BASIC CONCEPT OF MERGER

AND ACQUISITION
Pre 1 - Valuation, Concepts and Methods
GROUP 4
ANDAL
BAYACA
CIPRIANO
GAMOS
SIBONGA
USTARES
VILLALON
Merger vs. Acquisition

Mergers and acquisitions are two of the most misunderstood concepts in the
business world. Both involve the joining of two or more business entities, leading to a
restructuring of their corporate order to achieve better synergies, improve competence, and
enhance efficiency.

A merger takes place when individual organizations agree to combine their forces
and create a new business entity. Conversely, an acquisition occurs when a larger,
financially stronger organization takes over a smaller one, causing the latter to cease to
exist as its operations and assets are absorbed by the acquiring company.

While both terms refer to the joining of two companies, there are key differences
involved in their use

Merger

A merger occurs when two separate entities combine forces to create a new, joint
organization. It refers to an agreement in which two companies join together to form one
company. In other words, a merger is the combination of two companies into a single legal
entity. The firms that agree to merge are roughly equal in terms of size, customers, and
scale of operations. Such a scenario is sometimes referred to as a "merger of equals."

Types of Mergers

There are five basic categories or types of mergers:

1. Horizontal Mergers

A horizontal merger is a merger between companies that directly compete with each
other. Horizontal mergers are done to increase market power (market share), further utilize
economies of scale, and exploit merger synergies.

A famous example of a horizontal merger was that between HP (Hewlett-Packard)

and Compaq in 2011. The successful merger between these two companies created a
global technology leader valued at over US$87 billion.

2. Vertical Mergers

A vertical merger is a merger between companies that operate along the same
supply chain. A vertical merger is the combination of companies along the production and
distribution process of a business. The rationale behind a vertical merger includes higher
quality control, better flow of information along the supply chain, and merger synergies.

A notable vertical merger happened between America Online and Time Warner in
2000. The merger was considered a vertical merger due to each company’s different
operations in the supply chain – Time Warner supplied information through CNN and Time
Magazine while AOL distributed information through the internet.
3. Market-Extension Mergers

A market-extension merger is a merger between companies that sell the same

products or services but that operate in different markets. The goal of a market-extension
merger is to gain access to a larger market and thus a bigger client/customer base.

For example, RBC Centura’s merger with Eagle Bancshares Inc. in 2002 was a
market-extension merger that helped RBC with its growing operations in the North
American market. Eagle Bancshares owned Tucker Federal Bank, one of the biggest banks
in Atlanta, with over 250 workers and $1.1 billion in assets.

4. Product-Extension Mergers

A product-extension merger is a merger between companies that sell related

products or services and that operate in the same market. By employing a product-
extension merger, the merged company is able to group their products together and gain
access to more consumers. It is important to note that the products and services of both
companies are not the same, but they are related. The key is that they utilize similar
distribution channels and common, or related, production processions or supply chains.

For example, the merger between Mobilink Telecom Inc. and Broadcom is a product-
extension merger. The two companies both operate in the electronics industry and the
resulting merger allowed the companies to combine technologies. The merger enabled the
combination of Mobilink’s 2G and 2.5G technologies with Broadcom’s 802.11, Bluetooth,
and DSP products. Therefore, the two companies are able to sell products that complement
each other.

5. Conglomerate Mergers

A conglomerate merger is a merger between companies that are totally unrelated.

There are two types of a conglomerate merger: pure and mixed.

 A pure conglomerate merger involves companies that are totally unrelated

and that operate in distinct markets.
 A mixed conglomerate merger involves companies that are looking to expand
product lines or target markets.

The biggest risk in a conglomerate merger is the immediate shift in business

operations resulting from the merger, as the two companies operate in completely different
markets and offer unrelated products/services.

For example, the merger between Walt Disney Company and the American
Broadcasting Company (ABC) was a conglomerate merger. Walt Disney Company is an
entertainment company, while American Broadcasting company is a US commercial
broadcast television network (media and news company).

Advantages of a Merger
1. Increases market share- when companies merge, the new company gains a larger
market share and gets ahead in the competition.

2. Reduces the cost of operations- companies can achieve economies of scale, such as bulk
buying of raw materials, which can result in cost reductions. The investments on assets are
now spread out over a larger output, which leads to technical economies.

3. Avoids replication- some companies producing similar products may merge to avoid
duplication and eliminate competition. It also results in reduced prices for the customers.

4. Expands business into new geographic areas- a company seeking to expand its business
in a certain geographical area may merge with another similar company operating in the
same area to get the business started.

