Chapter 8 Mergers & Acquisitions

how do Mergers differ from Acquisitions?

Mergers = two firms become one new firm.

Original stock is dissolved, and new stock is issued.

Acquisition = one firm absorbs another.

Seller firm stock ceases to exist.
Buyer firm stock continues.
MERGER = COMBINE

ACQUISITION = TAKE CONTROL

1. Merger = Combine
• A merger describes two firms of approximately the same size, combining into one.
• This is often referred to as a "merger of equals."
• The stock of both firms is surrendered, and stock of the new entity is issued in its place.
Generally, mergers are separated into one of three forms.
• 1. Horizontal merger -- one firm mergers with another firm that provides similar
products
and/or services in the same geographic area
For example, this is done to become larger with more
bargaining power
• 2. Vertical Merger -- One in which involves the coupling of a customer and a supplier.
For example, this is often done to gain better access to end users and better market
visibility

• 3. Conglomerate mergers encompass all other combinations, including pure

conglomerate transactions where the merging parties have no evident commercial
relationship.
• For example, Internet company merges with a chain of restaurants.
2. Acquisition = Obtain/Take control

• In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm.
• The acquired firm ceases to exist, while the legal status and formal name of the acquiring firm rarely changes.

As in the case of a merger, acquisitions are divisible into Horizontal, Vertical, and Conglomerates.
However, they can be further separated into
• 1. Hostile (not welcome by takeover target)
• 2. Friendly (or invited) (welcome by takeover target)
 Some M&A strategic objectives can be similar
to those of strategic alliances.
1. To expedite the development of promising new technologies or products. (New knowledge and innovative
energies)

2. To transition into new lines of business

3. To bring together the personnel and expertise needed to create desirable new skill sets and capabilities to improve
supply chain efficiency, and/or gain economies of scale in production and/or marketing.

4. To acquire or improve market access through joint marketing agreements.

5. To help win the race against rivals for global market leadership.

6. To Grow Revenue.

7. To reduce costs through synergy.

8. To produce a STRONGER balance sheet.

 However, M&As have a disappointing history
Despite the potential benefits of M&As, they fail at a staggering rate
In fact, a recent study concluded that merger and acquisition events have
failed to achieve stated objectives at an astonishing rate of almost 80% of the time.
The extraordinarily high failure rate of M&As can translate into billions of
dollars in lost value to companies and shareholders.
Even a cursory review of high-profile M&A collapses from recent decades
reveals the magnitude of potential risks.
Examples of significant failures:
 2020 Merger Attempts gone wrong:

Cigna and Anthem

• Cigna Corp. and Anthem, Inc. attempted a $48 Billion merger deal
• Disagreements emerged
• Cigna sued Anthem for $14.7 plus a $1.8 Billion breakup fee
• Anthem countersued Cigna for $21.1 Billion
If they have such a
disappointing history,
Why do CEOs champion them?
 Why do they do it?
If the failure rate is so significant, why do CEO’s
champion M&A Activity?
Shareholder
Research suggests there are three (3) primary motivators: Interest

M&A
Personal
Hubris or Interest
Ego
 CEO Motivations for promoting M&As
(1) CEO’s “personal values” motivate a desire to deliver maximum value to shareholders.
– for example, counsel is pursued, due diligence is performed, and the final decision is vetted
by the CFO and the Corporate Board of Directors. (Does not seek unrestrained Discretion)

(2) CEO’s “personal values” motivate a desire to serve personal interest.

– for example – enriching compensation or by empire building. (Seeks unrestrained Discretion)

(3) CEO’s “personal values” motivate a desire to feed an oversized ego. CEO is excessively self-confident,
hubristic, and demonstrates a sense of personal “infallibility” (Seeks unrestrained Discretion)
– for example: “It’s my idea so it cannot go wrong, there is little need for discussion.”

What can go wrong in Corporate structures that facilitate unrestrained CEO discretion?
FOOLISH CEO decisions – can corporate board do anything to stop
the nonsense?

Go ahead
FOOL!
How can CEO discretion be moderated?
How can they be forced to listen?

Two primary moderators of CEO discretion

1. Proactive Corporate Board of Directors (BoD)

Responsibility:
Oversight of CEO proposed strategies

2. Proactive Chief Financial Officer (CFO)

Responsibility:
Protect the firm from unreasonable financial risks
 What is the benefit of CEO “discretion moderators?”

When Corporate Boards and CFOs are PROACTIVE and exercise due diligence
in approving CEO M&A Proposals -- Performance is likely to improve
Questions?

Be sure to ask next time

 End Session 8:
Corporate Mergers & Acquisitions
& Strategic Alliances

Study for test one

However, DO NOT FORGET TO BRING THINK – REMEMBER!
YOUR LAPTOP computer to the class
following the test!

This is EXTREMELY IMPORTANT