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Case Studies - Take Over Defences - Methods of Payment & Leverage - Regulatory Controls
Case Studies - Take Over Defences - Methods of Payment & Leverage - Regulatory Controls
Case Studies
Take over Defences
Methods of Payment & Leverage
Regulatory controls.
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Ulhas D Wadivkar
Ulhas D Wadivkar
Ulhas D Wadivkar
Acquisitions
When one company takes over another and clearly
established itself as the new owner, the purchase is called
an Acquisition. From a legal point of view, the Target
company ceases to exist, the buyer "swallows" the
business and the buyer's stock continues to be traded.
In practice, however, actual mergers of equals don't
happen very often. Usually, one company will buy another
and, as part of the deal's terms, simply allow the acquired
firm to proclaim that the action is a merger of equals, even
if it's technically an Acquisition. Being bought out often
carries negative connotations, therefore, by describing the
deal as a merger, deal makers and top managers try to
make the takeover more palatable
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Acquisitions
A purchase deal will also be called a merger when both
CEOs agree that joining together is in the best interest of
both of their companies. But when the deal is unfriendly
and is hostile, i.e. the Target Company does not want to
be purchased, then it regarded as Acquisition.
Whether a purchase is considered a Merger or an
Acquisition really depends on whether the purchase is
friendly or hostile and how it is announced. In other
words, the real difference lies in how the purchase is
communicated to and received by the target company's
board of directors, employees and shareholders.
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Varieties of Mergers -1
Horizontal merger - Two companies that are in direct competition
and share the same product lines and markets.
Vertical merger - A customer and company or a supplier and
company. Think of a cone supplier merging with an ice cream
maker. Vertical mergers occur when two firms, each working at
different stages in the production of the same good, combine.
Market-extension merger - Two companies that sell the same
products in different markets.
Product-extension merger - Two companies selling different but
related products in the same market.
Congeneric Merger / Concentric Mergers occur where two
merging firms are in the same general industry, but they have no
mutual buyer/customer or supplier relationship, such as a merger
between a Bank and a Leasing company. Example: Prudential's
acquisition of Bache & Company.
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Varieties of Mergers -2
Accretive mergers are those in which an acquiring company's
earnings per share (EPS) increase. An alternative way of
calculating this is if a company with a high price to earnings ratio (
P/E) acquires one with a low P/E & Dilutive mergers are the
opposite of above, whereby a company's EPS decreases. The
company will be one with a low P/E acquiring one with a high P/E.
Conglomerate : When two companies that have no common
business areas. There are two types of mergers that are
distinguished by how the merger is financed. Each has certain
implications for the companies involved and for investors:
A) Purchase Mergers - As the name suggests, this kind of
merger occurs when one company purchases another. The
purchase is made with cash or through the issue of some kind of
debt instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it
can provide them with a tax benefit. Acquired assets can be
written-up to the actual purchase price, and the difference
between the book value and the purchase price of the assets can
depreciate annually, reducing taxes payable by the acquiring
company.
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Varieties of Mergers -3
B) Consolidation Mergers - With this merger, a brand
new company is formed and both companies are
bought and combined under the new entity. The tax
terms are the same as those of a purchase merger
In some of the merger deals, a company can buy
another company with cash, stock or a combination of
the two.
In smaller deals, one company acquires 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). Thus, Company Y
becomes merely a shell and will eventually liquidate or
enter another area of business.
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Varieties of Mergers -4
Reverse merger is an another type of acquisition is 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
a Shell public company, and together they become an
entirely new public corporation with tradable shares.
Takeover : An Acquisition where the Target Firm did not
solicit the bid of acquiring firm.
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Why M& A ?
One plus one makes three is the main idea and is special
alchemy of a Merger or an Acquisition. The key principle
behind buying a company is to create shareholder value
over and above that of the sum of the two companies. Two
companies together are more valuable than two separate
companies - at least, that's the reasoning behind M&A.
