FINANCIAL
MANAGEMENT
354
NOTES &
QUESTIONS/ANSWERS
(BASED ON REGULARLY
ASKED PAST QUESTIONS)
, CHAPTER 1
INTRODUCTION
TYPES OF M&As CATEGORIZED
ACCORDING TO STRATEGIC
OBJECTIVES
MERGERS
A transaction where a new entity is created from two/ more existing entities.
A (acquirer) + B (target) = C (new entity)
Mergers are not restricted to private or publicly listed companies, so we use
the term ‘entity’
, CHAPTER 1
INTRODUCTION
MERGERS
HORIZONTAL MERGERS
When two/more competitors, in the same industry, combine forces.
Undertaken to reduce the level of competition in an industry.
Joining forces allows rivals to increase their market share and hence their
ability to negotiate better prices with suppliers.
VERTICAL MERGERS
When companies operating at different levels in a supply chain decide to merge.
Entities generally undertake backward & forward vertical mergers to gain
control over their supply chain.
Backward vertical: when a company merges with one that operates further
back in the supply chain.
Forward vertical: when a company merges with one that operates closer to the
end consumer.
CONGLOMERATE MERGERS
When entities operating in unrelated industries join forces.
Parties are neither competitors nor do they have a buyer-seller relationship.
Help stabilize revenue and returns.
CONGENERIC MERGERS
The acquiring company and target company are in the same industry but have
different business lines and/ or products.
ACQUISITIONS
A transaction where an acquirer obtains controlling interest of a target. The
shareholder who owns 50% or more of a company’s issued ordinary shares is
regarded as its controlling or majority shareholder.
A+B=A
, CHAPTER 1
INTRODUCTION
ACQUISITIONS
FRIENDLY ACQUISITION
The targets board considers the acquirers offer (or bid) as fair and agrees that
the deal would be mutually beneficial for both parties. They call on shareholders
to approve the proposal.
ACQUISITION TURNS ‘HOSTILE’
Occurs when the targets board outrightly rejects an acquirers offer. This usually
happens when a target receives an unsolicited/ unwanted bid or when the offer
price is regarded as being too low.
THE M&A PROCESS
OVERVIEW OF STEPS
1. Identify a Potential Target
2. Plan the Deal
3. Prepare an Amalgamation or Merger Agreement
4. Approach the Target’s Board
5. Seek Approval for the Deal
6. Integrate the Entities
7. Conduct a Post-integration Analysis
STEP 1: IDENTIFY A POTENTIAL
TARGET
Companies can either be cost leaders or cost differentiators irrespective of
whether they cater for the mass market or niche (subset of mass market)
market.
The strategic motives or objectives of a proposed M&A should strengthen the
acquirers competitive advantage.
An acquisition active company is one that undertakes several acquisitions in a
year (whether in the same or a different industry). A dedicated M&A
department is tasked with identifying a suitable target.
MANAGEMENT
354
NOTES &
QUESTIONS/ANSWERS
(BASED ON REGULARLY
ASKED PAST QUESTIONS)
, CHAPTER 1
INTRODUCTION
TYPES OF M&As CATEGORIZED
ACCORDING TO STRATEGIC
OBJECTIVES
MERGERS
A transaction where a new entity is created from two/ more existing entities.
A (acquirer) + B (target) = C (new entity)
Mergers are not restricted to private or publicly listed companies, so we use
the term ‘entity’
, CHAPTER 1
INTRODUCTION
MERGERS
HORIZONTAL MERGERS
When two/more competitors, in the same industry, combine forces.
Undertaken to reduce the level of competition in an industry.
Joining forces allows rivals to increase their market share and hence their
ability to negotiate better prices with suppliers.
VERTICAL MERGERS
When companies operating at different levels in a supply chain decide to merge.
Entities generally undertake backward & forward vertical mergers to gain
control over their supply chain.
Backward vertical: when a company merges with one that operates further
back in the supply chain.
Forward vertical: when a company merges with one that operates closer to the
end consumer.
CONGLOMERATE MERGERS
When entities operating in unrelated industries join forces.
Parties are neither competitors nor do they have a buyer-seller relationship.
Help stabilize revenue and returns.
CONGENERIC MERGERS
The acquiring company and target company are in the same industry but have
different business lines and/ or products.
ACQUISITIONS
A transaction where an acquirer obtains controlling interest of a target. The
shareholder who owns 50% or more of a company’s issued ordinary shares is
regarded as its controlling or majority shareholder.
A+B=A
, CHAPTER 1
INTRODUCTION
ACQUISITIONS
FRIENDLY ACQUISITION
The targets board considers the acquirers offer (or bid) as fair and agrees that
the deal would be mutually beneficial for both parties. They call on shareholders
to approve the proposal.
ACQUISITION TURNS ‘HOSTILE’
Occurs when the targets board outrightly rejects an acquirers offer. This usually
happens when a target receives an unsolicited/ unwanted bid or when the offer
price is regarded as being too low.
THE M&A PROCESS
OVERVIEW OF STEPS
1. Identify a Potential Target
2. Plan the Deal
3. Prepare an Amalgamation or Merger Agreement
4. Approach the Target’s Board
5. Seek Approval for the Deal
6. Integrate the Entities
7. Conduct a Post-integration Analysis
STEP 1: IDENTIFY A POTENTIAL
TARGET
Companies can either be cost leaders or cost differentiators irrespective of
whether they cater for the mass market or niche (subset of mass market)
market.
The strategic motives or objectives of a proposed M&A should strengthen the
acquirers competitive advantage.
An acquisition active company is one that undertakes several acquisitions in a
year (whether in the same or a different industry). A dedicated M&A
department is tasked with identifying a suitable target.
