Mergers And Acquisitions

Prof. Preeti Kumari

Mergers And Acquisitions

The key principle behind buying a company is to create
shareholder value over and above that of the sum of the two

The reasoning behind M&A is that two companies together
are more valuable than two separate companies.


When the target company does not want to be
purchased - it is regarded as an 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.

a takeover is considered "hostile“. Acquisitions can be either friendly or hostile. If the company's board of directors feels that accepting the offer serves the shareholders better than rejecting it. – If the target company's board rejects the offer. the acquiring company's stock or a combination of both. . – Friendly acquisitions occur when the target firm expresses its agreement to be acquired. it recommends the offer be accepted by the shareholders. but the Acquiring firm continues to pursue it. Acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake.Acquisitions   Acquisitions are often paid in cash.

 Both companies' stocks are surrendered and new company stock is issued in its place. agree to go forward as a single new company rather than remain separately owned and operated. .Merger  A merger is a Voluntary amalgamation of two or more corporations.  Owners of each pre-merger firm continue as owners. and the resources of the merging entities are pooled for the benefit of the new entity.

is often a driving force behind a merger. A synergistic merger occurs when the postmerger earnings exceed the sum of the separate companies‘ premerger earnings. or the potential financial benefit achieved through the combining of companies. .Synergy    Synergy. The concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts.

giving them new sales opportunities.Sources of Synergy  The expected synergy achieved through the merger can be attributed to various factors – – – – – Staff reductions As every employee knows. Acquiring new technology .A bigger company placing the orders can save more on costs.A merge may expand two companies' marketing and distribution. When placing larger orders. Improved market reach and industry visibility . . Economies of scale . a large company can maintain or develop a competitive edge.By buying a smaller company with unique technologies. Standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. mergers tend to mean job losses. companies have a greater ability to negotiate prices with their suppliers.

then P&G chairman." This is the idea behind synergy . The company continues to expect cost synergies of approximately $1 to $1. and we will be even stronger and even better together. president and chief executive A.that by combining two companies the financial results are greater than what either could have achieved alone. a P&G news release cited that "The increases to the company's growth objectives are driven by the identified synergy opportunities from the P&G/Gillette combination. "…We are both industry leaders on our own.2 billion…and an increase in the annual sales run-rate of about $750 million by 2008. when the Proctor & Gamble Company acquired Gillette in 2005. ." In the same press release. Lafley stated.G.Example  For example.

there is a whole host of different mergers. distinguished by the relationship between the two companies that are merging: .Varieties of Mergers  From the perspective of business structures. Here are a few types.

Example: – A merger between Coca-Cola and the Pepsi beverage division.Horizontal merger   Two companies that are in direct competition and share the same product lines and markets. The goal of a horizontal merger is to create a new. there may be opportunities to join certain operations. such as manufacturing. for example. Because the merging companies' business operations may be very similar. would be horizontal in nature. and reduce costs . larger organization with more market share.

by directly merging with suppliers. Such a vertical merger would reduce the cost of tires for the automaker and potentially expand business to supply tires to competing automakers. a company can decrease reliance and increase profitability. A vertical merger occurs when two or more firms. . An example of a vertical merger is a car manufacturer purchasing a tire company. operating at different levels within an industry's supply chain. merge operations In vertical mergers.Vertical Merger     A merger between two companies producing different goods or services for one specific finished product.

. 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.000 accounts and looks after assets worth US $1. Access to a bigger market and that ensures a bigger client base. Eagle Bancshares also holds the Tucker Federal Bank. It has almost 90.1 billion. Georgia and has 283 workers. which is one of the ten biggest banks in the metropolitan Atlanta region as far as deposit market share is concerned. This move would allow RBC to diversify its base of operations.Market Extension Mergers    A market extension merger takes place between two companies that deal in the same products but in separate markets. 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. Eagle Bancshares is headquartered at Atlanta. Example: – – – Acquisition of Eagle Bancshares Inc by the RBC Centura.

. by Broadcom is a proper example of product extension merger. Mobilink Telecom Inc. would be complementing the wireless products of Broadcom. 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. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN. This ensures that they earn higher profits. allows the merging companies to group together their products and get access to a bigger set of consumers.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. It is expected that the products of Mobilink Telecom Inc. Example: – – The acquisition of Mobilink Telecom Inc.

There are two types of conglomerate mergers: pure and mixed. – –  Pure conglomerate mergers involve firms with nothing in common. . merges with a soft drink firm.Conglomerate Merger   A merger between firms that are involved in totally unrelated business activities. while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. Example: – A leading manufacturer of athletic shoes. 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.

