SFM

I. Mergers and Acquisitions

1) Types of mergers and acquisitions

The terms mergers and acquisitions are often used interchangeably but they differ in
meaning.In an acquisition, one company purchases the other outright.A merger is the
combination of two firms, which subsequently form a new legal entity under the banner
of one corporate name.

Types of Mergers and Acquisitions

Companies will merge together and acquire each other for a variety of reasons. Here are four of
the main ways companies join forces:

Horizontal Merger / Acquisition

Two companies come together with similar products / services. By merging they are
expanding their range but are not essentially doing anything new. In 2002 Hewlett Packard
took over Compaq Computers for $24.2 billion. The aim was to create the dominant personal
computer supplier by combining the PC products of both companies.

Vertical Merger / Acquisition

Two companies join forces in the same industry but they are at different points on the supply
chain. They become more vertically integrated by improving logistics, consolidating staff and
perhaps reducing time to market for products. A clothing retailer who buys a clothing
manufacturing company would be an example of a vertical merger.

Conglomerate Merger / Acquisition

Two companies in different industries join forces or one takes over the other in order to broaden
their range of services and products. This approach can help reduce costs by combining back
office activities as well as reduce risk by operating in a range of industries.

Concentric Merger / Acquisition

In some cases, two companies will share customers but provide different services. An example
would be Sony who manufacture DVD players but who also bought the Columbia Pictures
movie studio in 1989. Sony were now able to produce films to be able to be played on their DVD
players. Indeed, this was a key part of the strategy to introduce Sony Blu-Ray DVD players.

2) Reasons for Merger

Firms undertake mergers considering different motives.Common reasons for mergers are:

Value creation
Two companies may undertake a merger to increase the wealth of their shareholders.
Generally, the consolidation of two businesses results in synergies that increase the
value of a newly created business entity.

Diversification

Mergers are frequently undertaken for diversification reasons. For example, a

company may use a merger to diversify its business operations by entering into new
markets or offering new products or services. Additionally, it is common that the
managers of a company may arrange a merger deal to diversify risks relating to the
company’s operations.

Note that shareholders are not always content with situations when the merger deal is
primarily motivated by the objective of risk diversification. In many cases, the
shareholders can easily diversify their risks through investment portfolios while a
merger of two companies is typically a long and risky transaction. Market-extension,
product-extension, and conglomerate mergers are typically motivated by
diversification objectives.

3. Acquisition of assets
A merger can be motivated by a desire to acquire certain assets that cannot be
obtained using other methods. In M&A transactions, it is quite common that some
companies arrange mergers to gain access to assets that are unique or to assets that
usually take a long time to develop internally. For example, access to new
technologies is a frequent objective in many mergers.

Increase in financial capacity

Every company faces a maximum financial capacity to finance its operations through
either debt or equity markets. Lacking adequate financial capacity, a company may
merge with another. As a result, a consolidated entity will secure a higher financial
capacity that can be employed in further business development processes.

5. Tax purposes
If a company generates significant taxable income, it can merge with a company with
substantial carry forward tax losses. After the merger, the total tax liability of the
consolidated company will be much lower than the tax liability of the independent
company.

6. Incentives for managers

Sometimes, mergers are primarily motivated by the personal interests and goals of the
top management of a company.

Additionally, managers may prefer mergers because empirical evidence suggests that
the size of a company and the compensation of managers are correlated. Although
modern compensation packages consist of a base salary, performance bonuses, stocks,
and options, the base salary still represents the largest portion of the package.

3) How do firms create Value through Mergers and Acquisitions?

