1.6. Legal and regulatory environment (2) – other issues

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From the course by Moscow Institute of Physics and Technology

Mergers and Acquisitions – The Relentless Pursuit of Synergy

10 ratings

Moscow Institute of Physics and Technology

Mergers and Acquisitions – The Relentless Pursuit of Synergy

10 ratings

Course 4 of 5 in the Specialization Understanding Modern Finance

The area of mergers and acquisitions (M&As) is special in finance. Incredible amounts of money are employed in such transactions. Deals draw a lot of public attention and dispute. Oftentimes, stories look more like fairy tales rather than financial reality. The key idea in any M&A transaction is to create value through a potentially synergetic activity. To this end, it is important to have a clear motive and implementation plan. Of special importance are the correct valuation, proper financing, and actual deal completion. But this is not the end – value mostly accrues from the post-merger integration. The understanding of the motives of various stakeholders is instrumental in the analysis of the potential creation of value. The learners will gain insight into the core value creating M&A strategies. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses. Finally, the Course is very helpful in successful completion of the Specialization’s Final Project.

From the lesson

Why M&As? Stakeholders, Framework and Process. Legal and Regulatory Environment. Accounting and Tax Issues an Overview

In Week 1 we paint the big picture of the M&A field. We identify the value creation as the key motive behind these deals. In order to analyze the value creation process, we introduce the stakeholders’ approach and study stakeholders’ motives in some detail. Then we discuss the idea of synergy as the core objective of a successful M&A transaction and its pitfalls. We introduce the framework and process of M&As and discuss the overall environment of these transactions – legal and regulatory issues (especially, antitrust motives), accounting treatment of M&As, and some important tax considerations. We will see how the transaction environment and treatment influence the potential of successful implementation of a transaction and the corresponding value creation.

1.1. Introduction: Why study M&As?5:43

1.2. The stakeholders’ paradigm14:30

1.3. Buzzwords and challenges. Synergy11:03

1.4. Studying M&As – framework and process11:42

1.5. Legal and regulatory environment (1) – antitrust motives9:51

1.6. Legal and regulatory environment (2) – other issues11:59

1.7. M&As – some accounting issues11:00

1.8. M&As – some tax considerations13:17

Meet the Instructors

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Before we proceeded, I'd like to add a few words to what we talked about in

the previous episodes when we studied antitrust regulation.

And I would, here,

provide some measures or guidelines that have been prepared

for the companies to assess the concentration in a certain industry.

I'm not putting much focus on that,

because these are formal,

just to you to have an idea about that,

because right now, much more informal measures are being used.

The measure of concentration historically

was the so-called HHI that stands for Herfindahl-Hirschman index,

that is just the sum of market shares

squared and those are measured in percentage points and guidelines are as follows.

If HHI is less than 1,000

then the industry is thought to be a low concentration industry.

For example, if we have 20 companies and they have five percent each,

then the index will be five squared times 20,

500 if the index

is between 1,000 and 1,800,

well, for example, it's like eight companies we're at

10 percent rate squared and then two companies,

and two companies we have the remaining well this is 80 percent,

and that one company we have just 20 percent,

and that gives you 1,200 so that falls right here,

and that industry is thought to be sort of medium concentration industry.

And then finally, if HHI exceeds

1,800 that is thought to be a high concentration industry.

For example, if there are four companies and each has

a 25 percent market share then this is 625 and we arrive at 2,500.

Well, this measure is highly mechanical if you will,

because right now when will it in the world of Major IT giants some of

them may have a market share that exceeds 50 percent sometimes even higher.

And although by these guidelines they have to be

treated as extremely high concentration histories, but still, sometimes,

better logic is applied and if these companies they still provide

much better services than anyone else and although

they technically speaking may be treated as monopolies,

but they do not produce adverse effect on the market and therefore,

these are just for the information and again,

that brings us logically to the next topic of this episode

and we know that when we talked about

antitrust the main idea was to avoid monopolization,

because this is bad for the market by

the same token other pieces of legislation that we will discuss in just a moment.

