I. Abstract
III. Table of Figures
IV. Table of Abbreveations
1. Introduction
1.1. Background
1.2. Problem discussion
1.3. Research question
1.4. Purpose
1.5. Delimitation
2. Theoretical Framework
2.1. Theory on Mergers & Acquisitions
2.1.1. Mergers
Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
2.1.2. Acquisitions
Hostile Acquisitions
Friendly Acquisitions
2.2. Trends in Mergers & Acquisitions
2.2.1. Mergers & Acquisitions as a Trend in history
The first M&A wave
The second M&A wave
The third M&A wave
The fourth M&A wave
The fifth M&A wave
Recent and current trends
2.2.2. Behavioral Catalysts in Mergers & Acquisitions
Hubris
Managerialism
Herding
2.3. Value creation in Mergers & Acquisitions
2.3.1. The discounted cash flow model
3. Methodology
3.1. Research design
3.1.1. Sample
3.2. Data collection
3.2.1. Realization
Interviews
Statistical ascertainment
3.2.2. Operationalization
3.3. Research quality
3.3.1. Validity
3.3.2. Reliability
3.3.3. Source criticism
Literature
Interviews
Statistical Ascertainment
4. Empirical investigation
4.1. The Case Study - Boss Media AB
4.1.1. Industry background - the online gaming industry
4.1.2. Company background - Boss Media AB
4.2. Revelations from the empirical data
4.2.1. Revelations from the interviews and statistical ascertainment
M&As
Hubris
Managerialism
Herding
Value creation in M&As
Value estimation of M&As
Overpricing
5. Analysis
5.1. Mergers & Acquisitions - a trend caused by social behavior?
5.2. Mergers & Acquisitions - sustainable value creation?
5.2.1. Evaluating Boss Media AB - the discounted cash flow model
Step I - entering historical data
Step II - deriving net working capital
Step III - projecting future data
Step IV - calculating free cash flows
Step V - estimating the WACC
Step VI - estimating PV, determining valuation and terminal value
Step VII - determining equity value
Step VIII - sensitivity analysis
5.2.2. Results from the evaluation of Boss Media AB
6. Conclusion
6.1. Summary of the results
6.2. Limitations
7. Reflections
7.1. Reflections of Mergers & Acquisitions as trigger for trends and value creation
7.2. Suggestions for future research
V. Bibliography
VI. Appendix
A. Operationalization
B. Empirical investigation - interviews
B.I. Competitors of Boss Media AB
B.II. E-mail interview with Andreas Löfstrand
B.III. Interview guideline
B.IV. Interview with Andreas Löfstrand
C. Empirical investigation - statistical ascertainment
C.I. Annual report Boss Media AB 2006 (excerpt)
C.II. Annual report Boss Media AB 2007 (excerpt)
C.III. Annual report Boss Media AB, 2007, increase in short-term debt
C.IV. Risk-free interest rate 2007 in accordance to Swedish government bonds
C.V. Beta
D. Glossary
Figure 1: Announced Mergers & Acquisitions Worldwide, 1985-2010 (IMAA, 2011)
Figure 2: The synergetic value effects of M&As (Damodaran, 2002)
Figure 3: The discounted cash flow model (Brealy, Myers, & Allen, 2008, p. 103)
Figure 4: Discounted cash flow model considering growth after year n (Gaughan, 2007, p 536)
Figure 5: WACC (not considering taxes) (Berk & DeMarzo, 2007, p. 439)
Figure 6: Capital asset pricing model (Berk & DeMarzo, 2007, p. 310)
Figure 7: WACC with marginal corporate tax rate (Berk & DeMarzo, 2007, p. 577)
Figure 8: Discounted cash flow model at the weighted average cost of capital (Brealy, Myers, & Allen, 2008, p. 535)
Figure 9: Share price development of Boss Media AB 01-2008 to 03-2008 (Euroinvestor A/S, 2008)
Figure 10: Announced Mergers & Acquisitions IT consulting and services, 1988- (IMAA, 2011)
Figure 11: Computation of historical data of Boss Media AB 2004-2007
Figure 12: NWC computation of Boss Media AB 2004-2007
Figure 13: Actual period and forecasted period computation of Boss Media AB EBIT to sales, 2004-2012
Figure 14: NWC of actual and forecasted period of Boss Media AB 2004-2012
Figure 15: Actual period and forecasted period computation of Boss Media AB EBIT to CF, 2004-2012
Figure 16: WACC considering the marginal corporate tax rate (Berk & DeMarzo, 2007, p 577)
Figure 17: WACC computation of Boss Media AB 2007-12-31
Figure 18: PV of Boss Media ABs FCF in 2008
Figure 19: PV of Boss Media AB’s FCF in 2008 using a mid-year convention
Figure 20: PV of Boss Media AB 2004-2012
Figure 21: GDP growth rate Europe and US, 2004 to 2007 (Bureau of Economic Analysis, Departement of Commerce, 2011), (European Commission, eurostat, 2011)
Figure 22: Terminal value of Boss Media AB 2007-12-31
Figure 23: Enterprise value and implied multiples of Boss
Figure 24: Sensitivity analysis of Boss Media AB 2007-12-31
Figure 25: Answers to the research questions
Figure 26: Operationalization
Figure 27: Competitors of Boss Media AB (Boss Media AB, 2007, pp. 28-29)
Figure 28: Announced Mergers & Acquisitions Worldwide, 1985-2010 (IMAA, 2011)
Figure 29: Announced Mergers & Acquisitions IT consulting and services, 1988- (IMAA, 2011)
Figure 30: Financial data group review of Boss Media AB from 2002 to 2006 (Boss Media AB, 2007, pp. 93-94)
Figure 31: Financial data group review of Boss Media AB from 2003 to 2007 (Boss Media AB, 2008, pp. 68-69)
Figure 32: Note 21, other receivables and liabilities (Boss Media AB, 2008, p. 59)
Figure 33: Risk-free interest rate 2007 in accordance to Swedish government bonds (Sveriges Riksbank, 2011)
Figure 34: Computation of Boss Media AB’s unlevered Beta (Damodaran A. , The Data Page, 2011), (Damodaran A. , Betas by Sector, 2011)
Abbildung in dieser Leseprobe nicht enthalten
Today, companies need to constantly expand their business to stay ahead of the severe competition. As competition grows more intense, it makes sense to join forces or simply acquire the rival to provide the most diverse service and to reach even the last customer. But is it really only about the need for efficiency to merge and acquire competitors? Are managers and investors right about their hope, that every new acquisition or merger offers more control over the market? Or are they themselves pushed into these promising expec- tations?