Value creation can have variant meanings for shareholders, owners or stakeholders. An owner
may seek to create value for himself during the inception stage of his business by generating
returns that not only surpass his capital costs but also meet his target return on investment
In an upcoming technology-driven venture like robotics, the value creation can be obtained by
investing in research & development, focusing on innovation or merging with existing
technology firms. Such strategies enable businesses to provide their customers with the latest
products having a myriad of advanced features.
Two companies may undertake a merger to increase the wealth of their shareholders.
Generally, the consolidation of two businesses results in synergies that increase the
value of a newly created business entity. Essentially, synergy means that the value of
a merged company exceeds the sum of the values of two individual companies. Note
that there are two types of synergies:

● Revenue synergies: Synergies that primarily improve the company’s revenue-

generating ability. For example, market expansion, production diversification,
and R&D activities are only a few factors that can create revenue synergies.
● Cost synergies: Synergies that reduce the company’s cost structure. Generally,
a successful merger may result in economies of scale, access to new
technologies, and even elimination of certain costs. All these events may
improve the cost structure of a company.

4) Mergers and Acquisitions versus Organic Growth

Organic Growth
An organic growth strategy seeks to maximize growth from within. There are many ways in
which a company can increase sales internally in an organization. These strategies typically take
the form of optimization, reallocation of resources, and new product offerings.
Organic growth allows for business owners to maintain control of their company whereas a
merger or acquisition would dilute or strip away their control. On the other hand, organic growth
takes longer, as it is a slower process to acquire new customers and expand business with
existing customers. A combination of both organic and inorganic growth is ideal for a company,
as it diversifies the revenue base without relying solely on current operations to grow market
share.
organic growth is driven by internal forces, for example:

● The development of new product lines.

● Promotions on specific products.
● Improved customer service.
–

Organic growth is important because it demonstrates that a business is capable of

earning more and expanding its market share year over year
Challenges
● It can take a long time to achieve the desired growth.
● It can be necessary to invest in additional expertise, labor and equipment.
● There’s no guarantee that it will deliver the desired market share.
● It can take away from the current value-generating activities.

Pros of Organic growth

● Management knows the company inside and out
● Less integration challenges and restructuring
● More Sustainable
Cons of Organic growth

● May decrease your competitive edge

● Competition drives the market.
–

Mergers and Acquisitions

Inorganic growth refers to growth by means of a merger or acquisition. According to Forbes, it
offers several advantages when compared to inorganic growth:

● It can be a way to quickly acquire new skills and knowledge.

● It immediately results in a larger market share and more assets.
● It can facilitate access to capital, as well as to new markets.
–

Nevertheless, an M&A also brings its own challenges. It’s imperative to integrate the
acquired business properly to ensure a good culture match that maximizes the potential of
its human capital. Branding and quality assurance need to be approached with care in
order to retain market share. Furthermore, operations, sales and support have to be scaled
up appropriately so they can meet the increased demand.

Pros of mergers

● Economies of scale – bigger firms more efficient

● More profit enables more research and development.
 ● Struggling firms can benefit from new management.

Cons of mergers

● Increased market share can lead to monopoly power and higher prices for
consumers
● A larger firm may experience diseconomies of scale – e.g. harder to
communicate and coordinate.

5) Advantages and disadvantages of mergers and acquisitions

There are several advantages and disadvantages for mergers and acquisitions.Some
of which are:
PROS
Network Economies. In some industries, firms need to provide a national network. This
means there are very significant economies of scale. A national network may imply the
most efficient number of firms in the industry is one

Research and development. In some industries, it is important to invest in research and

development to discover new products/technology. A merger enables the firm to be more
profitable and have greater funds for research and development.

Economies of scale

Firms benefit from economies of scale through bulk buying and from benefiting through
marketing economies

In a horizontal merger, economies of scale can be quite extensive, especially if there are
high fixed costs in the industry. For example, aeroplane manufacture is now dominated
by two large firms after a series of mergers.

If the merger was a vertical merger (two firms at different stages of production) or
conglomerate merger, the scope for economies of scale would be lower.
Regulation of Monopoly

Even if a firm gains monopoly power from a merger, it doesn’t have to lead to higher
prices if it is sufficiently regulated by the government.

6. Prevent unprofitable business from going bust

If a firm has been badly managed, it could find itself going out of business.

Avoid duplication

In some industries, it makes sense to have a merger to avoid duplication. For example,
two bus companies may be competing over the same stretch of roads. Consumers could
benefit from a single firm with lower costs. Avoiding duplication would have
environmental benefits and help reduce congestion.