5. Prevents closure of an unprofitable business- mergers can save a company from going
bankrupt and also save many jobs.

Disadvantages of a Merger

1. Raises prices of products or services- a merger results in reduced competition and a

larger market share. Thus, the new company can gain a monopoly and increase the prices
of its products or services.

2. Creates gaps in communication- the companies that have agreed to merge may have
different cultures. It may result in a gap in communication and affect the performance of
the employees.

3. Creates unemployment- in an aggressive merger, a company may opt to eliminate the

underperforming assets of the other company. It may result in employees losing their jobs.

4. Prevents economies of scale- in cases where there is little in common between the
companies, it may be difficult to gain synergies. Also, a bigger company may be unable to
motivate employees and achieve the same degree of control. Thus, the new company may
not be able to achieve economies of scale.

Acquisition

An acquisition refers to the takeover of one entity by another. In this process, the
smaller company is absorbed, and no new entity is created. The assets of the smaller
company become part of the larger company, with the buyer having full control.

Types of Acquisitions

1. Friendly Acquisition

A type of takeover that is very friendly in nature as the management of the acquired
company, as well as management of the target company, agrees to the terms and
conditions of the takeover, and takeover is done without any difficulty, arguments, and
fights. An acquirer doesn't have to do any plotting or make any strategies against the
target company in order to acquire the same. Therefore in literal terms, we could say that
when the takeover is with the consent of the board of directors and shareholders of the
target company, then the takeover is called a "Friendly Takeover."

Example:
In 2014, Facebook Inc. announced the acquisition of the mobile messaging company,
WhatsApp. According to the statement issued by Facebook, the deal was intended to
"support Facebook and WhatsApp's shared mission to bring more connectivity and utility to
the world by delivering core services efficiently and affordably."

The acquisition was executed in the form of a friendly takeover. Facebook acquired
all outstanding shares and options of WhatsApp for $4 billion in cash and 183 million of
Facebook Class A common shares. Additionally, Facebook assigned more than 45 million
restricted shares to WhatsApp's employees. The total value of the deal was estimated at
around $19 billion.

2. Reverse Acquisition

An act where a private company purchases a publicly traded company and shifts its
management into the latter.

Example:
Billionaire Warren Buffett's own Berkshire Hathaway. Berkshire began as a textile
corporation, which eventually merged with Buffett's private insurance empire when Buffett
bought a controlling interest in Berkshire's failing business. Buffett never changed the name,
and later shifted Berkshire into a holding company that houses a multitude of business
ventures.

3. Back Flip Acquisition

Backflip Acquisition is a rare type of takeover that occurs when an acquirer becomes
a subsidiary of the company it purchased. Upon completion of the deal, the two entities
join forces and retain the name of the company that was bought.

Example:
Suppose you are a pizza making company...well know for quality and taste you are
earning profit on daily basis but on the other side there i burger naming company which is
not at well state making losses, hence your company decides to buy shares of burger
making company to the extant of majority, which now gives you power to control the
company now after 2 years your pizza company is on loss and the burger one is gaining
profits than their is a chance of burger making company acquire your share.

4. Hostile Acquisition

A hostile acquisition is the acquisition of one company (called the target company)
by another (called the acquirer) that is accomplished by going directly to the company's
shareholders or fighting to replace management to get the acquisition approved. A hostile
takeover can be accomplished through either a tender offer or a proxy fight.

 Tender offer: Offering to purchase shares of the target company at a premium

to the market price.
 Proxy vote: Persuading shareholders of the target company to vote out the
existing management.

Example:
Pharmaceutical company Sanofi-Aventis's (SNY) acquisition of Genzyme Corp.
Genzyme produced drugs for the treatment of rare genetic disorders and Sanofi-Aventis
saw the company as a means to expand into a niche industry and broaden its product
offering. After friendly takeover offers were unsuccessful as Genzyme rebuffed Sanofi-
Aventis's advances, Sanofi-Aventis went directly to the shareholders, paid a premium for
the shares, added in contingent value rights, and ended up acquiring Genzyme.

Benefits of Acquisitions

Acquisitions offer the following advantages for the acquiring party:

1. Reduced entry barriers- a company is able to enter into new markets and product lines
instantaneously with a brand that is already recognized, with a good reputation and an
existing client base. An acquisition can help to overcome market entry barriers that were
previously challenging.

Market entry can be a costly scheme for small businesses due to expenses in market
research, development of a new product, and the time needed to build a substantial client
base.

2. Market power- an acquisition can help to increase the market share of your company
quickly. Even though competition can be challenging, growth through acquisition can be
helpful in gaining a competitive edge in the marketplace. The process helps achieves
market synergies.

