Mergers and Acquisitions

Mergers and Acquisitions refers to the aspect of corporate finance dealing with purchase, sale or combination of two business entities that can add strategic value to a company in a given industry and grow rapidly without having to grow organically.

Transaction Structure: Amalgamation into an Existing Company

 

 



















 

  • C1 🡪 Amalgamating Company; Ceases to exist

  • C2 🡪 Amalgamated Company

  • C2 receives all of C1’s Assets and Liabilities

  • S1 🡪 Shareholders of Co. 1 receive shares in Co. 2 and maybe other benefits like debentures, cash

  • Co. 2 will now have S1 and S2 as its shareholders

 

Categories of Mergers and Acquisitions

 

Horizontal Integration: 

  • In horizontal integration, two firms or companies operating under same industry combines

  • Major objective is to eliminate competition from the market

  • Motivation: To achieve

  • Industry consolidation to exploit economies of scale, size and / or scope

  • Entry into a new geography

  • Enhance product / services portfolio

 

Vertical Integration

  • In vertical integration, two firms or companies operating across vertically integrated industry combines 

  • It involves internalization of crucial forward or backward activities

    • Forward Integration involves “Buying your customer”

    • Backward Integration involves “Buying your supplier”

  • Motivation: To achieve

    • Control of a forward or backward activity in supply chain

    • Secure Raw Materials

 

Conglomerate Integration

  • In conglomerate integration, two companies operating in unrelated business streams combines

  • Motivation: To achieve

  • Diversification by combining uncorrelated assets and income streams

  • To reduce business risks

 

Form of Acquisition

Methods of Payment

 

 

 

Estimating Value

 

 

 

 

 

Evaluating a Merger Bid

  • Post-merger valuation for an acquirer

                                                              VAT = VA + VT + S -C          

  • Gains accrued to Target company

                                                              GainT = PT - VT

  • Gains accrued to Acquirer company

                                                              GainA = S - (PT - VT)

  • In case of stock offer

                                                              PT = N * PAT

  • VAT = Value Post Merger

VA = Value of Acquirer

VT = Value of Target

S = Synergies

C = Costs

PT = Price paid by Acquirer (Including Premium)

N = No of Shares