This Presentation Explains Mergers, Acquisition, Consolidation, Holding Companies, Parent Company, Management Buyout, Leveraged Buyout, Business Combinations, Congeneric Mergers, Conglomerate Mergers, Economic Reasons for Combining Businesses and Concepts of How merger is effected.

1. Mergers & Other Business
Combinations
Presented by:
Junaid Inam

2. MERGERS
• Combination of two or more corporations in such a way that
legally just one corporation survives.
• In a merger, two or more corporations combine into a single
corporation and the resulting entity is one of the merging
corporations (corporation A merges into corporation B, with
corporation B as the surviving corporation

3. ACQUISITION
• One firm takes over another corporation and establishes its
power as the single owner
• Firm which takes over is the bigger and stronger one
• Relatively less powerful, smaller firm loses its existence

4. DIFFERENCE BETWEEN MERGERS &
ACQUISITION
Mergers
• When a deal is made between two companies in friendly
terms, it is typically proclaimed as a merger, regardless of
whether it is a buy out.
Acquisition
• In an unfriendly deal, where the stronger firm swallows the
target firm, even when the target company is not willing to be
purchased, then the process is labeled as acquisition.

5. CONSOLIDATION
When Two or More Firms Combine to Create an Entirely New
Corporate Entity.
• No original firm continue to exist as separate entity
• Firms A and B form to create Firm C
• Shareholders give up their shares in original firms and receive
new shares in new corporation.

6. HOLDING COMPANIES
• Firm Owning Sufficient Voting Stock in One or More Other
Companies so as Have Effective Control Over Them
• 10% ownership for effective control
• Sometimes requires 51% ownership to maintain control

7. PARENT COMPANY
• A parent company is a company that owns enough
voting stock in another firm (subsidiary) to control
management and operations by influencing or electing
its board of directors
• Subsidiary companies are also called daughter companies

8. SPECIFIC TYPES OF MERGERS
Congeneric Mergers
• Occurs between firms that have related business interests and
can be classified as being either vertical or horizontal.

9. SPECIFIC TYPES OF MERGERS
Horizontal Mergers
• Consisted of Two Firms Engaged in Same Business.
• Surviving firm maintain the same business but simply is larger
in size
• “Robber Baron” era in late nineteenth century
• U.S Steal and Standard Oil joined their smaller competitors by
this method
• Robber Baron: An American capitalist of the latter part of the
19th century who became wealthy through exploitation (as of
natural resources, governmental influence, or low wage scales

10. SPECIFIC TYPES OF MERGERS
Vertical Mergers
• When a Firm Acquires Upstream and/or Downstream from
Another Corporation
• Upstream: Suppliers, raw material providers
• Downstream: Product distributions, Resellers
• Combination of two or more stages of production or
distribution that are usually separate

11. SPECIFIC TYPES OF MERGERS
Vertical Mergers
Advantages of Vertical
Mergers
• Low Transaction Cost
• Assured Suppliers
• Improved Coordination
• Higher Barriers to
Competitors Entry
Disadvantages of Vertical
Mergers
• Larger Capital
Requirements
• Reduce Flexibility
• Loss of specialization

12. SPECIFIC TYPES OF MERGERS
Conglomerate Mergers
• Occurs When Unrelated Businesses Combine
• Explosion of conglomerate mergers in 1960’s
• Teledyne Corporation to become one of America’s largest
firms by conglomerate mergers
• Important part of merger picture

14. ECONOMIC REASONS FOR COMBINING
BUSINESSES
• Operating Advantages
• To achieve Economy of Scale
• Most easiest & justified Solution
• Increase in production volume
• Reduction in overhead cost
• Enhanced schedule
• Inventorying opportunities

15. ECONOMIC REASONS FOR COMBINING
BUSINESSES
• Financial Advantages
• Being able to take advantages of new opportunities
• Increase in size and efficiency
• Ability to increase more funds from lower cost
• Reduces the risk of default
• Ability to issue new securities in larger amount
• Reduces flotation cost

16. ECONOMIC REASONS FOR COMBINING
BUSINESSES
• Enhanced Growth Opportunities
• Cheaper and faster way to grow
• Expend into related and new products
• Building a new plant & product is costly
• Uncertainties associated with cost overruns
• Acceptability of product in market

17. ECONOMIC REASONS FOR COMBINING
BUSINESSES
• Diversification
• Diversifying operations by mergers
• Increase in smooth earning in all seasons
• Spread of business risk over more operations
• Diversification of portfolio at less cost for S.H
• Reduced the risk of liquidity & bankruptcy

18. ECONOMIC REASONS FOR COMBINING
BUSINESSES
Tax Advantages
• Considerable tax advantages by earlier federal tax code
• Acquiring firms in operating losses to as an offset against
acquiring company’s income.
• Reduces the acquiring firm’s tax liability
• Acquiring firm taking advantage of merger
• New laws have restricted use of operating loss deduction
• Requires careful analysis of merger by managers

19. HOW MERGER IS EFFECTED
A Friendly Takeover
1. Purchase of Assets
• The assets of targeted company sold to acquiring company
• Once this is done targeted firm maybe terminated or remain
into existence.
• Advantages:
• Buying only a portion of targeted company's assets
• Buyer avoiding hidden liabilities of target
• Target firm enjoy cash in exchange of its assets

20. HOW MERGER IS EFFECTED
A Friendly Takeover
2. Purchase the Stock
• Acquiring firm making an outright purchase of target’s stock
• Target firm can exist as a subsidiary, division or can be
dissolved by acquiring company
• Acquiring firm then owns hidden liabilities of target firm
• Shareholders must approve the merger

21. HOW MERGER IS EFFECTED
A Hostile Takeover
1. Tender Offer
• Purchase of target stock through secondary financial market or
directly from individual stockholders
• Tends to be very costly
• Acquiring firm to pay higher prices for target firm
• Limitations of secretly acquiring the target’s stock

22. HOW MERGER IS EFFECTED
A Hostile Takeover
2. Proxy Fight
• Acquiring firm buying only a portion of target’s stock &
approach the management to request the right to vote
• Elect directors more receptive to negotiated merger
• Acquiring firm attempt to persuade shareholders to use
their proxy votes

23. OTHER FORMS OF CORPORATE
RESTRUCTURING
Sell-off
• When a firm sell it assets for money or securities
• Sell-off are voluntary and involuntary
• Selling company to avoid further losses by selling unprofitable
or non profitable assets
• Finding a buyer willing to pay more for actual value of assets

24. OTHER FORMS OF CORPORATE
RESTRUCTURING
Liquidations
• Total sale of a company’s assets
• Extreme form of a sell off
• Cash exchange for firm assets is distributed among its
stockholders
• assets and property of the company are redistributed
• Organization ceases to exist in current form

25. OTHER FORMS OF CORPORATE
RESTRUCTURING
Spin-off
• Separation of operations of a subsidiary from its parent
• Each separated unit acts as an independent corporation
• No change in owner ship
• Shareholders maintain their proportionate ownership in both
corporations

26. OTHER FORMS OF CORPORATE
RESTRUCTURING
Going Private
• When management or major owners purchases all shares from
outside stockholders & reorganize the firm as private company
• After going private shares of the company are no longer
available for sale to the outside public

27. OTHER FORMS OF CORPORATE
RESTRUCTURING
• Leveraged Buyout
• Management borrowing funds from outside investors to buy
out the shareholders
• Going private eliminate major cost elements.
• Management Buyout
• A management buyout (MBO) is a form of acquisition where a
company's existing managers acquire a large part or all of the
company from either the parent company or from the private
owners.