Introduction
04.0
Basics of mergers and acquisition
15.1.1
Definition of mergers and acquisitions
15.1.2
Types of mergers
15.1.3
Types and methods of acquisitions
04.1
Restructuring
04.2
Initial public offering (IPO)
Review questions
Learning objectives
The syllabus for this examination is broken down into a series of learning objectives and is included in the Syllabus Learning Map at the back of this workbook. Each time a learning objective is
INTRODUCTION
Mergers and acquisitions between companies take place to create value for shareholders that expected to exceed the sum of the value of the individual companies. This value adding results usually from what is come to be known as synergy. Synergy takes the form of revenue enhancement and cost savings. Out of merging, the companies‟ objective is to benefit from:
i. Economies of scale resulting from the bigger size of the merged companies.
ii. Improved market share by reaching new markets that help increase sales and earnings
iii. Staff reduction in major functions such as accounting, marketing, sales and other management jobs including top management.
iv. Acquired new technologies or processes owned by the target or any form of competitive advantage
15.1 BASICS OF MERGERS AND ACQUISITIONS
15.1.1 DEFINITIONS OF MERGERS AND ACQUISITIONS
Learning Objective 15.1.1 – Know the Basic Concept of Mergers and Acquisition
The term Merger & Acquisition (M & A) refers to two distinct actions:
i. An acquisition arises when one company takes over another and the company ceased to exist, while the buyer continued as usual
ii. The merger arises when two firms agree to continue as a single new company, rather than separately owned and operated.
15.1.2 TYPES OF MERGERS
Learning Objective 15.1.2 – Understand the Basic Types of Mergers
The main types of merger, based on the relationship between the two companies are:
i. Horizontal merger: takes place when two merged companies are in the same or similar businesses.
ii. Vertical merger: takes place when a company merged with its supplier (downstream) company or with its customer (upstream) company.
iii. Conglomeration merger: takes place when two companies that have no common business area merge.
15.1.3 TYPES AND METHODS OF ACQUISITIONS
Learning Objective 15.1.3 – Understand the Basic Types and Methods of Acquisitions
An acquisition is the purchase of all of other firms‟ assets for a controlling interest in its stock: i. Acquisition of assets: It requires a vote of the acquired company shareholders.
ii. Acquisitions of stock: It does not require a formal vote of the acquired companies‟ shareholders. Also, it is the viable method if the board of directors and management are hostile to the offer.
When the offer made by the acquiring company is not accepted by management, a tender offer maybe made directly to the target company shareholders to obtain a controlling interest (i.e. hostile acquisition).
On the other hand a proxy contest is an attempt usually made by dissident shareholders to get some degree of control by planting members on the board of directors.
Management buy-out (MBO) is usually effected by management or group of employees, and usually through the use of debt to buy the company. The buyers usually use little equity and use the assets of the bought company as collateral for the loan or debt issued to finance the transaction – the new owners usually take the company, if it is public one, private. The process is generally known as a Leveraged Buy – Out (LBO).
15.2 RESTRUCTURING
Learning Objective 15.2 – Understand the Various Types of Restructuring Methods
There are several restructuring methods in practice, but the three main ones are: i - Sell-off
ii - Equity carve – out iii - Spin-off
A sell-off (also known as divestiture), is the outright sale of a company subsidiary. Normally, management resorts to sell-off when it feels that the subsidiary hampers or negatively impacts the overall operating or/and financial performance of the group or simply that the subsidiary does not fit well with the company‟s operations.
Equity carve-out involves the sale of a portion of the company through an equity offering of shares in the new unit to external parties or investors, through an initial public offering (IPO). Thus, a new public-listed company is created, with the parent company retention of controlling interest in the new subsidiary.
15.3 INITIAL PUBLIC OFFERINGS (IPO)
Learning Objective 15.3 – Understand the Process of Initial Public Offering (IPO)
A company can issue its securities as a public issue or private issue. The first public equity issue that is made by a company is referred to as an initial public offering (IPO) – it is sometimes called unseasoned new issue. As the name implies this type of issue takes place when a company decides to go public. There are many methods through which IPO can be effected, the two famous of which are:
i. The firm commitment cash offer ii. The best efforts cash offer
In the firm commitments cash offer, the issuing company negotiates an agreement with an investment banker, to underwrite and distribute the new shares. In this agreement the underwriting bank commits itself to buy a specified number of shares (usually the whole issue) for sale to the public (at a higher price). Under this method the issuing company is certain about both the amount of shares to be issued and the net proceeds it receives.
In the best efforts cash offer, the company agrees with the investment banker(s) to sell as many of the new shares as possible at special price. Under this method the bank does not guarantee the quantity or the total amount of cash to be raised.