M&A Basic Concept & Terminology

• Takeover: transfer of controlling ownership (involves shares); Acquisition: purchase of one firm (involves assets); Merger: combination of two firms into a new legal entity, both shareholders must approved the transaction; Scheme of Arrangement: court approved union of two firms, governed by a set of contract.
• Hostility -- Hostile takeover: takeover without consultation and un-support by target's management. Tender offer, general offer from acquirer to target's shareholder with premium price. Friendly takeover: merger between two firms with support of target's management, target might solicit offer from other potential acquirers (hold-out problem).
• Relatedness -- Horizontal: merger of two firms in the same industry or similar product line; Vertical: merger of two firms in different steps of a production process (supply chain), merger to its upstream suppliers or its downstream buyers; Conglomerate: merger of two firms in unrelated business, to diversify by combining unrelated assets and income stream.
• Financing -- Cash deals: finance by acquirer cash or additional borrowing, size of combined firm less than acquirer+target size (1+1 < 2); Stock deal: finance by acquirer stock, target exchange their shares for acquirer shares, often with specified exchange ratio, size of combined firm near equal or more than acquirer+target size (1+1 = or > 2); Mixed deal: each target share is exchange for either cash or acquirer's shares. Note: buyers tend to offer stock deal when they believe their shares are overvalued and cash deal when their shares are undervalued. Stock deal: target shareholders still remain to control with their stocks, but Cash deal: target shareholders were removed permanently and the company under the indirect control of the bidder's shareholders.
• Vertical benefits: lower transaction costs (when making an economic exchange),;synchronisation of supply and demand along the chain of products; ability to monopolize market through the chain; strategic independence (especially when inputs are rare or highly volatile in price). Vertical disadvantage: higher coordination costs; higher organisation costs of switching to different suppliers/buyers; weaker motivation at the start of supply chain.
• M&A transaction costs might arise from: information asymmetries from searching information of target's synergic benefits; bargaining costs: costs required to reach an acceptable agreement with target; monitoring costs: cost of making sure the other party stick in the rules.
• Corporate control: a party has a dominant control of the firm if they have the veto power over the use of its assets.
• Economic driving forces of M&As waves: technology changes, competition environment, deregulation, privatisation, globalisation, equity and market conditions.
• Benefits of M&As: synergies, change of control (replace inefficient management), market power (to give additional revenue by increase the price), undervalued target (market price < intrinsic value), tax savings (acquire target company that losses in the past but should not in the future).
• Costs of M&As: overpayment (management hubris), merger integration costs (in the initial phase, usually decreasing in profits), agency costs (less of monitoring activities), increased bankruptcy risk (differ in leveraged), taxes, M&As advisory fees.
• Synergy definition: additional value created from combining two firms operations and financial structure. PV(AB) > PV(A) + PV(B) or 1+1 more than 2.
• Sources of synergy: economies of scale, economies of scope, complementary of resources, synergy from financial efficiencies, diversification, adopt a new financial structure, reduced bankruptcy costs.
• Gains in M&As: value of bidder without acquisition+value of a target as a stand alone company+synergies and operating improvements (synergic benefits and control benefits)+profit on sale of excess assets.
• M&As Deal Failures: poor post merger integration, unrealised synergies & control benefits, poor post deal management of target, overoptimism-over bidding-poor due diligence.