M&A STRATEGY

One of most fundamental motives for M&A is growth. Companies seeking to expand are faced with a choice between internal or organic growth and growth through M&As.

M&A provide a means whereby a company can grow quickly. Firms may acquire another firm with hope of experiencing economic gains.

International Growth&Cross-Border

Companies that have successful products in one national market may see cross – border acquisitions as a way of achieving greater revenues and profits.

Exchange rates can play an important role in international takeovers. When the currency of a bidder appreciates relative to that of a target, a buyer holding the more highly valued currency may be able to afford a higher premium.

International Growth&Cross-Border

As with all types of acquisitions, we need to consider the market reactions to international M&As and compare them to intracountry deals.

Entering new markets presents unique additional risks, such as political features of a country, tradition and culture.

M&A STRATEGYThese economic gains may come as a result of

economies of scale or economies of scope.Economies of scale are the reductions in per-unit

costs that come as the size of a company’s operations in terms of revenue or units production, increases.

Economies of scope occur when a business can offer a broader range of services to its customer base.

SYNERGY

Synergy may allow the combined firm to appear to have a positive Net Acquisition Value (NAV)

Where : V AB : the combined value of the two firmsV B : the value of BV A : the value of AP : premium paid for BE : expenses of the acquisition process

OPERATING SYNERGY

Comes in two forms : revenue enhancements and cost reductions.

These revenue enhancements and efficiency gains or operating economies may be derived in horizontal or vertical mergers.

Revenue - Enhancing

It may come from new opportunities that are presented as a result of the combination of the two merged companies.

There are many potential sources of revenue enhancements, may come from a sharing of marketing opportunities by cross-marketing each merger partner’s products.

Cost - Reducing

Mergers planners tend to look for cost-reducing synergies as the main source of operating synergies. These cost reductions may come as a result of economies of scale.

When financial institutions merge, they can share inputs to offer a broader range of services, such as a trust department, consumer investment products unit, or economic analysis group.

FINANCIAL SYNERGY

Refers to the impact of a corporate merger or acquisition on the costs of capital to the acquiring firm or the merging partners. Refers to the possibility that the cost of capital may be lowered by combining one or more companies.

As noted, the combination of two firms may reduce risk if the firms’ cash flow streams are not perfectly correlated.

FINANCIAL SYNERGYA company may experience economies of scale

through acquisitions, these economies are usually thought to come from production cost decreases, attained by operating at higher capacity levels or through a reduced sales force or a shared distribution system.

As a result of acquisitions, financial economies of scale are also possible in the form of lower flotation and transaction costs.

M&A STRATEGY

Some of these gains are reported as motives for horizontal and vertical acquisitions.

Horizontal deals involve mergers between competitors, whereas vertical involve companies that have a buyer-seller relationship.

M&A STRATEGY

Although the pursuit of monopolistic power is sometimes believed to be a cause of horizontal mergers, the research in this are often fails to show that the other companies in the market perceive that a real increase in market power will be achieved in many cases.

Vertical transactions may sometimes provide valuable benefits, but they sometimes generate unforeseen adverse effects.

MOTIVES HORIZONTAL INTEGRATION

• Market Powerwhich is sometimes also referred to as monopoly power, is defined as the ability to set and maintain price above competitive levels,

• Social costs of Increased concentrationthe costs to society that result from increased concentration are a function of the state of competition that exists after the horizontal mergers.

MOTIVES VERTICAL INTEGRATION

A firm might consider vertically integrating for several reasons. Companies may vertically integrate to be assured of a dependable source of supply, savings the lower transactions costs, arise to have specialized inputs,

M&A STRATEGY

Other gains may come in the form of financial benefits when a larger firm that resulted from the combination of two or more smaller firms has better access to capital markets.

Various other motives exist for M&As, including accelerating the R&D process through acquiring companies that are strong in that area.

M&A STRATEGY

Another motivation for M&As may take the form of improved management. A bidding firm may be able to pay a premium for a target because of the anticipated gains it will experience when it applies its superior management skills to the target’s business.

M&A STRATEGY

• Improve Research and DevelopmentR&D is critically important to the future growth of many companies, particularly pharmaceutical companies,.

• Improve DistributionVertical mergers between manufacturers and distributors or retailers often give competitor manufacturers cause for concern in that they worry about being cut off from distribution channels. Locking in dependable distribution channels can be critical to a firm’s success.

CASE STUDY