This research focuses on how social behavior influences value creation in mergers and acquisitions. Throughout history, waves have been observed that reflect the excessive hype for perennial need of growth. Growth by acquisitions and mergers is seen as key element to create value by investors and managers. However, reality looks different. This research focuses on a two step approach by first describing underlying social catalysts that amplify the trend towards value creation in mergers and acquisitions. Secondly, to verify the inves- tigation of social behavior, the results are matched to a financial approach to detect wheth- er the transaction price justifies the current value and possible synergies or whether value is destroyed.
A case study was conducted of Boss Media AB, a software company situated in the online gaming industry, which experienced several mergers and acquisitions since their foundations and was eventually acquired itself. The company provided an interview and further information on their involvement with mergers and acquisitions.
The research showed that mergers and acquisitions continue to increase in number and value, leading to the amplitude of each wave being higher than the previous one. This also means that more value is destroyed. It is illustrated that managers being determined to have bet on the right horse, are often more influenced by social behavior and trends than they think they are. Blinded by the overestimation of their own abilities, and prosperous short- term profits, managers overvalue their investment choices. Hence, the research implies that managers destroy shareholder value even though they initially intended to create it.
The research ’ s focus is the field of Mergers and Acquisiti]ons (M&As) and the underlying enthusiasm of investors towards them. More precisely, the issue of M&As being a business concept for sustainable value creation is weighted up against them being reoccurring trends, triggered by social behavior.
In the introductory chapter, the background and its surrounding controversy of M&As is introduced. Next delimitations, the theoretical and empirical boundaries set by researchers to meet the scope of their work, are portrayed (Bryman & Bell, 2007). Finally, the problem discussion transits to the research question and purpose.
Warren Buffet (1982) once said that acquirers perceive themselves as princesses who can turn toads into princes with their kiss. Acquirers pay horrendously overpriced premiums, believing they will break the enchanted prince ’ s spell.
“ We ’ ve observed many kisses but very few miracles. ” (Hayward & Hambrick, 1997, p. 103)
Throughout history there have been waves of M&A activity. M&As have become an im- portant tool for the reallocation of resources and for executing corporate strategies (Koller et al., McKinsey & Company, 2010). Particularly, most companies will be able to reach a certain level of growth by using their own resources, but no further. However, increasing competition forces companies to rethink their motives for investments. Companies will then have to decide whether they either invest fresh money into the company or sell it at a reasonable price. Another solution, which has become more and more appealing to manag- ers, is to merge with another company and thus ally in the battle of competitive advantage. Using the principle “if you cannot beat them, join them” (Auerbach, 1988, p. 321), stagnat- ing companies often find an efficient solution in joining forces with other players on the market or in complementary industries.
However, this recent boom of M&A activity started to decline in 2008 after three impres- sive years and plunged to a historic low in 2009 in combination with the financial crisis (Bloomberg Finance L.P., 2010). After the dot-com bubble burst in the beginning of the 21st century and the real-estate bubble during the financial crisis of 2007 to 2010, investors and shareholders have become cautious of what the next miscalculated craze will be. Are M&A’s just as much an overvalued mania as these previous economic downturns? Will they lead to the destruction of value? M&A waves and their steady raise seem to have an underlying pattern in the occurrence of trends. The question is whether the exponential explosion of M&As is only driven by rational implications such as value enhancement, or also by social behavior demonstrating power display and status. M&A has become an in- flationary term.
If a company does not participate in the M&A game, it will be considered an outsider. Showing competitors the ability to buy them up has become a wealth- and thus power dis- play (Cartwright, Cartwright, & Cooper, 2000). Hence, M&As represent much more than rational management decisions to add value, they display status and supremacy (Hayward & Hambrick, 1997).
Recently there have been discussions about the overvaluation of M&A investments caused by managerial behavior (Malmendier & Tate, 2008), (Hartley, 2011). This leads to a call for more rationality on the management’s behalf and governmental regulation to protect shareholders. There is a need for accurate measurement of the value of M&As to make successful decisions and avoid uncertainty.
M&As, the combination of workforce of two companies, is nothing new. M&As have tak- en place for centuries and will not disappear as long as willing buyers and sellers cede to exist in a market. Still the latest M&A explosion leaves questions of exaggeration and irra- tionality open. What causes the enthusiasm and excessive participation in M&A? Brealy, Myers and Allen (2008) criticize the lack of research in regards to the causes of M&A waves and their formation. They claim this to be one of the most important economic top- ics, which is still unresolved. M&As have been studied in waves and their correlation with economic up and downturns. Still their emergence has not been researched very much apart from that. Economic influences such as market shocks were considered to be influ- encing M&A activity (Mitchell & Mulherin, 1996). Nevertheless, behavioral or social as- pects as triggers for M&A waves have long been neglected or only been researched in fragments. Researchers such as Harford (2005) argue that M&A activity has its roots not only in economic influences, but also in behavioral patterns. The theoretical application has not been emphasized until recently. There is little evidence on a variety of behavioral patterns combined to be causing trends in M&A. Therefore, the first part of this research concentrates on the not yet fully explored landscape of combined behavioral catalysts to have an influence on M&A waves.
One of these behavioral catalysts is discussed by Malmendier and Tate (2008), who claim top management to act out of overconfidence and pride. Thus, the price investors have to pay for target companies are usually higher than their actual value would be. Overvaluation triggered by the management’s behavior has grave impacts on the company’s profits and the shareholder value. The motivation to undergo a merger or an acquisition has been in the critique over the last couple of years (Hartley, 2011). The discussion surrounded the question of how sustainable M&As are and whether they are a legitimate way to create growth (Hartley, 2011).
To prevent the shareholders from value destruction and keep their best interest, measures were developed by researchers such as Brealy, Myers and Allen (2008) to calculate the accurate price for an investment. Yet, there is not the one right equation to solve this prob- lem. Each merger and each acquisition differs and needs special adjustment. Due to high complexity of evaluation models, often models are applied that do not capture all risks or are manipulable. In its second part, this research picks up on the most common model, the discounted cash flow (DCF) model1 to appropriately measure an M&A investment.
Based on the problem discussion, the research question is determined to uncover the management’s fondness for M&As. It is questioned whether M&A serve as rational investment decision to create value or as a phenomenon solely triggered by social behavior.
Is social behavior a trend catalyst that destroys value?
Is the price of an acquisition an indicator for value creation?
These questions need to be jointly considered when trying to answer the objective of this research - Mergers and Acquisitions, a trendy fad or sustainable value creation?
