Maica Jimena BatiancelaBSBA Financial ManagementSaint Louise de Marillac College of Sorsogon

Mergers And Acquisitions

• A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.• An example of a major merger is the merging of JDS Fitel Inc. and Uniphase Corp. in 1999 to form JDS Uniphase. An example of a major acquisition is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services Inc.

Amalgations• Amalgamation is an arrangement where two or more companies consolidate their business to form a new firm, or become a subsidiary of any one of the company. • For practical purposes, the terms amalgamation and merger are used interchangeably. However, there is a slight difference. Merger involves the fusion of two or more companies into a single company where the identity of some of the companies gets dissolved. On the other hand, amalgamation involves dissolving the entities of amalgamating companies and forming a new company having a separate legal entity.

Types of Amalgations•The first one is similar to a merger where all the assets and liabilities and shareholders of the amalgamating companies are combined together. The accounting treatment is done using the pooling of interests method.• It involves laying down a standard accounting policy for all the companies and then adding their relevant accounting figures like capital reserve, machinery, etc. to arrive at revised figures

Types of Amalgations• The second type of amalgamation involves acquisition of one company by another company. • In this, the shareholders of the acquired company may not have the same equity rights as earlier, or the business of the acquired company may be discontinued. This is like a purchase of a business. The accounting treatment is done using a purchase method. It involves recording assets and liabilities at their existing values or revaluating them on the basis of their fair values at the time of amalgamation.

Takeovers•A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.

Methods of Takeover

•Friendly Takeover•Hostile Takeover

Friendly Takeover•Friendly takeovers can involve either the acquisition of the assets of the company or the purchase of the stock of the target. •There are several advantages associated with the purchase of assets. • First, the acquiring firm can purchase only those assets that it desires. • Second, the buyer avoids the assumption of any contingent liabilities of the target. • Third, the purchase of assets is easier to negotiate since only the board of directors, and not the shareholders, need approve the acquisition.

Friendly Takeover•The second type of friendly takeover involves the purchase of the stock of the target. • In this instance, the acquiring firm does assume the liabilities of the target firm. The target firm continues to operate as an autonomous subsidiary or it may be merged into the operations of the acquiring firm. The approval of the target's shareholders is necessary for this type of acquisition.

Hostile Takeovers•Hostile takeovers occur when the board of directors of the target is opposed to the sale of the company. • In this instance, the acquiring firm has two options if it chooses to proceed with the acquisition: •a tender offer or •a proxy fight.

Tender Offer•A tender offer represents an offer to buy the stock of the target firm either directly from the firm's shareholders or through the secondary market. •This method tends to be an expensive way of acquiring the stock since the share price is bid up in anticipation of a takeover. •Often, acquiring firms will first propose an offer to buy the company's stock to the target company's board of directors, with an indication that if the offer is turned down, it will then attempt a tender offer.

Proxy Fight• In a proxy fight, the acquirer solicits the shareholders of the target firm in an attempt to obtain the right to vote their shares.• The acquiring firm hopes to secure enough proxies to gain control of the board of directors and, in turn, replace the incumbent management.• Proxy fights are expensive and difficult to win, since the incumbent management team can use the target firm's funds to pay all the costs of presenting their case and obtaining votes.

Categories of Mergers and Acquisitions•Horizontal

A merger in which two firms in the same industry combine.

Often in an attempt to achieve economies of scale and/or scope.

Categories Of Mergers And Acquisitions•Vertical

A merger in which one firm acquires a supplier or another firm that is closer to its existing customers.

Often in an attempt to control supply or distribution channels.

Categories Of Mergers And Acquisitions•Conglomerate

A merger in which two firms in unrelated businesses combine.

Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams

Categories Of Mergers And Acquisitions•Cross-border (International) M&AsA merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target company.

Methods Of Payment In Mergers And Acquisitions• Cash Payment•A simple purchasing action which means the purchasing corporation purchases a certain amount of assets or stocks from the target company by paying a certain amount of cash. It is the most popular payment method with mergers and acquisitions on Chinese capital markets.

