A Diagnosis On Hiccup Of Merger And Acquisition
A DIAGNOSIS ON HICCUP OF MERGER AND ACQUISITION
Introduction:
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.
Acquisition/Takeover
Achieving acquisition success has proven to be very difficult; while various studies have showed that 50% of acquisitions were unsuccessful the acquisition process is very complex, with many dimensions influencing its outcome.
• The buyer buys the shares, of the target company ownership control of the company conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.
• The buyer buys the assets of the target company and the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer “cherry-pick” the assets that it wants and leaves out the assets and liabilities that it do not.
Mergers
There are two types of mergers that are distinguished based on finance. Each has certain implications for the companies involved and for investors:
Purchase mergers is a kind of merger when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.
Consolidation mergers are merger, where a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. The occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market Regulatory bodies such as the European Commission, the United States Department of Justice and the U.S. Federal Trade Commission investigates anti-trust cases for monopolies dangers, and have the power to block mergers.
Accretive mergers are those in which an acquiring company’s earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E.
Dilutive mergers are mergers where a company’s EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.
The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.
Mergers Vs acquisitions
Although they are often uttered in the same breath and used synonymous, the terms merger and acquisition mean slightly different things.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals”.
In practice, however, actual mergers of equals don’t happen very often. Usually, one company will buy another and, as part of the deal’s terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly – that is, when the target company does not want to be purchased – it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
a) Payment by cash – Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder’s shareholders alone.
b) Financing capital – capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively, the acquirer’s stock may be offered as consideration. Acquisitions financed through debt are known as leveraged buyouts if they take the target private.
c) Hybrids – An acquisition can involve a combination of cash and debt or of cash and stock of the purchasing entity.
d) Factoring – Factoring can provide the extra to make a merger or sale work. Hybrid can work as ad e-denit.
The Great Merger Movement of USA
The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used was so-called trusts. To truly understand how large this movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 it was around 10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other. However, there were companies that merged during this time such as DuPont, Nabisco, US Steel, and General Electric that have been able to keep their dominance in their respected sectors today due to growing technological advances of their products, patents, and brand recognition by their customers. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. The “quick mergers” involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually faced higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains; they were in fact done because that was the trend at the time.
Changing motives of Merger and Acquisitions
Acquiring firms’ financial performance does not positively change as a function of their acquisition activity. Motives for merger and acquisition that may not add shareholder value include:
• Diversification: This may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
• Manager’s hubris: Manager’s overconfidence about expected synergies from M&A which results in overpayment for the target company.
• Empire-building: Managers have larger companies to manage and hence more power.
• Manager’s compensation: Executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share.
A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies’ top management teams for at least a decade following a deal. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition – more than double the turnover experienced in non-merged firms.
Marketplace difficulties
In many countries, no marketplace exists for the mergers and acquisitions of privately owned small to mid-sized companies. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises from the possible negative reactions a company’s employees, bankers, suppliers, customers and others seek a transaction to become known. This need for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business. In USA, a Multiple Listing Service (MLS) of small businesses for sale is maintained by organizations such as Business Brokers of Florida (BBF). Another MLS is maintained by International Business Brokers Association (IBBA).
The process by which a company is bought or sold can prove difficult, slow and expensive. A transaction typically requires six to nine months and involves many steps. Locating parties with whom to conduct a transaction forms one step in the overall process and perhaps the most difficult one. Qualified and interested buyers of multimillion corporations are hard to find. Even more difficulties attend bringing a number of potential buyers forward simultaneously during negotiations. Potential acquirers in an industry simply cannot effectively “monitor” the economy at large for acquisition opportunities even though some may fit well within their company’s operations or plans.
An industry of professional “middlemen” known as intermediaries, business brokers, and investment bankers exists to facilitate M&A transactions. These professionals do not provide their services cheaply and generally resort to previously-established personal contacts, direct-calling campaigns, and placing advertisements in various media. In servicing their clients they attempt to create a one-time market for a one-time transaction. Stock purchase or merger transactions involve securities and require that these “middlemen” be licensed broker dealers under FINRA (SEC) (USA) in order to be compensated as a percentage of the deal. Marketing problems typify any private negotiated markets. Due to this problem and other problems like much more strenuous conditions for mid-sized companies. Mid-sized business brokers have an average life-span of only 12–18 months and usually never grow beyond 1 or 2 employees.