The purpose of this research addresses the very nature of M&As and its underlying enthu- siasm. Especially the issues of M&As as a sustainable, value creating tool will be elaborat- ed considering the price set for an M&A investment and thus resulting over- or underval- uation. Influences besides value creation such as behavioral catalysts will be discussed to cause M&A waves. Moreover, this research is intended to explore whether M&As are reoccurring trends triggered by social behavior and create a clarion call for action.
Delimitations serve to empirically and theoretically narrow down the field of interest to answer a specific research question. Theoretically the research is split into two main as- pects, the choice of models to explain behavioral catalysts of trends in M&A and the choice of models on estimating the value of M&A targets. Behavioral influences are stud- ied as activators for increased M&A activity, whereas value creation through M&As is evaluated calculative, allowing insight on inadequate valuations in M&A activities.
Empirically, the research was conducted via a qualitative case study of one company, using interviews and statistical ascertainment.
An introduction to the field of M&A is offered by distinguishing the term merger from the term acquisition, which also includes the description of the most common M&A designs. Thereafter, historical as well as recent trends in the movements of M&A are highlighted. The further design of this research is split into two parts: the detection of behavioral trend catalysts and models of value determination. Among the various models portrayed that influence trends, behavioral theories were chosen as the main model connected to social phenomena as trend activators. For the value assessment within a company, the DCF was selected. Additionally, a comparison to the share price was supplemental used.
The corresponding literature does not agree on a homogenous definition of the field of M&A. Researchers are discordant in terms of defining mergers in combination with acqui- sitions. The term merger is often used as a general expression for all kinds of economic transactions that form a new entity. Classifying the terms and models which occur in M&As is a necessity to create one clear foundation for the audience in opposition to vary- ing models used in literature.
The generic term mergers can be categorized into subordinate concepts: mergers, acquisitions or takeovers and many more designs2 (Weston, Mitchell, & Mulherin, 2004). However, the majority of researchers describe all kinds of mergers to have similar design features, except for acquisitions (Hubbard, 1999). Thus, this research follows the common idea to treat the expression merger and the term acquisition as two separate approaches. Contrarily, the majority of literature uses the verb “to merge” for both mergers and acquisitions, thus the given terminology is adopted in this research.
According to Hubbard (1999), mergers are partners of equivalent size and influence. The effort lies in creating a new cooperation in which both parties have the same rights, co- determination and negotiate their decisions towards the amalgamation of both companies (Weston, Mitchell, & Mulherin, 2004). Regarding prerequisite, structure and purpose, mergers can be further divided into vertical and horizontal mergers (Borghese & Borgese, 2002).
Horizontal mergers occur when two or more companies have their origin in similar indus- tries. Through horizontal mergers these companies join forces to strengthen market posi- tions (Weston, Mitchell, & Mulherin, 2004). Firms selling a similar product range, having a similar structure or catering to similar markets are called horizontal mergers (Sudarsanam, 2003).
The purpose of horizontal mergers is “to gain market share at the expense of competitors.” (Sudarsanam, 2003, p. 98). Moreover, economies of scale3 (Bain, 1959), workforce reduc- tion (Jensen, 1984), market power (Scherer, 1980) and decreasing excess capacities (Sudarsanam, 2003) are considerable reasons. Combining the production plants enables the merged companies to increase their production capacities. Costs can be reduced by sharing one administrative structure. Hence, workforce can be diminished, which contributes to further cost reduction. With a certain size comes the ability to penetrate market share and eliminate competitors. Size also enlarges the number of customers and increases sales, which leads to lower excess capacities. Jensen (1993) identifies demand reduction, techno- logical change, governmental regulations, fewer entry barriers and globalization as causes for horizontal mergers.
Vertical mergers occur in industries where companies are operating at different stages, but seek to combine their production or value chains4 (DePamphilis, 2003). This is usually executed by the merger of a company with another company further up or down the value chain, they both share (Borghese & Borgese, 2002). Upstream mergers are less common than downstream mergers, as the companies further down the value chain need to be in a strong bargaining position (Sudarsanam, 2003). However, if suppliers are specialized in certain products or services that require a superior expertise, they gain dominance in the negotiation process (Williamson, 1975).
The purpose of vertical mergers is to gain control and reduce costs throughout interlinked processes in which more than one party is involved (Weston, Mitchell, & Mulherin, 2004). Other reasons are to cut back on transaction costs (Williamson, 1975), to have immediate access to resources (Pfeffer, 1972), the avoidance of uncertainty and asymmetric information as well as the minimization of contractile costs (Sudarsanam, 2003).
Conglomerate mergers describe the merger of two companies which are originally operating in different industries and seek to diversify their risk (Weston & Mansinghka, 1971). Weston and Mansinghka (1971) describe the motivation of conglomerate mergers as “diversifying defensively to avoid sales and profit instability, adverse growth, developments, adverse competitive shifts, technological obsolescence, and increased uncertainties with their industries.” (Weston & Mansinghka, 1971, p. 928).
According to DePamphilis (2003) acquisitions can be defined as the possession of a con- trolling interest in another company, a legal subsidiary or selected assets. The term is inter- changeably used in relation to takeovers (Weston, Mitchell, & Mulherin, 2004). The buyer usually pays the takeover in cash (Sherman & Hart, 2006). The securities of the acquired company or assets, which are of value to the acquirer, can also serve as form of compensa- tion to the seller (Sherman & Hart, 2006). This is called an asset purchase, where the ac- quired firm or target company becomes a part of the buyer (Sherman & Hart, 2006). Asset purchases are done for financial reasons, as the buyer expects the asset’s value to outper- form the price paid for the takeover.
The acquisition can also be completed as a stock purchase (Sherman & Hart, 2006). In such a case, the acquired company often continues to exist as a legal subsidiary of the acquirer (DePamphilis, 2003). It does not necessarily include the acquisition of a whole company, but separate parts of it (Miller, 2008). If the seller is a public company, a stock purchase is usually done by a tender offer5 for the assets or stocks of the seller, which result in a hostile acquisition (Weston, Mitchell, & Mulherin, 2004). Besides hostile acquisitions another acquisition structure exists, friendly acquisitions.
A hostile acquisition is the attempt to buy a company despite the target’s retentions (Bragg, 2009). This is especially convenient if the target company is a publicly held organization as the acquirer can offer to buy shares directly from the shareholders (DePamphilis, 2003). The management and the board of directors of a company can thus be bypassed, which is called a tender offer (Weston, Mitchell, & Mulherin, 2004). Hostile takeovers may attract other bidders and as a consequence, the final purchasing price can accelerate (DePamphilis, 2003). Schwert (2000) claims, that hostile takeover are less successful than friendly acquisitions. The shares of the acquired company perform less favorably than the whole market especially when taking into account that the price paid for was presumably too high (Picot, 2002).
