M&A

See also M&A Issue

Mergers and Acquisitions - $1.5trilion spent recently 1. Why are they important a Size in billions b. National pride Vodaphone - Mannesman, Rowntree - Nestle c. Regional impact - mas redundancies d. Corporate Impact. Hanson reduced HQ staff from 550 to 75

Why a. Remove Underperfoming mgtr b. Add value by combining firms c. Agency theory - Managers like M&A's - increass their importance d. Raider - assets strip e. Reduce competition - increase prices f. valuation - gain information - use to advantage

Merger

A "merger" or "merger of equals" is often financed by an all stock deal' (a stock swap). An all stock deal occurs when all of the owners of stocks of either company get the same amount of stock in the new combined company. The term "demerger" is sometimes used to indicate the effective opposite of a merger, where one company splits into two, the second often being a separately listed stock company if the parent was a stock company.[1] [edit]

Acquisition

An acquisition (of un-equals, one large buying one small) can involve a cash and debt combination, or just cash, or a combination of cash and stock of the purchasing entity, or just stock. The Sears-Kmart acquisition is an example of a cash deal. In addition, the acquisition can take the form of a purchase of the stock or other equity interests of the target entity, or the acquisition of all or substantially all of its assets. [edit]

High-yield

In some cases, a company may acquire another company by issuing high-yield debt (high interest yield, "junk" rated bonds) to raise funds (often referred to as a leveraged buyout). The reason the debt carry a high yield is the risk involved. The owner can not or does not want to risk his own money in the deal, but third party companies are willing to finance the deal for a high cost of capital (a high interest yield).

The combined company will be the borrower of the high-yield debt and it will be on its balance sheet. This may result in the combined company having a low shareholders' equity to loan capital ratio (equity ratio). [edit]

Examples

In a 1985 merger between Pantry Pride and Revlon, Pantry Pride had to issue 2.1 billion dollars of high-yield debt to buy Revlon. The target Revlon was worth 5 times the acquirer. [edit]

Motives behind M&A

These motives are considered to add shareholder value:

* Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.
* Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and increasing its power (by capturing increased market share) to set prices.
* Cross Selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.
* Synergy: Better use of complementary resources.
* Taxes: A profitable company can buy a loss maker to use the target's tax write-offs.
* Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smooths the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).

These motives are considered to not add shareholder value:

* Diversification: While this may hedge a company against an downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to acchieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
* Overextension: Tend to make the organization fuzzy and unmanageable.
* Manager's hubris: Oftentimes the executives of a company will just buy others because doing so is newsworthy and increases the profile of the company.
* Empire Building: Managers have larger companies to manage and hence more power
* Manager's Compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders); although some empirical studies show that compensation is rather linked to profitablity and not mere profits of the company.
* Bootstrapping: Example: how ITT executed its merger.

Classifications of mergers

* Horizontal mergers take place where the two merging companies produce similar product in the same industry.
* Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.
* Conglomerate mergers take place when the two firms operate in different industries.

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. [edit]

Issues

The occurrence of a merger often raises concerns in anti-trust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market and what, if any, action could prevent it. Regulatory bodies such as the European Commission and the United States Department of Justice may investigate anti-trust cases for monopolies dangers, and have the power to block mergers.

The completion of a merger does not ensure the success of the resulting organization; indeed, many (in some industries, the majority) mergers result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities at one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger to not be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate. [edit]

Major Mergers & Acquisitions since 1990

Acquirer and target, announcement date, deal size, share and cash payment. [edit]

United States

* AOL Time Warner; America Online and Time Warner (US$166 billion excluding debt, Stock: 100%, Cash: 0%) (PBS coverage, CNN)
* ExxonMobil; Exxon and Mobil Oil (Dec. 1998, $77 billion, Stock: 100%, Cash: 0%) (Suns Online, CNN)
* Citigroup; Citicorp and Travelers Group (1999, $73 billion, Stock: 100%, Cash: 0%) (Cornell, Citigroup FAQ)
* J.P. Morgan Chase, Bank One (announced January 14, 2004) ($59 billion, Stock: 100%, Cash: 0%) (SNL)
* Procter & Gamble buy Gilette (2005, $54 billion) ([3])
* Bank of America; with FleetBoston Financial (2003, $47 billion) ([4])
* MCI Communications; with WorldCom; created MCI WorldCom (1997) ($44 billion, Stock: 100%, Cash: 0%) (Department of Justice, MCI.com)
* ChevronTexaco; Chevron and Texaco ($35 billion) ([5])
* DaimlerChrysler; Daimler Benz and Chrysler (Announced May 1998 - Final 1998) ($35 billion) ([6])
* Vivendi Universal; Vivendi and Seagram (agreed 19 June 2000) ($32 billion, Stock: 100%, Cash: 0%) (The Tocqueville Connection, Law firm)
* Hewlett-Packard; with Compaq (Announced Sept. 2001 - Final May 2002) ($25 billion) ([7])
* Walt Disney Company; with Capital Cities/ABC (1995) ($19 billion)
* Kmart; with Sears, Roebuck (Announced Nov. 17, 2004) ($11 billion, 55% stock, 45% cash) (Investorguide)
* Monsanto; with Pharmacia & Upjohn
* NBC Universal; NBC and Universal
* Pfizer; with Warner-Lambert
* Total; with Petrofina, and Elf Aquitaine
* JDS Uniphase; with SDL
* Union Pacific Railroad; with Southern Pacific Railroad
* Sprint; with Nextel
* Verizon; Bell Atlantic, GTE, and AirTouch Cellular
* G4; with TechTV, purchased for $300 Million by Comcast.

[edit]

Europe

* Vodafone; with Mannesmann (completed February 2000) ($130 billion) ([8])
* BP; with Amoco (completed August 1998) ($110bn)