TOPI

C
7

Corporate
Restructuring

OVERVIEW OF MERGERS AND ACQUISITIONS

Businesses may combine their resources, effort, and skill in the form of
either mergers or consolidation.
The basic goal of merger and acquisition activity is to create value for
shareholders even though such activities have an unfavourable impact on
employees.

OVERVIEW OF MERGERS AND ACQUISITIONS

TYPES OF MERGER
Merger and acquisition activities can be broadly categorized into three basic
forms. These are:
Horizontal mergers;
Vertical mergers; and
Conglomerate mergers.
The other forms of mergers are:
Related mergers;
Holding companies; and
Leverage buyouts.

Vertical Mergers

It is the merger of two different firms to form a bigger scale of business

activities. The vertical merger can be classified as either "backward" or
"forward".

Horizontal Mergers

Example:

Conglomerate Mergers

Related Diversification

Example:

Holding Companies

Example:

Leverage Buyouts

FORM OF MERGER TRANSACTION

A merger transaction may be on the basis of stock purchase and
asset purchase.
Normally, buyers of businesses prefer the purchase of assets
rather than the purchase of stocks.
If the merger transaction is based on buying an asset, the acquiring firm
will only buy the asset but will not assume the liability of the to-be-acquired
firm.

Mode of Payment
When a firm enters into a merger and acquisition activity, transfer of
ownership is based on either cash payment or through exchange of
common stocks.
Example:

REASONS FOR MERGER ACTIVITIES

A merger should only occur if it creates value. These values can be in the
form of financial and non-financial motives.

Financial Motives
There are two main financial reasons why companies merge or get involved
in acquisition activities:

Non-Financial Motives
The non-financial motives for mergers and acquisitions range from
the desire to expand the business management to marketing
capabilities as well as acquiring new products. More specifically,
there are four non-financial motives for mergers and acquisition:

Synergy
Business expansion
Guaranteed sources of funding
Greater market accessibility

Non-Financial Motives

Non-Financial Motives

MERGER VALUATION

MERGER VALUATION
Example:

MERGER VALUATION
Example:

PAST EXAM QUESTION:

PAST EXAM QUESTION:

PAST EXAM QUESTION:

Answer:
a) Generally, synergy in a merger means that the earnings of the surviving
company will be larger than the sum of pre-merger earnings of the separate
parts. (3m) This is often achieved through the operating economies realized
from the merger (economies of scale).
b) - Through mergers, the bidding firms can enjoy a potential desirable portfolio
risk reduction while maintaining the firms potential rate of returns.
- Through mergers, the merged firms will be in a better position to raise
capital through the financial market. Most investment banks and
underwriters are handling financing of larger firms.

PAST EXAM QUESTION:

Answer:
c) Firm X and Firm Y
The value of Firm X is: VX = RM50 x 700,000 = RM35,000,000
The value of Firm Y is: VY = RM20 x 350,000 = RM7,000,000
The incremental net gain (synergy) from the merger:
= VXY (VX + VY)
= RM43,000,000 (RM35,000,000 + RM7,000,000)
= RM43,000,000 RM42,000,000
= RM1,000,000
The premium paid to Firm Y = RM2 x 350,000 = RM700,000
Firm X should make the acquisition since the merger would create synergy
of RM1 million and it is more than the premium paid to Firm Y.

PAST EXAM QUESTION:

PAST EXAM QUESTION:

Answer:
a) Implications:
Changes in dividends and stock prices following the announcement will move in
the same direction, i.e. positive relationship. That is, increases in dividends
are perceived to be a favorable signal whereas omissions or reductions in
dividends are regarded as unfavorable. Firms with profitable investment
opportunities may want to convey it to investors by initiating or increasing
dividends, so that market may react favorably on stock prices.
Signaling theory argues that there is a positive relationship between changes in
dividends and future earnings of the firm. It suggests that firms which
increase dividends will yield higher earnings subsequently.

PAST EXAM QUESTION:

Answer:
b) Discussion:
A conglomerate merger is a combination of two or more unrelated businesses (for
which there is no obvious synergy)
A firm that grows through conglomerate mergers is unlikely to create lasting value for its
shareholders, because adding an unrelated business to its existing ones will neither
enhance its cash flows by more than the targets cash flows nor reduce its cost of capital.
It may under certain circumstances, increase the conglomerates earnings per share
(EPS) but the growth in EPS is unlikely to be accompanied by a permanent rise in
shareholder value.
Business combinations that are likely to create lasting value are those that result in
managerial improvements or synergistic value which is horizontal mergers (two firms in the
same sector pooling their resources).
Even vertical mergers (the integration of, say, a car manufacturer with its major supplier
or its major distributor) are not likely to achieve lasting value creation. There is no obvious
reason why a vertical merger will result in sales growth or cost reductions in a competitive
environment.

PAST EXAM QUESTION:

PAST EXAM QUESTION: