Module 6 Flashcards
Business combinations made up of
Mergers and takeovers
Types of combinations (3)
- Horizontal
- Vertical
- Conglomerate
Horizontal combinations
Between firms in the same industry, producing similar and possibly competitive products for the same markets
Vertical combinations
Integrate stages of the supply chain (buying up supply chain)
Conglomerate combations
Between firms in different industries with little or no common acitivities
Conditions which favour mergers (3)
- Stock market boom
- Deregulation and globalisation of the world’s economy
- New technology
Reasons for business combinations (6)
- Diversification
- Economies of scale
- Cost reductions
- Growth
- Access to customer lists
- Utilisation of cash
UK listed company business combinations are governed by (4)
- Stock Exchange regulations
- Takeover panel and city code
- The competition and markets authority (CMA)
- The European Commission (SEC if US)
City code applies to offers for following types of companies (4)
- Listed companies if the UK is their registered office
- Unlisted public companies if they have registered offices in the UK
- Private companies based in UK if their shares have been previously listed on LSE
- Companies in other European Economic Area countries
Purpose of city code (3)
- Fair treatment of shareholders
- Provides orderly framework within which takeovers are conducted
- Ensures that information is adequately disclosed to shareholders
Six general principles in city code
- Equivalent treatment
- Sufficient time and information
- Offeree company must act in interests of the whole company
- False markets banned
- Genuine announcements
- Reasonable hindrance only
City code rules to govern conduct of parties (5)
- How to approach target company
- Timing of share purchases
- Announcement of takeover bid
- Obligation of board of target company
- Conduct during the offer
CMA aims to
Promote competition both within and outside UK for the benefit of consumers
CMA Phase 1
If revenue of target > £70m or >25% combined market share
Detailed review
40 days
Determine if serious lessening of competition expected if no - no further action. If yes > phase 2
CMA Phase 2
In depth investigation
24 weeks
CMA final step
Would merger adversely affect the public interest?
Yes > make recommendations to mitigate public threat/ ban
No > merger can go ahead
European Commission - mergers
Must approve very large mergers where companies concerned each have European wide revenues in excess of very high thresholds
Board must seek (when receive bid)
Competent financial advice eg merchant bank
City Code for fighting a takeover
- Defending circulars must be prepared under good standard of care
- Bases and assumptions on which directors have prepared profit forecasts must be stated
- If revaluation of assets given in connection with offer supported by independent valuer
Sophisticated board of directors
Should be able to detect another company is interested in their company before any formal announcement
Well managed defence campaign will include
Aggressive publicity on behalf of company
Defence of takeover bid tactics (7)
- White Knight
- Poison Pills
- Crown Jewels
- Golden Parachutes
- Pac-Man Strategy
- Referral to CMA
- Producing revised profit forecast
White Knight =
Offering company to more friendly outside interest > permitted by City Code
Poison Pills =
Steps taken to make the company less attractive > not permitted by City Code
Crown Jewels =
Selling off highly valued company assets > once an offer is imminent this is not feasible
Golden Parachutes =
Introduce attractive termination packages for senior executives (makes acq more expensive + less painful for executives) > details must be sent to shareholders including any amendments in past six months
Pac-Man Strategy =
Target company tries to take over bidding company > No City Code implications
Referral to CMA =
Buys the company more time > No City Code implications
Producing a revised profit forecast =
Indicates a better future than market had been expecting - share price will rise and offer looks less attractive > No City Code implications
Methods of financing (3)
- Cash
- Debt
- Equity
Cash acquisitions > advantages to seller (2)
- Amount known with certainty
- No restrictions on use of proceeds
Cash acquisitions > disadvantages to seller
Immediate capital gains liability
Cash acquisitions > advantages for buyer (2)
- Doesn’t affect control
- Straightforward, may combat resistance
Cash acquisitions > disadvantage for buyer
May reduce dividends
Debt acquisitions > advantages (2)
- Tax benefits of debt > cheap
- Usually in conjunction with equity
Debt acquisitions > disadvantages (2)
- Often carries warrants
- Banks will want own duediligence
Equity acquisitions > advantage
Defers capital gains tax for seller
Equity acquisitions > disadvantage
Not suitable for hostile takeovers
Three valuation methods for target company
- Asset valuation
- Earnings valuation
- Discounted cash flow
Merger =
Combination of two companies of similar size
Share exchange scheme > Step 1
Decide which of the companies is to be the holding company
Share exchange scheme > Step 2
Valuation of the companies
Share exchange scheme > Step 3
Devise the future capital structure
Share exchange scheme > Step 4
Assess the effect on the shareholders of both companies
