MERGERS AND ACQUISITIONS;

DIVESTITURES

Nature and motives of mergers and
acquisitions
Valuing a merger
Tender Offer
Tactics to resist unfriendly mergers
Divestitures
Topics

Mergers and
Acquisitions

Merger two firms combine to form a single firm
1. Horizontal merger 2 companies in same industry

Mergers and Acquisitions

2. Vertical merger firm with a supplier & distributor
Mergers and Acquisitions

3. Conglomerate merger 2 companies with no related
products or markets
4. Product extension merger firms that sell different,
but somewhat related products
Mergers and Acquisitions

5. Consolidation an entirely new firm is created
Mergers and Acquisitions

Acquisition the purchase of one firm by another
Mergers and Acquisitions

Motives for Business
Combinations

Financial motives
1. Maintenance of the firms rate of return achieving
risk reduction; reducing variability in performance
2. Revenue enhancement acquiring a firm in a
growing market that may enhance revenues
3. Cost reduction
Economies of scale increase in size
reduces costs
Economies of scope joint use of
inputs
Motives for Business Combinations

X-efficiencies superior management skills and other
managerial factors
4. Tax considerations tax gains
5. Lowering the cost of capital cost of issuing securities
are subject to economies of scale
6. Exhaust unused debt potential increase debt
financing; create wealth
7. Reduction in bankruptcy costs if a merger reduces
possibility of bankruptcy, it creates some wealth
Motives for Business Combinations

Non-financial motives
1. Managers personal incentives in cases managers
compensation is based on firm size
2. Possible synergistic effect occurs when the whole is
greater than sum of its parts

Motives for Business Combinations

Valuing a Merger

Methods of payment in merger transactions
1. Cash purchase acquiring a going concern
example: (Illust. Case 30-1, page 830)

Valuing a Merger

Valuing a Merger

Valuing a Merger

Valuing a Merger
2. Stock-for-stock exchange earnings per share impact
of exchanging securities
example: (Illust. Case 30-2, page 832)

Valuing a Merger

Valuing a Merger
3. Debt and preferred stock financing convertible
debentures and convertible preferred stock have
frequently been used
4. Deferred Payment Plan (DPP) additional
compensation



Valuing a Merger
example: Company A acquired Company B in 2011



Valuing a Merger

Tender Offer

A tender offer involves a bid by an interested party
for controlling interest in another corporation

Tender Offer

Resisting Unfriendly
Mergers

Tactics to resist unfriendly mergers
1. White knight
Resisting Unfriendly Mergers

2. PacMan
Resisting Unfriendly Mergers

3. Shark repellents
Resisting Unfriendly Mergers

4. Poison pill
Resisting Unfriendly Mergers

5. Golden parachute
Resisting Unfriendly Mergers

6. Greenmail
Resisting Unfriendly Mergers

7. Staggered election of directors
Resisting Unfriendly Mergers

8. Fair price provisions (shareholder right plans)
Resisting Unfriendly Mergers

9. Flip-over rights
Resisting Unfriendly Mergers

10. Flip-in rights
Resisting Unfriendly Mergers

11. Issuing equity share
Resisting Unfriendly Mergers

12. Reverse tender
Resisting Unfriendly Mergers

13. Crown jewel transfer
Resisting Unfriendly Mergers

14. Legal action
Resisting Unfriendly Mergers

Divestitures

Divestiture is the process of selling off subsidiary
business interests or investments
Divestitures

Types of divestitures
1. Sell-off sale of a subsidiary, division, or product line
2. Spin-off giving up operating control of subsidiary
3. Liquidation assets are sold to another company
4. Going private transfer to small group of private
investors
5. Leveraged buyout a special case of going private
Divestitures
Reported by:
April Deguinion
Carel Tagaan
JC Ferol
Emie Titular