Corporate Finance: Ghana Institute of Management and Public Administration (Gimpa)

CORPORATE FINANCE
GHANA INSTITUTE OF MANAGEMENT AND

PUBLIC ADMINISTRATION (GIMPA)
LECTURE 9: MERGERS AND ACQUISITIONS

DR ANTHONY OWUSU-ANSAH
(PhD., MSc., BSc., AHEA, MGhIS)
Dr Anthony Owusu-Ansah 1
1
Learning Objectives
1. The different types of acquisitions
2. How a typical acquisition proceeds
3. What differentiates a friendly from a hostile

acquisition
4. Different forms of combinations of firms
5. Where to look for acquisition gains
Mergers and Acquisitions 15 - 2

Mergers and Acquisitions
Types of Takeovers
TYPES OF TAKEOVERS
GENERAL GUIDELINES
Takeover
The transfer of control from one ownership
group to another.
Acquisition
The purchase of one firm by another
Merger
The combination of two firms into a new legal
entity under common ownership
A new company is created
Both sets of shareholders have to approve the
transaction.
TYPES OF TAKEOVERSCONT.
GENERAL GUIDELINES
Amalgamation
A genuine merger in which both sets of
shareholders must approve the
transaction
Requires a fairness opinion by an

independent expert on the true value of
the firms shares when a public minority
exists

Acquisition versus Merger
Acquisition
One firm is acquired by another
Acquiring firm retains name and acquired firm
ceases to exist
26-6
Acquisition
Advantage legally simple
Disadvantage must be approved by
stockholders of both firms
26-7
Merger
Entirely new firm is created from combination
of existing firms
26-8
Financing the merger how to pay?
Cash
Equity
Debt
Usually a combination of sources of finance

TYPES OF TAKEOVERS
HOW THE DEAL IS FINANCED
Cash Transaction
The receipt of cash for shares by shareholders in the
target company.
Advantages
The acquirers shareholders retain the same level of
control over their company
Simplicity and preciseness give a greater chance of
success
It allows the recipients to spread their investments
A way of adjusting financial gearing
Disadvantage of cash to the target shareholders is that

they may be liable for capital gains tax (CGT)
Potential cash flow strain on acquirer
TYPES OF TAKEOVERS
Share Transaction
The offer by an acquiring company of shares or a
combination of cash and shares to the target
companys shareholders.
Advantages to target shareholders of receiving shares
in the acquirer
Capital gains tax can be postponed
They maintain an interest in the combined entity
To the acquirer, an advantage of offering shares is that
there is no immediate outflow of cash
Consider the effect on the capital structure of the
firm and the dilution of existing shareholders
positions.
TYPES OF TAKEOVERS
Going Private Transaction (Issuer bid)

A special form of acquisition where the
purchaser already owns a majority stake in the
target company.

Securities Laws Pertaining to

Takeovers
General Intent of the Legislation
Transparency Information Disclosure

To ensure complete and timely information be
available to all parties (especially minority
shareholders) throughout the process while at
the same time not letting this requirement stall
the process unduly.

General Intent of the Legislation
Fair Treatment
To avoid oppression or coercion of minority
shareholders.
To permit competing bids during the process

and not have the first bidder have special rights.
(In this way, shareholders have the opportunity
to get the greatest and fairest price for their
shares.)
To limit the ability of a minority to frustrate the

will of a majority. (minority squeeze out
provisions)
Securities Legislation
50.1%: Control
Shareholder controls voting decisions under
normal voting (simple majority)
Can replace board and control management
66.7%: Amalgamation
The single shareholder can approve
amalgamation proposals requiring a 2/3s
majority vote (supermajority)
Securities Legislation
90%: Minority Squeeze-out

Once the shareholder owns 90% or more of
the outstanding stock minority shareholders
can be forced to tender their shares.
This provision prevents minority

shareholders from frustrating the will of the
majority.

