Mergers and Acquisitions

Merger:
A transaction where two firms agree to integrate their operations on a relatively coequal basis. A merger occurs when two or more organizations of about equal size combine to become one through an exchange of stock or cash or both. Mergers can take place in different ways
2006 by Nelson, a division of Thomson Canada Limited. 8-1 *

Mergers and Acquisitions

Acquisition:
A strategy where one firm buys a controlling or 100% interest in another firm with the intent of making the acquired firm a subsidiary within its portfolio.
An acquisition occurs when a large organization purchases a smaller firm or viceversa

2006 by Nelson, a division of Thomson Canada Limited.

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Consolidation
If both firms dissolve their identity to create a new firm, it is called consolidation or amalgamation.

Friendly Merger
When both firms desire a merger or acquisiton, it is termed as a friendly merger.

2006 by Nelson, a division of Thomson Canada Limited.

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Takeover
A surprise attempt by one company to acquire control of another company against the will of the current management is a takeover or hostile takeover. It is usually done through the purchase of controlling share of voting shock in a publicly traded company. In the case of a takeover, the acquiring firm retains its identity wheras the target firm loses its identity after restructuring.

An acquisition where the target firm did not solicit the bid of the acquiring firm.
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Demergers
Demerger or split or division of a company is the opposite of mergers and acquisitions. This happens when a part of the undertaking is transferred to a newly formed company or to an existing company. The size of the company after demerger would reduce.

2006 by Nelson, a division of Thomson Canada Limited.

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Reasons For Mergers and Acquisitions

To gain economies of scale To achieve diversification of the portfolio To quickly acquire valuable resources To reduce risks and borrowing costs To achieve growth To gain additional capacity To obtain taxation or investment incentives To gain managerial expertise To acquire market supremacy To bypass legal hurdles To take over sick units
2006 by Nelson, a division of Thomson Canada Limited. 8-6

Types of Mergers
Horizontal Mergers Here the companies producing the same product or doing the same business join together The main purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and operations and broadening the product line, reduction in the investment of fixed assets and working capital, elimination of competition, reduction in advertising cost, increase the market power and to have better control over the market.

2006 by Nelson, a division of Thomson Canada Limited.

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Vertical Merger This is the joining of two or more companies involved in different stages of the production or distribution of the same product or service. The essential objective of such a merger is to ensure a source of supply required for the production of goods or services to ensure a ready market for the goods or services produced. It may take form of forward integration or backward integration.

2006 by Nelson, a division of Thomson Canada Limited.

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Lateral Merger It takes place when the firms producing different products which are related in some way or other. When a company producing ink, paper, case board, join with the printing press, it is called lateral merger.

2006 by Nelson, a division of Thomson Canada Limited.

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Conglomerated Merger It is the merger of two or more companies producing unrelated products.

Concentric Merger If the activities of the segments brought together are so related that there is carryover of specific mgmt functions or complimentary in relative strengths among them.
2006 by Nelson, a division of Thomson Canada Limited. 8-10

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Horizontal Acquisition
The acquisition of a company competing in the same industry in which the acquiring firm competes.

Vertical Acquisition
A firm acquiring a supplier of distributor of one or more of its goods or services.

Related Acquisition
The acquisition of a firm in a highly related industry.

2006 by Nelson, a division of Thomson Canada Limited.

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Reasons for Acquisitions

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Reasons for Acquisitions

Increased Market Power
Acquisition intended to reduce the competitive balance of the industry

Alcans purchase of Pechiney (Ch. 1 opening case)

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make start-ups economically unattractive Best Buys purchase of Future Shop

Lower Cost & Risk of New Product Development

Buying established businesses reduces risk of startup ventures Pharmaceutical firms access new products through acquisitions of other drug manufacturers
2006 by Nelson, a division of Thomson Canada Limited. 8-14

Reasons for Acquisitions

Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more timely fashion

British Telcoms Acquisition of Irelands East Telecom

Increasing Diversification and Competitive Scope

Firms may use acquisitions to restrict dependence on a single or a few products or markets
Torontos Onex Corporation

Avoiding Excessive Competition

Firms may acquire businesses in which competitive pressures are less intense than in their core business The Jim Pattison Group of Companies
2006 by Nelson, a division of Thomson Canada Limited. 8-15

Reasons for Acquisitions

Learn & Develop New Capabilities
Acquiring firms with new capabilities helps the acquiring firm to learn new knowledge and remain agile. Angiotech: a Vancouver based research lab.

Reshape the firms competitive scope

Reducing a firms dependence on specific markets alters the firms competitive scope. The Jim Pattison Group of Companies

2006 by Nelson, a division of Thomson Canada Limited.

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Problems With Acquisitions

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Problems with Acquisitions

Integration Difficulties
Differing cultures may make integration of firms difficult.
TD Banks acquisition of Canada Trust

Inadequate Evaluation of Target

Winners Curse causes acquirer to overpay for firm. Dynegys near purchase of Enron

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows. TransCanadas acquisition of Nova Corp
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Problems with Acquisitions

Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected benefits. Vivendis purchase of Seagram Co. Ltd.

Overly Diversified
Acquirer doesnt have expertise required to manage unrelated businesses. GE--prior to selling businesses and refocusing

Managers Overly Focused on Acquisitions

Managers lose track of core business by spending so much effort on acquisitions. Futurelink

Too Large
Large bureaucracy reduced innovation & flexibility.
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Attributes of friendly Acquisitions

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Restructuring Activities
Downsizing
Wholesale reduction of employees. Agilient Technologies cutting of its workforce by 15,000 jobs

Downscoping
Selectively divesting or closing non-core businesses. Reducing scope of operations. Leads to greater focus. Telus cutting of its workforce by 6,000 jobs

Leveraged Buyout (LBO)

A party buys a firms entire assets in order to take the firm private. Forsmann Littles buyout of Dr. Pepper
2006 by Nelson, a division of Thomson Canada Limited. 8-21

Restructuring and Outcomes

Alternatives

Short-Term Outcomes
Reduced Labour Costs Reduced Debt Costs Emphasis on Strategic Controls

Long-Term Outcomes
Loss of Human Capital

Downsizing

Lower Performance Higher Performance

Higher Risk
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Downscoping

Leveraged Buyout

High Debt Costs

2006 by Nelson, a division of Thomson Canada Limited.

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 2006 by Nelson, a division of Thomson Canada Limited.

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