Mergers and Acquisition
• Glossary • Purpose of merger and acquisition • Reasons for merger or takeover • Motivation of mergers and acquisitions
– From the standpoint of shareholders – From the standpoint of managers – Promoters’ gains
• Impact of mergers on general public
• Cumulative abnormal return: • Cumulative voting:
– In event studies , the sum of daily abnormal returns over a period relative to the event.
– Instead of one vote per candidate selected, shareholders can vote (the no. of shares they hold times the no.directors to be elected) for one candidate or divide the total votes among a desired no.of candidates. E.g A shareholder has 100 shares;6 directors have to be elected. With cumulative voting the shareholder has 600 votes to distribute among 6 candidates, however he/she chooses.
• Defensive diversifications:
– Entering new product markets to offset the limitations of the firms existing productmarket areas.
• Delphi technique:
– An information gathering technique in which questionnaires are sent to informed individuals. The responses are summarized into a feedback report and used to generate subsequent questionnaires to probe more deeply into the issue under study.
• De novo entry:
– Entry into an industry by forming a new company as opposed to combining with an existing firm in the industry.
• Differential managerial efficiency
hypothesis:
– A theory which hypothesizes that more efficient managements take over firms with less efficient managements and achieve gains by improving the efficiency of the target.
• Discriminatory poison pill:
– Anti-takeover plans which penalise acquirers who exceeds a given shareholding percentage (the kick-in-point).
• Dissident:
– A shareholder or group of shareholders , who disagrees with incumbent management and seeks to make changes via a proxy contest to gain representation on the board of directors.
• Diversification: • Divestiture:
– Holding assets whose return are not perfectly correlated. – Sale of a segment of a company (assets , a product line, a subsidiary ) to a third party for cash and/or securities.
– A model of industrial organization theory which extends the traditional models of price and output decisions of firms in a static environment to decisions on product quality, innovation, promotion, marketing, and so on in changing environment.
• Dynamic competition theory:
• Empirical test:
– Systematic examination of data to check the consistency of evidence with alternative theories.
• ESOP:
– Defined contribution pension plan (stock bonus and/or money purchase) designed to invest primarily in the stock of the employer firm.
• Equity carve out:
– A transaction in which a parent firm offers some of a subsidiaries’ common stock to the general public to bring in a cash infusion to the parent without loss of control.
• Event study:
– An empirical test of the effect of an event (e.g. a merger , divestiture ) on stock returns. The event is the reference data from which analysis of returns is made regardless of the calendar timing of the occurrences in the sample of firms.
– A defense against a merger challenge alleging that in the absence of the merger , the firm(s) would fail. The 1982 merger guidelines spell out the conditions under which this defense will be acceptable.
• Failing firm defense:
• Fallen angel:
– A bond issued at investment grade whose rating is subsequently dropped to below investment grade, below BBB.
• Financial synergy:
– A theory which suggests a financial motive for mergers, especially between firms with high internal cash flows (but poor investment opportunities) and firms with low internal cash flows (high investment opportunities which, absent merger, would require costly external financing).
• Flip-over poison pill plan:
– The most popular type of poison pill antitakeover defense. Shareholders of the target firm are issued rights to purchase common stock at an exercise price high above the current market price. If a merger occurs, the rights flip over and allows shareholders to purchase the acquiring firms common stock at a substantial discount.
Purpose of M & A
• Procurement of supplies
– To safeguard the source of supplies of raw materials or intermediary products – To obtain economies of purchases – To share the benefits of suppliers economies by standardizing the materials.
Revamping production facilities
• To achieve economies of scale by •
•
amalgamating production facilities thro optimum utilization. Standardize product quality, specification, aiming at customer satisfaction. To obtain improved production technology to reduce cost, improve quality.
Market expansion and strategy
• To eliminate competition • Newer markets outlets • New product, substitute or increase the • • •
product line Rationalize distribution by strengthening retail outlets and sales depots. To reduce adv cost Strategic control patents and copyrights.
Financial strength
• Improve liquidity and direct access to cash •
•
resources Dispose surplus and outdated assets for cash. To enhance gearing capacity, borrow on better strength and greater assets backing To avail tax benefits To improve EPS
• •
Reasons for M & A
• • • • • • • •
Synergistic operating economies Diversification Taxation advantages Growth advantages Production capacity reduction Managerial motives Acquisition for a specific asset Acquisition by management or LBO
Motivation for M & A
• From the standpoint of shareholders
– Realization of monopoly profits – Economies of scale – More productive labour force – Better investment opportunity
• From the standpoint of Managers
– Improving operations, all round growth leading to increase in their compensation – Fear of displacement
• Promoters gains
– Merger increases the size of their co. and financial strength – Private ltd into public ltd co. – HCL • Only one co. Hindusthan Reprographic was only a
public co. other 3 were pvt ltd. • The promoters of Hindusthan computers were given shares worth 1.27 crores in the new co. called HCL ltd. • 86% stake in HCL total equity of 1.48 crores • Original investment of 40 lakhs.
Impact of mergers on general public
• Consumers
– Products at lower price and better quality – Other benefits will depend upon whether a successful merger or not. – Benefits depends upon • Satisfaction of their demands, employment,
• Workers community
• General public
increased wages, better living conditions and working conditions.
– Monopoly, deceleration of level of power, concentration of wealth in few hands.
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