MERGERS
EXCHANGE RATIO DISCUSSION
• A ER is when a company is acquiring another company and it can happen either via payment of cash OR exchange of
shares
• When it is an exchange of shares = we need to determine the ER
• The ER is defined as the number of shares in the acquiring company that is exchanged for one share in the target
company
• 2 important factors that will affect ER
1) Whether the acquirer is willing to experience a dilution in relative earnings per share
2) ^^ but market value per share
• If the current market value of synergy benefits CANNOT be applied, the valuation methods are relevant to
determine the appropriate ER incorporating synergy benefits
• The negotiation process between shareholders of the acquirer & target will determine who receives synergy
benefits
• A MIN and MAX ER will then be determined
• The agreed upon ER will then be determined by negotiation between the Min & Max boundaries as mentioned
above
Factors to consider if we should merge
• The merger company must exclude all emotional factors to make sure that the take-over is a pure business decision
• What does the target companies most recent audited fin statements look like
• Will Target company be able to have a sustainable future OR if the company has a cash shortage is this an indication
of many start ups failing soon after inception
• How well is the target company managed, is it possible to increase cash flow by applying better management
• How will the acquirers role in the industry change
• Would there be no retribution from other competitors
• How will the market and shareholders react to the news of the take over
• Does the acquirer want to be associated with a company like the target
• Does the transaction require a majority vote of shareholders and if so how probable is it that the majority vote
would be obtained
STEPS to realize synergy advantages
➢ Combine head office functions, (IT & finance) where duplications occur, doing this can lead to savings in wages and
salaries (economies of scale)
➢ Where there is a duplication of facilities (head office building) it can be sold OR leases can be terminated
➢ Operation activities can be better optimized
➢ Since the company is larger after the takeover, it will have more bargaining power to negotiate better prices with
suppliers
➢ Decrease of finance costs
➢ Gaining access to products & product lines of other company
➢ Tax considerations – possible utilization of assessed loss
➢ Diversification = new markets or a bigger market share
➢ Improved management which may result in increased returns
, DANGERS for failure of acquisition
➢ Target company’s staff will be in service of the new company and may not fit in to the NEW culture which could
negatively affect productivity
➢ Key staff of the target company can decide to look for new jobs rather than working in the new company which will
negatively affect operations
➢ If staff are dismissed after the acquisition it will have a negative impact on the morale of the remaining staff
members
➢ The reorganization of operations can lead to inefficiency since new procedures, systems must be first me mastered
by staff
➢ Success rates of mergers are relatively low and if merger fails it is possible that the share price of the new group will
decrease
DISINVESTMENT
POSITIVES NEGATIVES
• Core business • Disruption
The aim of the disinvestment is so that the company A sell off can disrupt the rest of the organization,
can concentrate on its core business especially if key players disappear as a result
This is where the company’s strengths lie and so the
max added value for the shareho9lders can be
achieved
• Investment opportunities • Removal of economies of scale
The sell off will raise Rx cash which could be used to There may be shared operations (eg treasury
invest in other suitable business opportunities management) which benefited from economies of
scale
These will be reduced when a part of the organization
is sold
• Ease of control • Impact on earnings
Concentrating management efforts on core parts of Compare the earnings of the sold to the old
business may reduce any control/ management If the sold is higher earning growths then the
problems disinvestment may result in lower earnings for the
group
• Protection against takeover
The rest of the group may be protected from take
over If a attractive part of the business is sold
A sub may be attractive if it out-performed the rest of
the industry and if interest from other parties was
already visible
conclusions
- Less than 25% of all mergers are successful
- If the transaction fails all synergy benefits will be eradicated and existing value for both shareholders could also be eradicated
o Which could influence both companies shareholders negatively irrespective of beneficial exchange ratios
o In this case employees could lose their jobs which could cause negative publicity and lead to a decreased profits AND
less synergy benefits
- Integration of the 2 companies operations could be difficult if the manner in which business is conducted differs a lot
