Description
This is a presentation that includes the basics of mergers and acquisitions in detail.
Merger - A Merger may be defined as the
combination of two or more independent business corporations into a single enterprise, usually involving the absorption of one or more firms by a dominant firm. Mergers may be broadly classified as Horizontal, Vertical.
enterprise of acquiring, directly or indirectly of shares, voting rights, assets or control over the management, of another enterprise .
Acquisition may be defined as an act of one
?Target: the corporation being purchased, when
there is a clear buyer and seller. ?Bidder: The corporation that makes the purchase, when there is a clear buyer and seller. Also known as the acquiring firm. ?Friendly: The transaction takes place with the approval of each firm’s management ?Hostile: The transaction is not approved by the management of the target firm.
?Strategic: The combined FCFs (Free Cash Flows) of
the merged operation are greater than the sum of the individual cash flows. ?Financial: The cash flows and also the market value of the target are below their true value, due to perhaps inefficient management. Such firms are typically restructured after the acquisition. ?It is usually the case that shareholders can diversify much more easily than can a corporation. ?Individuals can easily diversify by buying shares in mutual funds
Horizontal (b/w competitive companies) • A merger in which two firms in the same industry combine. • Often in an attempt to achieve economies of scale and/or scope. Vertical (b/w buyer seller r/ship companies) • A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. • Often in an attempt to control supply or distribution channels.
Conglomerate (none of the above) • A merger in which two firms in unrelated businesses combine. • Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams Cross-border (International) M&As • A merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target company.
?
M&A activity seems to come in ‘waves’ through the economic cycle domestically, or in response to globalization issues such as:
?
? ?
Formation and development of trading zones or blocks (EU, North America Free Trade Agreement Deregulation Sector booms such as energy or metals
Table 15 - 1 M&A Activity in Canada
Period
1895 - 1904
Major Characteristics of M&A Activity
• Driven by economic expansion, U.S. transcontinental railroad, and the development of national U.S. capital markets • Characterized by horizontal M&As • 60 percent occurred in fragmented markets (chemical, food processing, mining) • Driven by growth in transportation and merchandising, as well as by communications developments • • • • • • • • • • • • • Characterized by vertical integration Driven by evasion of price and quota controls Characterized by conglomerate M&As Driven by aerospace industry Some firms merged to play the earnings per share "growth game" (discussed in the section The Effect of an Acquisition on Earnings per Share) Characterized by leveraged buyouts and hostile takeovers Many international M&As (e.g., Chrysler and Daimler-Benz, Seagram and Martell) Strategic motives were advanced (although the jury is still out on whether this was truly achieved) High technology/Internet M&As Many stock-financed takeovers, fuelled by inflated stock prices Many were unsuccessful and/or fell through as the Internet "bubble" burst Resource-based/international M&A activity Fuelled by strong industry fundamentals, low financing costs, strong economic conditions
1922 - 1929
1940 - 1947 1960s
1980s 1990s
1999 - 2001
2005 - ?
Source: Adapted in part from Weston, J.F., Wang, F., Chung, S., and Hoag, S. Mergers, Restructuring, and Corporate Control. Toronto: Prentice-Hall Canada, Inc., 1990.
Operating Synergies 1. Economies of Scale ? Reducing capacity (consolidation in the number of firms in the industry) ? Spreading fixed costs (increase size of firm so fixed costs per unit are decreased) ? Geographic synergies (consolidation in regional disparate operations to operate on a national or international basis)
2. Economies of Scope ? Combination of two activities reduces costs 3. Complementary Strengths ? Combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another.
Efficiency Increases
? ? New management team will be more efficient and add more value than what the target now has. The combined firm can make use of unused production/sales/marketing channel capacity Reduced cash flow variability Increase in debt capacity Reduction in average issuing costs Fewer information problems
Financing Synergy
? ? ? ?
Tax Benefits ? Make better use of tax deductions and credits ? Use them before they lapse or expire (loss carry-back, carry-forward provisions) ? Use of deduction in a higher tax bracket to obtain a large tax shield ? Use of deductions to offset taxable income (non-operating capital losses offsetting taxable capital gains that the target firm was unable to use) ? New firm will have operating income to make full use of available CCA. Strategic Realignments ? Permits new strategies that were not feasible for prior to the acquisition because of the acquisition of new management skills, connections to markets or people, and new products/services.
?
Managers may have their own motivations to pursue M&As. The two most common, are not necessarily in the best interest of the firm or shareholders, but do address common needs of managers Increased firm size ? Managers are often more highly rewarded financially for building a bigger business (compensation tied to assets under administration for example) ? Many associate power and prestige with the size of the firm.
Reduced firm risk through diversification • Managers have an undiversified stake in the business (unlike shareholders who hold a diversified portfolio of investments and don’t need the firm to be diversified) and so they tend to dislike risk (volatility of sales and profits) • M&As can be used to diversify the company and reduce volatility (risk) that might concern managers.