Especially, when times are tough; strong companies will
act to buy other companies to create a more competitive,
cost-efficient company. The companies will come together
hoping to gain a greater market share or to achieve greater
efficiency. Target companies will often agree to be
purchased when they know they cannot survive alone.
Synergy is the magic force that allows for enhanced cost
efficiencies of the new business. Synergy takes the form of
revenue enhancement and cost savings. By merging, the
companies hope to benefit
from the following:
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Why M& A ?
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Why M & A ?
Improved market reach and industry visibility - A merge
may expand two companies' marketing and distribution,
giving them new sales opportunities. Because of
improved financial standing, Bigger firms have an easier
time raising capital than smaller ones.
Overcome the Entry barriers: M & A is one of the way
for smooth market entry, as good will of another
company and the brand gets transferred to new entities
without initial hiccups. These costly barriers to entry
otherwise would make Start-ups economically
unattractive. e.g. Belgian Fortis acquisition of American
Bankers Insurance Group
Eliminating the Cost of new product Development.
Buying established business reduces risk of start-up
ventures. e.g. Watson Pharmaceuticals acquisition of
Thera Tech
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Why M & A ?
Lower risk compared to developing new products.
Increased feasibility and speed of Diversification. This
is a quick way to move into businesses when firm
currently lacks experience and depth in industry. e.g.
CNETs acquisition of mySimon.
Acquisition is intended to avoid excessive competition
and improve competitive balance of the industry and
thereby Increased Market Power and allowing market
entry in a timely fashion. Firms use acquisition to restrict
its dependence on a single or a few products or markets.
e.g. British Petroleums acquisition of U.S. Amoco.;
Kraft Foods acquisition of Boca Burger.; General
Electrics acquisition of NBC.
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Problems of M & A
Integration Difficulties: Differing financial and control systems can
make integration of firms difficult. e.g. Intels acquisition of DECs
semiconductor division.
Inadequate Evaluation of Target: Competitive bid causes acquirer
to overpay for firm. e.g. Marks and Spencers acquisition of Brooks
Brothers
Large or Extraordinary Debt : Costly debt can create onerous
burden on cash outflows. e.g. Agrbio Techs acquisition of dozens
of small seed firms
Inability to Achieve Synergy: Justifying acquisitions can increase
estimate of expected benefits. e.g. Quaker Oats and Snapple
Overly Diversified: Acquirer doesnt have expertise required to
manage unrelated businesses. e.g. GE prior to selling businesses
and refocusing
Managers Overly Focused on Acquisitions: Managers may fail to
objectively assess the value of outcomes achieved through the
firms acquisition strategy. e.g. Ford and Jaguar
Too Large: Large business bureaucracy reduces innovation and
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flexibility.
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Long Term
Operating
Financial Synergy
Synergy
Increased Debt Capacity Economies of Scale
Improved Capital
No Growth in Industry
Redeployment
Limited Competition
Reduction in Debt
Acquiring Technical &
Managerial Knowledge
Bankruptcy Costs
Product Extension
Stabilising Earnings Market Extension
Reduction in in Risk and
uncertainty
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Cultural Factors
1. Check organisations values, traditions, norms, beliefs and
behaviour patterns.
2. Check formal statements available, but observe informal
relationships and networks.
3. Check managements operating style. The firm must be
consistent in its formal statements of values and kinds of
actions that are rewarded.
4. Check need of proactive employee training for growth through
Merger.
5. Check cultural factors in addition to products, plant &
equipments.
6. Check how the organisation has handled cultural factors in the
past.
7. Cultures may move to similarity. Or differences may even be
valued as sources of increased efficiency.
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Implementation
1. Implementation starts as condition for thinking about M & A.
2. The firm must have implemented all aspects of efficient
operations before it can effectively combine organisations.
3. The acquiring firm must have shareholder value orientation
with strategies and organisational structures compatible to
multiple business units.
4. Mergers should further Corporate strategy, strengthening
weaknesses, filling gaps, developing new growth opportunities
and extending capabilities.