EXCHANGE RATIO DISCUSSION
• A ER is when a company is acquiring another company and it can happen either via payment of cash OR exchange of
shares
• When it is an exchange of shares = we need to determine the ER
• The ER is defined as the number of shares in the acquiring company that is exchanged for one share in the target
company
• 2 important factors that will affect ER
1) Whether the acquirer is willing to experience a dilution in relative earnings per share
2) ^^ but market value per share
• If the current market value of synergy benefits CANNOT be applied, the valuation methods are relevant to
determine the appropriate ER incorporating synergy benefits
• The negotiation process between shareholders of the acquirer & target will determine who receives synergy
benefits
• A MIN and MAX ER will then be determined
• The agreed upon ER will then be determined by negotiation between the Min & Max boundaries as mentioned
above
Factors to consider if we should merge
• The merger company must exclude all emotional factors to make sure that the take-over is a pure business decision
• What does the target companies most recent audited fin statements look like
• Will Target company be able to have a sustainable future OR if the company has a cash shortage is this an indication
of many start ups failing soon after inception
• How well is the target company managed, is it possible to increase cash flow by applying better management
• How will the acquirers role in the industry change
• Would there be no retribution from other competitors
• How will the market and shareholders react to the news of the take over
• Does the acquirer want to be associated with a company like the target
• Does the transaction require a majority vote of shareholders and if so how probable is it that the majority vote
would be obtained
STEPS to realize synergy advantages
➢ Combine head office functions, (IT & finance) where duplications occur, doing this can lead to savings in wages and
salaries (economies of scale)
➢ Where there is a duplication of facilities (head office building) it can be sold OR leases can be terminated
➢ Operation activities can be better optimized
➢ Since the company is larger after the takeover, it will have more bargaining power to negotiate better prices with
suppliers
➢ Decrease of finance costs
➢ Gaining access to products & product lines of other company
➢ Tax considerations – possible utilization of assessed loss
➢ Diversification = new markets or a bigger market share
➢ Improved management which may result in increased returns
, DANGERS for failure of acquisition
➢ Target company’s staff will be in service of the new company and may not fit in to the NEW culture which could
negatively affect productivity
➢ Key staff of the target company can decide to look for new jobs rather than working in the new company which will
negatively affect operations
➢ If staff are dismissed after the acquisition it will have a negative impact on the morale of the remaining staff
members
➢ The reorganization of operations can lead to inefficiency since new procedures, systems must be first me mastered
by staff
➢ Success rates of mergers are relatively low and if merger fails it is possible that the share price of the new group will
decrease
DISINVESTMENT
POSITIVES NEGATIVES
• Core business • Disruption
The aim of the disinvestment is so that the company A sell off can disrupt the rest of the organization,
can concentrate on its core business especially if key players disappear as a result
This is where the company’s strengths lie and so the
max added value for the shareho9lders can be
achieved
• Investment opportunities • Removal of economies of scale
The sell off will raise Rx cash which could be used to There may be shared operations (eg treasury
invest in other suitable business opportunities management) which benefited from economies of
scale
These will be reduced when a part of the organization
is sold
• Ease of control • Impact on earnings
Concentrating management efforts on core parts of Compare the earnings of the sold to the old
business may reduce any control/ management If the sold is higher earning growths then the
problems disinvestment may result in lower earnings for the
group
• Protection against takeover
The rest of the group may be protected from take
over If a attractive part of the business is sold
A sub may be attractive if it out-performed the rest of
the industry and if interest from other parties was
already visible
conclusions
- Less than 25% of all mergers are successful
- If the transaction fails all synergy benefits will be eradicated and existing value for both shareholders could also be eradicated
o Which could influence both companies shareholders negatively irrespective of beneficial exchange ratios
o In this case employees could lose their jobs which could cause negative publicity and lead to a decreased profits AND
less synergy benefits
- Integration of the 2 companies operations could be difficult if the manner in which business is conducted differs a lot