The market inefficiencies can prove detrimental for a sector of the economy. An important and large sector of the entire economy is held back by the difficulty in conducting corporate M&A. Furthermore, it is likely that since privately held companies are so difficult to sell they are not sold as often.
Previous attempts to streamline the M&A process through computers have failed to succeed on a large scale because they have provided mere “bulletin boards” – static information that advertises one firm’s opportunities. Users seek other sources for opportunities just as if the bulletin board were not electronic. A multiple listings service concept was not used due to the need for confidentiality but there are currently several in operations. The most significant of these are run by the California Association of Business Brokers (CABB) and the International Business Brokers Association (IBBA) These organizations have effectivily created a type of virtual market without compromising the confidentiality of parties involved and without the unauthorized release of information.
One part of the M&A process using networked computers is the improved access to “data rooms” during the due diligence process for larger transactions. For the purposes of small-medium sized business, these data rooms serve no purpose and are generally not used.
M&A failure
Reasons for failure of M&A were analyzed by Thomas Straub in “Reasons for frequent failure in mergers and acquisitions – a comprehensive analysis”, DUV Gabler Edition, 2007. Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are disappointing. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. Using four statistical methods, Thomas Straub shows that M&A performance is a multi-dimensional function. For a successful deal, the following key success factors should be taken into account:
Strategic logic which is reflected by six determinants:
• market similarities,
• market complementarities,
• operational similarities,
• operational complementarities,
• market power, and
• purchasing power.
Organizational integration which is reflected by three determinants:
• acquisition experience,
• relative size,
• cultural compatibility.
Financial / price perspective which is reflected by three determinants:
• acquisition premium,
• bidding process, and
• due diligence.
All 12 variables are presumed to affect performance either positively or negatively. Post-M&A performance is measured by synergy realization, relative performance and absolute performance.
Short-run factors
One of the major short run factors that sparked in The Great Merger Movement was the desire to keep prices high. During the panic of 1893, the demand declined. When demand for the good falls, as illustrated by the classic supply and demand model, prices are driven down. To avoid this decline in prices, firms found it profitable to collude and manipulate supply to counter any changes in demand for the good. This type of cooperation led to widespread horizontal integration amongst firms of the era. Focusing on mass production allowed firms to reduce unit costs to a much lower rate. These firms usually were capital-intensive and had high fixed costs. Because new machines were mostly financed through bonds, interest payments on bonds were high followed by the panic of 1893, yet no firm was willing to accept quantity reduction during this period
Long-run factors
In the long run, to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. This resulted in shipment directly to market from this one location. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel Co., the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing.
Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer’s. For every -billion deal, the currency of the target corporation increased s The rise of globalization has exponentially increased the market for cross border M&A. In 1996 alone there were over 2000 cross border transactions worth a total of approximately 6 billion. This rapid increase has taken many M&A firms by surprise because the majority of them never had to consider acquiring Due to the complicated nature of cross border M&A, the vast majority of cross border actions have unsuccessful companies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries.
1998 Citicorp
Travelers Group
73,000
5 1999 SBC Communications
Ameritech Corporation
63,000
6 1999 Vodafone Group
AirTouch Communications
60,000
7 1998 Bell Atlantic
GTE
53,360
8 1998 BP
Amoco
53,000
9 1999 Qwest Communications
US WEST
A DIAGNOSIS ON HICCUP OF MERGER AND ACQUISITION
S.Senthil Srinivasan[1]
Introduction:
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.
Acquisition/Takeover
Achieving acquisition success has proven to be very difficult; while various studies have showed that 50% of acquisitions were unsuccessful the acquisition process is very complex, with many dimensions influencing its outcome.
The buyer buys the shares, of the target company ownership control of the company conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.
The buyer buys the assets of the target company and the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer “cherry-pick” the assets that it wants and leaves out the assets and liabilities that it do not.
Mergers
There are two types of mergers that are distinguished based on finance. Each has certain implications for the companies involved and for investors:
Purchase mergers is a kind of merger when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.
Consolidation mergers are merger, where a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. The occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market Regulatory bodies such as the European Commission, the United States Department of Justice and the U.S. Federal Trade Commission investigates anti-trust cases for monopolies dangers, and have the power to block mergers.
Accretive mergers are those in which an acquiring company’s earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E.
Dilutive mergers are mergers where a company’s EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.
The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.
Mergers Vs acquisitions
Although they are often uttered in the same breath and used synonymous, the terms merger and acquisition mean slightly different things.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals”.
