M & A

Learning Objectives By the end of the lesson you will have.. An understanding of the different types of merger. An appreciation of the benefits and problems relating to Mergers & Acquisitions

M & A – Childs Play fMg

Corporate Integration Merger – 2 companies directors and shareholders agree to combine under one Board of Directors Takeover – one firm buys the majority (51%) of the shares in another company – has full management control.

Why merge / takeover? Growth –Economies of Scale –Cost savings Diversification –Reduce risk Market power –Price maker Asset Stripping –Short term cash-flow & improve liquidity –Usually when shares are undervalued

Types of Business Integration Vertical Integration – same industry but different stage of production process Backward vertical integration = merges / takes over a supplier Forward vertical integration = merges / takes over a customer

Types of Business Integration Horizontal Integration – same industry and stage of production process Conglomerate Integration – no clear connection with line of business

Who could this business integrate with? Horizontal Conglomerate Forward vertical Backward vertical

Who could this business integrate with? Horizontal Conglomerate Forward vertical Backward vertical

Evaluation of M&A Synergy = 5 Combined business = more powerful & efficient than 2 individual firms put together –Economies of Scale Problems Diseconomies of Scale Resistance to change –Jobs in danger? Strain on finances Diversification – little knowledge of the market

Exam focus Advantages & Disadvantages Do not underestimate disadvantages Related to given case Different effects on stakeholders –Consumers –Workforce –Not just the firm!

Activity In Pairs Choose a merger / acquisition to investigate –Alcatel & Lucent –Delta & Northwest –Activision and Vivendi Games –L’Oreal & Body Shop –Microsoft & Yahoo Is it Horizontal / Vertical, Backward / Forward? Create a presentation highlighting: –Advantages of the merger –Disadvantages of the merger –What would you recommend the companies do? Note : Different stakeholders my view the merger differently

Demergers Split in two or more companies –Sell off divisions –Float separately on Stock Exchange Often due to unsuccessful mergers Reduce interest payments when economic downturn (highly geared) Change of strategy –Economy –New CEO? Concentrate on core activities

Management Buy Outs 3 common reasons: Large firm may wish to sell part of the business to: –Raise cash –Get rid of non-profitable section –Refocus the business Family business decide to sell up / retire Company runs out of cash & receiver takes over

How do Management Buy-outs work? Managers usually don’t have enough cash of their own so venture capitalists add. Venture capitalist’s return – shareholding & loan repayment & any benefits if floated on Stock exchange

Do Management Buy-outs work? Usually! Managers highly motivated due to extra responsibility. Clear objectives (don’t worry about Head Office!) No Head Office overheads! Decentralisation – speed & effectiveness of decision making Share ownership for employees BUT – high level of gearing can make the firm vulnerable to interest rate changes & the business mat fundamentally be unprofitable