Unit 1: Mergers and Acquisitions:

An Overview
Objectives
After reading this chapter, you will be conversant with:
• Various Forms of Corporate Restructuring
• Merger Waves
 What is Corporate Restructuring?

Any change in a company’s:

1. Capital structure,
2. Operations, or
3. Ownership
that is outside its ordinary course of business.
 Forms of Corporate Restructuring
Expansion Corporate Control
Mergers and Acquisitions Takeover defenses
Tender Offers Share repurchases
Asset Acquisition Exchange offers
Joint Ventures Proxy contests

Contraction Changes in Ownership

Spin offs Structures
Split offs Leveraged buyout
Divestitures Junk Bonds
Equity carve-outs Going Private
Assets sale ESOPs and MLPs
 Expansion

• Expansion is a form of restructuring, which

results in an increase in the size of the firm. It
can take place in the form of a merger,
acquisition, tender offer, asset acquisition or a
joint venture.
 Mergers
• Merger is defined as a combination of two or
more companies into a single company
– Amalgamation is the type of merger that involves fusion of
two or more companies. After the amalgamation, the two
companies loose their individual identity and a new company
comes into existence. This form is generally applied to
combinations of firms of equal size.

A B AB
Brooke Bond Lipton Brooke Bond Lipton
India Ltd India Ltd India Ltd
 Acquisition
• A corporate action where an acquiring company makes a bid for
an acquiree. If the target company is publicly traded, the
acquiring company will make an offer for the outstanding shares
– Absorption is a type of merger that involves fusion of a small company with
a large company. After the merger the smaller company ceases to exist.

A B A
Oriental Bank Of Global Trust Oriental Bank Of
Commerce Bank Commerce
 Joint Venture

• Cooperation between two or more companies in which the

purpose is to achieve jointly a specified business goal. Upon
the attainment of the goal, the joint venture is terminated. A
joint venture, which is typically limited to one project, differs
from a partnership that can work jointly on many projects.

A B AB
Hero Motor Honda Hero Honda
Corp
 Tender Offer
• Tender offer is a corporate finance term denoting a type of
takeover bid.
• The tender offer is a public, open offer or invitation by a
prospective acquirer to all stockholders of a publicly traded
corporation (the target corporation) to tender their stock for sale
at a specified price during a specified time, subject to the
tendering of a minimum.
• To induce the shareholders of the target company to sell, the
acquirer's offer price usually includes a premium over the current
market price of the target company's shares. maximum number
of shares.
B
C
D
E F
A Public Offer G
H
I J K
 Asset Acquisition
• A buyout strategy in which key assets of the target company are purchased,
rather than its shares.
• These assets may be tangible assets like a manufacturing unit or intangible
assets like brands.
• This is particularly popular in the case of bankrupt companies, who might
otherwise have valuable assets which could be of use to other companies, but
whose financing situation makes the company un-attractive for buyers.

Plant & Plant &

M/C M/C

Patents Stock

A B
B A
A
Land &
Cash Building Patents
 Contraction
• Contraction is a form of restructuring, which
results in a reduction in the size of the firm. It
can take place in the form of a
– Spin-off,
– Split off,
– Divestiture
– Equity carve-out.
 Spin-off
• A Company distributes all the shares it owns in a subsidiary to its own shareholders
implying creation of two separate public companies with same proportional equity
ownership.
• Sometimes, a division is set up as a separate company. Hence, the stockholders
proportional ownership of shares is the same in the new legal subsidiary as well as the
parent firm.
• The new entity has its own management and is run independently from the parent
company. A spin-off does not result in an infusion of cash to parent company.

Shareholders of
Shareholders of
Company A also has
Company A
shares of Company B

A B
A B
Subsidiary
Company
of A
B
 Split- off
• In a split off, a new company is created to takeover the operations of an existing
division or unit.
• A portion of existing shareholders receives stock in a subsidiary (new company) in
exchange for parent company stock Hence the shareholding of the new entity does not
reflect the shareholding of the parent firm.
• A split-off does not result in any cash inflow to the parent company
Shareholders of
Shareholders of Company A
Company A
Shareholders Shareholders
of Company A of Company B
D
A New Company

A B
C D E F C E F D
Operations of Company A
 Split-UP
• In a split-up the entire firm is broken up in series of spin-offs, so that the parent
company no longer exists and only the new off springs survive.
• A split-up involves the creation of a new class of stock for each of the parent’s operating
subsidiaries, paying current shareholders a dividend of each new class of stock, and
then dissolving the parent company.

Shareholders of
Shareholders of Company A will get
Company A shares of

A A

B C D E
B C D E
Subsidiary Companies of A
 Divestitures
• A divestiture is a sale of a portion of the firm to an outside party, generally
resulting in an infusion of cash to the parent.
• A firm may choose to sell an undervalued operation that it determines to be
non-strategic or unrelated to the core business and to use the proceeds of the
sale to fund investments in potentially higher return opportunities.