In practice, however, actual mergers of equals don’t happen very often. Usually, one company will buy another and, as part of the deal’s terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly – that is, when the target company does not want to be purchased – it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
a) Payment by cash – Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder’s shareholders alone.
b) Financing capital – capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively, the acquirer’s stock may be offered as consideration. Acquisitions financed through debt are known as leveraged buyouts if they take the target private.
c) Hybrids – An acquisition can involve a combination of cash and debt or of cash and stock of the purchasing entity.
d) Factoring – Factoring can provide the extra to make a merger or sale work. Hybrid can work as ad e-denit.
The Great Merger Movement of USA
The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used was so-called trusts. To truly understand how large this movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 it was around 10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other. However, there were companies that merged during this time such as DuPont, Nabisco, US Steel, and General Electric that have been able to keep their dominance in their respected sectors today due to growing technological advances of their products, patents, and brand recognition by their customers. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. The “quick mergers” involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually faced higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains; they were in fact done because that was the trend at the time.
Changing motives of Merger and Acquisitions
Acquiring firms’ financial performance does not positively change as a function of their acquisition activity. Motives for merger and acquisition that may not add shareholder value include:
Diversification: This may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
Manager’s hubris: Manager’s overconfidence about expected synergies from M&A which results in overpayment for the target company.
Empire-building: Managers have larger companies to manage and hence more power.
Manager’s compensation: Executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share.
A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies’ top management teams for at least a decade following a deal. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition – more than double the turnover experienced in non-merged firms.
Marketplace difficulties
In many countries, no marketplace exists for the mergers and acquisitions of privately owned small to mid-sized companies. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises from the possible negative reactions a company’s employees, bankers, suppliers, customers and others seek a transaction to become known. This need for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business. In USA, a Multiple Listing Service (MLS) of small businesses for sale is maintained by organizations such as Business Brokers of Florida (BBF). Another MLS is maintained by International Business Brokers Association (IBBA).
The process by which a company is bought or sold can prove difficult, slow and expensive. A transaction typically requires six to nine months and involves many steps. Locating parties with whom to conduct a transaction forms one step in the overall process and perhaps the most difficult one. Qualified and interested buyers of multimillion corporations are hard to find. Even more difficulties attend bringing a number of potential buyers forward simultaneously during negotiations. Potential acquirers in an industry simply cannot effectively “monitor” the economy at large for acquisition opportunities even though some may fit well within their company’s operations or plans.
An industry of professional “middlemen” known as intermediaries, business brokers, and investment bankers exists to facilitate M&A transactions. These professionals do not provide their services cheaply and generally resort to previously-established personal contacts, direct-calling campaigns, and placing advertisements in various media. In servicing their clients they attempt to create a one-time market for a one-time transaction. Stock purchase or merger transactions involve securities and require that these “middlemen” be licensed broker dealers under FINRA (SEC) (USA) in order to be compensated as a percentage of the deal. Marketing problems typify any private negotiated markets. Due to this problem and other problems like much more strenuous conditions for mid-sized companies. Mid-sized business brokers have an average life-span of only 12–18 months and usually never grow beyond 1 or 2 employees.
The market inefficiencies can prove detrimental for a sector of the economy. An important and large sector of the entire economy is held back by the difficulty in conducting corporate M&A. Furthermore, it is likely that since privately held companies are so difficult to sell they are not sold as often.
Previous attempts to streamline the M&A process through computers have failed to succeed on a large scale because they have provided mere “bulletin boards” – static information that advertises one firm’s opportunities. Users seek other sources for opportunities just as if the bulletin board were not electronic. A multiple listings service concept was not used due to the need for confidentiality but there are currently several in operations. The most significant of these are run by the California Association of Business Brokers (CABB) and the International Business Brokers Association (IBBA) These organizations have effectivily created a type of virtual market without compromising the confidentiality of parties involved and without the unauthorized release of information.
One part of the M&A process using networked computers is the improved access to “data rooms” during the due diligence process for larger transactions. For the purposes of small-medium sized business, these data rooms serve no purpose and are generally not used.
M&A failure
Reasons for failure of M&A were analyzed by Thomas Straub in “Reasons for frequent failure in mergers and acquisitions – a comprehensive analysis”, DUV Gabler Edition, 2007. Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are disappointing. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. Using four statistical methods, Thomas Straub shows that M&A performance is a multi-dimensional function. For a successful deal, the following key success factors should be taken into account:
Strategic logic which is reflected by six determinants:
market similarities,
market complementarities,
operational similarities,
operational complementarities,
market power, and
purchasing power.
