200945 Mergers and Acquisitions Assignment Sample

Applied Project (Finance and Property)

Executive Summary of Mergers and Acquisitions

An introduction has been provided at the beginning of the report reflecting the concepts and definitions associated with mergers and acquisitions. There types have been stated and described after that along with the use of M&A models and their significance. Towards the end of the report the steps in a M&A process has been described comprehensively.

Table of Contents

Introduction.

Types of Mergers & Acquisitions.

Valuation.

Merger and acquisition models and their use.

References.

Introduction to Mergers and Acquisitions

Mergers and acquisitions can be referred as the process of consolidation of organizations via various activities, like financial transactions, acquisitions, mergers, purchase of assets, tender offers, and more. This is also applicable for various assets. In simpler terms, it can be said to be the process of merging or combining a company with another by mutual agreements and acceptance of certain conditions. Merger involves combination of two firms in which a new legal entity is formed under a mutually agreed brand name (Lebedev et al. 2015, p.652). On the other hand, in an acquisition, an entity or company is purchased by another, in which the legal name of the firm that has been acquires does not change its legal name but is owned by the parent company which has bought it in the first place. The primary benefit associated the process of mergers and acquisitions is enhanced organizational performance and increased profit margin of the company. Although there have been instances where companies are seen to perform better after undergoing mergers and acquisitions, there are also cases where firms have failed miserably after doing so. Although these two terms are generally used to define the same sets of activities and operations, they vary slightly if seen closely. In case of merger, two firms of approximately the same size and potential come together in order to form a new single entity and move forward with the newly acquired image in the market. An example is the merging of two companies Daimler-Benz and Chrysler, where they both ceased to exist after the new company Daimler Chrysler was formed. On the other hand, acquisition refers to the situation when one company is completely purchased by another one where it controls and coordinates all the organizational activities and operations (Bonaime, Gulen and Ion, 2018, p.532).

Types of Mergers & Acquisitions

Mergers

The approval of the combination and that of the stakeholders are taken by the board of directors of both the companies in mergers. One the merging process is complete; the companies ceases to exist and ultimately the new brand is formed under the collaboration of the companies.

Acquisitions

Under a simple natured acquisition, the company that is acquiring the other procures the majority of the stakes from it. Therefore, the name does not change as well as the legal structure of the company. Furthermore, in certain cases the existing stock symbol is preserved.

Consolidations

The core businesses are combined by the consolidation process as well as abandoning the old and outdated structures of the corporate world. The consolidation should be approved by the stockholders of both the companies. Also, the approval regarding the changes are to be made along with receiving common equity shares in the new company that has been formed (Baker, Pan and Wurgler, 2012, p.51).

Acquisition of assets

A company procures the asset of another firm in a direct way in tender offers. The stakeholder’s approval must be taken from the company from which the approval is being taken. Purchase of assets and related activities are common occurrences during periods of bankruptcy proceedings. Here various assets of the company that has been bankrupted is liquidated and they are acquired by the final firm.

Management acquisitions

Management acquisition also known as management led buyout (MBO) involves the purchase by firm executives of controlling stakes from another firm. This makes the assets and stakes private in nature. Often it is seen that these firms or organizations form pact with former financier or corporate officers in order to enable transaction funding. Such transactions involving M&A processes are usually funded in a disproportionate way in the presence of debt. Also, it requires approval from the majority of the shareholders. An example is regarding the incident in 2013 when the company Dell stated that it was procured by Michael Dell, who is the company’s chief executive manager (Ferreira, Massa and Matos, 2010, p.602).

Merger structures

There are numerous ways in which mergers can be structured. These are primarily dependent upon the relationship and connection between the firms that are involved in the specific deal. Some of the merger structures are as follows-

• Horizontal merger
• Vertical merger
• Congeneric merger
• Market-extension merger
• Product extension merger
• Conglomeration

In terms of finance, the mergers can be distinguished according to the following types-

• Consolidation mergers
• Purchase mergers

There are certain exemptions in this field where a company is allowed to purchase another firm with certain means, such as stock, cash, debt, or a combination of these elements. The deals that are smaller in nature the company that is purchasing can buy all the other company’s assets. The assets can be procured by the above stated means by the purchasing company. In these situations, the company from which the purchase is being is left with almost nothing, which eventually gets liquidated or a new business is started over the scraps of the previous one. Here, reverse merger can occur as well between the companies, which enables a private company to evolve into a publicly listed one in short duration of time. This is especially applicable for the private companies that are reputed and has a relatively large organizational size with strong prospects and potential.

Valuation

The valuation from the both end of the parties is different in respect to one another. The seller of the company that is being sold to the other will naturally want a price that is high, without compromising the elements and components of the deal. On the other hand, the buyer here will want to procure the company at the lowest possible price. Examples from other companies in the same industry can be taken as reference in order to come to a reasonable and proper decision that can be agreed from both the ends (Vaara and Monin, 2010, p.4). Additionally, there are other metrices that can be taken into account. Some of these are as follows-

Comparative ratios- This section can be further subdivided into two parts, which are price-earnings ratio and enterprise value to sales ratio. With the aid of the former, an offer is presented by a company that is being acquired that is related to the multiple of the amount of the earnings of the company that is being targeted. Here, inspecting the ratio related to the stocks within the similar industry will lead to exceptional organizational guidance regarding the target company’s multiple. On the other hand, in enterprise value to sales ratio, the company that is being acquired proposes an offer or deal that is related to the multiple of certain elements of the deal, such as revenues. However, here the price to sales ratio of other companies in the same industry are taken into account.

