Merger & Acquisition..

MBASemester 3 Reg # 531210865

Name: Tayework Fantaye Wolde Giorgis Registration No. : 531210865 Learning Center: Addis Ababa Learning Center Code: 2540 Course: Management Subject: Merger and acquisition Semester: Three (3) Module No. : MF 0011 Date of submission: 25, August 2013

Q1.What are the steps for successful mergers? Answer : Mergers need careful planning to achieve financial goals, reduce problems and for profit-making. Drop in productivity is expected to be around 50% as people from different workplaces have differences of opinion. Even a successful merger can take three months to
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Merger & Acquisition..MBASemester 3 Reg # 531210865

three years for the completion of recovery process in an organization. Even a successful merger can take three months to three years for the completion of recovery process in an organization. For employees, possibility of changes and uncertainty at workplace can create stress. This affects judgments, perceptions, and interpersonal relationships. Some suggestions for a smoother restructuring and transition are: Circulate a consistent message in the combining entities from top down. Maintain consistent accountability and compensation throughout the company for similar positions. Find out new ways of structuring the company to bridge corporate culture differences. Establish gaugeable objectives, especially in areas, which will be working together for a common goal. Revamp the compensation plan to recognize the additional work required by transition. Plan different ways for people to get to know each other. Q2.Explain the key approaches to identify acquisition opportunities. Answer : If pursuing an acquisition strategy is a critical part of a companys growth plans, then serious consideration should be given to a more proactive approach to identifying appropriate acquisition opportunities. The potential benefits of growth from successful acquisitions are considerable; however, acquisitions can be risky and consume excessive management time. Indeed, when a company is planning to make an acquisition, Without strategic goal-setting and activity planning, the business model is unlikely to succeed. cquisition. Some financial experts suggest selection criteria based on two approaches: 1.Present value analysis: The present value analysis is mostly similar to valuation on the basis of steady-state earnings and/or dividends for listed companies. The earnings or the target firm are projected and discounted at the acquirers cost of capital to obtain a theoretical market price of the shares of the target company. This is then compared with the actual market price to determine the net present value of investment in the target company. This approach does not consider the risk posture of acquisition. 2. Capital assets pricing: This approach provides a superior theoretical framework as it also factors the risk. The basic logic behind the model is that if expected rate of return,
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Merger & Acquisition..MBASemester 3 Reg # 531210865

considering the risk element, exceeds the required rate of return, the target company is a good buy. Therefore This approach does not consider the risk posture of acquisition, i.e., the portfolio effect. Q3.Write a note on the five stage model. Answer : To examine the issues that may contribute to the failure of acquisition and value destruction, a five-stage model of mergers and acquisitions was developed by the author Sudi Sudarsanam. This model advocates a view of M & A as a process rather than a transaction. The process is considered as a multi-stage one and a holistic view of the process is required to appreciate the links between different stages and develop effective value-creating M &A strategies. The five stages consists: Stage 1: Corporate strategy evolution The goal of M & A is to achieve corporate and business strategic objectives. Corporate strategy aims to achieve ways to optimise the portfolio of businesses that a firm has and how that portfolio can be modified in the interest of the shareholders. Business strategy aims to enhance the firms competitive positioning on a sustainable basis in its chosen markets. Both the objectives can be met by M & A but is only one of several alternatives including, for instance, strategic alliances, outsourcing, organic growth, etc. Generally, acquisitions are made by companies due to one or more of the following strategic intents: to gain market power to achieve economies of scale to internalize vertically linked operations to save cost on dealing with markets to acquire complementary resources. The acquirer looks for capabilities that can be leveraged to enhance the competitive advantage of both the firms post-merger. Achievement of the objectives depends both on the conceptual and empirical validity of the strategy. M & A generally seeks to create value through: enhancement of revenue while maintaining the existing cost base reduction in cost while maintaining the existing revenue levels
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Merger & Acquisition..MBASemester 3 Reg # 531210865