Friendly acquisitions are negotiated takeovers and usually encounter a lower acquisition price than hostile takeovers (Weston, Mitchell, & Mulherin, 2004). Usually a standstill agreement is settled to avoid the potential acquirer from further investments in the stock of the target (DePamphilis, 2003). This is done to prevent aggressive takeover tactics by the acquirer during the negotiation stage. Friendly acquisitions have become increasingly pop- ular since the 1990s as they are less conflicted and offer a higher potential for success (DePamphilis, 2003). Mørck, Schleifer and Vishny (1988) claim friendly takeovers to be more successful than hostile acquisitions due to better post merger integration.
Bergstöm and Vredin (2002) admit that there is no such thing as the ultimate definition of a trend. Trends come and go in waves, just as M&A waves do. These waves follow different patterns, which are industry and time specific. “The essence of a mania is that its pace be- comes so frenetic that people stop thinking clearly, and it only ends up when some ele- ments of economic reality disrupts the fantasy and brings the mania to an end.” (Perkins & Perkins, 1999, p. 221). M&A activity has increased with each M&A wave being of higher value and numbers, as Figure 1 shows. Additionally, effects influencing the overall econ- omy encourage an atmosphere for M&A activity (Mitchell & Mulherin, 1996). The follow- ing part describes trends in M&As, starting with the observation of historical M&A waves, followed by behavioral trend catalysts.
M&A activity has occurred during different timeframes and each decade reflects a certain type of a merger or acquisition (Weston, Mitchell, & Mulherin, 2004). Each M&A wave relates to the appearances of certain economic dynamics (DePamphilis, 2003). Mergers or acquisitions usually emerge as the restructuring of resources as a cause of economic unbal- ance or technological innovations (Borghese & Borgese, 2002). It has been noticed that M&A activities especially occur when the economy is thriving and experiences outstand- ing growth (Weston, Mitchell, & Mulherin, 2004). Figure 1 displays this assumption by comparing the Nasdaq Composite Indice6, as benchmark for the economic climate, with M&A activity from 1985 to 2010. It not only confirms the assumption of M&A activity during economic booms, but also shows a steady increase in the number and value of deals closed during peaks. Mitchell and Mulherin (1996) furthermore state that such a concentra- tion of M&A activity agglomerates in specific industries.
illustration not visible in this excerpt
Figure 1: Announced Mergers & Acquisitions Worldwide, 1985-2010 (IMAA, 2011) The first M&A wave
From the late 1890’s to the early 1900’s a first wave of M&A activity emerged (Borghese & Borgese, 2002). This wave consisted mainly of horizontal mergers where large compa- nies ingested smaller ones (Weston, Mitchell, & Mulherin, 2004). It mirrors the industrial revolution, which led to the aim for companies to improve their economies of scale (Kleinert & Klodt, 2002). Due to this fact, Stigler (1950) depicted the first wave as merg- ing for monopoly7. The decline of the first M&A wave was triggered by an economic re- cession in 1903 (Weston, Mitchell, & Mulherin, 2004). Moreover, governmental re- strictions, prohibiting monopolies finally took its toll (Borghese & Borgese, 2002).
The second wave of outstanding M&A activity took place from the mid 1910’s to the late 1920’s and was triggered by the post World War I economic boom (Borghese & Borgese, 2002). Due to harsh headwinds in regards to antitrust regulations, companies started to explore vertical mergers (Sudarsanam, 2003). The second wave was characterized as merg- ing for oligopoly8 (Stigler, 1950). The wave came to an end as a consequence of the stock market crash in 1929, also known as Black Thursday9, and the following depression (DePamphilis, 2003).
The third wave lasted from the mid to late 1960’s and was characterized as conglomerate merger activity (Weston, Mitchell, & Mulherin, 2004). These mergers were mostly unre- lated and targeted growth through diversification, caused by restrictions on horizontal and vertical mergers (Sudarsanam, 2003), (Borghese & Borgese, 2002). Consequently, the third wave resulted in a strategic shift in competition towards peripheral areas of interest (Weston, Mitchell, & Mulherin, 2004). The stock market became of great interest, but did often not represent the correct value of a company, which resulted into overpricing (Borghese & Borgese, 2002). The oil crisis10 and following inflation, which caused an ad- ditional economic slowdown, stimulated the end of the wave (Sudarsanam, 2003).
In the 1980’s the fourth M&A wave surfaced (Borghese & Borgese, 2002). Weston et al. (2004) interpreted the wave as the decade of greed. Escalating hostile takeovers and the divestures of previously acquired unrelated conglomerates were characteristic for this peri- od (DePamphilis, 2003). Hence, acquired companies were split into separate entities and sold in parts after the takeover (Shleifer & Vishny, 1991). The emergence of financial in- novations, like leveraged buyouts (LBO)11, increased the possibility to finance such hostile takeovers (Sudarsanam, 2003). The main source to finance takeovers dried up when legis- lative restrictions were placed on the junk bond market12 and the biggest vendor of LBOs, Drexel Burnham13, filed for bankruptcy (DePamphilis, 2003). The consequences of the financial innovations of the 1980s resonated in the early 1990s when a vast amount of companies went bankrupt due to the inadequately high costs of interest rates (Borghese & Borgese, 2002).
The fifth wave of M&A activity occurred during the 1990s and lasted well over ten years (Borghese & Borgese, 2002). Kleinert and Klodt (2002) characterize this period as the wave of globalization and deregulation. The stock market maintained its bull market14 trend as new investment banks settled into the junk bond market and interest rates re- mained low (Weston, Mitchell, & Mulherin, 2004). Climbing stock prices resulted in the use of stock options15 and shareholder value as a way to align a company’s strategies (Sudarsanam, 2003). Rivalry was intensified, fuelled by technologic inventions such as the internet (DePamphilis, 2003). Deregulations during the fifth wave created opportunities to privatize former national monopolies (Kleinert & Klodt, 2002). The decline of the fifth wave was mainly triggered by the burst of the dot-com bubble16 on the turn of the 20th century and the following economic downturn (Weston, Mitchell, & Mulherin, 2004).
