Mergers and AcquisitionsMergers and Acquisitions
A transaction where two firms agree to integrate theirA transaction where two firms agree to integrate their
operations on a relatively coequal basis because theyoperations on a relatively coequal basis because they
have resources and capabilities that together mayhave resources and capabilities that together may
create a stronger competitive advantagecreate a stronger competitive advantage
A transaction where one firm buys another firmA transaction where one firm buys another firm
with the intent of more effectively using a corewith the intent of more effectively using a core
competence by making the acquired firm acompetence by making the acquired firm a
subsidiary within its portfolio of businessessubsidiary within its portfolio of businesses
An acquisition where the target firm did not solicitAn acquisition where the target firm did not solicit
the bid of the acquiring firmthe bid of the acquiring firm
• A horizontal Merger involves two firms
operating in the same kind of Business
• Thus a merger between two steel firms
would represent a Horizontal Merger.
• Vertical Mergers involve different stages of
• Oil Industry – production, refining,
• Pharmaceutical Drugs – Development,
Production and Marketing.
• Involves Firms engaged in unrelated type
of Business Activities.
• Three types of Conglomerate Mergers
Product Extension Mergers
• Broaden the Product lines of the firm
Geographic Market Extension
• Involves two firms whose operations had
been conducted in non overlapping
Pure Conglomerate Merger
• Involves unrelated Business Activities that
would not qualify as either product
extension or market extension mergers.
• One party – generally a corporation
seeking controlling interest in another
corporation – asks the stockholders of the
firm it is seeking to control to submit, or
tender their shares in the firm.
• A company mails a letter to the directors of the
takeover target announcing the acquisition
proposal and requiring the directors to make a
quick decision on the bid.
• If approval cannot be obtained, the acquiring
company can appeal directly to the stockholders
by means of a tender offer, unless the
management and directors of the target firm
hold enough stock to retain control.
– The target firm may seek to elicit an offer from
a partner it considers more desirable – a
• Involve the intersection of only a small
fraction of the activities of the companies
involved and usually for a limited duration
of ten to fifteen years or less
• A spin off creates a new legal company
• Its shares are distributed on a pro rata
basis to existing shareholders of the
• Existing shareholders have the same
proportion of ownership in the new entity
as in the original one.
• A variation on the spin offs is the Split offs.
• A portion of the existing shareholders
receives stock in a subsidiary in exchange
for parent company stock.
• Still a variation in the spin off is the split
• The entire firm is broken into a series of
spin offs so that the parent no longer
exists and only the new offspring survive.
• The sale of a portion of the firm to an
outside third party.
• Cash or equivalent consideration is
received by the diveswting firm.
• Typically the buyer is an existing firm, so
that no new legal entity results.
• An equity carve out involves the sale of a
a portion of the firm via an equity offering
• New shares of equity are sold to outsiders
which gives them ownership of a portion of
the previously existing firm.
• A new legal entity is created.
• Premium buy backs
• Standstill agreements
• Anti takeover amendments
• Proxy contest
Premium buy backs
• Represent the repurchase of a substantial
stock holder’s interest at a premium above
the market price ( called greenmail)
• Voluntary contract in which the stockholder who
is bought out agrees not to make further
attempts to take over the company in the future.
• When a standstill agreement is made without a
buyback, the substantial stockholder simply
agrees not to increase his or her ownership
which presumably would put him or her in an
effective control position.
Anti Takeover Amendments
• Changes to the corporate bye laws to
make an acquisition of the company more
difficult or expensive.
• Supermajority voting provisions requiring a
high percentage of stockholders to
approve a merger.
Staggered terms for Directors
• These can delay the change of control for
a number of years.
• These award large termination payments
to existing management if the control of
the firm is changed and management is
• An outside group seeks to obtain
representation on the firm’s board of
• The outsiders are referred to as dissidents
• The insiders are incumbents or existing
board of directors.
• Proxy contests are often regarded as
directed against the existing management.
• Exchange of debt or preferred stock for
• Or common stock for more senior claims
• Corporation buys back some fraction of its
outstanding shares of common stock.
• Tender offers may be made for share
• The entire equity interest in a previously
public corporation is purchased by a small
group of investors.
• When the transaction is initiated by the
members of the incumbent management,
it is referred to as management buy out
• When financing from third parties involves
substantial borrowing by the private
company, such transactions are referred
to as Leveraged Buy outs (LBOs)
Issues raised by Restructuring
• Are they good or bad for the economic
health of the3 nation.
