Chapter 2: Types of M&A Transactions
Learning Outcomes
Differentiate between horizontal, vertical and conglomerate mergers
Discuss the main characteristics of a hostile takeover
Differentiate between joint ventures and strategic alliances
Explain the rationale behind franchising
Discuss the benefits of franchising from both the franchisor and franchisee’s point of view
Describe the main characteristics of an equity carve out
Describe what is meant by a spin-off
Argue in favour of dual-class capitalisation
Describe the main drivers behind leverage buyouts
Describe the rationale behind leveraged recapitalisation
Demonstrate the effect of increased leverage on the market value of a company
Explain the rationale behind employee share ownership plans
Explain the purpose of tracking stocks
Discuss the impact of the BBBEE Act (No.53 of 2003)on M&A activity in South Africa
Mergers
- Any transaction that creates a new economic unit from two or more existing economic units.
- In some cases the smaller company dissolves into the larger one
- In South Africa, reference is made to amalgamations
- It’s important to remember that acquiring company obtains all of the assets and liabilities of the target
- Mergers are friendly, negotiated deals where both parties arrive at a mutually beneficial agreement
Tender Offers
- This refers to a person or company that makes a direct offer to the shareholders of the target requesting
them to sell their shares at a specified price.
- Both tender offers and mergers can turn hostile
- Tender offers are however more often associated with hostile takeovers (bypass the directors and go
straight to the shareholders)
Horizontal Mergers
- Merging of two companies that operate in the same industry and so compete in some manner
- Can lead to monopolies and thus is subject to approval by the Competition Commission
- Three levels to Competition Authorities in South Africa – Competition Commission, Competition Tribunal and
Competition Appeal Court
1.) Competition Commission – statutory body, investigates, controls and evaluates restrictive business
practices, abuse of dominant positions in order to achieve equity and efficiency
2.) Competition Tribunal – jurisdiction throughout South Africa, adjudicates matters in accordance with the
Competition Act. Deals with larger M&As and can overturn Commissions decisions
3.) Competition Appeal Court – same authority as a high court
1|Page
, - Benefits of Horizontal Mergers:
Access to new markets
Increased market share
Less competition
- Industry roll-ups can be classified as horizontal mergers
- Horizontal mergers and roll-up’s undertaken to achieve economies of scale, manufacturing, marketing, IT
and distribution.
Vertical Mergers
- When companies operating on different levels of the supply chain merge
- Usually merge to decrease the costs of acquiring and distributing products and services.
- Largely pro-competitive since these transactions aid with the competitiveness in the industry
- If an extremely large transaction, still need permission from the Competition Commission
- Example: Aspen/ Fine Chemicals pharmaceutical company and manufacturer of narcotics and non-
narcotics
Conglomerate Mergers
- When companies from different and unrelated industries combine forces
- These are often undertaken to 1.) Access a new product line
2.) Gain access to new geographical regions
- Companies may be seeking diversification (eg. Virgin)
- Very seldom successful since there are many challenges with regard to managing diverse companies
- However if get the management right, can be a huge success
Acquisitions
- Any transaction where the acquiring company gains controlling interest of the target company
- Target company often becomes a subsidiary of the acquiring company
- These transactions can either be friendly or hostile
- Friendly transactions – negotiate a mutually beneficial agreement between the firms ( Nestle & Pfizer )
- Hostile transactions – bypass the directors and enter into negotiations with the shareholders once the
directors reject the proposal. (SAB Miller and Fosters)
Reverse M&As
- The unbundling of a merged entity through a spin-off or divestiture
- Companies unbundle to focus on their core competencies refocus there attention
- The disadvantage is that it is costly to merge and then unbundle.
Mergers & Acquisitions Undertaken to Achieve Growth
- In order to achieve growth, companies engage in:
1.) Joint Ventures
2.) Strategic Alliances
3.) Franchising Agreements
2|Page
Learning Outcomes
Differentiate between horizontal, vertical and conglomerate mergers
Discuss the main characteristics of a hostile takeover
Differentiate between joint ventures and strategic alliances
Explain the rationale behind franchising
Discuss the benefits of franchising from both the franchisor and franchisee’s point of view
Describe the main characteristics of an equity carve out
Describe what is meant by a spin-off
Argue in favour of dual-class capitalisation
Describe the main drivers behind leverage buyouts
Describe the rationale behind leveraged recapitalisation
Demonstrate the effect of increased leverage on the market value of a company
Explain the rationale behind employee share ownership plans
Explain the purpose of tracking stocks
Discuss the impact of the BBBEE Act (No.53 of 2003)on M&A activity in South Africa
Mergers
- Any transaction that creates a new economic unit from two or more existing economic units.
- In some cases the smaller company dissolves into the larger one
- In South Africa, reference is made to amalgamations
- It’s important to remember that acquiring company obtains all of the assets and liabilities of the target
- Mergers are friendly, negotiated deals where both parties arrive at a mutually beneficial agreement
Tender Offers
- This refers to a person or company that makes a direct offer to the shareholders of the target requesting
them to sell their shares at a specified price.
- Both tender offers and mergers can turn hostile
- Tender offers are however more often associated with hostile takeovers (bypass the directors and go
straight to the shareholders)
Horizontal Mergers
- Merging of two companies that operate in the same industry and so compete in some manner
- Can lead to monopolies and thus is subject to approval by the Competition Commission
- Three levels to Competition Authorities in South Africa – Competition Commission, Competition Tribunal and
Competition Appeal Court
1.) Competition Commission – statutory body, investigates, controls and evaluates restrictive business
practices, abuse of dominant positions in order to achieve equity and efficiency
2.) Competition Tribunal – jurisdiction throughout South Africa, adjudicates matters in accordance with the
Competition Act. Deals with larger M&As and can overturn Commissions decisions
3.) Competition Appeal Court – same authority as a high court
1|Page
, - Benefits of Horizontal Mergers:
Access to new markets
Increased market share
Less competition
- Industry roll-ups can be classified as horizontal mergers
- Horizontal mergers and roll-up’s undertaken to achieve economies of scale, manufacturing, marketing, IT
and distribution.
Vertical Mergers
- When companies operating on different levels of the supply chain merge
- Usually merge to decrease the costs of acquiring and distributing products and services.
- Largely pro-competitive since these transactions aid with the competitiveness in the industry
- If an extremely large transaction, still need permission from the Competition Commission
- Example: Aspen/ Fine Chemicals pharmaceutical company and manufacturer of narcotics and non-
narcotics
Conglomerate Mergers
- When companies from different and unrelated industries combine forces
- These are often undertaken to 1.) Access a new product line
2.) Gain access to new geographical regions
- Companies may be seeking diversification (eg. Virgin)
- Very seldom successful since there are many challenges with regard to managing diverse companies
- However if get the management right, can be a huge success
Acquisitions
- Any transaction where the acquiring company gains controlling interest of the target company
- Target company often becomes a subsidiary of the acquiring company
- These transactions can either be friendly or hostile
- Friendly transactions – negotiate a mutually beneficial agreement between the firms ( Nestle & Pfizer )
- Hostile transactions – bypass the directors and enter into negotiations with the shareholders once the
directors reject the proposal. (SAB Miller and Fosters)
Reverse M&As
- The unbundling of a merged entity through a spin-off or divestiture
- Companies unbundle to focus on their core competencies refocus there attention
- The disadvantage is that it is costly to merge and then unbundle.
Mergers & Acquisitions Undertaken to Achieve Growth
- In order to achieve growth, companies engage in:
1.) Joint Ventures
2.) Strategic Alliances
3.) Franchising Agreements
2|Page
