MERGERS AND ACQUISITIONS

(FIN14H)
M&A DEFINITION
 COURSE OUTCOMES

Course code: FIN14H

Number of credits: 03
Course Objective: The Mergers and Acquisitions module is a specialized
module that provides learners an overview of M&A-related knowledge and
skills to apply in proposing M&A strategies, recognize entrepreneurial
opportunities and financing via M&A activities, and applying research skills
to analyze M&A activities. To reach these objectives, the module focuses on
M&A fundamentals including basic concepts, process, Due diligence,
negotiation, valuation, taxation, accounting, synergies, and post-
acquisitions integration. Legal framework, entrepreneurial opportunities,
cross-border M&A, and research skills are also discussed in this module.
 COURSE OUTLINE

Lecture Topic Readings

1 Introduction to M&A Chapter 1
2 Introduction to M&A (cont.)
3 M&A Methods Chapter 3
4 Anti-takeover defense
5 Regulatory framework Chapter 2
6 Regulatory framework (cont)
7 The M&A Process (10 phases) Chapter 4, 5
8 M&A Process (cont.)
9 Due Diligence
10 Review and mid-term test 1
11 M&A valuation Chapter 7
12 M&A valuation (cont.) Chapter 8
13 M&A synergies and post-closing integration Chapter 6
14 M&A synergies and post-closing integration (cont.) Chapter 12
15 Review and mid-term test 2
16 General Review
 MATERIALS

Lecture slides
Textbook: Mergers, Acquisitions, and Other Restructuring Activities, 11th
Edition – Donald M. DePamphilis. Elsevier Inc, 2025.
Maximilian Dreher (2021). Mergers & Acquisitions Understanding M&A
Processes for Large- and Medium-Sized Companies. Springer
Alexandra Reed Lajoux (2024). The Art of M&A: A Merger, Acquisition, and
Buyout Guide - 6th Ed., McGraw Hill
CHAPTER 1: INTRODUCTION TO M&A
 CONTENT

1. Introduction

2. Definitions
3. Motivations of M&A

4. Transaction characteristics

5. History of M&A
6. Alternative takeover strategies

7. Participants in the M&A process

8. M&A assessment
10

1. Introduction

Mergers and acquisitions (M&A) are complex, involving many parties.

Mergers and acquisitions involve many issues, including
Corporate governance.
Form of payment.
Legal issues.
Contractual issues.
Regulatory approval.
M&A analysis requires the application of valuation tools to evaluate the
M&A decision.
 Example of a merger: AMR and U.S. Airways

November
July 2012 2012
• U.S. Airways
proposes • AMR and U.S. • Details of the
merger to Airways begin • U.S. Airways proposes merger are
• AMR creditors merger
bankrupt encourage AMR to merger, with its worked out.
AMR. discussions. shareholders owning
merge with another • Merger filed
airline, instead of 30% of the new
company. with the FTC
emerging from under Hart-
bankruptcy alone. Scott-Rodino
September Act.
April 2012 2012
February
2013
 2. Mergers and acquisitions Definitions

Acquisition
Merger with Consolidation

Company
Company
A
X
Co
Company mp
C any
X, Y
Company
B Company
Y
13

Mergers and Acquisitions Definitions

Merger: In a merger, the boards of directors for 2 companies approve the
combination and seek shareholders' approval. After the merger, the acquired
company ceases to exist and becomes part of the acquiring company.

Acquisition: In an acquisition, the acquiring company obtains the majority

stake in the acquired firm, which does not change its name or legal structure.

Consolidation: A consolidation creates a new company. Stockholders of both

companies must approve the consolidation, and subsequent to the approval,
they receive common equity shares in the new firm.
14

Mergers and Acquisitions Definitions

Acquisition include stock acquisition and asset acquisition.
Stock Acquisition: Buyer purchases the company's stock, becoming the owner of the
entire legal entity, including all its assets, contracts, and liabilities (known and unknown).
Pros: Simpler, maintains business continuity (licenses/contracts often remain), easier
transfer of operations.
Cons: Buyer assumes all hidden liabilities, more extensive due diligence needed.
Asset Acquisition: Buyer selects and purchases specific assets (e.g., equipment, IP,
inventory) and assumes only chosen liabilities, leaving the seller's corporate shell intact.
Pros: Buyer can cherry-pick assets, avoid unwanted liabilities, potentially better tax
treatment.
Cons: More complex process (consents, contract renewals needed), potential operational
disruption, time-consuming.
15

Dicussion

Find a real M&A deal and identify the

form of the deal (acquisition
(asset/stock), merger, consolidation,
etc.)
16

Mergers and Acquisitions Definitions

Parties to the acquisitions:

The target company (or target) is the company being acquired.
The acquiring company (or acquirer) is the company acquiring the
target.
Classified based on endorsement of parties’ management:
A hostile takeover is when the target company board of directors
objects to a takeover offer.
A friendly transaction is when the target company board of directors
endorses the merger or acquisition offer.
17

Mergers and Acquisitions Definitions

Classified by the relatedness of business activities of the parties to the combination:

Type Characteristic Example

Horizontal merger Companies are in the same line of Walt Disney Company buys
business, often competitors. Lucasfilm (October 2012).

