MERGERS AND ACQUISITIONS

MERGERS
A merger refers to the combination of two or more companies
into a single legal entity, typically to enhance operational
efficiency, expand market share, or achieve economies of scale.
In this process, the merging companies usually agree to operate
as equals, aligning their strategic goals and resources to create
a stronger and more competitive organization.
Key Features of Mergers
1. Creation of a Single Legal Entity: After the merger, the
involved companies cease to exist as separate entities,
forming one unified organization.
2. Similar Size and Structure: The merging companies are often
of comparable size and market presence, making the
integration process smoother.
3. Mutual Agreement: The decision to merge is usually made
cooperatively, driven by shared goals such as market
expansion or cost reduction.
4. Strategic Objectives: Mergers are often aimed at achieving
synergies in operations, innovation, or market presence.
Example:
Landbank of the Philippines and United Coconut Planters Bank
(UCPB)
The merger between these two government-owned banks in 2021
created a larger financial institution to better serve rural
areas and coconut farmers. The merger aimed to enhance financial
inclusion and improve the delivery of government programs,
leveraging the strengths of both entities.
Advantages of Mergers
Increases operational efficiency through streamlined
processes.
Enhances competitive advantage by combining market shares.
Facilitates cost savings via economies of scale.
Enables access to a broader customer base and expanded
resources.
Challenges of Mergers
Integrating different organizational cultures and systems.
Managing redundancies and potential layoffs.
Complying with regulatory approvals and antitrust laws.

ACQUISITIONS
An acquisition occurs when one company takes over another by
purchasing its assets or shares, thereby gaining control. Unlike
mergers, acquisitions often involve a dominant acquiring company
and a subordinate acquired company. The acquisition process may
be friendly (with mutual agreement) or hostile (against the will
of the target company’s management).
Key Features of Acquisitions
1. Dominance of the Acquiring Company: The acquiring company
absorbs the acquired entity, which may cease to exist as a
separate legal entity or continue as a subsidiary.
2. Unequal Relationship: The acquiring company exercises
control over the target company’s operations and management.
3. Flexibility in Agreement: Acquisitions may be agreed upon
mutually or forced in hostile takeovers.
4. Strategic Purpose: Acquisitions are often driven by the
acquiring company’s desire to grow, access new markets, or
eliminate competition.
Example
San Miguel Corporation's Acquisition of Ginebra San Miguel
San Miguel Corporation (SMC), a leading conglomerate in the
Philippines, acquired Ginebra San Miguel to consolidate its
presence in the beverage market. This acquisition allowed SMC to
strengthen its portfolio, streamline production, and dominate the
local and regional beverage industry.
Advantages of Acquisitions
Provides immediate access to new markets, customers, or
technologies.
Enhances market position by eliminating competitors.
Expands the acquiring company’s product portfolio or
geographic footprint.
Accelerates growth compared to organic expansion strategies.
Challenges of Acquisitions
High acquisition costs and potential debt burden.
Integration difficulties, including merging systems and
workforce.
Risk of cultural clashes between the companies.
Possible backlash from customers or employees of the
acquired company.

COMPARISON OF MERGER VS ACQUISITION

Aspect Merger Acquisition
Definition Combination of two or One company takes over
more companies as equals another company
Entity Results in a new,Acquired company may cease
Status unified legal entity to exist or operate as a
subsidiary
Usually similar in size Typically involves a larger
Size
and influence acquiring company and a
Relationship
smaller target company
Nature of Mutually agreed upon
May be mutual or hostile
Agreement
Strategic Synergies, cost Market entry, product
 reduction, market share expansion, eliminating
Goals
competition
TYPES OF MERGERS
1. Horizontal Merger
A horizontal merger occurs when two companies operating in
the same industry and producing similar products or services join
forces. These companies are often direct competitors targeting
the same customer base.
Objective:
 Reduce competition: By combining, the merged entity
eliminates or reduces competition, creating a more dominant
market presence.
 Increase market share: The merger allows the new entity to
capture a larger portion of the market, enhancing its
influence and pricing power.
 Achieve economies of scale: Reduces costs by consolidating
operations, such as manufacturing, marketing, and
distribution.
Example:
Globe Telecom and Bayantel (Bayan Telecommunications)
Globe’s acquisition of Bayantel in 2013 strengthened its position
in the telecommunications industry. The merger allowed Globe to
enhance its broadband services, improve network infrastructure,
and expand its customer base, creating a competitive advantage
over rivals like PLDT.

