Mergers, Acquisitions and Restructurings: Chapter 3 Notes

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Mergers, Acquisitions and Corporate Restructuring

BOOK NOTES

Merger is a combo of 2 corps in which one corp survives and the merged corporation goes out of

existence.

In a merger, acquirer assumes the As and Ls of the merged firm; AKA a statutory merger: the merger

produces a entity incorporate in a specific state

Subsidiary merger is mergr of 2 cos in which the target becomes a sub or part of a sub of the parent.

Forward triangular merger a subsidiary of the acquirer is merged w/ the tatrget and the acquirer’s

subsidiary is the sole surviving entity

Reverse triangular merger is a trans b/w the acquirers sub and the target but where the target is the

surviving entity

Mergers di%er from a consolidation, which is a business combination whereby 2 or more companies

join to form an entirely new company. All of the consolidating companies are dissolved and only the

new entity continues to operate.

In a consolidation, the original cos cease to exist; their shareholders become

shareholders in the new company

A merger: A+B=A, where B is merged into company A

A consolidation: A+B=C, where C is an entirely new company

That said, the terms are often used interchangeably

Generally, when the combining firms are ~same size, the term consolidation pplies;

when firm di%er materially in size, merger is used

Takeover (acquisition): a vague term applicable to multiple deals; may refer to hotile transactions, or

both friendly and unfriendly mergers

VALUING A TRANSACTION

Enterprise value is Base equity price + value of target’s short-term and long-term debt + PS less cash

Base equity price = the total price less the value of debt

The Buyer is the company w/ the larger market cap or the company that’s issuing shares to exchange

for the other firm’s shares in a stock-for-stock transaction

TYPES OF MERGER

Horizontal merger: occurs when 2 competitors combine.

If the horizontal merger causes combined firm to experience incrs in market power that

will have an anticompetitive e%ect, the merger may be opposed on antitrust grounds

Vertical merger: combinations of companies that have a buyer-seller relationship

Conglomerate merger: occurs when the firms are not competitors and don’t have a buyer-seller

relationship

E.g. GE is a conglomerate with a diversified por<olio of companies that create

shareholder calue and it is a serial acquirer

REASONS FOR M&A

Expansion

Buying a company in a line of business or geographic area in which the buyer wants to

explnd into can be quicker than internal expansion

Acquisition of a particular firm may yield synergistic benefit for the acquirer, such as

when 2 lines of business complement one another

Alternatively, it may be part of a diversification program that fascilitates the firm to mve

into other lines of business

Synergy occurs when the sum of the parts is more productive and valuable than the

individual components

Financial fctors

E.g. the acquirer’s financial analysis might reveal the target is undervalued, i.e. the value

of the buyer may be in excess of the market value of the target, even when a premium that is

normallty included in changes of control is added to the acquisition price.

PE firms buy undervalued targets only to sell it therea-er <or a higher value while

extracting dividend from it before its resold

Tax motives

MERGER CONSIDERATION

Mergers can be paid for in multiple ways:

All cash

All securities

A combo of cash and securities