Mergers and Acquisitions

Group Members
Waqas Ali Tunio Lt. Cdr. Ghulam Qadir Saud Zafar Usmani Cdr. Tanveer Anjum Bhatti Lt. Cdr. Tahir Mughal

Scheme of Presentation
Introduction - Mergers and Acquisitions Size of the Business How can businesses grow?
Merger Acquisition

Types of Takeovers Defensive Tactics against Hostile Takeovers Merger vs. Acquisition the difference Pros and Cons of Takeovers Benefits of Growing M&A Motives for Takeovers Conclusion

Mergers and Acquisitions

Corporations strive to increase their earnings per share over time. Methods
Internal growth:
A firm acquires specific assets and finances them by the retention of earnings or external financing

External growth :
Involves the acquisition of another company

Size of the Business

Size can be measured in a number of ways. The most common are
By number of employees By value of output and sales By profit By capital employed

There is no perfect way of comparing the size of businesses. It is quite common to use more than one method and to compare the results obtained.

How can businesses grow?

Mergers Takeovers or Acquisitions

Merger

When two or more companies combine. The shareholders of the target firm are adequately compensated for, if the merger is effected.
The combination of two firms into a new legal entity A new company is created Both sets of shareholders have to approve the transaction.

Acquisition

When one company acquires another company. The company, that is acquired is known as target firm. The company, which acquires is called acquiring company. An acquisition may be either friendly acquisition, when both the companies agree to the tender offer or may be unfriendly acquisition when the companies do not agree with the tender offer.
The purchase of one firm by another

Types of Takeovers

Takeover Takeover may be referred to as a corporate activity when a company places a bid for acquiring another company. The company, which intends to take over the target firm makes an offer of the "outstanding shares" in case the target firm is traded publicly. The transfer of control from one ownership group to another. Hostile takeover Is defined as an "unfriendly takeover". Such actions are usually revolted against by the managers and executives of the target firm.

Financing a takeover

Sufficient funds available with the acquiring company in its own account (unusual) Borrowed from a bank or by an issue of bonds
Debt moves down into the balance sheet

Leveraged Buyouts
Acquisition financed through debt are known as LBOs Debt ratio of financing can go as high as 80% The acquiring company would only need 20% of the purchase price

Defensive Tactics against Hostile Takeovers

People pill
High-level managers and employees threaten that they will all leave the company if it is acquired. This only works if employees are highly valuable and vital to companys success.

Shareholders Rights Plan

Gives non-acquiring shareholders get the right to buy 50 percent more shares at a discount price in the event of a takeover. The selling of a target companys key assets that the acquiring company is most interested in to make it less attractive for takeover. Can involve a large dividend to remove excess cash from the targets balance sheet.

Selling the Crown Jewels

Defensive Tactics against Hostile Takeovers

White Knight
The target seeks out another acquirer considered friendly to make a counter offer and thereby rescue the target from a hostile takeover

Golden Parachutes
Golden parachutes are compensation to outgoing target firm management.

Difference between an acquisition and a merger?

In the case of a merger, two firms together form a new company. After the merger, the separately owned companies become jointly owned and obtain a new single identity. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. Generally, mergers take place between two companies of more or less same size. However, with acquisition, one firm takes over another and establishes its power as the single owner. Generally, the firm which takes over is the bigger and stronger one. The relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the stock market.

Pros and Cons of Takeovers

Increase in sales/revenue & Venture into new business and market Profitability of target company Increased market share Decreased competition (monopoly) Reduction of over capacity in the industry Enlarged brand portfolio

Culture clashes within the two companies Reduced competition is bad for consumers & Likelihood of job cuts Conflict with new management Hidden liabilities of target company. The monetary cost to the company & lack of motivation for employees being bought

Increase in Economies of Scale Increased efficiency due to corporate synergies

Motivations for Mergers and Acquisitions

Creation of Synergy Motive for M&As

The primary motive should be the creation of synergy. Synergy value is created from economies of integrating a target and acquiring a company; the amount by which the value of the combined firm exceeds the sum value of the two individual firms. The possible synergies of an acquisition come from the following: Revenue enhancement Cost reduction Lower taxes Lower cost of capital

Conclusion
The synergy from a merger is the value of the combined firm less the value of the two firms as separate entities
For Example
Before Merger: V = 10 V = 10 After Merger: V = 30
A
B

AB

Synergy VAB (VA VB ) Synergy 30 (10 10) Synergy 10