Download - Mergers & Other Business Combinations
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Mergers & Other Business
Combinations
Presented by:
Junaid Inam
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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
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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
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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.
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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.
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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
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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
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SPECIFIC TYPES OF MERGERS
Congeneric Mergers
• Occurs between firms that have related business interests and
can be classified as being either vertical or horizontal.
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SPECIFIC TYPES OF MERGERS
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
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SPECIFIC TYPES OF MERGERS
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
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SPECIFIC TYPES OF MERGERS
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
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SPECIFIC TYPES OF 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
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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
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ECONOMIC REASONS FOR COMBINING
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
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ECONOMIC REASONS FOR COMBINING
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
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ECONOMIC REASONS FOR COMBINING
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
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ECONOMIC REASONS FOR COMBINING
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
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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
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HOW MERGER IS EFFECTED
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
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HOW MERGER IS EFFECTED
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
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HOW MERGER IS EFFECTED
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
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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
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OTHER FORMS OF CORPORATE
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
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OTHER FORMS OF CORPORATE
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
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OTHER FORMS OF CORPORATE
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
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OTHER FORMS OF CORPORATE
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.
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