The Takeover Bid Process
Takeover circular sent to all shareholders.
Target has 15 days to circulate letter to

shareholders with the recommendation of the board
of directors to accept/reject.
Bid must be open for 35 days following public

announcement.
Shareholders tender to the offer by signing

authorizations.

The Takeover Bid Process
Takeover bid does not have to be for 100% of the

shares.
Tender offer price cannot be for less than the

average price that the acquirer bought shares in
the previous 90 days.
If more shares are tendered than required under

the tender, everyone who tendered shares will get
a prorated number purchased.

Friendly Acquisition
The acquisition of a target company that is

willing to be taken over.
Usually, the target will provide access to

confidential information to facilitate the
scoping and due diligence processes.

Friendly Acquisitions
The Friendly Takeover Process
Normally starts when the target voluntarily

puts itself into play.
Target uses an investment bank to prepare an
offering memorandum
May set up a data room and use confidentiality
agreements to permit access to interest parties
practicing due diligence
A signed letter of intent signals the willingness of the

parties to move to the next step (usually includes a
no-shop clause and a termination or break fee)

Friendly Acquisitions
The Friendly Takeover Process
Legal team checks documents, accounting team may

seek advance tax ruling from the IRS
Final sale may require negotiations over the structure

of the deal including:
Tax planning
Legal structures
Can be initiated by a friendly proposal by an

acquisitor seeking information that will assist in
the valuation process.

Information
memorandum
Confidentiality Main due Ratified

agreement diligence
Sign letter Final sale

of intent agreement
Approach
target

Hostile Takeovers
A takeover in which the target has no desire to

be acquired and actively rebuffs the acquirer
and refuses to provide any confidential
information.
The acquirer usually has already accumulated

an interest in the target (20% of the
outstanding shares).

Hostile Takeovers
The Typical Process
The typical hostile takeover process:

1. File statement with SEC while not trying to attract too
much attention.
2. Accumulate 20% of the outstanding shares through
open market purchase over a longer period of time
3. Make a tender offer to bring ownership percentage to
the desired level (ie. the control (50.1%)
During this process the acquirer will try to
monitor management/board reaction and fight
attempts by them to put into effect shareholder
rights plans or to launch other defensive tactics.

Hostile Takeovers
Capital Market Reactions and Other Dynamics
Market clues to the potential outcome of a hostile

takeover attempt:
1. Market price jumps above the offer price
A competing offer is likely or
The bid price is too low
2. Market price stays close to the offer price
The offer price is fair and the deal will likely go through
3. Great deal of trading in the shares
Large numbers of shares being sold from normal investors
to arbitrageurs (arbs) who are, themselves building a
position to negotiate an even bigger premium for
themselves by coordinating a response to the tender offer.

Hostile Takeovers
Defensive Tactics
Shareholders Rights Plan

Known as a poison pill or deal killer
Can take different forms but often
Gives non-acquiring shareholders the right to buy 50
percent more shares at a discount price in the event of a
takeover.
Selling the Crown Jewels

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.

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

The case of Marks & Spencer
28 May 2004: Philip Green makes his first bid of

approx. 8bn.
Who is Philip Green?
Owner of BHS and Arcadia
Personal wealth estimated at 3.6bn
30 May 2004: M&S Board appoint Stuart Rose.

Package of 850,000 base salary, possible 100%
bonus, 1.25m signing on fee.
Desperate for a turnaround Chief?
M&S shares jumped from 290p to 360p.

The case of Marks & Spencer cont.
Greens first mistake: his bid was too

complex and he was the biggest benefactor
Rose dismissed the bid as significantly
undervaluing M&S
What were Roses first defence tactics?

Axed several senior positions and made new
appointments
Set a one month deadline for announcing steps to
improve operating performance
The case of Marks & Spencer cont.
Green v Rose the battle!

Considerable adverse publicity on both sides
Rose accused Green of bugging his telephone line
An unlikely defence strategy!

