11. Mergers and Acquisitions

Question	Answer
Merger Definition	A merger is the combining of two business entities under common ownership. There are three types of mergers.
Horizontal Merger	A horizontal merger is when the two firms are engaged in similar lines of activity
Vertical Merger	When the two firms are at different stages of the supply chain of an industry.
Conglomerate Merger	When the two firms operate in unrelated business areas.
The Merger Decision	- Theoretically the acquisition of other companies should be evaluated on essentially the same criteria as any other investment decision, that is, using NPV
The Merger Decision	Mergers are usually extremely difficult to evaluate using discounted cash flows techniques for two reasons: a) the benefits from mergers are often difficult to quantify b) Acquiring companies often do not know what they are buying
Merger Motives Synergy	- If A (£20) is the acquirer company, and B (£10) is the target company, synergy means that the value of two firms together (£35) is higher than the value of two firms apart. -Three types of synergy: revenue, cost and financial
Revenue Synergy	- Increased market power - Reduced competition - Entry to new markets
Cost Synergy	- Bulk discounts - Reduced fixed overheads - Savings from the sharing of central services (e.g. the service of marketing and accounting departments)
Financial Synergy	- Borrow in bulks - Save in bulk - Diversification of risk - Offsetting tax (country specific - not UK)
Merger Motives Superior Management	- Elimination of inefficient and misguided management - Conglomerate advantages in allocating capital and in using extraordinary resources - Undervalued shares - New people, new ideas
Merger Motives Managerial Motives	- The managers have to be paid a lot more money - Status - Putting together an empire - The excitement of the merger process itself
Merger Motives Third Party Motives	- Advisers - Investment Bankers (accountants, lawyers and the press) - Suppliers and customers (want suppliers to be concentrated)
Financing Mergers Cash	Advantages - The acquire shareholders retain the same level of control over their company - Simplicity and preciseness give a greater chance of success - It allows the recipients to spread their investment
Financing Mergers Cash	- A disadvantages of cash to the target shareholders is that they may be liable for capital gains tax (CGT) - Potential cash flow strain on acquire - Borrowing cash to fund the merger is a way of adjusting financial gearing
Financing Mergers Shares	Advantages - Capital gains tax can be postponed - They maintain an interest in the combined entity - To the acquirer, an advantage of offering shares is that there is no immediate outflow of cash
Financing Mergers Shares	- Consider the effect on the capital structure of the firm and the dilution of existing shareholders' positions - The price-earnings ratio (PE) game can be player. Companies can increase their EPS by acquiring firms with lower PE ratios than their own. The share price can rise (under certain condition) despite there being no economic value created from the merger. This is called the bootstrap game.
The merger process	There are three stages of mergers. Most attention should be directed at the first and third, but this does not seem to happen. These stages are: - Preparation - Negotiation and transaction - Integration
Who benefits from mergers?	- Society sometimes benefits from mergers but some studies suggest a loss, often through the exploitation of monopoly power. - The shareholders of acquires tend to receive return lower than the market as a whole after the merger. However may acquire do create value for shareholders. - Target shareholders, directors of acquires and advisers gain significantly from mergers. For the directors or targets and other employees the evidence is mixed.
Potential reasons for mergers fail	Mergers fail for three principal reasons: - The strategy is misguided - Over-optimism - Failure of integration management
Defence tactics from a takeover attack before bidding starts	- Eternal vigilance: be the most effective management team and educate shareholder about your abilities and the firm's potential. Cultivate good relationships with unions, work force and politicians. Polish social image.
Defence tactics from a takeover attack before bidding starts	- Defensive investments: your firms buys a substantial proportion of the shares in a friendly firm, and it has a substantial holding of your shares. - Forewarner is forearmed keep a watch on the share register for the accumulation of share by a potential bidder.
Defence tactics from a takeover attack after bidding has started	- Attack the logic of the bid. Also attach the quality of the bidder's management. Attack the value creating (destroying) record of the bidder - Improve the image of the firm. Use revaluation, profit projections, dividend promises, public relations consultants
Defence tactics from a takeover attack after bidding has started	- Encourage unions, the local community, politicians, customer and suppliers to lobby on your behalf. - White Knight. Invite a second bid from a friendly company - Buy another business to make the firm too big or incompatible with the bidder
Defence tactics from a takeover attack after bidding has started	- Arrange a management buyout of your company - Begin litigation against the bidder, bidders sometimes step over the legal boundary in their enthusiasm - e.g. making false statements, gaining private information by doing through dustbins - a court case could be embarrassing
Defence tactics from a takeover attack after bidding has started	- Employee share ownership plans (ESOPs) there can be used to buy a substantial stake in the firm and may make it more difficult for a bidder to take it over - Share repurchase reduces the number of share available in the marker for bidders - Grey Knight, a new bidder who is a rival to the hostile bidder launches a bid. the rivalry may produce a higher takeover price

Next up

11. Mergers and Acquisitions

Description

Resource summary

Similar

	Created by Kirsty Henderson over 8 years ago