Merger and Acquisition2(2)

8/7/2019 Merger and Acquisition2(2)

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Merger and Acquisition

Presented By:

Nidhi Goswami

Prashant SharmaSunidhi Rathee

Viprendra Vikram


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DEFINITION

The phrase mergers and acquisitions refers to the aspect of

corporate strategy, corporate finance and management dealingwith the buying, selling and combining of different companiesthat can aid, finance, orhelp a growing company in a givenindustry grow rapidly without having to create anotherbusiness entity.


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MEANINGMerger

A transaction where two firms agree to integrate theiroperations on a relatively co-equal basis because they have

resources and capabilities th

at togeth

er may create a strongercompetitive advantage.

The combining of two or more companies, generally byoffering the stockholders of one company securities in theacquiring company in exchange for the surrender of theirstock


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ContdACQUISITION A purchase of a company or a part of it so that the acquired

company is completely absorbed by the acquiring company

and thereby no longer exists as a business entity".

It also known as a takeover or a buyout

It is the buying of one company by another.

In acquisition two companies are combine together to form a

new company altogether.


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MERGER ACQUISITION

DIFFERENCE BETWEEN MERGER ANDACQUISITION:

i. Merging of two organization in to

one.

ii. It is the mutual decision.

iii. Merger is expensive thanacquisition (higher legal cost).

iv. Through merger shareholders can

increase their net worth.

v. It is time consuming and the

company has to maintain so muchlegal issues.

vi. Dilution of ownership occurs in

merger.

i. Buying one organization by

another.

ii. It can be friendly takeover or

hostile takeover.

iii. Acquisition is less expensive than

merger.

iv. Buyers cannot raise their enough

capital.

v. It is faster and easier transaction.

vi. The acquirer does not experience

the dilution of ownership.


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TYPES of Merger1.1. HorizontalHorizontal

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

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

2.2. VerticalVertical

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

Often in an attempt to control supply or distribution channels.Often in an attempt to control supply or distribution channels.

3.3. ConglomerateConglomerate A merger in which two firms in unrelated businesses combine.A merger in which two firms in unrelated businesses combine.

Purpose is often to diversify the company by combining uncorrelated assets andPurpose is often to diversify the company by combining uncorrelated assets andincome streamsincome streams

4.4. CrossCross--border (International) M&Asborder (International) M&As A merger or acquisition involving two foreign firms.A merger or acquisition involving two foreign firms.


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Conglomerate merger types Product extension conglomerate mergers involve

firms that sell non-competing products use relatedmarketing channels of production processes.

Market extension conglomerate mergers join togetherfirms that sell competing products in separategeographic markets.

A pure conglomerate merger unites firms that have noobvious relationship of any kind.


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Types Of Acquisitions

Two types

Hostile

Friendly


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Merger as a capital budget decision:-

Capital Budget: (or investment appraisal) is

the planning process used to determine

whether an organizations long terminvestments such as new machinery,

replacement machinery, new plants, new

products, and research

development projectsare worth pursuing. It is budget for major

capital, or investment, expenditures.


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Framework for evaluating acquisition

It consist of the following steps:- Step 1 Determine CF (X), the equity related post-tax cash flows of the

acquiring firm, X, without the merger, over the relevant planning horizon

period. Step 2 Determine PV (X), the present value of CF (X) by applying a suitable

discount rate,

Step 3 Determine CF (X), the equity-related post cash flows of the combined

firm Xwhich consists of the acquiring firm X and the acquired firm Y over

the planning horizon. These cash flows must reflect the post merger benefits.

Step 4 Determine PV (X), the present value of CF (X)

Step 5 Determine the ownership position (OP) of the shareholders of firm X

in the combined firm X, with the help of the following formula

OP = Nx/[Nx + ER (Ny)]


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Contd Where

Nx = number of outstanding equity shares of firm X (the acquiring firm)

before the merger.

Ny

= number of outstanding equity shares of firm Y (the acquired firm) before

the merger.

ER = exchange ratio representing the number of shares of firm X exchanged

for every share of firm Y.

Step 6 Calculate NPV of the merger proposal from the point of view of X as

follows

NPV (X) = OP [PV (X)] PV (X) Where

NPV (X) = NPV of the merger proposal from the point of view of shareholders

of X

OP = ownership position of the shareholder of firm X


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Contd PV (X) = PV of the cash flows of the combined firm X.

PV (X) = PV of the cash flows of firm X, before the merger.