• Do they divert energies of the managers
from bona fide econmic activity to financial
• Do they use up Financial resources which
otherwise would be employed in ‘real’
Issues raised by Restructuring
• Why has such heightened economic
activity been a Phenomenon of the last
Early Merger Movements
• All of the Merger movements occurred
when the economy experience3de
sustained high rates of growth and
coincided with particular developments in
• Mergers represent resource allocation and
reallocation processes in the economy.
• Firms respond to new investment and profit
activities arising out of changes in economic
conditions and technological innovations
• Mergers rather than internal growth may
sometimes expedite the adjustment process and
in some cases be more efficient in terms of
1895-1904 Merger Movement
• Consisted mainly of horizontal mergers
• Resulted in high concentration in many
industries including heavy manufacturing
• Period of rapid economic expansion.
• Movement peaked in 1899 and almost
ended in 1903
• Downturn in 1901
• Declined further by 1903 when the
economy went into recession.
• Major changes in econmic infrastructure
and production technologies.
• Completion of trans continental railroad
• The advent of Electricity
• Increased use of coal
• Development of National Economic
• Transformation of regional firms into
Economies of Scale
Reasons for success
• Astute Business Leadership
• Rapid Technological and Managerial
• Development of New Products
• Entry into new sub division of Industry
• Promotion of Quality Brandnames
• Commercial exploitation of Research
Reasons for Failure
• Lack of efforts to realize economies of
scale by modernizing plant and equipment
• Increase in Overhead Costs
• Lack of flexibility due to large size.
• Inadequate supply of talent to manage a
large group of plants.
The 1922-1929 Merger movement
• Began with the upturn in Business Activity
• Ended with the severe economic
slowdown in 1929.
• Public utilities and Banking companies
were most active.
• About 60 per cent of the mergers occurred
in the still fragmented food processing,
chemicals and Mining sectors.
• A large proportion of the mergers
represented product extension mergers as
in the cases of IBM, General foods and
• Market extension mergers in food retailing,
department stores, motion picture theaters
• Vertical Mergers in the mining and metals
Motivational factors of these
Major developments in
The 1940-47 Merger Movement
• Second world war and early post war
years were accompanied by rapid growth
of economy and an upsurge in merger
• Not very significant changes in
Technological and Business environments
• Merger movement was much smaller than
the previuos ones
• Government Regulation
• Tax policies
• Circumvent price controls and allocations
• Merger activity reached its highest level.
• Booming economy
• After 1969, economy slowed down
• So did the number of mergers
• Most acquirers were small or medium
• Diversification Strategy
• Largest single category of firms was from
the aerospace industry
• This industry was subject to wide
fluctuations in total market demand and
• Abrupt and major shifts in product mix
Merger Trends since 1976
• Following recession in 1974-75, the US
economy entered into a long period of
expansion during which M&As trended
• Have been concentrated in Service
Industries as Commercial and Investment
Banking, Finance, insurance, wholesale,
retail, broadcasting healthcare and in the
natural resources area.
• Involved consolidation within the industry
• Product extension
• Market extension and
• Pure conglomerate acquisitions
• Divestitures became a substantial portion
of acquisition activity.
• High rates of divestitures is one of the
reasons why not affected aggregate
concentration in the economy.
• Share of assets of the largest 200 US
Corporations to the assets of all non
• Historically the measure has been the
share of the four largest firms of industry
sales, assets, employment or the value
added in Manufacturing
• When the four firm concentration ratio
exceeds 40 per cent, one view holds that
competition in the Industry may be
diminished to some extent
• Concentration has stayed relatively
constant during 1960s and 1970s.
Risk Arbitrage in M&A Activity
• Arbitrageurs take advantage of temporary
price discrepancies between Markets.
• Buying the stock of takeover targets after
a merger is publicly announced and
holding the stock until the deal is officially
• Purchases at a discount to its eventual
value at the close of the merger.
• By taking a position in the stock of target
firms, risk arbitrageurs are , in effect,
betting that the merger will be successful
• Traditionally arbitrageurs have responded
to announced takeover bids.
• They evaluate the offer and assess its
probability of success relative to the value
of the target
• Information is the principal raw material inj
the arbitrage business
• Arbitrageurs have in some cases
attempted to anticipate takeover bids to
establish their stock position in advance of
any public announcement, thus increasing
their potential return.