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ACQUISITION & MERGER

In business there is one simple rule: grow or die. Companies on a growth path will take away market share from competitors, create economic profits and provide returns to shareholders. Those that do not grow tend to stagnate, lose customers and market share, and destroy shareholder value. Mergers and acquisitions play a critical role in both sides of the cycle -- enabling strong companies to grow faster than competition and providing entrepreneurs rewards for their efforts, and ensuring weaker companies are more quickly swallowed, or worse, made irrelevant through exclusion and ongoing share erosion. Reasons of Acquire and Merger Economies to scale and scope: A large company can enjoy economies of scale or savings from producing goods in high volume that are not available to a small company. Larger firms can also benefit from economies of scope, which are savings that come from combining the marketing and distribution of different types of related products. Vertical Integration: Vertical integration refers to the merger of two companies in the same industry that make products required at different stages of the production cycle. A company might conclude that it can enhance its product if it has direct control of the inputs required to make the product. Similarly, another company might not be happy with how its products are being distributed, so it might decide to take control of its distribution channels. The principal benefit of vertical integration is coordination. By putting two companies under central control, management can ensure that both companies work toward a common goal. Expertise: Firms often need expertise in particular areas to compete more efficiently. Faced with this situation, a firm can enter the labor market and attempt to hire personnel with the required skills. Hiring experienced workers directly might be very difficult for existing managers to identify the talent they need. A more efficient solution may be to purchase the talent as an already functioning unit by acquiring an existing firm. Monopoly Gains: It is often argues that merging with or acquiring a major rival enables a firm to substantially reduce competition within the industry and thereby increasing the profits. Society as a whole bears the cost of monopoly strategies, so most countries have antitrust laws that limit such activity.

ACQUISITION
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to

expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both. It is also known as a takeover or a buyout. It is the buying of one company by another. In acquisition two companies are combine together to form a new company altogether. Example: Company A+ Company B= Company A. Basic Forms of Acquisitions There are three basic legal procedures that one firm can use to acquire another firm: Merger or Consolidation Acquisition of Stock Acquisition of Assets Two Financial Side Effects of Acquisitions Earnings Growth If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth (i.e., an accounting illusion). Diversification Shareholders who wish to diversify can accomplish this at much lower cost with one phone call to their broker than can management with a takeover. Types Of ACQUISITION There are four types of acquisitions: Friendly acquisition Both the companies approve of the acquisition under friendly terms. There is no forceful acquisition and the entire process is cordial. Reverse acquisition A private company takes over a public company. Back flip acquisition A very rare case of acquisition in which, the purchasing company becomes a subsidiary of the purchased company. Hostile acquisition Here, as the name suggests, the entire process is done by force. The smaller company is either driven to such a condition that it has no option but to say yes to the acquisition to save its skin or the bigger company just buys off all its share, their by establishing majority and hence initiating the acquisition.

Defense strategies to prevent hostile acquisition Poison pill: The target company tries to ward off acquisition by making its stock less attractive to the buyer company. The existing shareholders can buy the shares at a discount, while nobody else is given this incentive. In the sandbag tactic, the target company stalls the acquisition until a more favorable company attempts the takeover. If the management team of the target company is the core fuel and losing them could mean big loss to the acquiring company, then the people pill strategy is used where the entire team of the target company threatens to quite altogether upon hostile acquisition. Macaroni defense is employed by giving out bonds with guarantee that the bonds will be redeemed at a higher price if the company is taken over.

Other tactics are back end, greenmail, blackmail, whitemail, crown jewel defense, golden parachute, white knight, Pac-man defense, etc. The list is endless. Impacts of acquisition The most obvious impact is there is drastic increase in sales and therefore the revenue. The acquisition also leads the buying company into new territories and new kinds of businesses. There is a definite decrease in competition by takeovers for the buying company. On the other hand, many employees get laid off and existing employees may lose morale, though they get their share of compensation. Acquisitions are driven by opportunistic competitors. Being on guard will save the skin

MERGER
A merger is a combination of two previously separate organizations. A merger can be seen as a decision made by two businesses that are broadly equal in terms of factors such as size, scale of operations, customers etc. The enlarged business, through the changes made by combining both together, can cut costs, grow revenues and increase profits - which should benefit shareholders of both the original two businesses. What typically happens in a merger is that a new company is formed - and the shares in the new company are distributed to the shareholders of the two original businesses in a suitable split Types of merger Conglomerate

A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. Example A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company. Horizontal Merger A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. Example A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs. Market Extension Mergers A market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base. Example A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion. Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan Atlanta region as far as deposit market share is concerned. One of the major benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the North American market.

