The document discusses mergers and acquisitions (M&A). It defines mergers as combinations of two companies to form a new joint owner, while acquisitions involve one company purchasing another. The document outlines different types of M&As including horizontal (between competitors), vertical (between suppliers and customers), conglomerate, and product extension. It also discusses objectives like growth, motives like economies of scale, advantages like additional skills/resources, disadvantages like culture clashes, and the multi-step M&A process of identifying targets, valuation, acquisition method, payment method, and accounting.

2. MERGER AND
ACQUISITION
Presented By:
Muhammad Shuaib Khan
Muhammad Shafiq Ur Rehaman
MBA-6

3. Merger Fundamentals
• Corporate restructuring:
Includes the activities involving expansion or contraction of
a firm’s operations or changes in its asset or financial
(ownership) structure.
• Consolidation:
Is the combination of two or more firms to form a
completely new corporation

4. Merger Fundamentals
• Holding company:
is a corporation that has voting control of one or more other
corporations.
• Subsidiaries:
Are the companies controlled by a holding company.
• Acquiring company:
is the firm in a merger transaction that attempts to acquire
another firm.

5. Merger Fundamentals
• Friendly merger:
Is a merger transaction endorsed by the target firm’s
management (board of directors), approved by its
stockholders, and easily consummated.
• Hostile merger:
Is a merger not supported by the target firm’s management,
forcing the acquiring company to gain control of the firm by
buying shares in the marketplace.

6. Mergers and Acquisitions
 Merger:
 Is where two companies come together to combine
and share resources to achieve a common
objectives.
 Under merger the combining firms remain
 Joint owners
 New company is created
6

7. Mergers and Acquisitions
 Acquisition:
 One firm purchase the assets of another, with the
acquired firm ceasing to be the owners of that firm.
Often it is the larger company which acquires a
smaller one
7

8. Types of M & A
 Horizontal merger :
 Two companies engaged in similar activities are combined
 A merger between Coca-Cola and the Pepsi beverage
division, for example, would be horizontal in nature. The
goal of a horizontal merger is to create a new, larger
organization with more market share. Because the merging
companies' business operations may be very similar, there
may be opportunities to join certain operations, such as
manufacturing, and reduce costs.
8

9. Con't
 Vertical merger :
 A merger between two companies producing different
goods or services for one specific finished product. A
vertical merger occurs when two or more firms, operating
at different levels within an industry's supply chain, merge
operations.
 A vertical merger joins two companies that may not
compete with each other, but exist in the same supply
chain. An automobile company joining with a parts
supplier would be an example of a vertical merger.

10. Con't
 Conglomerate merger:
 occurs when two businesses in unrelated industries
decide to combine
 A leading manufacturer of athletic shoes, merges
with a soft drink firm. The resulting company is
faced with the same competition in each of its two
markets after the merger as the individual firms
were before the merger.

11. Con't
 Product Extension Mergers
 A product extension merger takes place between two
business organizations that deal in products that are
related to each other and operate in the same market.
 The Mobilink Telecom Inc. & Broadcom is a proper
example of product extension merger. Broadcom deals
in the manufacturing Bluetooth personal area network
hardware systems and chips for IEEE 802.11b
wireless LAN.

12. Types of M & A
• Horizontal acquisition:
 When the acquirer and the target are in the same industry.
• Vertical acquisition:
When the acquirer and the target are at different stages of
the production process; example: an airline company
acquiring a travel agency.
• Conglomerate acquisition:
The acquirer and the target are not related to each other.

13. Objectives of M&As
Enhance shareholder wealth through competitive
advantage
Growth and expansion of the acquirer's assets
Empire Building
13

14. Motives of M & A
 Economies of scale
 To enable benefits of scale to be achieved
 To reduce competition
 Market power
 Increase market share
14

15. Motives of M & A
 Sharing complementary resources
 Bringing together the relative strength of each firm
 New market entry
 to facilitate expansion into new market
 To reduce risk
15

16. Motives of M & A
 Managerial motive
 to pursue growth in size, status and higher
remuneration
Removal of inefficient Management
-to remove managers who failed to maximise
shareholder wealth
16

17. Advantages
 Quality staff or additional skills, knowledge
 Funds or valuable assets for new development
 Wider customer base
 Increasing your market share
 Diversification of the products
 Reducing your costs
 Reducing competition
 Strengthens the business network

18. Disadvantages
 Diseconomies of scale if business becomes too large,
which leads to higher unit costs.
 Clashes of culture between different types of
businesses
 Workers redundant, especially at management levels
 May be a conflict of objectives between different
businesses

19. Methods of Financing Mergers
 Cash payment
 pay the purchase consideration by cash
 Shares
 issue of ordinary and preference shares
 Loan capital
 debentures
 convertible loans
19

20. M&A Process
 Identify a Target
 Valuation
 Mode of Acquisition
 Mode of Payment
 Accounting of Acquisition
22

21. M&A Process (Continued)
 Identify a Target:
 Based on a sound strategy that can increase
shareholders’ wealth
 Focus on “Value Related Reasons”
 Acquisitions are usually initiated by the acquiring
firm
 Sometimes a target can announce that it is for sale
23

22. M&A Process (Continued)
 Valuation:
 Should not ignore the value of strategic options and
payment terms
 In general an acquisition creates wealth for the
acquirer if:
What Acquirer
[Target Alone + Synergies + Other]
>=
[Cash Paid + Stock Paid + Debt Assumed]
Gets
What Acquirer
Gives
24

23. M&A Process (Continued)
 Mode of Acquisition:
 Refers to whether a proposed acquisition is friendly or
hostile to target managers
 Friendly acquisitions are approved by board of directors of
each firm
 Then shareholders vote on the proposal
 Hostile takeover can be quite time consuming especially
when target managers fight against the tender offer
25

24. M&A Process (Continued)
 Mode of Payment:
 How an acquisition is paid for: cash, stock or mixed
 If the stock is believed to be undervalued, then stock
should not be used for payment.
 If the stock is overvalued then the stock payment
should/can be used.
26