Pension fund deficit
Roses action plan seemed to win over shareholders

Greens subsequent bids not enticing enough
Green backed off by mid July 2004
The case of Manchester United
March 2003: Glazer buys 2.9% stake in club.

Remember below 3% and you dont need to
declare!
June 2004: Glazer now owns nearly 20%.
October 2004: United confirms bid approach

from Glazer. Board rejects offer. Glazer now
owns nearly 30%.
December 2004: Glazer revises bid.
The case of Manchester United cont.
February 2005: Another new bid; this time

at 800m. The club now opens its books, so
Glazers team can do a full due diligence.
April 2005: Takeover Panel sets 17 May
deadline for Glazer to announce whether he
intends to buy United.
12 May 2005: Glazer launches formal take
over bid. Glazer now owns almost 57%.
The case of Manchester United cont.
23 May 2005: Glazer now owns 76.21%.
26 May 2005: Board advises shareholders to

accept the offer.
28 June 2005: Glazer now owns 98%. Game

over!
Motives for Takeovers

CLASSIFICATIONS OF MERGERS AND
ACQUISITIONS
Horizontal
A merger in which two firms in the same industry
combine.
Often in an attempt to achieve economies of scale
and/or scope.
Proctor & Gamble (P&G) acquired Gillette for $57bn
(30.2bn) in January 2005
ECOBANK acquired TTB in Ghana
Lloyds TSB acquisition of HBoS
Combined group will own 28% share of mortgage market and
15.4% share of UK savings market
ACQUISITIONS
Vertical
A merger in which one firm acquires a supplier or
another firm that is closer to its existing
customers.
Often in an attempt to control supply or
distribution channels.
Conglomerate
A merger in which two firms in unrelated
businesses combine.
Purpose is often to diversify the company by
combining uncorrelated assets and income
streams
ACQUISITIONS
Cross-border (International) M&As
A merger or acquisition involving a Ghanaian and
a foreign firm at either the acquiring or target
company.
Attractiveness of the companies are key
determinants of this merger
The culture and PESTLE factors of the countries
the companies are situate are also key
determinants.

Exhibit 20.1 UK merger activity, 19702010 (UK firms merging with UK firms)
Exhibit 20.1 UK merger activity, 19702010 (UK firms merging with UK firms)
(Continued)
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.
Company X is worth 10m
Company Y is worth 5m
Company XY is worth more than 15m

IN-CLASS QUESTION 1
Sue's Bakery is planning on merging with

Ted's Deli. Sue's will pay Ted's shareholders
the current value of their stock in shares of
Sue's Bakery. Sue's currently has 4,500
shares of stock outstanding at a market
price of 19 a share. Ted's has 2,100 shares
outstanding at a price of 20 a share. What
is the value of the merged firm?

ANSWER
Value of merged firm = (4,500 19) +

(2,100 20) = 127,500

IN-CLASS QUESTION 2
Outdoor Living has agreed to be acquired by

New Adventures for 48,000 worth of New
Adventures stock. New Adventures currently
has 8,000 shares of stock outstanding at a
price of 32 a share. Outdoor Living has
1,500 shares outstanding at a price of 43 a
share. The incremental value of the
acquisition is 21,000. What is the value of
the merged firm?

ANSWER
Value of merged firm = (8,000 32) +

(1,500 43) + 21,000 = 341,500

IN-CLASS QUESTION 3
Aardvark Enterprises has agreed to be

acquired by Lawson Products in exchange for
30,000 worth of Lawson Products stock.
Lawson has 3,000 shares of stock
outstanding at a price of 28 a share.
Aardvark has 1,200 shares outstanding with
a market value of 23 a share. The
incremental value of the acquisition is
1,400. What is the value of Lawson
Products after the merger?
ANSWER
Value after merger = (3,000 28) + (1,200

23) + 1,400 = 113,000

MOTIVATIONS FOR MERGERS AND
ACQUISITIONS
Economies of Scale
Reducing capacity (consolidation in the
number of firms in the industry)
Spreading fixed costs (increase size of firm so
fixed costs per unit are decreased)
Geographic synergies (consolidation in regional
disparate operations to operate on a national
or international basis)

Economies of Scope
Combination of two activities reduces costs
Complementary Strengths
Combining the different relative strengths of
the two firms creates a firm with both
strengths that are complementary to one
another.

