Day 98 in MIT Sloan Fellows Class 2023, M&A and PE "Fundamentals of M&A"
8I am taking a Merger and Acquisition class and the following textbook is the best one to study fundamental of M&A.
Three merger dimensions
- horizontal ( in the same industry)
- vertical ( in the different stages of production)
- e.g. AT&T and Time Warner
- conglomerate ( unrelated line of businesses)
- e.g. Tata: Jaguar Land Rover, Ritz Calton, Corus Steel
Even in a horizontal merger, there are several pitfalls. However, a clear benefit of horizontal mergers is economy of scale.
- IT
- Mizuho and other banks
- People/Culture
- Chrysler and Daimler
Vertical integration facilitates coordination and administration. Those mergers potentially weaken competition.
Motivation of mergers
- Complementary resources
- Each has what the other needs
- e.g. Bristol Myers acquired IFM Therapeutics
- Surplus Funds
- If it faces a shortage of good investment opportunities, it turn to mergers financed by cash as a way of redeploying their capital.
- e.g. rich oil companies
- Eliminating inefficiencies
- Unexploited opportunities to cut costs and increase sales and earnings.
- Need better management
- e.g. Martin and McConnell
- Industry consolidation
- As an industry, there is trend of restructuring
- e.g. American banks( 14000 → 5000)
- Diversification
- Try to diverse the businesses and reduce the risk
- Bring "agency problem" because investors can diversify the risk by themselves.
- Increasing EPS: the boostrap game
- Share * 1.5 but total earning * 2.0
- 100 % arbitrage
- It generates earnings growth not from capital investment or improved profitability, but from purchase of slowly growing firms with low price-earning ratios
- Lower financing costs
- borrowing costs optimization
- The problem of mutual guarantees. It makes the debt less risky, so lenders can enjoy a lower interest rate.
