Unit 5

MERGERS & ACQUISITIONS

Mergers and acquisitions are terms used in the
combination or consolidation of two
companies under specific circumstances.
Although often used interchangeably, there
are slight differences between the two terms.
 MERGER – A merger is the
combination of two firms into
one new entity, with the
acquirer assuming the assets and
liabilities of the target firm. The
two companies involved in a
merger are generally of the same
size. *no purchase necessary
*one or two of the companies closes
On December 1, 1998, Exxon
and Mobil announced their
merger plans in a deal valued at
$81 billion. The merged entity
became the third largest
company in the world at the
time of announcement. The
merged company was called
ExxonMobil Corp. The new
company retained both Exxon
and Mobil brands. Under the
terms of the agreement, Mobil
shareholders received 1.32015
shares of Exxon stock (XON) for
every Mobil share (MOB) held.
H.J. Heinz Company And Kraft Foods Group
Sign Definitive Merger Agreement To Form
The Kraft Heinz Company

Under the terms of the agreement, which

has been unanimously approved by both
Heinz and Kraft's Boards of Directors, Kraft
shareholders will own a 49% stake in the
combined company, and current Heinz
shareholders will own 51% on a fully diluted
basis. Kraft shareholders will receive stock
in the combined company and a special cash
dividend of $16.50 per share.

The proposed merger creates substantial

value for Kraft shareholders. The special
cash dividend payment represents 27% of
Kraft's closing price as of March 24, 2015.
Also, by continuing to own shares of the new
combined company, Kraft shareholders will
have the opportunity to participate in the
new company's long-term value creation
potential.
Under the merger, which was
announced in October 2022, BPI will
be the surviving entity. Upon its
closing, RBC’s shareholders will hold
approximately 6% of the resulting
outstanding capital stock of BPI.
Through the merger, BPI will also be
taking over Robinsons Bank’s 20%
stake in digital lender GoTyme Bank, a
joint venture between the Gokongwei
Group and Tyme. GoTyme Bank was
one of the six entities granted an
online banking license by the Bangko
Sentral ng Pilipinas.
The merger between LANDBANK and
UCPB is pursuant to Executive Order
No. 142 signed by President Rodrigo
Duterte on 25 June 2021, which approved
the merger to form a better capitalized
and more resilient institution that will play
a principal role in the National
Government's development and financial
inclusion agenda.
ACQUISITION – An acquisition
is the takeover of a firm by
purchase of another
company’s common stock or
assets. The acquirer is
regarded as a larger company
which absorbs the smaller
company.
*purchase is necessary
*smaller company may continue operating/close
 As of August 2022,
the largest ever
acquisition was the
1999 takeover of
Mannesmann by
Vodafone Airtouch plc
at $183 billion
($297.7 billion
adjusted for inflation).
Convergys acquired by SYNNEX
Corporation for $2.8 Billion in
Cash and Stock – June 2018
Another successful buy was
Android, which Google acquired
up in 2005 for $50 million. Open-
sourcing Android helped allowed
Google's operating system to
live on a variety of mobile
devices from mobile carriers
around the world, accounting for
85% of the smartphone market
share, according to research
firm IDC.
 Rationale for Mergers
and Acquisitions
1. Stronger Market Power • Market
power is the capability of the firm to
influence prices of its products or
services in the overall market. Mergers
and acquisitions may provide control
over a firm’s supply chain and even
competitors, thus resulting to a stronger
market power.
2. Diversification • Another common reason for mergers is diversification.
Diversification may reduce market risk by stabilizing a company’s earnings.
This is especially true for companies in cyclical industries.
 3. Higher Growth • Mergers and acquisitions result to faster growth. With two
companies plowing in revenues from their previous market bases, higher revenues are
surely expected. Technological know-how and other up-to-date capabilities is another
aspect of growth that can be achieved faster in acquiring or merging with another
company.
4. Tax Consideration • A more uncommon reason for mergers and acquisitions is the “tax
benefit” of acquiring a firm with accumulated tax losses to offset against a firm’s high tax
bracket.

