Investment Banking

AMALGAMATION, MERGER, ACQUISITION & TAKEOVER

Introduction

Amalgamation & Mergers

AMALGAMATION "blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company.

Example

X
X

Y
Y

Z
X

Mergers and Acquisitions

Merger
A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage

Acquisition
A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses

Takeover

An acquisition where the target firm did not solicit the bid of the acquiring firm

"MERGER" its an arrangement, whereby the assets of two companies become vested in, or under the control of, one company (which may or may not be one of the original two companies), which has as its shareholders all, or substantially all, the shareholders of the two companies.

Procedure for Amalgamation / Merger

Check MoA (change accordingly). Draft Scheme of Arrangement ( Amalgamation / Merger). Consider it in Board Meeting. Apply to Court direction to call General Meeting.

Sent copy of application made to High Court to Central Gov.

Send notices of General Meeting to with scheme Notice Period Notice can be way of Advertisement also At General Meeting approve scheme, increase authorized share capital and to issue further shares, as required

Mergers and Acquisitions

Merger: One firm absorbs the assets and liabilities of the other firm in a merger. The acquiring firm retains its identity. In many cases, control is shared between the two management teams. Transactions were generally conducted on friendly terms.
In a consolidation, an entirely new firm is created.
Mergers must comply with applicable state laws. Usually, shareholders must approve the merger by a vote.

Mergers and Acquisitions

Acquisition: Traditionally, the term described a situation when a larger corporation purchases the assets or stock of a smaller corporation, while control remained exclusively with the larger corporation.
Often a tender offer is made to the target firm (friendly) or directly to the shareholders (often a hostile takeover). Transactions that bypass the management are considered hostile, as the target firms managers are generally opposed to the deal.

Mergers and Acquisitions

In reality, there is always a bidder and a target. Almost all transactions could be classified as acquisitions. Some modern finance textbooks use the two terms interchangeably. Divestiture: a transaction in which a firm sells one of its subsidiaries or divisions to another firm. Spin-off: a transaction in which a firm either sells or issues all or part of its subsidiaries to its existing public investors, by issuing public equity. In 1997 PepsiCo spun-off its restaurant division. Shareholders received one share of the new restaurant company (TRICON), for every 10 issues of Pepsi they held.

Mergers and Acquisitions

Target: the corporation being purchased, when there is a clear buyer and seller.
Bidder: The corporation that makes the purchase, when there is a clear buyer and seller. Also known as the acquiring firm.

Friendly: The transaction takes place with the approval of each firms management Hostile: The transaction is not approved by the management of the target firm.

Mergers and Acquisitions

Reasons for mergers & acquisitions:
Strategic: The combined FCFs (Free Cash Flows) of the merged operation are greater than the sum of the individual cash flows. Financial: The cash flows and also the market value of the target are below their true value, due to perhaps inefficient management. Such firms are typically restructured after the acquisition.

Mergers and Acquisitions

Reasons for mergers & acquisitions (continued):
Diversification: Dont put all your eggs in one basket. Current finance literature seriously questions the merits of this reasoning: Why does the management know better than the shareholders how to achieve diversification? It is usually the case that shareholders can diversify much more easily than can a corporation.

Individuals can easily diversify by buying shares in mutual funds.

Mergers and Acquisitions

Reasons given for divestitures and spin-offs:
To undo non-profitable mergers (originally motivated by pure diversification)

To break up a inefficiently run conglomerate

In the case of spin-offs, to improve managerial efficiency in the subsidiary, by offering a directly observable stock price as an (admittedly imperfect) measure of managerial performance. Also, in the case of spin-offs, to give equity investors more flexibility in diversifying their investment portfolios.

Reasons for Acquisitions

Increased market power Overcome entry barriers Cost of new product development Increased speed to market Lower risk compared to developing new products Increased diversification Avoid excessive competition

Problems in Achieving Success

Integration difficulties Inadequate evaluation of target Large or extraordinary debt

Acquisitions

Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Too large

Reasons for Acquisitions

Increased Market Power
Acquisition intended to reduce the competitive balance of the industry Example: British Petroleums acquisition of U.S. Amoco

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make start-ups economically unattractive

Lower Cost and Risk of New Product Development

Buying established businesses reduces risk of start-up ventures

Reasons for Acquisitions

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

Diversification
Quick way to move into businesses when firm currently lacks experience and depth in industry

Reshaping Competitive Scope

Firms may use acquisitions to restrict its dependence on a single or a few products or markets

Problems with Acquisitions

Integration Difficulties
Differing financial and control systems can make integration of firms difficult

Inadequate Evaluation of Target

Winners Curse bid causes acquirer to overpay for firm

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows

Problems with Acquisitions

Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected benefits

Overly Diversified
Acquirer doesnt have expertise required to manage unrelated businesses

Managers Overly Focused on Acquisitions

Managers may fail to objectively assess the value of outcomes achieved through the firms acquisition strategy

Too Large
Large bureaucracy reduces innovation and flexibility

Attributes of Effective Acquisitions

+ Complementary Assets or Resources

Buying firms with assets that meet current needs to build competitiveness

+ Friendly Acquisitions
Friendly deals make integration go more smoothly

+ Careful Selection Process

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

+ Maintain Financial Slack

Provide enough additional financial resources so that profitable projects would not be foregone

Attributes of Effective Acquisitions

+ +

Low-to-Moderate Debt
Merged firm maintains financial flexibility

Flexibility
Has experience at managing change and is flexible and adaptable

Emphasize Innovation
Continue to invest in R&D as part of the firms overall strategy

Restructuring Activities
Downsizing
Wholesale reduction of employees Example: Procter & Gambles cutting of its worldwide workforce by 15,000 jobs

Downscoping
Selectively divesting or closing non-core businesses Reducing scope of operations Leads to greater focus

Restructuring Activities
Leveraged Buyout (LBO)
A party buys a firms entire assets in order to take the firm private.

