Mergers and acquisitions:
Concept:
Company A Company B
How much is it worth?
Shares
What are we buying?
Assets
How are we going to pay?
Cash or loan
Share exchange- what is the exchange ratio? (Earnings per share or Share Price)
Wal-Mart paid R16.5 million for 51% share in Massmart CONDITIONAL on certain
provisions (June 2011)
[Paid 23% premium]
What happens here?
A/H’s (SH’s)
Bates / Assets Target
Verdienste / Earnings
Bestuur / Management
Verskaffers en kliënte /
Suppliers and customers
They consolidate into one company OR there is a holding company/ subsidiary relationship.
Introduction:
There are 2 ways a firm can expand its operations:
o Acquisition of long term operating assets which is called internal expansion or
organic growth.
o A firm can also expand via a take-over, by acquiring control of shares and
assets in another company. This is called external expansion.
, Growth
Internal Capital projects (Organic growth)
Expansion - Why?
External M&A- Control over assets, shares
Growth
Types of mergers:
Horizontal
o Companies in the same industry merge (E.g. Shoprite and Checkers)
Vertical
o A firm either expands forward to the customer, or expands backwards to the
raw material supplier stage.
o Therefore, up or down the supply chain (E.g. manufacturer and retailer)
Conglomerate
o Unrelated firms decide to merge
o Same group but not in the same industry (for example Bidvest). Reduces risk
through diversification from main line of business into unrelated business
areas. However, it can also be a negative as attention from the core business
becomes diverted.
Reasons for mergers:
Mergers should lead to synergy 2+2=5
If we merge, costs are saved, more is sold, etc. which makes the companies
worth more together than they were when they were apart (hence 2 +
2 = 5 principle). The whole is greater than the sum of its parts.
Vxy > Vx + Vy
Vxy < Vx + Vy
A merger should only take place if the value of the combined entity is
greater than the value of the separate entities added together.
Reasons for mergers:
1. Operating economies
a. May result in economies in production or distribution, such as lower unit costs
through higher production runs.
b. Greater market power over suppliers, lower cost prices and extended payment
terms
c. Effective utilization of spare capacity
d. Reduction in personnel costs and office rentals
2. Management expertise
a. A firm with strong management resources may decide to take over a firm with
low earnings in order to introduce improved management and reap the benefits
of the expected increase in returns.
3. Tax considerations
, a. May want to obtain the benefit of the tax- assessed loss of the target company
b. Interest tax shields are valuable if the company is not highly leveraged and
does not incur losses
4. Liquidity
a. Surplus cash resources can be used to acquire other companies
b. A company may also be targeted as a result of its strong liquidity position.
5. Diversification
a. The variability of returns are reduced which leads to the required rate of return
reducing.
b. However, taking attention away from core business is not recommended
6. Financing costs
a. Better use of debt capacity
b. Reduce risk to lender whilst merging and increasing the risk to firms
7. Replacement costs
a. It may be more beneficial to take over shares from another company, rather
than investing those amounts further into their own project (for example
importing goods from overseas may lead to increased foreign exchange and
currency costs)
8. Technology
a. Acquisitions take place in order to acquire technological knowledge that the
target company possesses
9. Products and product lines
a. Obtain access to the target company’s product range.
Structuring of takeover offers
A Ltd wishes to acquire shares in B Ltd so that B Ltd becomes its subsidiary. However, a
new company, namely C Ltd could be formed to hold the shares of A Ltd and B Ltd.
B
But also depends on the shareholding of the company.
Finance cost:
Acquirer Target
Concept:
Company A Company B
How much is it worth?
Shares
What are we buying?
Assets
How are we going to pay?
Cash or loan
Share exchange- what is the exchange ratio? (Earnings per share or Share Price)
Wal-Mart paid R16.5 million for 51% share in Massmart CONDITIONAL on certain
provisions (June 2011)
[Paid 23% premium]
What happens here?
A/H’s (SH’s)
Bates / Assets Target
Verdienste / Earnings
Bestuur / Management
Verskaffers en kliënte /
Suppliers and customers
They consolidate into one company OR there is a holding company/ subsidiary relationship.
Introduction:
There are 2 ways a firm can expand its operations:
o Acquisition of long term operating assets which is called internal expansion or
organic growth.
o A firm can also expand via a take-over, by acquiring control of shares and
assets in another company. This is called external expansion.
, Growth
Internal Capital projects (Organic growth)
Expansion - Why?
External M&A- Control over assets, shares
Growth
Types of mergers:
Horizontal
o Companies in the same industry merge (E.g. Shoprite and Checkers)
Vertical
o A firm either expands forward to the customer, or expands backwards to the
raw material supplier stage.
o Therefore, up or down the supply chain (E.g. manufacturer and retailer)
Conglomerate
o Unrelated firms decide to merge
o Same group but not in the same industry (for example Bidvest). Reduces risk
through diversification from main line of business into unrelated business
areas. However, it can also be a negative as attention from the core business
becomes diverted.
Reasons for mergers:
Mergers should lead to synergy 2+2=5
If we merge, costs are saved, more is sold, etc. which makes the companies
worth more together than they were when they were apart (hence 2 +
2 = 5 principle). The whole is greater than the sum of its parts.
Vxy > Vx + Vy
Vxy < Vx + Vy
A merger should only take place if the value of the combined entity is
greater than the value of the separate entities added together.
Reasons for mergers:
1. Operating economies
a. May result in economies in production or distribution, such as lower unit costs
through higher production runs.
b. Greater market power over suppliers, lower cost prices and extended payment
terms
c. Effective utilization of spare capacity
d. Reduction in personnel costs and office rentals
2. Management expertise
a. A firm with strong management resources may decide to take over a firm with
low earnings in order to introduce improved management and reap the benefits
of the expected increase in returns.
3. Tax considerations
, a. May want to obtain the benefit of the tax- assessed loss of the target company
b. Interest tax shields are valuable if the company is not highly leveraged and
does not incur losses
4. Liquidity
a. Surplus cash resources can be used to acquire other companies
b. A company may also be targeted as a result of its strong liquidity position.
5. Diversification
a. The variability of returns are reduced which leads to the required rate of return
reducing.
b. However, taking attention away from core business is not recommended
6. Financing costs
a. Better use of debt capacity
b. Reduce risk to lender whilst merging and increasing the risk to firms
7. Replacement costs
a. It may be more beneficial to take over shares from another company, rather
than investing those amounts further into their own project (for example
importing goods from overseas may lead to increased foreign exchange and
currency costs)
8. Technology
a. Acquisitions take place in order to acquire technological knowledge that the
target company possesses
9. Products and product lines
a. Obtain access to the target company’s product range.
Structuring of takeover offers
A Ltd wishes to acquire shares in B Ltd so that B Ltd becomes its subsidiary. However, a
new company, namely C Ltd could be formed to hold the shares of A Ltd and B Ltd.
B
But also depends on the shareholding of the company.
Finance cost:
Acquirer Target
