Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.
* Distinction between mergers and acquisitions :-
The terms
merger and acquisition mean slightly different things. The legal concept of a
merger (with the resulting corporate mechanics, statutory merger or statutory
consolidation, which have nothing to do with the resulting power grab as
between the management of the target and the acquirer is different from the
business point of view of a "merger", which can be achieved independently
of the corporate mechanics through various means such as "triangular
merger", statutory merger, acquisition, etc.
When one company
takes over another and completely establishes itself as the new owner, the
purchase is called an "acquisition". From a legal point of view, in
an acquisition, the target company still exists as an independent legal entity,
which is controlled by the acquirer.
In the pure sense
of the term, a merger happens when two firms agree to go forward as a single
new company rather than remain separately owned and operated. This kind of
action is more precisely referred to as a "merger of equals". The
firms are often of about the same size. Both companies' stocks are surrendered
and new company stock is issued in its place. For example, in the 1999 merger
of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they
merged, and a new company, GlaxoSmithKline, was created.
.jpg)
In practice,
however, actual mergers of equals don't happen very often. Usually, one company
will buy another and, as part of the deal's terms, simply allow the acquired
firm to proclaim that the action is a merger of equals, even if it is
technically an acquisition. Being bought out often carries negative
connotations; therefore, by describing the deal euphemistically as a merger,
deal makers and top managers try to make the takeover more palatable. An
example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which
was widely referred to as a merger at the time.
A purchase deal will
also be called a "merger" when both CEOs agree that joining together
is in the best interest of both of their companies. But when the deal is
unfriendly (that is, when the target company does not want to be purchased) it
is always regarded as an "acquisition".
* Financing M & A :-
Mergers are generally differentiated from
acquisitions partly by the way in which they are financed and partly by the relative
size of the companies. Various methods of financing an M&A deal exist:
- Cash :-
Payment by cash. Such
transactions are usually termed acquisitions rather than mergers because the
shareholders of the target company are removed from the picture and the target comes
under the (indirect) control of the bidder's shareholders.
- Stock :-
Payment in
the form of the acquiring company's stock, issued to the shareholders of the
acquired company at a given ratio proportional to the valuation of the latter.
- Financing Option :-
There are some
elements to think about when choosing the form of payment. When submitting an
offer, the acquiring firm should consider other potential bidders and think
strategically. The form of payment might be decisive for the seller. With pure
cash deals, there is no doubt on the real value of the bid (without considering
an eventual earn out). The contingency of the share payment is indeed removed.
Thus, a cash offer preempts competitors better than securities. Taxes are a
second element to consider and should be evaluated with the counsel of
competent tax and accounting advisers. Third, with a share deal the buyer’s
capital structure might be affected and the control of the buyer modified. If
the issuance of shares is necessary, shareholders of the acquiring company
might prevent such capital increase at the general meeting of shareholders
A)Cash on hand: it consumes financial
slack (excess cash or unused debt capacity) and may decrease debt rating. There
are no major transaction costs.
B)It consumes financial slack, may
decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs
of 1% to 3% of the face value.
C)Issue of stock: it increases
financial slack, may improve debt rating and reduce cost of debt. Transaction costs include
fees for preparation of a proxy statement, an extraordinary shareholder meeting
and registration.
If the buyer pays with stock, the
financing possibilities are:
a) Issue of stock (same effects
and transaction costs as described above).
b) Shares in treasury: it
increases financial slack (if they don’t have to be repurchased on the market),
may improve debt rating and reduce cost of debt. Transaction costs include
brokerage fees if shares are repurchased in the market otherwise there are no major
costs.
In general, stock will
create financial flexibility. Transaction costs must also be considered but
tend to have a greater impact on the payment decision for larger transactions.
Finally, paying cash or with shares is a way to signal value to the other
party, e.g.: buyers tend to offer stock when they believe their shares are
overvalued and cash when undervalued.[
No comments:
Post a Comment