All you need to know about Mergers and Takeovers
Merger
A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value.
How a Merger Works
A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, scale of operations, etc. For this reason, the term "merger of equals" is sometimes used. Acquisitions, unlike mergers, or generally not voluntary and involve one company actively purchasing another
e.g. Hindustan Unilever bought GSK’s consumer nutrition brands in one of India’s largest consumer goods deals.
De-Merger
✒Demerger is the business strategy wherein company transfers one or more of its business undertakings to another company.
✒In other words, when a company splits off its existing business activities into several components, with the intent to form a new company that operates on its own or sell or dissolve the unit so separated, is called a demerger.
The demerger can take place in any of the following forms:
✒ Spin-off
It is the divestiture strategy wherein the company’s division or undertaking is separated as an independent company. Once the undertakings are spun-off, both the parent company and the resulting company act as a separate corporate entities.
✒ Split-up
A business strategy wherein a company splits-up into one or more independent companies, such that the parent company ceases to exist. Once the company is split into separate entities, the shares of the parent company is exchanged for the shares in the new company and are distributed in the same proportion as held in the original company, depending on the situation.
Ex. Marico and Kaya
Horizontal Merger
- A horizontal merger takes place when two companies offering similar, or compatible, products or services to the same market combine under single ownership.
- If the other company sells products similar to yours, your combined sales give you a greater share of the market.
- If the other company manufactures products complementary to your range, you can now offer a wider range of products to your customers.
- A merger with a company that offers different products to a different sector of the market enables you to diversify your activities and enter new markets.
- The main aim of a horizontal merger is to increase revenue by offering an additional range of products to your existing customers. You do not have to invest time or resources in developing your own new products.
- The new merged company may have greater resources and market share than your other competitors, enabling you to achieve economies of scale and exercise greater control over pricing.
Ex. In 2015, Marriott International acquired Starwood Hotels
Vertical Merger
A vertical merger (also called vertical integration) is a merger between a manufacturer and a supplier. This is different from a horizontal merger between two companies that manufacture similar products.
How it works:
✏A vertical merger is a merger between two companies that produce separate services or components along the value chain for some final product.
✏Mergers between such companies occur in an effort to reduce production costs and increase efficiency for higher profits.
Why it Matters:
✏Vertical mergers allow manufacturers to control the entire production cycle by purchasing suppliers and bringing them on as part of the company.
✏This way, manufactures can have control over the cost and production of individual components, resulting in lower cost and greater output efficiency.
Example
✏In 2002, Ebay, a prominent online auction and shopping website, acquired PayPal, a company that supports online payments and money transfers. Although both businesses provided different services, PayPal was used for a growing number of transactions on Ebay and therefore very relevant to their operations.
Hostile Takeover
A hostile takeover, in mergers and acquisitions (M&A), is the acquisition of a target company by another company (referred to as the acquirer) by going directly to the target company’s shareholders, either by making a tender offer or through a proxy vote. The difference between a hostile and a friendly takeover is that, in a hostile takeover, the target company’s board of directors do not approve of the transaction.
? Hostile Takeover Strategies
There are two commonly-used hostile takeover strategies: a tender offer or a proxy vote.
1⃣ Tender offer
A tender offer is an offer to purchase shareholder’s shares in a company at a premium to the market price. For example, if Company B’s current market price of shares is $10, Company A could make a tender offer to purchase shares of company B at $15 (50% premium). The goal of a tender offer is to acquire enough shares for a majority stake in the target company.
2⃣ Proxy vote
A proxy vote is the act of the acquirer company persuading existing shareholders to vote out the management of the target company so it will be easier to take over. For example, Company A could persuade shareholders of Company B to use their proxy votes for changes to the company’s board of directors. The goal of such a proxy vote is to remove the board members opposing the takeover and to install new board members.
? Example
In 2000, Essel Packaging owned by Subhash Chandra of Zee acquired Switzerland's Propack AG, and became the world’s largest producer of laminated tubes.
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