Merger & Acquisition Shareholder Impact

This report examines the effects of mergers and acquisitions (M&A) on shareholders, focusing on both acquiring and acquired companies. It explores the reasons behind M&A activity, including synergy creation (cost and revenue), growth strategies, market power enhancement, unique capability acquisition, diversification, and tax considerations. Different M&A methods are discussed, such as asset purchase, common share purchase, and share exchanges. The report analyzes short-term, medium-term, and long-term impacts on shareholder wealth, considering scenarios with cash settlements, share swaps, and combinations thereof. Case studies, including Sanofi-Aventis and Genzyme Corp, illustrate real-world outcomes. The analysis reveals that target company shareholders often gain in the short term due to acquisition premiums, while acquiring company shareholders may experience short-term losses due to premium payments but potentially long-term gains from synergies. The report concludes that the success of M&A for shareholders depends on various factors, including the deal structure, market conditions, and the successful integration of the companies.

Merger and Acquisition- Who wins and who lose? - A
shareholder perspective Study
Introduction
This is an era of dynamic environment where changes are taking place at every second. Due to
such volatility, it is very difficult to sustain same position or status for a people or for an
organization. Business environment is considered as the most dynamic environment as it is not
the organization or industry that brings changes but also other factors like technology, natural
environment, politics, socio-cultural aspects etc. are affecting business in many ways. Terms like
industrialization, globalization, privatization, public-private partnership (PPP) and liberalization
are giving lot of freedom and scope to bring new and new thoughts and ideas into business.
This is not only helping the organizations to generate revenue but also developing the standard
of living of society, providing employment, raising economic condition and overall progress at
global stage. [Subramanian, R., et.al1992]
As business environment is giving opportunity and scope to all who have new ideas to bring
business, we are witnessing a sheer competition in various industrial sectors. One of the
important objective of every business is to grow day by day and be a leader in market. Not
everyone can be a market leader nor all can have same position in business environment. It is
the organization who finds differentiation identifiable within customers is now leading the race.
There are number of strategies which organizations are trying out to find edge over other.
Some are trying it at quality, some are trying it at cost, some are creating unique brand image,
and some are establishing strategic partnership or joint venture and now some are using
merger and acquisition as strategy. [Vazirani, N., 2012.]
Here in this report we are focusing on merger and acquisition (M&A) strategy. Here we are
going to see why the organizations prefer such strategy? Our main aim for this study focuses on
the shareholders of both the organization i.e. the shareholders of acquired company and of the
holding company.

As the shareholders are the owners of the organizations (referring joint-stock companies only),
they are the one who bears all losses and gets the return after payment to all debt and
preference shareholders. They take high risk by investing money in the organization with an
anticipation to gain more but not every time the situation goes in favour of the organization.
[Ghosh, M.S.et.al2014]
A company which is now a market leader may face severe crisis if the product or service
offering doesn’t meet expectation of customers. In such case, merger and acquisition come into
action. Either the company liquidates and goes into another company by losing its identity or
may be controlled and managed by any other company who holds majority of share (51%) of
that company. The former case is a merger situation and later one is acquisition. In such
situation, it is the shareholder who faces trouble who comes under settlement process.
Our aim from this study is to bring outcomes that are going in favour or against the
shareholders. We will also find in such situation which shareholders (the one whose
organization merged or acquired or the one who is now parent) is gaining or losing more. This
study would take real cases under study to support the statement and will also carry financial
analysis to give strong support to the questions under study.
Merger and Acquisition- What and Why?
Before we would discuss about the gain and loss to shareholders, it is very important to know
the two terms. This will help in identifying the benefit or loss to the parti9es concerned with
such strategic move.
Merger and Acquisition (M&A) is basically a process of combining two entities into one or as a
one entity.
Merger is the extreme case where the organization who is going to be acquired loses its
identity. It is a form of combination where tow companies become a single entity. While
Acquisition includes the strategic move of an organization to overtake the management or
control position of another entity where the entity identity exists but the control or
management is now in other organization’s hand.