Vertical merger Companies are in the same line of Google acquired Motorola Mobility
production (e.g., supplier– Holdings (June 2012).
customer).

Conglomerate merger Companies are in unrelated lines Berkshire Hathaway acquires

of business. Lubrizol (2011).
18

3. Motivations of M&A

• Synergy
• Growth
Creating Value • Increasing market power
• Acquiring unique capabilities or resources
• Unlocking hidden value

• Exploiting market imperfections

• Overcoming adverse government policy
Cross-Border
• Technology transfer
Mergers
• Product differentiation
• Following clients
• Diversification
Dubious • Bootstrapping earnings
Motives • Managers’ personal incentives
• Tax considerations
19

Example: Bootstrapping earnings

Bootstrapping earnings is the increase in earnings per share as a result of a merger,

combined with the market’s use of the pre-merger P/E to value post-merger EPS.

Assumptions:
• Exchange ratio: One share of Company One for two shares of Company Two
• Market applies pre-merger P/E of Company One to post-merger earnings.

Company One Post-

Company One Company Two Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 $1.20
P/E 20 10 20
Price per share $20 $10 $24
Market value of stock $2,000 million $500 million $3,000 million
20

Example: Bootstrapping earnings

$100 $50
Weighted PΤE = × 20 + × 10 = 16.67
$150 $150

Assumptions:
• Exchange ratio: One share of Company One for two shares of Company Two
• Market applies weighted average P/E to the post-merger company.
Company One
Company One Company Two Post-Acquisition
Earnings $100 million $50 million $150 million

Number of shares 100 million 50 million 125 million

Earnings per share $1 $1 $1.20

P/E 20 10 16.67

Price per share $20 $10 $20

Market value of stock $2,000 million $500 million $2,500 million

21

Motives and the Industry’s Life Cycle

The motives for a merger are influenced, in part, by the industry’s stage
in its life cycle.
Factors include
Need for capital.
Need for resources.
Degree of competition and the number of competitors.
Growth opportunities (organic vs. external).
Opportunities for synergy.
22

Motives and the Industry’s Life Cycle

Industry Life Industry Types of

Cycle Stage Description Motives for Merger Mergers
Pioneering •Industry exhibits •Younger, smaller companies may sell •Conglomerate
development substantial themselves to larger companies in •Horizontal
development costs mature or declining industries and
and has low, but look for ways to enter into a new
slowly increasing, growth industry.
sales growth. •Young companies may look to merge
with companies that allow them to
pool management and capital
resources.

Rapid •Industry exhibits •Explosive growth in sales may require •Conglomerate

accelerating high profit margins large capital requirements to expand •Horizontal
growth caused by few existing capacity.
participants in the
market.
23

Motives and the Industry’s Life Cycle

Industry Life Types of

Cycle Stage Industry Description Motives for Merger Mergers
Mature • Industry •Mergers may be undertaken to •Horizontal
growth experiences a drop achieve economies of scale, savings, •Vertical
in the entry of new and operational efficiencies.
competitors, but
growth potential
remains.

Stabilization • Industry faces •Mergers may be undertaken to •Horizontal

and market increasing achieve economies of scale in
maturity competition and research, production, and marketing
capacity constraints. to match the low cost and price
performance of other companies
(domestic and foreign).
•Large companies may acquire smaller
companies to improve management
and provide a broader financial base.
24

Motives and the Industry’s Life Cycle

Industry Life Industry Types of

Cycle Stage Description Motives for Merger Mergers
Deceleration •Industry faces •Horizontal mergers may be •Horizontal
of growth overcapacity and undertaken to ensure survival. •Vertical
and decline eroding profit •Vertical mergers may be carried out •Conglomerate
margins. to increase efficiency and profit
margins.
•Companies in related industries
may merge to exploit synergy.
•Companies in this industry may
acquire companies in young
industries.
25

4. Transaction characteristics

Form of the • Stock purchase

Transaction • Asset purchase
• Cash
Method of
• Securities
Payment
• Combination of cash and securities

Attitude of • Hostile
Management • Friendly
26

Form of an Acquisition

In a stock purchase, the acquirer provides cash, stock, or combination of

cash and stock in exchange for the stock of the target firm.
A stock purchase needs shareholder approval.
Target shareholders are taxed on any gain.
Acquirer assumes target’s liabilities.
In an asset purchase, the acquirer buys the assets of the target firm,
paying the target firm directly.
An asset purchase may not need shareholder approval.
Acquirer likely avoids assumption of liabilities.
27

