Types Of Mergers & Acquisitions

Definitions
A merger is a combination of two or more corporations in which only one corporation survives and the merged corporations go out of business. Statutory merger is a merger where the acquiring company assumes the assets and the liabilities of the merged companies A subsidiary merger is a merger of two companies where the target company becomes a subsidiary or part of a subsidiary of the parent company

Reasons for Mergers/Acquisitions

1) To improve economic efficiency
2) To extend the power base of management 3) To effect transfers of wealth between classes of stakeholders

Mergers & Acquisitions Defined

Mergers
two firms are combined on a relatively co-equal basis

Acquisitions
one firm buys another firm

the words are often used interchangeably even though they mean something very different

merger sounds more amicable, less threatening

Mergers & Acquisitions Defined

Mergers
parent stocks are usually retired and new stock issued name may be one of the parents or a combination one of the parents usually emerges as the dominant management

Acquisitions
can be a controlling share, a majority, or all of the target firms stock can be friendly or hostile usually done through a tender offer

Mergers & Acquisitions Defined

Types of M&A Activity

Vertical Related Horizontal Product Extension Market Extension Unrelated Conglomerate

suppliers or customers competitors complementary products complementary markets everything else

Types of Mergers
Horizontal Mergers - between competing companies Vertical Mergers - Between buyer-seller relation-ship companies Conglomerate Mergers - Neither competitors nor buyer-seller relationship

Horizontal Merger
A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Examples:- The biggest M & A deal was done by Reliance Communication which merged its telecoms tower business with GTL infrastructure Ltd for USD 11 billion. Bharti Airtel acquired Kuwait based Zain Telecom's

Vertical Mergers
A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Example:-An example of a vertical merger is a car manufacturer purchasing a tire company. Such a vertical merger would reduce the cost of tires for the automaker and potentially expand business to supply tires to competing automakers.

Conglomerate Mergers
A conglomerate merger is officially defined as being "any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas".

Reasons of Conglomerate Mergers

Share of the market that is owned by the company and indulging in cross selling. The companies also look to add to their overall synergy and productivity by adopting the method of conglomerate mergers.

Do Mergers and Acquisitions Create Value?

The Logic
Related M&A Activity
value creation would be expected due to synergies between divisions economies of scale economies of scope transferring competencies sharing infrastructure, etc.

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not capture any value from M&As, why do they continue to merge and acquire?
Survival avoid competitive disadvantage avoid scale disadvantages

Free Cash Flow

cash generating, normal return investment

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not capture any value from M&As, why do they continue to merge and acquire?
Agency Problems

managers benefit from increases in size

managers benefit from diversification

Managerial Hubris

managers believe they can beat the odds

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not capture any value from M&As, why do they continue to merge and acquire?
some M&A activity does generate above normal profits (expected and operational over the long run) Above Normal Profits

proposed M&A activity may satisfy the logic of corporate level strategy
managers may see economies that the market cant see

Summary
M&A activity is a mode of entry for vertical integration and diversification strategies A firms M&A strategy should satisfy the logic of corporate level strategy M&A activity can create economic value at announcement, but target firms usually capture that value M&A activity can create value over the long term for the acquiring firm