Organizational integration which is reflected by three determinants:
acquisition experience,
relative size,
cultural compatibility.
Financial / price perspective which is reflected by three determinants:
acquisition premium,
bidding process, and
due diligence.
All 12 variables are presumed to affect performance either positively or negatively. Post-M&A performance is measured by synergy realization, relative performance and absolute performance.
Short-run factors
One of the major short run factors that sparked in The Great Merger Movement was the desire to keep prices high. During the panic of 1893, the demand declined. When demand for the good falls, as illustrated by the classic supply and demand model, prices are driven down. To avoid this decline in prices, firms found it profitable to collude and manipulate supply to counter any changes in demand for the good. This type of cooperation led to widespread horizontal integration amongst firms of the era. Focusing on mass production allowed firms to reduce unit costs to a much lower rate. These firms usually were capital-intensive and had high fixed costs. Because new machines were mostly financed through bonds, interest payments on bonds were high followed by the panic of 1893, yet no firm was willing to accept quantity reduction during this period
Long-run factors
In the long run, to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. This resulted in shipment directly to market from this one location. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel Co., the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing.
Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer’s. For every -billion deal, the currency of the target corporation increased s The rise of globalization has exponentially increased the market for cross border M&A. In 1996 alone there were over 2000 cross border transactions worth a total of approximately 6 billion. This rapid increase has taken many M&A firms by surprise because the majority of them never had to consider acquiring Due to the complicated nature of cross border M&A, the vast majority of cross border actions have unsuccessful companies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries.
Table – A – Major M&A World wide
Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:
Rank
Year
Purchaser
Purchased
Transaction value (in mil. USD)
1
1999
Vodafone Airtouch PLC
Mannesmann
183,000
2
1999
Pfizer
Warner-Lambert
90,000
3
1998
Exxon
Mobil
77,200
4
1998
Citicorp
Travelers Group
73,000
5
1999
SBC Communications
Ameritech Corporation
63,000
6
1999
Vodafone Group
AirTouch Communications
60,000
7
1998
Bell Atlantic
GTE
53,360
8
1998
BP
Amoco
53,000
9
1999
Qwest Communications
US WEST
48,000
10
1997
Worldcom
MCI Communications
42,000
Table – B – Major M&A World wide
Top 9 M&A deals worldwide by value (in mil. USD) since 2000:
Rank
Year
Purchaser
Purchased
Transaction value (in mil. USD)
1
2000
Fusion: America Online Inc. (AOL)
Time Warner
164,747
2
2000
Glaxo Wellcome Plc.
SmithKline Beecham Plc.
75,961
3
2004
Royal Dutch Petroleum Co.
Shell Transport & Trading Co
74,559
4
2006
AT&T Inc.
BellSouth Corporation
72,671
5
2001
Comcast Corporation
AT&T Broadband & Internet Svcs
72,041
6
2004
Sanofi-Synthelabo SA
Aventis SA
60,243
7
2000
Spin-off: Nortel Networks Corporation
59,974
8
2002
Pfizer Inc.
Pharmacia Corporation
59,515
9
2004
JP Morgan Chase & Co
Bank One Corp
58,761
10
2008
Inbev Inc.
Anheuser-Busch Companies, Inc
52,000
Source: www.wikipedia.com
Failure and Exiting Assets
A merger is not likely to create or enhance market power or to facilitate its exercise, if imminent failure, of one of the merging firms would cause the assets of that firm to exit the relevant market. In such circumstances, post-merger performance in the relevant market may be no worse than market performance had the merger been blocked and the assets left the market.
Failing Firm
A merger is not likely to create or enhance market power or facilitate its exercise if the following circumstances are met:
1) the allegedly failing firm would be unable to meet its financial obligations in the near future;
2) it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act;
3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers of acquisition of the assets of the failing firm that would both keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger; and
4) absent the acquisition, the assets of the failing firm would exit the relevant market.
Failing Division
A similar argument can be made for “failing” divisions as for failing firms.
First, upon applying appropriate cost allocation rules, the division must have a negative cash flow on an operating basis.
