Revision Notes

Mergers and Takeovers

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. 

For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America.

A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. 

An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.

Target companies can employ a number of tactics to defend themselves against an unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.

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Types of Mergers 

Distinguished by the relationship between the two companies that are merging: 

Distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors: 

Synergy

All mergers and takeovers have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. The success of a merger or acquisition depends on whether this synergy is achieved. 

By merging, the companies hope to benefit from the following: 

Why a merger/takeover may or may not achieve objectives

An example is the epic failure of the when eBay decided to buy Skype for $2.6 billion in 2005, only to sell the company four years later for $1.9 billion. Apparently, it didn’t work out because eBay and Skype were unable to integrate their technological systems successfully.

Good Reads

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/where-mergers-go-wrong

http://www.pearsoned.co.uk/bookshop/article.asp?item=439

http://www.bmmagazine.co.uk/columns/opinion/many-mergers-fail/

http://knowledge.wharton.upenn.edu/article/why-do-so-many-mergers-fail/

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