Ch 1
Introduction to business
combinations
section 1
By: Nada Magdy
A business combination occurs when the
operations of two or more companies are
brought under common control.
vertical combination Horizontal Combination
a merger between a supplier a merger between
and customer whose competitors operate in same
operation on different, but business lines and markets.
successive stage of production
or distribution or both
conglomeration
The primary motivation for combination was often to
diversify business risk by combining companies in
different industries.
A business combination may be friendly or unfriendly.
• In a friendly combination, the boards of directors of the potential
combining companies negotiate mutually agreeable terms of a proposed
combination.
• The proposal is then submitted to the stockholders of the involved
companies for approval.
• Normally, a two-thirds or three-fourths positive vote is required by
corporate bylaws to bind all stockholders to the combination.
• An unfriendly (hostile) combination results when the board of
directors of a company targeted for acquisition resists the combination.
• A formal tender offer is a public proposal made by a company or an
investor to purchase some or all of a company's shares at a specific
price for a limited period. The offer is usually made directly to the
shareholders, bypassing the company’s management.
• It usually published in a newspaper, typically provides a price higher
than the current market price for shares made available by a certain
date.
• Because they are relatively quick and easily executed (often in about a
month), tender offers are the preferred means of acquiring public
companies.
• Most tender offers are friendly ones, done with the support of the
target company’s management.
Defense Tactics for Hostile Combinations
1. Poison pill: Issuing stock rights to existing shareholders enabling them to
purchase additional shares at a price below market value
2. Greenmail: The purchase of any shares held by the would-be acquiring
company at a price substantially in excess of their fair value. The
purchased shares are then held as treasury stock or retired.
• largely ineffective because it may result in an expensive tax;
• the excess of the price paid over the market price is expensed.
3. White knight: Encouraging a third firm more acceptable to the target company
management to acquire or merge with the target company.
4. Pac-man defense: Attempting an unfriendly takeover of the would-be
acquiring company.
5. Selling the crown jewels: The sale of valuable assets to others to make the firm
less attractive to the would-be acquirer.
• But if it survives, it is left without some important assets.
6. Leveraged buyouts: The purchase of a controlling interest in the target firm by
its managers and third-party investors, who usually incur substantial debt in the
process and subsequently take the firm private. The bonds issued take the form
of high-interest, high-risk “junk” bonds.
Advantages of business combination
Provides an established operating unit with its own experienced personnel,
regular suppliers, productive facilities, and distribution channels.
• In the case of vertical mergers, elimination of certain costs related to
negotiation, bargaining, and coordination between the parties.
• Enable a company to compete more effectively in the international
marketplace.
• take advantage of income tax laws (via losses of unprofitable affiliates).
• Diversification resulting from a merger leads to:
• increased flexibility, an internal capital market, an increase in the firm’s debt
capacity, more protection from competitors over proprietary information.
MCQ
Which of the following is a reason why a company would expand
through a combination, rather than by building new facilities?
a. A combination might provide cost advantages.
b. A combination might provide fewer operating delays.
c. A combination might provide easier access to intangible
assets.
d. All of the above are possible reasons that a company might
choose a combination.
Answer: D
Types of combination
Asset acquisition Stock acquisition
a firm may gain control of
a firm may acquire the total assets another firm through acquiring
of another firm. the total, or a percentage of,
stocks of the acquired firm.
(1) what is acquired (assets or stock) and (2) what is given up
(the consideration for the combination = using cash, debt,
stock, or some
combination of the three).
Business combinations are classified by method of
combination into three types: statutory mergers, statutory
consolidations, and stock acquisitions.
A Statutory Merger results when one company acquires all
the net assets of one or more other companies through an
exchange of stock, payment of cash or other property, or
issue of debt instruments (or a combination of these
methods).
• The acquiring company survives, whereas the acquired
company (or companies)
ceases to exist as a separate legal entity
A+B= A
A Statutory Consolidation results when a new
corporation is formed to acquire two or more other
corporations through an exchange of voting stock;
• the acquired corporations then cease to exist as separate
legal entities.
A+B =C
A Stock Acquisition(Consolidated Financial Statements)
occurs when one corporation pays cash or issues stock or
debt for all or part of the voting stock of another company.
• the acquired company remains intact as a separate legal
entity.
• When the acquiring company acquires a controlling
interest in the voting stock of the acquired company, a
parent- subsidiary relationship results.
Companies can pay for an acquisition in cash, stock, or debt.
Open-market acquisition means buying shares directly from the
stock market.
The price of the shares is determined by market forces (supply and
demand). The payment is usually made in cash.
Stock swap means exchanging shares instead of cash, based on a
negotiated exchange ratio.
MCQ
One company wishes to acquire another company. Which of the
following forms of acquisition does not require a formal vote by the
shareholders of the acquired firm?
A. Merger
B. Acquisition of stock
C. Acquisition of assets
D. Consolidation
E. All of the above require a formal vote
Thank
You