Example :-

Consider th

e firm X limited. Step 1- Estimated equity related post tax cash flow CF (X)t of X limited are as

follows-

Year 1 2 3 4 5

CF(X)t 200 220 236 248 260


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Contd After five years, CF (X) t will grow at a compound rate of 5% per annum.

Step 2 Determination ofPV of cash flows using the discount rate of 15%

PV (X) = 200/1.15 + 220/(1.15)

2

+ 236/(1.15)

3

+248/(1.15)

4

+260/(1.15)

5

+260(1.05) /[(0.15 0.05)(1.15)5] = 2123.79

The last item in the above equation represents the PV of the perpetual stream of

cash flows beyond the fifth year.

Step 3 Estimation of the equity related cash flows of the combined firm X is

as follows Year 1 2 3 4 5

CF(X)t 320 360 410 430 450


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Contd After 5 years cash flows of the combined firm is expected to grow at the

compounded rate of 6% per year.

Step 4 Determination of PV of expected cash flows of the combined firm.

PV(X) = 320/1.15 + 360/(1.15)2 + 410/(1.15)3 + 430/(1.15)4 +

450/(1.15)5 +450(1.06) /[(0.15 0.06)(1.15)5] = 3660.6

Step 5 Determining the ownership position of the shareholders of X. the

number of outstanding shares of firm X before merger are 100. The number

of outstanding sharesof firm Y are 100. The proposed exchange ratio (ER) is 0.6. The ownership

position

of the shareholders of firm X in the combined firm X will be

OP = 100 / [100 + 0.6(100)] = 0.625


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Contd Step 6 Calculation of NPV of the merger

proposal from the point of view of

shareholders X - NPV (X) = (0.625) 3660.6 - 2123.79 = 164.085 .


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Benefits of M&A Staff reduction.

Economies of scale.

Acquiring new technology. Improved market reach and industry visibility.

Tax gains.

Good for companies in their tough time. Cost Efficiency.


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TERMINOLOGIES Due Diligence

Leverage Buy out

Management Buy out

Poison Pills


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Due - Diligence "Due diligence" is a term used for a number of concepts

involving either an investigation of a business or person prior

to signing a contract, or an act with a certain standard of care

It can be a legal obligation, but the term commonly applies to

voluntary investigations

The term "due diligence" first came into common use as a

result of the United States' Securities Act of 1933

This Act included a defense at Sec. 11, referred to as the "DueDiligence" defense


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Contd could be used by broker-dealers when accused of inadequate

disclosure to investors of material information with respect to

the purchase ofsecurities

Originally the term was limited to public offerings of equity

investments.

It has come to be associated with investigations of private

mergers and acquisitions as well

The process of due diligence is carried out by a team whosemembers have expertise in various functional areas.


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Contd Due diligence process is accomplished in four

steps

1. Identification Phase

2. Analysis

3. Summarizing

4. Consolidation


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Leveraged Buy Out The acquisition of another company using a significant

amount of borrowed money (bonds or loans) to meet the cost

of acquisition.

Often, the assets of the company being acquired are used as

collateral for the loans in addition to the assets of

the acquiring company.

The purpose of leveraged buyouts is to allow companies to

make large acquisitions without having to commit a lot ofcapital.


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MAN

AGE

MENT

BUY

-OUT

It is a special case of a leveraged acquisition

occurs when a company's managers buy or acquire a large partof the company.

The goal of an MBO may be to strengthen the managers'

interest in the success of the company.


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POISONPILL

A poison pill is an attempt to discourage an acquisition by

making it more expensive to acquire a company, or by

reducing the value of the acquired business.

Poison pills are largely designed to protect directors, and are

harmful to shareholders.

Poison pills does not allow the shareholder to sell to an

acquirer (usually at a significant premium to the price without

bid interest). Poison pill strategies are defensive tactics that allow

companies to thwart hostile takeover bids from other

companies.


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TYPES OF POISON PILL

STRATE

GIE

S FLIP-OVERRIGHTSPLAN

"FLIP-IN" RIGHTSPLAN

POISONDEBT

"PUT

RIG

HTS

"PL

AN

VOTINGPOISONPILLPLAN


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Purpose

From the managers' point of view may be :-

to save their jobs either if the business has been

scheduled for closure or if an outside purchaserwould bring in its own management team.

They may also want to maximize the financial

benefits they receive from the success they bring to

the company by taking the profits for themselves


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Documents

Merger and Acquisition2(2)