Replacement cost- In certain cases, acquisitions are made depending upon the expense of replacing the company that is being targeted. In case the set cost target is not met by the purchasing company, competitors worth same costs can be created by it.

Discounted cash flow- Discounted cash flow can be considered as an effective valuation tool in the area of mergers and acquisitions. It helps to analyze and determine the current value of a company in accordance to its cash flows in the future as predicted. The free cash flows that are forecasted here are reduces as discounts to current values utilizing the firm’s weighted average costs of capital (WACC). Although the tool is a trickly and complex one, it has significant advantages over other valuation methods and tools known in this field.

Merger and Acquisition Models and Their Use

The process of merger, which is the combination of two companies via the process of M&A can be critically analyzed and examined with the help of a merger model.

On the other hand, acquisition models are known as predictive models which can be utilized for acquiring new groups of customers to the benefit of the brand. However, there needs to be certain considerations while working on acquisition models. The models related to acquisition can be predictive in nature which can be utilized to acquire new customer groups as stated previously. The model lacks in availability of the right predicant along with sampling problems, that are faced primarily due to the large sample size in the study. Although the model is effective in certain situations, this is relatively newer in the field. There can be certain considerations that are needed to be developed into the modelling process (Alexandridis, Petmezas, and Travlos, 2010, p.1672).

In another scenario, where the predicant is defined as an individual who is a good responder in an acquisition model developed by an analyst, and trying to build a model that is predictive in nature that will be scored against a large amount of data, there might be severe difficulties regarding the stability of the model. The predicand here is considered to be belonging to the acquirable group or prospect database. Therefore, a certain sample can be selected from the either of them for developing the model.

There can be certain approaches to acquisition, in some of which the problem is to be defined where the predicand is being followed.

The steps involving the development of the merger and acquisition model can take a lot of time, including months and even years to complete. The steps of setting up a M&A process are as follows-

Development of the acquisition strategy- Here, the acquirer should have a clear idea regarding the expectations from the market by making acquisitions. This is considered as one of the key elements of developing an exceptional acquisition strategy. Furthermore, the purpose of the business is determined here that is necessary for acquiring the company that has been targeted in the first place. Some of the examples of activities in this step includes expansion of product lines or gaining access to new markets.

Setting the search criteria for mergers and acquisitions (M&A)- This includes the primary criteria that is essential to identify the potential companies that can be targeted. Some of the examples include profit margins, customer base, or geographic locations.

Searching for and identifying potential targets of acquisition- Here, search criteria that has been identified is utilized by the acquirer to search for potential companies that can be targeted. Additionally, the analysis of these companies is included in this step as well. It is considered as an important step as searching for the potential companies out there will enable to develop the process and progress further in it.

Initiating acquisition planning- In this step contact with one or multiple companies are made by the acquirer. The search criteria are taken into account while doing so. This is followed by offering values that are considered good for these companies. The purpose here is to get additional information and data related to the targeted company in order to observe how amenable the company is to a merger or acquisition. This is the step where information facts and figures related to the target company is gathered and the next steps are aligned according to it.

Performing valuation analysis- Once the initial conversations are carried out, the target company is asked to provide significant information about it by the acquirer. These information and data sets may be related to current financials as well. This enables the acquirer to further pass judgment on its decisions and take the future steps accordingly. Re-checks and assessment of the company is carried out intricately in this step finding the loopholes present along with the opportunities for the acquirer.

Negotiations- In this step numerous valuation models of the target company is provided by the acquirer in order to come to a reasonable and just offer. After the initial stage of proposition of the offer is presented, both the companies can negotiate and come to a certain price point.

M&A due diligence- Due diligence can be difficult and exhaustive in certain cases. It is generally initialized one the negotiations are complete and a final decision has been made regarding the price. The aim of the diligence is to ensure the acquirer’s assessments are correct and the information gathered so far are accurate and proper. In this step a detailed analysis of the target company’s operations and activities is carried out including assets, liabilities, financial metrics, human resources, customers and more (Lebedev et al. 2015, p.652).

Purchase and sale contract- Once the previous step has been successfully carried out, and the majority of the steps are complete, the final contract for sale is then executed. A purchase agreement is considered by both the parties, including the type of the purchase that is to be carried out.

References for Mergers and Acquisitions

Alexandridis, G., Petmezas, D. and Travlos, N.G., 2010. Gains from mergers and acquisitions around the world: New evidence. Financial Management, 39(4), pp.1671-1695. 

Baker, M., Pan, X. and Wurgler, J., 2012. The effect of reference point prices on mergers and acquisitions. Journal of Financial Economics, 106(1), pp.49-71.

Bonaime, A., Gulen, H. and Ion, M., 2018. Does policy uncertainty affect mergers and acquisitions?. Journal of Financial Economics, 129(3), pp.531-558.

Ferreira, M.A., Massa, M. and Matos, P., 2010. Shareholders at the gate? Institutional investors and cross-border mergers and acquisitions. The Review of Financial Studies, 23(2), pp.601-644.

Lebedev, S., Peng, M.W., Xie, E. and Stevens, C.E., 2015. Mergers and acquisitions in and out of emerging economies. Journal of World Business, 50(4), pp.651-662.

Vaara, E. and Monin, P., 2010. A recursive perspective on discursive legitimation and organizational action in mergers and acquisitions. Organization Science, 21(1), pp.3-22.

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