Mergers And Acquisitions Flashcards
What is a merger
It’s a combination of two business entities to form an enlarged group.
Merger and acquisitions are interchangeable.
Friendly takeover vs hostile takeover
Both companies are happy to be taking over. Company that is potentially be acquired, doesn’t want to be acquired.
Predator/bidder
Dominant party in a merger transactions
Target
Company being acquired.
Horizontal
Two companies in the same industry.
Very popular because they represent globalization of the merger and the business in general. Also popular in industry with over-capacity.
Example would be two supermarkets joining together.
Main reason = stronger market position as the combined company would be significantly larger. Also, economies of scale where costs savings of expanding. E.g bulk buying
Vertical
Two companies at different stages of production.
Upstream vertical integration = manufacturer buys the raw materials downstream integration = manufacturer acquires the sales outlet
E.g a cake shop, bakers and flour.
Baker needs flour to bake and would acquire from the maker - upstream integration
Oil industry is very highly vertically integrated.
e.g BP which has oil exploratory subsidiaries and they have drilling companies to extract the oil, then they have refineries which has make the oil kettles, then the distribution companies.
Main reason = secure sales or secure supplies. BP petrol stations would need petrol if vertically integrated. Same with distribution companies and have a secure place to sell the oil to. Also, increased market power and a better position. Thirdly, an advantage would be streamlined operations and reduced costs. Gol is for a smooth transaction between buyer and seller.
Conglomerate mergers
Where two or unrelated companies combine.
Best example is virgin company group which has various arms holidays, trains, media and internet which are totally unrelated.
Main reason = risk reduction which is caused by diversifying risk.
Recent example is the Walt Disney Company
Merger waves
Boom periods and there are not so many waves.
Causes:
1970s and 80s loads of merger activities.
Difficult to underpin reasons. But some patterns were identified:
High share price = economic stability = more mergers
Capital expenditure = general expansion = artificial growth is more efficient than organic growth. Artificially = merge with other companies
Surplus cash = managers may use it to purchase other companies.
Empire building = managers acquire other companies because they want to be in control of a bigger company.
Industry de-regulation and consolidation = 2004-6 which allowed more mergers, e.g telephone banking sector.
Effect of the current credit crunch = 2008 and brexit as it impacts mergers due to low confidence as share prices plummeted which made them more attractive. UK companies acquiring foreign companies as mergers.
Cross border mergers
Significant increases in UK companies acquiring foreign companies and vice versa
Uk companies are attractive to foreign bidders
This is because:
UK culture is less supportive of national sovereignty and we don’t care what company owns a company
there is limited red tape and regulation due to brexit.
Uk trade unions are pragmatic which work on employee rights and employees are not disadvantaged by takeovers.
But uk nationals are less motivated = foreign companies feel they can make uk companies more profitable.
Problems = language barriers, cultural differences, time differences and from a company perspective is that R&D suffers as they lose their comparative advantage. Also potential of job losses in usually the home company. Example is factory in Livingstone and hall’s sausages was acquired by a German company and they closed the livingstone firm and 50,000 people lost their jobs.
Both social and economic problems.
Synergy- Reasons for mergers
Primarily advanced by horizontal mergers and the idea is that two companies after the merger the merged company is now present value worth more than the separate companies alone.
The synergistic benefits come from economies of scale and cost of savings.
Post merger they now have increased market power.
You can get it for vertical and c.
Increased market power or share - reasons for mergers
Proposed for horizontal mergers but it does hold for vertical and conglomerate mergers.
Bigger = market share or position meaning a greater market power. Then there is less people selling the service meaning the company can now push prices up due to a lack of competition.
New market entry - reasons for mergers
Entrance to new market, location or industry.
Example is Tesco which acquired and American supermarket to enter the US market. But it was a disaster as Walmart acquired Asda which was a success.
Complementary resources - reasons for mergers
Both companies would benefit equally.
Large companies would enjoy research and development aspects as they seem to have more unique ideas.
The smaller company benefits from access lore funds for R&D and provide expertise and experience. Part of a larger and mote established company
Valuable assets - reasons for mergers
Desire to get a hold of both tangible and intangible assets.
Tangible = locations of property which is a fixed asset. E.g M&S takeover by Phillip green due to the locations of property.
Intangible assets = brand names, patents and licenses.
Secure supplies and certainty of sales - reasons for mergers
Vertical integration both upstream and downstream integration.
But the company may end up making a lot in house.
Risk reduction - Reasons for mergers
Diversification of risk.
Most common with conglomerate mergers.
Eliminating inefficient management - reasons for mergers
Idea is that a company wants to be taken over and shareholders want to get rid of the management team. But the board of directors can just be voted off
Using surplus cash - reasons
Buy other companies
Empire State Building on behalf of shareholders
Boost growth rates - reasons for mergers
Established company acquires a new company in the growth stage.
Earnings per share will increase by taking over more gross prospects.
However managers like to be able to advertise
