MAPE

MAPE
Session 1
--What is M&A?
M&A refers to the aspect of corporate strategy, corporate finance and management dealing with
the buying, selling and combining of different companies.
Acquisitions: when one company takes over another and clearly establishes itself as the new
owner. From a legal point of view, the target company ceases to exist, and the buyer “swallows”
the business.
Merger: when two firms agree to go forward as a single new company rather than remain
separately owned and operated. The firms are often of about the same size.
A broader definition of M&A also included the formation of joint ventures, strategic alliances and
divestments.
--Traditional classification of different types of M&A

 Horizontal
The acquisition of one company by another in the same industry/sector that has similar operations.
e.g. Ahold acquiring Delhaize
When: increase market share, market access and power; improve performance of target (e.g. cost
cutting); realize economies of scale; remove excess capacity in the industry; eliminate a
competitor.
 Vertical
The acquisition of one company by another across the value chain such as acquiring a
supplier/customer.
e.g. VW acquiring battery producers
When: secure resources (upstream); assume market (downstream); reduce transaction cost; control
the value chain.
 Related
The acquisition of one company by another in a related industry
e.g. CVS acquiring Aetna Insurance
When: acquire skills and technologies more quickly and/or at lower cost than could be built in
house; exploit cross sell opportunities; to support an adaptive, visionary or shaping strategy.
 Diversifying
The acquisition of one company by another in an industry/sector in which it doesn’t currently
operate.
e.g. General electric
When: exploit managerial capabilities; help targets to develop their business; exploit financing
synergies; you are already a conglomerate; increase firm size hence compensation.
--Key drivers of M&A activity

Corporate clarity: companies will continue to realize the benefits if unlocking value and
refocusing on core assets through divestiture activity, including spin-offs and split-offs, further
catalysed by increased activist pressure.
Ongoing tech disruption: as the pace of technological change continues to increase, its expected
that companies across all industries will focus on tech acquisitions as companies seek out these
skills externally rather than develop them in-house.
Cheap access to financing: with low interest rates and high equity valuations, acquisition
financing will be relatively cheap.
Dry powder of private equity: private equity firms are ready to develop record amounts of equity
and debt capital competing against strategic buyers.
Capital allocation strategy: while many companies deployed much of their excess cash in share
repurchases and dividends, most companies will continue to engage in M&A to boost limited
organic growth opportunities.
(Geo) political/macro economic/regulatory uncertainty: uncertainties will remain with respect to
political-and trade instability, possible economic downturn, data privacy etc.
--Theories on explaining M&A activity

 Neoclassical theory:
Firms engagr in M&A to create value (NPV>0) from synergies:
Value combination> value acquirer + value target standalone
 Redistribution theories:
Value is extracted from stakeholders for example government, customers, suppliers,
employees etc. due to market power, tax optimalization.
 Behavioural theories:
M&A is a consequence of behavioural aspects such as overconfidence (hubris), benefitting
from short term market market mispricing and agency problems (e.g. empire building).
--Rational and irrational motives for M&A

Rational motives for M&A: economy of scale/scope; increased market power; defensive motives;
cross-selling opportunities; managerial synergies; taxation driven; diversification; acquiring
(technological) capabilities; vertical integration.
Irrational motives for M&A: manager hubris/overconfidence; herding behaviour; empire building;
managers compensation; diversification.
--Resulting in significant cost savings

Creating value through realizing cost synergies: direct sourcing (50%-60%), indirect sourcing
(15%-20%), general & administrative and other (25%-30%) +focused integration team, clear
governance and accountability
--Contributing to long term sustainable value creation

Delivering long term value for shareholders (realizing significant synergies and investing in long
term growth)
Highly cash generative businesses, enabling Ahold Delhaize to invest in future growth and deliver
attractive returns to shareholders.
Anticipated run-rate synergies of $500 million per annum, to be fully realized in the third tyear
after completion.
One-off costs of $350 million required to achieve synergies.
Expected to be earnings accretive in first year after completion.
Ahold Delhaize is currently expected to adopt a dividend policy of a payout of 40-50% of adjusted
net income.
--Corporate M&A process has three distinctive phases

