Monday 28 January 2019

Merger (rationale behind Merger) - Meaning, Acquisition, pdf


A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers.


is the main Motivation behind most mergers is to increase the value of the combined company. If companies A and B combine to form company C, and C if the value exceeds the value of A and B and if seen separately, then such synergy can be said to have occurred.

Tax Considerations

have pushed Tax Considerations also the occurrence of a number of mergers. For example, companies that are profitable and are in the highest tax range can acquire a company that has accumulated a large amount of tax losses. Losses are next for this tax can be directly converted into tax savings rather than taken to the next year and used. If the company is experiencing a shortage of internal investment opportunities when compared to free cash flow is available, then the company can pay an extra dividend, ((2) invest in securities, (3) buying back its shares, or (4) buy other companies.

Purchase Assets under the cost of the Successor

company will Sometimes be seen as the candidate of the acquisition because of the replacement cost of its assets is much higher than its market value. For example, in the early 1980 's, oil companies can buy backup with cheaper price through the purchase of companies other than oil drilling exploration.


managers often mention diversification as one of the reasons for the merger. They argued that diversification will help stabilize the company's profits and consequently provide a profit for the owners. Stabilization of profit is surely advantageous for employees, suppliers and customers, but from the point of view of shareholders, stabilization is a value that is less certain.

Personal Incentive Managers

financial Economists love to argue that only business decisions based on economic considerations alone, especially in terms of maximizing the value of a company. However, many business decisions actually based more on personal motivation rather than managers in economic analysis.
Personal Consideration would hinder all at once can also motivate mergers. After most of the takeover, some managers of the companies acquired are losing their jobs, or at least autonomy they have. Therefore, the managers of which have less than 51% of the stock of the company they are trying are hardly be a way that will minimize the chances of the takeover the event. Defensive mergers like that is very difficult to be maintained based on economic reasons.

The value of the Residual

value of the company can be judged from his book, its economic value, or the value of his successor. Recently, the firm takeover specialists has begun to acknowledge thevalue residue as one other base to do a valuation.

Types of Mergers

There are four types of mergers:

Horizontal Merger, occurs when a company merges with another company in the same line of business.

Vertical Mergers, such as the acquisition of a company with one of its suppliers or its customers.
Merger would involve companies that are related but not a manufacturer of a product the same or the company that owns the relationship supplier-manufacturers.

The conglomerate Merger, occurs when companies that are not interconnected.

Level of Merger Activity

Five "wave of mergers" have occurred in the United States. The first wave occurred in the late 1800 's, when consolidation in the oil industry, steel, tobacco, and other basic industries. The second wave took place in the year 1920, when rising stock market helped the promoter finances consolidated companies in a number of industries, including public facilities, communication, and motor vehicles.
Third Wave occurred in the 1960 's, when the conglomerate mergers occur everywhere. The fourth took place in the 1980 's, when the LEVERAGED BUYOUT firms and other companies started using junk bonds to fund various types of acquisition. The fifth wave, which deals with strategic alliances designed to allow companies to compete better in the global economy, still continues to this day.

The takeover of force vs. the takeover friendlier

according to existing conventions, we refer to companies that want to acquire other companies as taker company and companies that want to acquired as a company target.

After identifying the prospective acquirer target company, then that company must (1) determine the price or price range, and (2) temporarily determine the payment terms — whether the company will offer cash, common stock, bonds, or a combination of both? If an agreement is reached, then the second group management will issue a statement to their respective shareholders indicated that they approved the merger, the target company's management and will provide recommendations to the shareholders that they have approved the merger. Typically, shareholders will be asked to size their stock to a financial institution that has been designated, the following letter of authority was signed transferring ownership of such shares to the company the acquirer. This way is called a friendly merger.

But often, the target company management will reject the merger. They may feel that the price offered is too low or perhaps they try to retain their jobs. Whatever the conditions, the forced nature of the acquirer company's bidding rather than friendly.

Regulation of Mergers

Before the mid-1960 's, acquisitions are friendly in General occurs in the form of mergers through stock exchange is simple, and the seizure of a mandate is the main weapon used in a war over control by force. However, mid-1960-70s looters company feather operates differently. First, the live capture of the mandate will require a long time — the looters must first ask for a list of the shareholders of the target company, rejected, and then tried to get a subpoena forcing management submit a list.
Then looters began to think that if we bring the decision directly to the target quickly, before management had taken precautions, then it will certainly increase the chances of success. This then causes the looters turned from grabbing the mandate to the filing deals, which have far shorter response time.

It is unfair to target companies so that Congress finally passed a law Williams (Williams Act) in 1968. This rule has two goals: (1) regulate the way companies can bid submission structuring acquirer, and (2) force the company acquirer expose more information about the given offer.

Merger Analysis

In theory, analysis of the merger is actually quite simple. Company acquirer only need to do an analysis to assess the target company and then determine whether the target company can be bought at that value, or preferred, again, lower than the estimated value.

Assess the target company

In assessing the company's objectives, there are several methodologies that can be used, however, we limit this discussion only on the two methodologies: (1) current approaches Discounted cash, and (2) the method of multiplication of the market.

Discounted Cash Flow Analysis

The Discounted cash flow approach in assessing a business will involve the application of capital budgeting procedures or whole companies instead of just one project only. To implement this method, there are two important things are needed: (1) reports a predicted increase in the proforma cash flow freely as a result of the merger, and (2) a discount rate, or the cost of capital, which will be applied to the cash flow projections.

Pro forma cash flow statement. Get the cash flow forecast accurately so far post merger is an important task in the DCF approach. In a pure financial merger, in which not expected happen a synergy, increased cash flow post manager actually is the cash flow from the company's expectations. However, in the merger operation, where operation of both companies will be integrated,forecasting cash flow in the future is a thing that is harder to do.

Estimates of discount rates. Total net cash flow is after interest and taxes, so it will reflect the equity. Therefore, the cash flow should be discounted by the cost of equity rather than from the overall cost of capital. Further, the discount rate used should reflect the level of risk of cash flow within the table.

Market Analysis Of Multiplication

The second method in assessing the company's target is the analysis of the product market (multiple market analysis) is a method of valuation a company targets apply multiplication determined by market at net income, earnings per shares, sales, book value, and so on.

Determine the offer price

Method by specifying a price quote is by looking at the highest amount that can be paid, reflecting the synergistic advantages expected from the merger, the following some things to note:
If there are synergistic benefits, offer the maximum given will be the same as the value of the company at this time.

The greater synergistic benefits, then it is more likely that a merger was implemented.
The problem about the synergistic advantages of split is also a very important thing, both sides want totals possible.

The actual price will be depending on several factors, including whether the company offers to pay in cash or securities, the skill of negotiation between both the management team and most importantly, the positions of the two sides offer specified by fundamental economic conditions of each company
The company would like to keep secret deals are cut and corporate planning strategies offer carefully and consistently with the situation. The company can give you a quote of anticipation is high in hopes of scaring a rival offer or denial management.

Post Merger Control

The situation control is vital in an analysis of the merger. First consider a situation where a small company run by its owners sold out to a bigger interests.

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