2. Vertical Merger
A vertical merger occurs when companies in the same supply
chain, but operating at different stages of production, merge.
For example, one company might produce raw materials while the
other handles manufacturing or distribution.
Objective:
 Enhance supply chain efficiency: Integrates operations,
ensuring better coordination between production stages.
 Reduce costs: Eliminates intermediaries and reduces
transaction costs, leading to higher profit margins.
 Improve control over the supply chain: Ensures consistent
quality, reduces delays, and enhances customer satisfaction.
Example:
San Miguel Corporation (SMC) and its acquisition of Petron
Corporation
SMC, a conglomerate with interests in food and beverage
production, acquired Petron, the Philippines’ largest oil
refining and marketing company. This vertical merger ensured SMC
could control fuel supply for its extensive logistics operations,
thereby reducing operational costs and securing consistent
supply.
3. Conglomerate Merger
A conglomerate merger involves companies from entirely
different industries merging. These companies do not share
operational or market commonalities but join forces for
diversification or financial synergies.
Objective:
 Diversify business risks: Reduces dependence on a single
market or product line by expanding into unrelated sectors.
 Enter new markets: Enables the company to tap into
previously unexplored industries.
 Leverage financial strength: A financially stable company
can support a weaker partner during challenges.
Example:
Ayala Corporation acquiring Zalora Philippines
Ayala, a diversified conglomerate involved in real estate,
banking, and utilities, invested in Zalora, an online fashion
retailer. This move marked Ayala’s entry into e-commerce,
diversifying its portfolio and capturing a share of the growing
digital retail market.

4. Market-Extension Merger
A market-extension merger occurs when companies in different
geographical markets, offering similar products or services,
merge. The goal is to expand the merged entity’s reach and access
untapped markets.
Objective:
 Expand geographic reach: Gains entry into new territories
where the other company already has an established presence.
 Increase customer base: Accesses a broader audience,
enhancing sales and market influence.
Example:
BDO Unibank merging with Citibank Philippines’ retail banking
operations
In 2022, BDO acquired Citibank’s consumer business in the
Philippines. This merger extended BDO’s reach into high-net-worth
clients and corporate accounts, expanding its geographic presence
and customer portfolio.

5. Product-Extension Merger
A product-extension merger occurs when companies in the same
market but with complementary products or services merge. The
merged company can cross-sell products to the same customer base.
Objective:
 Increase product offerings: Broadens the product or service
portfolio, catering to a wider range of customer needs.
 Cross-sell opportunities: Leverages the existing customer
base to promote new or complementary products.
Example:
Universal Robina Corporation (URC) acquiring Griffin’s Foods
Limited
URC, a leader in snacks and beverages in the Philippines,
acquired New Zealand’s Griffin’s Foods, a premium biscuit and
snack manufacturer. This merger allowed URC to complement its
product offerings while entering new markets abroad.

KINDS OF ACQUISITION
1. Friendly Acquisition
A friendly acquisition occurs when the target company
willingly agrees to the acquisition. This type of transaction is
mutually beneficial and often involves negotiations between the
two companies to align their goals.
Key Features:
The target company consents to the acquisition.
The transaction is collaborative and non-disruptive.
Often conducted to strengthen market position or gain new
capabilities.
Objective: Both entities aim to align their strategies for mutual
benefit, such as expanding market reach or improving operational
efficiency.
Example: The merger between Landbank of the Philippines and
United Coconut Planters Bank (UCPB) in 2021 was a friendly
acquisition, aimed at creating a stronger government financial
institution to better serve rural areas and improve financial
inclusivity.

2. Hostile Acquisition
A hostile acquisition occurs when the acquiring company
takes control of the target without its consent. This often
involves tactics such as a tender offer (buying shares directly
from shareholders) or a proxy fight (seeking to replace the
target’s board).
Key Features:
The target company resists the acquisition.
May involve aggressive tactics, such as buying shares on the
open market or lobbying shareholders.
 Can lead to public disputes and litigation.
Objective: To gain control of the target’s assets or market
share, even if the management resists.
Example:
Hostile acquisitions are rare in the Philippines due to its tight
regulatory framework, such as the Securities Regulation Code
(SRC). However, they are more common in global markets.
Global Example: In 2000, Vodafone’s hostile bid for Mannesmann AG
is a notable example, where Vodafone ultimately succeeded in a
$183 billion takeover.

3. Reverse Acquisition
In a reverse acquisition, a smaller company acquires a
larger or more established company, often as a strategy to enter
the public market or strengthen its position. This type of
acquisition is particularly common among startups and emerging
companies.
Key Features:
The acquiring company is smaller but gains control of a
larger entity.
Often used to gain a public listing without going through
the traditional IPO process.
Typically involves companies with complementary strengths.
Objective: To quickly gain market access or competitive
advantage.
Example in the Philippines:
A tech startup acquiring a larger but underperforming software
company to expand its technological portfolio and market share.
Global Example: In 2003, Tandy Brands Accessories used a reverse
acquisition to acquire a publicly listed but struggling company
to gain a public market presence.

4. Asset Acquisition
In an asset acquisition, the buyer purchases specific assets
of the target company rather than its shares. This allows the
acquirer to acquire valuable assets (e.g., properties, patents,
or equipment) while avoiding liabilities.
Key Features:
Focuses on acquiring assets rather than taking over the
entire company.
Helps avoid inheriting unwanted liabilities, such as debts
or legal issues.
Offers flexibility in choosing which assets to acquire.
Objective: To acquire strategic assets without assuming the risks
associated with the entire company.
Example:
Ayala Land, a leading Philippine real estate developer, acquired
prime land assets from Gaisano Capital Group to expand its retail
and mixed-use projects.
Global Example: Google acquired Motorola’s patents in 2012 to
strengthen its intellectual property portfolio for Android
devices.