Diagrammatic presentation
Merger situation where Company-A and Company-B combined to make a new company called
Company-AB. Identity of Company-A and B lost.
It is the case of Acquisition where Company-A is acquiring Company-B’s management and
control so that after such action Company-A board will become the decision maker of
Company-B but it won’t lose any identity. [Miglani, P., 2011]
Shareholder Group Shareholder gains for
M&A
What should
take into
account
What should not be taken
into account
Company B (Target) Acquisition purchase
premium (APP)
APP Synergies as it is already
reflected in APP. Shares
paid by acquirer is just an
investment activity, no
future synergies should be
taken into account
Company A (Acquire) Net Relisable Synergies
(NRS)-APP ($7200
million)
Synergies, APP
(it will be paid
for the control
of target so it
is related)
Payment method is
through shares as it is
depending on the
financing activities as it is
not related to M&A.
A B AB
A B A
B

Market value of Target as
it is an investment.
Why M&A take place?
There is no particular case for M&A strategic move. This can take place for various reasons.
Some of the reasons can be-
Synergy- This is the most common reason for a merger. It is expected that when two entities
come together to form a new bigger company, the value of new organization will be much
more than their individual entity value. Such synergies can take place in two forms such as-
Cost synergy- The synergy that reduces overall cost through economies of scale in various
division of companies such as R&D, procurement, sales and marketing, manufacturing,
distribution and general administration.
Revenue synergies- The synergy that increases overall revenue generation through expanded
market, product cross selling and market share.
Example- Alaska air and Virgin America merger took place to increase the west coast air
travelling market to compete with Southwest.
Growth- Any organization has two options to grow i.e. organic growth and external growth.
Organic growth is achieved by increase in sales and making internal investments. Merger or
acquisition is an external growth strategy where an organization either tries to join with a
successful organization or acquires the organization. [Piloff, S.J.et.al1998]
Example- Facebook’s acquisition of WhatsApp was intended to grow the Facebook market
capitalization.
Market Power- This is another popular purpose of M&A. This can take place on two forms that
is either horizontal or vertical. Horizontal M&A takes place when an organization feels
increasing competition is affecting revenue and growth of the organization thus it acquires
some of the competitive firms. Example- HP and Compaq [Shleifer, A.et.al2003]

Vertical M&A takes place when the organization tries to control its entire supply chain
management. This way it reduces the dependencies on supplier and other supply chain
member who can influence the business. Example- E-bay tried up with PayPal to ensure all
online payment option.
Unique capability- It is true that not all company have all resources for successful growth. Thus
many at time, they face difficulties to be competitive thus they go for M&A strategy where they
acquire or get into another organization where it can find those resources to develop capability
internally. Example- Apple Inc. bought Siri (the automated personal assistant) in 2010 to
enhance IPhone capability.
Diversification- Sometimes when the existing business doesn’t give expected return,
organizations move into another business area which is called as diversification. Such
diversification can take place through M&A. Example- Amazon’s acquisition of Washington Post
Newspaper for enhancing Amazon Kindle market.
Tax issues- When a company is having large taxable income, it goes with M&A with a company
with large carry forward tax losses. By this way the acquiring company can reduce the tax
effect. Though this is not approved by regulator to give as reasons however behind other above
mentioned motives, this is also having strong presence.
How can it take place?
There can be several way M&A can take place. They are-
 Purchasing of assets- This is the mode of M&A where the organization buys the assets of
another organization instead of stocks. Such type of acquisition takes place when an
organization is having unique set of assets such as copyright which the other organization
can utilize for own benefit. Such type of acquisition doesn’t normally take place as it creates
a lot of trouble to settle issues like purchase consideration and tax. Even such acquisition
leads to tax paid on capital gain.