3. New competencies and resources- a company can choose to take over other businesses
to gain competencies and resources it does not hold currently. Doing so can provide many
benefits, such as rapid growth in revenues or an improvement in the long-term financial
position of the company, which makes raising capital for growth strategies easier.
Expansion and diversity can also help a company to withstand an economic slump.

4. Access to experts- when small businesses join with larger businesses, they are able to
access specialists such as financial, legal or human resource specialists.

5. Access to capital- after an acquisition, access to capital as a larger company is improved.

Small business owners are usually forced to invest their own money in business growth,
due to their inability to access large loan funds. However, with an acquisition, there is an
availability of a greater level of capital, enabling business owners to acquire funds needed
without the need to dip into their own pockets.
Challenges with Acquisitions

Acquisitions can be a good way to grow your business by increasing your revenues
when you acquire a complimentary company that is able to contribute to your income.
Nevertheless, Acquisitions deals can also create some hitches and disadvantage your
business. You must take these potential pitfalls into consideration before pursuing an
acquisition.

1. Culture clashes- a company usually has its own distinct culture that has been developing
since its inception. Acquiring a company that has a culture that conflicts with yours can be
problematic. Employees and managers from both companies, as well as their activities, may
not integrate as well as anticipated. Employees may also dislike the move, which may
breed antagonism and anxiety.

2. Duplication- acquisitions may lead to employees duplicating each other’s duties. When
two similar businesses combine, there may be cases where two departments or people do
the same activity. This can cause excessive costs on wages. M&A transactions, therefore,
often lead to reorganization and job cuts to maximize efficiencies. However, job cuts can
reduce employee morale and lead to low productivity.

3. Conflicting objectives- the two companies involved in the acquisition may have distinct
objectives since they have been operating individually before. For instance, the original
company may want to expand into new markets, but the acquired company may be looking
to cut costs. This can bring resistance within the acquisition that can undermine efforts
being made.

4. Poorly matched businesses- a business that doesn’t look for expert advice when trying to
identify the most suitable company to acquire may end up targeting a company that brings
more challenges to the equation than benefits. This can deny an otherwise productive
company the chance to grow.

5. Pressure on suppliers- following an acquisition, the capacity of the suppliers of the

company may not be enough to provide the additional services, supplies, or materials that
will be needed. This may create production problems.

6. Brand damage- acquisition may hurt the image of the new company or damage the
existing brand. An evaluation of whether the two different brands should be kept separate
must be done before the deal is made.

Merger And Acquisition Process

A. Preliminary Assessment or Business Valuation- in this process of assessment not

only the current financial performance of the company is examined but also the
estimated future market value is considered.
B. Phase of Proposal- After complete analysis and review of the target firm's market
performance, in the second step, the proposal for merger or acquisition is given to
multiple suitors.

C. Exit Plan- When a owners decide to exit the target firm the structure is decided and
proposed to the potential suitors.

D. Structured Marketing- After finalizing the Exit Plan, the target firm gets involves in
the marketing process and tries to achieve highest selling price.

E. Structured Marketing- After finalizing the Exit Plan, the target firm gets involves in
the marketing process and tries to achieve highest selling price.

Mergers and acquisitions (M&A) are powerful business strategies that enable
companies to grow, expand their market share, and enhance their financial positions. The
process of M&A involves various steps, including business valuation, proposal creation, exit
planning, structured marketing, and integration. Successful mergers or acquisitions provide
companies with new resources, competencies, and greater market power, allowing them to
overcome entry barriers and gain a competitive edge.

However, despite these potential benefits, M&As also present challenges. These
include cultural clashes, duplication of functions, and conflicts in objectives, which may
hinder effective integration. Such challenges can lead to financial losses, brand damage,
and increased pressure on suppliers. Therefore, careful planning and alignment of goals
between the acquiring and acquired companies are critical to ensuring successful
integration and long-term success.

Ultimately, while mergers and acquisitions offer significant growth opportunities,

they also carry risks that must be carefully managed. Conducting thorough assessments,
creating strong proposals, and ensuring seamless integration are essential to maximizing
the benefits of M&A transactions.
REFERENCES

https://www.investopedia.com/terms/m/merger.asp

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https://corporatefinanceinstitute.com/resources/valuation/merger/

https://corporatefinanceinstitute.com/resources/valuation/acquisition/

https://www.investopedia.com/terms/f/friendly-takeover.asp

https://www.investopedia.com/terms/f/friendly-takeover.asp

https://www.pcecompanies.com/resources/why-you-need-a-preliminary-ma-valuation

https://iica.nic.in/.../Mergers%20and%20Acquisitions.pdf

https://www.slideshare.net/.../mergers-and.../75949033

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