INDIA - As a result of the merger, the transferring company's transfer of

capital assets will not be regarded as a transfer, and thus the merger will not
be subject to capital gains tax. As long as both firms are based in India, the
shareholder is likewise exempted from taxation

CHINA - The acquirer may preserve the net operating loss and other tax attributes of
the target company, which may result in a tax liability reduction.

If the acquiring and the target companies are involved in different business area with
different applicable income tax rates, the acquirer may take advantage of such
differentials. Compared with an asset acquisition, a merger will not trigger any VAT or
business tax issues.
5. Synergy
• The main reason for mergers and acquisitions is creating synergies. A synergy is created when
the combined value of the two companies involved is greater than the sum of the values of
each company taken separately.
• Operating SYNERGY:

- Can create strategic advantages that result in higher returns on investment and the
ability to make more investments and more sustainable excess returns over time. •
These often results from vertical mergers and acquisitions – when entities along a
supply chain are merged.
• Functional integration may also create strategic advantages by making the most out of
the individual entity’s strengths in marketing, human resources, operations and other
functions of the business.

Can also result in economies of scale, allowing the acquiring company to save costs in
current operations, whether it be through bulk trade discounts from increased buyer
power, or cost savings by eliminating redundant business lines.

• These can often be seen from horizontal mergers and acquisitions– when entities in
similar markets combine.
• Financial
- creates tax benefits, increased debt capacity and diversification
benefits.
- In terms of tax benefits, an acquirer may enjoy lower taxes on
earnings due to higher depreciation claims or combined operating
loss carry forwards.
- A larger company may be able to incur more debt, reducing its
overall cost of capital.
- Diversification may reduce the cost of equity, especially if the
target is a private or closely held firm.
Potential Drawbacks of Mergers and Acquisitions

1. Increased prices of products or services

• A merger results in reduced competition and a larger market share. Thus, the new
company can gain a monopoly and increase the prices of its products or services. This may
result to lower customer goodwill.

2. Communication and cultural gap • The companies that have agreed to merge may have
different cultures. It may result in a gap in communication and affect the performance of the
employees.

3. Unemployment • In an aggressive merger, a company may opt to eliminate the

underperforming assets of the other company. It may result in employees losing their jobs.

4. Prevents economies of scale of unrelated entities • In cases where there is little in

common between the companies, it may be difficult to gain synergies. Also, a bigger
company may be unable to motivate employees and achieve the same degree of control.
Thus, the new company may not be able to achieve economies of scale.
C. Factors to Consider in Merger and Acquisition Decisions

The goal of firm growth including mergers and acquisitions is increasing shareholder wealth.
Achieving the desired ROI of shareholders is paramount in the selection of target firms. With
this in mind, screening targets for acquisitions must be in line with the firm’s strategic
objectives. A clear rationale for a merger or acquisition is integral in identifying potential
targets. Selection criteria may include but is not limited to the following:

• Size and profitability

• Type of product or service
• Industry position
• Customer segmentation
• Market share
• Synergies
• Geography and region
 Types of Mergers and Acquisitions
According to Purpose
1. Horizontal • combines businesses which sell same products or offer same services
to the same market. The primary purpose is to combine the market shares between
the competing businesses. Added benefits include reduced costs in operations
administration and fixed overhead.
2. Vertical
• combines business which belong to the same supply chain. The primary purposes are (1)
to lower input costs or improve gross profits and/or (2) to improve control over the
manufacturing process (usually through improved supply-demand forecasting).
Walt Disney acquired Pixar Animation Studios for $7.4 billion in 2006. Pixar was an innovative
animation studio and had talented people. Walt Disney was a mass media and entertainment
company. The merger turned out to be a successful and strategic one. Before the merger, Disney’s own
animation films were failing. Disney’s CEO said that animation was a critical engine for driving growth
across its businesses. Pixar designed a slew of successful movies after the merger. These movies
turned out to be innovative with ever-lasting characters that ended up delighting the audience. The
merger also helped Disney reduce its competition. If Pixar would have ended up in someone else’s
hands, then it would be been extremely negative for Disney.
3. Product- extension
• combines businesses that sell different but related products to the same
market
 4. Market-extension
• combines businesses that sell similar products to different
markets
 5. Congeneric
• combines business which sell somewhat related products and services to
not- clearly separated markets. A typical example usually given by corporate
finance textbooks which exhibits this distinction in a simple fashion is an ice-
cream manufacturer buying a wafer manufacturer.

