ch1 the basics of mergers and

8/6/2019 Ch1 the Basics of Mergers And

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After several years of downsizing, cost cutting, and slow growth, seasonedexecutives and entrepreneurs are searching for efficient and profitableways to increase revenues and win market share.

The growth options are as follows: organic

hiring additional salespeople, developing new products, or expanding geographically.

Inorganic

an acquisition of another firm, often done to gain access to a newproduct line, customer segment, or geography

external means

external revenue growth opportunities are franchising, licensing, joint ventures, strategic alliances, and the appointment of overseas distributors, which are available to growing companies asan alternative to mergers and acquisitions as a growth engine


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Acquisition: The purchase of an asset such as a plant, a division, or even an entire company.


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The distinction in meaning may not reallymatter, since the net result is often the same:

two companies (or more) that had separateownership are now operating under the sameroof, usually to obtain some strategic or financialobjective.

Yet the strategic, financial, tax, and evencultural impact of a deal may be verydifferent, depending on the type of transaction.


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A merger typically refers to two companies joining together (usually through the exchange of shares) as peers to become one.

An acquisition typically has one company thebuyer that purchases the assets or shares of theseller, with the form of payment being cash, thesecurities of the buyer, or other assets of value tothe seller.

In a stock purchase transaction, the seller s shares arenot necessarily combined with the buyer s existingcompany, but often kept separate as a new subsidiaryor operating division.


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In an asset purchase transaction , the assetsconveyed by the seller to the buyer becomeadditional assets of the buyer s company, withthe hope and expectation that the value of theassets purchased will exceed the price paidover time, thereby enhancing shareholder

value as a result of the strategic or financialbenefits of the transaction.


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G rowthstrategy

Organic(Build) Inorganic(Buy)

Merger

Exchange of Shares

Acquisition

Assetpurchase

Stockpurchase

Externalmeans


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W hat s All the Fuss About?

W hat factors have fueled the current resurgence of merger andacquisition activity? More

strategicallymotivated

Financing ismore soundand secure

The need totransform

corp.identity

Key trendwithin a

given

industry

Mosteffective and

efficientwaytHe need to

spread therisk and cost

G lobalization:meanstodevelop an

international

presenceand

expandedmarketshare

ompleteproduct orservice line

may benecessary

to remaincompetitive

or tobalanceseasonal or

cyclicalmarket

Cheaper

competitivenecessity


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Ten key reasonsfor today s deals

More strategicallymotivated

Financing is moresound and secure

The need totransform corp.

identity

Key trend within agiven industry

Most effective andefficient way

The need to spreadthe risk and cost

G lobalization: meansto develop aninternational

presence andexpanded market

share

A complete productor service line may be

necessary

to remaincompetitive or to

balance seasonal or

cyclical market

Cheaper

competitive necessity


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W hy Bad Deals Happen to GoodPeople

Classic mistakes include: A lack of adequate planning,

An overly aggressive timetable to closing, A failure to really look at possible post-closing

integration problems, The projected synergies that were intended to be

achieved turn out to be illusory


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The underlying theme is the goal of post-closingsynergyThe key premise to synergy is that the whole willbe greater than the sum of its parts.But the quest for synergy can be deceptive,especially if there is inadequate communicationbetween buyer and seller, a situation that usuallyleads to a misunderstanding regarding what thebuyer is really buying and the seller is reallyselling.


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Every company says that it wants synergywhen doing a deal, but few take the time todevelop a transactional team, draw up a jointmission statement of the objectives of thedeal, or solve post-closing operating orfinancial problems on a timely basis.


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W hy Do Buyers Buy, and W hy DoSellers Sell?

The mergers and acquisitions activity is oftendriven by cycles.

both at a macro level in the overall marketplace

driven by such factors as the availability of capital andstate of the economy, and at a micro level based upon where this particular

buyer or seller stands in their growth plans or lifecycle.

The M&A strategic cycle in some ways mimics thehuman digestive cycle


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For the buyer, the key motivators in an acquisitioninclude:

Revenue enhancement Cost reduction Vertical and/or horizontal operational synergies or economies of scale G rowth pressures from investors Underutilized resources A desire to reduce the number of competitors (increase market

share and reduce price competition) A need to gain a foothold in a new geographic market especially

if the current market is saturated) A desire to diversify into new products and services


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otivations in aMerger

It is important to note that a merger is a different animalfrom an acquisition and thus a different set of objectivestypically emerges for either party:

To restructure the industry value chain

To respond to competitive cost pressures through economiesof scale and scope (e.g., HP/Compaq)

To improve process engineering and technology To increase the scale of production in existing product lines To find additional uses for existing management talent

To redeploy excess capital in more profitable or complementaryuses

To obtain tax benefits


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In a classic merger, there is no buyer or seller,though one party may be quarterbacking thetransaction or have initiated the discussion.

the culture and spirit of the negotiations are differentfrom those for an acquisition.

In a merger, data gathering and due diligence aretwo-way and mutual, with each party positioning

its contribution to the post-merger entity to justify its respective equity share, management,and control of the new company.


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ch1 the basics of mergers and

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