Benefits of mergers and acquisitions Assignment PDF

BBMF 2093CF- LECTURE NOTES 10 TO 14
LECTURE 10
Benefits of mergers and acquisitions
There are many advantages of growing your business through
an acquisition or merger. These include:
Obtaining quality staff or additional skills, knowledge of your industry or
sector and other business intelligence. For instance, a business with good
management and process systems will be useful to a buyer who wants to
improve their own. Ideally, the business you choose should have systems that
complement your own and that will adapt to running a larger business.
Accessing funds or valuable assets for new development. Better
production or distribution facilities are often less expensive to buy than to
build. Look for target businesses that are only marginally profitable and have
large unused capacity.
Your business underperforming. For example, if you are struggling with
regional or national growth it may well be less expensive to buy an existing
business than to expand internally.
Accessing a wider customer base and increasing your market
share. Your target business may have distribution channels and systems you
can use for your own offers.
Diversification of the products, services and long-term prospects of
your business.A target business may be able to offer you products or
services which you can sell through your own distribution channels.
Reducing your costs and overheads through shared marketing budgets,
increased purchasing power and lower costs.
Reducing competition. Buying up new intellectual property, products or
services may be cheaper than developing these yourself.
Organic growth, ie the existing business plan for growth, needs to be
accelerated.Businesses in the same sector or location can combine
resources to reduce costs, remove duplicated facilities or departments and
increase revenue.
4 Types of Mergers and Acquisitions
Companies will merge together and acquire each other for
a variety of reasons. Here are four of the main ways
companies join forces:
Horizontal Merger / Acquisition

Two companies come together with similar products / services. By
merging they are expanding their range but are not essentially doing
anything new. In 2002 Hewlett Packard took over Compaq Computers for
$24.2 billion. The aim was to create the dominant personal computer
supplier by combining the PC products of both companies.
Vertical Merger / Acquisition
Two companies join forces in the same industry but they are at different
points on the supply chain. They become more vertically integrated by
improving logistics, consolidating staff and perhaps reducing time to
market for products. A clothing retailer who buys a clothing manufacturing
company would be an example of a vertical merger.
Conglomerate Merger / Acquisition
Two companies in different industries join forces or one takes over the
other in order to broaden their range of services and products. This
approach can help reduce costs by combining back office activities as well
as reduce risk by operating in a range of industries.
Concentric Merger / Acquisition
In some cases, two companies will share customers but provide different
services. An example would be Sony who manufacture DVD players but
who also bought the Columbia Pictures movie studio in 1989. Sony were
now able to produce films to be able to be played on their DVD players.
Indeed, this was a key part of the strategy to introduce Sony Blu-Ray DVD
players.
Case Study – 1998 – Daimler Benz and Chrysler
Daimler Benz bought Chrysler in 1998 and combined to form Daimler
Chrysler, a $37 billion automotive giant that had a massive presence
both sides of the Atlantic. However, cultural clashes between the two
companies were cited as a key reason for the failure that led Daimler to
selling Chrysler in 2007 for $7 billion.
In this case, the “efficient, conservative and safe” culture of Daimler
clashed with the “daring, diverse and creating” culture of Chrysler.
The due diligence work carried up front had not properly assessed the
challenge both organisations faced in working with each other.
Also, the transaction was described as a “merger of equals” and this
was not the reality within the new organisation. Chrysler had obviously
been taken over and there was little trust between the two
organisations.
A failure on this scale shows the importance of a thorough and
objective due diligence process.
Types of Acquisition Structures

There are normally three alternatives in relation
to structuring a merger or acquisition deal:
1. Stock purchase
In a stock purchase, the buyer acquires the stock of the target
company from its stockholders. The target company will remain
intact, but it will now be under new ownership. The purchaser
acquires all or the majority of the seller’s voting shares. The buyer
fundamentally now owns all the assets and liabilities of the seller. The
purchaser needs to negotiate the representations and
warranties regarding the assets and liabilities of the business to ensure
that the target company is accurately and completely understood.
Stock purchases are typically beneficial to sellers. The earnings of a
sale are usually taxed at the lower and long-term capital gains
rate. Moreover, such sales are less disruptive to the day-to-day
business of the company. For buyers, a stock purchase is
advantageous because the seller continues to be in charge of the
operations, making the integration less expensive and shorter. The buyer
still owns all the assets, contracts, and intellectual property, making the
derivation of value from the acquisition easier.
Stock purchase negotiations also tend to be less contentious. One
disadvantage is that, since all unsettled liabilities of the seller
are acquired by the purchaser, the buyer may be forced to inherit
financial and legal problems that, in the long run, diminish the
value of the acquisition. Moreover, if the selling entity faces dissenting
shareholders, a stock purchase will not prevent them from going away.
2. Asset purchase
In an asset purchase, the buyer only buys the assets and not the
liabilities that are precisely specified in the purchase agreement.
The structure is desirable to buyers because they can select only
the assets they desire to buy and the liabilities they would like to
assume. Buyers often use an asset purchase when they want to
acquire a single business unit or division within a company.
The process can be complex and time-intensive due to the
additional effort needed in finding and transferring the specified
assets only. Typically, the buyer will acquire a majority of the
seller’s assets by offering cash payment or in exchange for its
own shares and ignore all liabilities linked to the assets. However,

buyers may end up losing important non-transferable assets like permits
or licenses.
The sale method is not preferred by sellers since it may be faced
with adverse tax consequences because of allocating the
purchase price to the assets. After the sale, the selling entity will
continue to exist legally, though in most cases it may end its operations
as soon as the deal closes.
3. Merger
In a merger, two distinct companies come together to form a single
combined legal entity, and the shareholders of the target
company obtain cash, the stock of the buyer company, or a
combination of both. Either the seller’s company or the buyer’s
company is reconstituted, or a fresh entity is started. One main benefit
of a merger is that it normally needs the approval of only a
majority of the shareholders of the target company.
A merger is an excellent choice if there are many stockholders in
the target firm. The process is also relatively simple. All
contracts, as well as liabilities, are passed into the new company;
hence minimal negotiation about the terms is required. The
disadvantage of the structure is that if a large enough block is formed,
disapproving shareholders on whichever side are capable of thwarting the
merger by deciding to vote against it.
Shark repellent refers to measures employed by a company to lock
out hostile takeover attempts. The measures may be periodic or
continuous efforts exerted by management to make special
amendments to its bylaws. The bylaws become active when a takeover
attempt is made public to the company’s management and shareholders.
It fends off unwanted takeover attempts by making the target less
attractive to the shareholders of the acquiring firm, hence preventing
them from proceeding with the hostile takeover.
A golden parachute involves including a provision in an
executive’s contract that gives them a fairly large compensation
in the form of cash or stock if the takeover attempt succeeds. The
provision makes it more expensive and less attractive to acquire the
company since the acquirer will incur a large debt in the sum of money to
pay the senior executives.