mergers and acquisitions main

8/2/2019 Mergers and Acquisitions Main

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MERGERS AND ACQUISITIONS

By:RAJAN KAPOOR-111558ROHIT SINGH-111560SACHIN GANGWAR-111561

SACHIN KR. SINGH-111562


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INTRODUCTION

Mergers and acquisitions (abbreviated M&A)refers to the aspect of corporate strategy,corporate finance and management dealing with

the buying, selling, dividing and combining ofdifferent companies .

The distinction between a "merger" and an"acquisition" has become increasingly blurred in

various respects (particularly in terms of theultimate economic outcome), although it has notcompletely disappeared in all situations.


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ACQUISITIONS(TAKEOVER) An acquisition is the purchase of one business

or company by another company or otherbusiness entity. Consolidationoccurs when two

companies combine together to form a newenterprise .

. Acquisitions are divided into "private" and

"public" acquisitions, depending on whether theacquiree or merging company (also termed atarget) is or is not listed on public stock markets.


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COMPLICATIONS IN ACQUISITION

Improper documentation and changing implicitknowledge makes it difficult to share informationduring acquisition.

For acquired firm symbolic and cultural independence

which is the base of technology and capabilities aremore important than administrative independence. Detailed knowledge exchange and integrations are

difficult when the acquired firm is large and highperforming.

Management of executives from acquired firm iscritical in terms of promotions and pay incentives toutilize their talent and value their expertise.


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DISTINCTION BETWEEN MERGERS ANDACQUISITIONS In the pure sense of the term, a merger happens

when two firms agree to go forward as a single newcompany rather than remain separately owned andoperated.

This kind of action is more precisely referred to as a"merger of equals". The firms are often of about the same size. Both

companies' stocks are surrendered and newcompany stock is issued in its place.

For example, in the 1999 merger of Glaxo Wellcomeand SmithKline Beecham, both firms ceased to existwhen they merged, and a newcompany, GlaxoSmithKline, was created.


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DISTINCTION BETWEEN MERGERS ANDACQUISITIONS (CONTD). In practice, however, actual mergers of equals don't

happen very often. Usually, one company will buy another and, as part of the

deal's terms, simply allow the acquired firm to proclaimthat the action is a merger of equals, even if it istechnically an acquisition.

Being bought out often carries negative connotations;therefore, by describing the deal euphemistically as amerger, deal makers and top managers try to make thetakeover more palatable.

An example of this would be the takeoverof Chrysler by Daimler-Benz in 1999 which was widelyreferred to as a merger at the time.


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BUSINESS VALUATION

The four most common ways to valuate abusiness are:

asset valuation.

historical earnings valuation

future maintainable earnings valuation

relative valuation (comparable company& comparable transactions.


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FINANCING M&A

Mergers are generally differentiated from acquisitions partlyby the way in which they are financed and partly by therelative size of the companies. Various methods of financingan M&A deal exist:

1. Cash.

2. Stock.


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METHODS OF FINANCING M&A

Cash:

Payment by cash.

Such transactions are usually termedacquisitions rather than mergers.

Because the shareholders of the targetcompany are removed from the picture andthe target comes under the (indirect) controlof the bidder's shareholders.


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METHODS OF FINANCING M&A

Stock:

Payment in the form of the acquiringcompany's stock, issued to the shareholdersof the acquired company at a given ratioproportional to the valuation of the latter.


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WHICH METHOD TO CHOOSE??.

If the buyer pays cash:

This method consumes financial slack(excess cash or unused debt capacity) andmay decrease debt rating. There are nomajor transaction costs.


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WHICH METHOD TO CHOOSE??.

If the buyer pays with stock, the financingpossibilities are:

It increases financial slack (if they donthave to be repurchased on the market), mayimprove debt rating and reduce cost ofdebt. Transaction costs include brokerage

fees if shares are repurchased in the marketotherwise there are no major costs


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MOTIVES BEHIND M&A

The dominant rationale used to

explain M&A activity is that

acquiring firms, seek improvedfinancial performance. The followingmotives are considered to improve

financial performance.


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MOTIVES & REASONS M&A

Increased revenue or market share: Thisassumes that the buyer will be absorbing amajor competitor and thus increase its market

power (by capturing increased market share) toset prices.

Cross-selling: For example, a bank buyinga stock broker could then sell its banking

products to the stock broker's customers, whilethe broker can sign up the bank's customers forbrokerage accounts.


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MOTIVES & REASONS M&A

Taxation: A profitable company can buy aloss maker to use the target's loss as theiradvantage by reducing their tax liability. In

the United States and many other countries,rules are in place to limit the ability ofprofitable companies to "shop" for loss

making companies, limiting the tax motive ofan acquiring company.


