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

In acquisition two companies are combine together to form a new company altogether.. . 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. an accounting illusion). Hostile acquisition Here. the acquiring company's stock or a combination of both.expanding on its own. 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. It is the buying of one company by another. Reverse acquisition A private company takes over a public company. Back flip acquisition A very rare case of acquisition in which. There is no forceful acquisition and the entire process is cordial. Types Of ACQUISITION There are four types of acquisitions: Friendly acquisition Both the companies approve of the acquisition under friendly terms. It is also known as a takeover or a buyout. their by establishing majority and hence initiating the acquisition. as the name suggests. 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. the entire process is done by force.e. the purchasing company becomes a subsidiary of the purchased company. Acquisitions are often paid in cash.

A merger can be seen as a decision made by two businesses that are broadly “equal” in terms of factors such as size. golden parachute. greenmail. The existing shareholders can buy the shares at a discount. through the changes made by combining both together. There is a definite decrease in competition by takeovers for the buying company. On the other hand. while nobody else is given this incentive. blackmail. The enlarged business. Acquisitions are driven by opportunistic competitors. The list is endless.which should benefit shareholders of both the original two businesses. 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. 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 . If the management team of the target company is the core fuel and losing them could mean big loss to the acquiring company. though they get their share of compensation. can cut costs. the target company stalls the acquisition until a more favorable company attempts the takeover. Being on guard will save the skin MERGER A merger is a combination of two previously separate organizations. The acquisition also leads the buying company into new territories and new kinds of businesses. etc. customers etc.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. scale of operations. Pac-man defense. whitemail. white knight. then the people pill strategy is used where the entire team of the target company threatens to quite altogether upon hostile acquisition. crown jewel defense. grow revenues and increase profits . Other tactics are back end. In the sandbag tactic. Impacts of acquisition The most obvious impact is there is drastic increase in sales and therefore the revenue. many employees get laid off and existing employees may lose morale.

Horizontal Merger A merger occurring between companies in the same industry. Example A leading manufacturer of athletic shoes. which is one of the ten biggest banks in the metropolitan Atlanta region as far as deposit market share is concerned. Eagle Bancshares also holds the Tucker Federal Bank. would be horizontal in nature. Example A merger between Coca-Cola and the Pepsi beverage division. while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. It has almost 90. larger organization with more market share. 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. Market Extension Mergers A market extension merger takes place between two companies that deal in the same products but in separate markets. and reduce costs.A merger between firms that are involved in totally unrelated business activities. Georgia and has 283 workers. The goal of a horizontal merger is to create a new. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company. for example.1 billion. 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. There are two types of conglomerate mergers: pure and mixed. such as manufacturing. Horizontal mergers are common in industries with fewer firms. 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.000 accounts and looks after assets worth US $1. 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. 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. Horizontal merger is a business consolidation that occurs between firms who operate in the same space. merges with a soft drink firm. Because the merging companies' business operations may be very similar. Pure conglomerate mergers involve firms with nothing in common. there may be opportunities to join certain operations. often as competitors offering the same good or service. .

A vertical merger occurs when two or more firms. Vertical Merger A merger between two companies producing different goods or services for one specific finished product. in turn. but exist in the same supply chain. would be complementing the wireless products of Broadcom. operating at different levels within an industry's supply chain. Co-Generic Merger . Synergy.With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta . The parts division.11b wireless LAN. It is expected that the products of Mobilink Telecom Inc. Example A vertical merger joins two companies that may not compete with each other. deals in the manufacturing of product designs meant for handsets that are equipped with the Global System for Mobile Communications technology. which is among the leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations. This ensures that they earn higher profits. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one. Example The acquisition of Mobilink Telecom Inc. merge operations. by Broadcom is a proper example of product extension merger. would be guaranteed a steady stream of business. Mobilink Telecom Inc. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802. 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. An automobile company joining with a parts supplier would be an example of a vertical merger. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. 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.

Company Y becomes merely a shell and will eventually liquidate or enter another area of business. a deal that enables a private company to get publicly-listed in a relatively short time period. Defence techniques Preventive measures Preventive measures against hostile takeovers are much more effective than reactive measures implemented once Takeover attempts have already been launched. business markets. The first step in a company’s defense. therefore. as in some of the merger deals we discuss above. • 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. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. and together they become an entirely new public corporation with tradable shares. In an acquisition. II. • Check the track record of the share registrar in regards to its involvement in hostile takeovers in the past. Instead. is for management and controlling shareholders to begin their preparations for a possible fight long before the battle is joined. This makes it much more diffi cult for the raider to identify who is the real owner of the shares. With joint stock companies this information is contained in the share register. Another type of acquisition is a reverse merger. or basic required technologies. if they had debt before). usually one with no business and limited assets. a company can buy another company with cash. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publiclylisted shell company. stock or a combination of the two. the share register provides for the possibility to identify the owners of the shares.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. the share register contains information on the nominee holders1. The private company reverse merges into the public company. Company X buys all of Company Y's assets for cash. Control over debts . Another possibility. some of which are described below. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements. nominal value and type of shares held by shareholders. 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. 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. Of course. quantity. There are Several principal weapons in the hands of target management to prevent takeovers. which means that Company Y will have only cash (and debt. which is common in smaller deals. In particular. is for one company to acquire all the assets of another company.

