MERGERS & ACQUISITIONS Business Finance 335 Supplemental Material.

MERGERS & ACQUISITIONSMERGERS & ACQUISITIONS

Business Finance 335Supplemental Material

Dr. David P. Echevarria

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MERGERS & ACQUISITIONSMERGERS & ACQUISITIONS

Why do firms merge or acquire other firms?Several possibilities. Increase market powerIncrease market power Acquire financial strengthAcquire financial strength, Tax loss carry forwardsTax loss carry forwards Acquire specific product linesAcquire specific product lines Achieve synergiesAchieve synergies Gain economies of scaleGain economies of scale

Strategies subject to debate: Prevalent belief is that M&A result in increased profits, competitiveness, & increased stockholder wealth. Evidence reveals this is not necessarily so…



I. I. BASIC DEFINITIONSBASIC DEFINITIONS

A. Merger; combination of two firms into one.

B. Acquisition; one business buys another.1. Cash.2. Securities.3. Combination of cash and securities.




C. General Process; Acquisitions1. Initial contacts between management teams.2. Tender offer by acquireracquirer to targettarget company

stockholders.3. Stockholders required to vote approval.4. Acquirer purchases majority or complete

interest.




D. General Process; Merger1. Initial contacts between management teams.2. Negotiations as to new name, management

team.3. Stock exchange details negotiated.4. Merger proposal goes to stockholders for vote.5. If stockholders approve, deal consummated

when stock changes hands.



II. II. TERMINOLOGY OF M&ATERMINOLOGY OF M&A

A. "BEAR HUG" Acquirer mails letter to directors of target firm

announcing intentions and requiring a quick decision on bid.

B. "SATURDAY NIGHT SPECIAL" Offer made to stockholders just before the

market’s close on Friday. Takes maximum advantage of stockholder greed



II. II. TERMINOLOGY OF M&ATERMINOLOGY OF M&A

C. “HOSTILE TAKEOVER”1. When the target firm's management fights the

tender offer. 2. Acquiring firm must carry offer to stockholders

of target firm. 3. This strategy is generally nasty and expensive -

an effort frequently carried out to a questionable conclusion.

Good deal for stockholders of target firm. Bad deal for stockholders of acquiring firm.



II.II.TERMINOLOGY OF M&ATERMINOLOGY OF M&A

D. “WHITE NIGHT” When target firm cannot defend itself against

the hostile acquirer, it will seek another firm to firm to acquire it (one more acceptable to management).

E. “Shark Repellant” Slang term for any one of a number of

measures taken by a company to fend off an unwanted or hostile takeover attempt

Examples: poison pills, scorched earth policies, leveraged recapitalization




F. "PAC-MAN";1. A form of defense in which the target tenders for

shares of acquirer: e.g., Martin-Marietta - Bendix.

2. The standoff is usually resolved when one of the parties finds a "white knight" to help.

In the case of Martin-Marietta, it was Allied Corp




G. "POISON PILL";1. Another anti-takeover defense;

a. target company threatens to load the balance sheet with debt

b. the acquirer effectively gets more debt than the business can handle.

2. Effectiveness is not always guaranteed.



IIIIII. . RESTRUCTURING FIRMS.RESTRUCTURING FIRMS.

After the M&A activity in the 1980's, many companies were left with large amounts of debt. Many deals went “south”.

A. The most prevalent response was to restructure the resulting reorganizations. 1. Spinoff: create new independent company via

sale or distribution of new shares2. Carve-outs: selling minority interest in a

subsidiary:3. Tracking stock: stock issued by parent to track

fortunes of a particular division or group.

MERGERS & ACQUISITIONS Business Finance 335 Supplemental Material.

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