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Mergers & acquisitions (M&A) (Cont)

 What're your market tiers and valuation?

 To begin the Mergers and Acquisitions process, you need to
know which part of the market your company is in: the lower
end market, middle market, or the top market. These are
merely relative references to the size of a company in regards
to its total revenue or asset base. As a result, there is no
universally accepted valuation range for these terms.
 In general, however, many Merger and Acquisition experts use
these rule of thumb numbers:

1. Mergers & acquisitions (M&A) (Cont)

 Each market segment has its own unique set of buyers and
sellers.
 For example, buyers may pay a hefty premium for small market
companies with the potential to grow into mid-market
companies, and for mid-market companies with the potential to
develop into top market companies.

 Understanding relative valuations will help you determine

who the players are in your market segment as well as identify
potential buyers or sellers.

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 1. Mergers & acquisitions (M&A) (Cont)

 Why companies persue M&A ?

 Companies pursue mergers and acquisitions to generate value.
Utilizing a M&A approach, companies can:
 Increase market share

 Break into or buy their way into a promising market

 Promote growth

 Acquire valuable assets

 Achieve vertical integration

 Leverage “synergies” to create even more value

1. Mergers & acquisitions (M&A) (Cont)

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 1. Mergers & acquisitions (M&A) (Cont)

 Reasons for Mergers and Acquisitions

 Financial synergy for lower cost of capital

 Improving company’s performance and accelerate growth

 Economies of scale

 Diversification for higher growth products or markets

 To increase market share and positioning giving broader

market access
 Strategic realignment and technological change

 Tax considerations

 Under valued target

 Diversification of risk

1. Mergers & acquisitions (M&A) (Cont)

 The typical M&A life cycle

 While each Merger & Acquisition deal is unique, there are
broadly defined interdependent phases of every M&A deal that
every entrepreneur or business owner, whether they are buying
or selling, should strive to understand: strategy, target
screening, transaction, and post-M&A integration.

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 1. Mergers & acquisitions (M&A) (Cont)

 M&A Strategy - Identify value-creating merger and

acquisition opportunities.
 M&A Target Screening - Identify promising merger and
acquisition targets to acquire or sell to.
 M&A Transaction - Execute the merger and acquisition deal.
 Post-M&A Integration - Seamlessly integrate an acquisition.
Identify issues and challenges from this deal to take into
account for future transactions.

1. Mergers & acquisitions (M&A) (Cont)

 Who is involved in M&A?
 Seller - This is the company looking to be acquired.
 Buyer - This is the company seeking acquisitions.
 Transaction lawyers - Transaction lawyers are a must for any deal.
They provide transaction advice, manage negotiations, and provide
legal documentation for the sale. Transaction lawyers aid in legal
due diligence.
 Accountants - The role of accountants in any merger and
acquisition deal are many and varied. Accountants are involved
throughout the process from the initial stages of financial due-
diligence to the final closing process and beyond.
 Tax Advisers - Tax advisers provide expert analysis and
assessments of a deal’s tax implications and overall financial
feasibility. They help achieve structuring goals of both the buyer
and the seller in a merger and acquisition deal. 8

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 1. Mergers & acquisitions (M&A) (Cont)

 Integration Consultants - Integration consultants ensure a

seamless post-acquisition or post-merger transition, such as the
integration of new management. They help manage changes to
the business after an M&A transaction, including changes to a
business’s talent and culture.
 Business brokers - Business brokers help businesses in the lower
end or mid-market sell to individual owners or private equity
groups.
 Investment Bankers - Like a business broker, investment bankers
help a business buy, sell, or merge. However, investment bankers
typically only work at the upper end of the market and deal with
complex business transactions. In general, investment bankers
help corporations sell to other corporations.

1. Mergers & acquisitions (M&A) (Cont)

 Types of mergers
 Horizontal Mergers

 Conglomerate Mergers

 Vertical Mergers

 Extension Mergers

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 1. Mergers & acquisitions (M&A) (Cont)

 Horizontal merger
 It occurs between companies in the same industry.

 Purpose
 The purpose of a horizontal merger is to make partners of
former competitors. The newly created company claims the
combined market share of both companies, along with the
technologies and expertise that made them able to compete
with one another. 11

1. Mergers & acquisitions (M&A) (Cont)

 Benefits
 The benefits of horizontal mergers are easy to understand.
Among the benefits:
 Increased market power: The combined market share, assets
(patents), experts and leadership can make the merged companies
far more powerful and capable of growth than either would have
been alone.
 Dramatic reduction in competitive costs: The two companies may
have needed to aggressively invest in new technologies or keep
product prices low in order to compete with one another. With
competition relieved, those costs can be directed elsewhere.
 Apparent synergies: Companies that share the same market and the
same understanding of the market are more likely to have
synergies that can be easily leveraged for even more market power.
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 Exxon (Esso) & Mobil Merger

 Exxon and Mobil merged in

1999: creation of Exxon Mobil
Corporation.
 Group activities:
 Upstream: exploration and

gas.
 Petrochemicals.

