Mergers and Acquisitions

M&A definition
M&A can be seen as one type of strategic combination:

Alliance /
Licensing Franchising Joint Venture Merger Acquisition
Partnership

LO control, investment, impact, integration or pain of separation HIG

W H

Subject Activity Objective Output

M&A is an aspect of corporate
strategy, corporate finance and
management
dealing with the buying,
selling, dividing and
combining of different
companies and similar
entities
that can help an enterprise without creating a subsidiary,
grow rapidly in its sector or other child entity or using a
location of origin, or a new joint venture.
field or new location,

The ultimate goal of merger is to create value

Value can only be created when the value of Company A + Company B is greater than the value of Company A and Company
B separately.

In the industrial organizations two basic motives stand out behind the M&A deals:
Efficiency motive Strategic motive
Efficiency gains arise because takeovers increase synergy M&A might change the market structure and as such have
between companies that increase economies of scale or an impact on company profitability.
scope.
Mergers
Mergers create a combined company with consolidation and integration occurring of previously separate business units.
Generally, a larger business organization overall is created, that is in primarily the same line of business as the previously distinct
organizations, though there may be a re-orientation of overall business strategy. Market presence or strength is typically the goal.
The overall ownership of records from a corporate perspective evolves to the newly created larger corporate entity. An
immediately pressing issue after a merger will be the cooperative resolution of previously existing policies, procedures, and
practices that will become adopted or combined for the new company.
Mergers are commonly referred to as either merger by absorption or merger by establishment:
Merger by absorption Merger by establishment (Amalgamation)
is the situation in which one company buys all stocks of refers to the case where two or more companies are
one or more companies (i.e., absorbing) and the absorbed merged into a newly created one and the combining
companies cease to exist; merger by absorption could be entities in the merger are dissolved; the term
considered as a de facto acquisition. consolidation could be used to imply a merger by
establishment.

In addition mergers can be divided into three basic variations:

Up-stream merger Down- Side-stream merger
stream
The daughter merger
company mergers The parent company absorbs the The sister companies merger on
with the parent company. daughter company. one level.

 Reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed
shell company, usually one with no business and limited assets. That enables a private company to by- pass lengthy and
complex process to get publicly listed.
 Reverse takeover refers to a transaction when a smaller company acquires management control of a larger or longer
established company and keeps its name for the combined entity.
 Reverse triangular merger is the formation of a new company that occurs when an acquiring company creates a subsidiary,
the subsidiary purchases the target company and the subsidiary is then absorbed by the target company.
A cquisitions
Acquisitions occur when one company buys and takes over the operations on another company. Usually a larger company with
greater assets and more facilities buys a smaller company that is less complex, though not always. This often occurs when a
company wants to take advantage of new assets or information that may be of value to current operations, services, and products.
More common for the acquired organization a need to adopt the records, management policies, procedures, and practices of the
new owner. This can be mandated, but a transition period will occur in which not all new business units will be in compliance
with expected operational standards. In some cases, if government imposed regulatory mandates supersede corporate records
retention mandates, the acquired company may continue its current practices and processes.

In acquisition, the acquiring company may seek to acquire a significant share of stocks or assets of the target company.
Consequently, there are two forms of acquisitions:
Asset acquisition Share acquisition

when a company purchases all or part of the target when a company buys a certain share of stocks in the
company’s assets and the target remains as a legal target company in order to influence the management
entity after the transaction. of the target company.

Depending on the significance of the share of stocks acquired by the acquiring company, acquisitions are then classified
as:
Complete takeover Majority takeover Minority takeover
100% of target’s issued shares 50-99% of target’s issued shares less <50% of target’s issued
shares
Friendly or Hostile Management or Leveraged
Types of acquisitions depending on…:
… how it is communicated to and Buyouts
Private or received by the target company's … a company is acquired by its own
… whether Public
the acquiree company is board of directors, employees and management or by a group of
or isn't listed in public markets. shareholders. investors.
 R etreat
Corporate
Inrestructuring
case of corporate distress, there is a need of corporate restructuring as the company needs to improve its efficiency and
profitability. In broad sense, corporate restructuring refers to the changes in ownership, business mix, assets mix and alliances to
enhance the shareholder value.
Divesture
Divesture (sell-off) is a transaction through which a company sells a portion of its assets, division or subsidiary for cash or
securities to another company (outsider). Normally, sell-offs are done because the subsidiary doesn't fit into the parent
company's core strategy, operates at a loss or requires upkeep capital.

Demerger
Demerger (brake-up) is a type of corporate restructuring policy in which the entity's business operations are segregated into
one or more components. A demerger is often done to help each of the segments operate more smoothly, as they can focus
on a more specific task after demerger.
 Spin-off is a way to offload underperforming or non-core business divisions that can drag down profits. It creates a new
independent business organization to realize the true potential of an outperforming asset, whose performance is not properly
valued by the market.
 Split-off is a transaction in which some, but not all, parent company shareholders receive shares in a subsidiary, in return for
relinquishing their parent company's share.
 Split-up is a transaction in which a company spins off all of its subsidiaries to its shareholders and ceases to exist.
 Carve-out is when a parent company makes a subsidiary public through IPO of shares, amounting to a partial sell-off,
but keeps a controlling stake in this new publicly-listed company.

Reverse synergy
This concept is in contrast to the M&A principles of synergy, where a combined unit is worth more than the individual
parts together. According to reverse synergy, the individual parts may be worth more than the combined unit. This is a
common reasoning for divesting the assets. The company may decide that more value can be unlocked from a division
by divesting it off to a third party rather than owning it.
Broad concept of M&A
Absorption
merger
Merger
Amalgamation
(equal merger)

Complete
M&A takeover
(narrow view)
Stock
Majority
acquisition

Minority
Acquisitions

Capital injection Slump sale

Minority
M&A cross-ownrship (asset purchase,
Asset
(broad view) business transfer)
cooperation Itemized sale
Founding of
holding companies
In the broad sense, M&A may imply a number of
Franchising different transactions ranging from the purchase
and sales of undertakings, concentration between
undertakings, alliances, cooperation and joint
Management
ventures to the formation of companies, corporate
Business outsourcing
succession/ ensuring the independence of
cooperation businesses, management buy-out and buy-in,
Joint venture
change of legal form, initial public offerings and
even restructuring.
Cooperation
 T heories on M&A motives
Merger as rational
choice benefits bidder’s shareholders
Merger Merger benefits manag ers
Efficiency (synergy) theory Monopoly (market power) Empire building
Nettheory
gains through 3 types of No efficiency gain and wealth (managerialism) theory
Mergers are planned and executed by
synergy: transfer from target’s customers;
managers who maximize their own
• financial; combined companies:
utility instead of their shareholders'
• operational; • cross-subsidize products;
value.
• managerial. • limit competition in more
than one market;
• deter potential entrants from
Raider Hubris hypothesis
the market.
theory Mergers are planned and executed by
Wealth transfer from target’s
shareholders the ‘rider’ bids for in Valuation (investment) managers of acquiring firms who
forms of greenmail or excessive theory overestimated their managerial
Mergers are planned and executed by
compensation after a successful ability and the value of the targeted
managers who have better
takeover. firm.
information about the target's value
than the stock market.

Merger as process Merger as macroeconomic

outcome
Process theory phenomenon
Disturbance theory
M&A decisions are caused and influenced by processes: Merger (waves) are caused by economic disturbances:
• individuals' limited information processing • they change individual expectations and increase
capabilities; uncertainty;
• organizational routines; • previous non-owners of assets now place a higher
• political games played between an organization's value on these assets than their owners, and vice-
sub-units and outsiders. versa.