Second, absent the acquisition, it must be that the assets of the division would exit the relevant market in the near future if not sold. Due to the ability of the parent firm to allocate costs, revenues, and intracompany transactions among itself and its subsidiaries and divisions, the Agency will require evidence, not based solely on management plans that could be prepared solely for the purpose of demonstrating negative cash flow or the prospect of exit from the relevant market.
Third, the owner of the failing division also must have complied with the competitively preferable purchaser requirement
Although at present the majority of M&A advice is provided by full-service investment banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice. These companies are sometimes referred to as Transition Companies, assisting businesses often referred to as “companies in transition.” To perform these services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA) regulation.
Poison bill
The poison pill was invented by noted M&A lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz, in 1982, as a response to tender-based hostile takeovers. Poison pills became popular during the early 1980s, in response to the increasing trend of corporate raids.
Poison pill is a term referring to any strategy, generally in business or politics, to increase the likelihood of negative results over positive ones for a party that attempts any kind of takeover. It derives from its original meaning of a literal poison pill carried by various spies throughout history, taken when discovered to eliminate the possibility of being interrogated for the enemy’s gain.
It was reported in 2001 that since 1997, for every company with a poison pill that successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers. The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since, despite the above statistic, poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
Common types of poison pills
Preferred stock plan
Flipover rights plan
Ownership flip-in plan
Back-end rights plan
Voting plan
Constraints and legal status
Following the development of poison pills in the 1980s, the legality of their use was unclear in the United States for some time. However, poison pills were upheld as a valid instrument of Delaware corporate law by the Delaware Supreme Court in its 1985 decision Moran v. Household International, Inc.
Many jurisdictions other than the U.S. view the poison pill strategy as illegal, or place restraints on their use.
Canada
In Canada, almost all shareholders rights plans are “chewable”, meaning they contain a permitted bid concept such that a bidder who is willing to conform to the requirements of a permitted bid can acquire the company by take-over bid without triggering a flip-in event. Shareholder rights plans in Canada are also weakened by the ability of a hostile acquirer to petition the provincial securities regulators to have the company’s pill overturned. A notable Canadian case before the securities regulators in 2006 involved the poison pill of Falconbridge Ltd. which at the time was the subject of a friendly bid from Inco and a hostile bid from Xstrata plc, which was a 20% shareholder of Falconbridge. Xstrata applied to have Falconbridge’s pill invalidated, citing among other things that the Falconbridge had had its pill in place without shareholder approval for more than nine months and that the pill stood in the way of Falconbridge shareholders accepting Xstrata’s all cash offer for Falconbridge shares. Despite similar facts with previous cases in which securities regulators had promptly taken down pills, the Ontario Securities Commission ruled that Falconbridge’s pill could remain in place for a further limited period as it had the effect of sustaining the auction for Falconbridge by preventing Xstrata increasing its ownership and potentially obtaining a blocking position that would prevent other bidders from obtaining 100% of the shares.
United Kingdom
In Great Britain, poison pills are not allowed under Takeover Panel rules. The rights of public shareholders are protected by the Panel on a case-by-case, principles-based regulatory regime. One disadvantage of the Panel’s prohibition of poison pills is that it allows bidding wars to be won by hostile bidders who buy shares of their target in the marketplace during “raids”. Raids have helped bidders win targets such as BAA plc and AWG plc when other bidders were considering emerging at higher prices. If these companies had poison pills, they could have prevented the raids by threatening to dilute the positions of their hostile suitors if they exceeded the statutory levels (often 10% of the outstanding shares) in the rights plan. The London Stock Exchange itself is another example of a company that has seen significant stakebuilding by a hostile suitor, in this case the NASDAQ. The LSE’s ultimate fate is currently up in the air, but NASDAQ’s stake is sufficiently large that it is essentially impossible for a third party bidder to make a successful offer to acquire the LSE.
Takeover law is still evolving in continental Europe, as individual countries slowly fall in line with requirements mandated by the European Commission. Stakebuilding is commonplace in many continental takeover battles such as Scania AB. Formal poison pills are quite rare in continental Europe, but national governments hold golden shares in many “strategic” companies such as telecom monopolies and energy companies. Governments have also served as “poison pills” by threatening potential suitors with negative regulatory developments if they pursue the takeover. Examples of this include Spain’s adoption of new rules for the ownership of energy companies after E.ON of Germany made a hostile bid for Endesa and France’s threats to punish any potential acquiror of Groupe Danone.