Sherman and Hart (2006) refer to the most recent and sixth wave as the wave of the mega deals. The sixth wave started in the early 2000s and lasted for the following five years. 2006 was the year of record M&A activity (Brealy, Myers, & Allen, 2008). Characteristics for this wave were the emergence of private equity financing17 and foreign direct investors as well as the search for true synergies across the globe (Marks & Mirvis, 2010). The interrelation of M&A activity and economic up- or downturns is a recurrent theme in the history of merger waves.
Researches such as Harford (2005) claim M&A waves not only to be a result of economic biases, but just as much of behavioral influences. As a result of managerial behavior, fads develop, last for some time and vanish again (Sahlin & Wedlin, 2010). Shleifer and Vishny (2003) as well as Rhodes-Kropf and Viswanathan (2004) developed models showing the impact of managerial behavior as underlying reason for M&A waves.
The selfish behavior of management and its impacts on acquisitions has been assessed by Roll (1986). Roll (1986) claims that overpriced premiums paid in an acquisition process result from the overestimation of increase in value. He argues that value does not accumulate in M&As due to hubris. This overestimation is triggered by the management’s arrogance and belief that they are entitled to make the best decisions and therefore destroy value (Seth, Son, & Pettit, 2000). Roll (1986), who was the first to classify management’s behavior in the context of M&A activities, refers to it as hubris.
Markets and management are expected to behave rational and thrive for their equilibrium (Peters, 2005). Rational decision making provided, acquisitions are supposed to result in an increase of value for the buyer (Roll, 1986). However, an imbalanced market reflects up on the irrational behavior of management and does not add value to an M&A investment (Hayward & Hambrick, 1997). An example of overvaluation is the occurrence of bidding wars in acquisition, resulting in prices beyond realistic dimensions (Borghese & Borgese, 2002). Managers risk being excluded, if they disobey market’s rules (Peters, 2005). Man- agers infected by hubris will not retreat from the bid unless they face serious personal harms (Roll, 1986). They will not consider the best interest of the company any longer, but thrive for self-fulfillment (Hayward & Hambrick, 1997). Especially retreating from a bid shows weakness and implies the lack of resources to acquire the target (Roll, 1986).
Overvalued bids are more likely to be accepted during economic peaks as managers easily overestimate synergetic effects (Rhodes-Kropf & Viswanathan, 2004). They accept internal overpricing as a reason of asymmetrical information, assuming the company is undervalued externally (Malmendier & Tate, 2008).
Anticipated, rational behavior also reflects in managerialism, which is very similar to hu- bris, but puts an emphasize on the managers behavior to accumulate personal benefits at the expenses of their employers and shareholders (Seth, Son, & Pettit, 2000). This means that managers would rather increase the size of a company to gain power than consider possible low downs (Buckley & Ghauri, 2002). Borghese and Borgese (2002) rank the unhealthy pride of managers very high in the catalogue of motives to undergo M&As, which they consider very immoral. Managers truly believe to act in the best interest for their company even though they are knowingly disregarding shareholders interests and are destroying value (Malmendier & Tate, 2008). The reason for M&A waves to mostly occur in economic upturns is due to the increase of cash flows18, which lead to a decrease in fi- nancial constraints and thus makes it more likely for managers to get away scot-free (Harford, 2005). Behavioral patterns can become widely accepted if they seem to structure social behavior and benefit the participant (Peters, 2005). Another differentiation of mana- gerialism to hubris is the management’s conscious state of their unethical actions (Gaughan, 2007).
According to Sudarsanam (2003), within an industry competitors are orientating itself on one another and the moves they make. This triggers domino effects with close and similarly adopted strategies amongst opponents. Some industries are more prone to imitation than others (Sahlin & Wedlin, 2010).
Depending on the timing of the implementation of a certain strategy, the success or failure of a company is often determined (Sudarsanam, 2003). In regards to the point of execution of a new strategy, there can be found so called first movers19 or “me-too” runners20 (Sudarsanam, 2003). The “me-too” behavior is also described as herd behavior or herding. That behavior can be defined as identical, collective behavior of individuals without them exchanging information (Johnson, Jefferies, & Hui, 2003). Johnson et al. (2003) claim herding to be unconscious or irrational even though individuals perceive their behavior as rational. However, herding is triggered by an underlying coordination mechanism (Devenow & Welch, 1996). Sahlin and Wedlin (2010) describe imitation as guide for trends, following certain ideas, models or practices. Imitation consists not only of self iden- tification, but also of recognition as it shapes identities (Sahlin & Wedlin, 2010). If a man- gers lacks trust in their own decision making abilities, imitation is carried out rationally. If other manager’s behavior is unconsciously copied, Devenow and Welch (1996) speak of non-rational imitation. Rational herding appears in cascades, which leads to exponential imitation (Bikhchandani, Hirshleifer, & Welch, 1992).
The most explicit example of correlating herding behavior is the culture towards mistakes. If an individual and many others make the same mistakes, the mistake will not be detected as the individual’s fault (Bikhchandani, Hirshleifer, & Welch, 1992). An idea becomes justifiable and valid as being essential when key actors embrace them (Sahlin & Wedlin, 2010).This uniformity can even lead to following others in their decision albeit an individ- ual has the information that such a decision is fatal. Furthermore, Devenow and Welch (1996) state that the importance of information is measured by its popularity. If others ac- quire information, than it is perceived as important and a crowd of people seems not be wrong. These examples prove the unconsciousness of herding. Individuals are expected to act rationally on behalf of their knowledge, still they blindly follow the crowd (Johnson, Jefferies, & Hui, 2003). Devenow and Welch (1996) consider herding as one of the major impacts of creating merger waves and consider this cluster behavior as evidence for trends and manias.
Herding and hubris have one thing in common: their irrationality and lack of consciousness. Managers are considered to reasonably reflect on the economic value of an investment without self-interest or influences by others and accurately evaluate the investment’s appeal to the company (Seth, Son, & Pettit, 2000).
The motives to undergo M&A are usually the creation of value within the company. Value is created by synergetic effects, which are complicated to measure, because the outcome of multiple scenarios must be estimated (Bradley, Desai, & Kim, 1988). Therefore, an acquisition is often overpriced and does not correspond to the value of the target company (Borghese & Borgese, 2002). This makes it necessary to correctly evaluate the target company by using a model that suits the characteristics of the assets being evaluated (Damodaran, 2002). Bradley et al. (1988), point out that synergies should provide a mutual financial gain or an increase in market power.
According to Damodaran (2002), the value of a synergy can be described by the greater value of the two merging companies combined in contrast to their lower value apart as Figure 2 shows. However, the synergy hypothesis describes an ideal scenario.
