Chapter 18

Acquisitions, Divestitures, Restructuring, and Corporate Governance

Acquisition :
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm.

Divestitures:
The action or process of selling off subsidiary business interests or investments.

Restructuring :
A significant modification made to the debt, operations or structure of a company. This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy.

Corporate governance:
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled.

Reasons and Rationale for Mergers and Acquisitions:

Diversification Taxation Taxation Geographical or other Growth diversification Consolidation of Production Resource transfer Capacities and increasing market Vertical integration power Hiring Increased revenue or market share Economy of scale Cross-selling Economy of scope Synergy

Strategies of Merger & Acquisition:

A. Growth Strategies: 1. Mergers 2. Joint ventures 3. Other forms of collaboration B. Shrinkage strategies 1.Divestitures. 2.Equity carve outs 3.Spin-offs 4.Tracking stock

Types of Mergers:
1. Horizontal merger 2. Vertical merger 3. Reverse merger 4. Conglomerate Mergers 5. Congeneric Merger

Synergistic operating economics:

Synergy May be defined as follows:

V (AB) > V (A) +V (B)

In other words the combined value of two firms or companies shall be more than their individual value. This may be result of complimentary services economics of scale or both.

Gains from Mergers or Synergy:

1. Manage the pre-acquisition phase. 2. Screen candidates. 3. Eliminate those who do not meet the criteria and value the rest 4. Negotiate 5. Post-merger integration. At a glance:Value of acquirer + Stand alone value of target + Value of synergy = Combined value

Target Valuation for Merger & Acquisition:

There are various techniques to value a business:
A. Earnings Based Valuation

1. Discounted Cash flow/Free cash flow 2. Cost to create 3. Capitalized Earning Method 4. Chop- hops Method

B. Market based valuation:

1. Market capitalization for listed companies 2. Market multiples of comparable companies for unlisted company
C. Asset based valuation:

(1) Net Adjusted Asset Value or Economic Book Value : (2) Intangible Asset Valuation: (3) Liquidation Value
Assumption among them:

1. The value of a business is based on bargaining powers of buyers and sellers. 2. Business is based on expectations which are dynamic, valuation also tends to be dynamic and not static . 3. Shareholders value creation depends not on pre-merger market valuation of the target company but on the actual acquisition price.

Importance of Merger & Acquisition:

1.Efficiency Increases 2.Total value increased 3.Solving agency problem 4.Redistribution of tax, Market power, Pension fund reversions & Redistribution from bondholder, labor 5.Effect on Leverage, Variance, Maturity effect 6.Studies of event returns 7.Longer-run performance studies

Causes of failure Merger & Acquisition: 1.Development of a common frame, conflicting theoretical assumptions

from different perspectives.

2.Employee turnover is the cause of failure M&A's 3.Changing organizational behavior, variables acquisition experience, relative size, and cultural differences

Joint Ventures:
A joint venture is a separate business entity that usually involves only a fraction of the activities of the participating organizations.

Success of joint venture are:

1.Each has something to offer 2.Careful preplanning 3.Key executive assignment to implement 4.May be used for information for an acquisition 5.Preplan termination; often provisions are made for a buyout by one of the parties 6.Use of each partners skills and assets

7.Increasing the amount of surety capacity available to the partner

8.Increasing the financial strength of the partners for performance on a project 9.Sharing of risks with a venture partner 10.Access to greater resources, including specialized staff and technology

Disadvantages of Joint Ventures:

1.It takes time and effort to build the right relationship and partnering with another business can be challenging 2.The objectives of the venture are not 100 per cent clear and communicated to everyone involved. 3.There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. 4.The partners don't provide enough leadership and support in the early stages. 5.Success in a joint venture depends on thorough research and analysis of the objectives.

Changes in ownership structure:

1. Leveraged Buyouts: When the ownership of a public company completely changes into a private company then it is called a leverage buy out. 2. Leveraged recapitalization: Substantial ownership changes take place in leveraged recapitalization. 3. Dual-class recapitalization: In dual class recapitalization, firms create a second class of common stock with inferior voting rights and higher dividend payments.

Conclusion:
Merger & Acquisition is the significant part of modern finance. On the above discussion describes the major change forces behind the worldwide growth in M&A activities. Merger & acquisition has various hypotheses, efficiency increases (restructuring), equity carveouts, operating synergies, financial synergies, hubris & the winners curse, agency problem are including them. Changed ownership structure includes Leveraged Buyouts, Leveraged recapitalization and Dual - class recapitalization. The types of merger defenses can be grouped into Defenses restructuring, Poison Pills, Poison Nuts, Anti takeover amendments and Golden Parachutes. The value of a business is a function of the business logic driving, is based on bargaining powers of buyers and sellers.