The parent transfers to subsidiaries the most valuable assets as a contribution to the share capital. In other words the parent company does not even have a blocking shareholding.Creditor indebtedness of the company may be used by a raider as the principal or auxiliary tool in the process of hostile takeover. according to a survey by Executive Compensation Advisory Services. may make undesirable suitors think twice before acquiring a company if they do not want to retain the target’s management nor dismiss them at a high price. the company should do its best to pay all outstanding debts. 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. bonuses. 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 executive’s control (for instance. Benefits written into the executives’ contracts may include items such as stock options. Subsidiaries then distribute the shares among themselves. 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). In particular. Then the subsidiaries issue more shares. the raider may employ so-called “contract bankruptcy” in order to acquire the assets of the target. The presence of “golden parachute” plans at Fortune 1000 companies increased from 35% in 1987 to 81% in 2001. 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 . Golden parachutes can be prohibitively expensive for the acquiring firm and. The result of such an operation is that the parent owns less that 25% of the share capital of each subsidiary. In connection with this the following cautionary measures should be taken: • Monitor the creditors of company carefully. • Prevent overdue debts. hefty severance pay and so on. Golden parachute This measure discourages an unwanted takeover by offering lucrative benefits to the current top executives. Cross shareholding Several subsidiaries of a company (at least three) have to be established. • If there is indirect evidence that a bankruptcy procedure is about to be launched. John Reed’s USD 30 million in severances and USD 5 million per year for life. The amount of these should be more than four times the initial share capital. who may lose their job if their company is taken over by another firm. When implementing this scheme it is important to ensure that the management of the subsidiaries is loyal to the parent company. and Citigroup Inc. Notable examples include exMattel CEO Jill Barad’s USD 50 million departure payment. • 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. where the parent company owns 100% of share capital in each subsidiary. therefore. The golden parachute defense is widely used by American companies. the other party to the agreement has the right to accelerate the debt or terminate the contract. In this way the raider who proceeds with a takeover may find himself deprived of the very objective of his ambitions.

securities law or other skeletons in the closet of the attacker. debts. and bills of exchange. rights of claim. Although one of the effects of change of control clauses is to discourage raiders. It should also be kept in mind that such shares must be disposed of or cancelled within a period of one year. 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. 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 . Post takeover defence It is essential that the company starts to react immediately after the takeover attempt is launched. e. Litigation Bringing administrative claims or court proceedings against the raider is regarded as one of the most common antitakeover measures. 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. named after the videogame. Self-tender Under the Business Associations Act of Ukraine. e. their purpose is legitimate: to protect creditors from being placed in a worse position than they visualized. 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. self tender may prove to be a rather time consuming exercise.g. 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. Otherwise the company may find itself at a strategic and tactical disadvantage that may prove fatal. consists of a counter-purchase by the target of the shares against its attacker.by the target. However. Propaganda .g. 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. 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. if the charter of the company provides that the decision on buyback of own shares falls within the competence of a general shareholders meeting. In such a case the law requires that of shareholders should be notified about the general shareholders meeting at least 45 days in advance. Pac man defense This defense. 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. the shares of the attacker are consolidated in the hands of shareholders friendly to the attacker. A target of a hostile offer should search for any regulatory.

http://www.html . Losing them could seriously harm the company. shareholders and general public in favor of the company.ub. 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. On the other hand. There is no “one size fits all” strategy to make the company takeover-proof. a regular review of the takeover environment is essential as is keeping the available defenses up to date. It is also important to remain flexible in responding to changing dynamics of takeover techniques. so the effectiveness of a people pill defense depends on the specific situation. People Pill Here. hostile takeovers often result in the management being fired anyway.com/doc/45334998/MERGERS-AND-ACQUISITIONS-FINAL http://www. The company may strengthen its positive image and emphasize its importance for the region/country and. Concluding remarks Hostile takeover defense is an art. at the same time. III.The company is well advised to make use of media to let the public know its arguments against a takeover.scribd. 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. Therefore.se/bitstream/2077/28242/1/gupea_2077_28242_1. This is especially useful if they are highly qualified employees who are crucial in identifying and developing business opportunities 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. not a science. management threatens that in the event of a hostile takeover.gu.com/defence/defence1. A skillfully organized PR campaign may significantly influence the position of state bodies.scribd.com/doc/22506438/Merger-and-Acquisition-Defensive-Strategies https://gupea. the management team and the core specialists will resign at the same time en masse. especially if the company operates in hi-tech business where talented human resources are the main asset of the company. Careful advance preparation is necessary to ward off the unfriendly bids. as being prepared can well make the difference between success and failure.pdf http://mergersindiainfo. The target may seek out a white knight by itself or with the help of investment bankers.

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