CONS

Higher Prices

A merger can reduce competition and give the new firm monopoly power. With less
competition and greater market share, the new firm can usually increase prices for
consumers.

Less choice

A merger can lead to less choice for consumers.

Job Losses

A merger can lead to job losses. Tha way for the firm to survive and many jobs to be
saved
6)Demergers

De-mergers are a valuable strategy for companies that want to refocus on their most
profitable units, reduce risk, and create greater shareholder value.

A de-merger is a corporate restructuring in which a business is broken into components,

either to operate on their own, or to be sold or to be liquidated as a divestiture.

A de-merger (or "demerger") allows a large company, such as a conglomerate, to split off
its various brands or business units to invite or prevent an acquisition, to raise capital by
selling off components that are no longer part of the business's core product line, or to
create separate legal entities to handle different operations.

● A de-merger is when a company splits off one or more divisions to operate

independently or be sold off.
● A de-merger may take place for several reasons, including focusing on a
company's core operations and spinning off less relevant business units, to raise
capital, or to discourage a hostile takeover.
● The most common type of de-merger, the spin-off, results in the parent company
retaining an equity stake in the new company.

II. Corporate Restructuring

1) Forms of Corporate Restructuring
● Merger and Acquisition
● Takeover/Acquisition
 ● Demerger
● Buyout
● Strategic Alliance
● Financial Restructuring
2) Spin-off, Split-off, Split-up, Leveraged Buyouts (LBOs)
● Spin-off:-It is the division of a company into a wholly owned subsidiary of a parent
company by distributing all its shares of the subsidiary company on a pro-rated basis.
● Sell-off:-Selling off the assets of a company in a declining market
● Split-up:-Split or division of a company.
● Split-off:- A split-off is a way of restructuring the capital structure of a company.
Shareholders of a split-off must relinquish their shares of stock in the parent company in
order to receive shares of the subsidiary company. The split-off is also a tax-efficient way
for the parent company to redeem its shares of stock.
● Leveraged Buyouts:-A leveraged buyout (LBO) is the acquisition of another company
using a significant amount of borrowed money to meet the cost of acquisition. The assets
of the company being acquired are often used as collateral for the loans, along with the
assets of the acquiring company.
3) Takeovers
A takeover occurs when an acquiring company successfully closes on a bid to assume control of
or acquire a target company. Takeovers are typically initiated by a larger company seeking to
take over a smaller one. Takeovers can be welcome and friendly, or they may be unwelcome and
hostile.
4) Business Alliances
A business alliance is an agreement between businesses, usually motivated by cost reduction and
improved service for the customer. Alliances are often bounded by a single agreement with
equitable risk and opportunity share for all parties involved and are typically managed by an
integrated project team. An example of this is code sharing in airline alliances.
Types of alliances
● Sales:- A sales alliance occurs when two companies agree to go to market together to sell
complementary products and services.
● Solution-specific:- A solution-specific alliance occurs when two companies agree to
jointly develop and sell a specific marketplace solution.
● Geographic-specific:- A geographic-specific alliance is developed when two companies
agree to jointly market or co-brand their products and services in a specific geographic
region.
● Investment:- An investment alliance occurs when two companies agree to join their
funds for mutual investment.
● Joint venture:- A joint venture is an alliance that occurs when two or more companies
agree to undertake economic activity together.
 ● In many cases, alliances between companies can involve two or more categories or types
of alliances.
● Horizontal alliances:-A type of an alliance is a horizontal alliance. For example, a
horizontal alliance can occur between logistics service providers, i.e., the cooperation
between two or more logistics companies that are potentially competing. In a horizontal
alliance, these partners can benefit twofold. On one hand, they can "access tangible
resources which are directly exploitable." In this example extending common
transportation networks, their warehouse infrastructure and the ability to provide more
complex service packages can be achieved by combining resources. On the other hand,
partners can "access intangible resources, which are not directly exploitable." This
typically includes know-how and information and, in turn, innovation.
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