 Downstream: fuel and

lubricant.
 Why ?
 Sharing know-how

 In the short term: synergy of

efficiency
 Long term: synergy of growth

1. Mergers & acquisitions (M&A) (Cont)

 Conglomerate mergers : It takes place when the merging

companies exist in different, unrelated industries. In this type
of merger, the purchasing company is often significantly
larger and more cash-rich than the merged company.

 There are 2 subtypes of mergers within this type:

 Pure Conglomerate Mergers - This type of merger occurs when the
two companies exist in entirely separate markets.
 Mixed Conglomerate Mergers - This type of merger occurs when the
two companies intend to combine their operations to target new
markets or create new products that aren’t related to the products or
services of either one. 14

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 1. Mergers & acquisitions (M&A) (Cont)

 Purpose
 The purpose of a conglomerate merger is often to diversify.

 Companies that predict the obsolescence of their products or

services may pursue pure conglomerate mergers as a way of

transitioning their brand into another market while they are
still profitable.
 Mixed conglomerate mergers may be attractive because the

purchasing company expects that the separate markets may

become related at a later time due to changes in technology
or consumer behavior.

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1. Mergers & acquisitions (M&A) (Cont)

 Benefits
 Though the risks can be significant, there are important

benefits to conglomerate mergers when the merging

companies have the ability to leverage them.
 Protection against changing markets: Conglomeration

can give companies a safer path to transition to a new

market over time. A company that is trapped in one market
as sales decline may lose the cash needed to transition.
 Cross-marketing and sales: Even if the companies serve

different markets, they may still serve the same

demographic. Conglomeration can enable greater capture of
a particular geographic area or age-group.

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 General Electric

 Creation : homas A. Edison founded the Edison Electric Light

Company in 1878. General Electric Company was formed in
1892 from the merger of Edison General Electric Company and
Thomson-Houston Electric Company.
 Pioneer company in diversification.
 GE is a diversified technology and services company:
 aircraft engines
 energy production
 financial services
 medical imaging
 television programs
 plastics

1. Mergers & acquisitions (M&A) (Cont)

 Vertical mergers : It takes place when a company joins forces

with another that exists at a different place in the same supply
chain. The merger may occur between companies that control
the raw materials, manufacture or distribution.

 Purpose
 The purpose of vertical mergers is to achieve greater control
of the supply chain by unifying different parts of it into the
same company.
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 1. Mergers & acquisitions (M&A) (Cont)

 Benefits
 Cut costs: A vertical merger allows for the elimination of the
seller-purchaser relationship between two companies, resulting in
immediate cuts to the costs that are necessary to move a product
through the supply chain.
 Improved Efficiency: Companies that unify a supply chain can
exercise greater control over it, allowing for increased
production, more reliable delivery of raw materials or other
advantages that allow them to claim a larger market share.

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Walt Disney Company & ABC Inc

 Walt Disney Company bought ABC

Inc (Capital Cities) for $ 19 billion
in February 1996.

 Why ?
 The ABC Inc opportunities in
radio and television:
 Broadcast its programs.

 Promotion theme parks.

 New opportunity for external

growth.

 Strengthening show activities

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 1. Mergers & acquisitions (M&A) (Cont)

 Extension merger
 Market-extension mergers : It takes place when two

companies that sell the same product in different geographic

markets merge.

 Purpose
 The purpose of market-extension mergers is to increase global
market share. It is often one of the major steps to achieving
international market power.
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1. Mergers & acquisitions (M&A) (Cont)

 Benefits
 There are many benefits to choosing market-extension mergers,
especially over the alternative methods of entering new
markets.
 Increased Market Share: The most basic advantage of market-extension
mergers is the increased market share that comes with absorbing the
merged company. In addition to the existing market share, there is now
the possibility of sharing both types of products across both markets.
 Adopted Expertise: Market extension mergers are a powerful alternative
to entering new markets using existing infrastructure. They allow
companies to adopt the expertise that already exists in those markets
instead of entering them blind to the challenges that exist there.
 Example : Merger of Egle Bancshares by the RBC centura (in
2002)
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 1. Mergers & acquisitions (M&A) (Cont)

 Product-extension mergers : Product-extension mergers take

place when two companies that sell similar products or that
operate in the same market unite.

