MERGER, ACQUISITION & CORPORATE RESTRUCTURING Patrick A. Gaughan Chapter 1 Introduction First Merger Wave 1897-1904 Fourth Merger Wave ends in 1990s. Fifth Merger Wave ends in 2001 It was an International Wave RECENT M&A TRENDS The pace of mergers and acquisitions (M&As) picked up in the early 2000s after a short hiatus in 2001. The economic slowdown and recession in the United States and elsewhere in 2001 brought an end to the record-setting fifth merger wave. This wave was international one. Whereas, up till now Merger was a U.S phenomena. 2007-2008 recession also brought hold to new merger and it was difficult for investor to get funds. Introduction Deal volume in most regions of the world generally tended to follow the patterns in the United States and Europe. Australia, for example, exhibited such a pattern, with deal volume growing starting in 2003 but falling off in 2008 and 2009 for the same reason it fell off in the United States and Europe. Picture of Asia remain quite different. MERGER AND CONSOLIDATION A merger is an agreement that unites two existing companies into one new company. . Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value. Mergers are most commonly done to gain market share, reduce costs of operations, expand to new territories, unite common products, grow revenues and increase profits, all of which should benefit the firms' shareholders. After a merger, shares of the new company are distributed to existing shareholders of both original businesses. Example – • American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presence in North America. Consolidation In business, consolidation occurs when two or more businesses combine to form one new entity, with the expectation of increasing market share and profitability and the benefit of combining talent, industry expertise, or technology. Also referred to as amalgamation, consolidation can result in the creation of an entirely new business entity or a subsidiary of a larger firm. This approach may combine competing firms into one cooperative business MERGER AND CONSOLIDATION When the combining firms are of same size the consolidation is most appropriate word used. When two firms differ significantly Merger is used. Merger is categorized as Horizontal, Vertical and Conglomerate. Types of Mergers Horizontal Merger: when two competing firms combine Example: Exxon and Mobile Petroleum. If Merger is done to increase power of the firm or to reduce competition it will be opposed on antitrust grounds. Vertical Mergers A vertical merger is the merger of two or more companies involved at different stages in the supply chain process for a common good or service. Most often, the merger is purposed to increase synergies, gain more control of the supply chain process, and increase business. Also, it often results in reduced costs and increased productivity and efficiency. Example: Gul Ahmed Conglomerate Conglomerate mergers involve the combination of corporations involved in business activities that are completely unrelated. The two types of conglomerate merger further define the goal of the merger: Pure conglomerate merger – the parties have absolutely nothing in common Mixed conglomerate merger – the parties seek to expand their market regions, or to extend their product offerings. Merger Consideration Transaction can occur in cash, securities or combination. Or the firm can use debentures. Stock for stock ratio. Floating exchange Fixed exchange Contingent Value Right Holdback Provision Merger Professionals •Investment Banker Leveraged Buyout & Private Equity Market Corporate Restructuring The term corporate restructuring usually refers to asset sell-offs, such as divestitures. Companies that have acquired other firms or have developed other divisions through activities such as product extensions may decide that these divisions no longer fit into the company’s plans. There are several forms of corporate sell-offs, with divestitures being only one kind. Spin and equity carve-outs are other ways that sell-offs can be accomplished. Changing the focus of the company. Merger Negotiation Friendly Negotiation Keep board of director up to date Confidentiality Hostile takeover Material adverse change clause Deal Structure Asset vs. Entity Deal. Depend upon portion of target acquisition. Advantages of Asset deal: Choosing asset and limiting liability. Tax Benefit through lower depreciation. Disadvantages: Consent from other parties & tax implication for seller. Entity deal Stock transaction(for small companies) Mergers(for Larger Companies) Advantages of Stock Transaction: No conveyance issue No appraisal right Disadvantages: Unwanted Liability Approval from all Stock holder Forward Triangular Merger The target merges directly into the buyer, eliminating the target’s existence. The buyer consequently assumes the target’s rights and liabilities by operation of law. The target shares are exchanged for cash or a combination of cash and securities. Disadvantages of Forward merger Buyer assume all the liabilities Delaware Law treats it as asset sale Voting appeal of shareholders of both the companies. Solution: Subsidiary Merger Two types: Forward Triangular Reverse Subsidiary Forward Triangular Subsidiary A forward triangular merger, or indirect merger, is the acquisition of a company by a subsidiary of the purchasing company. The acquired company is merged into this shell company, which assumes all the target's assets and liabilities. Advantages: No Automatic Voting required No exposing of asset against liabilities. Forward Triangular Merger Reverse merger A reverse merger (also known as a reverse takeover or reverse IPO) is a way for private companies to go public. It's typically through a simpler, shorter, and less expensive process than that of a conventional initial public offering (IPO), in which private companies hire an investment bank to underwrite and issue shares of the new soon-to-be public entity. Reverse Triangular Merger Advantages More liquid equity Less cost Less time Less Dilution of shares than IPO Holding Companies A holding company is a parent corporation, limited liability company, or limited partnership that owns enough voting stock in another company to control its policies and management. The company does not have any operations or active business itself; instead, it owns assets in one or more companies Holding companies also exist for the purpose of owning property such as real estate, patents, trademarks, stocks and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary. In fact, even a 51% interest may not be necessary to allow a buyer to control a target. For companies with a widely distributed equity base, effective working control can be established with as little as 10% to 20% of the outstanding common stock. Advantages of Holding Company Lower cost. No control premium. Control with fractional ownership. Approval not required Disadvantages Multiple taxation Antitrust issues Lack of 100% ownership