Cross-border mergers  One of the main reasons why foreign firms are interested in buying U. market. . companies is to gain entrance to the U.S.S.

Defensive mergers  A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired by a third company. .

.Defensive tactics  Firms use defensive tactics to fight off undesired mergers.  A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Poison pills   A strategy used by corporations to discourage hostile takeovers. – selling off at bargain prices the assets that originally made the firm a desirable target. . the target company attempts to make its stock less attractive to the acquirer. 3 procedures used to defend against hostile takeovers. – Borrowing funds on terms that would require immediate repayment of all loans if the firm is acquired. With a poison pill.

. Benefits include items such as stock options.Poison pills  3 procedures used to defend against hostile takeovers. cash bonuses. – and granting huge “golden parachutes” that open if the firm is acquired • Substantial benefits given to a top executive (or top executives) in the event that the company is taken over by another firm and the executive is terminated as a result of the merger or takeover. Golden parachutes are contracts given to key executives and can be used as a type of antitakeover measure taken by a firm to discourage an unwanted takeover attempt. generous severance pay or any combination of these benefits.

sometimes to preserve the company's core business and other times just to negotiate better takeover terms. current management typically remains in place in a white knight scenario.white knight     The white knight is the "savior" of a company in the midst of a hostile takeover. Unlike a hostile takeover. A white knight is a company (the "good guy") offers the target firm a way out with a friendly takeover that is facing a hostile takeover from another party (a "black knight"). and investors receive better compensation for their shares. . Often a white knight is sought out by company officials .

 This is an effort to have the justice department intervene. .Raising antitrust issues.

This strategy is an intentional antitakeover measure used to make the corporation less attractive to potential acquirers. The result is asset and/or liability restructuring.Leveraged recapitalization strategy     A corporate strategy in which a company takes on significant additional debt with the intention of paying a large cash dividend to shareholders and/or repurchasing its own stock shares. ." since they are intended to fend off unwanted or hostile takeover attempts. Also called leveraged recap. where the company's liabilities are increased and where equity is reduced. these are often called "shark repellents. strategies. In mergers and acquisitions.

. Joint ventures are controlled by the combined management of the two (or more) parent companies.Joint venture    A joint venture involves the joining together of parts of companies to accomplish specific. limited objectives. A corporate or strategic alliance is a cooperative deal that stops short of a merger.

.  The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.  Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.Merger analysis  Since the primary rationale for any operating merger is synergy. in planning such mergers the development of accurate pro forma cash flows is the single most important task.

LBO      The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. . an increasing number of firms have been acquired by private equity firms. Private equity firms raise capital from wealthy individuals and look for opportunities to make profitable investments. In recent years. the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.Leveraged buyouts .

Divestiture    Divestitures are a way for a company to manage its portfolio of assets. . As companies grow they may find they are trying to focus on too many lines of business. The partial or full disposal of a business unit through sale. exchange. closure or bankruptcy. and that they must close some operational business units in order to focus on more profitable lines.

if jettisoning a unit increases the resale value of the firm or if a court requires the sale of a business unit to improve market competition. For example.Divestiture    Divestiture may result from a management decision to no longer operate a business unit because it is not part of a core competency. an automobile manufacturer that sees a significant and prolonged drop in competitiveness may sell off its financing division in order to pay for the development of a new line of vehicles. . It may also occur if a business unit is deemed redundant after a merger or acquisition.

a company might spin off one of its mature business units that is experiencing little or no growth so it can focus on a product or service with higher growth prospects.Spinoff  It is a type of divestiture. .  Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs.  For example.

Motivation for mergers .

Why do companies merge with or acquire other companies?  Synergy: The most used word in M&A is synergy. which is the idea that by combining business activities.  Diversification / Sharpening Business Focus: A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry's performance on its profitability. performance will increase and costs will decrease. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations. .

If a company buys out a distributor. . it may be able to ship its products at a lower cost.  Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product's market. they buy a competitor's business for a price. it is able to save on the margins that the supplier was previously adding to its costs.Why do companies merge with or acquire other companies?  Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves instead. If a company buys out one of its suppliers. a business can eliminate a level of costs.  Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of the distributors.

Functions of Bank Advisers/Investment Bankers in Mergers     Arranging mergers Assisting in defensive tactics Establishing a fair value Financing mergers .

because of competitive bids. and/or better management. – Shareholders of target firms reap most of the benefits.Do mergers really create value?  The evidence strongly suggests: – Acquisitions do create value as a result of economies of scale. . other synergies.