Example- VCA Antech, a nationwide chain of veterinary clinics and diagnostic laboratories which
Mars Inc. used asset acquisition strategy by buying Antech. The agreement took place at $93
per share which resulted a total purchase consideration of $9.1 billion. [Loughran, T.et.al1997]
 Purchasing of common shares or stocks- - It is form of acquisition where the acquirer buys
all the equity of targeted company. This doesn’t make any change in employees or ongoing
process. Just ownership gets shifted to another company.
Example- Exxon Mobile Corporation acquired Mobil Corporation under stock acquisition
plan which valued $8.3 billion.
Such type of acquisition can take place in 3 forms such as- Take over (100% stakes in other
company), low touch ownership (majority of shareholding to influence decision making) and
conglomeration (strategic expansion plan)
 Exchange of shares for assets- This is a popular mode of M&A where a company buys the
assets of another company in exchange of its share giving to the stockholders of the
acquired company. Example- AT and T acquisition of Time Warner in stock-cash transaction
$107.50 per share. [Nandy, D.et.al 2009]
 Exchange of shares for share- This time of M&A takes place when one company offers its
own share in exchange of the shares of the acquired company. This takes place at an agreed
ratio.
Shareholders of the Target:
This value paid for the shares of the target in excess for the pre-merger market price is
considered as takeover premium. Thus the amount for the takeover premium is the gain of
the shareholder of target.
Shareholders of the Acquirer:
The shareholders of the acquiring the company as assuming the greater risk within the
merger as the gain will be able for management in order to create synergy value which
exceeds the takeover the premium.
In this case,

Gains for the shareholders (acquirer) = Synergies – Takeover Premium
As the synergies for exceeding the takeover premium as the value for shareholders for the
acquirer is declined as negative so it is declined in share price.
Impact of M&A on shareholders
It is quite certain that whenever an organization goes for the M&A, it is the owner of the
organization i.e. shareholders who are going to be effected from such strategic moves. It is not
just the shareholders of the acquired company is getting affected but also the shareholders of
the holding company will have more or less effect on such action.
Here are some of the effect after M&A
Changes in stock price- In the event of M&A, there is volatility in stock price movement of both
acquiring firm and target firm. The share price of the acquired firm drops post announcement
of merger while the acquiring firm’s share price goes up temporarily after such announcement
normally. It is because the perception of the acquired firm’s shareholder goes negative with the
organization such as poor performance, management etc. thus they release shares in market
instead of holding it to avoid financial loss. On the other hand, the shareholders of the acquiring
firm perceive it positive most of time by taking it increase in capability and efficiency of the firm

which is why they try to hold the shares to gain profit in future dates. [Thompson,
R.B.et.al2004]
In case of merger, when the two company joined, the price of stock normally stays higher than
Target Company and acquired company.
Stockholder voting rights and dilution- The shareholders of both the company may experience
dilution of voting power due to increase of shares during merger process. This normally takes
place when stock in exchange of stock takes place. In other form, this can take place while
settlement with the target company’s stockholders by giving cash in exchange of shares.
Change of management- Whenever M&A takes place, certainly changes take place in
management of Target Company majorly. Such changes may affect the shareholding of the
target company as the board may surrender their entire shares to the acquiring company which
would change the controlling right of organization management. [Limmack, R.J., 1991.]
Target Company Stakeholder
They are the one whose stakes are in risk when the merger and acquisition takes place. Of
course it is wrong to say that whenever any M&A takes place, the target firm share holder
would face loss all the time. There can be two situation which is possible here i.e. either the
shareholders will lose their desired return on investment or would get more than their desired
earning. This depends on cases. [Lubatkin, M., 2013.]
To understand the benefit or loss for the target company, we are considering various
circumstances by which we will try to identify gain or loss.
In this case the shareholder of target Company (B) can gain as the value gain (APP) is
considered as fixed as the deal is closed. Thus the shareholder of the acquirer will gain only
when the NRS exceed APP has paid. For NRS it is the additional FCF for synergies as the Merger
and acquisition will be discounted by using WACC.

For NRS < APP, it will considered as the destroy value or it is for Merger and Acquisition failure.
The break-even point of the value gain to the shareholder for acquirer and the target is
considered as below:
The value gain of shareholder of acquirer (Company A) = Value gain of target’s shareholder
(Company B)
Or, NRS-APP = APP
Or, NRS = 2APP
As per the below calculation, it can be checked 66% of M&A failure means the same percentage
or 66% of the acquirer cannot be achieved in the long run as NRS=APP. So it means there is not
more than 34% of shareholder of Acquirer will gain the shareholder target.
Short run-
It is the situation where the target shareholder receive immediate gain or loss after merger and
acquisition. There is no such definition of short run period, thus let us assume the period is 1
year.
Let us take a case-
Company-A which is looking for acquiring Company B who is in similar business. Here the
situation,
Company-A market capitalization- $5 billion made of (50 m shares @$100 per share)
Company-B- market capitalization- $2.8 billion -40 million shares @ 70 each
Reason behind merger- Synergy
Case-1- Consideration will be settled in cash
Suppose the Company-A declares a cash payment of $100 each of each shares of Company B.
Thus benefit that target company shareholder would get immediately on shares-