5. Integration leadership with management leadership qualities,
experience with external constituencies and credibility with the
various integration participants.
6. Provide early, frequent & clear integration messages. Lack of
communications causes distress. Ensure quick integration.
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Valuation - 1
Asset Valuation: Disciplined procedure for arriving at a
price.
Historical earnings valuation,
Future maintainable earnings valuation,
Valuation as per Discounted Cash Flow (DCF) :
A key valuation tool in M&A, discounted cash flow analysis
determines a company's current value according to its
estimated future cash flows. Forecasted free cash flows
(operating profit + depreciation + amortization of goodwill
capital expenditures cash taxes - change in working
capital) are discounted to a present value using the
company's Weighted Average Costs of Capital (WACC).
Few tools can rival this valuation method though it is tricky.
NPV =
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t =1
Cash Flow
- Initial Capital
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Valuation -2
These values are determined for the most part by looking
at a company's Balance Sheets and / or Income
Statements and withdrawing the appropriate information.
The information in the balance sheet or income
statement is obtained by one of three Accounting
measures: a Notice to Reader, a Review Engagement or
an Audit.
Accurate business valuation is one of the most important
aspects of M&A as valuations like these will have a major
impact on the price that a business will be sold for. Most
often this information is expressed in a Letter of Opinion
Value (LOV) when the business is being evaluated for
interest's sake.
There are other, more detailed ways of expressing the
value of a business. These reports generally get more
detailed and expensive as the size of a company
increases, however, this is not always the case as there
are many complicated industries which require more
attention to detail, regardless
of size.
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Valuation -3
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Valuation - 4
2.
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Methods of Payment
Financing M&A
Mergers are generally differentiated from acquisitions
partly by the way in which they are financed and partly
by the relative size of the companies. Various methods
of financing an M&A deal exist:
Cash
Payment by cash. Such transactions are usually termed
acquisitions rather than mergers because the
shareholders of the target company are removed from
the picture and the target comes under the (indirect)
control of the bidder's shareholders alone.
A cash deal would make more sense during a downward
trend in the interest rates. Another advantage of using
cash for an acquisition is that there tends to lesser
chances of EPS dilution for the acquiring company. But a
caveat in using cash is that it places constraints on the
cash flow of the company.
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Methods of Payment
Financing
Financing capital may be borrowed from a bank, or
raised by an issue of bonds. Alternatively, the acquirer's
stock may be offered as consideration. Acquisitions
financed through debt are known as Leveraged Buyouts
if they take the target private, and the debt will often be
moved down onto the Balance Sheet of the acquired
company.
Hybrids
An acquisition can involve a combination of cash and
debt or of cash and stock of the purchasing entity.
Factoring
Factoring can provide the extra to make a merger or sale
work. Hybrid can work as additional factor.
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Strategy
Develop a new Strategic Vision
Achieve long run Strategic goals
Acquire capabilities in new industry.
Obtain talent for fast moving industries.
Add capabilities to expand role in a technologically
advancing industry.
6. Quickly move into new products, markets.
7. Apply a broad range capabilities and managerial skills in
new areas.
B. Economies of Scale
1. Cut production costs due to large volume.
2. Combine R & D operations
3. Increased R & D at controlled risk.
4. Increased Sales force.
5. Cut overhead costs.
6. Strengthen distribution systems.
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C. Economies of Scope
1. Broaden Product line.
2. Provide one stop shopping for all services
3. Obtain complementary products
D. Extend advantages in differential products
E. Advantages of size
1. Large size can afford high tech equipments.
2. Spread the investments in the use of expensive equipments
over more units.
3. Ability to get quantity discounts
4. Better terms in deals.
F. Best Practices
1. Operating efficiencies-improve management of receivables,
inventions, fixed assets etc.
2. Faster tactical implementation.
3. Incentives for workers rewards
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Better utilisation for resources.
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G. Market Expansion
1.
Increased Market Share.
2.
