revise lecture 28 1. mergers and acquisitions three measure of corporate growth? internal growth...

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Revise Lecture 28

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Mergers and Acquisitions

• Three measure of corporate growth?

• Internal growth & External growth?

• Reasons firm’s seek to grow?

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• Financial managers use the term growth to mean increases in the size and activities of a firm over the long run.

• Three measures of corporate growth are commonly used;

1. Increases in sales2. Increases in profits3. Increases in assets

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Internal GrowthA firm is said to be growing internally when it increases sales and profits by expanding its own operations. It may purchase new machinery to increase its capacity to produce existing products or it may purchase machinery and train its sales force to produce and sell a new product.

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External GrowthExternal growth occurs when a firm takes over the operations of another firm. The acquiring firm may purchase the assets or stock or may combine with the second firm.Since the second company has sales and assets of its own, the first company does not have to generate the new business from scratch.

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A number of reasons may be offered as to why firm’s seek to grow. Among the more important ones are the following;1. Diversification2. Stability3. Operating Economies4. Profits from Turnaround Situations

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Mergers & Acquisitions

• Forms Of Business Combinations

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Forms Of Business Combinations

1. Mergers

2. Consolidations

External growth may be achieved by the purchase of the assets or common stock of another firm, paid for with cash or the issuance of shares.

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MergersA merger is a combination of two or more businesses in which only one of the corporation survives. The other corporation ceases to exist, and its assets and possibly, debts are taken over by the surviving corporation.In a merger of companies X and Y, company X may continue while Y ceases to exist.

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The merger may occur in four ways:

1. Purchase of assets2. Purchase of common stock3. Exchange of stock for assets4. Exchange of stock for stock

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1. Purchase of Assets:The assets of company Y may be sold to company X. Once this is done, company Y is a corporate shell with a capital structure but no resources.The company is then legally terminated, company X survives in the asset merger.

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2. Purchase of Common Stock

The common share of company Y may be purchased. When company X holds the stock of company Y, company Y is dissolved.

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3. Exchange of Stock for Assets

Company X may give shares of X common share to the shareholders of Y for the assets of Y. Then Y is terminated by a vote of its shareholders, who now hold X stock.

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4. Exchange of stock for stockCompany X gives its shares to the shareholders of Y. Then Y is terminatesIn most cases, the merger must be recommended by the board of directors of both firms and must be approved by a majority to three-fourths of the shareholders in accordance with the applicable state laws.

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ConsolidationsA consolidation is a combination of two or more businesses into a third, entirely new corporation.The new corporation absorbs the assets, and possibly liabilities, of both original corporations, which cease to exist. The legal and financial characteristics of a consolidation are basically the same as those for a merger.

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When is a consolidation preferable to a merger?

Possible situations are the followings;

1. For firms of equal size

2. When a new charter is desired

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1. For firms of equal sizeWhen a large and small firm combine, normally the small firm is merged into the large firm. For firms of equal size, however, it may be difficult to get either of the board of directors to agree that their company should terminate by being merged into the other company. In these cases, a new company is the better choice.

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2. When a new charter is desiredCompanies receive their corporate charters at the beginning of their existence from an individual state. In many cases, the charters contain undesirable features that restrict the firm as it reaches maturity. A consolidation represents an opportunity to obtain a new corporate charter with more favourable features than in either of the charters of the existing companies

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• Because mergers and consolidations involve the combining of two or more firms into a single firm, the term merger is commonly used to refer to both forms of external growth. Even though the item also refers to consolidations.

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Kinds of Mergers

Three major types of mergers have been important in the development of large American corporations:

1. Horizontal Merger2. Vertical Merger3. Conglomerate Merger

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Kinds of Mergers

1. Horizontal Merger

This is the joining of two firms in the same area of business. Examples would be the combining of two book publishers or two manufacturers of toys

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Kinds of Mergers

2. Vertical MergerThis is the joining of two firms involved in different stages of the production or distribution of the same product.Examples would be the combining of a coal company and a railroad that carries the coal or the joining of a typewriter manufacturer and a chain of office supply stores.

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Kinds of Mergers

3. Conglomerate MergerA conglomerate is a firm that has external growth through a number of mergers of companies whose businesses were not related either vertically or horizontally.A typical conglomerate might have operating areas in manufacturing, electronics, insurance and other unrelated businesses

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Resisting An Acquisition

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Resisting an Acquisition

In many cases, the management of a firm decides that the firm should not be acquired by another firm. Many reasons may be given to explain the management’s feelings:1. Failure to understand target firm’s problems2. Future plans not in the interest of target firm’s

shareholders3. Tender price or exchange ratio to low4. Acquiring firm’s plan for new management

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2. Future plans not in the interest of target firm’s shareholdersThe acquiring firm may be planning to operate the target firm as a subsidiary in a new or restricted role. The target firm’s operations may be modified or partially eliminated to fit in with the parent firm’s other activities. This reduction of growth in production and sales might be viewed as harmful to the remaining shareholders of the target firm.

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1. Failure to understand target firm’s problemsThe management may feel that the acquiring firm does not understand the real difficulties being faced by the existing management.This lack of understanding may cause even greater problems once the acquisition has been completed.

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3. Tender price or exchange ratio to lowA firm that is about to be acquired is normally not realizing its full potential. If it were, the price of its stock, would be too high for another firm to attempt a takeover. The target firm’s management may feel that conditions will soon be improving and the target firm’s stock will soon be rising rapidly. Thus, they may object to a takeover at the bargain price implied in the tender offer or exchange ratio.

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4. Acquiring firm’s plan for new managementPerhaps the most common objection of the existing management is that a new management will be installed after the takeover. The acquiring firm usually makes a major effort to identify the deadwood in the old management and may even replace it entirely. If the old management were strong, the firm would be doing better. This reasoning is commonly used to replace the old management.

revise lecture 28 1. mergers and acquisitions three measure of corporate growth? internal growth...

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