MERGERS AND ACQUISITIONS
1. Be able to classify M&As
a. Merger:
- Board of directors of two firms agree to combine and seek
shareholder approval for the combination (usually ordinary
resolution)
- The target firm ceases to exist and becomes part of the acquiring
firm
b. Acquisition
- One company (acquiror) buys & absorbs another company
(target), retains identity. Often excluding liabilities
c. Consolidation:
- New firm is created after the merger and both firms receive stock
in the new firm
d. Tender Offer
- One firm offers to buy the outstanding stock of the other firm at a
specified price and communicates the offer to shareholders
through adverts/mailings
- By doing so, it bypasses the incumbent management and board of
directors of the target firm
May be delayed if some target shareholders hold out for
more money
Can obtain less than 100% interest
- Existing employee contracts maintained
- The acquired firm will continue to exist as long as there are
minority shareholders who refuse the tender
- Most tender offers become mergers if acquiring firm is able to
gain control (>50%)
- Sometimes used for hostile takeovers
e. Acquisition of assets
- One firm acquires the assets of another through a formal vote by
the shareholders (ordinary resolution) of the firm being acquired.
, MERGERS AND ACQUISITIONS
-Assets can be used as security to raise a loan to assist buyer (no
contravention of section 38 of Companies Act).
- Interest on loan will be tax deductible.
- Stamp duty on creation of shares saved.
- Liabilities of firm are not transferred
f. Management/Leveraged Buyouts
- Firm is acquired by own managers or a group of investors usually
with tender offer
- After this, the acquired firm can cease to be a publicly listed firm
and instead become a private business
2. Define the various terms associated with M&A activity
TYPES
- Horizontal
Same industry (often competitors), normally accompanied
by economies of scale and reduced competition (2 soft-drink
manufacturers).
- Vertical
Involves firms with different steps of the production process
(a soft-drink manufacturer might buy a sugar producer
(expanding backward) or a fast-food chain as an outlet for
its product (expanding forward).
- Congeneric
Related industries, but different products (e.g. sharing
distribution channels of clients - bank and leasing Co.)
- Conglomerate
Unrelated industries; little in common, diversifying risk
(Food producer acquired by Computer Co.)
ROLE-PLAYERS
- Acquirer:
Management: Usually initiates offer and negotiates on
behalf of shareholders.
Shareholders: Generally passive in the deal (i.e. approval
not required).
- Target:
Management: directly or indirectly involved through board.
Board: negotiates on behalf of shareholders. Can
recommend offer to shareholders.
Shareholders: ultimately approves or rejects deal.
- Advisors:
Investment bankers
Lawyers (sell side and buy side)
- Regulatory authorities
Government
Stockbrokers
1. Be able to classify M&As
a. Merger:
- Board of directors of two firms agree to combine and seek
shareholder approval for the combination (usually ordinary
resolution)
- The target firm ceases to exist and becomes part of the acquiring
firm
b. Acquisition
- One company (acquiror) buys & absorbs another company
(target), retains identity. Often excluding liabilities
c. Consolidation:
- New firm is created after the merger and both firms receive stock
in the new firm
d. Tender Offer
- One firm offers to buy the outstanding stock of the other firm at a
specified price and communicates the offer to shareholders
through adverts/mailings
- By doing so, it bypasses the incumbent management and board of
directors of the target firm
May be delayed if some target shareholders hold out for
more money
Can obtain less than 100% interest
- Existing employee contracts maintained
- The acquired firm will continue to exist as long as there are
minority shareholders who refuse the tender
- Most tender offers become mergers if acquiring firm is able to
gain control (>50%)
- Sometimes used for hostile takeovers
e. Acquisition of assets
- One firm acquires the assets of another through a formal vote by
the shareholders (ordinary resolution) of the firm being acquired.
, MERGERS AND ACQUISITIONS
-Assets can be used as security to raise a loan to assist buyer (no
contravention of section 38 of Companies Act).
- Interest on loan will be tax deductible.
- Stamp duty on creation of shares saved.
- Liabilities of firm are not transferred
f. Management/Leveraged Buyouts
- Firm is acquired by own managers or a group of investors usually
with tender offer
- After this, the acquired firm can cease to be a publicly listed firm
and instead become a private business
2. Define the various terms associated with M&A activity
TYPES
- Horizontal
Same industry (often competitors), normally accompanied
by economies of scale and reduced competition (2 soft-drink
manufacturers).
- Vertical
Involves firms with different steps of the production process
(a soft-drink manufacturer might buy a sugar producer
(expanding backward) or a fast-food chain as an outlet for
its product (expanding forward).
- Congeneric
Related industries, but different products (e.g. sharing
distribution channels of clients - bank and leasing Co.)
- Conglomerate
Unrelated industries; little in common, diversifying risk
(Food producer acquired by Computer Co.)
ROLE-PLAYERS
- Acquirer:
Management: Usually initiates offer and negotiates on
behalf of shareholders.
Shareholders: Generally passive in the deal (i.e. approval
not required).
- Target:
Management: directly or indirectly involved through board.
Board: negotiates on behalf of shareholders. Can
recommend offer to shareholders.
Shareholders: ultimately approves or rejects deal.
- Advisors:
Investment bankers
Lawyers (sell side and buy side)
- Regulatory authorities
Government
Stockbrokers
