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Jeffrey Timmermans
Global Financial Journalism
Week 10: Mergers & Acquisitions (& IPOs & Trade)
Thursday, 25 April, 13

Types of M&A
✤ Merger: companies join as “equals”
✤ Acquisition: one company buys another
✤ Take private: all shares in a listed company are purchased from
shareholders (typically by a private equity firm) and the company is
restructured as a private entity before re-listing
✤ Joint venture: two companies form another venture
✤ Reverse takeover: purchase of a listed company by a private company

Global M&A activity 2004-2012
Source: Mergermarket

Global Private Equity Activity
Source: Mergermarket

The M&A process
✤ Initiated by acquirer, target, private equity firm, or investment bank
✤ Mandate of investment banks as advisors
✤ Due diligence/valuation process
✤ Possible emergence of rival bid
✤ Shareholders of target vote on deal / regulatory approval
✤ Unification of operations/possible mass firings

Questions to ask
✤ What’s the value of the deal?
✤ Who’s buying what for what
amount from whom?
✤ Is it a hostile bid?
✤ The reasons for the deal – how
it “fits.”
✤ How buyer is paying: cash,
stock, debt, or a combination?
✤ What seller will do with
money?
✤ Effect on companies’ revenue,
earnings?
✤ Is there a large amount of debt
at the target that will be
assumed by the acquirer?

More questions
✤ Are there regulatory or other
legal concerns?
✤ Antitrust issues? Political
issues?
✤ Who will run the new entity?
Changes?
✤ What happens to employees?
Transfers? Layoffs?
✤ What are the fees the banks/
advisors are getting?
✤ When is the deal expected to
close?
✤ How did the market react to the
announcement of the deal?

Sourcing in M&A
✤ Investment banks (advisors and rivals)
✤ Management consultants
✤ Institutional shareholders in target (& acquirer)
✤ Shareholder activists
✤ David Webb (HK)
✤ Institutional Shareholder Services (US)

Valuations
✤ Cash Deals: Exclude all assumed debt, multiply price-per-share offered
by buyer by number of outstanding shares of target.
✤ ABC offers $1 per XYZ share x 100m XYZ shares = $100M
✤ Stock Deals: Multiply exchange ratio offered by Buyer’s trading price.
ABC offers 0.64 of its shares for each XYZ share:
✤ 0.64 x ABC trading price $2.00 = $1.28/Share for XYZ shareholders
✤ Total Value: $1.28 x XYZ outstanding shares 1.0B = $1.28B

Initial Public Offerings

Initial Public Offerings
✤ The sale of shares in a private (unlisted) company to institutional
and/or retail investors
✤ A primary equity deal
✤ Results in the listing of company on one or more stock exchanges
✤ So those shares can trade on the secondary market
✤ Is an “exit strategy” for private equity firms that acquired a (formerly)
public company

The IPO process
✤ Intention to list (announced by
company)
✤ Underwriter (investment bank)
mandate
✤ Pricing range
✤ Strategic investors
✤ Subscription levels
✤ Final pricing
✤ Listing

Intention to list
✤ Amount of cash to be raised
✤ Which market it will list
✤ Number of shares to be issued
✤ Percentage of the company’s
share capital to be listed
✤ Relative sizes of the
institutional and retail tranches
✤ What the company does
✤ Names, phone numbers of key
executives

Indicative price range
✤ Once mandated, the
underwriters will start
“building the book” for the deal
✤ Will sound out institutional
investors on interest at a
range of prices
✤ Will distribute preliminary
term sheets
✤ Check earlier reported details
for changes
✤ Compare price range to rivals
✤ Is there a “greenshoe,” or
overallotment option?

