Merger of Equals (합병)
A merger of equals (MOE) is the combination of two companies of roughly equal size.
Key Features of an MOE
One company’s stock survives the transaction (meaning that one company’s stock will be used for the new company going forward)
There is no buyer from a “control” or governance standpoint. Shared governance, at both the management and board levels, is a defining characteristic.
No control premium is paid to one party. Management and boards of both companies participate in creating value for the new company going forward.
MOEs are almost always stock-for-stock exchanges structured in fixed exchange ratio because it determines the post-transaction ownership of the new company between the two sets of shareholders.
In purchase accounting, target’s balance sheet would be fair valued and combined with Acquiror’s historical balance sheet (meaning Acquiror’s balance sheet would not be fair valued).
Value is created through synergies
Revenue enhancement
Cost savings
Expansion of trading multiples
Splitting the New Company Equity
The Split is negotiated by the two companies based on financial and social contributions to the new company. The three most widely used analyses are:
Contribution Analysis
Historical natural exchange ratio (historical market-based exchange ratio analysis)
Valuation analysis (DCF, Comparable company analysis and precedents)
The goal in all three of these analyses is to determine the stand-alone value of each company relative to the other company in order to determine what fixed exchange ratio most fairly allocates ownership of the new company between the two sets of shareholders.
The exchange ratio is the number of Acquiror shares offered in exchange for one share Target.
Exchange ratio = Target offer price / Acquiror share price
Most MOEs are structured as fixed exchange ratio with no collar, cap or floor, so that both companies share equally in any increase (or decrease) in the surviving company’s stock price.
Case study
Company A and Company B - % of Combined Equity Value
The market exchange ratio, assuming Company A’s stock will survive, is:
For Company B shareholders: $65 / $20 = 3.25x
This means that a Company B shareholder receives 3.25 shares of Company A.