CLASSIFICATION OF DEFENSES

1. Pre-Offer Defenses
These mechanisms are implemented before a hostile bid is
initiated to deter or complicate such attempts.
1.1. Poison Pill
The poison pill allows existing shareholders, excluding the
hostile bidder, to purchase additional shares at a discount,
diluting the acquirer’s stake and increasing the cost of the
takeover.
Example in the Philippines: A local bank adds a provision to
issue shares at discounted prices if an acquirer exceeds a 15%
ownership threshold.
Global Example: Netflix adopted a poison pill in 2012 to prevent
activist investor Carl Icahn from gaining control.

1.2. Staggered Board of Directors

A staggered board divides board members into classes, with only a
portion up for re-election at any given time. This delays the
hostile bidder’s ability to gain control of the board.
Example in the Philippines: A publicly listed company, like a
manufacturing firm, implements staggered terms where only one-
third of the board can be replaced annually.
Global Example: Airgas successfully used a staggered board to
fend off a bid by Air Products and Chemicals in 2010.

1.3. Dual-Class Share Structure

Under this mechanism, the company issues two classes of shares:
one with voting rights (held by insiders) and another without
voting rights (available to the public). This ensures that
insiders retain control even if a majority of shares are
acquired.
Example in the Philippines: A tech startup issues "Class A"
shares with 10 votes per share for founders and "Class B" shares
with 1 vote per share for public investors.
Global Example: Alphabet (Google's parent company) uses a dual-
class share structure to keep voting control with its founders.

1.4. Golden Parachutes

Golden parachutes are lucrative compensation packages offered to
top executives if they are terminated following a takeover. This
increases the acquisition cost for the hostile bidder.
Example in the Philippines: A telecommunications firm includes
provisions in executive contracts for severance packages
equivalent to three years’ salary.
Global Example: Twitter implemented golden parachutes for its
executives before Elon Musk’s acquisition.

2. Post-Offer Defenses
These strategies are enacted after a hostile bid has been made to
counter or derail the takeover attempt.
2.1. White Knight
The target company seeks a friendly party (a white knight) to
acquire it instead of the hostile bidder. This ensures alignment
with the target’s strategic goals.
Example in the Philippines: A Cebu-based hotel chain targets
Ayala Land as a white knight to prevent acquisition by a foreign
competitor.
Global Example: In 2001, Mitsubishi Tokyo Financial Group acted
as a white knight for Nippon Trust Bank during a takeover
attempt.

2.2. Crown Jewel Defense

The target company sells or threatens to sell its most valuable
assets (crown jewels) to a third party, making itself less
attractive to the hostile bidder.
Example in the Philippines: A real estate firm sells its prime
property to a partner company to reduce its appeal to a hostile
acquirer.
Global Example: In the 1980s, W.R. Grace sold its most profitable
division to thwart a hostile bid by Gulf Oil.

2.3. Pac-Man Defense

The target company turns the tables by attempting to acquire the
hostile bidder. This counterattack forces the bidder to
reconsider its takeover strategy.
Example in the Philippines: A BPO firm targets a smaller
competitor trying to acquire it, using its financial resources to
reverse the takeover attempt.
Global Example: Bendix Corporation used the Pac-Man defense
against Martin Marietta in the 1980s.
2.4. Greenmail
Greenmail involves repurchasing the hostile bidder's shares at a
premium to make them abandon their takeover efforts.
Example in the Philippines: A Philippine manufacturing company
repurchases shares held by a hostile foreign investor at a 30%
premium.
Global Example: Goodyear Tire paid greenmail to Sir James
Goldsmith in the 1980s to prevent a takeover.

2.5. Litigation
The target company files lawsuits against the hostile bidder,
challenging the legality of their actions or acquisition methods.
This delays the process and increases the cost for the acquirer.
Example in the Philippines: A local conglomerate files a case
with the Securities and Exchange Commission (SEC) claiming a
hostile bidder violated tender offer rules.
Global Example: PeopleSoft filed lawsuits against Oracle during
its hostile bid in the early 2000s.

2.6. Employee Stock Ownership Plan (ESOP)

An ESOP allows employees to purchase shares in the company,
aligning their interests with the management. This consolidates
internal control and blocks hostile attempts.
Example in the Philippines: A Philippine bank implements an ESOP,
giving employees significant ownership stakes to prevent external
control.
Global Example: Avis Rent-a-Car used an ESOP to block a hostile
bid by ITT Corporation.

References:
 Cabrera, M. A. (2020). Financial Markets and Institutions:
Philippine Perspective. GIC Enterprises.
 Timbang, E. B. (2018). Corporate Governance and Financial
Management in the Philippine Setting. Rex Book Store.
 Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles
of Corporate Finance (13th ed.). McGraw-Hill Education.