MERGERS AND ACQUISITIONS

MK, UNIT 21

MERGERS AND ACQUISITIONS

PricewaterhouseCoopers

GlaxoSmithKline

America Online & Time Warner

Volkswagen→Porsche

HewlettPackard→Vertica

Agrokor→Mercator?

WHY MERGERS AND TAKEOVERS?

… to add shareholder value through:

• economies of scale • increased revenue/increased market share• cross selling• synergy• taxes• geographical or other diversification

MERGER

Two or more companies join together to form a larger

company.

TAKEOVER OR ACQUISITION

One company buys another one, or buys part of another one. It makes a takeover bid, i.e. offers to

buy all shareholders’ shares at a certain price during a limited period of time.

RAID

Buying as many shares as possible on the stock market, hoping to gain a majority.

FRIENDLY TAKEOVER

A takeover that a company being taken over agrees to.

HOSTILE TAKEOVER

A takeover that a company taken over does not want and doesn’t agree to.

INVESTOPEDIA VIDEO:Hostile takeover

HOME ASSIGNMENTDEFENSE AGAINST A HOSTILE BID

•Bankmail•Crown Jewel Defense•Flip-in•Flip-over•Golden Parachute•Gray Knight•Greenmail•Jonestown Defense•Killer bees•Leveraged recapitalization•Lobster trap•Lock-up provision•Nancy Reagan Defense•Non-voting stock•Pac-Man Defense

HANDOUT

•Pension parachute•People Pill•Poison pill•Safe Harbor•Scorched-earth defense•Shark Repellent•Staggered board of directors•Standstill agreement•Targeted repurchase•Top-ups•Treasury stock•Voting plans•White knight•White squire•Whitemail

ADDITIONAL READINGhttp://www.investopedia.com/articles/stocks/08/corporate-takeover-defense.asp

BIDDING COMPANY OR THE TARGET COMPANY?

• acquires another company

• wants to be taken over

• launches a bid

• accepts a bid

• defends itself against a hostile takeover bid

• rejects a bid

INTEGRATION

HORIZONTAL INTEGRATION

Acquiring a competitor in the same field of activity.

VERTICAL INTEGRATION

Acquiring a business in other parts of supply chain.

IF VERTICAL…

BACKWARD INTEGRATION

Buying suppliers of raw materials or components.

FORWARD INTEGRATION

Buying distributors or retail outlets.

EXAMPLES

A car company that expands into tire manufacturing?

A brewery buys a pub?

Mlinar buys a wheat producer?

CONGLOMERATES

A large parent company controlling a number of subsidiaries in different business areas.

PROBLEMS

Inefficient, not focused on core activity, lacking synergy →low stock price

i.e. market capitalization is lower than the value of its assets, e.g. land, buildings, pension funds…

LEVERAGED BUYOUT (LBO)

leveraged = financed from borrowed capital

A company borrows funds by issuing…

bonds or taking out…

a loan. It uses the company’s assets as a…

collateral. Once it buys the company it sells off…

the assets to repay…

the debt. This is called asset-…

stripping.

ORDER THE EVENTS

• Raiders calculate that a large company is undervalued.

• Investors buy the bonds because they pay a high interest rate.

• The new owners sell some of the company’s subsidiaries.

• The new owners repay the bondholders.• The raiders buy the company.• The raiders issue bonds to raise capital to buy

the company.

ORDER THE EVENTS

1. Raiders calculate that a large company is undervalued.

2. The raiders issue bonds to raise capital to buy the company.

3. Investors buy the bonds because they pay a high interest rate.

4. The raiders buy the company.

5. The new owners sell some of the company’s subsidiaries.

6. The new owners repay the bondholders.

Source: Professional English In Use Finance MK

FINISH THE SENTENCE

• Large conglomerates formed by takeovers…

• An inefficient conglomerate’s stock market value…

• If a conglomerate is worth less than its assets,…

• Raiders do not have to have their own money if…

Source: Professional English In Use Finance MK

READING, p. 105

P1• How do successful companies use profits?• Who is usually the target company in horizontal

integration?• When do mergers occur?• Why is vertical integration undertaken?

P2• What is a raid?• What does a raid usually cause?• Do raids typically result in the acquisition of a

controlling interest? • What do companies launch when they want to

acquire a controlling interest in the target company?

• What makes a takeover friendly or hostile?

P3• What is the role of banks in M&As?

P4• Why did LBOs target conglomerates in the USA

in the 1980s?• Explain “market capitalization is lower than the

value of its total assets”• How do raiders actually earn money in LBOs?

P5• What reputation do private equity funds have

today?

Vocabulary Comprehension

Gordon GekkoWallstreet

(1987, O. Stone)

The point is ladies and gentlemen that greed, for lack of a better word, is good.

Why do you need to wreck this company? Because it's WRECKABLE, all right?