MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING

Mergers and Acquisitions

What is the motivation behind Mergers and Acquisitions? 2. Which type of firms engage in Merger activities? 3. Why do we see more mergers in some periods than in others?
1.

Merger

A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This is referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.

Types of Mergers

I. Horizontal Merger

Involves two firms operating in the same kind of business activity. eg. Merger between two steel firms.

II. Vertical Merger

Involves different stages of production operations. eg. In oil industry, exploration and production activity is distinct from refining operations and from marketing activity. eg. In pharmaceutical industry, one could distinguish between research and the development of new drugs, production of drugs, and the marketing of these drugs.

III. Conglomerate Merger

Involves firms engaged in unrelated types of business activity.

Among Conglomerates, subtypes are: a. Product-extension mergers

They broaden the product lines of firms.

b. Geographic market-extension mergers

They involve two firms whose operations had been conducted in non overlapping geographic areas.

c. Pure conglomerate merger

They involve unrelated business activities that do not qualify as either product-extension or market-extension mergers.

Acquisition

An acquisition or takeover is the purchase of one business or company by another company or other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.
Eg. Chevron acquired Golf, General Motors acquired Hughes Aircraft and Electronic Data Systems, Nestle acquired Carnation, American General acquired Gulf United Insurance etc.

Forms of Restructuring Business Firms

II. SELL- OFFS I. EXPANSION
a. Mergers & Acquisitions b. Tender Offers c. Joint Ventures

a. Spin-Offs: Split-Offs Split-Ups b. Divestitutes: Equity Carve-outs

III. CORPORATE CONTROL

a. Premium Buy-backs b. Standstill Agreements c. Antitakeover amendments d. Proxy Contests

IV. CHANGES IN OWNERSHIP STRUCTURE

a. Exchange Offers b. Share Repurchases c. Going Private d. Leveraged Buy-outs

1. Tender offer: one party, generally a corporation seeking a

controlling interest in another corporation, asks the stockholders of the firm it is seeking to control to submit, or tender, their shares of stock in the firm.

II. Joint Venture: it involves the intersection of only a small

fraction of the activities of the companies involved and usually for a limited duration of ten to fifteen years or less. They may represent a separate entity in which each of the parties makes cash and other forms of investments.

III. Sell- Offs:

A. Spin-off: creates a separate new legal entity, its shares are distributed on a pro rata basis to existing shareholders of the parent company. Thus, the existing shareholders have the same proportion of ownership in the new entity as in the original firm. However, there is a separation of control, and eventually the new entity as a separate decision-making unit may develop policies and strategies different from those of the original parent. No cash is received by the original parent. a. Split-off: a portion of existing shareholders receives stock in a subsidiary in exchange for parent company stock. b. Split-up: the entire firm is broken up in a series of spin-offs, so that the parent no longer exists and only the new offspring survive.

B. Divestiture: involves the sale of a portion of the firm to an outside third party. Cash or equivalent consideration is received by the divesting firm. Typically, the buyer is an existing firm, so that no new legal entity results. It simply represents a form of expansion on the part of the buying firm.
a. Equity carve-out: involves the sale of a portion of the firm via an equity offering to outsiders. In other words, new shares of equity are sold to outsiders which give them ownership of a portion of the previously existing firm. A new legal entity is created. The equity holders in the new entity need not be the same as the equity holders in the original seller. A new control group is immediately created.