We just wrapped up all major strategic ideas about why companies engage in this or that strategy. And we said that the M&A strategy is one of them. Sometimes companies may prefer it. But now, we are moving towards something more specific. Namely, we will try to answer the following question, why would we bother to engage in a potential M&A transaction? What is our main motive? And this topic is oftentimes entitled, the Theories of Merges and Takeovers. And that's what we'll be doing until the end of this week. Namely, we will discuss the motives and main reasons for that. And those who will study what obstacles can be met on this path, and how people are trying, in general, to overcome that. Well, first of all, so we will put it like theories, Of M&A. Well, the first, and it's historical, the first motive, is this idea of the size. So this is return to size, return to scale, return to scope, whatever. So the main idea, as it was pursued as early as maybe 130, 150 years ago was, if I grow, if I become the bigger company, then that might be creating value. So the first thing is, I will put them like 1, size and return to scale. Well, we talked a lot about the potential caveat here, that is antitrust considerations. But for now, we will leave that, because we talked about that before. So here, what points can be made? First of all, these experience curves, That result in corresponding cost leadership, then better capacity utilization. Well, maybe, let's say, you have a lot of capacity or plans that are underloaded. And by buying another company that has projects, you can implement these projects on your plans. And that makes the utilization plans higher, that feeds efficiency. Then various kinds of economies of scope, what do we mean here? The examples that are easy to understand is, let's say, you have the mobility of the pseudo-pharmaceutical industry. If you you some edge in making one group of automobiles or one maybe one platform, that might be easier for you to enter the other one. Or if you have successfully marketed one drug, then if you have another drug, then your marketing force may easier bring that to customers. So all that contributes to your efficiency, and in the long-term, it creates value. Well, all that is sort of the first thing. Then also, we can mention some other things here that deal with financial capacity. But for that, we will reserve the special part. Now, the next thing, this is sort of models, Of the M&A process. And here, I would not talk about many of them. But this topic is covered in detail in our handouts and in the book, because they are, first of all, what can we say about? That they are plenty. We can use a couple of pages of this flip chart to just mention them, but as you will see that all, what do we deal with? We deal with various things. And what we will mention here is that sometimes they deal with some private information. Well, high from capital markets of course, and then also, they may deal with some other special areas. So the process, itself, may be the motive and again, that just gives you an idea. So you can see that the first, although this has something behind it, the second one is quite vague, but I will move forward. And we will start to remove this vagueness, if you will. Now, the next two, they are entitled, Value, Creation strategy, and I will put here 1. And on our next page, we will discuss value creation two. So here, I will mention something specific. You can say, well, wait a minute, it seems that the value creation motive is key to any potential transaction. Well, indeed, it is, but this sort of specifies how exactly we are trying to catch this value. Well, the first thing is efficiency increases. Well, you can say this sounds heretic, it does, but what we exactly do mean by that? Various kinds of economies, again, as was mentioned before, and then maybe you just know how to do certain things better than others. And if you buy in other company, you introduce the stability to them. Now, here comes something like operating synergy. Again, in the most simplistic form, we are back to economies of scale and scope, but it may be also some managerial capacity. Now, the next motive is diversification. And here, you can say well, wait a minute. In corporate finance, we talked a lot about diversification. It seems to be the thing that is not core to M&A. It is observed everywhere in finance, but here, I would like to remind you of something. When we talked in finance about diversification that any investor can enjoy, we specifically emphasized that that happens only in liquid capital markets. So when we talk about diversification at the level of the company, I even gave you examples when sometimes that the network has moved as it was supposed to. So here, we have to specify what exactly we mean by this diversification. And that may be diversification on the part of owners, that may be diversification on part of managers. Of employees. For example, if you work in the same company, then you're sort of really linked to that, you're tied to that. If you would like to pursue some other projects, then you're likely to be forced to leave. If, however, the company itself opens up a broader horizon for you, then you, as an employee or as a manager, can find some may be better way to reach your goals or to do something better. Now, the same thing here is observed on other levels. Now, I would like to shift focus a bit, and also mention financial synergy as I mentioned just one page of flip chart out. What do we mean by that? You can say, again, this is what we pursue in all feasible transactions, but here, we are specific, that maybe let's say lower cost of financing. Well, I have a big company. I have a good credit rating. And this company that I am about to merge with or about to buy is a smaller company with worse credibility in the market. Not because you are doing poorly, but because they do not have this wonderful history of borrowing and then repaying their debt. Now for me, it's cheaper to borrow in large amounts, but I might have that excess cash but I may lack investment projects. So if I buy this company, I borrow cheaper, and then I finance with this cheap money with these projects. So that's a classic synergistical win-win situation. Now, then it may be not only lower cost, but close to that is just debt capacity. Let's say, I have a lot of cash and little debt, so I can borrow in large amounts. The company that is growing fast lacks cash, and they cannot borrow. Now, the next thing here is sometimes this idea of just financing someone else's projects, that may be more than the financial synergy, but here, it's seemed the best. And now, the final thing here is strategic re-alliance, Or I would say, realignment is better to say, Sorry. And what does that mean? Remember, in previous episodes, we talked in quite some detail about strategy. Maybe now, I'm thinking to realign my strategy because remember, we mentioned that many times but here, come these notorious technology, And change. So maybe, I prefer to engage in these transactions specifically to change my strategic focus somewhat. And that may be done by purchasing the company that is doing that. So I can do that internally, but that takes not only money and effort, but also time. And by the time I hopefully succeed, that may be too late. That's what's going on in the recent M&As in these IT and Internet areas. People cannot wait until they create the better technology themselves. They just prefer to buy this technology to go with the product. Now, so that was sort of value creation one. Let's proceed to what I call here as value creation two. And here, We talk about the issues that, again, we talked in some detail in our capital markets course, and also in our corporate finance course. The first thing is undervaluation. Well, it can be because of the notorious short-term myopia. So sometimes remember that managers, they bother about the result for this quarter or for this year. We talked about that also in our accounting course, then we talked about relevant costs and decisions to change or replace the equipment. And then we said that sometimes managers are pushed to take shorter term decisions, because that specifically and directly influences their performance. And because of that, they will lose out on some potential longer term opportunities. Now, the next thing is just information. Well, here, we mean, let's say, the company is sitting on a gold mine, on some new super product or super technology. And they sort of know this, and if they disseminate it properly, that may create value. And also, we obviously talk about our good old friend, asymmetric information. Now, the next thing that is close to that is signaling. Once again, we talked about market scores. But here, we specifically mean that if someone makes an offer for another company, that signals that this company is either undervalued, or its value can be pushed up by some actions. Well, that has been supported by the idea that even if the transaction fails, then oftentimes the stock of the target company does not fall to the pre-offer level or lower. Because some people said, well, maybe they failed to complete this transaction, but some potential still stays there. So, basically, some examples here. What's a share repurchase? That signals the fact that may be the stock is now undervalued. So if the company buys back its stock, that's a signal. Or as I said before, that the tender offer, This is the same as some potential in this target company. So I would take a pause here, and in the next episode, I'll proceed with some other major motives for engaging in the M&A transaction. Because there are quite a few of them and not to make this episode too
