Move Over Synergies Make Way for Financial Engineering

Abstract

This paper compares the merger of AOL-Time Warner with the LBO of Hertz. AOL was a classic case where a strategic buyer sought to diversify its business following the perennial principal of bigger is better. The later transaction was structured as a stock purchase transaction where a large portion of the acquisition was funded by securitizing Hertz's US and international car and equipment rental fleet. Securitization, when structured as a true sale, is a process of accelerating future cash flow from illiquid receivables without creating additional liability. Increased familiarity among the issuers and growing popularity among the investors is encouraging potential acquirers to look beyond the traditional sources of fund and engineer acquisition financing through innovative use of structured finance products. Financial engineering is driving both a strategic buyer and a financial buyer to hustle together when it comes to making an acquisition. There seems to be a gradual shift as more acquisitions are being structured in a deal room on Wall Street instead of the corporate board room of a strategic buyer. Given the cost advantage of incorporating securitization in a LBO, the use of asset backed securities is expected to become increasingly prevalent in future. There lies no doubt that during the current and future merger waves financial engineering would play a more significant, if not dominating, role than the age old argument of unraveling synergies.