Method of Payment

Cash offering Merger Transactions, 2005

Cash offering may be cash from existing

acquirer balances or from a debt issue.
Securities offering Cash only

Target shareholders receive shares of

common stock, preferred stock, or debt of Stock only

the acquirer.
The exchange ratio determines the number Cash and securities

of securities received in exchange for a

share of target stock. Other securities

Factors influencing method of payment:

Sharing of risk among the acquirer and
target shareholders.
Signaling by the acquiring firm.
Capital structure of the acquiring firm.
Based on data from Mergerstat Review, 2006. FactSet
Mergerstat, LLC ([Link]).
28

Impact of the form of Payment

If a company announces an acquisition paid entirely with

stock, do you expect the acquirer’s share price to go up
or down?
Why?
29

Impact of the form of Payment

• Acquirer shareholders often experience negative announcement-date
returns when both acquirer and target are publicly traded and the deal
is paid mainly with stock.
• Acquirers tend to issue stock when they believe their shares are overvalued,
sending a negative signal to the market and triggering sell-offs.
• A significant portion (approx. 60%) of the stock price decline around the
announcement date is driven by merger arbitrage activity (buying target
shares and short-selling acquirer shares).
• Stock-financed acquisitions are more prone to overpayment, as acquirers use
overvalued equity to pay excessive premiums that cannot be fully recovered
through synergies.
30

Impact of the form of Payment

• Cash-financed deals generally involve less overpayment and show stronger
long-term performance than stock-for-stock deals, particularly in the U.S.
• In the European Union, stock deals may generate higher acquirer returns due
to the presence of large block shareholders and stronger post-merger
monitoring.
• Target shareholders may accept acquirer stock due to tax deferral benefits,
financing constraints, reduced post-merger leverage, or uncertainty about
overvaluation.
• Any announcement-period gains for acquirer shareholders tend to dissipate
within 3–5 years, suggesting that gains are often short-lived.
31

Friendly merger: Offer made through the Hostile merger: Offer made directly to the
target’s board of directors target shareholders

Approach target management. Types

• Bear hug
• Tender offer
Enter into merger discussions. • Proxy fight

Perform due diligence.

Enter into a definitive merger agreement.

Shareholders and regulators approve.

32

Hostile vs. Friendly mergers

The classification of a merger as friendly or hostile is from the perspective of the

board of directors of the target company.
A friendly merger is one in which the board negotiates and accepts an offer.
A hostile merger is one in which the board of the target firm attempts to
prevent the merger offer from being successful.
33

5. History of M&A (M&A waves)

1. The First Wave (1897 - 1904): Horizontal Consolidation

2. The Second Wave (1916 - 1929): Increasing Concentration
3. The Third Wave (1965 - 1969): The Conglomerate Era
4. The Fourth Wave (1981 - 1989): The Retrenchment Era
5. The Fifth Wave (1992 - 1999): The Age of the Strategic Megamerger
6. The Sixth Wave (2003 - 2008): The Rebirth of Leverage
34

6. Participants in the M&A process

❑ Providers of Specialized Services: Investment Banks, Lawyers, Accountants,
Proxy Solicitors, Public Relations Firms
❑ Regulators
❑ Institutional Investors and Lenders:
Insuranre, Pension, and Mutual Funds
Commercial Banks
Hedge, Private Equity, and Venture Capital Funds
Sovereign Wealth Funds
Angel Investors
❑ Activist Investors
Mutual Funds and Pension Funds
Hedge Funds and Private Equity Firms
7. Alternative takeover strategies
 8. M&A ASSESSMENT

➢ At the market level:

Provides an overall assessment of M&A market development through deal
volume (number and total value), participants, the breakdown of deal
volume by criteria (industry, country, type of enterprise), transaction forms
and methods, market outlook, etc.
➢ At the firm level: Two main approaches:
The market-based approach (Event Study)
The financial statement data approach (Operating assessment)

Lương Minh Hà
 Example: Event Study - Does the Deal Generate Abnormal
Returns for Shareholders?

Company Y's share price around the announcement date of an M&A deal (day t = 0) had the
following actual and expected returns (per the market model):
Y's share returns around the deal announcement date
Day Actual Return Expected Return
-2 0.5% 0.4%
-1 0.3% 0.4%
0 2.8% 0.4%
+1 0.9% 0.4%
+2 0.3% 0.4%

Assuming the calculations are statistically significant, please:

(a) compute the daily abnormal return (AR) for each day in the event window [-2, +2];

(b) compute the cumulative abnormal return (CAR) over the entire event window;
(c) comment on the market's reaction before and right at the time of the announcement.
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