Improving financial performance through mergers and acquisition is mainly considered a management strategy. Management considers merger and acquisition to reduce costs and expenses and maximize shareholder value. 1.1.1 Mergers and Acquisitions Mergers and Acquisitions refer to the change in ownership, business mix, assets mix. Improving financial performance through mergers and acquisition is mainly considered a management strategy. Management considers merger and acquisition to reduce costs and expenses and maximize shareholder value. 1.1.1 Mergers and Acquisitions Mergers and Acquisitions refer to the change in ownership, business mix, assets mix. Mergers and Acquisitions Edinburgh Business School ix Preface An understanding of mergers and acquisitions as a discipline is increasingly im-portant in modern business. A glance at any business newspaper or business news web page will indicate that mergers and acquisitions are big business and are taking place all the time.
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PDF From the last few decades, maximum studies focused to understand the importance of going into the deal of Mergers & Acquisitions (M&A). The current study examined the motivation to recognize. Will M&A activity be on the rise once again this year? Our annual survey takes a closer look at deal trends and common challenges faced by corporations and private equity firms. Tax reform, a more relaxed US regulatory climate, and growing cash reserves fuel optimism among US dealmakers in our 2019.
What Are Mergers and Acquisitions – M&A?
Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. The term M&A also refers to the desks at financial institutions that deal in such activity.
What's an Acquisition?The Essence of Merger
The terms 'mergers' and 'acquisitions' are often used interchangeably, although in actuality, they hold slightly different meanings. When one company takes over another entity, and establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer absorbs the business, and the buyer's stock continues to be traded, while the target company’s stock ceases to trade.
On the other hand, a merger describes two firms of approximately the same size, who join forces to move forward as a single new entity, rather than remain separately owned and operated. This action is known as a 'merger of equals.' Both companies' stocks are surrendered and new company stock is issued in its place. Case in point: both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, Daimler Chrysler, was created. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies.
The Action of Acquisition
Unfriendly deals, where target companies do not wish to be purchased, are always regarded as acquisitions. Therefore, a purchasing deal is classified as a merger or an acquisition, based on whether the purchase is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company's board of directors, employees and shareholders. Nestle, for instance, has performed a variety of acquisitions lately.
Types of Mergers & Acquisitions
Here is a list of transactions that fall under the M&A umbrella:
Merger
In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. Post merger, the acquired company ceases to exist and becomes part of the acquiring company. For example, in 2007 a merger deal occurred between Digital Computers and Compaq, whereby Compaq absorbed Digital Computers.
Acquisition
In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its legal structure. An example of this transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and organizational structures.
Consolidation
Consolidation creates a new company. Stockholders of both companies must approve the consolidation. Subsequent to the approval, they receive common equity shares in the new firm. For example, in 1998, Citicorp and Traveler's Insurance Group announced a consolidation, which resulted in Citigroup.
Tender Offer
In a tender offer, one company offers to purchase the outstanding stock of the other firm, at a specific price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors. For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million. While the acquiring company may continue to exist — especially if there are certain dissenting shareholders — most tender offers result in mergers.
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Acquisition of Assets
In an acquisition of assets, one company acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.
Management Acquisition
In a management acquisition, also known as a management-led buyout (MBO), a company's executives purchase a controlling stake in another company, making it private. These former executives often partner with a financier or former corporate officers, in an effort to help fund a transaction. Such M&A transactions are typically financed disproportionately with debt, and the majority of shareholders must approve it. For example, in 2013, Dell Corporation announced that it was acquired by its chief executive manager, Michael Dell.
Key Takeaways
The Structure of Mergers
Mergers may be structured in multiple different ways, based on the relationship between the two companies involved in the deal.
Mergers may also be distinguished by following two financing methods--each with its own ramifications for investors.
Mergers And Acquisitions 2019
Details of Acquisitions
Like some merger deals, in acquisitions, a company may buy another company with cash, stock or a combination of the two. And in smaller deals, it is common for one company to acquire all of another company's assets. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if any). Of course, Company Y becomes merely a shell and will eventually liquidate or enter other areas of business.
Another acquisition deal known as a 'reverse merger' enables a private company to become publicly-listed in a relatively short time period. Reverse mergers occur when a private company that has strong prospects and is eager to acquire financing buys a publicly-listed shell company, with no legitimate business operations and limited assets. The private company reverses merges into the public company, and together they become an entirely new public corporation with tradeable shares.
Valuation Matters
Both companies involved on either side of an M&A deal will value the target company differently. The seller will obviously value the company at the highest price as possible, while the buyer will attempt to buy it for the lowest possible price. Fortunately, a company can be objectively valued by studying comparable companies in an industry, and by relying on the following metrics:
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