An Analysis of Merger and Acquisition Activity

This assignment requires a detailed analysis of mergers and acquisitions, covering topics such as CEO overconfidence, vertical acquisitions, and management buyouts. It includes a list of references to relevant research papers and articles, as well as case studies of notable M&A deals, including Facebook's acquisition of Instagram and Volvo's abandonment of a merger with Renault. The assignment also explores the sources of value destruction in acquisitions by entrenched managers and the role of corporate culture analysis in mergers and acquisitions.

Running head: MERGERS AND ACQUISITIONS
Mergers and Acquisitions
Name of the Student
Name of the University
Author’s Note

1MERGERS AND ACQUISITIONS
Table of Contents
Introduction......................................................................................................................................2
Requirement: Part A........................................................................................................................2
Answer to Question 1..................................................................................................................2
Answer to Question 2..................................................................................................................3
Answer to Question 3..................................................................................................................3
Answer to Question 4..................................................................................................................4
Answer to Question 5..................................................................................................................5
Answer to Question 6..................................................................................................................5
Answer to Question 7..................................................................................................................6
Answer to Question 8..................................................................................................................8
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2MERGERS AND ACQUISITIONS
Introduction
Mergers and Acquisitions are considered as two of the major aspects in the world
business over the years. In general, mergers and acquisitions refer to the process of consolidation
of the companies. It needs to be mentioned that there are various forms of mergers and
acquisitions; they are acquisitions, mergers, tender offers, consolidations and others (Cartwright
and Cooper 2012). The main aim of the report is to analyze and evaluate different dimensions of
mergers and acquisitions and the report is based on the provided case study of Earling
Construction Plc and Manco Construction Plc.
Requirement: Part A
Answer to Question 1
Manco Plc should take the following steps to defend the takeover bid by Earling PLC:
 Manco Plc should adopt the strategy of Poison Pill Defense to defend the takeover from
Earling PLC. Under thus strategy, the target company that is Manco Plc is required to
dilute their shares in such a manner that Earling PLC needs to incur large amount of
expenses for obtaining the controlling percentage of share (Rhee and Fiss 2014). As per
the provided case study, the economic crisis badly hit Earling PLC economically. In this
situation, the company would think twice before incurring large expenditure for the
acquisition of Manco Plc.
 Apart from the above, Manco Plc can also adopt the strategy of Stock Repurchase to
defend takeover. Under this process, Manco Plc needs to repurchase their shares from
their shareholders to prevent this takeover from Earling PLC. Manco Plc can adopt these
two techniques (Auerbach 2013).
In general, Manco Plc can take the following techniques to defend any potential takeover:
 Manco Plc can adopt the strategy of Staggered Board under which only one third of the
directors are reelected annually.
 Manco Plc can adopt the strategy of Shark Repellants in which the acquirer companies
need a supermajority vote requirement for the takeover of the company.

3MERGERS AND ACQUISITIONS
 In addition, other techniques are Golden Parachute, Greenmail, Standstill Agreement
and others (Ferris, Jayaraman and Sabherwal 2013).
Answer to Question 2
According to the provided case study, it is advised that Earling PLC is the ‘predator’ and
Manco Plc is the ‘target’. The justification is provided below with definition.
Predator: In the process of mergers and acquisitions, a company with sufficient financial power
can easily bear the associate risks of the process of takeover. For this reason, financial stronger
companies are regarded as Predators. In this case, Earlings PLC has financial superiority than
Manco Plc and thus, needs to be considered as predator (Jordan 2016).
Target: In the merger and acquisition process, companies with less financial capability are
considered as Target; as they can be easily takeover by more financially stable companies. As
per the provided case study, Manco Plc needs to be considered as target due to their poor
financial condition (Shi, Sun and Prescott 2012).
Answer to Question 3
As per the provided case study, Earlings PLC offered Manco Plc €4.75 per share while
the actual value was €10.50 per share. It can be seen that Earling PLC is offering very less
amount of the actual share value. However, in case of Management Buyout (MBO) strategy,
Manco Plc can get higher price of share value than the offering of Earling PLC. For this reason,
Manco Plc might consider a potential MBO (Mao and Renneboog 2015).
The advantages and disadvantages of MBO are discussed below:
Advantages
 The main advantage of MBO is that it increase the motivation of the employees as the
overall success of the business create positive impact on them.
 The new owners of the business can make effective business decisions based on their
experience as they have been the employees of the company for years.
 In case the business was a part of large group, MBO increases the efficiency of the
business as the management does not have to discuss the decision with the head
management of the group (Berry and Green 2016).