An example of a congeneric merger is when banking giant

Citicorp merged with financial services company Travelers
Group in 1998. In a deal valued at $70 billion, the two
companies joined forces to create Citigroup Inc. While
both companies were in the financial services industry,
they had different product lines. Citicorp offered
consumers traditional banking services and credit cards.
Travelers, on the other hand, was known for its insurance
and brokerage services. The congeneric merger between
the two allowed Citigroup to become one of the biggest
financial services companies in the world.
 6. Conglomerate
• combines businesses which belong to unrelated industries.
This type of merger diversifies the acquirer's operations.
Types of Mergers and Acquisitions According to Approach
Towards the Acquiree

1. Friendly • These is amicable discussion and agreement between the acquirer and the
acquired-to-be. The process commonly includes a proposal of the acquirer and the board and
management of the acquired-to-be.
In 2014, Facebook Inc. announced the acquisition of the
mobile messaging company, WhatsApp. According to the
statement issued by Facebook, the deal was intended to
“support Facebook and WhatsApp’s shared mission to
bring more connectivity and utility to the world by
delivering core services efficiently and affordably.”

The acquisition was executed in the form of a friendly

takeover. Facebook acquired all outstanding shares and
options of WhatsApp for $4 billion in cash and 183 million
of Facebook Class A common shares. Additionally,
Facebook assigned more than 45 million restricted shares
to WhatsApp’s employees. The total value of the deal
was estimated at around $19 billion.

Following the acquisition, WhatsApp retained its brand

and continued functioning, as the company’s operations
remained independent from the operations of Facebook.
Also, WhatsApp’s co-founder and CEO Jan Koum obtained
a seat on the board of Facebook.
2. Hostile • There is no or little attempt to communicate and discuss with
the acquired business entity to the acquisition. Oftentimes, the
transaction would come as a surprise to the shareholder, board, and/or
management.
 Kinds of Hostile Takeovers:

a. One-time Tender Offer – the acquirer makes a public offer at a fixed price to acquire a
large number of shares.

b. Creeping Tender Offer and/or Step Acquisition - the acquirer makes a public offer at a fixed
price to acquire a large number of shares multiple times over a period to eventually reach
majority stake in the to-be-acquired corporation.

c. Premium Raid – a type of tender offer wherein the acquirer makes a public offer at a
significantly higher price to acquire a large number of shares.

d. Dawn Raid – a type of tender offer wherein the acquirer suddenly makes a public offer at a
fixed price to acquire a large number of shares.

e. Proxy Fight – persuasion of a majority of shareholders to replace the board of directors with
a new set that would approve the takeover.
Microsoft’s $45 billion acquisition of Yahoo! in 2008. When
Microsoft went public with its first offer in February 2008, it had
already been in informal discussions with Yahoo for the previous
two years. Yahoo! was seen as something of a basket case at the
time, continuously shedding workers, issuing profit warnings, and
generally showing an inability to offer any answer to Google’s
domination of internet search.

Over the next two months, the publicity generated by Microsoft’s

offer brought others on board, including Google, AOL, and News
International. Yahoo! flirted with all four, only one of which
(Microsoft)retained any interest. In May, Carl Icahn and T Boone
Pickens acquired a combined $1.25 billion in Yahoo! stock in an
attempt to force the board to sell to Microsoft.