Methods OF Payment in Mergers and Acquisitions•Security Payment•The purchasing company issue new securities in order to buy the stocks or assets of the target company. It includes 2 forms:

• Stock payment – the purchasing company issues new stocks to buy the stocks or assets of the target company. The most popular form of is stock exchange which means the purchasing company directly to the target company to buy out the stocks or assists of the target company.• Bond payment – The purchasing company issues new

corporate bonds to buy out the stocks or assets of target company. As a payment method with mergers and acquisitions , this type of bond has to have relatively high negotiability and credit rating .

Methods Of Payment In Mergers And Acquisitions• Leveraged Buyout (LOB)•The purchasing company finance capitals with mergers and acquisitions through increasing debts. Under leveraged buyout, the purchasing company take the assets or future operating cash flows of target company as pledges in order to raise debts to finance capitals from investors and then purchase the stocks and ownership of target company with cash payment.

Steps In Merger Transactions

1.PlanningThe most complex part of the

merger process, entails the analysis, the action plan, and the negotiations between the parties involved. The planning stage may last any length of time, but once it is complete, the merger process is well on the way.

Steps In Merger TransactionsPlanning stage also includes:

signing of the letter of intent which starts off the negotiations;

the appointing of advisors who play the role of consultants, examining the strengths, weaknesses, opportunities, and threats of the merger;

detailing the timetable (deadline), conditions (share exchange ratio), and type of transaction(merger by integration or through the formation of a new company);

expert report on the consistency of the share exchange ratio, for all of the companies involved.

Steps In Merger Transactions

2. The resolution The management's

approval first, then by the shareholders involved in the merger plan.

Steps In Merger TransactionsThe resolution stage also includes:

The Board of Directors calling an extraordinary shareholders’ meeting whose item on the agenda is the merger proposal;

The extraordinary shareholders’ meeting being called to pass a resolution on the item on the agenda;

Any opposition to the merger by creditors and bondholders within 60 days of the resolution;

Green light from the Italian Antitrust Authority, that evaluates the impact of the merger and imposes any obligations as a prerequisite for approving the merger.

Steps In Merger Transactions

3. Implementation The final stage of the merger process, including enrolment of the merger deed in the Company Register.

Normally medium-sized/big mergers require one year from the start-up of negotiations to the closing of the transaction. This is because, in addition to the time needed technically, there are problems relating to the share exchange ratio between the merging companies which is rarely accepted by the parties without drawn-out negotiations.

Steps In Merger Transactions

During the merger process, share prices will adjust to the share exchange ratio. On the effective date of the merger, financial intermediaries will enter the new shares with the new quantities in the dossiers. The shareholders may trade without constraint the new shares and benefit from all rights (dividends, voting rights).

Reverse Mergers• A reverse merger is an alternative to a traditional initial public offering (IPO) for a company desiring to have its stock become publicly traded. In a reverse merger, the owners of a private company acquire control of a dormant public one, called a “shell,” and complete a business combination with it. When the merger is complete, the private company becomes public and its stock can be publicly traded in its own right. Reverse mergers are also used when a larger private company wishes to combine with a smaller publicly held operating business.

Public ShellA “public shell” or “shell company” is a public company that has no or nominal assets (other than cash) and minimal, if any, day-to-day business operations. It may be the remnant of a bankrupt or sold organization or specially formed for the purpose of combining with a private company.

Steps in Reverse Merger

1. Find a shell company. There are hundreds of dormant public companies available. You can also ask corporate law firms, accountants, or financial consultants.2. Develop a financial strategy for raising additional capital contemporaneous with or after the deal.

Steps in Reverse Merger

3. Hire a law firm and accounting firm. There are a myriad of SEC rules, forms to fill out, legal documents, confusing numbers, and steps you will need help with.4. Complete the transaction and trade shares. Shares of the private company are traded for shares of the public company and typically the private company continues its existence as a wholly owned subsidiary of the former shell.

Defensive Strategies In Hostile Take Over •Shareholders Rights Plan

Known as a poison pill or deal killer

Can take different forms but often

Gives non-acquiring shareholders get the right to buy 50 percent more shares at a discount price in the event of a takeover.

Defensive Strategies In Hostile Take Over •Selling the Crown Jewels

The selling of a target company’s key assets that the acquiring company is most interested in to make it less attractive for takeover.

Can involve a large dividend to remove excess cash from the target’s balance sheet.

Defensive Strategies In Hostile Take Over •White Knight

The target seeks out another acquirer considered friendly to make a counter offer and thereby rescue the target from a hostile takeover