4MERGERS AND ACQUISITIONS
Disadvantages
 In the process of MBO, the new management is required to put much effort to turn the
business in a successful one. This can be considered as a disadvantage.
 In case, the business is struggling due to the lack of strengths, skills and vision of the
management team, then the MBO is not going to be much helpful for the company
(Mao and Renneboog 2015).
Answer to Question 4
Three major types of acquisitions are Horizontal Acquisition, Vertical Acquisition and
Concentric Acquisition. These are discussed below with example:
Horizontal Acquisition: Horizontal acquisition refers to the acquisition of one company by
another company in the same industry. The main advantage of horizontal acquisition is that it
expands the capacity of the acquirer while keeping the business operations same. The companies
in this acquisition process involve in the selling of same product or services (Ferreira et al.
2014).
Example: The acquisition of Instagram by Facebook can be presented as a major example of
horizontal acquisition. This acquisition took place in the year 2012 and the reported value was $1
billion. It is regarded as horizontal acquisition as both Facebook and Instagram operates in the
same industry with same services that is photo sharing (Forbes.com 2018).
Vertical Acquisition: Vertical acquisition refers to the acquisition of one company by another
company in the same industry, but both of them occupy different position in the supply chain of
the industry. The main advantage of vertical acquisition is that it establish cooperation between
the companies by improving efficiency and lowering the overall cost (Frésard, Hoberg and
Phillips 2014).
Example: The acquisition of PayPal by Ebay in the year 2002 can be well presented as the
example of vertical acquisition. This can be considered as the example of vertical acquisition as
both the companies operates in the online platform, but provides different services. Ebay
involves in online shopping, but PayPal involves in online payment and money transfer
(Forbes.com 2018).

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Concentric Acquisition: In the process of concentric acquisition, the two companies involved
belong to the same or related industry, but they do not involve in the offering of same products
or services. However, these companies may use similar distribution channel (Risberg 2013).
Example: The acquisition of Travelers Insurance by Citigroup can be considered as a perfect
example of concentric acquisition. This is called concentric acquisition as both Citigroup and
Travelers Insurance belong to financial industry, but both of them involves in the offering of
different products and services (Forbes.com 2018).
Answer to Question 5
From the provided case study, it can be seen that both the companies that are Earling
Construction PLC and Manco Construction Plc belong to the same industry that is the
construction industry. From this, it is clear that both the companies involves in the offerings of
same construction related products and services. Hence, it implies that both the companies
operates in the same industry and sell same products and services. For all these reasons, the
acquisition of Manco PLC can be classified as horizontal acquisition as it possesses all the
features of horizontal acquisition (Ferris, Jayaraman and Sabherwal 2013).
Answer to Question 6
The seven reasons of acquisition for Earling PLC are discussed below:
i. The major reason of acquisition for Earling PLC is survival. The case study states that the
economic crisis of 2008 affected Earling PLC in a bad manner. In this kind of situation,
acquisition was one of the ways for Earling PLC to survive and remain in the competition
(Cartwright and Cooper 2012).
ii. It is possible for Earling PLC to ensure growth from the positive effects of acquisition.
Most of the time, acquisition ensures satisfactory and balance growth of the business
(Vazirani 2012).
iii. It would be possible for Earling PLC to gain necessary competitive advantage and bigger
market share due to the acquisition as it improves the distribution and marketing
networks. It would also help Earling PLC in developing wide customer base (Cartwright
and Cooper 2012).

6MERGERS AND ACQUISITIONS
iv. Diversification of products and services world be another reason for Earling PLC for
adopting the strategy of acquisition and it can complement the current product and
services of the company (Vazirani 2012).
v. It can be happened that the management of Earling PLC failed to identify eligible
successor of the company. In this situation, the option of acquisition can provide Earling
PLC with the option of eligible leadership (Vazirani 2012).
vi. Reduction or cutting of costs could be another major reason for Earling PLC for
acquisition as the acquisition of two companies with same services is effective in cost
reduction (Vazirani 2012).
vii. Better financial planning would be possible for Earling PLC due to the positive effects of
acquisition. The collective finances of both the companies can be resulted in better
financial planning (Cartwright and Cooper 2012).
Among many cases, the acquisition of Volvo and Renault in the year 1993 as both the
companies failed to address the ownership structure of them after the process of acquisition.
Both the companies were supposed to save $5 billion from this acquisition. However, the main
reason for the failure of this acquisition was the consideration of the problem related to the
combination of investors-owned company with the government-owned company. Due to this
acquisition, the shareholders of Volvo would have left with 35% stake in the combined company
and the rest was controlled by the government of France (Nytimes.com 2018). Thus, the
shareholder of Volvo could not accept the selling of the prized company to the French
Government. These were the major reasons for the failure of this acquisition.
Answer to Question 7
The acquirer companies can use various ways to pay for the target companies in the
process of take over. Three of these major ways are discussed below:
Payment in Cash: Cash payment is considered as one of the most popular ways for the payment
of takeover in acquisition process. Cash transaction is considered as clean, instantaneous and it
does not require high level of management as compared to the stock payment. The shareholders
who are not able to sell their shares prefer the payment of takeover through cash (Harford,
Humphery-Jenner and Powell 2012). Most importantly, the shareholders do not have the worry
about the future performance of their companies that has impact on the amount they will be paid.