generation of new resources and capabilities, thus leading to revenue growth or cost reduction or both. Stage 2: Organising for acquisition It is important to understand the decision process of acquisition because it has a bearing not only on the quality of the decision and its value creation logic but also on the ultimate success of the post-merger integration. There are two primary perspectives here: The rational perspective: This view is based on hard economic, strategic and financial evaluation of the acquisition proposal and the potential value creation. The acquisition is basically a matter of measurement of expected costs and benefits. The acquisition decision is assumed to be a unified view which requires commitment from all managers within the firm. The process perspective: This is based on soft human dimension. In this view the process of decision-making is more politically complex and has to be carefully managed so that the required clarity and commitment of managers is achieved, which is taken for granted in the rationalist approach. Stage 3: Deal structuring and negotiation The result of the processes described in Stages 1 and 2 is the specific target selection. Once the selection has been made by the firm, the merger transaction has to be negotiated or a takeover bid to be made. The deal making takes place in this stage. The deal structuring and negotiation process is complex and involves many interconnected steps including: valuing the target company choosing experts like investment bankers, lawyers and accountants as advisors to the deal obtaining and evaluating maximum intelligence possible about the target company performing due diligence negotiating the senior management positions of the both firms in the post-merger context developing the appropriate bid and defense strategies and tactics within the regulatory and other parameters.
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Merger & Acquisition..MBASemester 3 Reg # 531210865

Stage 4: Post-acquisition integration The objective of this important stage is to make the merged organization operational so that the strategic value expectations can be delivered which drove the merger in the first place. Integration of two organizations is not just about making changes in the organizational structure and instituting a new hierarchy of authority. It involves integration of processes, systems, strategies, reporting systems,etc. Integration of organizations may require change in the mindset and behavior of the people. This stage of the acquisition process is, therefore, a major factor which determines the success of the acquisition. The extent of integration depends upon the degree of strategic interdependence required between the two firms as a precondition for value creation and capability transfer. The value creation logic behind the acquisition dictates the extent to which the capabilities of the two firms need to be merged into a single organization. The taxonomy results in four types of post acquisition integration reveals; Preservation: There is a great need for autonomy so that the capabilities of the acquired firm are nurtured by the acquirer with judicious and limited intervention such as financial control while allowing the acquired firm to develop and exploit its capabilities to the full. Holding company: This refers to involving no interaction between portfolio companies, with passive investment by parent more in the nature of a financial portfolio motivated by risk reduction and reduction in capital costs Symbiosis: This refers to two firms initially co-existing but gradually becoming independent. Symbiosis-based acquisitions need simultaneous protection and permeability of the boundary between the two firms. Absorption: This means full consolidation of the operations, organisation and culture of both the firms over time.

Stage 5: Post-acquisition audit and organizational learning Companies trying to grow through acquisitions need to develop acquisition making as a core competence and excel in it. Companies possessing the right growth strategy through acquisition and the necessary organizational capabilities to manage their acquisitions efficiently and effectively can sustain their competitive advantage far longer and create sustained value for their shareholders. Q4.Explain the role of industry life cycle.
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Merger & Acquisition..MBASemester 3 Reg # 531210865

Answer: Life cycle models are not just a phenomenon of the life sciences. Industries experience a similar cycle of life. Just as a person is born, grows, matures, and eventually experiences decline and ultimately death, so too do industries. The stages are the same for all industries, yet industries cycle through the stages in various lengths of time. Even within the same industry, various firms may be at different life cycle stages. Industry lifecycle has a crucial impact on mergers and acquisitions. The different stages of industry lifecycle are: Fragmentation Stage: The first stage of the new industry is referred to as fragmentation. In this stage, the new industry develops the business. The entrepreneur plans on how to introduce new products or services into the market. The twin problems of innovation and invention are overcome by the entrepreneur at this stage. Shake-out: In the industry lifecycle, the second stage is the shake-out stage. A new industry emerges in this stage and it is at this stage, competitors begin realizing business opportunities in the emerging industry. There is a rapid rise in the value of the industry as well. To gain benefits of the growing opportunities, many firms enter this stage through mergers and acquisitions. Maturity: The third stage of the lifecycle is maturity. At this stage, the dominant business models efficiency gives companies a competitive advantage over competition. Due to the presence of many competitors and product substitutes, the competition in the industry is rather aggressive. To gain competitive advantage, some firms may shift some of their production overseas. Decline: The final stage of the industry lifecycle is the decline. It is a stage at which there is possibility of a war of slow destruction between businesses resulting in the failure of those with heavy bureaucracies. In addition, the market demand may be fully met or suppliers may have a shortage. In this stage many companies leave the market and many other try to take the advantage by acquiring companies which are performing low. Many companies also try to merge with other companies in the decline stage. Q5.What are the important forces contributing to mergers and acquisitions? Answer : Mergers and acquisitions have become more popular in the era of increased competition, free flow of capital across geographical boundaries and globalization of business. A number of reasons can be attributed to the rise in business combinations. Some of these are: Safeguarding the sources of raw material Achieving economies of scale by combining production facilities through efficient utilization of resources
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Merger & Acquisition..MBASemester 3 Reg # 531210865