What is Corporate Restructuring?

Any change in a companys: 1. Capital structure, 2. Operations, or 3. Ownership that is outside its ordinary course of business. So where is the value coming from (why restructure)?

Why Engage in Corporate Restructuring?

Sales enhancement and operating economies* Improved management Information effect

Wealth transfers
Tax reasons Leverage gains Hubris hypothesis Managements personal agenda

Sales Enhancement and Operating Economies

Sales enhancement can occur because of market share gain, technological advancements to the product table, and filling a gap in the product line. Operating economies can be achieved because of the elimination of duplicate facilities or operations and personnel. Synergy -- Economies realized in a merger where the performance of the combined firm exceeds that of its previously separate parts.

Sales Enhancement and Operating Economies

Economies of Scale -- The benefits of size in which the average unit cost falls as volume increases.
Horizontal merger: best chance for economies

Vertical merger: may lead to economies

Conglomerate merger: few operating economies

Divestiture: reverse synergy may occur

Strategic Acquisitions Involving Common Stock

Strategic Acquisition -- Occurs when one company acquires another as part of its overall business strategy.

When the acquisition is done for common stock, a ratio of exchange, which denotes the relative weighting of the two companies with regard to certain key variables, results.
A financial acquisition occurs when a buyout firm is motivated to purchase the company (usually to sell assets, cut costs, and manage the remainder more efficiently), but keeps it as a stand-alone entity.

Strategic Acquisitions Involving Common Stock

Example -- Company A will acquire Company B with shares of common stock.

Company A Present earnings $20,000,000 Shares outstanding 5,000,000 Earnings per share $4.00 Price per share $64.00 Price / earnings ratio 16

Company B $5,000,000 2,000,000 $2.50 $30.00 12

Strategic Acquisitions Involving Common Stock

Example -- Company B has agreed on an offer of $35 in common stock of Company A.

Surviving Company A Total earnings Shares outstanding* Earnings per share $25,000,000 6,093,750 $4.10

Exchange ratio = $35 / $64 = .546875

* New shares from exchange = .546875 x 2,000,000 = 1,093,750

Restructuring and Outcomes

Alternatives Short-Term Outcomes Long-Term Outcomes

Downsizing

Downscoping

Leveraged Buyout

Restructuring and Outcomes

Alternatives Short-Term Outcomes Long-Term Outcomes Loss of Human Capital

Downsizing

Reduced Labor Costs

Lower Performance

Restructuring and Outcomes

Alternatives Short-Term Outcomes Long-Term Outcomes Loss of Human Capital

Downsizing

Reduced Labor Costs

Reduced Debt Costs

Lower Performance Higher Performance

Downscoping
Emphasis on Strategic Controls

Restructuring and Outcomes

Alternatives Short-Term Outcomes Long-Term Outcomes Loss of Human Capital

Downsizing

Reduced Labor Costs

Reduced Debt Costs

Lower Performance Higher Performance

Downscoping
Emphasis on Strategic Controls

Leveraged Buyout

High Debt Costs

Higher Risk

Risk

Risks associated with mergers

Many studies find that at least 50% of mergers (especially big mergers) are unprofitable Overvaluation, over-indebtedness Overestimating management capabilities Difficulty of integrating the merged companies (e.g. different corporate or national cultures)

Threat in M&A
Special Interest Groups gain from M&A Financial Criminals Competitors Acquisition / Merger Company Disgruntled Employees General Interest Groups gain from impact Everyone Else

Script Kiddies Hackers / Crackers Hacktivists Terrorists Spies

Your interest gets attackers interest

Relevance
Sudden Change

Profile Threat Model Form

Sudden Impact

Resources

Mergers Acquisitions Spin Offs / Ventures / New Business Initiatives

Business Drivers
Confidentiality Speed

Business as usual

Zero Impact

Informed Business Decision on Risk

Risk
Publicity and Profile
Known Target due to impact on:

Resources Technologies Infrastructure Confusion Absorption of Soft Target

Disgruntled Employees One of the few times an Organization is really shaken up

Risk to You
Change in threat model Change in risk model

Impacting resources
Absorbing unknown Disgruntled employees Creating new attack vectors Creating window of opportunity

Business drivers can force this upon you very quickly

Are you equipped for change?

Major overnight change in Threat Model

Multi-site / Global
Foreign Nationals

Different technologies
Different skill requirements

Are you equipped for change?

Upgrade of data classification Ownership of intellectual property Ownership of controlled technologies Significant change in number of employees Legislative liabilities. Do you know about the change?

Risk to Acquisition
Change in threat model Change in risk model Impacting resources Absorbing unknown Disgruntled employees Creating new attack vectors Creating window of opportunity

Business drivers can force this upon them very quickly

Are they equipped for change Your interest gets Attackers interest!

Importance of Confidentiality
Premature Disclosure of Intent Loss of Key employees Bidding wars SEC Liability Loss of Initiative Loss of Goodwill

Target Company 3rd Parties relationships Customer relationships

Importance of Availability
Loss of Goodwill Loss of Reputation Customers 3rd Parties Employees