M& A

Lecture # 6

Prof Sonali

M&A

3/30/2012

Types of Acquisitions
Assets Purchase Stock Purchase

Prof Sonali

M&A

3/30/2012

Assets Purchase
The acquiring firm purchases specific identifiable assets for

the business These assets are perceived as having potential to add value to he acquiring company In some cases it may also assume specified liabilities . This helps the acquiring company to reduce the risk of taking unknown liabilities

Prof Sonali

M&A

3/30/2012

 The acquiring company keen on purchase mode as it can

acquire the assets at a comparatively lower price .This potentially reduces future capital gains tax upon a sale of assets . It increases the future depreciation cost ,thereby reducing income tax If one evaluate this method from point of view of the target company it typically does not prefer this method for it has to pay capital gains tax on the difference between assets sold and purchase price allocated to such assets

Prof Sonali

M&A

3/30/2012

 If target company desires to use the proceeds of the assets

sale for paying dividend to the stockholders ,dividend would be subject to an additional tax thus increasing the burden on the target company . Instead that target company prefer selling the entire business with employees in place and without the need to wind down the company

Prof Sonali

M&A

3/30/2012

Limitations of the method

The acquiring company must be assured that all necessary

assets are listed . Closing deal is comparatively difficult for the following reasons :I. For titled assets such as vehicles and property transferring ,the ownership title of each asset becomes a tedious task . II. The content of the shareholders is required for each transfer . III. If the entire business is being sold ,each employee must be terminated and rehired by the acquirer .this can create lot of employee benefit issues
Prof Sonali M&A 3/30/2012

Stock Purchase
The acquirer purchases the entire outstanding equity of the

target company . The company's outstanding equity consists of shares of its stock held by the investing public (existing shareholders). It is the method where by the acquirer purchases the entire company and all assets and liabilities of the business that come with it Stock purchase does not cause any disruption in the operations which can continue as usual .

Prof Sonali

M&A

3/30/2012

Method is popular because : Closings are simplified Fewer contracts consents and very little paperwork is

required to transfer specific assets All employees and employee benefits are transferred with the stock sale

Prof Sonali

M&A

3/30/2012

 One needs to take care that if the shares are widely held ,a

transmittal letter needs to be distributed to shareholders to facilitate the exchange of shares for the consideration by delivery of their stock certificates Transmittal letters often accompany reports and inform readers of a report's context. Typically, the letter includes information not found in the report. For example, the letter contains information about the particular project and/or due dates..

Prof Sonali

M&A

3/30/2012

Good for target Company

It incurs capital gains only on difference between basis in

stock sold which is not subject to depreciation and purchase price for stock No dividend has to be paid to distribute the proceeds of sale to the stockholders and double taxation can be avoided Target company is not required to tackle any issues relating to winding up of the company

Prof Sonali

M&A

3/30/2012

Bad for acquiring company

It cannot pick and choose assets and liabilities . It has to inherit liabilities

Prof Sonali

M&A

3/30/2012

Difference acquisition

between

Merger

and

Prof Sonali

M&A

3/30/2012

Reasons for failure of Mergers and Acquisition

The end result Is not always positive Quite often M & A destroy rather than add value to the

acquirers business

Prof Sonali

M&A

3/30/2012

The most common reasons for the failure are as follows :Unrealistic price paid for target II. Difficulties in cultural integration E.g. :- Daimler Benzs culture stressed on a more formal and structured management style ,Chrysler favored more relaxed freewheeling style III. Overstated synergies IV. Integration difficulties V. Inconsistent strategy VI. Poor Business Fit VII. Inadequate Due Diligence
I.
Prof Sonali M&A 3/30/2012

VIII. High Leverage IX. Boardroom Split

Regulatory Issues XI. HR issues

X.

Prof Sonali

M&A

3/30/2012

References
Meregrs and Acqusitions

- Rajinder Arora

Prof Sonali

M&A

3/30/2012