support de cours de corporate finance

Franck Ceddaha – Corporate Finance – SciencesPo (2015‐2016) 1

Support de Cours de Corporate Finance

2015-2016

Livre IIFranck CEDDAHA

2

Plan de cours Corporate Finance 2014-2015


1. Rappels d’analyse financière et techniques d’évaluation d’entreprise (Séances des 4/09/2015, 11/09/2015, 18/09/2015 animées par F. Ceddaha)

2. Mise en œuvre des techniques d’évaluation d’entreprise (Séance du 25/09/2015 animée par P. Giraudon)

3. Les différentes formes de rapprochement d’entreprises (Séances du 2/10/2015 et 9/10/2015 animées par F. Ceddaha)

4. Le LBO (Séance du 16/10/2015 animée par F. Ceddaha)

5. La mise en œuvre d’une opération de LBO (Séance du 6/11/2015 animée par S. Bedrossian)

6. Les opérations boursières (Séance du 13/11/2015 animée par F. Ceddaha)

7. Politique financière (Séance du 20/11/2015 animée par F. Ceddaha)

8. L’augmentation de capital et l’émission de titres hybrides (Séance du 27/11/2015 animée par E. Goldstein)

9. Les opérations de restructuring (Séance du 4/12/2015 animée par F. Proust)

3Franck Ceddaha – Mergers and Acquisitions – HEC Paris 2014

Markets, players, tactics, legal issues and synergies

Markets Players Process and tactics Synergies


Definition of a M&A Transaction

An M&A transaction is usually a pooling of economic interests (often achieved by combining two companies)

It is a complex and iterative process involving multiple skill sets:

Finance

Strategy

Tax

Legal

Accounting

Stock Market

Tactics

Execution / Process Management

Multi time zones, multi-languages, multi-cultural

4Franck Ceddaha – Mergers and Acquisitions – HEC Paris 2014Franck Ceddaha – Corporate Finance – SciencesPo (2015‐2016) 4

Key Features of the M&A Market

A cyclical Market

Multiple Drivers

Among Recent Trends: longer processes and some jumbo deals

Beware of failures!


Franck Ceddaha – Corporate Finance – SciencesPo (2015‐2016)

Reasons to sell

Shareholder aspirations for capital

Business Performance

Succession planning

Inability to grow further

under ownership structure

Opportunisticpurchasers

Economic environment – past and

future

Banking pressure

Management aspirations

Consolidating market

Horizontal or vertical

integrationTaxation Non core

operations

6

Seven Historical Waves over Past Century - Is Sky the limit ?


Global M&A # completed deals from 1895 to date (in thousands)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

LeveragedFinance

1916‐1929

1965‐1969

1981‐1989

Internet Bubble

1993‐2000

2004‐2007

VerticalIntegrationMarket

Consolidation

Conglomerates

2015e

1827‐1904

2008‐2015

FinancingBubble / Industry

Consolidation

Post crisis


Drivers of M&A transactions


Source: UBS/BCG 2012

59 %

36 % 35 %

28 %

19 %15 %

12 % 13 %9 % 8 %

Expand therange ofproducts

Newgeographical

locations

Reach newclients

Economies ofscale

R&D, patentor brand

Balance theportfolio ofactivities

Respond tothe wave of

concentrationof the sector

Improve theEPS ratio

Refocusactivity on itscore business

Access tonew

ressources


Worldwide M&A Market


M&A Market Breakdown in 2014 (value)

M&A Market Breakdown in 2014 (volume)

Source: Statista, William Blair


North America 45%

Central and South

America 4%

Europe 29%

Asia 20%

Africa and the Middle East

2% North America 30%

Latin America 4%

Europe 34%

Africa/Middle East 3%

Asia Pacific 30%

Value and number of M&A transactions in Euro Zone (from 1995 to 2015e)


Source: Thompson


Different types of M&A deals


Types of transaction and means of payment

Type of transaction

Asset purchase Stock purchase

PaymentCash Acquisition (or sale)

of assetsAcquisition (or sale) of

shares

Stock Contribution of assets

Contribution of shares or merger


Financial Advisors

Investment banks: Typically perform a financial analysis and a valuation Lead the negotiation Advise on financing Coordinate the work of various advisors, in particular during due diligence

Various models:

Universal banks or “one stop shop” vs. specialized banks or “boutiques”

Partnership model vs.. listed company

Fees:

