merger and equisition


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merger and equisition

  1. 1. MERGER AND ACQUISITION Presented By: Muhammad Shuaib Khan Muhammad Shafiq Ur Rehaman MBA-6
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 12. Objectives of M&As Enhance shareholder wealth through competitive advantage Growth and expansion of the acquirer's assets Empire Building 13
  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. 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. 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. 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. 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. 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. 19. M&A Process  Identify a Target  Valuation  Mode of Acquisition  Mode of Payment  Accounting of Acquisition 22
  20. 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. 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. 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. 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