Professional Documents
Culture Documents
Introduction
Business Combinations
METHODS OF BUSINESS
COMBINATION
There are several methods for
achieving a business combination. It
is useful to have an understanding of
these different methods.
Business Combinations(Contd)
Acquisition
An acquisition can take the form of a purchase of the stock
or other equity interests of the target entity, or the
acquisition of all or a substantial amount of its assets.
* Share purchases - in a share purchase the buyer buys
the shares of the target company from the shareholders of
the target company. The buyer will take on the company
with all its assets and liabilities.
* Asset purchases - in an asset purchase the buyer buys
the assets of the target company from the target company.
In simplest form this leaves the target company as an
empty shell, and the cash it receives from the acquisition is
then paid back to its shareholders by dividend or through
liquidation. However, one of the advantages of an asset
purchase for the buyer is that it can "cherry-pick" the
assets that it wants and leave the assets - and liabilities that it does not.
Business Combinations(Contd)
Merger
In a merger, two separate companies
combine and only one of them survives. In
other words, the merged (acquired)
company goes out of existence, leaving its
assets and liabilities to the acquiring
company. Usually when two companies of
significantly different sizes merge, the
smaller company will merge into the larger
one, leaving the larger company intact.
Business Combinations(Contd)
Consolidation
A consolidation is a combination of two or more
companies in which an entirely new corporation is
formed and all merging companies cease to exist.
Shares of the new company are exchanged for
shares of the merging ones. Two similarly sized
companies usually consolidate rather than merge.
Although the distinction between merger and
consolidation is important, the terms are often
used interchangeably, with either used to refer
generally to a joining of the assets and liabilities
of two companies.
M & A - Definitions
Various authors give variety of
definitions for mergers and
acquisitions.
A merger in the true legal sense
happens when two or more
businesses dissolve and fold their
assets and liabilities into a newly
created third entity.
M & A - Definitions
The buying, selling and combining of
different companies to grow rapidly
without having to create another business
entity
M & As are the most popular means of
corporate
restructuring
or
business
combinations.
Corporate restructuring includes mergers
and acquisitions (M & As), amalgamation,
takeovers, spin-offs, leveraged buy-outs,
buyback of shares, capital reorganisation
etc.
Different definitions
A takeover
refers to the transfer of control of the firm from one group
of shareholders (i.e. the bidder) to another
Takeovers occur by acquisition, proxy contest, or going private
Proxy contests occur when a group of shareholders attempts to gain
controlling seats on the board of directors by voting in new directors.
In going private transactions all the share of a public firm are purchased
by a small group of investors. The shares are delisted from stock
exchanges.
Acquisition
Of stock: buying stock in a public offer
Of assets: buying all the assets in an
offer
Business Combinations(Contd)
Leveraged Buyout
A leveraged buyout (LBO) is a type of acquisition
that occurs when a group of investors, sometimes
led by the management of a company
(management buyout or MBO), borrows funds to
purchase the company. The assets and future
earnings of the company are used to secure the
financing required to purchase the company.
Sometimes employees are allowed to participate
through an employee stock ownership plan, which
may provide tax advantages and improve
employee productivity by giving employees an
equity stake in the company.
Business Combinations(Contd)
Holding Company
A holding company is a company that owns
sufficient voting stock to have a controlling
interest in one or more companies called
subsidiaries. Effective working control or
substantial influence can be gained through
ownership of as little as 5 percent to as much as
51 percent of the outstanding shares, depending
on how widely the shares are distributed. A
holding company that engages in the
management of the subsidiaries is called a parent
company.
Business Combinations(Contd)
Divestitures
While divestitures do not represent a business
combination, they are a means of facilitating the
acquisition of part of a company. Sometimes
divestitures are used by companies as a means to
improve earnings and shareholder value, or as a
means of raising capital. A divestiture involves the
sale of a portion of a company. Two popular means of
divestiture are spin-offs and equity carve-outs.
In a spin-off, a company distributes all of its shares
in a subsidiary to the company's shareholders as a
tax-free exchange.
An equity carve-out is similar to a spin-off. It
occurs when a company sells some of its shares in
a subsidiary to the public.
Diversification of Risk
Companies at Risk?
Chronic underperformers
Perception of missed opportunities
Lower market capitalization relative
to peers
Substantial cash balances
Leveraged Buy-outs
A leveraged buy-out (LBO) is an acquisition of a
company in which the acquisition is substantially
financed through debt. When the managers buy their
company from its owners employing debt, the
leveraged buy-out is called management buy-out
(MBO).
The following firms are generally the targets for LBOs:
High growth, high market share firms
High profit potential firms
High liquidity and high debt capacity firms
Low operating risk firms
The evaluation of LBO transactions involves the same
analysis as for mergers and acquisitions. The DCF
approach is used to value an LBO.
Legal Procedures
Permission for merger
Information to the stock exchange
Approval of board of directors
Application in the High Court
Shareholders and creditors meetings
Transfer of assets and liabilities
Payment by cash or securities