Let Mr. Alex has 120 shares of Company-B
According to market value, his shareholder wealth would be- 120*70= $8400
After the merger, he would receive- 120*100= $12000
Overall benefit generated- $(12000-8400) = $3600
Case-2- Shares in exchange of shares
Suppose Company-A declares a stock exchange of 1:1 for all shareholders of Company-B on
account of merger.
This means all 40M shares will be issued to the then Company-B shareholders @$100 each.
Clearly here the shareholders of Company B is getting shares of Company-A (after merger)
without any extra payment which they can sell in stock market immediately at a profit of $30
per share.
How? - Taking the case of Mr. Alex, whose worth prior to merger was- 120*70= $8400
Now, after merger he would get 120 shares of Company-A at $100 thus his worth would be -
120*100= $12000
If he sells immediately, then he would gain- $(12000-8400) = $3600. [Moeller, T., 2005.]
Case-3- Partial settlement in cash and rest in shares
Here in this case, let us assume Company-A is ready to pay $ 30 per share in cash and rest as
shares in new company on 1:1 basis.
At present wealth of Alex is – 120*70= $8400
Now under the settlement policy,
Alex would receive cash- 120*30= $3600
As Alex has got cash thus remaining worth is 8400-3600= $4800
The no. of shares- 4800/70= 69 shares approx.

Thus he would get- 69 shares @100 each = $6900
Total value he got- 3600+6900= $10500
Profit- 10500-8400= $2100
From the above three cases we found that in each of case the target company shareholder is
getting the benefit. In first and second case he is able to get a profit of $3600 from the
investment in Company B after merger while in third case, he is getting a profit of $2100.
Condition where this gain would occur
This hypothetical case we took under study has certain assumptions on which we carried out
the gain situation in short run. The assumptions are-
 Company-B is having good market presence and successful operation over the period of
time prior to merger.
 The board members and shareholders are ready to accept the consideration offered by
Company A under acquisition plan.
 The price level has not changed abnormally during the merger period.
 Shares are readily available for trade in share market. [Piloff, S.J.et.al1998]
 Company A has sufficient cash and bank balances to settle purchase consideration on cash.
 Company-A shareholders gave at least 51% vote in favour of any one of the above cases.
Real-Life case- Sanofi-Aventis and Genzyme Corp (2010)
In this case Sanofi was desperately wanted to acquire Genzyme Corp in order to get better
position in market. As Genzyme was at better position to Sanofi, it has to offer a high price
(higher premium rate) to get 90% of total control of that company. The deal locked in $24.5
billion. Here the shareholders of the Genzyme Corp gained around 30-40% profit over the
wealth they had prior to deal. [Nandy, D. et.al2009]
Loss situation
There can be loss situation for the target company stakeholders at times. Although no
stakeholder would like to face loss and also the management wouldn’t allow such deals where

the stakeholders would face loss but at times it happens where the target company
stakeholders are settled with lower value.
This can result in circumstances where-
 The firm’s market share price is continuously declining over a long period of time and it is
also forecasted to go lower.
 When the business debt capital is getting higher which is difficult to pay off.
 When the organization has suffered from financial crisis which can’t be recovered by the
organization and cost of operation is gone beyond the control.
In such circumstances normally, management either declares liquidation or offers other
companies to but the stakes at a price which is normally lower to worth they had before such
crisis.
Many at times to protect loss, strategies like management buyout, poison pills, super majority,
golden parachute etc. are adopted to stop any hostile offering over the company.
Medium and long run
Like short run, it is very difficult to say the medium run period. Still we can consider medium
and long run period as from 20-25 months from the period after merger and acquisition take
place. In this case also there is 50:50 chances of gain and loss for the target company
stakeholders.
Let us discuss each-
Case-1- Super majority
It is the case where around 60-70% of the stakeholders denies any hostile merger and
acquisition offer acceptance until the interested company brings better offer. This is a strategy
of delaying the proposal so that they would get better value on the shares. [Engelhardt, C.,
2017.]