Topic 6: Mergers and Acquisitions

References: ESP – International Banking and Finance, FTU investopedia.com wikipedia.org

A. TERMS, THEORIES AND DEFINITIONS                             

Mergers and acquisitions (abbreviated M&A) are both aspects of strategic management, corporate finance andmanagement dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. 

Distinction between Mergers and Acquisitions 
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. 

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. 

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. 

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. 

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. 

B. VOCABULARY EXERCISES

Match the words on the left with the words on the right

1. make / reject / accept / improve / retract 2. buy up some 3. subscribe to / follow / ignore 4. an unregulated 5. do / close 6. gain 7. consolidate 8. sell off an

a. a code of practice b. controlling interest c. a deal d. activity / industry e. unwanted subsidiary f. an offer / a bid g. our position in the market h. shares / smaller companies

C. READING

Reading 1:

Spring in their steps. Some notes for company bosses out on the prowl.

(Adapted from The Economist, February, 2004.)

1. After a long hibernation, company bosses are beginning to rediscover their animal spirits. The $145 billion – worth of global mergers and acquisitions announced last month was the highest for any month in over three years.There are now lots of chief executives thinking about what target they might attack in order to add growth and value to their companies and glory to themselves. Although they slowed down for a while because of the dot – com boom, they are once again on the prowl.

2. What about CEOs do to improve their chances of success in the coming rush to buy? First of all, they should not worry to much about widely – quoted statistics suggesting that as many as three out of every four deals have failed to create shareholder value for the acquiring company. The figures are heavily influenced by the time period chosen and in any case, one out of four is not bad when compared with the chances of getting a new business started. So they should keep looking for good targets.

3. There was a time when top executives considered any type of business to be a good target. But in the 1990s the idea of the conglomerate, the holding company with a diverse portfolio of businesses, went out of fashion as some of its most prominent protagonists – CBS and Hanson Trust, for example – faltered. Companies had found by then that they could add more value by concentrating on their ‘core competence’, although one of the most successful companies of the decade, General Electric, was little more than an old – style conglomerate with a particularly fast – changing portfolio.

4. Brian Roberts, the man who built Comcast into a giant cable company, was always known for concentrating on his core product – until his recent bid for Disney, that is. It is not yet clear wether his bid is an opportunistic attempt to acquire and break up an undervalued firm, or wether he is chasing the media industry’s dream of combining entertainment content with distribution, a strategy which has made fortunes for a few but which regularly proves the ruin of many big media takeovers.

5. If vertical integaration is Comcast’s aim, then it will be imperative for Mr. Roberts to have a clear plan of how to achieve that. For in the end, CEOs will be judged less for spotting a good target than for digesting it well, a much more difficult task. The assumption will be that, if they are paying a lot of money for a business, they know exactly what they want to do with it.

6. If CEOs wish to avoid some of the failure of the 1990s, they should not forget that they are subject to the eternal tendency of business planners to be over – confident. It is a near certainty that, if asked, almost 99 per cent of them would describe themselves as ‘above average’ at making mergers and acquisitions work. Sad as it may be, that can never be true.

7. They should also be aware that they will be powerfully influenced by the herd instinct, the feeling that it is better to be wrong in large numbers than to be right alone. In the coming months they will have to watch carefully to be sure that the competitive space into which the predator in front of them is so joyfully leaping does not lie at the edge of a cliff.

Exercise 1. Read the article. Are these statements true or false?

1. In the first paragraph, the author says that CEOs can no longer find targets for mergers and acquistions.

2. Studying facts and figures from the recent past won’t necessarily help CEOs to form a successful alliance.

3. The trend in the 1990s was for companies to build portfolios with diverse investments.

4. The author suggests that media mergers are always likely to improve share value.

5. CEOs need above all to find the right company to acquire.

6. If business planners wish to avoid some of the errors of the 1990s, they should be prudent when taking risks.

Exercise 2. Find the words in italics in the text and match them with their meaning below.

1.___________ A collection of companies

2.___________ An offer to buy

3.___________ Most important activity

4.___________ Controlling all stages of one particular type of business

5.___________ Organization comprising several companies

6.___________ What stocks in a public company are worth.

Reading 2:

A.___________

Successful companies generally want to diversify; to introduce new products or services, and enter new markets. Yet entering new markets with new brands is ussually a slow, expensive and risky process, so buying another company with existing products and customers is often cheaper and safer. If a country is too big to acquire, another possibility is to merge with it, forming a new company out of the tow old ones. Apart from diversifying, reasons for acquiring companies including getting stronger position in a market and a larger market share, reducing competition, benefiting from economics of scale, and making use of plant and equipment.

B.___________

There are two ways to acquire a company: a raid or a takeover bid. A raid simply involves buying as many of a company’s stocks as possible on the stock market. Of course if there is more demand for stock than there are sellers, this increases the stock price. A takeover bid is a public offer to a company’s stockholders to buy their stocks at a certain price (higher than the current market price) during a limited period of time. This can be much more expensive than a raid, because if all the stockholders accept the bid, the buyer has to purchase 100% of the company’s stocks, even though they only need 50% plus one to gain control of a company. (In fact they often need much less, a many stockholders do not vote at stockholders’ meeting.) If stockholders accept a bid, but receive stocks in the other company instead of cash, it is not always clear if the operation is a takeover or a merger – journalists sometimes use both terms.

C.___________

Companies are somtimesencouraged to take over other ones by investment banks, if researchers in their Mergers and Acquisitions departments consider that the target companies are undervalued. Banks can earn high fees for advising on takeovers.