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Figure 2: The synergetic value effects of M&As (Damodaran, 2002)
The choice of valuation method depends on the different perceptions of value of the tar- get’s value to the acquirer (Koller et al., McKinsey & Company, 2010). Young start-up companies are more difficult to evaluate than companies in a mature environment (Damodaran A. , 2002). Evaluation results are highly biased by economic predictions made to compute the model (ibid.). Market efficiency assumes that investors are on the lookout for over or under evaluation to create a profit from the deviation (ibid.). However, market inefficiency implies that mistakes will be corrected eventually (ibid.). Studies have shown that some market segments are more prone to inefficiency than others.
The DCF21 is commonly used to estimate a firm’s worth (Barker, 2001). Damodaran (2002) states that most valuation models build up on the DCF and it is said to have a high level of objectivity. Contrarily to market approaches, the DCF considers a company’s intrinsic value. Market approaches can be heavily influenced by market fluctuations (Rosenbaum & Pearl, 2009).
The ability to generate cash flows (CFs) reflects the capability of a company to create shareholder value. Shareholders frequently seek for investments that reliably earn them a steady return in the long-run, as CFs are driven by long-term development and returns on a firms investments and earnings (Koller et al., McKinsey & Company, 2010). Kaplan and Ruback (1995) affirm the DCF to be superior to other evaluation methods like for example comparables.
The DCF model is used to estimate a company’s value by discounting a company's future free cash flows (FCF)22 to their present value (PV)23 (Gaughan, 2007). Hence, the entity's value is estimated in regards to future earnings discounted to its current market price (ibid.), representing the intrinsic value of a company (Damodaran, 2002). The valuation approach computes the company’s equity as value of its operations less its market value of debt (Koller et al., McKinsey & Company, 2010). The value of operations is reflected in future FCFs. These describe the amount of money that a company can payout to share- holders after it covered for all investments essential for the company to grow like invest- ments in the working capital24 and other capital assets (Brealy, Myers, & Allen, 2008). In other words, the FCF is the difference of cash in- and outflows available to shareholders (DePamphilis, 2003). When valuating business in the context of M&As, the DCF model embraces future revenue increases or cost reductions that can be anticipated in such special situations (Brealy, Myers, & Allen, 2008).
The selection of an accurate discount rate25 r, chosen to discount the future FCFs to their current value has a grave impact on the PVs result. The discount rate corresponds to the company’s risk. The higher the risk of an investment is projected, the higher the discount rate (Gaughan, 2007). The risk is measured relative to a risk-free investment in federal treasury bills with a maturity up to ten years (ibid.).
The DCF is computed in a two step process, estimating a company’s PV as shown in Figure 3 (Brealy, Myers, & Allen, 2008). First, the PV of CFs is projected over a set period of time, which seems justifiable. Secondly the remaining CFs are calculated as perpetuity26 where represents the CFs succeeding year n, the horizon value.
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Figure 3: The discounted cash flow model (Brealy, Myers, & Allen, 2008, p. 103)
Figure 3 suggests CFs after year n not to grow but stagnate, which in most cases does not echo reality. Therefore, the equation of the Figure 3 needs to be further developed as shown in Figure 4.
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Figure 4: Discounted cash flow model considering growth after year n (Gaughan, 2007, p. 536)
The future FCF of year n, the horizon value, is multiplied by the growth rate g, which dis- plays the estimated growth of future FCFs (Gaughan, 2007). This future FCF is perpetual as displayed in Figure 4 above the second curly bracket. This part of the equation serves to explain the perpetuity in more detail. To estimate the perpetuity of FCFs after year n, a two step process is applied. The FCF of the year n+1 is projected by multiplying year n’s FCF by the growth rate (1+g). Next, the value of the conclusion is divided by the cost of capi- tal27 to compute the PV of year n+1 and from then on (Gaughan, 2007). This result pre- sents the PV at the start of year n+1. Afterwards, computing the PV in year 0 of all future FCFs for year n+1 and thereafter, the PV of year n+1 is divided by (ibid.). The final result is the perpetuity, which combined with the FCFs of the previous years to n, equals the PV and thus the total shareholder value of the evaluated company. As mentioned earlier, the determination of an adequate discount rate is vital as it represents the risk of the reviewed company. The CFs, shown in Figure 4, need to be adjusted for the underlying capital structure to fairly address the expected returns. Therefore, thought has been given to the capital structure of equity and debt which contributes to a company’s value determination (Berk & DeMarzo, 2007). FCFs reflect a company's earnings plus noncash charges less investments in working capital or fixed assets (Koller et al., McKin- sey & Company, 2010). The remainder services are distributed to both equity and debt holders. The cost of capital of a company’s assets can be calculated by weighting the aver- age cost of capital (WACC)28 as shown in Figure 5 (Berk & DeMarzo, 2007). The WACC is the opportunity cost29 or returns of an investor in comparison to an investment with simi- lar risk and can therefore be used as the discount rate r (Koller et al., McKinsey & Compa- ny, 2010).
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Figure 5: WACC (not considering taxes) (Berk & DeMarzo, 2007, p. 439)
Figure 5 illustrates that the WACC is the minimum return a company has to earn on an investment in order to remain profitable (Berk & DeMarzo, 2007).
As the WACC consists of equity and debt, their cost of capital needs to be estimated. The cost of equity is difficult to compute. Usually the cost of equity is estimated by the capital asset pricing model (CAPM)30, considering the market’s risk premium, the risk-free inter- est rate and a company specific risk premium as shown in Figure 6 (Koller et al., McKin- sey & Company, 2010). The CAPM measures a company’s risk by the deviation of its stock to the market.
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Figure 6: Capital asset pricing model (Berk & DeMarzo, 2007, p. 310)
The risk-free interest rate is set by referring to government bonds as they are default free (Pratt & Grabowski, 2008). The market risk premium, respectively equity risk premium, is the additional, higher return of an investment over the market (ibid.). It can be retrieved historically (Damodaran A. , 2002). An approach, which further develops the CAPM has found wide acceptance, the Fama-French three factor model. It will not be elaborated in this research due to time restrictions.
The cost of debt represents the interest paid by a company on its debt. Since interest ex- penses are tax deductible, tax reduction need to be taken into consideration as well. When deriving the WACC in further detail, as shown in Figure 7, it becomes apparent that the tax shield is incorporated as due to interest being deductable. As the cash flow enables shareholders to keep more of their earnings in the company, it is integrated in the equation by reducing the WACC (Koller et al., McKinsey & Company, 2010).