Strategy phase: select and analyse industry=>self-evaluate/ identify skills to be leveraged=>screen
universe and create short list=>identify potential synergies=>identify restructuring
opportunities=>value top candidates.
Transaction phase: establish initial contact=>analyse various deal structures=>value and prepare a
preliminary bid=>negotiate terms and conduct due diligence=>pre plan post merger
integration=>negotiate final deal/ complete legal docs.
Post merger integration: clarify deal rationale and vision=>decide on organizational
structure=>setup task forces synergy capturing=>plan and implement communication=>manage
cultural differences=>integrate target.
--Characteristics of successful acquirers
--Acquirers find it difficult to create value from M&A

While failed integrations are often viewed by the acquirer as the fault of the target, the true
problem often lies in:
1) inappropriate assessment of target resulting in overestimated standalone value and synergies
amongst others due to inadequate due diligence.
2)emotional bidding as a result of overconfidence and herding behaviour nor based on
fundamental value analysis resulting in overpaying.
3) the inability of the buyer to integrate the business successfully due to no cultural and
organizational fit and poor execution of integration.
--Key success factors in M&A
Effective integration 23%
Economic certainty. 19%
Accurate valuation of target 18%
Stable regulatory and legislative environment 16%
Proper target identification 14%
Sound due diligence process 11%
--Main pillars of M&A analysis
Strategy, pricing & negotiations, due diligence, legal docs, deal valuation, payment structuring,
acquisition financing, target integration, investor relations, capturing value.
--Introduction to multiples(relative valuation, the market approach)

A valuation (or p)
Session 3 Valuation
--DCF introduction
--FCF is generated by operating assets of the business

Free cash flow: the cash flows generated by the operating capital of the firm, considering all
investments in operating capital and assuming the firm is 100% equity financed.
EBITDA
-Depreciation
-Amortization/impairment intangibles
=Operating profit before tax
-Operating tax expense
=Net operating profit after taxes
+Depreciation
+Amortization/impairment intangibles
-Capex tangible assets
-Capex intangible assets
+Change in operating provosions
+Change in deferred taxes
-Investments in Operating Working Capital
=Free Cash Flow
--Terminal value
Perpetuity method: assuming an infinite cash flow of the firm growing at a constant rate.
Continuing value highly dependent on cash flow in last year of forecast period and the infinite
growth rate selected.
Multiples: continuing value based on EV-multipleEV/EBIT(D)Alt*EBIT(D)A last year forecast

Multiple should reflect steady statemid cycle multiples
Typically used by financial buyers
Liquidation approach:
assuming liquidation at the end of the explicit forecast period
determine the liquidation value of the tangible assets
Not used in going-concern setting
--Calculating continuing value

Continuing value is based on the present value of an infinite cash flow that is assumed to be
growing with a constant growth rate GCV
CV=FCFcv / (WACC-Gcv)
The nominal growth rate in the continuing value period equals inflation + real growth
Gcv=RI cv * RONIC cv
Gcv=RI cv*RONIC cv
RI=new investments/NOPLAT = (NOPLAT - FCF)/NOPLAT=reinvestment rate

CV=NOPLAT cv/WACC

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MAPE

--Traditional classification of different types of M&A

--Key drivers of M&A activity

--Theories on explaining M&A activity

--Rational and irrational motives for M&A

--Resulting in significant cost savings

--Contributing to long term sustainable value creation

--Corporate M&A process has three distinctive phases

--Acquirers find it difficult to create value from M&A

--Introduction to multiples(relative valuation, the market approach)

--FCF is generated by operating assets of the business

Multiples: continuing value based on EV-multipleEV/EBIT(D)Alt*EBIT(D)A last year forecast

--Calculating continuing value

RI=new investments/NOPLAT = (NOPLAT - FCF)/NOPLAT=reinvestment rate

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