Market Power
To exercise some control over the price of the

product
monopoly, oligopoly or dominant producer
positions
A motivator in vertical as well as horizontal
mergers
Even conglomerate mergers can enhance
market power
Efficiency Increases
New management team will be more efficient and
add more value than what the target now has.
The combined firm can make use of unused
production/sales/marketing channel capacity
Financing Synergy
Reduced cash flow variability
Increase in debt capacity
Reduction in average issuing costs

Internalisation of transactions
Costs of communication
The costs of bargaining
The costs of monitoring contract compliance
The costs of contract enforcement
Reduces the uncertainty of supply or the prospect of finding
an outlet
Avoids the problems of having to deal with a supplier or
customer in a strong bargaining position
Savings have to be compared with the extra costs due to
the loss of competition between suppliers

Entry to new markets and industries

Know-how
Critical size
Over-supply and excessive competition
Chance to apply general managerial skills and
experience to a cutting-edge technology through
a deal with the technologically literate
enthusiasts

Tax Benefits
Make better use of tax deductions and credits
Use them before they lapse or expire
Use of deductions to offset taxable income (non-
operating capital losses offsetting taxable capital gains
that the target firm was unable to use)
Strategic Realignments
Permits new strategies that were not feasible for
prior to the acquisition because of the acquisition
of new management skills, connections to
markets or people, and new products/services.

Other benefits
Risk diversification
Inefficient management
A conglomerates superior efficiency in allocating

capital and in using an extraordinary resource

Managerial Motivations for M&As
Managers may have their own motivations to

pursue M&As. The two most common, are
not necessarily in the best interest of the
firm or shareholders, but do address
common needs of managers
Increased firm size
Managers are often more highly rewarded financially
for building a bigger business (compensation tied to
assets under administration for example)
Many associate power and prestige with the size of
the firm.

Managerial Motivations for M&As
The managers have to be paid a lot more money

Status
Putting together an empire
The excitement of the merger process itself
Reduced firm risk through diversification
Managers have an undiversified stake in the business
(unlike shareholders who hold a diversified portfolio of
investments and dont need the firm to be diversified)
and so they tend to dislike risk (volatility of sales and
profits)
M&As can be used to diversify the company and reduce
volatility (risk) that might concern managers.
WARREN BUFFETT
The acquisition problem is often compounded by a

biological bias: many CEOs attain their positions in
part because they possess an abundance of animal
spirits and ego. If an executive is heavily endowed
with these qualities which, it should be
acknowledged, sometimes have their advantages
they wont disappear when he reaches the top. When
such a CEO is encouraged by his advisors to make
deals, he responds much as would a teenage boy
who is encouraged by his father to have a normal sex
life. Its not a push he needs.
JOHN KAY
For the modern manager, only acquisition reproduces
the thrill of the chase, the adventures of military
strategy. There is the buzz that comes from the late-
night meetings in merchant banks, the morning
conference calls with advisers to plan your strategy.
Nothing else puts your picture and your
pronouncements on the front page, nothing else offers
so easy a way to expand your empire and emphasize
your role.
Third party motives
Advisers
Investment bankers
accountants and lawyers
the press
Suppliers and customers

Merger motivessummary
Empirical Evidence of Gains through M&As
Target shareholders gain the most

Through premiums paid to them to acquire their shares
15 20% for stock-finance acquisitions
25 30% for cash-financed acquisitions (triggering
capital gains taxes for these shareholders)
Between 1995 and 2001, 302 deals worth

US$500.
61% lost value over the following year
The biggest losers were deals financed through shares
which lost an average 8%.
Empirical Evidence of Gains through M&As
Shareholder Value at Risk (SVAR)
Shareholder Value at Risk (SVAR)

Is the potential in an M&A that synergies will not be
realized or that the premium paid will be greater
than the synergies that are realized.
When using cash, the acquirer bears all the risk
When using share swaps, the risk is borne by the
shareholders in both companies
SVAR supports the argument that firms

making cash deals are much more careful
about the acquisition price.
The impact of mergers

The impact of mergers
Are target firms poor performers?