Takeover Defenses
Poison pill is sometimes used more broadly to describe other types of takeover defenses that involve the target taking some action. Although the broad category of takeover defenses (more commonly known as “shark repellents”) includes the traditional shareholder rights plan poison pill. Other anti-takeover protections include:
Classified boards with staggered terms.
Limitations on the ability to call special meetings or take action by written consent.
Supermajority vote requirements to approve mergers.
Supermajority vote requirements to remove directors.
The target adds to its charter a provision which gives the current shareholders the right to sell their shares to the acquirer at an increased price (usually 100% above recent average share price), if the acquirer’s share of the company reaches a critical limit (usually one third). This kind of poison pill cannot stop a determined acquirer, but ensures a high price for the company.
The target takes on large debts in an effort to make the debt load too high to be attractive—the acquirer would eventually have to pay the debts.
The company buys a number of smaller companies using a stock swap, diluting the value of the target’s stock.
The target grants its employees stock options that immediately vest if the company is taken over. This is intended to give employees an incentive to continue working for the target company at least until a merger is completed instead of looking for a new job as soon as takeover discussions begin. However, with the release of the “golden handcuffs”, many discontented employees may quit immediately after they’ve cashed in their stock options. This poison pill may create an exodus of talented employees. In many high-tech businesses, attrition of talented human resources often means an empty shell is left behind for the new owner.
The practice of having staggered elections for the board of directors. In some companies, certain percentages of the board (33%) may be enough to block key decisions (such as a full merger agreement or major asset sale), so an acquirer may not be able to close an acquisition for years after having purchased a majority of the target’s stock. As of December 31, 2008, 47.05% of the companies in the S&P Super 1500 had a classified board.
Peoplesoft guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle Corporation, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their Peoplesoft software licenses. The hypothetical cost to Oracle was valued at as much as US.5 billion. Peoplesoft allowed the guarantee to expire in April 2004. If PeopleSoft had not prepared itself by adopting effective takeover defenses, it is unclear if Oracle would have significantly raised its original bid of per share. The increased bid provided an additional .1 billion for PeopleSoft’s shareholders.
Conclusion
The Merger Guidelines issued by the U.S. Department of Justice in 1984 and the Statement of the Federal Trade Commission Concerning Horizontal Mergers issue in 1982. The Merger Guidelines may be revised from time to time as necessary to reflect any significant changes in enforcement policy or to clarify aspects of existing policy. Burden with respect to efficiency and failure continues to reside with the proponents of the merger. Sellers with market power also lessen competition on dimensions other than price, such as product quality, service, or innovation. The Clayton Act prohibits mergers that may substantially lessen competition “in any line of commerce . . . in any section of the country.” Accordingly, the Agency normally assesses competition in each relevant market affected by a merger independently and normally will challenge the merger if it is likely to be anticompetitive in any relevant market. In some cases, however, the Agency in its prosecutorial discretion should consider efficiencies not strictly in the relevant market, but inextricably linked with a partial divestiture or other remedy feasible to eliminate the anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s).
The Agency should consider the effects of cognizable efficiencies with no short-term, direct effect on prices in the relevant market. Delayed benefits from efficiencies should be given less weight because they are less proximate and more difficult to predict.
Reference:
http://www.investopedia.com/articles/forex/05/MA.asp | accessdate = 2007-06-17.
http://en.wipipedia.org/wifi/mergers & acquistions note 6 to note 19.
http://www.csdpj.gov/atr/hmerger N.38 and N.39
Television Sets Corporate – Mergers & Acquisitions
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[1] Assistant Professor, P.G. and Research Department of Corporate Secretaryship, Bharathidasan Government College for Women, Puducherry – 605 003. Email: www.sensri68@rediff.com
A DIAGNOSIS ON HICCUP OF MERGER AND ACQUISITION
Introduction:
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.
Acquisition/Takeover
Achieving acquisition success has proven to be very difficult; while various studies have showed that 50% of acquisitions were unsuccessful the acquisition process is very complex, with many dimensions influencing its outcome.
The buyer buys the shares, of the target company ownership control of the company conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.
The buyer buys the assets of the target company and the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer “cherry-pick” the assets that it wants and leaves out the assets and liabilities that it do not.
Mergers
There are two types of mergers that are distinguished based on finance. Each has certain implications for the companies involved and for investors:
Purchase mergers is a kind of merger when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.
Consolidation mergers are merger, where a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. The occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market Regulatory bodies such as the European Commission, the United States Department of Justice and the U.S. Federal Trade Commission investigates anti-trust cases for monopolies dangers, and have the power to block mergers.
