind Exxon Mobil and the transaction will
expand the company's capabilities in US shale oil and gas production. Many industry
commentators have indicated consolidation in the fragmented sector is overdue, prompting
speculation of further deal activity.

During 2019, 108 deals with a value of over $600 billion where announced. North America
was the most active region, however, Saudi Aramco's $61.9 billion purchase of Saudi Basic
Industries was a notable transaction outside the region. Energy deals have topped $110 billion,
including both the Anadarko and the Saudi Basic Industries transactions.
 Illustrating Economies of Scale
Period 1: Firm A (Pre- Period 2: Firm A (Post-
merger) merger)
Assumptions: Assumptions:
Price = $4 per unit of output sold Firm A acquires Firm B which is producing 500,000
Variable costs = $2.75 per unit of units of the same product per year
output Fixed costs = $1,000,000 Firm A closes Firm B’s plant and transfers production to
Firm A is producing 1,000,000 units of output per Firm A’s plant
year Firm A is producing at 50% of plant capacity Price = $4 per unit of output sold
Variable costs = $2.75 per unit of
output Fixed costs = $1,000,000
Profit = price x quantity – variable costs
– fixed costs Profit = price x quantity – variable costs
= $4 x 1,000,000 - $2.75 x – fixed costs
1,000,000 = $4 x 1,500,000 - $2.75 x 1,500,000
- $1,000,000 - $1,000,000
= $250,000 = $6,000,000 - $4,125,000 -
$1,000,000
Profit margin (%)1 = $250,000 / $4,000,000 = 6.25% = $875,000
Fixed costs per unit = $1,000,000/1,000,000 = $1 Profit margin (%)2 = $875,000 / $6,000,000 = 14.58%
Fixed costs per unit = $1,000,000/1.500,000 = $.67

Key Point: Profit margin improvement is due to spreading fixed costs over
more units of output.
1 Margin per $ of revenue = $4.00 - $2.75 - $1.00 = $.25
2 Margin per $ of revenue = $4.00 - $2.75 - $.67 = $.58
 Illustrating Economies of Scale
Pre-Merger:
Firm A’s data processing center supports 5
manufacturing facilities
Firm B’s data processing center supports 3
manufacturing facilities
Key Point: Cost savings due to expanding the scope of a single center
to
Post-Merger:
Firm A’s and Firm B’s data processing
centers are combined into a single
operation to support all 8 manufacturing
facilities
By combining the centers, Firm A is
able to achieve the following annual
pre-tax savings:
▪Direct labor costs = $840,000.
▪Telecommunication expenses =
$275,000
▪Leased space expenses =
$675,000
▪General & administrative
expenses =
$230,000
 Discussion Questions
1. Using the motives for M&As described in Chapter 1, which do you
think apply to Microsoft´s acquisition of Nokia? Discuss the logic
underlying each motive you identify. Be specific
2. Speculate as to why Microsoft and Nokia initially decided to form a
partnership rather than have Microsoft simply acquire Nokia? Why
was the partnership unsuccessful?
3. Speculate as to why Microsoft used cash rather than some other form
of payment to acquire Nokia? Be specific
4. The Nokia takeover is an example of vertical integration. How does
vertical integration differ from horizontal integration? How are the two
businesses (software and hardware) the same and how are they
different? What are the potential advantages and disadvantages of
this vertical integration for Microsoft? Be specific
5. What are the critical assumptions that Microsoft is making in buying
Nokia? Do you believe these assumptions are realistic? Explain
your answer