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Figure 7: WACC with marginal corporate tax rate (Berk & DeMarzo, 2007, p. 577)
The WACC then substitutes the previously used discount rate r, as used in Figure 4, in the DCF, displayed in Figure 8.
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Figure 8: Discounted cash flow model at the weighted average cost of capital (Brealy, Myers, & Allen, 2008, p. 535)
Research methodology can either be conducted qualitatively or quantitatively in respects of research design and structure. The quantitative approach accentuates the quantification of data collected and the application of natural science laws, whereas qualitative approaches are focused on the description (Bryman & Bell, 2007).
This study was conducted as case study, being tied to one organization, Boss Media AB. The case study was executed using a qualitative approach. The qualitative approach was accomplished by a case study to get a better and more intense insight on the topic of M&As in accordance to Bryman and Bell (2007). Moreover, is a case study defined as being of descriptive, more social nature (ibid.). Looking up on a contemporary case study and including historical background information, fits with the proposed definition of a qualitative approach by Bryman and Bell (2007). The qualitative approach was also chosen as it suggests interpretivism over numerical evaluation. Even though the case study evalu- ates annual reports, they are interpreted in regards to the case study’s objective’s roadmap. Additionally, captures a case study a comprehensive and more emotional picture than a survey could. The authenticity of the case study is of great concern due to the social aspect of behavioral patterns beneath trends.
The first part of the research was conducted by an interview. However, the outlooks from annual reports of Boss Media AB were considered as well. For a better insight on emerging trends, statistics provided by institutions on M&As were taken into consideration as well. The second part of the research, the assessment of value creation through calculations, was mainly conducted through the annual reports of Boss Media AB from 2006 to 2007, illus- trating data from 2002 to 2007. In addition, findings from interviews with Boss Media AB were utilized as well as the annual report of GTECH Corporation from 2008. Additionally, statistical surveys available from international and national institutions such as Statistics Sweden, Sveriges Riksbank and KPMG International were used. Thus, the research was carried out with a balanced mixture of interviews and data ascertainment.
The case study’s object is a growing small size company, Boss Media AB, situated as a B2B supplier in the gaming software industry. The sample was chosen due to the young age of the online gaming industry and its rapid growth. Industries with high growth potential tend to be very competitive due to the fast moving pace of the market and thus trigger strong M&A activity. The company was furthermore selected due to its representativeness of an industry with very high M&A activity (Löfstrand, 2011). Additionally, obtained Boss Media AB four companies from its foundation in 1996 to nowadays and was eventually acquired itself in 2008 (Löfstrand, 2011).
As time frame of observation were the years from 2004 to 2007 chosen, as Boss Media AB did not continue to exist as Aktiebolag31 after 2007, which would have made it very diffi- cult to access information like annual reports. Additionally, the time frame of the observa- tion was set to a maximum of four years as the average duration of employees is 2,7 years (Boss Media AB, 2008). Four years seem reasonable, as there can still be employees found who have experienced such a long time period, but have not yet left the company.
The data for this case study was collected by performing an interview as well as by statisti- cal ascertainment from annual reports and institutional surveys. The interview’s structure and realization started with the search for a representative interviewee, the deduction of semi-structured questions and finally the interview. The compilation of data from the an- nual reports was based on the information required to compute the DCF as described in chapter 2.3.1.
The realization describes how the data collection was implemented and carried out. To get a variety of empirical materials, the interview was conducted with Andreas Löf- strand, who holds the highest position at Boss Media AB in Sweden. Furthermore, annual reports of Boss Media AB served to fill in financial data as well as institutional statistics.
The interviews consisted of one major interview, which was semi-structured according to Bryman and Bell (2007). Semi-structured interviews imply a selected portfolio of ques- tions, which leave enough room to adjust them while interviewing. Therefore an interview guide was used for the main interview, which can be found in appendix I.B.III. However, this guide does not reflect all questions asked during the interviews as questions were changed and adapted during the course of the conversation. These additional questions made it possible to pick up on spontaneous ideas and remarks by the interviewee. Moreover, provide semi-structured interviews the option to further explain or deepen topics of interest as more questions or ideas can come up during the course of the interview, but still keep the interview focused enough to receive valid answers.
The major interview was held with Andreas Löfstrand, who is in charge of Boss Media AB’s operations in Sweden. The interview lasted for approximately 60 minutes and was held on the 29th of April 2011 at the office of Boss Media AB in Växjö. The complete in- terview can be recapped in appendix I.B.IV. Before holding the main interview, an e-mail interview was performed on the 21st of April 2011 in advance. Questions were sent out to Andreas Löfstrand to give him the opportunity to prepare for the interview and pick up information needed. Appendix I.B.II shows the e-mail interview with Andreas Löfstrand from the 21st of April 2011, including his answers. This first interview with Boss Media AB was used to further develop and deepen the following main interview.
The interview was recorded to ensure no loss of data. The interviewer’s roles were separated. One of the three attendants posed the interview questions whereas the other two people took notes. This division was chosen to avoid confusion on the behalf of the interviewee with one clear contact person.
The annual reports of Boss Media AB from the years of 2006 to 2007 were directly retrieved from Boss Media AB and investigated in regards to the collection of data for the DCF described in chapter 2.3.1.
Relevant information from the annual reports of Boss Media AB, especially the balance sheets and income statements, were taken and transferred in an excel sheet to affirm opti- mal processing and transparency. These data can be retraced in appendix I.C.I and I.C.II. From there ratios and financial evaluations were derived as shown in Figure 11 to Figure 22. To be able to calculate the DCF, additional data was needed. Thus, information such as interest rates and market risk premiums were provided by Statistics Sweden, Sveriges Riksbank and KPMG International. To allow further insights in the acquisition process of Boss Media AB by GTECH Corporation, the annual report of Lottomatica Group32 from 2008 as well as press releases by GTECH Corporation were consulted.
The operationalization helps to connect theory and empirical investigation by ensuring that only relevant data is collected, implied by the theory. An overview of the operationalization can be found in appendix I.A.
