LO 1 Merger versus Consolidation 23 1 Merger

LO 1 Merger versus Consolidation 23. 1 • Merger • One firm is acquired by another • Acquiring firm retains name and acquired firm ceases to exist • Advantage – legally simple • Disadvantage – must be approved by stockholders of both firms • Consolidation • Entirely new firm is created from combination of existing firms 23 -0

LO 1 Acquisitions • A firm can be acquired by purchasing voting shares of the firm’s stock • Tender offer – public offer to buy shares • Circular bid – takeover bid communicated to shareholders by direct mail • Stock exchange bid – takeover bid communicated to shareholders through a stock exchange 23 -1

LO 1 Stock Acquisition • No stockholder vote required • Can deal directly with stockholders, even if management is unfriendly • May be delayed if some target shareholders hold out for more money – complete absorption requires a merger 23 -2

LO 1 Acquisition Classifications • Horizontal – both firms are in the same industry • Vertical – firms are different stages of the production process • Conglomerate – firms are unrelated 23 -3

Takeovers LO 1 • Control of a firm transfers from one group to another • Possible forms • Acquisition • Merger or consolidation • Acquisition of stock • Acquisition of assets 23 -4

LO 1 Takeovers - continued • Proxy contest – Attempts to gain control of a firm by soliciting a sufficient number of shareholder votes to replace existing management • Going private – All publicly owned stock in a firm is replaced with complete equity ownership by a private group. • Leveraged Buyouts (LBOs) – Going-private transactions in which a large percentage of the money used to buy the stock is borrowed. Often, incumbent management is involved. 23 -5

LO 1 Alternatives to Merger • Strategic Alliance – Agreement between firms to cooperate in pursuit of a joint goal • Joint Venture – Typically an agreement between firms to create a separate, coowned entity established to pursue a joint goal 23 -6

LO 1 & LO 7 Synergy 23. 4 • The whole is worth more than the sum of the parts • Some mergers create synergies because the firm can either cut costs or use the combined assets more effectively • This is generally a good reason for a merger • Need to examine whether the synergies create enough benefit to justify the cost 23 -7

LO 1 & LO 7 Revenue Enhancement • Marketing gains • Advertising • Distribution network • Product mix • Strategic benefits • Market power 23 -8

LO 1 & LO 7 Cost Reductions • Economies of scale • Ability to produce larger quantities while reducing the average per unit cost • Most common in industries that have high fixed costs • Economies of vertical integration • Coordinate operations more effectively • Reduced search cost for suppliers or customers • Complimentary resources 23 -9

LO 1 & LO 7 Tax Gains • Take advantages of net operating losses • Carry-backs and carry-forwards • Merger may be prevented if the IRS believes the sole purpose is to avoid taxes • Unused debt capacity • Surplus funds • Pay dividends • Repurchase shares • Buy another firm • Asset write-ups 23 -10

LO 1 & LO 7 Reducing Capital Needs • A merger may reduce the required investment in working capital and fixed assets relative to the two firms operating separately • Firms may be able to manage existing assets more effectively under one umbrella • Some assets may be sold if they are redundant in the combined firm (this includes human capital as well) 23 -11

LO 1 & LO 4 Diversification 23. 5 • Diversification, in and of itself, is not a good reason for a merger • Stockholders can normally diversify their own portfolio cheaper than a firm can diversify by acquisition • Stockholder wealth may actually decrease after the merger because the reduction in risk in effect transfers wealth from the stockholders to the bondholders 23 -12

Defensive Tactics 23. 7 LO 1 • Corporate charter • Establishes conditions that allow for a takeover • Supermajority voting requirement • • • Targeted repurchase aka greenmail Standstill agreements Exclusionary offers and dual class stock Poison pills Shareholder rights plans 23 -13

LO 1 Defensive Tactics continued • Leveraged buyouts • Other defensive tactics • Golden parachutes • Crown jewels • White knight 23 -14