Shareholder Value At Risk (SVAR) in M&A

Shareholder Value At Risk (SVAR) in M&A

One of the mysteries in #mergersandacquisitionsย deals, in my experience, is to ๐ฃ๐ฎ๐ฌ๐ญ๐ข๐Ÿ๐ฒ ๐š๐ง ๐š๐œ๐ช๐ฎ๐ข๐ฌ๐ข๐ญ๐ข๐จ๐ง ๐ฉ๐ซ๐ž๐ฆ๐ข๐ฎ๐ฆ ๐ญ๐ก๐ž ๐ฌ๐ž๐ฅ๐ฅ๐ž๐ซ ๐๐ž๐ฆ๐š๐ง๐๐ฌ ๐š๐ ๐š๐ข๐ง๐ฌ๐ญ ๐ญ๐ก๐ž ๐ž๐ฑ๐ฉ๐ž๐œ๐ญ๐ž๐ ๐ฌ๐ฒ๐ง๐ž๐ซ๐ ๐ข๐ž๐ฌ ๐Ÿ๐ซ๐จ๐ฆ ๐ญ๐ก๐ž ๐ญ๐ซ๐š๐ง๐ฌ๐š๐œ๐ญ๐ข๐จ๐ง. Too often, the acquirer’s share price declines after the announcement of the merger (the recent example is theย Zomatoย #Blinkitย merger) because of the following:

1)The buyer shareholders believe they have paid more.
2)The buyer shareholders think they cannot realize synergies that justify the premium.

In my experience of analyzing and closing multiple M&A deals, i focus on two things:

1)Shareholder Value at Risk (SVAR)
2)Revenues and Cost synergies the buyer must achieve to justify the premium

In this post, i will talk on SVAR.

Shareholder value at risk = Premium paid for the deal/Market price of the buyer pre-deal

For instance, if the buyer pays a 30% premium, the buyer’s market cap pre-deal is 1000, and the seller’s market cap pre-deal is 100,

Deal Value = 100(1+30%) = 130
Seller Value/Buyer value = 100/1000 = 10%
Shareholder value at risk = 10%
30% = 3%

Thus, the buyer must achieve at least 3% of synergies to break even.

Therefore, the function of the buyer’s stock price movement post-deal announcement is a function of:

1)๐—ง๐—ต๐—ฒ ๐—ฑ๐—ฒ๐—ฎ๐—น ๐˜ƒ๐—ฎ๐—น๐˜‚๐—ฒ – Higher the size of the seller relative to the buyer, the higher the risk
2)๐—ฃ๐—ฟ๐—ฒ๐—บ๐—ถ๐˜‚๐—บ – Higher the premium, higher the risk
3)Synergies:ย How likely can buyer realize projected synergies. Here, the Market looks at the buyer’s track record to assess if the deal succeeds.

๐€๐ฌ๐ฌ๐ฎ๐ฆ๐ž ๐ญ๐ก๐š๐ญ ๐ญ๐ก๐ž ๐›๐ฎ๐ฒ๐ž๐ซ ๐ฎ๐ฌ๐ž๐ฌ ๐ข๐ญ๐ฌ ๐ฌ๐ญ๐จ๐œ๐ค ๐ญ๐จ ๐ฉ๐š๐ฒ ๐ญ๐ก๐ž ๐ญ๐š๐ซ๐ ๐ž๐ญ ๐ฌ๐ก๐š๐ซ๐ž๐ก๐จ๐ฅ๐๐ž๐ซ๐ฌ:

In that case, the buyer’s stake in the combined firm = 1000/1130 = 88.5%

SVAR = 88.5%*3% = 2.65%

The buyer’s SVAR declines with the stock deal against cash deals because the target takes a specific risk in synergies realization.

However, stock deals send negative signals to investors as they assume:

1)Buyer issues its stocks because it is overvalued.
2)If the buyer is confident in realizing synergies, why does it wants to share benefits with the seller

Thus investors treat stock deals negatively compared to cash deals.

In my experience, such ๐˜€๐˜๐—ฟ๐—ฎ๐˜๐—ฒ๐—ด๐—ถ๐—ฐ ๐—ฎ๐—ป๐—ฎ๐—น๐˜†๐˜€๐—ถ๐˜€ ๐—ต๐—ฎ๐˜€ ๐˜€๐—ถ๐—ด๐—ป๐—ถ๐—ณ๐—ถ๐—ฐ๐—ฎ๐—ป๐˜ ๐—ถ๐—บ๐—ฝ๐—น๐—ถ๐—ฐ๐—ฎ๐˜๐—ถ๐—ผ๐—ป๐˜€ ๐—ณ๐—ผ๐—ฟ ๐—ฎ ๐—ฏ๐—ผ๐—ฎ๐—ฟ๐—ฑ ๐—ฎ๐˜€๐˜€๐—ฒ๐˜€๐˜€๐—ถ๐—ป๐—ด ๐—ฎ ๐—ฑ๐—ฒ๐—ฎ๐—น’๐˜€ ๐˜ƒ๐—ฎ๐—น๐˜‚๐—ฒ, ๐—ณ๐—ผ๐—ฟ ๐—ถ๐—ป๐˜๐—ฒ๐—ด๐—ฟ๐—ฎ๐˜๐—ถ๐—ผ๐—ป ๐—ฝ๐—น๐—ฎ๐—ป๐—ป๐—ถ๐—ป๐—ด, ๐—ฎ๐—ป๐—ฑ ๐—ด๐˜‚๐—ถ๐—ฑ๐—ฎ๐—ป๐—ฐ๐—ฒ ๐—ถ๐—ป ๐˜„๐—ฟ๐—ถ๐˜๐—ถ๐—ป๐—ด ๐—ฎ ๐˜„๐—ถ๐—ป๐—ป๐—ถ๐—ป๐—ด ๐—ถ๐—ป๐˜ƒ๐—ฒ๐˜€๐˜๐—ผ๐—ฟ ๐—ฝ๐—ฟ๐—ฒ๐˜€๐—ฒ๐—ป๐˜๐—ฎ๐˜๐—ถ๐—ผ๐—ป.



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