PROBLEM SET 1 M&A

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Feb 20, 2024

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PROBLEM SET 1 Q1. A. Do you agree with the chosen form of collaboration between the two firms? Rely on the frameworks we covered in class and on the material discussed in “When to Ally and When to Acquire.” GECAS and AerCap's businesses are both in the aviation leasing industry, which involves significant hard assets (aircrafts). This suggests that combining resources could create substantial synergies in terms of fleet size, geographic reach, and market influence. The collaboration seems aimed at creating sequential and modular synergies, where the combined entity can leverage a larger, more diverse fleet and a broader customer base. Synergy Creation : Mergers are often pursued to achieve synergies that neither company could attain independently. In this case, merging GECAS with AerCap could lead to substantial operational and financial synergies. The combined entity would likely benefit from a more extensive portfolio of assets, broader market access, and enhanced bargaining power with suppliers and clients. Resource Complementarity : Both firms possess complementary resources. GECAS has a robust financial backing from GE, while AerCap has demonstrated proficiency in fleet management and leasing operations. This complementarity suggests that their merger could result in a more competitive and efficient business model. Market Dynamics : The aviation leasing industry is highly capital-intensive and sensitive to economic cycles. By merging, GECAS and AerCap might better withstand market volatilities, such as those experienced during the COVID-19 pandemic. A combined entity would likely have a more diversified asset base and customer portfolio, mitigating risks associated with industry downturns. Scale and Competitive Advantage : The merger creates a larger entity with a significant market presence. This scale can be a crucial competitive advantage in negotiations, attracting customers, and achieving economies of scale in operations. AerCap now has a portfolio of over 2,000 aircraft, over 900 engines and over 300 helicopters, as well as an order book of approximately 450 of the most fuel-efficient and technologically advanced aircraft in the world. The aircraft fleet represents approximately 90% of the assets of the combined company. New technology aircraft are expected to make up 75% of the aircraft fleet by 2024. Strategic Alignment with Frameworks : According to the framework in the HBR article, when two companies in the same industry with overlapping but complementary resources combine, it often leads to more effective integration and value creation than an alliance. Mergers in such scenarios can streamline decision-making processes, align strategic objectives, and reduce complexities associated with joint ventures or alliances.

In summary, the decision for GECAS and AerCap to merge aligns well with the strategic considerations outlined in M&A theories and the HBR article “When to Ally and When to Acquire.” The merger seems poised to create a more resilient, synergistic, and competitive entity in the aviation leasing sector. B. Explain the actual form of takeover that was chosen, including the financing and payment structure. The transaction between GE's GE Capital Aviation Services (GECAS) and AerCap Holdings N.V. in March 2021, Under the terms of the transaction agreement, General Electric received 111.5 million newly issued AerCap shares, approximately $23 billions of cash and $1 billion of AerCap notes. General Electric now owns approximately 46% of AerCap's outstanding shares. In connection with the transaction, Jennifer VanBelle has joined the Board of Directors of AerCap, bringing the number of members serving on AerCap's Board of Directors to 10. Equity Stake : GE received a 46% equity stake in the combined company. This significant share provided GE with continued exposure to the aviation leasing market while offloading the operational management to AerCap. Cash Component : GE was paid $24 billion in cash as part of the deal. This cash payment was a crucial aspect of the transaction, providing immediate liquidity to GE. Debt Assumption/Refinancing : AerCap took on approximately $34 billion in net liabilities and asset-backed debt from GECAS. This assumption of debt is a standard feature in such large-scale acquisitions, as it reflects the transfer of financial liabilities alongside the business assets. Total Deal Value : The total value of the transaction, considering the cash, debt, and equity components, was estimated at more than $30 billion. This valuation reflects the substantial size of both companies' aviation leasing portfolios and their market positions. Financing the Deal : To finance this acquisition, AerCap likely used a mix of debt financing (such as loans and bond issuances) and equity. The exact proportions of this mix would have been determined based on the optimal capital structure for the merged entity, considering factors like interest rates, repayment schedules, and equity dilution. Post-Merger Market Position : The combined entity of AerCap and GECAS created the largest player in the aircraft leasing industry, with an estimated total of over 2,000 aircraft owned, managed, or on order, significantly surpassing competitors in scale and reach. These reasons underscore the magnitude of the deal in the aviation leasing industry, reflecting both the financial aspects of the transaction and its impact on the market landscape.

