SHAHZAD HASSN CHAUDHRY

Instructor Business Management

University of Lahore, Lahore
Merger and Acquisition
 The phrase mergers and acquisitions
refers to the aspect of corporate
strategy, corporate finance and
management dealing with the buying,
selling and combining of different
companies that can aid, finance, or help
a growing company in a given industry
grow rapidly without having to create
another business entity

SHAHZAD CHAUDHRY
Acquisition
 An acquisition, also known as a
takeover or a buyout or "merger", is the
buying of one company (the ‘target’) by
another
Friendly
 the companies cooperate in negotiations
Hostile
 the takeover target is unwilling to be
bought or the target's board has no prior
knowledge of the offer

SHAHZAD CHAUDHRY
Types of Merger and
acquisition
 Takeover
 Reverse takeover
 Merger
 Reversemerger
 De-merger

SHAHZAD CHAUDHRY
Process of Merger &
Acquisition
 Preliminary Assessment or Business Valuation
 Phase of Proposal
 Exit Plan
 Structured Marketing
 Origination of Purchase Agreement or Merger
Agreement
 Stage of Integration

SHAHZAD CHAUDHRY
Successful Merger &
Acquisition
Merger Vs Acquisition
 In the pure sense of the  When one company
term, a merger happens takes over another and
when two firms agree to clearly establishes itself
go forward as a single as the new owner, the
new company rather purchase is called an
than remain separately acquisition
owned and operated
(merger of equals)

Merger Acquisition

SHAHZAD CHAUDHRY
Merger Vs Acquisition
 Both companies' stocks  From a legal point of
are surrendered and new view, the target company
company stock is issued ceases to exist, the
in its place. For example, buyer "swallows" the
in the 1999 merger of business and the buyer's
Glaxo Wellcome and stock continues to be
SmithKline Beecham, a traded
new company,
GlaxoSmithKline, was
created.

Merger Acquisition

SHAHZAD CHAUDHRY
Merger Vs Acquisition
 A purchase deal will also  when the deal is
be called a merger when unfriendly - that is, when
both CEOs agree that the target company does
joining together is in the not want to be purchased
best interest of both of - it is always regarded as
their companies an acquisition

Merger Acquisition

SHAHZAD CHAUDHRY
Merger Vs Acquisition
 In practice, however,
actual mergers of equals
don't happen very often
Merger
 Usually, one company
will buy another and, as
part of the deal's terms,
simply allow the acquired
firm to proclaim that the
action is a merger of
equals, even if it is
technically an acquisition
Acquisition
SHAHZAD CHAUDHRY
Business valuation
 Asset valuation,
 Historical earnings valuation,
 Future maintainable earnings valuation,
 Relative valuation (comparable
company & comparable transactions),
 Discounted cash flow (DCF) valuation

SHAHZAD CHAUDHRY
History
 Gaughan (2002) refers to five waves of merger
and acquisition activity since 1897, claiming
that we are currently in the fifth wave of this
ever-evolving field. However activity has
slowed recently, with reported figures showing
a 26 per cent reduction in global merger and
acquisition activity in 2002.

SHAHZAD CHAUDHRY
Five waves of mergers and
acquisitions
 First wave (1897–1904): horizontal combinations and
consolidations of several industries, US dominated.
 Second wave (1916–29): mainly horizontal deals, but
also many vertical deals, US dominated.
 Third wave (1965–69): the conglomerate era involving
acquisition of companies in different industries.
 Fourth wave (1981–89): the era of the corporate
raider, financed by junk bonds.
 Fifth wave (1992–?): larger mega mergers, more
activity in Europe and Asia. More strategic mergers
designed to compliment company strategy.

SHAHZAD CHAUDHRY
First Wave (1897 – 1904)
 The greatest motivation for these actions was the
expansion of the business into adjacent markets
 78% of the mergers and acquisitions occurring during this
period resulted in horizontal expansion
 The business environment related to mergers and
acquisitions was much less regulated and much more
dynamic than it is today
 With few laws and even less enforcement
 Acquisition and merger activity included primary metals,
fabricated metal products, transportation equipment,
machinery, petroleum products, bituminous coal,
chemicals, and food products

SHAHZAD CHAUDHRY
Second Wave (1916 – 1929)
 Business monopolies resulting from the first
wave produced some market abuses
 The industries with greatest concentrations of
these activities included primary metals,
petroleum products, chemicals, transportation
equipment, and food products
 higher percentage of the resulting businesses
resulted in conglomerates that included
previously unrelated businesses
 include General Motors, IBM, John Deere
(now Deere & Company), and Union Carbide
SHAHZAD CHAUDHRY
Third Wave (1965 –
1969)
 80% of the mergers that occurred were
conglomerate transactions
 companies attempted to pursue an avenue of
diversification
 Financing by stock (boost EPS and P/E ratio)
 Issue of convertible debentures

SHAHZAD CHAUDHRY
Diversified Vs
Conglomerated companies
 A company with some subsidiaries in other industries,
but a majority of its production or services within one
industry category
 Boeing, which primarily produces aircraft and missiles,
has diversified by moving into areas such as Exostar,
an online exchange for Aerospace & Defense
companies
 Which conducts its business in multiple industries,
without any real adherence to a single primary industry
base
 ITT has conglomerated, with industry leadership
positions in electronic components, defense electronics
& services, fluid technology, and motion & flow control.