As M&A is a very broad and inexact expression, the term was precisely defined in chapter 2.1. Merged companies work together equally in a new found corporation. A merger can be split into horizontal, vertical and conglomerate mergers (Borghese & Borgese, 2002). Horizontal mergers occur in similar industries, structures or product ranges (Sudarsanam, 2003), whereas vertical mergers aim to increase the benefits of value chains (DePamphilis, 2003). Conglomerate mergers seek to diversify risk (Weston & Mansinghka, 1971). An acquisition is the controlling interest in another company (DePamphilis, 2003). Acqui- sitions can be distinguished into hostile and friendly acquisitions. Both differ significantly. Hostile acquisitions describe the purchase of a target without their agreement (Bragg, 2009), whereas friendly acquisitions are negotiated (Weston, Mitchell, & Mulherin, 2004). Due to different structures and purposes of M&A designs it is essential to be able to speci- fy where Boss Media AB fits in. Moreover, the M&A design provides reasons for the transaction’s success or failure. Thus, the initial questions posted, related to the chosen M&A design by Boss Media AB, including definitions of mergers and acquisitions in the interview guide to help the interviewee to choose correctly. To assure the fit of the theoret- ical background with the case study’s object and the most precise answers by the inter- viewee as well as the desired purpose, the two main approaches in M&A, mergers and ac- quisitions were dealt with.
A further question to deepen the previous one was asked. The interviewee had to decide which design Boss Media AB followed and whether Boss Media AB underwent a friendly or hostile acquisition. To identify advantages and disadvantages in these designs, the inter- viewee was asked to elaborate the decision for the one design over the other. To be able to answer the research question, the field of M&A needed to be narrowed down even further. During the evaluation of theory, it became evident that there is a missing link in research about the underlying patterns of trends in M&A. Literature does not agree on a clear definition of a trend. Hence, historical M&A waves were explored because their movement made it possible to observe up- and downward trends in M&A activity. Each M&A wave refers to a specific type of M&A (Weston, Mitchell, & Mulherin, 2004). Therefore, patterns could be detected which are causing M&A waves. The M&A waves are closely correlated to economic up- and down turns (DePamphilis, 2003). Consequently the timing of when Boss Media AB merged was insightful. Showing Figure 28 and Figure 29 to the interviewee and having him point out the date of merging and the correct industry did help to compare the date of the acquisition with the economic climate during that peri- od. As Boss Media AB did not merge during an economic upturn it was asked how much Boss Media AB was influenced by the recessions during the date of merging. These time frames were important to find out whether Boss Media AB was following a general trend, a trend specific to the online gaming industry or no trend at all. Being aware of the point in time when Boss Media AB merged, it was interest to find out about characteristics of the wave, like synergetic effects or foreign investments, and whether they are applicable to Boss Media AB and GTECH Corporation. Synergies create sustainable growth, which rep- resents another aspect, the research wants to find out about. Thus, it was asked what syner- getic effects Boss Media AB expected from the acquisitions and why they expected them especially from targets abroad.
Throughout history technological development triggered growth and M&As. The internet created a new field of businesses which is not as much regulated as mature industries. Due to the young age and high competition of the online gaming industry there is a lot of M&A activity. Löfstrand was hence asked to elaborate his thoughts on the increase of M&A activity in the online gaming industry.
To find reasons that cause M&A waves, there was a need to look at the topic more closely by discovering underlying triggers of M&A waves. As shown in chapter 2.2.2, researchers found out that not only economic factors influence M&A waves, but just as much behavioral ones. Therefore, herding, hubris and managerialism were chosen for further investigating behavioral causes for M&A waves.
Herding is the imitation of other people’s behavior (Sahlin & Wedlin, 2010). To affirm or disprove, that M&As are influenced by behavior, it was asked whether Boss Media AB considers itself as a first mover or if they could see patterns of herding in the online gam- ing industry.
[...]
1 Discounted cash flow model (DCF) - used to value an asset by its present value, which is estimated by discounting cash flows with an accurate discount rate.
2 For further explanations on additional designs refer to Weston, Mitchell, & Mulherin, 2004
3 Economies of scale - cost advantages a business receives by expanding their current production in goods and services (quantitative).
4 Value Chain - chain of value creating activities within a company.
5 Tender offer - public offer to buy shareholders' shares at a premium to the market price.
6 Nasdaq Composite Indice - 3000 components, mainly technological companies and growth companies, only U.S situated companies.
7 Monopoly - a high amount of control a company has over a market segment’s specific product or service with high entry barriers to that market.
8 Oligopoly - the dominance of a small number of sellers in a market and the influence by each other to agree on decisions and by controlling the market.
9 Black Thursday, 1929 - most value-destructive Stock market crash in US history on the 24th October 1929, which leads to a 12 year depression.
10 Oil crisis - political and economic crisis in the beginning and end 1970’s due to oil shortages by reducing oil productions.
11 Leveraged buyouts (LBOs) - acquisition of a company financed primarily by debt in order to create lev- erage.
12 Junk bond market - market of high yield bonds with high default risk, rated below investment grade when issued and thus paying a high coupon to make up for the additional risk of investors.
13 Drexel Burnham - one of the largest Wall Street investment banks, which mainly operated in financing M&A business by the use of junk bonds. It faced bankruptcy in 1990s, which lead to a sharp decline in the junk bond market and resulted in an economical downturn.
14 Bull market - increasing investments due to anticipated rises in stock prices. It describes upward trends and usually occurs in recovering economies.
15 Stock option - an advantage (given) to sell or buy a stock, but it is not obligatory.
16 Dot-com bubble - climaxed in 2000, speculative bubble in IT-segment, with a lot of price misevaluations.
17 Private equity - institutional and recognized investors that make investments directly into private companies and offer big amounts of money for a long period of time.
18 Cash Flow (CF) - the cash in- and outflows of a business over a fixed period of time. It can be computed directly by adding up the cash flows from operating, financing and investing activities or indirectly derived from earnings.
19 First mover - individuals that take the initial first move on a market.
20 Me-too runner - follows the first mover. Fears to miss out on the current trend, but does not really have an idea on the reasons for the underlying momentum.
21 For further explanations on the principles of the DCF and its origin, refer to (Brealy, Myers, & Allen, 2008).
22 Free Cash Flow (FCF) - cash flow that is possible to distribute to their securities holders.
23 Present Value (PV) - the value of an investment at present.
24 Working Capital - current assets of a company less current liabilities.
25 Discount rate - rate at which cash flows are discounted to the present.
26 Perpetuity - no ending annuity.
27 Cost of capital - determined by the minimum return shareholders expect from taking a specific investment risk.
28 Weighted average cost of capital (WACC) - discount rate, considering a company’s capital structure of debt and equity.
29 Opportunity cost - the cost one has to give up for the next best alternative.
30 For further explanations on the principles of the CAPM, compare (Sharpe, 1964), (Markowitz & Miller, 1960) and (Lintner, 1965).
31 Aktiebolag - Similar to a joint stock company with no personal liabilities of the owners.
32 Lottomatica Group - the world’s largest lottery operator. Holding company of GTECH Corporation.
