merger and equisition

MERGER AND ACQUISITION

Presented By:

Muhammad Shuaib Khan

Muhammad Shafiq Ur Rehaman

MBA-6

Merger Fundamentals• Corporate restructuring:

Includes the activities involving expansion or contraction of

a firm’s operations or changes in its asset or financial

(ownership) structure.

• Consolidation:

Is the combination of two or more firms to form a

completely new corporation

Merger Fundamentals

• Holding company:

is a corporation that has voting control of one or more other

corporations.

• Subsidiaries:

Are the companies controlled by a holding company.

• Acquiring company:

is the firm in a merger transaction that attempts to acquire

another firm.

• The target company in a merger transaction is the firm that

the acquiring company is pursuing.

Merger Fundamentals• Friendly merger:

Is a merger transaction endorsed by the target firm’s

management (board of directors), approved by its

stockholders, and easily consummated.

• Hostile merger:

Is a merger not supported by the target firm’s management,

forcing the acquiring company to gain control of the firm by

buying shares in the marketplace.

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Mergers and AcquisitionsMerger:

Is where two companies come together to combine and share resources to achieve a common objectives.

Under merger the combining firms remain Joint ownersNew company is created

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Mergers and Acquisitions

Acquisition: One firm purchase the assets of another, with the

acquired firm ceasing to be the owners of that firm. Often it is the larger company which acquires a smaller one

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Types of M & AHorizontal merger :

Two companies engaged in similar activities are combinedA merger between Coca-Cola and the Pepsi beverage

division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.

Con'tVertical merger :A merger between two companies producing different

goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations.A vertical merger joins two companies that may not

compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger.

Con'tConglomerate merger:

occurs when two businesses in unrelated industries decide to combine

A leading manufacturer of athletic shoes, merges with a soft drink firm. 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. 

Con'tProduct Extension MergersA 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.

The Mobilink Telecom Inc. & Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN. 

Types of M & A• Horizontal acquisition: When the acquirer and the target are in the same industry.

• Vertical acquisition:

When the acquirer and the target are at different stages of the production process; example: an airline company acquiring a travel agency.

• Conglomerate acquisition: The acquirer and the target are not related to each other.

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Objectives of M&As

Enhance shareholder wealth through competitive advantage

Growth and expansion of the acquirer's assets

Empire Building

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Motives of M & AEconomies of scale

To enable benefits of scale to be achieved

To reduce competition

Market power Increase market share

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Motives of M & ASharing complementary resources

Bringing together the relative strength of each firm

New market entryto facilitate expansion into new market

To reduce risk

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Motives of M & AManagerial motive

to pursue growth in size, status and higher remuneration

Removal of inefficient Management

-to remove managers who failed to maximise shareholder wealth

AdvantagesQuality staff or additional skills, knowledgeFunds or valuable assets for new developmentWider customer baseIncreasing your market shareDiversification of the productsReducing your costsReducing competitionStrengthens the business network

DisadvantagesDiseconomies of scale if business becomes too large,

which leads to higher unit costs.Clashes of culture between different types of

businessesWorkers redundant, especially at management levelsMay be a conflict of objectives between different

businesses

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Methods of Financing MergersCash payment

pay the purchase consideration by cash

Sharesissue of ordinary and preference shares

Loan capitaldebentures convertible loans

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M&A ProcessIdentify a TargetValuationMode of AcquisitionMode of PaymentAccounting of Acquisition

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M&A Process (Continued)Identify a Target:

Based on a sound strategy that can increase shareholders’ wealth

Focus on “Value Related Reasons”Acquisitions are usually initiated by the acquiring

firmSometimes a target can announce that it is for sale

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M&A Process (Continued)Valuation:

Should not ignore the value of strategic options and payment terms

In general an acquisition creates wealth for the acquirer if:

[Target Alone + Synergies + Other]

>=

[Cash Paid + Stock Paid + Debt Assumed]

What Acquirer Gets

What Acquirer Gives

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M&A Process (Continued)Mode of Acquisition:

Refers to whether a proposed acquisition is friendly or hostile to target managers

Friendly acquisitions are approved by board of directors of each firm

Then shareholders vote on the proposalHostile takeover can be quite time consuming especially

when target managers fight against the tender offer

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M&A Process (Continued)Mode of Payment:

How an acquisition is paid for: cash, stock or mixed

If the stock is believed to be undervalued, then stock should not be used for payment.

If the stock is overvalued then the stock payment should/can be used.