Subscriptions
✤ Underwriters will usually try to ensure excess demand for the
number of shares on offer, or oversubscription
✤ If investors apply to buy 100 million shares, but only 10 million are on
offer, then the IPO is 10-times subscribed or covered (and 9-times
oversubscribed)
✤ Excess demand at subscription stage typically results in sharp price
rise once shares start trading on the market

What do these countries have in
common?
✤ China
✤ Morocco
✤ Sri Lanka
✤ Colombia
✤ Lesotho
✤ India
✤ Turkey
✤ Bangladesh
✤ Cambodia
✤ Mexico

And the answer is....
✤ All ten countries supply
clothing to U.S. discount
clothing retailer Old Navy
✤ Old Navy sources its products
from around 50 countries
✤ Men’s T-shirt for US$3.99
✤ Old Navy sold US$1.51 billion
in merchandise in 3Q 2012
Photo:
Boone
NC
Magazine
Sources: Gap Inc. 10-Q filing, Old Navy Web site

Source: WTO secretariat
Volume of monthly exports, 1998-2009

Absolute advantage
“The producer that requires a smaller quantity of inputs to
produce a good is said to have an absolute advantage in
producing that good.”
– N. Gregory Mankiw,
Principles of Economics

Comparative advantage
“The producer who gives up less of other goods to produce [a
particular good] has the smaller opportunity cost of
producing [that particular good] and is said to have a
comparative advantage in producing it.”
– N. Gregory Mankiw,
Principles of Economics

Free trade: winners
✤ Domestic consumers in importing countries
✤ Domestic producers in exporting countries

Free trade: losers
✤ Domestic consumers in exporting countries
✤ Domestic producers in importing countries

Other benefits of trade
✤ Overall economic well-being increases
✤ But not for everyone
✤ Variety of available goods increases
✤ Increased competition
✤ Enhanced flow of ideas

Arguments against trade
✤ Eliminates jobs
✤ Endangers national security
✤ Harms developing industries
✤ Unfair competition (dumping)

Government trade policies
✤ Trade barriers
✤ Trade subsidies
✤ Free-trade agreements (to lower barriers & subsidies)
✤ Global (e.g. World Trade Organization negotiations)
✤ Multi-lateral (e.g. North American Free Trade Agreement, Trans-
Pacific Partnership)

Trade barriers: the obvious ones
✤ Tariffs
✤ Licenses
✤ Quotas
✤ Subsidies
✤ Content requirements
✤ Embargo

Trade subsidies
✤ The U.S. paid domestic farmers $245.2 billion in subsidies from
1995-2009, including $15.4 billion in 2009
✤ 10% of farmers received 74% of subsidies
✤ Corn subsidies totaled $73.8 billion (1995-2009)
✤ The E.U.’s Common Agricultural Policy costs €55 billion per year, or
around 40% of the total E.U. budget
Sources: Environmental Working Group, European Union

Trade barriers: the less obvious
✤ “Quality” requirements
✤ Health concerns
✤ Packaging
✤ Labeling
✤ Other product standards
✤ Dense bureaucracy

Trade terminology
✤ Trade surplus = exports > imports
✤ Trade deficit = imports > exports
✤ Deficits and surpluses “widen” or “narrow” as they move farther
from or closer to zero

Trade: a zero-sum game
✤ One country’s trade surplus is another country’s trade deficit
✤ If China exports a T-shirt to the U.S., the value of that T-shirt is
counted as a credit (addition) to China’s trade balance and as a debit
(subtraction) to the U.S. trade balance

BEIJING (MarketWatch) — China’s trade surplus narrowed in February,
but exports performed far better than expected — a positive signal for
both China and the world economy.
However, economists say that Chinese data in January and February are
usually volatile due to the Lunar New Year holiday, and often warn against
reading too much into strong trade figures for these months.
China’s February trade surplus declined to $15.25 billion from $29.15
billion in January, according to figures released Friday, but economists
polled earlier had expected a $16.0 billion deficit.
Though China has a large trade surplus with the outside world, it is
common for the country to run deficits in the early part of the year, partly
because factories close and workers return home for the Lunar New Year.
China trade surplus narrows, but exports rising
March 07, 2013|Aaron Back
Source: MarketWatch
Writing about trade

Trade & Currencies
✤ Trade surpluses tend to lead to stronger currencies
✤ Trade deficits tend to lead to weaker currencies

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