CAN YOU GUESS THE TOPIC?

TAKEOVERS, MERGERS AND BUYOUTS UNIT 21

WHAT DO YOU THINK? Why do companies take over other companies? How do companies take over other companies? What is a merger? Have there been any big takeovers or mergers in the news recently? Why do you think they happened?

WHAT DO YOU KNOW ABOUT SOME RECENT EXAMPLES OF TAKEOVERS AND MERGERS?

WHAT ABOUT THIS TYPE OF TAKEOVER? ...the act of inviting someone to take over your account for a period of time in order to reach new audiences, increase engagement, build your brand or drive web traffic.

INTRODUCTION Successful companies make a lot of money, which sooner or later has to be spent. VARIOUS POSSIBILITIES: ☺ to invest it all in R&D – innovation and diversification (if successful → leads to even greater cash returns) ☺ to spend money by acquiring other companies → suppliers, distributors, competitors or companies in unrelated fields (if successful → leads to even greater cash returns) ☺ a company can grow both by way of mergers and acquisitions → corporate finance strategy and management dealing

HOW DOES A COMPANY GROW? higher revenue through innovation and diversification more assets more employees expansion into foreign markets mergers and acquisitions HOW DOES A COMPANY INVEST ITS CASH RETURNS? R&D → innovation and diversification takeovers, mergers and acquisitions (suppliers, distributors, retailers, companies in unrelated fields) HOW ARE LARGE CONGLOMERATES SPLIT UP? LEVERAGED BUYOUTS

ACQUISITION, TAKEOVER, HOSTILE TAKEOVER, FRIENDLY TAKEOVER, LEVERAGED BUYOUT, OR MERGER? two or more companies join together to form a larger company one company buys another one, or  buys part of another one getting control of a company by buying over 50% of its shares a takeover that a company being taken over agrees to a takeover that a company taken  over does not want and doesn’t  agree to a person or company buys a company using a loan borrowed against the company’s assets; these assets can  then be sold to pay off the debt

WHAT’S THE ENGLISH WORD FOR…? OTKUP PODUZEĆA UZ  ZADUŽIVANJE NEPRIJATELJSKO PREUZIMANJE PODUZEĆA PRIJATELJSKO PREUZIMANJE PODUZEĆA KUPNJA, STJECANJE PODUZEĆA PREUZIMANJE DRUŠTVA KUPNJOM VIŠE OD 50% GLASAČKIH PRAVA U DRUŠTVU SPAJANJE DRUŠTAVA

READING – TAKEOVERS, MERGERS AND BUYOUTS – MK, pp. 105 & 106 PARAGRAPH 1 – 1) Why do companies take over other companies? 2) Explain the difference between horizontal and vertical integration. 3) Explain the difference between backward and forward integration. PARAGRAPHS 2 & 3 – 1) How do companies take over other companies? 2) Explain the difference between a raid and a takeover bid? 3) Explain the difference between a friendly and a hostile takeover. PARAGRAPHS 4 & 5 – 1) When do leveraged buyouts happen? 2) Explain the concept of asset-stripping? 3) How is it possible to make a profit out of a leveraged buyout?

VOCABULARY – TAKEOVERS, MERGERS AND BUYOUTS – MK, p. 106 I Find the words in the text which match the explanations. II Explain the following in your own words: 1 the difference between horizontal and vertical integration 2 the difference between backward and forward 3 the difference between a raid and a takeover bid 4 the difference between a friendly and a hostile bid 5 asset-stripping

HOW DO THESE PICTURES RELATE TO LEVERAGED BUYOUTS?

WHAT IS THE ROLE OF LEVERAGED BUYOUTS IN THE GLOBAL ECONOMY?

FOOD FOR THOUGHT... All public companies face the permanent risk of takeover bids. Is this a good thing for business? What are the arguments in favour of and against takeovers and buyouts?

DEFENSIVE ACTION AGAINST TAKEOVERS POISON PILL – an action taken by a company to make itself less attractive to a potential takeover bid or a raider (e.g. a company will borrow large amount of money and give it away to shareholders as dividends, so that a company has an unacceptably high level of borrowing) WHITE KNIGHT – an alternative buyer that comes to rescue of a company from a threatened hostile takeover

MERGERS ('a merger of equals') ☺ occur in a friendly setting where executives from the respective companies participate in a successful combination of all parts: HORIZONTAL – where too merging companies produce similar product in the same industry VERTICAL – when two firms, each working at different stages in the production of the same good, combine CONGLOMERATE – when the two firms operate in different industry ☺ all the owners of stocks of either company get the same amount of stock in the new combined company ☺ can resemble a takeover, but result in a new company name (often combining the names of the original companies) and in new branding

ACQUISITIONS (of un-equals, one large buying one small) can involve a cash and debt combination, or just cash can involve a combination of cash and stock of the purchasing entity can involve a purchase of the stock or other equity interests of the target entity can involve a purchase of all or substantially all of its assets

MOTIVES BEHIND MERGERS AND ACQUISITIONS TO ADD SHAREHOLDER VALUE ECONOMIES OF SCALE: reducing the number of duplicate departments → lowering costs relative to the same revenue → increasing profits INCREASED REVENUE/INCREASED MARKET SHARE: absorbing a major competitor → increasing its power (by capturing increased market share) to set prices SYNERGY: a better use of complementary resources CROSS SELLING: a bank buying a stockbroker could then sell its banking products to the stock broker’s customers, while the broker can sign up the bank’s customers for brokerage accounts

MERGERS AND ACQUISITIONS

MERGERS - PROBLEMS ☹ often, terming the combination a merger rather than acquisition is done purely for POLITICAL OR MARKETING REASONS ☹ net loss of value due to problems caused by INCOMPATIBILITY (technology, equipment or corporate culture) ☹ CONCEALMENT OF LOSSES OR LIABILITIES at one of the partners ☹ OVERLAPPING SUBSIDIARIES or redundant staff may continue, creating INEFFICIENCY ☹ NEW MANAGEMENT may cut too many operations or personnel, losing expertise and disrupting the employee culture ☹ similar to those encountered in takeovers → if it is not to be considered a failure, it must INCREASE SHAREHOLDER VALUE faster than if the companies were separate

HOW DO THESE CARTOONS RELATE TO MERGERS?

HOW ABOUT THIS ONE?

WHAT IS THE ROLE OF MERGERS AND ACQUISITIONS WORLDWIDE?

MORE CARTOONS ON MERGERS AND ACQUISITIONS...

TAKEOVERS – PROS OR CONS? WRITE ‘CONS’ OR ‘PROS’ IN GAPS: ______________: Increase in Sales / Revenues (e.g. Procter & Gamble takeover of Gillette) Venture into new businesses and markets Profitability of target company Increased market share Eliminating competition Increased efficiency Reduced competition and choice for consumers Likelihood of price increases and job cuts Cultural integration/conflict with new management Hidden liabilities of target entity

HOW DO THESE CARTOONS RELATE TO TAKEOVERS?