Success fee Retainer Fairness Opinion Fee


M&A Financial Advisors Mapping


GLOBAL

REGIONAL

GENERALISTSPECIALIST


Market Fluidity – Example of US M&A Leaguetables


1980 1990 2000 2010 2014

1 Morgan Stanley Goldman Sachs Goldman Sachs Goldman Sachs Goldman Sachs

2 Lazard Morgan Stanley Merill Lynch Morgan Stanley JP Morgan

3 Salomon Brothers First Boston Morgan Stanley Crédit Suisse Morgan Stanley

4 First Boston Salomon Brothers Donaldson Lufkin & Jenrette JP Morgan Bank of America

Merrill Lynch

5 Merrill Lynch Lazard UBS Barclays Capital City

6 Lehman Brothers Dillon Read Chase ManhattanCorporation

Bank of AmericaMerrill Lynch Barclays

7 Shearson JP Morgan Lazard Deutsche Bank Lazard

8 Kidder Peabody Merrill Lynch Crédit Suisse UBS Deutsche Bank

9 Dean Witter Shearson Schroder SalomonSmith Barney Citigroup Crédit Suisse

10 Goldman Sachs Lehman Brothers Bear Stearns Evercore Partners UBS

Sic transit gloria mundi…


Source: Thomson Reuteurs; Mergers & Acquisitions review

15

Technical Advisors

Technical advisors can provide an expertise in specific areas at various stages of a transactions:

Accounting (transaction services group of an audit firm) Legal (lawyers from several practices: corporate law, stock market rules,

labor law, antitrust) Tax Analysis of financial risks (off balance sheet items, hedging of financial

assets), environmental risks or social risks (strikes…), of the quality of information systems, etc.

Team communication (internal and external) is key factor of success of a transaction:

On large and complex LBO transactions, more than 100 advisers can work simultaneously for the same client

Generally paid on a per hour basis so that client due diligence costs increase proportionally to chances of success


Financial Sponsors

Financial Sponsors are professional financial investors…

… whose objective is to create value by:

Improving the profitability and accelerating organic growth

Increasing external growth (build-up)

Leveraging up

Riding the cycle: entering on low valuations and selling on high valuations

Attractive profit-sharing packages for managers (MBO)


A permanent exchange between buyer and seller until exclusivity


Buyer Seller

Information provided on the target

Growing interest


Information shared on the target

Main stages in a M&A transaction…


Binding

Offer

MP

DD

SV

LOIIMNDA ClosingExclusivity SPATeaser

+

+

-

-Risk for the seller


Auction

Process in which several potential buyers bid on an asset for a limited period of time

The five main stages of an auction process are: Preliminary contact with the buyer’s universe Non-binding offer or letter of intent Due diligence Exclusivity Signing and closing

In theory auctions maximize the final price, in practice buyers speak with each other and undermine the tension

Auctions can be affected by leaks

Important risk is the full involvement of the target management team (answering questions, conducting management presentation…)


From value to price


Price / Exchange Ratio proposed by

buyer to seller

Transaction Background

Standalone Value of Target

Synergies net of Implementation

costs

Key risk mapping &

quantification

Buyer’sobjectives

Negotiation environment

Regulatory Environment

Cost Synergies

Revenue Synergies

Operating

Financial

Technical (tax, legal,

environment, etc.)

DUE DILIGENCES

CONTROL LEVEL & EXPECTED SYNERGIES

Restated net worth

Analogical Value

Intrinsic Value

VALUATION

OBJECTIVES / CONSTRAINTS OF BUYER AND SELLER


Private negotiation

Some private shareholders tend to be reluctant to hire an adviser and enter into an auction

They prefer private negotiation usually with a very limited number of buyers or even one buyer at a time

Process is less formal than an organized auction

Main advantages are: The path to a deal is jointly defined The adverse effects, in case of failure, are more limited The seller gets an immediate feeling of the commitment of the buyer for the

deal

Risk of getting stuck is higher than in an auction

The seller has no guarantee to maximize the price and can be left with no serious back-up plan


Dual Tracks

In a private negotiation or targeted sale, the seller contacts a limited number of potential buyers (even sometimes only one potential acquirer) to test their interest

After signing the NDA, the process is less formal than an auction, i.e. more flexible and customized…

… But the risk for the process to fail is higher

Middle-ground between auction and private negotiation

A dual track process consists in running an auction process and the preparation to an IPO launching of the target simultaneously:

The dual track tactic is appealing mostly to Financial Sponsors Hard to run process for the seller vs.. improved bargaining power


Synergies

Two types of synergies

• Cost synergies Overlaps in plants / distribution network Economies of scale in group purchasing Headquarters, central and administrative functions IT Management Listing costs

• Revenue synergies Pricing power Cross-selling Complementary geographical distribution network


Different types of synergies


Revenue synergies

Duplicated

functions

Operational

synergies

Administrative

synergies

Commercial

synergies

Probability of successStrong Limited

Long

Short

Potential

commercial

synergies

Cost synergies

Tim

e re

quire

d


Synergies

Synergies in the price but not in the standalone value

Consequences on prices: for same value, different buyers may have different synergies, hence different prices

