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merger and equisition

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  • 1. MERGER AND ACQUISITION Presented By: Muhammad Shuaib Khan Muhammad Shafiq Ur Rehaman MBA-6
  • 2. Merger Fundamentals • Corporate restructuring: Includes the activities involving expansion or contraction of a firm’s operations or changes in its asset or financial (ownership) structure. • Consolidation: Is the combination of two or more firms to form a completely new corporation
  • 3. Merger Fundamentals • Holding company: is a corporation that has voting control of one or more other corporations. • Subsidiaries: Are the companies controlled by a holding company. • Acquiring company: is the firm in a merger transaction that attempts to acquire another firm.
  • 4. Merger Fundamentals • Friendly merger: Is a merger transaction endorsed by the target firm’s management (board of directors), approved by its stockholders, and easily consummated. • Hostile merger: Is a merger not supported by the target firm’s management, forcing the acquiring company to gain control of the firm by buying shares in the marketplace.
  • 5. Mergers and Acquisitions  Merger:  Is where two companies come together to combine and share resources to achieve a common objectives.  Under merger the combining firms remain  Joint owners  New company is created 6
  • 6. Mergers and Acquisitions  Acquisition:  One firm purchase the assets of another, with the acquired firm ceasing to be the owners of that firm. Often it is the larger company which acquires a smaller one 7
  • 7. Types of M & A  Horizontal merger :  Two companies engaged in similar activities are combined  A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs. 8
  • 8. Con't  Vertical merger :  A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations.  A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger.
  • 9. Con't  Conglomerate merger:  occurs when two businesses in unrelated industries decide to combine  A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger.
  • 10. Con't  Product Extension Mergers  A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market.  The Mobilink Telecom Inc. & Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN.
  • 11. Types of M & A • Horizontal acquisition:  When the acquirer and the target are in the same industry. • Vertical acquisition: When the acquirer and the target are at different stages of the production process; example: an airline company acquiring a travel agency. • Conglomerate acquisition: The acquirer and the target are not related to each other.
  • 12. Objectives of M&As Enhance shareholder wealth through competitive advantage Growth and expansion of the acquirer's assets Empire Building 13
  • 13. Motives of M & A  Economies of scale  To enable benefits of scale to be achieved  To reduce competition  Market power  Increase market share 14
  • 14. Motives of M & A  Sharing complementary resources  Bringing together the relative strength of each firm  New market entry  to facilitate expansion into new market  To reduce risk 15
  • 15. Motives of M & A  Managerial motive  to pursue growth in size, status and higher remuneration Removal of inefficient Management -to remove managers who failed to maximise shareholder wealth 16
  • 16. Advantages  Quality staff or additional skills, knowledge  Funds or valuable assets for new development  Wider customer base  Increasing your market share  Diversification of the products  Reducing your costs  Reducing competition  Strengthens the business network
  • 17. Disadvantages  Diseconomies of scale if business becomes too large, which leads to higher unit costs.  Clashes of culture between different types of businesses  Workers redundant, especially at management levels  May be a conflict of objectives between different businesses
  • 18. Methods of Financing Mergers  Cash payment  pay the purchase consideration by cash  Shares  issue of ordinary and preference shares  Loan capital  debentures  convertible loans 19
  • 19. M&A Process  Identify a Target  Valuation  Mode of Acquisition  Mode of Payment  Accounting of Acquisition 22
  • 20. M&A Process (Continued)  Identify a Target:  Based on a sound strategy that can increase shareholders’ wealth  Focus on “Value Related Reasons”  Acquisitions are usually initiated by the acquiring firm  Sometimes a target can announce that it is for sale 23
  • 21. M&A Process (Continued)  Valuation:  Should not ignore the value of strategic options and payment terms  In general an acquisition creates wealth for the acquirer if: What Acquirer [Target Alone + Synergies + Other] >= [Cash Paid + Stock Paid + Debt Assumed] Gets What Acquirer Gives 24
  • 22. M&A Process (Continued)  Mode of Acquisition:  Refers to whether a proposed acquisition is friendly or hostile to target managers  Friendly acquisitions are approved by board of directors of each firm  Then shareholders vote on the proposal  Hostile takeover can be quite time consuming especially when target managers fight against the tender offer 25
  • 23. M&A Process (Continued)  Mode of Payment:  How an acquisition is paid for: cash, stock or mixed  If the stock is believed to be undervalued, then stock should not be used for payment.  If the stock is overvalued then the stock payment should/can be used. 26