Corportate Restructuring Mergers & Acquisitions

 

1.       Merger is a combination of two or more companies into one larger company. (relatively equal companies)

a.       A + B = A (Absorption)

b.      A + B = C (Amalgamation or Consolidation

2.       Types of Mergers

a.       Horizontal Mergers (Similar Products, Same Industry)

b.      Vertical Mergers (Supplier or distributor of same product)

c.       Congeneric Merger (Same Industry, But no customer/supplier relationship, eg:bank)

d.      Conglomerate Merger (Diiferent Industry Sectors)

e.      Reverse Merger (Merge with inactive public company for tax savings)

f.        Accretive Merger (High PE acquires Low PE to Increase EPS)

g.       Dilutive Merger (Low PE acquires High PE for high mkt price/brand/popularity)

 

3.       Acquisition, also known as takeover, is the buying of one company by another. (relatively unequal companies)

4.       Types of Acquisitions:

a.       Friendly Takeover

b.      Hostile Takeover

c.       Reverse Acquisiton/Takeover (Small acquire Large)

5.       Corporate Restructuring: Divestitures / Demergers

6.       Methods of Payment:

a.       Cash Transfer (usually acquisition,

                                                               i.      Good: (1) Simple transfer of ownership (2) EPS Dilution minimized

                                                             ii.      Bad: Constraints on Cash Flow for Acquirer

b.      Exchange of Shares

                                                               i.      “Leveraged Buyout” – Acquisitions financed through debt

                                                             ii.      Type 1: Fixed Shares (but value of deal may differ)

                                                            iii.      Type 2: Fixed Value (but number of shares may differ)

                                                           iv.      Type 3: Bootstrapping (High PE buys Low PE to result in High EPS)

c.       Hybrid: Combinations of cash and debt or cash and stock of purchasing entity

 

7.       Motives behind M&A:

                                 i.            Effecting Organizational Growth

                               ii.            Diversification (Cost of building internally exceeds cost of acquisition)

                              iii.            Increasing Revenue/Market Share and Market Power

                             iv.            Obtaining New Products  (avoid time and money invested in R&D)

                               v.            Innovations/ Discoveries in Products and Technology (As a substitute for innovation)

                             vi.            Access to New Distribution or Gaining into New Markets (minimize risk)

                            vii.            Overcoming Entry Barriers (More effective to acquire over building from scratch)

                          viii.            Increased Speed to Market (Rapid Market Entry)

 

                             ix.            Responses to Economic Scenarios (Monetary policies)

                               x.            Keeping pace with Change (Change itself to stay competitive)

                             xi.            Political and Regulatory Change (Economies of Scales in open competitive Sector)

                            xii.            Lessening Competition (buy the competition)

                          xiii.            Reshaping Firm’s Competitive Scope (Reducing dependence on any single product or market)

                          xiv.            Economies of Scale

                           xv.            Cross Selling

                          xvi.            Reduce Taxes

                        xvii.            Resource Transfer

 

8.       Problems in M&A Success:

a.       Integration Difficulties

b.      Evaluation of Target

c.       Huge Amount of Debt

d.      Lack of Synergy Benefit

e.      Excessive Diversification