Mergers, Acquisitions, Divestitures, and Other Restructurings. Paul Pignataro
is typically significantly larger than the asset or entity being purchased (the target).
Acquisitions can take several forms, including the following:
• Acquisition of assets: An acquisition of assets is the purchase of an asset or group of assets, and the direct liabilities associated with those assets.
• Acquisition of equity: An acquisition of equity is the purchase of equity interest in a business entity. The differences between an acquisition of assets and an acquisition of equity are important from a legal, regulatory, accounting, and modeling perspective and will be detailed further later in the book.
• Leveraged buyout: A leveraged buyout (LBO) is an acquisition using a significant amount of debt to meet the cost of acquisition. Please see my book entitled Leveraged Buyouts: A Practical Guide to Investment Banking and Private Equity for a thorough analysis of leveraged buyouts.
• Management buyout: A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the business entity.
Acquisitions can be considered hostile or friendly, depending on the assertive nature of the process.
• Friendly acquisition: An acquisition accomplished in agreement with the target company's management and board of directors; a public offer of stock or cash for example is made by the acquiring firm, and the board of the target firm will publicly approve the terms.
• Hostile acquisition: An acquisition that is accomplished not by coming to an agreement with the target company's management or board of directors, but by going through other means to get acquisition approval, such as directly to the company's shareholders; a tender offer and a proxy fight are ways to solicit support from shareholders without direct approval from company management.
Mergers, consolidations, and acquisitions can be categorized further:
• Horizontal: A horizontal transaction is between business entities within the same industry. Such a combination would potentially increase market share of a business in that particular industry.
• Vertical: A vertical transaction is between business entities operating at different levels within an industry's supply chain. Synergies created by merging such firms would benefit both. A good example is within the oil and gas industry. In the oil and gas industry you have exploration and production (E&P) companies that drill for oil. Once oil is found, the wells are producing, and the energy is refined, distribution companies or pipeline companies transport the product to retail for access to the customer, such as a gas station. So in this example, an E&P company purchasing a pipeline company or a gas station would represent vertical integration – a vertical merger. In contrast, an E&P company purchasing another E&P company is a horizontal merger.
• Conglomerate: A transaction between two or more unrelated business entities – entities that basically have no business activity in common; there are two major types of conglomerate transactions: pure and mixed. Pure conglomerate transactions involve business entities that are completely unrelated, while mixed conglomerate transactions involve firms that are looking for product extensions or market extensions.
Divestiture: A divestiture is the sale of an interest of a business entity, an asset, or group of assets.
Divestitures can be delineated futher:
• Asset divestiture: An asset divestiture is the sale of an asset or group of assets. In Part Two of this book we will discuss a simple asset divestiture.
• Spin-off: A spin-off occurs when a parent company creates a separate entity and distributes shares in that entity to its shareholders as a dividend.
• Equity carve-out: An equity carve-out occurs when a parent company sells a percentage of the equity of a subsidiary to the public. This is also known as a partial IPO.
Other restructurings: Mergers, consolidations, acquisitions, and divestitures can all be considered types of business restructurings as they all involve some level of reorganization aimed to increase business profitability. Although the foregoing are just major categories, other types of business restructurings can be considered to help fuel growth. A share buyback, for example, is when a company buys back shares in the open market. This creates an antidilutive effect, hopefully fueling an increase in company stock price. A workforce reduction is another example of a way to reduce costs and improve earnings performance. Each of these strategies are other restructuring examples which aim in some way to improve business value.
Although not a complete overview, briefing the foregoing terminology should in the least give perspective on the analyses to follow. Again for more subjective detail on M&A definitions and process, there are plenty of M&A books out in the market to complement this book. The purpose of this book specifically is to illustrate the technical analysis quantifying the financial benefits of an M&A situation.
The M&A Process
Although there are many facets to M&A and the industry is constantly evolving, it is important to understand the possible steps an acquirer would take in order to pursue a target business. This will further help one understand the M&A process. The early stages of the process are considered friendly, and the latter hostile.
Casual pass: A casual pass is an informal inquiry made to business management. This can literally be done via e-mail, a letter, or a phone call. A solicitation to management to discuss “strategic alternatives” can be a suggestion for acquisition. Management can either respond or reject. A rejection would lead the acquirer to one of the next steps, and this can now be considered hostile.
Bear hug: A bear hug is a letter to company management regarding an acquisition and demanding a rapid response. The letter is not a proposal but rather a demand and arrives without warning. Often the bear hug action is made public and is utilized to encourage management to negotiate in a friendly manner.
Open market purchase: In an open market purchase the acquirer purchases shares in the open market. Although an interesting tactic, this can often end up unsuccessful if a majority of shareholders are not willing to sell their shares. However, if successful, this could lower the overall cost of the transaction as one blanketed control premium is no longer negotiated, among other reasons. We will discuss the control premium later in the book.
Proxy contest: In a proxy contest the acquirer seeks to gain shareholders' support to change the board of directors' or management's decision in some way to allow the acquisition to proceed. A proxy letter can be mailed out to every shareholder in an attempt to garner support in the form of “votes.” Although the proxy strategy comes in several forms, it can prove to be unsuccessful if the target company stock is held by a large number of individuals.
Tender offer: A tender offer is a direct solicitation to purchase shareholders' shares. Because a significant purchase premium is involved in order to try to ensure that enough shareholders would be willing to sell their shares and allow the acquisition to proceed, the tender offer is a costly method of acquiring a business.
These major categories do have subcategories, and other methods of pursuing an acquisition do exist. But these major methods should help provide the most general perspective on acquisition procedure. Of course, all of the steps to an acquisition are vast and time-consuming, and consist of legal, regulation, research, and due diligence. But these are the major components designed to help you understand from a very high and investment banking–minded level where these acquisitions come from. Let see how this framework applies to Office Depot and OfficeMax.
Office Depot and OfficeMax
It is important to research various data sources for accurate information on the Office Depot and OfficeMax transaction. I would recommend going to both company websites and www.sec.gov for the most accurate information on the company and transaction.