? Market Intensification: ? Horizontal Integration – Buying a competitor ? Market Extensions – New markets for Present products
? Vertical Integration : Internalization of crucial forward or backward activities • Vertical Forward Integration – Buying a customer • Vertical Backward Integration – Buying a supplier
? Diversification: Overcome Barriers to Entry • Product Extension: New product in Present territory • Free-form Diversification: New product & New territories
? Advantages:
? Greater Economic Clout: ? Economies of scale and Sharing Overheads: Size really does matter ? Synthesized capabilities
?
? ? ?
?
?
SEBI (substantial Acquisition of shares &Takeovers) Regulations 1997. The Securities and Exchange Board of India Act,1992 . Security Contract Regulation Act ,1956 . The Depositories Act,1956. SEBI Disclosure and Investor Protection Guidelines 2000. Securities and Exchange Board of India (Prohibition of Insider Trading Regulation ),1992.
?
? ? ?
Securities and Exchange Board of India (Merchant Bankers) Rules/Regulation 1992. SEBI (Delisting of Securities )Guidelines,2003. Foreign Exchange Management Act,1999. Companies Act,1956.
? Tata
Steel acquired UK based Corus for $ 8 billion. ? Suzlon Energy Ltd acquired German firm Repower Systems AG for $ 1.7 billion. ? United Spirits bought Scotch whisky distiller Whyte & Mackay for US$ 1.11 billion ? Hindalco acquired Novelis for $ 6 billion
? TATA
Chemical acquires US based Soda Ash Maker General Industrial Products for $ 1 billion ? Indian shipping company Great Offshore acquires UK based Sea Dragon for US$ 1.4 billion ? Essar Energy acquires 50% stake in Kenya Petroleum refineries ltd. ? Banswara Syntex to acquire France firm Carreman Michel Thierry for around US$ 125 million
? Sistema,
Russian Joint Stock Company’s acquisition of 74% stake in Shyam Telelink – Telecommunications ? French banking major BNP Paribas’s acquisition of 45% stake in financial services firm Sundaram Home Finance for $45.81 million ? Standard Chartered Bank bought 49% stake for $34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million
? Fursa
Mauritius’s acquisition of 42.63% equity in Gayatri Starchkem ? UBS Global Management’s Acquisition of Standard Chartered Asset Management Company for $ 117.78 Million ? EMC Corporations Acquisition of Valyd Software Pvt. Ltd. ? Orkla’s Acquisition of MTR foods for $ 100 Million
doc_823858806.pptx
This is a presentation that includes the basics of mergers and acquisitions in detail.
Merger - A Merger may be defined as the
combination of two or more independent business corporations into a single enterprise, usually involving the absorption of one or more firms by a dominant firm. Mergers may be broadly classified as Horizontal, Vertical.
enterprise of acquiring, directly or indirectly of shares, voting rights, assets or control over the management, of another enterprise .
Acquisition may be defined as an act of one
?Target: the corporation being purchased, when
there is a clear buyer and seller. ?Bidder: The corporation that makes the purchase, when there is a clear buyer and seller. Also known as the acquiring firm. ?Friendly: The transaction takes place with the approval of each firm’s management ?Hostile: The transaction is not approved by the management of the target firm.
?Strategic: The combined FCFs (Free Cash Flows) of
the merged operation are greater than the sum of the individual cash flows. ?Financial: The cash flows and also the market value of the target are below their true value, due to perhaps inefficient management. Such firms are typically restructured after the acquisition. ?It is usually the case that shareholders can diversify much more easily than can a corporation. ?Individuals can easily diversify by buying shares in mutual funds
Horizontal (b/w competitive companies) • A merger in which two firms in the same industry combine. • Often in an attempt to achieve economies of scale and/or scope. Vertical (b/w buyer seller r/ship companies) • A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. • Often in an attempt to control supply or distribution channels.
Conglomerate (none of the above) • A merger in which two firms in unrelated businesses combine. • Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams Cross-border (International) M&As • A merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target company.
?
M&A activity seems to come in ‘waves’ through the economic cycle domestically, or in response to globalization issues such as:
?
? ?
Formation and development of trading zones or blocks (EU, North America Free Trade Agreement Deregulation Sector booms such as energy or metals
Table 15 - 1 M&A Activity in Canada
Period
1895 - 1904
Major Characteristics of M&A Activity
• Driven by economic expansion, U.S. transcontinental railroad, and the development of national U.S. capital markets • Characterized by horizontal M&As • 60 percent occurred in fragmented markets (chemical, food processing, mining) • Driven by growth in transportation and merchandising, as well as by communications developments • • • • • • • • • • • • • Characterized by vertical integration Driven by evasion of price and quota controls Characterized by conglomerate M&As Driven by aerospace industry Some firms merged to play the earnings per share "growth game" (discussed in the section The Effect of an Acquisition on Earnings per Share) Characterized by leveraged buyouts and hostile takeovers Many international M&As (e.g., Chrysler and Daimler-Benz, Seagram and Martell) Strategic motives were advanced (although the jury is still out on whether this was truly achieved) High technology/Internet M&As Many stock-financed takeovers, fuelled by inflated stock prices Many were unsuccessful and/or fell through as the Internet "bubble" burst Resource-based/international M&A activity Fuelled by strong industry fundamentals, low financing costs, strong economic conditions
1922 - 1929
1940 - 1947 1960s
1980s 1990s
1999 - 2001
2005 - ?
