Mergers and Acquisitions

In the Philippines
- AirAsia to acquires 40% of Zest Air
- San Miguel Corporation buys into PAL, Air Philippines
- Puregold buys S&R for P16.5B
- Allied Bank and PNB announce merger
- Planned BPI, PNB merger to result in superbank
- Banco de Oro and Equitable PCI Bank merges
- PLDT acquires JG Summit's shareholdings in Digitel, parent

company of Sun Cellular

- Jollibee acquires 70% of Mang Inasal for P3B
- Maxs Group acquires Pancake House
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Merger Fundamentals:
Terminology
Corporate restructuring is the activities involving
expansion or contraction of a firms operations or
changes in its asset or financial (ownership)
structure.
A merger is the combination of two or more firms,
in which the resulting firm maintains the identity of
one of the firms, usually the larger.
Consolidation is the combination of two or more
firms to form a completely new corporation.

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Merger Fundamentals:
Terminology (cont.)
A holding company is a corporation that has voting
control of one or more other corporations.
Subsidiaries are the companies controlled by a holding
company.
The acquiring company is the firm in a merger
transaction that attempts to acquire another firm.
The target company is the firm in a merger transaction
that the acquiring company is pursuing.

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Merger Fundamentals:
Terminology (cont.)
A friendly merger is a merger transaction
endorsed by the target firms management,
approved by its stockholders, and easily
consummated.
A hostile merger is a merger transaction that
the target firms management does not
support, forcing the acquiring company to try
to gain control of the firm by buying shares
in the marketplace.

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Merger Fundamentals:
Terminology (cont.)
A strategic merger is a merger transaction
undertaken to achieve economies of scale.
A financial merger is a merger transaction
undertaken with the goal of restructuring the
acquired company.

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Merger Fundamentals:
Motives for Merging
The overriding goal for merging is maximization of the owners
wealth as reflected in the acquirers share price.
More specific motives include:
Growth or Diversification
Synergy
Fund raising
Increased managerial skill or technology
Tax considerations
Increased ownership liquidity
Defense against takeover
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Merger Fundamentals: Types of

Mergers
A horizontal merger is a merger of two firms in the same line of
business, while a vertical merger is a merger in which a firm acquires
a supplier or a customer.
A congeneric merger is a merger in which one firm acquires another
firm that is in the same general industry but is neither in the same line
of business nor a supplier or customer, while a conglomerate merger
is a merger combining firms in unrelated businesses.
A leveraged buyout (LBO) is an acquisition technique involving the
use of a large amount of debt to purchase a firm.

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LBOs and Divestitures (cont.)

An operating unit is a part of a business, such as a plant,
division, product line, or subsidiary, that contributes to the
actual operations of the firm.
A divestiture is the selling of some of a firms assets for
various strategic reasons.

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LBOs and Divestitures (cont.)

Firms divest themselves of operating units by a variety of
methods.
Sale of a product line to another firm
Spin-off, which is a form of divestiture in which an operating
unit becomes an independent company
Liquidation of the operating units individual assets.

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Analyzing and Negotiating Mergers:

Valuing the Target Company
Acquisition of assets
Occasionally, a firm is acquired not for its incomeearning potential but as a collection of assets (generally
fixed assets) that the acquiring company needs.
The price paid for this type of acquisition depends
largely on which assets are being acquired;
To determine whether the purchase of assets is
financially justified, the acquirer must estimate both
the costs and the benefits of the target assets.
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Analyzing and Negotiating Mergers:

Valuing the Target Company (cont.)
Acquisitions of Going Concerns
Analyzed by using capital budgeting techniques similar to those
used for asset acquisitions.
The methods of estimating expected cash flows from an
acquisition are similar to those used in estimating capital
budgeting cash flows.
Typically, pro forma income statements reflecting the
postmerger revenues and costs attributable to the target
company are prepared.
They are then adjusted to reflect the expected cash flows over
the relevant time period.
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Analyzing and Negotiating Mergers:

Stock Swap Transactions
A stock swap transaction is an acquisition method in which
the acquiring firm exchanges its shares for shares of the
target company according to a predetermined ratio.
The ratio of exchange is the ratio of the amount paid per
share of the target company to the market price per share of
the acquiring firm.

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Analyzing and Negotiating Mergers:

Stock Swap Transactions (cont.)
Grand Company, whose stock is currently selling for $80 per share, is
interested in acquiring Small Company. To prepare for the acquisition,
Grand has been repurchasing its own shares over the past 3 years.
Smalls stock is currently selling for $75 per share, but in the merger
negotiations, Grand has found it necessary to offer Small $110 per
share. Small has agreed to accept Grands stock in ex-change for its
shares. As stated, Grands stock currently sells for $80 per share, and it
must pay $110 per share for Smalls stock.
The ratio of exchange is 1.375 ($110 $80).

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Analyzing and Negotiating Mergers:

Merger Negotiation Process
Investment bankers are financial intermediaries who, in addition to
their role in selling new security issues, can be hired by acquirers in
mergers to find suitable target companies and assist in negotiations.
The investment banker is typically compensated with a fixed fee, a
commission tied to the transaction price, or a combination of fees and
commissions.

To initiate negotiations, the acquiring firm must make an offer either

in cash or based on a stock swap with a specified ratio of exchange.

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Analyzing and Negotiating Mergers:

Merger Negotiation Process
When negotiations for an acquisition break down, tender offers may
be used to negotiate a hostile merger directly with the firms
stockholders.
A tender offer is a formal offer to purchase a given number of shares of a
firms stock at a specified price. The offer is made to all the stockholders at a
premium above the market price.
Occasionally, the acquirer will make a two-tier offer, a tender offer in which
the terms offered are more attractive to those who tender shares early

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Analyzing and Negotiating Mergers:

Merger Negotiation Process
Takeover defenses are strategies for fighting hostile takeovers.
A white knight is a takeover defense in which the target firm finds an
acquirer more to its liking than the initial hostile acquirer and prompts the
two to compete to take over the firm.
A poison pill is a takeover defense in which a firm issues securities that give
their holders certain rights that become effective when a takeover is
attempted; these rights make the target firm less desirable to a hostile
acquirer. (such as allowing existing shareholders to buy more shares at a
discount; investors get instant profits and, more importantly, they dilute the
shares held by the acquirer; makes the takeover attempt more difficult and
more expensive) .
Greenmail is a takeover defense under which a target firm repurchases,
through private negotiation, a large block of stock at a premium from one or
more shareholders to end a hostile takeover attempt by those shareholders.
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Analyzing and Negotiating Mergers:

Merger Negotiation Process
Other takeover defenses include:
A leveraged recapitalization is a takeover defense in which the target firm
pays a large debt-financed cash dividend, increasing the firms financial
leverage and thereby deterring the takeover attempt.
Golden parachutes are provisions in the employment contracts of key
executives that provide them with sizable compensation if the firm is taken
over; deters hostile takeovers to the extent that the cash outflows required are
large enough to make the takeover unattractive.
Shark repellents are anti-takeover amendments to a corporate charter that
constrain the firms ability to transfer managerial control of the firm as a
result of a merger.

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