Types Of Mergers & Acquisitions

Definitions
A merger is a combination of two or more
corporations in which only one corporation
survives and the merged corporations go out
of business.
Statutory merger is a merger where the
acquiring company assumes the assets and
the liabilities of the merged companies
A subsidiary merger is a merger of two
companies where the target company
becomes a subsidiary or part of a subsidiary of
the parent company

Reasons for Mergers/Acquisitions

1) To improve economic efficiency
2) To extend the power base of
management
3) To effect transfers of wealth between
classes of stakeholders

Mergers & Acquisitions Defined

Mergers
two firms are combined on
a relatively co-equal basis

Acquisitions
one firm buys another
firm

the words are often used interchangeably even

though they mean something very different

merger sounds more amicable, less threatening

Mergers & Acquisitions Defined

Mergers
parent stocks are usually
retired and new stock issued
name may be one of the
parents or a combination
one of the parents usually
emerges as the dominant
management

Acquisitions
can be a controlling
share, a majority, or
all of the target firms
stock
can be friendly or
hostile
usually done through
a tender offer

Mergers & Acquisitions Defined

Types of M&A Activity

Vertical
Related

Unrelated

Horizontal

suppliers or customers
competitors

Product Extension

complementary products

Market Extension

complementary markets

Conglomerate

everything else

Types of Mergers
Horizontal Mergers
- between competing companies
Vertical Mergers
- Between buyer-seller relation-ship companies
Conglomerate Mergers
- Neither competitors nor buyer-seller
relationship

Horizontal Merger
A merger occurring between companies in the
same industry. Horizontal merger is a business
consolidation that occurs between firms who
operate in the same space, often as competitors
offering the same good or service.
Examples:- The biggest M & A deal was done by
Reliance Communication which merged its
telecoms tower business with GTL infrastructure
Ltd for USD 11 billion.
Bharti Airtel acquired Kuwait based Zain
Telecom's

Vertical Mergers
A merger between two companies producing
different goods or services for one specific
finished product. A vertical merger occurs when
two or more firms, operating at different levels
within an industry's supply chain, merge
operations.
Example:-An example of a vertical merger is a car
manufacturer purchasing a tire company. Such a
vertical merger would reduce the cost of tires for
the automaker and potentially expand business
to supply tires to competing automakers.

Conglomerate Mergers
A conglomerate merger is officially defined as
being "any merger that is not horizontal or
vertical; in general, it is the combination of
firms in different industries or firms operating
in different geographic areas".

Reasons of Conglomerate Mergers

Share of the market that is owned by the
company and indulging in cross selling. The
companies also look to add to their overall
synergy and productivity by adopting the
method of conglomerate mergers.

Do Mergers and Acquisitions Create Value?

The Logic
Related M&A Activity
value creation would be expected due to
synergies between divisions
economies of scale
economies of scope
transferring competencies
sharing infrastructure, etc.

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not
capture any value from M&As, why do they
continue to merge and acquire?
Survival

avoid competitive disadvantage

avoid scale disadvantages

Free Cash
Flow

cash generating, normal return investment

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not
capture any value from M&As, why do they
continue to merge and acquire?
Agency
Problems

Managerial
Hubris

managers benefit from increases in size

managers benefit from diversification

managers believe they can beat the odds

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not
capture any value from M&As, why do they
continue to merge and acquire?
some M&A activity does generate
above normal profits (expected and
operational over the long run)
Above Normal
Profits

proposed M&A activity may satisfy

the logic of corporate level strategy
managers may see economies that
the market cant see

Summary
M&A activity is a mode of entry for vertical
integration and diversification strategies
A firms M&A strategy should satisfy the
logic of corporate level strategy
M&A activity can create economic value at
announcement, but target firms usually capture
that value
M&A activity can create value over the long term
for the acquiring firm