7MERGERS AND ACQUISITIONS
There are both advantages and disadvantages of the process of cash payment. In the process of
competitive bidding, the target companies always prefer cash payment for the process of
takeover. However, the main disadvantage is that the shareholders of the target company will not
receive any dividend in case the company performs well in near future. It implies that the
shareholders of the target company are taking cash instead of future performance bonus and they
ate blocked from any future gains (Harford, Humphery-Jenner and Powell 2012).
Payment with Stock: It is considered as another popular ways of payment in the process of
takeover. In the process of payment with stock, the shareholders of the target company swap
their shares for the shares of the acquirer company (Fu, Lin and Officer 2013). The payment by
the shares is essential for the target companies when their shareholders do not want to recognize
any kind of taxable gains in the near future. It implies that the shareholders of the target
companies do not have to pay income taxes on the acquisition process due to the absence of cash
transaction. This option of financing is considered as the most safe way to pay for the takeover as
both the acquirer and the selling company share the risks on an equal basis. In case the stocks are
overvalued, the particular way becomes largely beneficial for the acquirers (Fu, Lin and Officer
2013). At the same time, the acquirer firms have to bear the risk of decline in the stock price.
Thus, there are both advantages and disadvantages.
Debt Acquisition: The agreement to take on the debt of the seller is considered as one of the
major ways of the payment for takeover and it is also considered as a viable alternative of cash
payment and share payment (Phan 2014). For many business organizations, debts become one of
the major forces to be acquired. In this position, it is the priority of the debtors of the target
companies to be acquired by a company that can pay the debt. At the same time, from the point
of view of the creditors, this way can be considered as one of the cheapest way for the
acquisition of assets. At the same time, this way is also beneficial from the perspective of the
shareholders of the target company as they do not have to pay income taxes until they receive the
payment of debt. At the time of takeover under this payment process, the sellers is required to be
sure about the financial stability of the acquirer (Phan 2014). In case the acquirer become
bankrupt, the shareholders of the target or seller company would be fallen under the creditors of
the acquirer. Thus, this way also has certain advantages and disadvantages.

8MERGERS AND ACQUISITIONS
Advised Finance Technique: The above discussion evaluates three ways of payment for a
takeover. It can be observed that all the three ways have some advantages and some
disadvantages. Based on the above discussion, it is advised that Earling PLC should adopt the
way for cash payment for the takeover considering the advantages of this technique. Payment
through cash is a clear process that needs less management involvements. After that, the
shareholders of the seller company do not have to depend in the performance of the shares as the
payment is done in cash. Most importantly, the shareholders of the seller company cannot claim
any future gain of the company (Ferris, Jayaraman and Sabherwal 2013). For all these reasons,
Earling PLC is required to adopt the strategy of cash payment for financing the takeover.
Answer to Question 8
It needs to be mentioned that there are many risks involved in the process of acquisition
and there is not any exception of this fact in case of Manco PLC. From the provided case study,
it can be seen that Earking PLC is considering offering a paper offer to Manco PLC for
acquisition that is one share of Earling PLC is for every share of Manco PLC. In case, this deal is
extended, Manco PLC can face some deals. First, Manco PLC can lose the deal as it is a good
deal for the company. After that, there is a possibility that Manco PLC can face legal risks due to
not compliance with the laws and regulations. Most importantly, Manco PLC can face the risk of
closing down the business due to be not acquired (Weber and Yedidia Tarba 2012).
Conclusion
As per the above discussion, it can be seen that Manco Plc should adopt the strategy of
Poison Pill and Stock Repurchases against the takeover of Earlings Plc. The discussion also
shows that Earling Plc is the predator due to financial superiority and Manco Plc is the target.
The study shows the advantages and disadvantages of management buyout in the process of
acquisition. As per the above discussion, three kinds of acquisition are there; they are Horizontal
Acquisition, Vertical Acquisition and Concentric Acquisition and the takeover of Manco Plc by
Earling Plc is the example of horizontal acquisition. It can also be seen that the companies can
use various strategies to pay for the process of acquisition like cash payment, stock payment,
debt acquisition and others.

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References
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Chicago Press.
Berry, D.F. and Green, S., 2016. Cultural, structural and strategic change in management
buyouts. Springer.
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Routledge.
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research: A bibliometric study of top strategy and international business journals, 1980–
2010. Journal of Business Research, 67(12), pp.2550-2558.
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good deals?. Journal of Financial Economics, 109(1), pp.24-39.

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