Ch1 The Basics of Mergers and Acquisitions

After several years of downsizing, cost cutting, and slow growth, seasoned executives and entrepreneurs are searching for efficient and profitable ways to increase revenues and win market share. The growth options are as follows: organic hiring additional salespeople, developing new products, or expanding geographically. Inorganic an acquisition of another firm, often done to gain access to a new product line, customer segment, or geography external means external revenue growth opportunities are franchising, licensing, joint ventures, strategic alliances, and the appointment of overseas distributors, which are available to growing companies as an alternative to mergers and acquisitions as a growth engine

Understanding Key Terms

Merger: A combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity. The merger of equals between Sprint and Nextel is an example. In short,

Acquiring firm acquires all assets and liabilities of acquired firm . Must be approved by shareholders of acquired firm

 Acquisition: The purchase of an asset such as a plant, a division, or even an entire company.

 The distinction in meaning may not really matter, since the net result is often the same:
two companies (or more) that had separate ownership are now operating under the same roof, usually to obtain some strategic or financial objective.

Yet the strategic, financial, tax, and even cultural impact of a deal may be very different, depending on the type of transaction.

 A merger typically refers to two companies joining together (usually through the exchange of shares) as peers to become one. An acquisition typically has one company the buyer that purchases the assets or shares of the seller, with the form of payment being cash, the securities of the buyer, or other assets of value to the seller.
In a stock purchase transaction, the seller s shares are not necessarily combined with the buyer s existing company, but often kept separate as a new subsidiary or operating division.

 In an asset purchase transaction, the assets conveyed by the seller to the buyer become additional assets of the buyer s company, with the hope and expectation that the value of the assets purchased will exceed the price paid over time, thereby enhancing shareholder value as a result of the strategic or financial benefits of the transaction.

Growth strategy

Organic (Build)

Inorganic(Buy)

External means

Merger

Acquisition

Exchange of Shares

Asset purchase

Stock purchase

What s All the Fuss About?

What factors have fueled the current resurgence of merger and acquisition activity?
More strategically motivated competitive necessity Financing is more sound and secure

Cheaper

The need to transform corp. identity

omplete product or service line may be necessary to remain competitive or to balance seasonal or cyclical market

Key trend within a given industry Globalizatio n:means to develop an international presence and expanded market share

tHe need to spread the risk and cost

Most effective and efficient way

More strategically motivated competitive necessity Financing is more sound and secure

Cheaper

The need to transform corp. identity

A complete product or service line may be necessary to remain competitive or to balance seasonal or cyclical market

Ten key reasons for today s deals

Key trend within a given industry

Globalization: means to develop an international presence and expanded market share

Most effective and efficient way The need to spread the risk and cost

Why Bad Deals Happen to Good People

Classic mistakes include:
A lack of adequate planning, An overly aggressive timetable to closing, A failure to really look at possible post-closing integration problems, The projected synergies that were intended to be achieved turn out to be illusory

 The underlying theme is the goal of post-closing synergy The key premise to synergy is that the whole will be greater than the sum of its parts. But the quest for synergy can be deceptive, especially if there is inadequate communication between buyer and seller, a situation that usually leads to a misunderstanding regarding what the buyer is really buying and the seller is really selling.

 Every company says that it wants synergy when doing a deal, but few take the time to develop a transactional team, draw up a joint mission statement of the objectives of the deal, or solve post-closing operating or financial problems on a timely basis.

Why Do Buyers Buy, and Why Do Sellers Sell?

The mergers and acquisitions activity is often driven by cycles.
both at a macro level in the overall marketplace driven by such factors as the availability of capital and state of the economy, and at a micro level based upon where this particular buyer or seller stands in their growth plans or life cycle.

The M&A strategic cycle in some ways mimics the human digestive cycle

otivations in an Acquisition
For the seller, the key motivators in an acquisition include:
Ownership nearing retirement or ready for an exit Inability to compete as an independent concern The need or desire to obtain cost savings through economies of scale Access to the greater resources of the acquiring company

 For the buyer, the key motivators in an acquisition include:

Revenue enhancement Cost reduction Vertical and/or horizontal operational synergies or economies of scale Growth pressures from investors Underutilized resources A desire to reduce the number of competitors (increase market share and reduce price competition) A need to gain a foothold in a new geographic market especially if the current market is saturated) A desire to diversify into new products and services

otivations in aMerger
It is important to note that a merger is a different animal from an acquisition and thus a different set of objectives typically emerges for either party:
To restructure the industry value chain To respond to competitive cost pressures through economies of scale and scope (e.g., HP/Compaq) To improve process engineering and technology To increase the scale of production in existing product lines To find additional uses for existing management talent To redeploy excess capital in more profitable or complementary uses To obtain tax benefits

 In a classic merger, there is no buyer or seller, though one party may be quarterbacking the transaction or have initiated the discussion.
the culture and spirit of the negotiations are different from those for an acquisition.

In a merger, data gathering and due diligence are two-way and mutual, with each party positioning its contribution to the post-merger entity to justify its respective equity share, management, and control of the new company.