With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta , which is among the leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations. Product Extension Mergers A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits. Example The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. It is expected that the products of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom. Vertical Merger A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one. Example

A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business. Synergy, the idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts is one of the reasons companies merger. Co-Generic Merger

Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business. Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publiclylisted shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares.
II. Defence techniques Preventive measures Preventive measures against hostile takeovers are much more effective than reactive measures implemented once Takeover attempts have already been launched. The first step in a companys defense, therefore, is for management and controlling shareholders to begin their preparations for a possible fight long before the battle is joined. There are Several principal weapons in the hands of target management to prevent takeovers, some of which are described below.

Control over the register


The raider needs to know who the shareholders of the target are in order to approach them with the offer to sell Their shares. With joint stock companies this information is contained in the share register. In particular, the share register provides for the possibility to identify the owners of the shares, quantity, nominal value and type of shares held by shareholders. So it is very important to ensure that non-authorized persons do not have access to the share register of the company by taking the following steps: Careful consideration is needed when choosing the registrar; the preference should be given to a reputable Registrar; Check the track record of the share registrar in regards to its involvement in hostile takeovers in the past; Check who controls the registrar company? In case of transfer of shares to a nominee holder (custodian or depository) information on the beneficiary owners of shares is not stated in the share register. Instead, the share register contains information on the nominee holders1. This makes it much more diffi cult for the raider to identify who is the real owner of the shares.

Control over debts

Creditor indebtedness of the company may be used by a raider as the principal or auxiliary tool in the process of hostile takeover. In particular, the raider may employ so-called contract bankruptcy in order to acquire the assets of the target. In connection with this the following cautionary measures should be taken: Monitor the creditors of company carefully; Prevent overdue debts; If there is indirect evidence that a bankruptcy procedure is about to be launched, the company should do its best to pay all outstanding debts; Accumulate all the debts and risks relating to commercial activity of the company on a special purpose vehicle that does not hold any substantial assets.

Cross shareholding
Several subsidiaries of a company (at least three) have to be established, where the parent company owns 100% of share capital in each subsidiary. The parent transfers to subsidiaries the most valuable assets as a contribution to the share capital. Then the subsidiaries issue more shares. The amount of these should be more than four times the initial share capital. Subsidiaries then distribute the shares among themselves. The result of such an operation is that the parent owns less that 25% of the share capital of each subsidiary. In other words the parent company does not even have a blocking shareholding. When implementing this scheme it is important to ensure that the management of the subsidiaries is loyal to the parent company. In this way the raider who proceeds with a takeover may find himself deprived of the very objective of his ambitions.

Golden parachute
This measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. The triggering events that enable the golden parachute clause are change of control over the company and subsequent dismissal of the executive by a raider provided that this dismissal is outside the executives control (for instance, reduction in workforce2 or dismissal of the head of the board of directors due to the decision of the general meeting of shareholders provided such additional ground for dismissal is stated in the labor contract with the head of the board3). Benefits written into the executives contracts may include items such as stock options, bonuses, hefty severance pay and so on. Golden parachutes can be prohibitively expensive for the acquiring firm and, therefore, may make undesirable suitors think twice before acquiring a company if they do not want to retain the targets management nor dismiss them at a high price. The golden parachute defense is widely used by American companies. The presence of golden parachute plans at Fortune 1000 companies increased from 35% in 1987 to 81% in 2001, according to a survey by Executive Compensation Advisory Services. Notable examples include exMattel CEO Jill Barads USD 50 million departure payment, and Citigroup Inc. John Reeds USD 30 million in severances and USD 5 million per year for life.

