Fundamental
transactions
Mergers and Acquisitions
• Mergers and acquisitions (usually abbreviated
M&A) refers to the aspect of corporate strategy,
corporate finance and management dealing with
the buying, selling, dividing and combining of
different companies
• These are transactions or a series of transactions,
involving two or more companies, resulting in the
survival of one or more of the merging companies
or the formation of one or more new companies
• Put differently in a merger, the assets and liabilities
of two or more companies are pooled together in a
single company which could either be one of the
merging companies or a newly formed company
• The key principle behind buying a
company is to create shareholder value
over and above that of the sum of the
two companies.
• Two companies together are more
valuable than two separate companies at least, that's the reasoning behind
M&A
• This rationale is particularly alluring to
companies when times are tough.
• Strong companies will act to buy other
companies to create a more
competitive, cost efficient company. The
companies will come together hoping to
gain a greater market share or to
achieve greater efficiency.
• Because of these potential benefits,
target companies will often agree to be
purchased when they know they cannot
survive alone
• The distinction between a merger and
an acquisition has become somewhat
blurred over time but important
difference still remain
• a merger is a business combination and
occurs when two companies combine
together to form a new enterprise
altogether, and neither of the previous
companies survives independently
• Whether a purchase is perceived as
being a "friendly" one or a "hostile"
depends significantly on how the
proposed acquisition is communicated
to and perceived by the target
company's board of directors,
employees and shareholders.
• It is normal for M&A deal
communications to take place in a socalled 'confidentiality bubble' wherein
the flow of information is restricted
pursuant to confidentiality agreements
• In the case of a friendly transaction, the
companies cooperate in negotiations; in
the case of a hostile deal, the board
and/or management of the target is
unwilling to be bought or the target's board
has no prior knowledge of the offer.
• Hostile acquisitions can, and often do,
ultimately become "friendly", as the
acquiror secures endorsement of the
transaction from the board of the acquiree
company. This usually requires an
improvement in the terms of the offer
and/or through negotiation.
• An acquisition is the purchase of one
business or company by another
company or other business entities
• "Acquisition" usually refers to a purchase
of a smaller firm by a larger one.
Sometimes, however, a smaller firm will
acquire management control of a larger
and/or longer-established company and
retain the name of the latter for the postacquisition combined entity. This is known
as a reverse takeover.
Types of mergers
• ‘pooling type’ merger:- this is the traditional
concept of a merger where two companies
are pooled into one company that holds
the combined pool of assets and liabilities
previously held severally by the two
constituent merging companies
• The two sets of shareholders of the merging
companies continues to participate as
shareholders in the surviving company
• In this merger model, the shareholders of
the target (or disappearing company)
usually receive shares in the acquiring
company ( or surviving company)
• In this event, the shares of the
disappearing company are conveniently
converted automatically, by operation
of law, into shares of the surviving
company on the implementation of the
merger agreement
• Triangular type merger:- the great
disadvantage of the pooling type merger is the
general rule that the liabilities of the target
company (disappearing
company)automatically become the liabilities
of the acquiring company
• This may discourage mergers
• The triangular merger provides aw ay around
this problem
• One of its primary benefits is that it enables an
acquiring company to avoid the assumption of
the liabilities of the target company
• As the name suggests the triangular type
merger involves three companies
• On the target side there is (Company C)and
on the acquiring side are two companies ,
(Company A and Company B)
• Company A would be the holding company
of Company B which is invariably a wholly
owned subsidiary of Company A
• Company B is usually a shell company holding
no assets or liabilities of its own. It functions as
an acquisition vehicle in the merger with the
target company (Company C)
• The merger between Company A and Company
C is structured in such a way that Company C
mergers into Company A’s wholly owned
subsidiary Company B
• Company C is the disappearing company and
after the merger it would be ‘housed’ into
Company B
• Since Company B was a shell the effect of the
merger would be that the business of Company C
effectively becomes the business of Company B
• The triangular merger is A very important merger
model because it allows the acquiring company to
ring fence the liabilities of the target company
•
• A 2nd advantage is that under a
triangular merger neither the business of
Company A and Company C need
disappear
• The target company’s business, customer
relations and goodwill may accordingly
be maintained relatively intact
• This is especially convenient where the
business of Company A and Company C
are of a different nature and best kept
separate
• Horizontal merger :- Two companies that are in direct
competition and share the same product lines and
markets.
• Vertical merger :- A customer and company or a
supplier and company. Think of a cone supplier
merging with an ice cream maker.
• Market-extension merger :- Two companies that sell
the same products in different markets.
• Product-extension merger :- Two companies selling
different but related products in the same market.
• Conglomeration :- Two companies that have no
common business areas