Accretive mergers are those in which an acquiring company’s earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E.
Dilutive mergers are mergers where a company’s EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.
The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.
Mergers Vs acquisitions
Although they are often uttered in the same breath and used synonymous, the terms merger and acquisition mean slightly different things.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals”.
In practice, however, actual mergers of equals don’t happen very often. Usually, one company will buy another and, as part of the deal’s terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly – that is, when the target company does not want to be purchased – it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
a) Payment by cash – Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder’s shareholders alone.
b) Financing capital – capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively, the acquirer’s stock may be offered as consideration. Acquisitions financed through debt are known as leveraged buyouts if they take the target private.
c) Hybrids – An acquisition can involve a combination of cash and debt or of cash and stock of the purchasing entity.
d) Factoring – Factoring can provide the extra to make a merger or sale work. Hybrid can work as ad e-denit.
The Great Merger Movement of USA
The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used was so-called trusts. To truly understand how large this movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 it was around 10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other. However, there were companies that merged during this time such as DuPont, Nabisco, US Steel, and General Electric that have been able to keep their dominance in their respected sectors today due to growing technological advances of their products, patents, and brand recognition by their customers. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. The “quick mergers” involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually faced higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains; they were in fact done because that was the trend at the time.
Changing motives of Merger and Acquisitions
Acquiring firms’ financial performance does not positively change as a function of their acquisition activity. Motives for merger and acquisition that may not add shareholder value include:
Diversification: This may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
Manager’s hubris: Manager’s overconfidence about expected synergies from M&A which results in overpayment for the target company.
Empire-building: Managers have larger companies to manage and hence more power.
Manager’s compensation: Executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share.
A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies’ top management teams for at least a decade following a deal. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition – more than double the turnover experienced in non-merged firms.
Marketplace difficulties
In many countries, no marketplace exists for the mergers and acquisitions of privately owned small to mid-sized companies. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises from the possible negative reactions a company’s employees, bankers, suppliers, customers and others seek a transaction to become known. This need for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business. In USA, a Multiple Listing Service (MLS) of small businesses for sale is maintained by organizations such as Business Brokers of Florida (BBF). Another MLS is maintained by International Business Brokers Association (IBBA).
The process by which a company is bought or sold can prove difficult, slow and expensive. A transaction typically requires six to nine months and involves many steps. Locating parties with whom to conduct a transaction forms one step in the overall process and perhaps the most difficult one. Qualified and interested buyers of multimillion corporations are hard to find. Even more difficulties attend bringing a number of potential buyers forward simultaneously during negotiations. Potential acquirers in an industry simply cannot effectively “monitor” the economy at large for acquisition opportunities even though some may fit well within their company’s operations or plans.
An industry of professional “middlemen” known as intermediaries, business brokers, and investment bankers exists to facilitate M&A transactions. These professionals do not provide their services cheaply and generally resort to previously-established personal contacts, direct-calling campaigns, and placing advertisements in various media. In servicing their clients they attempt to create a one-time market for a one-time transaction. Stock purchase or merger transactions involve securities and require that these “middlemen” be licensed broker dealers under FINRA (SEC) (USA) in order to be compensated as a percentage of the deal. Marketing problems typify any private negotiated markets. Due to this problem and other problems like much more strenuous conditions for mid-sized companies. Mid-sized business brokers have an average life-span of only 12–18 months and usually never grow beyond 1 or 2 employees.
The market inefficiencies can prove detrimental for a sector of the economy. An important and large sector of the entire economy is held back by the difficulty in conducting corporate M&A. Furthermore, it is likely that since privately held companies are so difficult to sell they are not sold as often.
Previous attempts to streamline the M&A process through computers have failed to succeed on a large scale because they have provided mere “bulletin boards” – static information that advertises one firm’s opportunities. Users seek other sources for opportunities just as if the bulletin board were not electronic. A multiple listings service concept was not used due to the need for confidentiality but there are currently several in operations. The most significant of these are run by the California Association of Business Brokers (CABB) and the International Business Brokers Association (IBBA) These organizations have effectivily created a type of virtual market without compromising the confidentiality of parties involved and without the unauthorized release of information.
One part of the M&A process
s.senthil srinivasan, Assistant Professor, P.G. and Research Department of Corporate Secretaryship, Bharathidasan Government College for Women, Puducherry – 605 003. Email: www.sensri68@rediff.com
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