mergers & other business combinations

Mergers & Other Business

Combinations

Presented by:

Junaid Inam

MERGERS

• Combination of two or more corporations in such a way that

legally just one corporation survives.

• In a merger, two or more corporations combine into a single

corporation and the resulting entity is one of the merging

corporations (corporation A merges into corporation B, with

corporation B as the surviving corporation

ACQUISITION

• One firm takes over another corporation and establishes its

power as the single owner

• Firm which takes over is the bigger and stronger one

• Relatively less powerful, smaller firm loses its existence

DIFFERENCE BETWEEN MERGERS &

ACQUISITION

Mergers

• When a deal is made between two companies in friendly

terms, it is typically proclaimed as a merger, regardless of

whether it is a buy out.

Acquisition

• In an unfriendly deal, where the stronger firm swallows the

target firm, even when the target company is not willing to be

purchased, then the process is labeled as acquisition.

CONSOLIDATION

When Two or More Firms Combine to Create an Entirely New

Corporate Entity.

• No original firm continue to exist as separate entity

• Firms A and B form to create Firm C

• Shareholders give up their shares in original firms and receive

new shares in new corporation.

HOLDING COMPANIES

• Firm Owning Sufficient Voting Stock in One or More Other

Companies so as Have Effective Control Over Them

• 10% ownership for effective control

• Sometimes requires 51% ownership to maintain control

PARENT COMPANY

• A parent company is a company that owns enough

voting stock in another firm (subsidiary) to control

management and operations by influencing or electing

its board of directors

• Subsidiary companies are also called daughter companies

SPECIFIC TYPES OF MERGERS

Congeneric Mergers

• Occurs between firms that have related business interests and

can be classified as being either vertical or horizontal.


Horizontal Mergers

• Consisted of Two Firms Engaged in Same Business.

• Surviving firm maintain the same business but simply is larger

in size

• “Robber Baron” era in late nineteenth century

• U.S Steal and Standard Oil joined their smaller competitors by

this method

• Robber Baron: An American capitalist of the latter part of the

19th century who became wealthy through exploitation (as of

natural resources, governmental influence, or low wage scales


Vertical Mergers

• When a Firm Acquires Upstream and/or Downstream from

Another Corporation

• Upstream: Suppliers, raw material providers

• Downstream: Product distributions, Resellers

• Combination of two or more stages of production or

distribution that are usually separate


Advantages of Vertical

Mergers

• Low Transaction Cost

• Assured Suppliers

• Improved Coordination

• Higher Barriers to

Competitors Entry

Disadvantages of Vertical

Mergers

• Larger Capital

Requirements

• Reduce Flexibility

• Loss of specialization

Vertical Mergers


Conglomerate Mergers

• Occurs When Unrelated Businesses Combine

• Explosion of conglomerate mergers in 1960’s

• Teledyne Corporation to become one of America’s largest

firms by conglomerate mergers

• Important part of merger picture

ECONOMIC REASONS FOR COMBINING

BUSINESSES

• Operating Advantages

• To achieve Economy of Scale

• Most easiest & justified Solution

• Increase in production volume

• Reduction in overhead cost

• Enhanced schedule

• Inventorying opportunities


BUSINESSES

• Financial Advantages

• Being able to take advantages of new opportunities

• Increase in size and efficiency

• Ability to increase more funds from lower cost

• Reduces the risk of default

• Ability to issue new securities in larger amount

• Reduces flotation cost


BUSINESSES

• Enhanced Growth Opportunities

• Cheaper and faster way to grow

• Expend into related and new products

• Building a new plant & product is costly

• Uncertainties associated with cost overruns

• Acceptability of product in market


BUSINESSES

• Diversification

• Diversifying operations by mergers

• Increase in smooth earning in all seasons

• Spread of business risk over more operations

• Diversification of portfolio at less cost for S.H

• Reduced the risk of liquidity & bankruptcy


BUSINESSES

Tax Advantages

• Considerable tax advantages by earlier federal tax code

• Acquiring firms in operating losses to as an offset against

acquiring company’s income.

• Reduces the acquiring firm’s tax liability

• Acquiring firm taking advantage of merger

• New laws have restricted use of operating loss deduction

• Requires careful analysis of merger by managers

HOW MERGER IS EFFECTED

A Friendly Takeover

1. Purchase of Assets

• The assets of targeted company sold to acquiring company

• Once this is done targeted firm maybe terminated or remain

into existence.

• Advantages:

• Buying only a portion of targeted company's assets

• Buyer avoiding hidden liabilities of target

• Target firm enjoy cash in exchange of its assets


A Friendly Takeover

2. Purchase the Stock

• Acquiring firm making an outright purchase of target’s stock

• Target firm can exist as a subsidiary, division or can be

dissolved by acquiring company

• Acquiring firm then owns hidden liabilities of target firm

• Shareholders must approve the merger


A Hostile Takeover

1. Tender Offer

• Purchase of target stock through secondary financial market or

directly from individual stockholders

• Tends to be very costly

• Acquiring firm to pay higher prices for target firm

• Limitations of secretly acquiring the target’s stock


A Hostile Takeover

2. Proxy Fight

• Acquiring firm buying only a portion of target’s stock &

approach the management to request the right to vote

• Elect directors more receptive to negotiated merger

• Acquiring firm attempt to persuade shareholders to use

their proxy votes

OTHER FORMS OF CORPORATE

RESTRUCTURING

Sell-off

• When a firm sell it assets for money or securities

• Sell-off are voluntary and involuntary

• Selling company to avoid further losses by selling unprofitable

or non profitable assets

• Finding a buyer willing to pay more for actual value of assets


RESTRUCTURING

Liquidations

• Total sale of a company’s assets

• Extreme form of a sell off

• Cash exchange for firm assets is distributed among its

stockholders

• assets and property of the company are redistributed

• Organization ceases to exist in current form


RESTRUCTURING

Spin-off

• Separation of operations of a subsidiary from its parent

• Each separated unit acts as an independent corporation

• No change in owner ship

• Shareholders maintain their proportionate ownership in both

corporations


RESTRUCTURING

Going Private

• When management or major owners purchases all shares from

outside stockholders & reorganize the firm as private company

• After going private shares of the company are no longer

available for sale to the outside public


RESTRUCTURING

• Leveraged Buyout

• Management borrowing funds from outside investors to buy

out the shareholders

• Going private eliminate major cost elements.

• Management Buyout

• A management buyout (MBO) is a form of acquisition where a

company's existing managers acquire a large part or all of the

company from either the parent company or from the private

owners.