C Shares Shares
Some Operations of
A

Operat

A
A Cash Patents B
B ions of
A

Assets
Operations Assets
 Equity Carve Out
• A parent has substantial holding in a subsidiary. It sells part of that holding to
the public.
• "Public" does not necessarily mean a shareholder of the parent company. Thus
the asset item "Subsidiary Investment" in the balance-sheet of the parent
company is replaced with cash.
• Parent company keeps control of the subsidiary but gets cash.

A
Issues IPO of B 20% Investors
Shares of B

CCashA
B 20%
Shares of
Subsidiary Company
Company B
of A
 Corporate Control

• Firms can also restructure without necessarily

acquiring new firms or divesting existing
corporations.
• Corporate control involves obtaining control
over the management of the firm.
• Control is the process by which managers
influence other members of an organization to
implement the organizational strategies
 Takeover Defenses

 Takeover defenses, both pre-bid and post-bid have been resorted

to by the companies.
Pre Bid: This defense is also called preventive defense it is
employed to prevent a sudden, unexpected hostile bid from
gaining control of the company.
Post Bid: When preventive takeover defenses are not
successful in fending off an unwanted bid, the target
implements post-bid or active defenses
 These takeover defenses intend to change the corporate control
position of the promoters.
 Changes in Ownership Structure
• Changes in the ownership structure represent the fourth
group of restructuring activities which results in a change
in the restructure of ownership in the firm.
• Various techniques of changing the ownership structure:
• Leveraged buyout
• Junk Bonds
• Going Private
• ESOPs and MLPs
 Leveraged Buy-Outs
LBO-Acquisition of a firm by private group of investors using borrowed debt.
Unique Features of LBOs:-
Large portion of buy-out financed by
debt

Shares of the LBO no longer trade on

the open market

 Elements of a typical LBO operation:

– A portion of funding in the form of equity is provided by the
managers/ owners
– Loans are arranged for the balance amount
– Acquire the company and make it private
– Overhaul firm’s operations to increase profitability
– Again take the firm (now with higher valuation), public through SIPO/
reverse LBO
 Going Private

 Going private: Transformation of a public company into privately held

firm
– Mainly through repurchasing of some/all of firm’s equity by private
investors
 Issues:
– Justice to minority shareholders
– Sourcing of funds for the transaction
 Methods:
– Through merger directly with target company
– Tender/ public offer to purchase shares from shareholders
– Reverse stock split: reduces number of stockholders
 Employee Stock Option (ESOP)

 An ESOP is a qualified, defined contribution employee benefit plan

required to invest primarily in the company’s securities.
 ESOPs function as both an employee retirement benefit plan and a
technique of corporate finance intended to encourage employee
ownership of a company.

Master Limited Partnership (MLP)

Type of limited partnerships whose interests are divided into
units that are traded on organized exchanges
 First developed in oil and gas industry
 Advantages -
 Unit tradability similar to stock
 Limited liability (for limited partners)
 Continuity of life
 No double taxation of business earnings
 Mergers Waves

 The United States of America has witnessed five periods of merger

activity, often referred to as merger waves, each wave having been
dominated by a particular type of merger.
 These periods were characterized by high level of cyclic activity, that is,
high levels of mergers followed by periods of relatively fewer mergers.
 All the merger movements occurred when the economy experienced the
sustained high growth rates and coincided with particular developments
in business environments, because firms are motivated to make large
investment outlays only when the business prospects are favorable.
 Merger Waves

Period Events coinciding with beginning of wave Events coinciding

with end of wave
Wave 1 1890’s- 1903 Economic expansion; industrialisation processes; Stock market crash;
introduction of new state legislations on economic stagnation;
incorporations; development of trading on NYSE; beginning of First
radical changes in technology World War
Wave 2 1910’s – 1929 Economic recovery after the market crash and the Stock market crash;
First World War; strengthen enforcement of beginning of Great
antimonopoly law Depression
Wave 3 1950’s – 1973 Economic recovery after the Second World War; Stock market crash; oil
tightening of anti-trust regime in 1950 crisis; economic
slowdown
Wave 4 1981 – 1989 Economic recovery after recession; changes in anti- Stock market crash
trust policy; deregulation of fin. services sector; new
financial instruments and markets (e.g. junk bonds);
technological progress in electronics
Wave 5 1993 – 2001 Economic and financial markets boom; globalization Stock market crash;
processes; technological innovation, deregulation and 9/11 terrorist attack
privatisation
New 2003 - ? Economic recovery after the downturn in 2000–2001 n.a.
wave ?