They're aimed at another very important topic which is linked to that,

how we can protect investors or market participants of that,

for this will reason that can't protect themselves.

Remember we dealt with that back in our first course about capital markets,

when we talked about deposit insurance, for example.

We said that the deposit insurance is aimed that protection of the weakest,

of the smallest investors,

while the big guys of people who have deposits or assets that

count and millions and millions of dollars

they're supposed to be able to protect themselves.

Now, so here, we,

first of all have to recall securities laws,

we have some idea about that and here we talked about

registration and in general

I would say protection, securities.

We talk about capital markets for us about

various regulatory guidelines and laws that govern this.

But again, the idea is that you cannot issue securities the

way that may be harmful for the majority of investors.

Now the next thing,

I would add some of that is tender offer regulation,

so this is closer to our topic and here we have to first of all,

recall the Williams Act 1968.

Now, Williams Act basically talks about more information disseminated to the public,

then it talks about the minimum length of the offer so that people cannot be,

cannot be found in a situation when they say, "Well,

we just realize what is going on but it's a day after a fair."

So, there must be some time period over which the people can make a decision.

And basically, it specifically allowed

the targets to sue bidders in case that these bidders they commit something wrong.

Now, all of that must be demanded by two other very strong acts that

deal with potential abuses in this market that

are somewhere in between securities and M & As.

And this is, first of all,

Insider Trading Sanctions Act

that is 1984,

and the key story here is that if you engage

in insider trading and you're indicted you haven't committed that,

then the plaintiffs can sue you for triple damages.

So, that's really very strong and it must be added to

that the famous RICO Act of 1970.

RICO stands for Racketeer Influenced and Corrupt Organizations.

Here, not only winning plaintiffs are entitled for triple damages

but also for assets seizure.

So basically, if you're indicted of having committed the crime under the RICO Act,

you may be really crashed.

The famous case when Michael Milken was sued by plaintiffs,

that happened under the RICO Act.

So, he went to jail and also his company actually faced big damages.

So, that is basically what we know about this and now

its time to say a few final words about,

so we talked about laws.

Now, just other regulatory issues,

again the idea here is as follows.

You must do something in the corners of certain guidelines.

If you fail to do so,

then we go back to the previous pages of a slip chart

and you can be sued on the grounds of some of these acts.

So first of all, we deal with disclosure,

so you have to provide certain information and you cannot afford to lie.

Now, there are clearly some regulatory bodies that watchful that,

then also there is another dimension like I said it's

international both antitrust and other related laws

and there's one more thing that we thought

in much greater detail close to the end of this course.

But now we mentioned that,

this is corporate governance issues.

We will see that,

that is all aimed at protection of

small investors and protection of minority participants.

So, in our jargon of the weakest.

Now, and there are some challenges

to the regulatory environment that are observed right now in recent years.

So these challenges include,

I would put it like fake news because this area is extremely delicate so you can say,

"Well, this company is actual lying to its investors."

Well, you can prove that this is not true,

that takes time and maybe some investors will say,

"Well, we'll wait until that's all clarified and the transaction may fall apart."

And also now, we see

channels like social media and other channels,

information channels, I will put it like this.

So here, again, anyone can say,

can post on his or her face on a page on Facebook say,

"Well, something's going wrong here."

It may be well fake news is probably tough word,

but people might think about that.

They have not yet approved, but they doubt something and that in itself may be actually

very harmful for the potential transaction success and therefore value creation,

oftentimes without any ground.

So basically, I would like to say that the key story in the regulation again is

protection of the weak

and at this angle we have to look at that.

In the remaining two episodes of this first week,

we will talk about some other issues that are close to regulation namely about

some accounting expert aspects and

some tax factors that also influence M & A transactions.

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