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Mergers - Coggle Diagram
Mergers
Why mergers sometime fail
Lack of goal congruence
Bargain purchase
Lack of industrial or commercial fit
Paying to much
Lack of management fit
Failure to integrate the entities successfully
Inability to manage change
Legal implications (regulate mergers)
Securities regulation panal
JSE
Companies Act
Security services act
Competition commission of SA
Exchange control department of the SA reserve bank
Valuation consideration
Minimum price
Shareholders of the target company. Normal valuation principles apply. No synergy taken into account.
Maximum price
Point of view of the acquiring company.
Will be able to unlock synergy and therefore considered as part of the valuation
Fair share value
Valued in the open market
Financial synergy
Revenue enhancement
Marketable gains
Strategy benefits
Market monopoly power due to reduction in competition
Cost reduction
Economics of scale
Sharing of resources
Elimination of duplicate functions
Cheaper sources of finance since better credit rating
Tax gains
Can come from
Use of tax losses from net operating losses
Use of unused debt capacity
Use of surplus funds
Dividend vs earnings and cash valuations
Business and equity valuation mind map (valuation methods)
Operational synergies
Acquisition intended for
Complementary resources
Production processes & parents
Geographical expansion
Behavioral implications
Target & acquiring companies management
Senior management resist mergers and takeovers if they perceive that it will negatively affect shares
Employees of both
They may resist it if they perceive that it will adversely affect employment
Target & acquiring companies SH
SH concerned about their wealth, therefor it is will decrease the value they might vote against it
The State
It's concerned about the public interest such as employment & competition
Funding of mergers & acquisitions
Impact of capital structure
How they pay for shares in target company will have significant effect on capital structure.
Consider D:E ratio
Share exchange = diluting in share holding of existing SH
Methods of payment: cash vs share exchange
Cash
Effects on SH of target company
Unlikely to prefer cash
Advantage = certainty of amount received
Potential tax consequences for SH, because of cash sale
Effects on SH of acquiring company
Acquiring company may claim tax deduction on assets purchased
Control remains intact
Share exchange
Effect on SH of target company
Any potential CGT is deferred
Effect on SH of acquiring company
Effect of increased earnings per share if acquiring company has higher P/E ratio
Big disadvantage
Dilution of shareholding by SH
Management buyouts
Reasons for it
Large company decide to sell or close division because
Division may have become peripheral to company's mainstream activities
Sell of lost making sub or division
Sell unwanted elements of portfolio
Holding company needs cash
A private company decides to sell division / sub
SH believe business no longer profitable for them
SH wish to retire
SH may require quick cash
Management team would buy out the business because
Gives them a chance to run their own business
Leaves them free from interference form Head office
Secures their position with company which could be taken over
Why it usually succeed
The new owners will have an incentive to succeed
Company more flexible and decision making is faster
Purchase price
If company shows poor results = price based on book values
Company can be sold as successful going concern = normal valuation techniques
Finance
Normally long-term loans financed by banks, pension funds or insurance companies
Institution providing funding usually require board representation or equity
Form of mergers
Takeover
A subsidiary relationship is created
Merger
A new company is formed and holds the shares in the target
and acquiring companies
Reasons for takeovers and mergers
Acquisitions
Horizontal acquisition
Company acquires competitor in the same industry
Vertical acquisition
Company on supply chain acquires company up or down the same chain
Conglomerate acquisition
2 companies trade in unrelated markets & merge
Relevant economic arguments
Economies of scale
Bigger facilities & equipment result in decrease in unit cost
Synergy
2+2=5
Leadership
May improve overall management team
Marketing gain
Often results in improved marketing techniques
Entry into new markets
Can provide quick entry into new markets
Financial reasons
Reduce risk portfolio
Strategic benefits
Take advantage of competitive environment
Asset stripping
Predator acquires company whose assets as per SFP are undervalued. The assets are then sold for a profit
Investment opportunities
Cash-rich company's may acquire other companies as why of using excess cash
Share price
Technology
Financial effects of acquisition
Must be able to calculate the market value, earnings per share and PE ratio post-merger
Keen to take over other companies because
It eliminates competition
The acquiring company can purchase assets for bargain price
It can buy into new product and technological ideas
Compared to organic growth it is an easy way to expand
It creates value