4Types of Takeovers: Takeover: The transfer of control from one ownership group to another.Acquisition:The purchase of one firm by anotherMerger:The combination of two firms into a new legal entityA new company is createdBoth sets of shareholders have to approve the transaction.Amalgamation:A genuine merger in which both sets of shareholders must approve the transactionRequires a fairness opinion by an independent expert on the true value of the firm’s shares when a public minority exists
5History of M&A’s:Most histories of M&A begin in the late 19th U.S. However, mergers coincide historically with the existence of companies. In 1708, for example, the East India Company merged with an erstwhile competitor to restore its monopoly over Indian trade.
6Reasons behind M&A’s:There are a number of reasons why a corporation willmerge with, acquire or to be acquired by anothercorporations. Sometimes:Corporations can produce goods or services more efficiently if they combine their efforts & facilities.Collaborating or sharing expertise may achieve gains in efficiency.A company might have other utilized assets, the other company can better use.Change in management may make the company more profitable.
7Regulations for M&A’s: M&A’s are governed by both state & federal laws.State law sets the procedures for the approval of mergers & establishes judicial oversight for the terms of mergers to ensure shareholders of the target company, receive fair value.
8Mergers & Acquisitions Defined • one firm buys anotherfirm• two firms are combined ona relatively co-equal basis• the words are often used interchangeably eventhough they mean something very different• merger sounds more amicable, less threatening
9Mergers & Acquisitions Defined • parent stocks are usuallyretired and new stock issued• can be a controllingshare, a majority, orall of the target firm’sstock• name may be one of theparents’ or a combination• can be friendly orhostile• one of the parents usuallyemerges as the dominantmanagement• usually done througha tender offer
11AcquisitionAn acquisition strategy is a plan or approach used in securing ownership of a businessAcquisition essentially means ‘to acquire’ or ‘to takeover’. And when we talk about acquisition, it is always clubbed with mergers. In short mergers and acquisitions are referred to as M&A.
12Types of Acquisition: There are four types of acquisitions: Friendly acquisitionReverse acquisitionBack flip acquisitionHostile acquisition
13Types of Acquisition: Friendly acquisition Both the companies approve of the acquisition under friendly terms. There is no forceful acquisition and the entire process is smoothly performed.Reverse acquisitionA private company takes over a public company.
14Types of Acquisition: Back flip acquisition A very rare case of acquisition in which, the purchasing company becomes a subsidiary of the purchased company.Hostile acquisitionHere, as the name suggests, the entire process is done by force. The smaller company is either driven to such a condition that it has no option but to say yes to the acquisition to save its skin or the bigger company just buys off all its share, their by establishing majority and hence initiating the acquisition.
15Types of Company Mergers: There are five commonly-referred to types of business combinations known as mergers:Conglomerate mergerHorizontal mergerCross-border (International)Vertical mergerMarket extension merger.The term chosen to describe the merger depends on the economic function, purpose of the business transaction and relationship between the merging companies
16ConglomerateA merger between firms that are involved in totally unrelated business activities.A merger in which two firms in unrelated businesses combine.Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streamsExampleA 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. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.
17Horizontal MergerA merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.ExampleA 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.
18Market Extension Mergers A market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.ExampleShoe maker company one from Lahore, and other from Karachi merge with each other for the expansion of their market
19Cross-border (International) A merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target companyExampleIn 2000 Glaxo Wellcome Plc merged with SmithKline Beecham Plc as a result of cross border merger
20Vertical MergerA 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. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.ExampleA 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. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business.
21Financing M&A:Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:1. Cash2. Stock
221. Cash:Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.
232. Stock:Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.
24Financing Options:If the buyer pays cash, there are three main financing options:Cash on hand: it consumes financial slack (excess cash or unused debt capacity) and may decrease debt rating. There are no major transaction costs.It consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.
25Financing Options:If the buyer pays with stock, the financing possibilities are:Issue of stock: In general, stock will create financial flexibility.Shares in treasury: it increases financial slack (if they don’t have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs.
26Motives Behind M&A’S:These motives are considered to add share holder’s value.
271. Creation of Synergy Motive for M&A’s The primary motive should be the creation of synergy. Synergy means better use of complimentary resources. Synergy value is created from economies of integrating a target and acquiring a company; the amount by which the value of the combined firm exceeds the sum value of the two individual firms.
28Creation of Synergy Motive for M&As: Synergy is the additional value created (∆V) :Where:VT = the pre-merger value of the target firmVA = value of the pre-merger acquiring firmVA - T = value of the post merger firm[ 15-1]
292. Economies of Scale:This refers to the fact that the combined companies can often reduce the duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit.
303. Increased Revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices.
314. Cross Selling:For example, a bank buying a stock broker then sell its banking products to the stock broker’s customers , while the broker can sign up the bank’s customers for brokerage accounts. Or, a manufacturer can acquire and sell complimentary produts.
325. Taxation:A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.
33Motives Behind M&A’S:These motives are considered not to add share holder’s value.
341. Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur.
35Reasons behind Vertical integration: One reason is to internalise an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.
362. Diversification:While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
373. Manager’s Hubris:Manager's overconfidence about expected synergies from M&A which results in overpayment for the target company.
384. Empire Building:Managers have larger companies to manage and hence more power.
39→TERMINOLOGY OF M&A: A. "BEAR HUG" B. "SATURDAY NIGHT SPECIAL" Acquirer mails letter to directors of target firm announcing intentions and requiring a quick decision on bid.B. "SATURDAY NIGHT SPECIAL"Offer made to stockholders just before the market’s close on Friday. Takes maximum advantage of stockholder greed
40→TERMINOLOGY OF M&A: C. “WHITE NIGHT” D. “Shark Repellant” When target firm cannot defend itself against the hostile acquirer, it will seek another firm to firm to acquire it (one more acceptable to management).D. “Shark Repellant”Slang term for any one of a number of measures taken by a company to fend off an unwanted or hostile takeover attemptExamples: poison pills
41→TERMINOLOGY OF M&A: F. "POISON PILL"; E. "PAC-MAN"; 1. Another anti-takeover defense;a. target company threatens to load the balance sheet with debt2. Effectiveness is not always guaranteed.E. "PAC-MAN";1. A form of defense in which the target tenders for shares of acquirer:
42Merger & Acquisitions Process: (doing the deal): The target’s responseStarts with an offerClosing the deal
432. The Target’s response: After completion of tender offer, the target company accepts the term of the offer, attempts to negotiate , execute poison pill or some other hostile defense.1. Starts with an offer:When the CEO & top managers of the company decide that they want to do merger or acquisition, they start with a tender offer. The process typically begins with the acquiring company carefully & discreetly buying up shares , in the target company or building a position.3. Closing the deal:When regulatory requirements met, the merger’s deal will be executed by means of some transaction. The acquiring company will pay for the target company’s share with cash, stock or both. When the deal is closed, investors usually receive a new stock in their portfolios- the acquiring company’s expanded stock.
44Specialist M&A advisory firms Although at present the majority of M&A advice is provided by full-service investment banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice (and not financing). These companies are sometimes referred to as Merchant Capital Advisors or Advisors, assisting businesses often referred to as "companies in selling."
45The Competition Commission of Pakistan (CCP) The Competition Commission of Pakistan (Commission / CCP) aims to provide guidance and facilitation to undertakings* in complying with the Competition Act In this spirit the Commission has taken the initiative of establishing the “Acquisitions & Mergers Facilitation Office”.To facilitate those parties which are contemplating merger or acquisition (as defined in the Competition Act 2010) and want to get informal and non binding view of the Commission.