mergers and acquisitions-final own

8/7/2019 Mergers and Acquisitions-Final Own

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Mergers and Acquisitions 1


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Presented By:

SADIQ AMIR ALISADIQ AMIR ALI

KHURRAM SATTARKHURRAM SATTAR

MUDDASIR SHAKOORMUDDASIR SHAKOOR

MUHAMMAD HASAN SAKRANIMUHAMMAD HASAN SAKRANI

MUHAMMAD HUSSAIN SAKRANIMUHAMMAD HUSSAIN SAKRANI

Business FinanceBusiness Finance I ( GroupI ( Group II)II)

Merger & AcquisitionMerger & Acquisition(A Presentation.)(A Presentation.)

Presented ToPresented To Sir Danish HussainSir Danish Hussain


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INTRODUCTIONINTRODUCTION

When we use the term "merger", we areWhen we use the term "merger", we arereferring to the merging of two companiesreferring to the merging of two companieswhere one new company will continue to exist.where one new company will continue to exist.

The term "acquisition" refers to the acquisitionThe term "acquisition" refers to the acquisitionof assets by one company from anotherof assets by one company from anothercompany. In an acquisition, both companiescompany. In an acquisition, both companiesmay continue to exist.. The acquiring companymay continue to exist.. The acquiring company

will remain in business and the acquiredwill remain in business and the acquiredcompany (which we will sometimes call thecompany (which we will sometimes call theTarget Company) will be integrated into theTarget Company) will be integrated into theacquiring company and thus, the acquiredacquiring company and thus, the acquiredcompany ceases to exist after the merger.company ceases to exist after the merger.


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Types of TakeoversTypes of TakeoversGeneral GuidelinesGeneral Guidelines

TakeoverTakeover The transfer of control from one ownership group to another.The transfer of control from one ownership group to another.

AcquisitionAcquisition The purchase of one firm by anotherThe purchase of one firm by another

MergerMerger The combination of two firms into a new legal entityThe combination of two firms into a new legal entity

A new company is createdA new company is created

Both sets of shareholders have to approve the transaction.Both sets of shareholders have to approve the transaction.

AmalgamationAmalgamation

A genuine merger in which both sets of shareholders mustA genuine merger in which both sets of shareholders mustapprove the transactionapprove the transaction

Requires a fairness opinion by an independent expert on theRequires a fairness opinion by an independent expert on thetrue value of the firms shares when a public minority existstrue value of the firms shares when a public minority exists


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Types of TakeoversTypes of TakeoversHow the Deal is FinancedHow the Deal is Financed

Cash TransactionCash Transaction

The receipt of cash for shares by shareholders in theThe receipt of cash for shares by shareholders in thetarget company.target company.

Share TransactionShare Transaction

The offer by an acquiring company of shares or aThe offer by an acquiring company of shares or acombination of cash and shares to the targetcombination of cash and shares to the targetcompanys shareholders.companys shareholders.

Going Private Transaction (Issuer bid)Going Private Transaction (Issuer bid) A special form of acquisition where the purchaserA special form of acquisition where the purchaser

already owns a majority stake in the target company.already owns a majority stake in the target company.


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MERGERMERGER

AA mergermerger happenshappens whenwhen twotwo firmsfirms agreeagree toto gogo forwardforward asas aa

singlesingle newnew companycompany ratherrather thanthan remainremain separatelyseparately ownedowned

andand operatedoperated.. ForFor example,example, inin thethe 19991999 mergermerger ofof GlaxoGlaxo

WellcomeWellcome andand SmithKlineSmithKline Beecham,Beecham, bothboth firmsfirms ceasedceased totoexistexist whenwhen theythey merged,merged, andand aa newnew company,company,

GlaxoSmithKlineGlaxoSmithKline,, waswas createdcreated.. AnotherAnother exampleexample isis aboutabout thethe

mergermerger ofofHabibHabib BankBank AGAG ZurichsZurichs (HBZ)(HBZ) PakistanPakistan OperationsOperations

andand MetropolitanMetropolitan BankBank LimitedLimited (MBL)(MBL) TheThe combinedcombined entityentity

hashas emergedemerged asas aa distinguisheddistinguished bankingbanking institutioninstitution byby thethenamename ofofHabibHabib MetropolitanMetropolitan BankBank LimitedLimited (HMB)(HMB)..