Change of control clauses (Shark Repellents)


The company may include in loan agreements or some other agreements conditional covenants that in the event of the company passing under the control of a third party, the other party to the agreement has the right to accelerate the debt or terminate the contract. The result of such agreements is that a potential raider may not be sure whether it will be able to benefit from important advantages enjoyed

by the target. Although one of the effects of change of control clauses is to discourage raiders, their purpose is legitimate: to protect creditors from being placed in a worse position than they visualized.

Post takeover defence


It is essential that the company starts to react immediately after the takeover attempt is launched. Otherwise the company may find itself at a strategic and tactical disadvantage that may prove fatal.

Litigation
Bringing administrative claims or court proceedings against the raider is regarded as one of the most common antitakeover measures. A target of a hostile offer should search for any regulatory, securities law or other skeletons in the closet of the attacker. Court action can considerably lengthen the period of time needed to complete the takeover and reduce its chances of success by increasing the cost and by allowing time for the target to solicit competing bids or put up defenses
.

Self-tender
Under the Business Associations Act of Ukraine, a joint stock company has the right to acquire the paid up shares from the other shareholders only by sums that exceed the share capital. A corporate buy-back of its own shares increases the relative voting power of those shareholders friendly to management who do not Tender their shares. However, if the charter of the company provides that the decision on buyback of own shares falls within the competence of a general shareholders meeting, self tender may prove to be a rather time consuming exercise. In such a case the law requires that of shareholders should be notified about the general shareholders meeting at least 45 days in advance. The period of time necessary for proper convening the shareholders meeting may be enough for the raider to accumulate a sufficient quantity of shares to block the decision on buyback of shares. It should also be kept in mind that such shares must be disposed of or cancelled within a period of one year. During this period voting and determination of a quorum on the general shareholders meeting will be made without taking into account own shares bought by the company.

Pac man defense


This defense, named after the videogame, consists of a counter-purchase by the target of the shares against its attacker. In some cases it will suffice to buy even a small fraction of shares of the attacker to be able to initiate legal claims against the attacking company in the capacity of minority shareholder. Sometimes the company will be unable to buy the shares of a raider due to the lack of readily available funds or for some other reasons, e.g. the shares of the attacker are consolidated in the hands of shareholders friendly to the attacker. In this case the company or the persons affiliated with the company may start to acquire other tools of influence on the attacker or the business group it belongs to, e.g. rights of claim, debts, and bills of exchange.

Propaganda

The company is well advised to make use of media to let the public know its arguments against a takeover. The company may strengthen its positive image and emphasize its importance for the region/country and, at the same time, to put stress on the means of takeover tactics used by the raider that fall within the grey area of law or contradict the law altogether. A skillfully organized PR campaign may significantly influence the position of state bodies, shareholders and general public in favor of the company.

White Knight
A White Knight is a company (the good guy) that gallops to rescue the company that is facing a hostile takeover from another company (a Black Knight) by making a friendly offer to purchase the shares of the target company. The target may seek out a white knight by itself or with the help of investment bankers.

People Pill
Here, management threatens that in the event of a hostile takeover, the management team and the core specialists will resign at the same time en masse. This is especially useful if they are highly qualified employees who are crucial in identifying and developing business opportunities of the company. Losing them could seriously harm the company, especially if the company operates in hi-tech business where talented human resources are the main asset of the company. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense depends on the specific situation.

III. Concluding remarks


Hostile takeover defense is an art, not a science. Careful advance preparation is necessary to ward off the unfriendly bids, as being prepared can well make the difference between success and failure. It is also important to remain flexible in responding to changing dynamics of takeover techniques. A company must have an efficient defense strategy in place to provide maximum fl edibility in dealing with whatever the attacking company might throw its way. There is no one size fits all strategy to make the company takeover-proof. Therefore, a regular review of the takeover environment is essential as is keeping the available defenses up to date.

http://www.scribd.com/doc/45334998/MERGERS-AND-ACQUISITIONS-FINAL http://www.scribd.com/doc/22506438/Merger-and-Acquisition-Defensive-Strategies https://gupea.ub.gu.se/bitstream/2077/28242/1/gupea_2077_28242_1.pdf http://mergersindiainfo.com/defence/defence1.html

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