Disadvantage of Acquisition

• Marginal success record

• Overconfidence in ability

• Key employee often lose

• Overvalued

Structuring the Deal

• Common means of acquisition• Direct purchase of firm’s entire stock• Bootstrap purchase

• Locating acquisition candidateAccountantsBankersBusiness AssociateBrokers

Mergers

Survival Requirement

• Capital structure deterioration

• Technological obsolescence

• Loss of raw material

• Market Loss

Protection against

• Market infringement

• Lower cost position of the competitor

• Product innovation

Diversification

• Countercyclical• International

operations• Multiple

strategic plans

Gains in

• Market position• Technological

edge• Financial

strength

Fig: Merger Motivations

Pros and Cons

Pros• Economies of scale• R&D• Avoid duplication• Speed to market

Cons• High cost involved• Integration issues• Unrelated diversification

Leveraged Buyouts (LBO)

• Borrowed fund to purchase an existing venture for cash

• Great amount of external funding required

• Long term debt financing

• High financial risk

Characteristics of a Good LBO Candidate• Strong, predictable operating cash flows with which the leveraged

company can service and pay down acquisition debt• Well-established business and products and leading industry position• Moderate CapEx and product development (R&D) requirements so that

cash flows are not diverted from the principle goal of debt repayment• Limited working capital requirements• Strong tangible asset coverage• Seller is motivated to cash out of his/her investment or divest non-core

subsidiaries, perhaps under pressure to maximize shareholder value• Strong management team• Viable exit strategy

Pros and Cons

• Interest payments on debt are tax deductible, while dividend payments on equity are not. Thus, tax shields are created and they have significant value.• Large principal and interest payments can force management to

improve performance and operating efficiency. • Increase in fixed costs from higher interest payments can reduce a

leveraged firm’s ability to weather downturns in the business cycle.