Mergers and Acquisitions Group Members • Waqas Ali Tunio • Lt. Cdr. Ghulam Qadir • Saud Zafar Usmani • Cdr. Tanveer Anjum Bhatti • Lt. Cdr. Tahir Mughal
Scheme of Presentation• Introduction - Mergers and Acquisitions• Size of the Business• How can businesses grow? – Merger – Acquisition• Types of Takeovers• Defensive Tactics against Hostile Takeovers• Merger vs. Acquisition – the difference• Pros and Cons of Takeovers• Benefits of Growing – M&A• Motives for Takeovers• Conclusion
Mergers and Acquisitions• Corporations strive to increase their earnings per share over time.• Methods – Internal growth: • A firm acquires specific assets and finances them by the retention of earnings or external financing – External growth : • Involves the acquisition of another company
Size of the Business• Size can be measured in a number of ways. The most common are – By number of employees – By value of output and sales – By profit – By capital employed There is no perfect way of comparing the size of businesses. It is quite common to use more than one method and to compare the results obtained.
How can businesses grow?• Mergers• Takeovers or Acquisitions
Merger• When two or more companies combine. The shareholders of the target firm are adequately compensated for, if the merger is effected. – The combination of two firms into a new legal entity – A new company is created – Both sets of shareholders have to approve the transaction.
Acquisition• When one company acquires another company. The company, that is acquired is known as target firm. The company, which acquires is called acquiring company. An acquisition may be either friendly acquisition, when both the companies agree to the tender offer or may be unfriendly acquisition when the companies do not agree with the tender offer. – The purchase of one firm by another
Types of Takeovers Takeover Takeover may be referred to as a corporate activity when a company places a bid for acquiring another company. The company, which intends to take over the target firm makes an offer of the "outstanding shares" in case the target firm is traded publicly. The transfer of control from one ownership group to another. Hostile takeover Is defined as an "unfriendly takeover". Such actions are usually revolted against by the managers and executives of the target firm.
Financing a takeover• Sufficient funds available with the acquiring company in its own account (unusual)• Borrowed from a bank or by an issue of bonds – Debt moves down into the balance sheet
Leveraged Buyouts• Acquisition financed through debt are known as LBOs• Debt ratio of financing can go as high as 80%• The acquiring company would only need 20% of the purchase price
Defensive Tactics against Hostile Takeovers • People pill – High-level managers and employees threaten that they will all leave the company if it is acquired. This only works if employees are highly valuable and vital to company’s success. • Shareholders Rights Plan – Gives non-acquiring shareholders get the right to buy 50 percent more shares at a discount price in the event of a takeover. • Selling the Crown Jewels – The selling of a target company’s key assets that the acquiring company is most interested in to make it less attractive for takeover. – Can involve a large dividend to remove excess cash from the target’s balance sheet.
Defensive Tactics against Hostile Takeovers• White Knight – The target seeks out another acquirer considered friendly to make a counter offer and thereby rescue the target from a hostile takeover• Golden Parachutes – Golden parachutes are compensation to outgoing target firm management.
Difference between an acquisition and a merger?• In the case of a merger, two firms together form a new company. After the merger, the separately owned companies become jointly owned and obtain a new single identity. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. Generally, mergers take place between two companies of more or less same size.• However, with acquisition, one firm takes over another and establishes its power as the single owner. Generally, the firm which takes over is the bigger and stronger one. The relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the stock market.
Pros and Cons of Takeovers Culture clashes within the two Increase in sales/revenue & companies Venture into new business and market Reduced competition is bad for Profitability of target company consumers & Likelihood of job Increased market share Decreased competition cuts (monopoly) Conflict with new management Reduction of over capacity in the industry Hidden liabilities of target company. Enlarged brand portfolio The monetary cost to the company & lack of motivation Increase in Economies of Scale for employees being bought Increased efficiency due to corporate synergies
Motivations for Mergers and Acquisitions Creation of Synergy Motive for M&AsThe primary motive should be the creation of synergy.Synergy value is created from economies of integrating a target andacquiring a company; the amount by which the value of the combinedfirm exceeds the sum value of the two individual firms.• The possible synergies of an acquisition come from the following:• Revenue enhancement• Cost reduction• Lower taxes• Lower cost of capital
Conclusion The synergy from a merger is the value of the combined firm less the value of the two firms as separate entities For Example Before Merger: V = 10 A V = 10 B After Merger: V = 30 ABSynergy VAB (VA VB )Synergy 30 (10 10)Synergy 10