C. Upon the announcement of the deal, the stock price of GE rose by approximately 3%. What do you think were the reasons for this positive stock market reaction? The reasons behind the approximately 3% rise in GE's stock price following the announcement of the GECAS-AerCap deal involves looking at specific financial and market aspects: Financial Restructuring Impact : GE's focus on reducing its complex business structure likely improved investor confidence. Simplifying its operations could enhance operational efficiency and profitability. Debt Reduction : The $24 billion cash component of the deal offered a significant opportunity for GE to reduce its debt. For context, as of the end of 2020, GE's total borrowings stood at about $75 billion. A reduction in debt of this magnitude can significantly improve a company's financial health and credit ratings. Value of Equity Stake : GE's 46% stake in the merged entity implied a substantial ongoing interest in a leading global aviation leasing company. Assuming the total deal value over $30 billion, GE’s stake would be theoretically valued at around $14 billion, representing a significant asset on its balance sheet. Market Recovery Expectations : The timing of the deal coincided with expectations of a post-pandemic recovery in the aviation sector. This optimism could have contributed to the stock's positive movement, reflecting the potential for growth and recovery in the industry. Strategic Benefits : The combined AerCap-GECAS entity's enhanced market position and scale might have implied potential long-term benefits for GE as a significant stakeholder. These strategic advantages could positively influence GE’s future earnings and market valuation. Immediate Liquidity Boost : The immediate liquidity injection from the cash component could be strategically deployed for various beneficial purposes, including further debt reduction, reinvesting in growth areas, or returning value to shareholders. In summary, the rise in GE's stock price can be quantitatively linked to the substantial cash infusion, the significant reduction in debt burden, the strategic value of the equity stake in the merged entity, and the positive market sentiment regarding the aviation sector's recovery. Each of these factors contributed to an improved outlook for GE's financial stability and future growth prospects.

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Q2. A. Statutory Consolidation Combined Firm Assets Liabilities 300 100 Equity 200 300 300 The New Combined Firm will be owned by both Firm X & Firm Y shareholders, with 25% & 75% ownership respectively. B. The new firm will be 60% owned by Firm Y shareholders. & 40% by Firm X shareholders. Firm X Assets Liabilities 100 50 Equity 50 100 100 Firm Y Assets Liabilities 200 50 Equity 150 200 200 Firm X Assets Liabilities Firm Y New Equity 100 50 Equity 50 100 100 Firm Y Assets Liabilities 200 50 Firm X Assets 100 Equity 150 100 New Equity 300 300

C. In statutory consolidation, both merging companies are dissolved to form a new entity. This new company represents a combination of the balance sheets of the two original companies. Shareholders are compensated with shares in this new entity, proportionate to their previous holdings in the dissolved companies. Conversely, in an asset acquisition, Company Y acquires the assets of Company X, compensating with its own newly issued equity. Company X, while not dissolved, temporarily becomes a holding entity for Company Y's equity, until it can settle its liabilities. Statutory consolidation is typically suited for companies of comparable size and market position, aiming to generate value through increased scale and efficiency. An all-stock asset acquisition is often chosen by a company that can improve operational profitability by acquiring another firm's assets but lacks the necessary cash to manage the target's debt immediately. By issuing equity, the acquiring company doesn’t directly take on the liabilities but can service the target company’s debt eventually, leveraging the operational efficiencies gained from the acquired assets.