April 17
- Corp Behavior. M&A strategic considerations
- New Ventures
When there are no entry barriers, Asset Value and Earning Power are more critical.
(Bruce asked who are going to work at IB and who want to. A lot of people are but only one wants.)
DCF: you can produce any outcome you want.
i.e. Growth option – Coke to acquire: 1) always positive DCF. 2) Almost impossible to measure.
M&A considerations:
I. Basic Investment Logic
a) Limited diversification (buy whole company)
b) Pay above MKT price – 30~100% premium.
Nobody would like to invest such a fund.
II. I-Banker Logic
a) Investment Buyers (No Synergies, portfolio buyers) Doesn’t make sense at all. Bring nothing to the table buy pay premium? If so, why not simply buy stocks?
b) Strategic Buyers (with synergies)
III. Tax Logic
a) Redistribute cap without paying dividend tax.
b) Diversify without paying capital gains tax. Like Berkshire-Hathaway. Max premium 25%. Or could buy stocks back.
IV. Diversification Logic
a) Smooth earnings flow.
b) Higher debt ratio.
c) Lower cost of capital (Tax Shield)
d) Max premium + 30% Debt – Tax Saved (40% of Interest of 8%) = at least 1%. So max premium = 10 ~ 15%
Creative bankers are needed.
Empirical Evidence
I. Event Studies
a) Acquirers suffer decline in MKT Value on announcements (greater for stock than cash acquisitions).
b) Winning bidders lose value.
c) Losing bidders gain value.
II. Valuation Studies
a) Diversified acquirers have lower MKT/Book
Underestimate of impact: stupid acquirers always discounted (event studies); overestimate of impact: acquirers signal lower reinvestment opportunities.
Series M&A (unrelated acquisitions) – CBS, RCA, Xerox, 3M, P&G, JnJ …
Porter conditions for good acquisitions
a) attractive industry (high growth, highly profitable).
b) synergies are essential – in your industry: cost saving and pricing power.
c) reasonable price premium.
Greenwald warning: when you say investors are stupid but not you, watch out!
Strategic definition of attractive industry
Incumbent comp. adv. ßà Barriers-to-entry (without BTW, growth rate doesn’t matter)
No BTE à value of firm = reproduction value of assets
à Entrant/acquirer could reproduce assets by itself and enter without acquisition.
à Acquisition strategy is asset purchase
à All acquirers are investment acquirers
No comp. adv ßà No synergies
Attractive Industry ßà Synergies
Mittal Acquisition: to set local monopoly and cooperate successfully.
a) Need to buy the bad-behaving ones
b) For cooperative ones, we don’t need to buy
We buy, then raise prices, benefiting the whole industry. The others take a free ride.
Other examples for good cooperation include Gas Industry in same area, TV industry in NYC (they are all Jewish, too).
Identify Synergies
I. No BTE: Value = Asset Value. No EOS, no Customer Captivity, no Proprietary Tech. No benefits for joint ventures.
II. Consumer Captivity
a) Consumer barriers:
i. switching cost + habit + search cost à tied customers
ii. With different customers, where are the joint gains? Unless we change the consumer behavior
b) Producer Ad (Non-patents). Reduced by tech diffusion.
c) Producer Ad (products patents). Combination improves efficiency.
III. EOS
a) Reduce overhead (geographic separation makes it hard) à synergies captured by cost savings.
Time Warner bought AOL at $19bn premium, telling a $1bn saving à NPV of $1bn saving = $19bn premium?
Blackstone bought real estate firm at tiny premium (risk shifts to banks). Annual ROI of PE industry as a whole during 1982 to 1999 is 18% while 17% for S&P. And PE usually leveraged 4~5x at 8%. If same to S&P, 85% - 32% = 53%!
Synergies (depend on comp. adv.)
I. Improvement is prisoner’s dilemma. 4 firms become 2 who know how to cooperate. 3 firms become 2? 8 become 5? Government may intervene.
II. Improvements in Entry/pre-emption.
i. Eliminated potential entrant. Must have special characteristics. Again, Government may intervene.
ii. Bargaining power
iii. M&A cooperative analysis is the basic principal
iv. Rational agents should jointly maximize benefits
v. Non-rational behavior must be eliminated post-acquisition.
vi. Basic improvement: Cost
vii. Beware of false revenue synergy, i.e. Disney (contents) took over ABC (channels). 1) Disney doesn’t want to sell to ABC. Disney loses $100M while ABC gained less that $100M. 2) ABC doesn’t want to buy from Disney. ABC loses $100M while Disney gains less than $100M. Only synergy gain from cost savings.
Conclusion
I. A characterized by free-entry: Bargains extremely rare.
II. Information distribution is critical. If we are least well-informed bidder and we win, we overpaid. So must stick to what we know (instead of guessing and assuming).
III. “Strategic” mergers must be cost-justified to make sense, in particular EOS savings. (Hire IB to sell, not to buy assets)
VC
I. Nascent MKT: No customer captivity, No EOS, Proprietary Tech?
II. Future BTW:
a) Recognized – more valuable prize, tougher the race.
b) Unrecognized
III. Assets not competitive advantages – people, not biz plans, matter.
In General, VC is operation efficiency game on information, organization, etc. and going to be highly specialized.
Labels: 哥伦比亚商学院 Bruce Greenwald 战略行为经济学
