MERGER & ACQUISITION

PRESENTED BY: NURUL BALQIS BT ZULKIFLI NUR HANISAH BT ABD RAHIM AINUL MARDHIAH BT AZMAN

FORM OF ACQUISITION
MERGER OR ACQUISITION OF ACQUISITION AF CONSOLIDATION STOCK ASSET

1.MERGER OR CONSOLIDATION
Merger: combination of asset and liabilities of two firm to form a single business entity. Acquiring firm acquires all asset and liabilities of acquired firm and retain its name and identity.

Consolidation: legal action whereby two or more companies combine to form a new company.

We refer both types of reorganization as merger because of its similarities. Important points: 1) Merger does not cost as much as other form of acquisition. Shareholder of acquired firm have appraisal right. 2) Stockholder of each firm must approve a merger.

2.

ACQUISITION OF STOCK

To purchase firms voting stock in exchange for cash, shares of stock, or other securities. May start as private offer from management to another. Sometimes, offer are made directly to the stockholder of selling firm using tender offer. Tender offer is public offer to buy share of target firm directly to the shareholder. Communicated using public announcement such as newspaper advertising and public mail.

FACTOR IN CHOOSING BETWEEN ACQUISITION OF

STOCK AND A MERGER

In acquisition of stock Dont have to held shareholder meeting because vote is not required. Bidding firm can directly with the shareholder via tender offer. Target manager often resist acquisition, resulted in higher cost compare to merger. Frequently, a minority shareholder will hold out in tender offer, thus firm cannot be completely absorbed. Complete absorption of firm require a merger.

3. ACQUISITION OF ASSET

Can acquire firm by buying all its assets. Target stockholder is require to vote. Involve transferring title to individuals assets, can be costly.

3 CLASSIFICATION SCHEME
1.

Horizontal acquisition when two companies competing in same market merge. either have large effect or little to no effect to market. When two extremely small companies combine, the result are less noticeable. If a company holding 20% of the market share combine with another company holding another 20% of market shares, its give unfair market advantage over its competitor. Eg: acquisition of Mobil by Exxon

2.

Vertical Acquisition which a firm or company combine with a supplier or distributor. Involve manufacturer forming a partnership with distributor. The distributor is free to get the material at base cost. Less money used in the production. Acquisition of tyre company by car manufacturing company.

3.

Conglomerate acquisition when two or more firms in different markets producing unrelated goods join to form a single firm. Eg: merging of an athletic shoe company with a soft drink company

NOTE ABOUT TAKEOVER

Is a general term referring to the transfer of control of firm from one group of shareholder to another. Firm that want to take over another firm is referred as the bidder. The bidder offer to pay cash or securities to obtain stock or asset of another company. If the offer is accepted, target firm will give up control over its stock or asset to the bidder in exchange for consideration. Takeover can occur by acquisition, proxy contest, and going private transaction.

Proxy contests: occur when a group of shareholders attempts to gain seats on the board of directors. Is written authorization for one shareholder to vote the stock of another shareholder. Going private transaction Small group of investor purchase all the equity shares of a public firm. Shares are delisted from stock exchange and can no longer be purchased in the open market.

SYNERGY
Is there a rational for merger? Refer to the differences between value of the combined firm synergy=VAB-(VA+VB)
1.

Synergy

occur if the value of the combined firm after the merger is greater than the sum of the value of acquiring firm before the merger. 2. Where does synergy comes from? Increase in cash flow create value.
CFt= RevtRequirementt CosttTaxestCapital

(4) basic categories: i. Revenue enhancement ii. Cost reduction iii. Lower tax iv. Lower capital requirement 3. How are these synergistic gain shared? The acquiring firm pays a premium for acquired firm. The bidder would actually lose if synergy were less than premium.

4. Are there any motive for merger besides synergy? Yes. Even if the synergy from merger is less than the premium paid to the target, the manager of acquiring firm is still benefit. E.g : the revenue of the combined firm after the merger will almost certainly be greater than revenue of the bidder before merger. The manager may receive compensation. Manager generally experience greater prestige and power when managing a larger firm. But, the manager of target could lose job.

Source of Synergy

Revenue Enhancement

Cost Reduction

Tax Gain

Reduced Capital Requirements

REVENUE ENHANCEMENT
generate greater revenues when combined. Increase by :

Marketing gains

improve marketing can increase operating revenue

Strategic benefits Market or Monopoly power

Can reduce competition by acquire another firm. Generate monopoly profits.

COST REDUCTION

Operate more efficiently when combined. Increase by:

Economy of scale average cost of production falls as the level of production increase.

Economies of Vertical Integration make coordination of closely related operating activities easier.

Technology Transfer Complementary Resources improve usage of existing resources.

Elimination of Inefficient Management

change in management can often increase firm value.

TAX GAIN
Tax

reduction may be a powerful incentive for some acquisition. come from:

Reduction

1)

Net Operating Losses

firm with a profitable division and unprofitable one will have a low tax bill because the loss in one division offset the income in the other.

2)

Debt Capacity

Case 1 : Unused Debt Capacity

Every firm can borrow a certain amount before the marginal costs of financial distress equal the marginal tax shield

Case 2 : Increased Debt Capacity

exp:
Firm can borrow RM 100 before merger. After merger able to borrow RM 250. Increase RM 50 (RM 250 RM 200) Risk reduction from the merger creates greater debt capacity and thus a greater tax shield.

3)

Surplus Fund company can lower paying tax paid by share repurchase. however, a share repurchase is not legal option if the sole purpose is to avoid taxes on dividends.

REDUCE CAPITAL REQUIREMENTS

Reduce Fixed Capital

By move to one headquarters building.

Reduce Working Capital

Inventory-to-sale and the cash-to-sales ratio decrease as firm size increase.

Question
Aman Bhd is considering making an offer to purchase Bahagia Sdn Bhd. Financial Controller of Aman Bhd has collected the following information:

Aman Bhd Total earnings Number of shares outstanding Price per share RM 2,000,000 1,200,000 RM 2.50

Bahagia Sdn Bhd RM 1,000,000 400,000 RM 1.80

Assume that both firms have no debt outstanding. Aman Bhd. Has estimated that the value of the combined firm will be RM 4 million. Bahagia Sdn Bhd has indicated that it would accept a cash purchase offer of RM 4.40 per share. Calculate the synergy from the merger.

Synergy

= VAB - [ VA + VB ] = RM 4,000,000 [RM 3,000,000 + RM 720,000] = RM 280,000