8/7/2019 m&a class pre

1/22

MERGERS, ACQUISITIONS

AND CORPORATE

RESTRUCTURING

Sub Code:

08MBAFM323

8/7/2019 m&a class pre

2/22

M & A

Corus was taken over by Tata

Vodafone took over Hutchison-Essar in India

Hewlett-Packard; with Compaq. Procter & Gamble buy Gillette

The Walt Disney Company; acquiring Pixar,

ICICI bank with sangli bank ltd

Tech mahindra Satyam

8/7/2019 m&a class pre

3/22

Introduction

M&As refer to

Traditional mergers and acquisitions

Takeovers

Corporate restructuring

Corporate control

Changes in the ownership structure of firms

8/7/2019 m&a class pre

4/22

MERGERS

Mergers is defined as a combination of two or

more companies into single company

The combining of two or more entities into one,through a Purchase, acquisitions or a pooling of

interest

Any transaction that forms one economic unit

from two or more previous units

8/7/2019 m&a class pre

5/22

Forces Affecting Mergers Technology Globalization

Deregulation

Efficiency of operations

Changes in industry organization

Entrepreneurship

Economic and financial environment

8/7/2019 m&a class pre

6/22

Types of Mergers Horizontal mergers

Combination between firms in same business activity

Rationale

Economies of scale and scope

Synergies such as combining of best practices

Government regulation due to potential anticompetitive

effects

Vertical mergers

Combinations between firms at different stages

Rationale is information and transaction efficiency

8/7/2019 m&a class pre

7/22

Conglomerate mergers

Combination of firms in unrelated types ofbusiness activity.

Types of conglomerate mergeres

Financial conglomerates : They provide flow offunds to each segment , exercise control & are

the final financial risk takers.

Managerial conglomerates: They play a role in

operating decisions & provide staff expertise &services to operating entity.

8/7/2019 m&a class pre

8/22

Reasons for M&As

Economies of scale from horizontal mergers

Economies of scope from vertical mergers Complementarities: a small firm may have a

unique product, but may need the experience in

marketing and sales of a mature firm that may

also be in need of new products.

8/7/2019 m&a class pre

9/22

Contd Unused tax shields: a firm may acquire another

(loss-making) firm to take advantage of tax-loss

carry-forwards .

Utilizations of Surplus Funds: A firm may generate

lot of cash ,a merger with another firm involving cashcompensation often represents a more efficient

utilization of surplus funds

Managerial effectiveness :One of the potential gains

of merger is an increase in managerial effectiveness

8/7/2019 m&a class pre

10/22

Other (not so good) reasons

for M&As

The target firm tries to avoid bankruptcy and

chooses to be acquired The Hubris Hypothesis: the acquiring firms

management overvalue their ability to create

value once they take control of the target

firms assets

Managers motivations to build an empire may

lead to several acquisitions that end up

destroy value

8/7/2019 m&a class pre

11/22

Other reasons

Synergy

Lack of technology & managerial talent

Patents rights

Monopoly

Government pressure

Effects of trade cycles

8/7/2019 m&a class pre

12/22

Sources of Value Increases

from M&As

Efficiency increases

Unequal managerial capabilities

Better growth opportunities

Critical mass

Better utilization of fixed investments

8/7/2019 m&a class pre

13/22

THEORIES OF

MERGERS

8/7/2019 m&a class pre

14/22

Theories of mergers

Theories of mergers are classified into:

Efficiency Theories

Information & Signaling Agency Problems & Managerialism

Free cash flow hypothesis

Market power

Hubris hypothesis

8/7/2019 m&a class pre

15/22

Efficiency theories

These theories can be divided broadly into:

differential efficiency theory

inefficient management theory

Synergy

Pure diversification

Strategic realingment to changing environments undervaluation

8/7/2019 m&a class pre

16/22

8/7/2019 m&a class pre

17/22

Agency Problems

Agency problems arise when conflict

between managers & shareholders of

the firm Managers may work less (shirk) and/or

overconsume perks

Individual shareholders have little

incentive to monitor managers Dealing with agency problems give rise

to monitoring and controlling costs

8/7/2019 m&a class pre

18/22

Acquisitions

Managerialism

Mergers are a manifestation of agencyproblems

Managers are motivated to increase the size of

their firms because their compensation is a

function of firm size, sales, or total assets

Theory may not be valid if managers'compensation is based on profitability or

value increases

Solutions to agency problem

8/7/2019 m&a class pre

19/22

Free Cash Flow Hypothesis

Free cash flows (FCF) are cash flows in

excess of the amount needed to fund all

positive net present value projects

8/7/2019 m&a class pre

20/22

Payout of free cash flow to reduce agencycosts

Reduces amount of resources under control of

managers

Prevents managers from investing in negativeNPV projects

Outside financing is subject to monitoring by

capital markets

8/7/2019 m&a class pre

21/22

Market Power

One of the main motives for a merger is

to increase the share of a firm in the

market Through horizontal merger a firm can

increase its market share

8/7/2019 m&a class pre

22/22

Winner's Curse and Hubris

Winner's Curse: The winning bid in a

bidding contest for an object ofuncertain value will typically pay in

excess of its true value

One cause of the winner's curse

phenomenon in M&As is hubris,defined as overweening pride and

excessive optimism