Obtain access to new Markets.
H. New Capabilities, Managerial Skills
1.
Apply a broad range of capabilities and managerial skills
in new areas.
2.
Acquire capabilities in new industry.
3.
Obtain talent for fast moving industries.
I.
Competition
1.
Achieve critical mass before rivals.
2.
Pre-empt acquisitions by competitors.
3.
Compete on EBIT growth for higher valuations.
J. Customers
1.
Develop new key customer relationships.
2.
Follow Clients.
3.
Combined company can meet customers demand for a
wide range of services.
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K. Technology
1. Enter technologically dynamic industries.
2. Seize opportunities in industries with developing
technologies.
3. Exploit technological advantage.
4. Add new R & D capabilities.
5. Add key technological and complementary technological
capabilities.
6. Add key Patents or Technology.
7. Acquire technology for lagging areas.
L. Shift in industry organisation
1. Adjust to de-regulations relaxed Government barriers,
geographic & new market extensions.
2. Change in strategic scientific industry segment.
M. Shift in product Strategy
1. Eliminate industry excess capacity. Shift from over capacity
area to area with more favourable sales capacity.
2. Exit a product area that has become area of speciality.
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N. Globalisation
1. International Competition to establish presence in foreign
markets and strengthen position in domestic market.
2. Size & economies of scale required for global competition.
3. Growth opportunities outside domestic market.
4. Diversification product, Geographically, reduce
dependence on export or imports, reduce systematic risks.
O. Favourable product inputs - Obtain assured sources of
supply of RMs, inexpensive & trained Labour, Locally
manufactured inputs.
Q. Improved distribution in other countries.
R. Investment acquire company, improve it , sell it.
S. Prevent Competitor from acquiring target company.
T. Create antitrust problem to deter potential acquirers.
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Summing up
M&A comes in all shapes and sizes, and investors need
to consider the complex issues involved in M&A. Let's
sum up:
A merger can happen when two companies decide to
combine into one entity or when one company buys
another. An acquisition always involves the purchase of
one company by another.
The functions of synergy allow for the enhanced cost
efficiency of a new entity made from two smaller ones synergy is the logic behind mergers and acquisitions.
Acquiring companies use various methods to value their
targets. Some of these methods are based on
comparative ratios - such as the P/E and P/S ratios replacement cost or discounted cash flow analysis.
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Summing up
An M&A deal can be executed by means of a cash
transaction, stock-for-stock transaction or a combination
of both. A transaction struck with stock is not taxable.
Break up or de-merger strategies can provide companies
with opportunities to raise additional equity funds, unlock
hidden shareholder value and sharpen management
focus. De-mergers can occur by means of divestitures,
carve-outs spin-offs or tracking stocks.
Mergers can fail for many reasons including a lack of
management foresight, the inability to overcome
practical challenges and loss of revenue momentum
from a neglect of day-to-day operations.
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Merger waves :
The economic history has been divided into Merger Waves based on
the merger activities in the business world as:
Period
Name
Facet
1889 -1904
1st Wave
Horizontal Mergers
1916 -1929
2nd Wave
Vertical Mergers
1965 - 1989
3rd Wave
Diversified Conglomerate
Mergers
1992 - 1998
4th Wave
2000 onwards
5th Wave
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Rank Year
In Mil. - USD
2000
Fusion : America on
Line : AOL
Time Warner
$1,64,747
2000
Smith Kline
Beecham plc.
$75,961
2004
Royal Dutch
Petroleum Co.
$74,559
2006
AT & T Inc.
Bell South
Corporation
$ 72,671
2001
Comcast Corporation
AT & T Broadband
& Internet
$ 72,041
2004
Sanofi-Synthelabo SA
Aventis SA
$ 60,243
2002
Pfizer Inc.
Pharmaica Corp.
$ 59,515
2004
JP Morgan Chase Co
$ 58,761
2009
Pfizer Inc.
Wyeth
$ 68,000
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a)
b)
c)
d)
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4.
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