MERGERS AND ACQUISITIONS MK, UNIT 21. MERGERS AND ACQUISITIONS PricewaterhouseCoopers GlaxoSmithKline America Online & Time Warner Volkswagen→Porsche.

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MERGERS AND ACQUISITIONS MK, UNIT 21

MERGERS AND ACQUISITIONS PricewaterhouseCoopers GlaxoSmithKline America Online & Time Warner Volkswagen→Porsche HewlettPackard→Vertica Agrokor→Mercator?

WHY MERGERS AND TAKEOVERS? … to add shareholder value through: economies of scale increased revenue/increased market share cross selling synergy taxes geographical or other diversification

MERGER Two or more companies join together to form a larger company. TAKEOVER OR ACQUISITION One company buys another one, or buys part of another one. It makes a takeover bid, i.e. offers to buy all shareholders’ shares at a certain price during a limited period of time. RAID Buying as many shares as possible on the stock market, hoping to gain a majority.

FRIENDLY TAKEOVER A takeover that a company being taken over agrees to. HOSTILE TAKEOVER A takeover that a company taken over does not want and doesn’t agree to. INVESTOPEDIA VIDEO:Hostile takeover

HOME ASSIGNMENT DEFENSE AGAINST A HOSTILE BID Bankmail Crown Jewel Defense Flip-in Flip-over Golden Parachute Gray Knight Greenmail Jonestown Defense Killer bees Leveraged recapitalization Lobster trap Lock-up provision Nancy Reagan Defense Non-voting stock Pac-Man Defense HANDOUT Pension parachute People Pill Poison pill Safe Harbor Scorched-earth defense Shark Repellent Staggered board of directors Standstill agreement Targeted repurchase Top-ups Treasury stock Voting plans White knight White squire Whit ADDITIONAL READING 08/corporate-takeover-defense.asp

BIDDING COMPANY OR THE TARGET COMPANY? acquires another company wants to be taken over launches a bid accepts a bid defends itself against a hostile takeover bid rejects a bid

INTEGRATION HORIZONTAL INTEGRATION A cquiring a competitor in the same field of activity. VERTICAL INTEGRATION Acquiring a business in other parts of supply chain.

IF VERTICAL… BACKWARD INTEGRATION B uying suppliers of raw materials or components. FORWARD INTEGRATION Buying distributors or retail outlets.

EXAMPLES A car company that expands into tire manufacturing? A brewery buys a pub? Mlinar buys a wheat producer?

CONGLOMERATES A large parent company controlling a number of subsidiaries in different business areas. PROBLEMS Inefficient, not focused on core activity, lacking synergy →low stock price i.e. market capitalization is lower than the value of its assets, e.g. land, buildings, pension funds…

LEVERAGED BUYOUT (LBO) leveraged = financed from borrowed capital A company borrows funds by issuing… bonds or taking out… a loan. It uses the company’s assets as a… collateral. Once it buys the company it sells off… the assets to repay… the debt. This is called asset-… stripping.

ORDER THE EVENTS Raiders calculate that a large company is undervalued. Investors buy the bonds because they pay a high interest rate. The new owners sell some of the company’s subsidiaries. The new owners repay the bondholders. The raiders buy the company. The raiders issue bonds to raise capital to buy the company.

ORDER THE EVENTS 1.Raiders calculate that a large company is undervalued. 2.The raiders issue bonds to raise capital to buy the company. 3.Investors buy the bonds because they pay a high interest rate. 4.The raiders buy the company. 5.The new owners sell some of the company’s subsidiaries. 6.The new owners repay the bondholders. Source: Professional English In Use Finance MK

FINISH THE SENTENCE Large conglomerates formed by takeovers… An inefficient conglomerate’s stock market value… If a conglomerate is worth less than its assets,… Raiders do not have to have their own money if… Source: Professional English In Use Finance MK

READING, p. 105 P1 How do successful companies use profits? Who is usually the target company in horizontal integration? When do mergers occur? Why is vertical integration undertaken?

P2 What is a raid? What does a raid usually cause? Do raids typically result in the acquisition of a controlling interest? What do companies launch when they want to acquire a controlling interest in the target company? What makes a takeover friendly or hostile? P3 What is the role of banks in M&As?

P4 Why did LBOs target conglomerates in the USA in the 1980s? Explain “market capitalization is lower than the value of its total assets” How do raiders actually earn money in LBOs? P5 What reputation do private equity funds have today? Vocabulary Comprehension

Gordon Gekko Wallstreet (1987, O. Stone) The point is ladies and gentlemen that greed, for lack of a better word, is good. Why do you need to wreck this company? Because it's WRECKABLE, all right?