Standardizing product specifications and improving product quality Achieving improved technical knowhow from the combined entity to cut cost, improvise on quality and produce better products to retain and improve market share. Reducing competition and protecting existing market Obtaining new markets Enhancing borrowing power of the combined entity on better and enhanced asset backing Gaining economies of scale and increase income with proportionately less investment Reducing tax liability because of the provision of setting off accumulated losses and unabsorbed depreciation of one company against the profits of another

Achieving diversification. Utilizing under-utilized manpower. Offering enhanced satisfaction to consumers.

Q6.What is leveraged buyout? Explain the different modes of LBO Financing. Answer : A leveraged buyout (LBO) is an acquisition (usually of a company but, can also be single assets such as a real estate property) where the purchase price is financed through a combination of equity and debt and in which the cash flows or assets of the target are used to secure and repay the debt. Modes of LBO Financing There are many types of financing used in an LBO. These include the following (in order of their risk): 1. Senior debt: The debt that is at the topmost rank amongst all the other debts and equity capital in the business is the senior debt. A typical structure of a bank loan is up to three trenches: A, B and C. Specific assets of the company generally secure the debt, which implies that if there is a breach in the obligations under the loan agreement. Most of the times,
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Merger & Acquisition..MBASemester 3 Reg # 531210865

the terms of senior debt in an LBO requires debt repayment over a period of seven years approximately through equal annual installments. 2. Subordinated debt: In the order of priority in any liquidation, subordinated debt is ranked after senior debt. In this debt, the terms are less stringent compared to the senior debt. At the end of the term, repayment is required in the form of one bulet payment. Lending costs are typically higher in this debt as it offers less security to the Lender than in senior debt. The high yield bond, which is often listed in the Indian markets, is an increasingly significant form of subordinated debt. High yield bonds that are publicly handed over to institutional investors can either be senior or subordinated securities. 3. Mezzanine finance: It is an alternative to high yield bonds and is considered as a type of intermediate financing between debt and equity. It is usually high risk subordinated debt. 4. Loan stock: It can be regarded as a form of equity financing once it is convertible into equity capital. An investigation should be carried out with the companys advisers whether or not loan stock is tax deductible. 5. Preference share: It is a part of the companys share capital. It gives a fixed dividend and fixed share of the companys equity which depends on the availability of adequate profits. 6. Ordinary shares: It is the riskiest among the parts of a LBOs capital structure. However, if the company is successful, majority of the upside will be enjoyed by ordinary shareholders Governance aspects of LBOs Every restructuring programmer must generate some additional value for The business and for its stakeholders. The sources of value generation of An LBO are as follows a. Reduction in agency cost: An LBO privatizes a public corporation. In case of a public corporation, the management is different from owners. Management may take suboptimal decisions without approval of the owners, for their personal benefit. These are costs of agency that are avoided. b. The second source of value gain is associated with efficiency. A private firm is arguably quicker in decision-making, and this is needed in a fast changing environment. c. Thirdly the tax benefit of leveraging, in view of tax deductibility of interest expense, is a distinct benefit. The concept of stepping up of assets for depreciation as an ingredient of LBO calls for additional tax advantages.

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Merger & Acquisition..MBASemester 3 Reg # 531210865

d.

Final y, it is understood that management or investors in an LBO deal have more information on the value of the firm than the ordinary shareholders.

Leveraged buyouts and corporate governance Today, LBO firms are attempting to create value in acquired companies by enhancing profitability, pursuing growth that includes roll-up strategies (where the acquired company is used as the platform for more acquisitions of related businesses in order to gain critical mass and create economies of scale), and improving corporate governance to create a better

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