Mergers & Acquisitions

The Main Idea One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, costefficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

Merger.. A merger is where two or more businesses join forces to become one organization. A new legal entity will be formed & decisions will need to be made regarding the future of the newly merged organizations including who will lead and manage the business and how cost efficiency will be achieved. With a merger consent is given, it is sometimes referred to a marriage between two companies. A merger happens when two firms, of same size, agree to move forward & exist as new company rather than remain separately owned and operated. A purchase deal will be called a merger when the CEOs of both the companies agree that joining together is in the best interest of both of their companies. Merger of equals Mergers are often financed by a stock swap, in which the stock owners in both companies receive an equivalent quantity of stock in the new company.

Prof. Prasad Joshi

E-mail id: prof.prasadjoshi@gmail.com

Varieties of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging: - Two companies that are in direct competition and share the same product lines and markets. - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. -extension merger - Two companies that sell the same products in different markets. -extension merger - Two companies selling different but related products in the same market. - Two companies that have no common business areas. Horizontal Merger: It takes place when there is a combination of two or more organizations in the same business, or of organizations engaged in certain aspects of the production or marketing processes.

Example: a company making footwear combines with another footwear company, or a retailer of pharmaceuticals combines with another retailer in the same business. Vertical mergers: It takes place when there is a combination of two or more organisations , not necessarily in the same business, which create complementarily either in the terms of supply of materials(inputs) or marketing of goods and services (outputs).

Example: a footwear company combines with a leather tannery or with a chain of shoe retail stores Conglomerate mergers; it takes place when there is a combination of two or more organizations unrelated to each other , either in terms of customer functions, customer groups, or alternate technologies used, for Example, a footwear company combining with a pharmaceutical firm. Concentric mergers: It takes place when there is a combination of two or more organizations related to each other either in the terms of customer functions, customer groups, or the alternative technologies used. Example: A footwear company combining with a hosiery firm making socks or another specialty footwear company, or with a leather goods company making purses, handbags, and so

Prof. Prasad Joshi

E-mail id: prof.prasadjoshi@gmail.com

Acquisitions o An acquisition is the purchase or takeover of another business, so that the organization becomes the legal owner and controller of the business they have acquired. o This can be expensive as the acquiring company will be paying for the net assets, goodwill and brand name of the company they are buying. o With an acquisition no consent is given.

When one company takes over another company and clearly establishes itself as the new owner, the purchase is called an acquisition. When the deal is unfriendly - that is, when the target company does not want to be purchased, it is regarded as an acquisition. Merger of unequals In acquisitions, as the target company ceases to exist, the buyer swallows the business & buyer's stock continues to be traded. cash price per share according to a spec, C. ratio Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the

Prof. Prasad Joshi

E-mail id: prof.prasadjoshi@gmail.com

acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business. Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A 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. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.

Prof. Prasad Joshi

E-mail id: prof.prasadjoshi@gmail.com

Take Over
A takeover in business refers to one company (the acquirer, or bidder) purchasing another (the target). TYPES FRIENDLY TAKEOVER HOSTILE TAKE OVER When a bidder makes an offer for another company, it will usually inform the board of the target beforehand. If the board feels that the offer is such that the shareholders will be best served by accepting, it will recommend the offer be accepted by the shareholders. A takeover would be considered "hostile" if (1) the board rejects the offer, but the bidder continues to pursue it, or (2) if the bidder makes the offer without informing the board beforehand. REVERSE TAKEOVER A reverse takeover occurs when a publicly-traded smaller company acquires ownership of a larger company.

Synergy Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate

Prof. Prasad Joshi

E-mail id: prof.prasadjoshi@gmail.com

into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. ity - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Prof. Prasad Joshi

E-mail id: prof.prasadjoshi@gmail.com