Source: Adapted in part from Weston, J.F., Wang, F., Chung, S., and Hoag, S. Mergers, Restructuring, and Corporate Control. Toronto: Prentice-Hall Canada, Inc., 1990.
Operating Synergies 1. Economies of Scale ? Reducing capacity (consolidation in the number of firms in the industry) ? Spreading fixed costs (increase size of firm so fixed costs per unit are decreased) ? Geographic synergies (consolidation in regional disparate operations to operate on a national or international basis)
2. Economies of Scope ? Combination of two activities reduces costs 3. Complementary Strengths ? Combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another.
Efficiency Increases
? ? New management team will be more efficient and add more value than what the target now has. The combined firm can make use of unused production/sales/marketing channel capacity Reduced cash flow variability Increase in debt capacity Reduction in average issuing costs Fewer information problems
Financing Synergy
? ? ? ?
Tax Benefits ? Make better use of tax deductions and credits ? Use them before they lapse or expire (loss carry-back, carry-forward provisions) ? Use of deduction in a higher tax bracket to obtain a large tax shield ? Use of deductions to offset taxable income (non-operating capital losses offsetting taxable capital gains that the target firm was unable to use) ? New firm will have operating income to make full use of available CCA. Strategic Realignments ? Permits new strategies that were not feasible for prior to the acquisition because of the acquisition of new management skills, connections to markets or people, and new products/services.
?
Managers may have their own motivations to pursue M&As. The two most common, are not necessarily in the best interest of the firm or shareholders, but do address common needs of managers Increased firm size ? Managers are often more highly rewarded financially for building a bigger business (compensation tied to assets under administration for example) ? Many associate power and prestige with the size of the firm.
Reduced firm risk through diversification • Managers have an undiversified stake in the business (unlike shareholders who hold a diversified portfolio of investments and don’t need the firm to be diversified) and so they tend to dislike risk (volatility of sales and profits) • M&As can be used to diversify the company and reduce volatility (risk) that might concern managers.
? Market Intensification: ? Horizontal Integration – Buying a competitor ? Market Extensions – New markets for Present products
? Vertical Integration : Internalization of crucial forward or backward activities • Vertical Forward Integration – Buying a customer • Vertical Backward Integration – Buying a supplier
? Diversification: Overcome Barriers to Entry • Product Extension: New product in Present territory • Free-form Diversification: New product & New territories
? Advantages:
? Greater Economic Clout: ? Economies of scale and Sharing Overheads: Size really does matter ? Synthesized capabilities
?
? ? ?
?
?
SEBI (substantial Acquisition of shares &Takeovers) Regulations 1997. The Securities and Exchange Board of India Act,1992 . Security Contract Regulation Act ,1956 . The Depositories Act,1956. SEBI Disclosure and Investor Protection Guidelines 2000. Securities and Exchange Board of India (Prohibition of Insider Trading Regulation ),1992.
?
? ? ?
Securities and Exchange Board of India (Merchant Bankers) Rules/Regulation 1992. SEBI (Delisting of Securities )Guidelines,2003. Foreign Exchange Management Act,1999. Companies Act,1956.
? Tata
Steel acquired UK based Corus for $ 8 billion. ? Suzlon Energy Ltd acquired German firm Repower Systems AG for $ 1.7 billion. ? United Spirits bought Scotch whisky distiller Whyte & Mackay for US$ 1.11 billion ? Hindalco acquired Novelis for $ 6 billion
? TATA
Chemical acquires US based Soda Ash Maker General Industrial Products for $ 1 billion ? Indian shipping company Great Offshore acquires UK based Sea Dragon for US$ 1.4 billion ? Essar Energy acquires 50% stake in Kenya Petroleum refineries ltd. ? Banswara Syntex to acquire France firm Carreman Michel Thierry for around US$ 125 million
? Sistema,
Russian Joint Stock Company’s acquisition of 74% stake in Shyam Telelink – Telecommunications ? French banking major BNP Paribas’s acquisition of 45% stake in financial services firm Sundaram Home Finance for $45.81 million ? Standard Chartered Bank bought 49% stake for $34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million
? Fursa
Mauritius’s acquisition of 42.63% equity in Gayatri Starchkem ? UBS Global Management’s Acquisition of Standard Chartered Asset Management Company for $ 117.78 Million ? EMC Corporations Acquisition of Valyd Software Pvt. Ltd. ? Orkla’s Acquisition of MTR foods for $ 100 Million
doc_823858806.pptx