Does society benefit from mergers?
Do the shareholders of acquirers gain from mergers?
Do target shareholders gain from mergers?
Do the employees gain?
Do the directors of the acquirer gain?
Do the directors of the target gain?
Do the financial institutions gain?
Reasons for Merger Failure

Reasons for merger failure
Acquiring for the wrong reason
Overestimating gains/ underestimating costs
Badly planned integration

CASE 1
Defensive merger tactics are designed to

thwart unwanted takeovers and mergers. Do
such activities work to the advantage of
shareholders all of the time? Are these types
of activities ethical? Who do you think
benefits the most from these activities?

CASE 2
Empirical evidence indicates that the returns

to shareholders of the target firm vary
significantly from the returns to the
shareholders of the acquiring firm. Identify
the shareholders that tend to realize the
smaller return and provide some possible
explanation for these low returns.

END
END OF LECTURE.
QUESTIONS???
1-70

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CORPORATE FINANCE

GHANA INSTITUTE OF MANAGEMENT AND

LECTURE 9: MERGERS AND ACQUISITIONS

1. The different types of acquisitions

2. How a typical acquisition proceeds

3. What differentiates a friendly from a hostile

4. Different forms of combinations of firms

5. Where to look for acquisition gains

Mergers and Acquisitions 15 - 2

Requires a fairness opinion by an

Mergers and Acquisitions 15 - 5

Usually a combination of sources of finance

Disadvantage of cash to the target shareholders is that

Going Private Transaction (Issuer bid)

Mergers and Acquisitions 15 - 12

Securities Laws Pertaining to

Transparency Information Disclosure

Mergers and Acquisitions 15 - 14

To permit competing bids during the process

To limit the ability of a minority to frustrate the

90%: Minority Squeeze-out

This provision prevents minority

Mergers and Acquisitions 15 - 17

Takeover circular sent to all shareholders.

Target has 15 days to circulate letter to

Bid must be open for 35 days following public

Shareholders tender to the offer by signing

Mergers and Acquisitions 15 - 18

Takeover bid does not have to be for 100% of the

Tender offer price cannot be for less than the

If more shares are tendered than required under

Mergers and Acquisitions 15 - 19

The acquisition of a target company that is

Usually, the target will provide access to

Mergers and Acquisitions 15 - 20

Normally starts when the target voluntarily

A signed letter of intent signals the willingness of the

Mergers and Acquisitions 15 - 21

Legal team checks documents, accounting team may

Final sale may require negotiations over the structure

Can be initiated by a friendly proposal by an

Mergers and Acquisitions 15 - 22

Confidentiality Main due Ratified

Sign letter Final sale

Mergers and Acquisitions 15 - 23

A takeover in which the target has no desire to

The acquirer usually has already accumulated

Mergers and Acquisitions 15 - 24

The typical hostile takeover process:

Mergers and Acquisitions 15 - 25

Market clues to the potential outcome of a hostile

Mergers and Acquisitions 15 - 26

Shareholders Rights Plan

Selling the Crown Jewels

Mergers and Acquisitions 15 - 27

Mergers and Acquisitions 15 - 28

28 May 2004: Philip Green makes his first bid of

30 May 2004: M&S Board appoint Stuart Rose.

M&S shares jumped from 290p to 360p.

Greens first mistake: his bid was too

What were Roses first defence tactics?

Green v Rose the battle!

An unlikely defence strategy!