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MERGERS,

ACQUISITIONS

AND

CORPORATERESTRUCTURING

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Mergers and Acquisitions

1. What is the motivation behind Mergers andAcquisitions?

2. Which type of firms engage in Mergeractivities?

3. Why do we see more mergers in someperiods than in others?

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Merger

A merger happens when two firms agree to goforward as a single new company rather than

remain separately owned and operated. This is

referred to as a "merger of equals". The firms are

often of about the same size. Both companies'stocks are surrendered and new company stock is

issued in its place.

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Types of Mergers

I. Horizontal MergerInvolves two firms operating in the same kind of business

activity.

eg. Merger between two steel firms.

II. Vertical MergerInvolves different stages of production operations.

eg. In oil industry, exploration and production activity is distinct

from refining operations and from marketing activity.

eg. In pharmaceutical industry, one could distinguish between

research and the development of new drugs, production of

drugs, and the marketing of these drugs.

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III. Conglomerate Merger

Involves firms engaged in unrelated types of business activity.

Among Conglomerates, subtypes are:

a. Product-extension mergersThey broaden the product lines of firms.

b. Geographic market-extension mergersThey involve two firms whose operations had been conducted in

non overlapping geographic areas.

c. Pure conglomerate mergerThey involve unrelated business activities that do not qualify aseither product-extension or market-extension mergers.

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Acquisition

An acquisition or takeover is the purchase of onebusiness or company by another company or other

business entity. Such purchase may be of 100%, or

nearly 100%, of the assets or ownership equity of

the acquired entity. Eg. Chevron acquired Golf, General Motors acquired Hughes

Aircraft and Electronic Data Systems, Nestle acquired

Carnation, American General acquired Gulf United Insurance

etc.

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Forms of Restructuring Business

Firms

I. EXPANSION

a. Mergers & Acquisitions

b. Tender Offers

c. Joint Ventures

II. SELL- OFFS

a. Spin-Offs:

Split-Offs

Split-Ups

b. Divestitutes:

Equity Carve-outs

III. CORPORATE

CONTROLa. Premium Buy-backs

b. Standstill Agreements

c. Antitakeover amendments

d. Proxy Contests

IV. CHANGES INOWNERSHIP

STRUCTUREa. Exchange Offers

b. Share Repurchases

c. Going Private

d. Leveraged Buy-outs

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1. Tender offer: one party, generally a corporation seeking acontrolling interest in another corporation, asks the stockholders ofthe firm it is seeking to control to submit, or tender, their shares ofstock in the firm.

II. Joint Venture: it involves the intersection of only a smallfraction of the activities of the companies involved and usually for alimited duration of ten to fifteen years or less. They may represent aseparate entity in which each of the parties makes cash and otherforms of investments.

III. Sell- Offs: A. Spin-off: creates a separate new legal entity, its shares are

distributed on a pro rata basis to existing shareholders of the parentcompany. Thus, the existing shareholders have the same proportionof ownership in the new entity as in the original firm. However, thereis a separation of control, and eventually the new entity as a

separate decision-making unit may develop policies and strategiesdifferent from those of the original parent. No cash is received by theoriginal parent.

a. Split-off: a portion of existing shareholders receives stock in asubsidiary in exchange for parent company stock.

b. Split-up: the entire firm is broken up in a series of spin-offs, so

that the parent no longer exists and only the new offspring survive.

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B. Divestiture: involves the sale of a portion of the firm to an outside

third party. Cash or equivalent consideration is received by the

divesting firm. Typically, the buyer is an existing firm, so that no new

legal entity results. It simply represents a form of expansion on the

part of the buying firm.

a. Equity carve-out: involves the sale of a portion of the firm via an

equity offering to outsiders. In other words, new shares of equity are

sold to outsiders which give them ownership of a portion of the

previously existing firm. A new legal entity is created. The equity

holders in the new entity need not be the same as the equity holdersin the original seller. A new control group is immediately created.

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