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MOTIVES AND REASON

"Acqui-hire": An "acq-hire" (or acquisition-by-hire) may occur especially when the target is asmall private company or is in the startupphase. In this case, the acquiring company

simply hires the staff of the target privatecompany.

Resource transfer: resources are unevenlydistributed across firms (Barney, 1991) and the

interaction of target and acquiring firmresources can create value through eitherovercoming information asymmetry or bycombining scarce resources.


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EFFECTS ON MANAGEMENT

A study suggests that mergers and acquisitionsdestroy leadership continuity in targetcompanies top management teams for at least adecade following a deal.

The target companies lose 21 percent of theirexecutives each year for at least 10 years followingan acquisition more than double the turnoverexperienced in non-merged firms.

If the businesses of the acquired and acquiring

companies overlap, then such turnover is to beexpected; in other words, there can only be one CEO,CFO, et cetera at a time.


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MAJOR MERGERS!

FROM 19902010

RANK

YEAR Purchaser Purchased Transactionvalue (in mil.USD).

1 1999 Vodafone Airtouch

PLC

Mannesmann 183,000

2 1999 Pfizer Warner-Lambert 90,000

3 1998 Exxon Mobil 77,200

4 1999 Citicorp Travelers Group 73,000

5 1999 SBCCommunications Ameritech Corporation 63,000

6 1998 Vodafone Group AirTouchCommunications

60,000

7 1999 Bell Atlantic[ GTE 53,360

8 1999 BP Amoco 53,3009 1997 Worldcom MCI Communications 42 000
http://en.wikipedia.org/wiki/Mannesmannhttp://en.wikipedia.org/wiki/Warner-Lamberthttp://en.wikipedia.org/wiki/Mobilhttp://en.wikipedia.org/wiki/Travelers_Grouphttp://en.wikipedia.org/wiki/Ameritech_Corporationhttp://en.wikipedia.org/wiki/AirTouch_Communicationshttp://en.wikipedia.org/wiki/AirTouch_Communicationshttp://en.wikipedia.org/wiki/GTEhttp://en.wikipedia.org/wiki/Amocohttp://en.wikipedia.org/wiki/MCI_Communicationshttp://en.wikipedia.org/wiki/MCI_Communicationshttp://en.wikipedia.org/wiki/Amocohttp://en.wikipedia.org/wiki/GTEhttp://en.wikipedia.org/wiki/AirTouch_Communicationshttp://en.wikipedia.org/wiki/AirTouch_Communicationshttp://en.wikipedia.org/wiki/AirTouch_Communicationshttp://en.wikipedia.org/wiki/Ameritech_Corporationhttp://en.wikipedia.org/wiki/Travelers_Grouphttp://en.wikipedia.org/wiki/Mobilhttp://en.wikipedia.org/wiki/Warner-Lamberthttp://en.wikipedia.org/wiki/Warner-Lamberthttp://en.wikipedia.org/wiki/Warner-Lamberthttp://en.wikipedia.org/wiki/Mannesmann


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Rank Year Purchaser Purchased value (in mil.USD)

1 2000 Fusion: America Online Inc.(AOL)

Time warner 164,747

2 2000 . Glaxo Wellcome Plc SmithKlineBeecham Plc

75,961

3 2004 Royal Dutch Petroleum Co ShellTransport &Trading Co

74,559

4 2006 AT&T Inc BellSouth Corporation

72,671

5 2001 Comcast Corporation AT&T Broadband & InternetSvcs

72,041

6 2009 Pfizer Inc Wyeth 68,000

7 2002 Pfizer Inc PharmaciaCorporation

59,515

8 2004 JP Morgan Chase & Co Bank OneCorp

58,761
http://en.wikipedia.org/wiki/GlaxoSmithKlinehttp://en.wikipedia.org/wiki/GlaxoSmithKlinehttp://en.wikipedia.org/wiki/GlaxoSmithKlinehttp://en.wikipedia.org/wiki/AT&Thttp://en.wikipedia.org/wiki/BellSouthhttp://en.wikipedia.org/wiki/Comcasthttp://en.wikipedia.org/wiki/AT&Thttp://en.wikipedia.org/wiki/Pfizerhttp://en.wikipedia.org/wiki/Pfizerhttp://en.wikipedia.org/wiki/AT&Thttp://en.wikipedia.org/wiki/Comcasthttp://en.wikipedia.org/wiki/BellSouthhttp://en.wikipedia.org/wiki/AT&Thttp://en.wikipedia.org/wiki/GlaxoSmithKlinehttp://en.wikipedia.org/wiki/GlaxoSmithKlinehttp://en.wikipedia.org/wiki/GlaxoSmithKlinehttp://en.wikipedia.org/wiki/GlaxoSmithKline

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