 Purpose
 The purpose of a product-extension merger is to expand
products or service offerings while being able to take
advantage of existing production and distribution
infrastructure. 23

1. Mergers & acquisitions (M&A) (Cont)

 Benefits
 There are many benefits to choosing market-extension mergers,
especially over the alternative methods of entering new
markets.
 Improves the variety of products: Companies that enter into a product-
extension merger can increase the variety of their products without any
further development of their manufacturing or supply chains. They
simply adopt the existing infrastructure from the merged company.
 Enables the bundling of technology: Companies can dramatically
improve the quality or the competitiveness of their products and services
with the raw materials, technology and supply chains that product-
extension mergers provide.
 Example : Merger of Mobilink telecom by Broadcom

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 1. Mergers & acquisitions (M&A) (Cont)

 Attitude of Management
 From the perspective of the board of directors of the target
companies, the merger can be classified into two broad
categories:
 A friendly merger: This happens when the ‘board of directors’ agree,
negotiate and finally accept an offer.
 A hostile merger: This happens when the ‘board of directors’ attempt to
prevent the merger.
 In case of a hostile takeover, takeover defenses are used, with the intention
to either prevent the transaction or increase the bid. Directors may trigger
pre-offer mechanism, which makes the target company seem less
attractive. This prevents the acquiring firm from making a decent offer.
Alternatively, directors may try post-offer mechanism, which include
addressing ownership of shares, hence reducing acquirer’s power gained
from its ownership. 25

1. Mergers & acquisitions (M&A) (Cont)

 Why Does Due Diligence Matter?

 Due diligence matters because it’s the process that helps
investors and companies truly understand the deal they are
entering into, along with all of the unique risks involved.
 Both sides of the deal are obligated to tread carefully because
of their obligations to their respective investors, shareholders,
and lenders. A poorly planned merger can have disastrous
consequences and even lead to the collapse of a company as
well as possible litigation.
 The process is necessary to determine:
 The accuracy of any information that was introduced be either party
before or during the deal
 Whether the deal is a good fit for either party
 Whether the value of the deal represents proper value to the buyer 26

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 1. Mergers & acquisitions (M&A) (Cont)

 Fortunately, proper due diligence will identify most risks so

that they can be controlled or properly addressed in the Merger
and Acquisition transaction documents.
 As long as the due diligence period is sufficiently long enough
to allow a comprehensive review by the buyer of the seller's
information, there will be no surprises during the completion of
the M&A transaction, and any necessary safety precautions can
be planned in advance.

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1. Mergers & acquisitions (M&A) (Cont)

 What is Investigated Before a Merger and Acquisition Deal?

 Synergies

 It is vital that the seller be able to understand how the target company's
operations will synergize with theirs. All existing infrastructure at the
target company should be closely examined to determine if there are
redundancies or opportunities combine or eliminate dual functions to save
costs that directly affect the bottom line.
 The due diligence process should not be considered complete until the
following questions are answered:
 What market/consumer base does the target company serve that the
buyer doesn’t yet?
 What role does the target company play in the buyer’s existing
strategy?

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 1. Mergers & acquisitions (M&A) (Cont)

 Finances, assets and debts

 The due diligence process should be used to determine the most accurate
value of the target company. The real value may not be realized without
the right leadership, but that’s why it’s important to have a full accounting
of all the assets and debts that exist right now.
 The buyer should have confident answers to all of the following questions.
 What is the current cost of managing the target company’s operations?

 Are those margins increasing or decreasing?

 Are the projections for future growth well-grounded in market data?

 What debt is currently being managed by the target company?

 What patents/trademarks does the target company hold that is relevant

to the buyer's own operations?
 Are there trade secrets or other know-how, and how are they
preserved?
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1. Mergers & acquisitions (M&A) (Cont)

 Management and employee structure

 Significant differences in corporate structure and management policies
can make mergers very difficult if not managed properly. Switching
masses of employees over to a new style of management, or culture, can
cause significant disruption, but trying to maintain two contradicting
structures in one company comes with its own problems.
 The buyer should understand such by addressing the following
questions:
 How is the workforce compensated at every level?

 How comprehensive and consistently enforced are the target

company's employee manuals?
 What are the policies regarding incentives and bonuses?

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 1. Mergers & acquisitions (M&A) (Cont)

 Corporate charters and governance standards

 The buyer needs to ensure that its current corporate governance
standards and documents do not conflict with those of the target
company. These documents often determine the responsibilities of the
officers of the merged company, and the rights and powers granted to
stockholders.
 Any buyers should make sure they understand the following:
 Who holds the securities of the target company including options,
preferred stocks, and warrants?
 What voting agreements govern the stockholders?

 Are there documents that govern recapitalization or restructuring?

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1. Mergers & acquisitions (M&A) (Cont)

 Legal liabilities and /or pending litigation

 All successful companies must manage legal challenges. Ongoing
litigation isn’t disqualifying on its own, but any buyers should
understand how likely these cases are to end with judgments against the
target company that may decrease its value.
 Buyers should know:
 What type of litigation is currently pending?

 Has any additional litigation been threatened?

 What were the terms of past settlements?

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