SHAHZAD CHAUDHRY
Fourth Wave (1981 –
1989)
 Advent of the hostile takeover
 Advent of deregulation
 Leveraged buy-out
 Large amounts of debt, to finance the acquisition
 Advent of the international acquisition
 The acquisition of Standard Oil by British
Petroleum for $7.8 billion in 1987

SHAHZAD CHAUDHRY
Fifth Wave (1992 - ?)
 More equity-based than debt-based in terms of
their funding
 It relied less on leverage that required near-term
repayment
 Wave of the "roll-up“ process that consolidates a
fragmented industry through a series of
acquisitions by comparatively large companies
 First one in which a very large percentage of the
total global activity occurred outside of the United
States

SHAHZAD CHAUDHRY
Motives behind Mergers
and Acquisitions
SHAHZAD CHAUDHRY
Motives behind M&As
 Economy of scale- cost advantage due to
business expansion.

 Economy of scope- increasing or decreasing

the scope of marketing and distributions.

 Growth

 Increased revenue/market share

 Synergy- 2+2=5

SHAHZAD CHAUDHRY
Motives behind M&As Cont’d

 Taxation- a profitable company buy a

loss making company to reduce tax
liability

 Resource transfer- both the firms can

create value by combining scarce
resources

 Vertical integration

SHAHZAD CHAUDHRY
Guidelines for Mergers
and Acquisitions

SHAHZAD CHAUDHRY
Guidelines for Mergers and
Acquisitions
 Stage 1: Merger or Acquisition announced

 Employees’ experience
Shock
Disbelief
Relief-that rumors are conformed

 Management action: Communicate

reasons and aims behind this
merger/acquisition

SHAHZAD CHAUDHRY
Guidelines for Mergers and
Acquisitions
 Stage 2: Specific plans are announced

 Employees’ experience
Denial
Anger and Blame
 Management action:
 Discuss implications of M/A with individuals
and teams
 Give people timescale for clarification of
new structure
 Acknowledge people’s needs and concerns

SHAHZAD CHAUDHRY
 Management action cont’d
Be patient with people’s concerns
Be clear about future
Do not take their emotional outburst
personally

SHAHZAD CHAUDHRY
Guidelines for Mergers and
Acquisitions
 Stage 3: Changes start to happen

• Employees’ experience:
Depression – finally letting go of two
companies, and accepting the new company.
Acceptance
 Management action:
 Acknowledge ending of an era
 Delegate new responsibilities to employees
 Encourage experimentation
SHAHZAD
CHAUDHRY
 Management action cont’d
 Give positive feedback when people take
risks.
 Create new joint goals.
 Discuss and agree new ground rules
for the new team.
 Coach in new skills and behaviors.

SHAHZAD CHAUDHRY
Guidelines for Mergers and
Acquisitions
 Stage 4: New organization begins to
take shape

 Employees’ experience
Try new things out
Optimism
New energy

SHAHZAD CHAUDHRY
 Management action
Encourage risk taking
Foster communication at all levels between the
two parties
Create development opportunities, especially
where people can learn from new colleagues
Discuss new values and ways of working
Reflect on experience, reviewing how much
things have changed since the start
Celebrate successes as one group

SHAHZAD CHAUDHRY
Problems with Acquisitions

SHAHZAD CHAUDHRY
Problems with Acquisitions

 Integration difficulties- Differing financial and

control systems.

 Inadequate evaluation of target

 Inability to achieve synergy

 Overly diversified- unable to manage unrelated

business.

 Too large- bureaucracy reduces innovation and

flexibility
SHAHZAD CHAUDHRY
Attributes of Effective
Acquisition
SHAHZAD CHAUDHRY
Attributes of Effective
Acquisition
 Complementary assets or resources-
buying firms with assets that meet current
needs to build competitiveness

 Friendly acquisitions- friendly deals make

integration more smoothly

 Careful selection process- deliberate

evaluation and negotiations is more likely
to lead to easy integration and building
synergies

SHAHZAD CHAUDHRY
Attributes of Effective
Acquisition
 Maintain financial slack- provide
additional financial support so profitable
projects are not foregone

 Emphasize innovation- invest in R&D as

part of firm’s overall strategy

SHAHZAD CHAUDHRY
Thank You
SHAHZAD CHAUDHRY