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ACQUISITIONACQUISITION

WhenWhen oneone companycompany takestakes overover anotheranother andand

clearlyclearly establishedestablished itselfitself asas thethe newnew owner,owner, thethe

purchasepurchase isis calledcalled anan acquisitionacquisition.. FromFrom aa legallegalpointpoint ofof view,view, thethe targettarget companycompany ceasesceases toto

exist,exist, thethe buyerbuyer "swallows""swallows" thethe businessbusiness andand

thethe buyer'sbuyer's stockstock continuescontinues toto bebe tradedtraded.. ForFor

exampleexample WallsWalls CompanyCompany hashas acquiredacquired PolkaPolka inin

19961996.. AnotherAnother exampleexample ofof acquiringacquiring AVAAVA WaterWater

byby NestleNestle CompanyCompany..


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Friendly AcquisitionFriendly Acquisition

The acquisition of a target company that is willing toThe acquisition of a target company that is willing to

be taken over.be taken over.

Usually, the target will accommodate overtures andUsually, the target will accommodate overtures and

provide access to confidential information to facilitateprovide access to confidential information to facilitate

the scoping and due diligence processes.the scoping and due diligence processes.


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Friendly AcquisitionsFriendly AcquisitionsThe Friendly Takeover ProcessThe Friendly Takeover Process

1.1. Normally starts when the target voluntarily puts itself into play.Normally starts when the target voluntarily puts itself into play. Target uses an investment bank to prepare anTarget uses an investment bank to prepare an offeringoffering

memorandummemorandum May set up a data room and use confidentiality agreements to permitMay set up a data room and use confidentiality agreements to permit

access to interest parties practicing due diligenceaccess to interest parties practicing due diligence

A signed letter of intent signals the willingness of the parties to moveA signed letter of intent signals the willingness of the parties to moveto the next stepto the next step (usually includes a no(usually includes a no--shop clause and ashop clause and atermination or break fee)termination or break fee)

Legal team checks documents, accounting team may seek advanceLegal team checks documents, accounting team may seek advancetax ruling from CRAtax ruling from CRA

Final sale may require negotiations over the structure of the dealFinal sale may require negotiations over the structure of the dealincluding:including:

Tax planningTax planning

Legal structuresLegal structures

2.2. Can be initiated by a friendly overture by an acquisitor seekingCan be initiated by a friendly overture by an acquisitor seekinginformation that will assist in the valuation process.information that will assist in the valuation process.

(See Figure 15(See Figure 15 --1 for a Friendly Acquisition timeline)1 for a Friendly Acquisition timeline)


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Friendly AcquisitionFriendly Acquisition

15-1 FIGURE

Friendly Acquisition

Information

memorandum

Approach

target

Sign letter

of intent

Final sale

agreement

Confidentiality

agreement

Main due

diligence

Ratified


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ClassificationsMergers and AcquisitionsClassificationsMergers and Acquisitions

1.1. HorizontalHorizontal A merger in which two firms in the same industry combine.A merger in which two firms in the same industry combine.

Often in an attempt to achieve economies of scale and/orOften in an attempt to achieve economies of scale and/orscope.scope.

2.2. VerticalVertical A merger in which one firm acquires a supplier or another firmA merger in which one firm acquires a supplier or another firm

that is closer to its existing customers.that is closer to its existing customers.

Often in an attempt to control supply or distribution channels.Often in an attempt to control supply or distribution channels.

3.3. ConglomerateConglomerate A merger in which two firms in unrelated businesses combine.A merger in which two firms in unrelated businesses combine.

Purpose is often to diversify the company by combiningPurpose is often to diversify the company by combininguncorrelated assets and income streamsuncorrelated assets and income streams

4.4. CrossCross--border (International) M&Asborder (International) M&As A merger or acquisition involving a Canadian and a foreign firmA merger or acquisition involving a Canadian and a foreign firm

a either the acquiring or target company.a either the acquiring or target company.