D.___________

Yet there are also a number of good arguments against takeovers. Diversification can damage a company’s image, goodwill and shared values (e.g. quality, good service, innovation). After a hostile takeovers (where the managers of a company do not want it to be taken over), the top exccutives of the newly acquired company are often replaced or choose to leave. This is a problem if what made the company special was its staff (or ‘human capital’) rather than its products and customer base. Futhermore, a company’s optimum size or market share can be quite small, and large conglomerates can become unmanageable an inefficient. Takeovers do not always result in synergy. In fact, statistics show that most mergers and acquisitions reduce rather than increase the company’s value.

E.___________

Consequently, corporate raider and private equity companies look for large conglomerates (formed by a serious of takeovers) which have become inefficient, and so are undervalued. In other words, their market capitalization (the price of all their stocks) is less than the value of their total assets, including land, buildings and – unfortunately – pension funds. Raiders can borrow money, ussually by issuing bond, and buy the companies. They can split them up or sell off the assets, and then pay back the bonds while making a large profit. Until the law was changed, they were also able to to appropriate the pension funds. This is known as asset – stripping, and such takeovers are called leveraged buyouts or LBOs. If a company’s own managers buy its stocks, this is a management buyout of MBO.

Exercise 3. Read the text and match the titles (1 – 5) to the paragraphs (A – E)

1. Disavantages of takeovers

2. Raiders and assets – tripping

3. Raids and bids

4. The ‘make – or – buy’ decision

5. The role of banks

Exercise 4. Find words or phrases in the text that mean the following:

1. ___________ Adding new and different products or services

2. ___________ A company’s sales expressed as a percentage of the total sales in the market

3. ___________  Reductions in costs resulting from increased production

4. ___________ Money paid to investment banks for work done

5. ___________  All the individuals or organizations that regularly or occasionally purchase goods or services from a company

6. ___________ Best, perfect or ideal

7. ___________ Combined production or productivity that is greater than the sum of the separate parts

8. ___________ People or companies that try to buy and sell other companies to make a profit

9. ___________ Large corporation or groups of companies offering a number of different products or services

10. __________ Buying a company in order to sell its most valuable assets at a profit

D. FOLLOW – UP EXERCISES

Exercise 1. Choose the best word from each pair in bold type

1. Anderson Accounting has been taken over / taken up by Berlin Brothers.

2. Collins Corporation has made a bid / play for Dacher Deutsche.

3. The board of Dacher Deutsche rejected / denied Collins Corporation’s offer.

4. Eastern Electricity has joined / merged with Grampian Gas.

5. Inter – tek has been sold by its father / parent company, Harrison Holdings.

6. Inter – tek has been acquired / got by Johson & Johnson.

7. Harrison Holdings is expected to sell more of its subsidiaries / children in the future.

Exercise 2. Put the words below into the correct spaces.

conditional bid       controlling interest           hostile takeover            merger             ‘poison pill’          shareholder              target company           unconditional bid        ‘white knight’

Takeover bids

In a takeover bid, another person or business makes an offer to the (1)................. to buy their shares at a fixed price. The aim is to take control of the (2)......................

If it is a welcome takeover bid, the directors of the company advise the shareholders to accept the offer. If the shareholders accept the offer, the result is usually called a (3).........................

If the bid is unwelcome, the directors advise the shareholders against accepting it. The bidders may then write to the shareholders explaining the advantages of the takeover, and perhaps improving the offer for the share. This is known as a (4).............................. bid.

To avoid an unwelcome takeoverbid, the directors may devise a (5)...................... – a tactic that will mean the company is worth much less if the takeover bid is successful.

Alternatively, they may look for a (6)........................ – an alternative bidder for the company whose takeover would be more welcome.

In an (7)......................., the bidder offers a price for each share regardless of how many share it can buy. In a (8)......................., the offer price depends on the bidder being able to buy enough shares to gain a (9)....................... in the target company.

Exercise 3. Choose the best word to go into the space.

1. Berlin Brothers bought a ................ shareholding in Anderson Accouting.

a. more – than – half         b. biggest                       c. majority

2. In the UK, mergers and acquisitions are not ................buy the government.

a. controlled                      b. checked                     c. regulated

3. However, they subject to a voluntary ................

a. code of conduct             a. code of practice         c. way of doing things

4. Buying a company for less than the value of its assets, then selling those assets to make a profti is called.........................

a. asset stripping               b. profiteering               c. exploitation

5. Sometimes a controlling interest in a company is bought buy its managers. This called a management .........................

a. buy – out                       b. buy – out                   c. buy – in

6. In the past, a lot of small banks were .................buy larger industry.

a. bought up                      b. eaten up                    c. chewed up

7. In other words, there was........................ in the bank industry.

a. amalgamation                b. combining                 c. consolidation

8. A takeover of a foreign company is known as a ....................deal.

a. cross – boundary          b. cross – border           c. cross – state

E. GUIDE

READING

Exercise 1 1. F 2. T 3. F 4. F 5. F 6. T

Exercise 2 1. conglomerate 2. bid 3. core competence 4. vertical intergration 5. porfolio 6. shareholder value

Exercise 3 1. D 2. E 3. B 4. A 5. C

Exercise 4

1. diversifying 2. market share 3. economies of scale 4. fees 5. customer

6. optimum 7.synergy 8. raider 9. conglomerate 10. asset stripping

FOLLOW – UP EXERCISES

Exercise 1 1. taken over 2. bid 3. rejected 4. merged 5. parent 6. acquired 7. subsidiaries

Exercise 2 1. shareholder 2. target company 3. merger 4. hostile takeover 5. poison pill 6. white knight 7. unconditional bid 8. conditional bid 9. controlling interest

Exercise 3 1. a 2. c 3. b 4. a 5. a 6. a 7. c 8. b