It was all to no avail. Yahoo!’s management instead entered a

partnership agreement with Microsoft around internet advertising,
which largely went nowhere. The company was subsequently sued
by its shareholders (led by Carl Icahn) who were able to prove that
the board of directors had planned to reject Microsoft’s offer well
in advance of it arriving, thus neglecting their fiduciary
responsibility to shareholders.
F. Financing Modes
1.Cash Purchase – The acquiring firm simply pays the
existing shareholders cash in exchange for the shares of
the target company.

2. Equity Swap – One of the most commonly used method

for mergers and acquisitions. Shareholders of the target
company are given shares of the acquiring company.

3. Combination of Cash and Equity

Anti-Hostile Takeover
Strategies

Not all corporations want to be acquired by another entity. The following can be done
depending on the circumstances of the to-be-acquired business to fight off a potential
merger or acquisition.
1. Staggered Board of Directors – The positions in the board of directors are not filed at
the same time. Only a fraction (usually a third) of the members of the board of directors
are elected each year. Should the bidding company win in the recent election, they would
still not have majority votes to acquire the target firm.

2. Supermajority Provisions – requires shareholder approval of a number of votes which

is more than what is legally for all transactions involving change of control, mergers and
takeovers.

3. Back-end Plans – The target company provides existing shareholders, with the
exception of the company attempting the takeover, with the ability to exchange existing
securities for cash or other securities valued at a price determined by the company’s
board of directors.

4. Share Buyback – Shares are bought out by the target firm from the market in order to
reduce the number of shares that are on the market and can be bought by the acquiring
firm.
5. Greenmail/ Target Repurchase – Shares are repurchased by the target firm away
from the bidder or acquiring firm at a higher price which makes the bidder happy
to leave the target alone.

6. Standstill Agreement – A contract that contains provisions that restricts how a

bidder of a company can purchase or dispose stocks of the target company. A
standstill agreement can effectively stall or stop the process of a hostile takeover if
the parties cannot negotiate a friendly deal.

7. People Pill – threatens the acquiring firm that the acquiree management will
quit en masse in the event of a successful hostile takeover.

8. Poison Pill or Shareholder Rights Plan – gives a prospective acquiree’s

shareholders the right to buy shares of the firm bought by anyone at a deep
discount.
9. Suicide Pill/ Jonestown Defense – extreme poison pill that may lead to the bankruptcy
of the target corporation.

10. Pacman Defense – the target firm also attempts to take over the acquiring firm.

11. Macaroni Defense – allows the acquiree to issue a large number of bonds that must
be redeemed at a higher value if the company is taken over. It suddenly expands or
increases the cost of a hostile takeover.

12. Nancy Reagan Defense – When the acquiring firm makes a formal bid to the
shareholders to buy their shares, the board of directors of the target firm simply denies
or “just says no” to the bid.

13. Silver and Golden Parachutes – allows the all employees (silver) or top management
(golden) a large lump-sum cash compensation in the event that they are eliminated from
their positions as a decision by the acquirer.
14. Pension Parachutes – allows the cash in the pension fund of the acquiree firm to
be solely used for the pension plan participants. The fund remains to be the property
of the plan’s participants, e.g., the original employees.

15. Whitemail – The target company sells significantly discounted stocks to a friendly
third party.

16. White Squire – A friendly company buys a stake in a target company to prevent a
hostile takeover.

17. White Knight – A friendly company buys a significant number of shares to prevent
a hostile takeover while allowing it to have control over the target firm
*Black knight – the unfriendly company or acquiring firm
*Gray knight – a second unsolicited acquiring firm
*Yellow knight – an unfriendly company which has backed out from its plans on
acquiring a firm but instead offers to have a merger of equals.
18. Crown Jewel – The target company sells some of its most valuable assets to a
third party to reduce the value of the company.

19. Scorched Earth – The target company seeks to make itself less attractive to
hostile bidders (sell valuable assets, increase debt, etc.).

20. Killer Bees – The target company employs several experts (investment bankers,
accountants, attorneys, tax, specialists) who can provide various anti-takeover
strategies.

21. Lobster Traps – The target firm includes a provision that prevents individuals
with more than 10% ownership of convertible securities from transferring these
securities to voting shares.