This presentation discusses crafting a successful merger. It defines mergers and acquisitions, explores reasons corporations pursue acquisitions like vertical integration and diversification. It outlines potential exit paths and discusses valuation fundamentals and methods. The presentation also covers corporate control takeover mechanisms, buyout structures, acquisition agreements, the acquisition process steps, and post-merger integration challenges.

1. This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
Crafting a successful merger
1

2. Definitions:
• Merger: One corporation is combined with and
disappears into another corporation
– Statutory Merger: done under the law
• Corporate Acquisition: The process by which the stock or
assets of a corporation come to be owned by a buyer.
Can be a purchase of stock or a purchase of assets.
• Acquisition is the generic term. A merger is the narrow
technical term for the legal procedure

3. Why corporations are looking for acquisitions
• Vertical Integration
• Diversification
• New market entry
• Strategic alliance
• Customer acquisition
• Reduce potential
competition

4. Potential Exit paths
• Porter model
Current
Industry
Structure
(rivalry amongst
competitors)
Potential Entrants
Customers
Substitutes
Suppliers

5. Vertical Integration
• Strategic model used to achieve
economies in purchasing, sales and/
or distribution
• Vertical backward integration:
– Buying a supplier
• Vertical forward integration:
– Buying current or potential customers
• Danger – loosing leverage or
relationships with your other suppliers
or customers
Suppliers
Company
Customers

6. Diversification
• Product (or service) extension:
– Adding a product or service to be sold in the same
geography, generally to the same customers
– Example: water company buys a company that sells sodas
• Geographic diversification:
– Merging with a company in a similar business in a different
territory
• Danger: entry into a field of activity and a geographic
area where the acquirer has no present operations
(High Risk)

7. Valuation Fundamentals
• Valuation is an absolute art.
• How much is a company worth?
– As much as someone is willing to pay!
• Should be based on operations and future value, not assets and
risk factors come into play
• Different objective methods can be applied in order to validate
valuations:
– Replacement Value
– Investment or Average Rate of Return
– Payback
– Internal Rate of Return (IRR)
– Market Value
– Comparable Net Worth to Market Value
– Discounted Cash Flow

8. Corporate Control Takeover Mechanisms
• Friendly mergers
– Both firms agree that combining them would be value creating.
– There may be an exchange of stock or one firm may make a tender offer for the other
firm's stock.
– Friendly mergers and takeovers account for most of the transaction volume that
occurs.
• Hostile takeovers.
– Occur when there is conflict between the acquirers and acquirees over the price that
should be paid, the effectiveness of the policies that will be implemented and so forth.
– Hostile tender offers allow the acquirers to go over the heads of the target
management and appeal directly to their shareholders.
– This mechanism is potentially very important in ensuring an efficient allocation of
resources.
• Proxy contests
– A group of shareholders trying to persuade the remaining shareholders to unseat the
existing board of directors.
– Used to change a firm's policies, to have her and others with similar views voted onto
the board of directors at a shareholders meeting. Group solicits proxies from other
shareholders which allows group to vote other’s shares.
– Difficult to win because holdings are often spread among many individuals and groups.

9. Buyout Structures
• Compensation:
– Cash
– Stock
– Vested with “earn-out” milestones
• Stock transactions are more easily financed vs. cash
– Debt and lease obligations
– Sale
– Sale of assets
– Company break up, partitioning, and resale
– Loans
– Bonds
– Seller Take back Financing

10. Structures
• All dependent on situation. Strong legal and investment
banking advice is recommended
• Stock Purchase
• Asset Purchase
• Taxable Forward Merger
• Taxable Reverse Merger
• Taxable Forward Subsidiary Merger
• Tax Free Forward Merger (Reorganization)
• Tax Free Forward Triangular Merger

11. Acquisition Agreement
• Covers Due Diligence concerns
• Representations and Warranties
• Covenants
– actions to be done and actions prohibited
• Conditions to Closing
• Indemnity (protections)
• Termination Procedures
• Employment Agreements
• Stockholder Agreements

12. Steps to an acquistion
• Planning and Finding
• Valuation and Pricing
• Financing or Refinancing
• Structuring the Transaction
• A Letter of Intent
• Due Diligence
• Negotiate an Acquisition Agreement
• Closing and transfers
• Post-merger integration

13. Post Merger Integration
(This is where mergers succeed or fail)
• Having a Plan is key
• Plan development
• Outsiders may have a role
• Communicating to employees
• Integrating Human Resources
• Integrating Assets
• Financial restructuring
• Management and personal issues

14. Consolidation Process
• Who becomes:
– President, CEO, Chairman?
• Stand-alone division or subsumed into acquirer
• Eliminating redundancies – “synergies”
– You don’t need two:
• Finance departments
• Facilities groups
• QA departments
• HR Departments
• …
• Value of brands
• Department-by-department
• Product line-by-product line

15. Congratulations on your merger!
May everything go as well as planned…