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Reasons For Merger and AcquisitionReasons For Merger and Acquisition

The best mergers seem to have strategic reasons for theThe best mergers seem to have strategic reasons for thebusiness combination. These strategic reasons include:business combination. These strategic reasons include:

PositioningPositioning ::

TakingTaking advantageadvantage ofof futurefuture opportunitiesopportunities thatthat cancan bebe exploitedexploitedwhenwhen thethe twotwo companiescompanies areare combinedcombined.. ForFor example,example, aatelecommunicationstelecommunications companycompany mightmight improveimprove itsits positionposition forfor thethefuturefuture if if it it werewere toto ownown aa broadbroad bandband serviceservice companycompany..CompaniesCompanies needneed toto positionposition themselvesthemselves toto taketake advantageadvantage ofofemergingemerging trendstrends inin thethe marketplacemarketplace..

Gap FillingGap Filling ::

OneOne companycompany maymay havehave aa majormajor weaknessweakness (such(such asas poorpoordistribution)distribution) whereaswhereas thethe otherother companycompany hashas somesome significantsignificant

strengthstrength..ByBy combiningcombining thethe twotwo companies,companies, eacheach companycompany fillsfills--inin strategicstrategicgapsgaps thatthat areare essentialessential forfor longlong--termterm survivalsurvival..


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Reasons For Merger and AcquisitionReasons For Merger and Acquisition

(Contd)(Contd)

Organizational CompetenciesOrganizational Competencies ::

Acquiring human resources and intellectualAcquiring human resources and intellectual

capital can help improve innovative thinkingcapital can help improve innovative thinking

and development within the company.and development within the company.

Broader Market AccessBroader Market Access ::

Acquiring a foreign company can give aAcquiring a foreign company can give a

companycompany

quick access to emerging global markets.quick access to emerging global markets.


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Friendly TakeoversFriendly TakeoversStructuring the AcquisitionStructuring the Acquisition

In friendly takeovers, both parties have the opportunityIn friendly takeovers, both parties have the opportunity

to structure the deal to their mutual satisfactionto structure the deal to their mutual satisfaction

including:including:

1.1. Taxation IssuesTaxation Issues cash for share purchases trigger capital gainscash for share purchases trigger capital gains

so share exchanges may be a viable alternativeso share exchanges may be a viable alternative2.2. Asset purchases rather share purchases that may:Asset purchases rather share purchases that may:

Give the target firm cash to retire debt and restructure financingGive the target firm cash to retire debt and restructure financing

Acquiring firm will have a new asset base to maximize CCAAcquiring firm will have a new asset base to maximize CCA

deductionsdeductions

Permit escape from some contingent liabilities (usually excludingPermit escape from some contingent liabilities (usually excluding

claims resulting from environmental lawsuits and control orders thatclaims resulting from environmental lawsuits and control orders thatcannot severed from the assets involved)cannot severed from the assets involved)

3.3. Earn outsEarn outs where there is an agreement for an initial purchase pricewhere there is an agreement for an initial purchase price

with conditional later payments depending on the performance ofwith conditional later payments depending on the performance of

the target after acquisition.the target after acquisition.


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Hostile TakeoversHostile Takeovers

A takeover in which the target has no desire to beA takeover in which the target has no desire to be

acquired and actively rebuffs the acquirer andacquired and actively rebuffs the acquirer and

refuses to provide any confidential information.refuses to provide any confidential information.

The acquirer usually has already accumulated anThe acquirer usually has already accumulated an

interest in the target (20% of the outstanding shares)interest in the target (20% of the outstanding shares)

and this preemptive investment indicates theand this preemptive investment indicates thestrength of resolve of the acquirer.strength of resolve of the acquirer.


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Hostile TakeoversHostile TakeoversThe Typical ProcessThe Typical Process

The typical hostile takeover process:The typical hostile takeover process:1.1. Slowly acquire a toehold (beach head) by open market purchase ofSlowly acquire a toehold (beach head) by open market purchase of

shares at market prices without attracting attention.shares at market prices without attracting attention.

2.2. File statement with OSC at the 10% early warning stage while notFile statement with OSC at the 10% early warning stage while nottrying to attract too much attention.trying to attract too much attention.

3.3. Accumulate 20% of the outstanding shares through open marketAccumulate 20% of the outstanding shares through open marketpurchase over a longer period of timepurchase over a longer period of time

4.4. Make a tender offer to bring ownership percentage to the desired levelMake a tender offer to bring ownership percentage to the desired level(either the control (50.1%) or amalgamation level (67%))(either the control (50.1%) or amalgamation level (67%)) -- this offerthis offercontains a provision that it will be made only if a certain minimumcontains a provision that it will be made only if a certain minimumpercentage is obtained.percentage is obtained.