Theoretical sharing of synergies between buyer and seller – though such presentation depends on reality of synergies and perception of those synergies by the market

Price is also timing-dependent: all things being equal (including value), synergy opportunities may not be the same between a buyer and a target at different period of times/cycles

Example: ability for a buyer to accelerate use of tax-losses carried forward of target


Valuation of Synergies

Stream of synergies Several-year ramp-up to reach run-rate

Costs of implementation

Post-tax Valuation Methods Multiple-based in some sectors

DCF

Perpetuity (Gordon-Shapiro)


N+1 N+2 N+3 N+4N

Cost Synergies

Implementation Costs

…

Revenue Synergies


Sharing of Synergies


EXAMPLE OF ALL CASH DEAL – ENTERPRISE VALUE WATERFALL

600

180850

540

148

162

Price paid for the target

(50)

(60)

Revenue synergies

Transactioncosts

Stand alone

enterprisevalue

Cost synergies

IntegrationCost

Enterprise Value of

the targetfor the Buyer

180

ControlPremium

Market value of

the Target

Expected value creation for the shareholders of the Buyer


Sharing of Synergies


600

180

850

540

59

162

Contribution value of shares

(50)

(60)Revenue

Synergies

Transactioncosts

Stand alone

enterprisevalue

Costsynergies

Entreprise value of

the targetfor the buyer

ControlPremium

Enterprise Value of

the target

89

40%

60%

Ex-target shareholders

Value and risk sharing between shareholders of the target and the bidder

IntegrationCosts

Buyer Shareholders (after deal)

EXAMPLE OF SHARE-FOR-SHARE DEAL – MARKET CAP WATERFALL

180


Example 1: Lafarge / Holcim: “Merger of equals”

“Merger of equals” in April 2014 in order to form the world’s largest cement maker

Lafarge in 2013: revenue of € 15.2bn / EBITDA of € 3.1bn / market cap as of 28/07/2014: € 17.6bn

Holcim in 2013: sales of CHF 20bn / EBITDA of CHF 3.9bn / market cap as of 28/07/2014: CHF 20.12bn

“Synergies will total more than CHF 1.7bn (€ 1.4bn) on a full run-rate basis phased in over three years with one third in year one”

Lafarge-Holcim market cap: € 40bn

In March 2015, Holcim wants to raise the exchange parity: 9 Holcim shares for 10 Lafarge shares


“Merger of equals”



Example 1: Lafarge / Holcim: Process

Public exchange offer initiated by Holcim for the shares of Lafarge (from01/06/2015 to 03/07/2015)

Exchange parity: 9 Holcim shares for 10 Lafarge shares

Success conditions

If the contribution of shares is between 66,66 and 95%, the offer is accepted

After the public exchange offer, LafargeHolcim holds 87,46%. After the re-openedpublic exchange offer, the new entity holds 96,41% of the share capital

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Example 2: Capgemini / Igate acquisition

34Franck Ceddaha – Mergers and Acquisitions – HEC Paris 2014Franck Ceddaha – Corporate Finance – SciencesPo (2015‐2016)

New Capgemini profile – Strengthening Capgemini presence in key verticals

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• Key transaction data• Acquisition price ou equity value: US$ 4bn • Multiples: 17x EBITDA; 3,5x revenue• Igate revenues: US$ 1,3bn• Combined revenue and EBITDA: US$ 12,5bn; US$ 1,600bn• Operating margin: 10%• Combined employees: 177K• Funded by debt (US$ 2bn), equities (US$ 600M), cash (US$ 1,4 bn)

• Affirming global leadership by scaling up North America• Costs synergies: US$ 30‐40M• Revenue synergies: US$ 100‐150M• Increase its presence in India (25k Igate workers are in India)

Are Mergers Successful ?


Percentage of observed failures according to empirical studies

Source: from Jansen (2002), Pautler (2003), McKinsey Quarterly

75%

61%

50%

72%

83%

58%53%

61%66%

91%

63%

0%

20%

40%

60%

80%

100%


Recommended readings

F. Ceddaha, Fusions Acquisitions, Scissions, Economica 2013, Introduction and Chapters 1, 11 and 12

E. Gomes, Y. Weber, C. Brown S. Tarba Mergers, Acquisitions and Strategic Alliances, PalgraveMcmillan 2011, Part 1

Patrick A. Gaughan, Mergers, Acquisitions and Corporate restructurings, Wiley, 5th Edition 2011 Chapters 2, 4 and 6

Capgemini, Capgemini to acquire IGATE, April 27th, 2015 (https://www.capgemini.com/resource-file-access/resource/pdf/capgemini_to_acquire_igate_analyst_presentation.pdf)


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