corporate transactions Flashcards
mergers
By acquisition of an existing company or by formation of a new company
In a merger
▪ The (A)cquiring firm absorbs the assets and liabilities of the (T)arget firm. ▪ (A) retains name and (T) ceases to exist
In a consolidation
▪ Entirely new firm is created from combination of existing firms
types of companies that may merge according to TCC
limited liability companies + limited liability companies
− partnerships + partnerships
− limited liability may acquire partnership (but not vice versa)
Types of mergers
Horizontal Mergers: Between competing companies
✓Amazon buys eBay
▪ Vertical Mergers: Between buyer-seller or supplier-manufacturer relationship companies
✓Yemeksepeti buys Café Nero
▪ Conglomerate Mergers: Neither competitors nor buyer-seller relationship
✓Siemens buys a fintech startup; Elon Musk buys Twitter
Why?
* Synergy: [AB] > A + B
frequently used term in the M&A practice
▪ by combining business activities, performance will increase and costs will decrease
▪ essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses
Mergers
* Revenue Synergy
Market power, network effect, brand awareness ▪ Complementary product
▪ Reduced competition, hence, costs
mergers Cost synergy
Removal of managers with poor performance
▪ Market efficiency, eg. marketing and advertisement of one brand, economies of scope/scale ▪ Reduced fixed overhead costs by downsizing overlapping departments and resources.
mergers Financing synergy
Borrow in bulk - get better rates in borrowing
▪ Save in Bulk - get better rates in deposit saving
▪ Diversification of Risk - more companies in portfolio
Offsetting tax losses, eg. unused debt capacity, a company making high profit has to pay more tax unless merged with a loss making one
mergers Procedure
Merger agreement to be signed by the BoD and approved by the GA of both companies
▪ Exchange ratios of company shares; explanations regarding shares and rights of shareholders of the transferred company in the transferee company; Cash payment for leave
* Merger report: terms, purpose and results of the merger, legal and economic grounds, valuation of shares and similar content with merger agreement
* Shareholders’ right to inspect: Merger agreement, merger report, financial statement of the last three years,
* Merger is approved by the General Assembly, unless simplified procedure is applied
Acquisitions
Acquisition of share ✓Acquisition of asset
* There is no merger of two distinct firms. Control of the target changes as a result of share purchase agreement.
Acquisition of shares adv disadv
Advantages
▪ No stockholder vote required
▪ Acquirer can deal directly with stockholders, even if management is unfriendly (hostile takeover still possible!)
* Disadvantages
▪ Tax related issues ▪ Hold-up problems
Acquisition of shares Friendly vs. Hostile Takeovers
In a ‘friendly’ merger, both companies’ management are receptive. Usually, the target will accommodate overtures and provide access to confidential information to facilitate due diligence processes
▪ In a ‘hostile’ merger, the acquiring firm attempts to gain control of the target without the board of the target’s approval.
✓Tender offer ✓Proxy fight
Leveraged buyout (LBO)
An LBO is the acquisition of another company using a significant amount of debt to meet the cost of acquisition. The assets of the target company are often used as collateral for the loans, along with the assets of the acquiring company.
▪ Change of control
▪ Significant debt for acquisition finance
▪ Target’s assets are used to facilitate the acquisition
The goal is to benefit from equity / debt ratio in financing the acquisition
▪ in order to increase debt ratio, the target’s assets are used
▪ return on equity is maximized with significant bank credit – because less equity is used to obtain the
same profit
structural changes, divisions
Divestments / Spin-offs
− when the company distributes its shareholding in subsidiary to its
shareholders or to a new company it establishes
▪ Split-ups
− when an existing company is dissolved to form new companies
− assets of the company are divided into sections and transferred to new companies
dvision prodecusre
Terms of division in written
− If assets transferred to newly formed companies there must be division plan
− The terms of division and the division plan must be approved by a general meeting of each company involved