During this process the acquirer will try to monitorDuring this process the acquirer will try to monitormanagement/board reaction and fight attempts by them tomanagement/board reaction and fight attempts by them toput into effect shareholder rights plans or to launch otherput into effect shareholder rights plans or to launch otherdefensive tactics.defensive tactics.


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Hostile TakeoversHostile TakeoversCapitalMarket Reactions and Other DynamicsCapitalMarket Reactions and Other Dynamics

Market clues to the potential outcome of a hostile takeoverMarket clues to the potential outcome of a hostile takeoverattempt:attempt:

1.1. Market price jumps above the offer priceMarket price jumps above the offer price

A competing offer is likely orA competing offer is likely or

The bid price is too lowThe bid price is too low

2.2. Market price stays close to the offer priceMarket price stays close to the offer price

The offer price is fair and the deal will likely go throughThe offer price is fair and the deal will likely go through

3.3. Little trading in the sharesLittle trading in the shares

A bad sign for the acquirer because shareholders are reluctant to sell.A bad sign for the acquirer because shareholders are reluctant to sell.

4.4. Great deal of trading in the sharesGreat deal of trading in the shares Large numbers of shares being sold from normal investors to arbitrageursLarge numbers of shares being sold from normal investors to arbitrageurs(arbs) who are, themselves building a position to negotiate an even bigger(arbs) who are, themselves building a position to negotiate an even biggerpremium for themselves by coordinating a response to the tender offer.premium for themselves by coordinating a response to the tender offer.


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Hostile TakeoversHostile TakeoversDefensive TacticsDefensive Tactics

Shareholders Rights PlanShareholders Rights Plan

Known as a poison pill or deal killerKnown as a poison pill or deal killer

Can take different forms but oftenCan take different forms but often

Gives nonGives non--acquiring shareholders get the right to buy 50 percent moreacquiring shareholders get the right to buy 50 percent moreshares at a discount price in the event of a takeover.shares at a discount price in the event of a takeover.

Selling the Crown JewelsSelling the Crown Jewels

The selling of a target companys key assets that the acquiringThe selling of a target companys key assets that the acquiringcompany is most interested in to make it less attractive for takeover.company is most interested in to make it less attractive for takeover.

Can involve a large dividend to remove excess cash from the targetsCan involve a large dividend to remove excess cash from the targetsbalance sheet.balance sheet.

White KnightWhite Knight

The target seeks out another acquirer considered friendly to make aThe target seeks out another acquirer considered friendly to make acounter offer and thereby rescue the target from a hostile takeovercounter offer and thereby rescue the target from a hostile takeover


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Mergers and Acquisition ActivityMergers and Acquisition Activity

M&A activity seems to come in waves throughM&A activity seems to come in waves through

the economic cycle domestically, or inthe economic cycle domestically, or in

response to globalization issues such as:response to globalization issues such as:

Formation and development of trading zones orFormation and development of trading zones orblocks (EU, North America Free Trade Agreementblocks (EU, North America Free Trade Agreement

DeregulationDeregulation

Sector booms such as energy or metalsSector booms such as energy or metals

Table 15Table 15 --1 on the following slide depicts major1 on the following slide depicts major

M&A waves since the late 1800s.M&A waves since the late 1800s.


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Summary and ConclusionsSummary and Conclusions

In this chapter you have learned:In this chapter you have learned:

The various forms of business combinationsThe various forms of business combinations

The common motives that exist for takeovers as well asThe common motives that exist for takeovers as well as

the desirable characteristics of potential takeover targetsthe desirable characteristics of potential takeover targets

How to evaluate a potential takeover candidate using theHow to evaluate a potential takeover candidate using the

multiples approach and using discounted cash flowmultiples approach and using discounted cash flow

analysisanalysis

How acquisitions should be accounted for in the financialHow acquisitions should be accounted for in the financialstatements including the impact that acquisitions can havestatements including the impact that acquisitions can have

on EPS.on EPS.


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THANK YOU !!!THANK YOU !!!

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