Professional Documents
Culture Documents
Presented By :
Anuj Gupta 3
Jitesh Patil 13
Bhushan Patil 23
Hiral Shah 33
Neha Shenvi 43
Neelesh Patil 53
Sonal Kumar PG4
1. A merger is the complete absorption of one firm by another
and in this scenario we refer to an acquisition that takes place
in friendly terms.
2. The acquiring firm retains its identity and acquires all the
assets and liabilities of the acquired firm that ceases to exist
and, thus, such transactions are also called acquisitions (e.g.
the acquisition of McDonnell Douglas by Boeing)
600
500
400
N o. of Deals
300 Amount (USD million)
200
100
0
2006 2007
Mergers & Acquisitions Defined
Mergers Acquisitions
Mergers Acquisitions
1. Horizontal
• A merger in which two firms in the same industry combine.
• Often in an attempt to achieve economies of scale and/or scope.
2. Vertical
• A merger in which one firm acquires a supplier or another firm that is
closer to its existing customers.
• Often in an attempt to control supply or distribution channels.
3. Conglomerate
• A merger in which two firms in unrelated businesses combine.
• Purpose is often to ‘diversify’ the company by combining
uncorrelated assets and income streams
4. Cross-border (International) M&As
• A merger or acquisition involving a Canadian and a foreign firm a
either the acquiring or target company.
TYPES OF TAKEOVERS
Takeover
– The transfer of control from one ownership group to another.
Acquisition
– The purchase of one firm by another
Merger
– The combination of two firms into a new legal entity
– A new company is created
– Both sets of shareholders have to approve the transaction.
Amalgamation
– A genuine merger in which both sets of shareholders must approve the
transaction
– Requires a fairness opinion by an independent expert on the true value
of the firm’s shares when a public minority exists
CAPITAL STRUCTURE CHANGES
Recapitalize
Share buyback or paying super dividend
Greater voting rights to the management
Firm 1 Firm 2
# of shares 25 10
Assume that
Both firms are 100% equity owned
The incremental net gain to firm 1 from acquiring firm 2 is $100
Firm 2 has decided not to sell for less than $150 ($100 firm value + $50 acquisition
premium)
The value of firm 2 to firm 1 is
V2* = V2 + V = $100 + $100 = $200
The NPV of the cash acquisition is $200 - $150 = $50
After the acquisition, firm 1’s value increases by $50 to $550 ($500 was initial
value) and firm 2’s stockholders have captured $50 out of the $100 merger gains
Firm 1 continues to have 25 share and each share will be worth $550/25 = $22,
meaning a gain of $2 per share
CASE 2: COSTS OF A STOCK
ACQUISITION
In a stock acquisition, the stockholders of firm 2 exchange their
shares for shares in the new firm
Since firm 2’s stockholders want to sell the firm for $150 they will
receive $150 worth of shares from firm 1 or $150/$20 = 7.5 shares
given the price of firm 1’s shares
The new firm has 25 + 7.5 = 32.5 shares worth $700 meaning a value per share of
$700/32.5 = $21.54, which is lower because firm 2’s stockholders also own part of
the new firm
What was the cost of acquiring form 2 to firm 1? Was it only $150?
The 7.5 shares of the merged firm owned by firm 2’s stockholders are worth 7.5
$21.54 = $161.55
which is lower than the NPV of the cash acquisition because firm 2’s stockholders
share some of the gains (but also the losses)
Implementation Issues
Structure, Control, and Compensation
M&A activity requires responses to these issues:
Government Policy