ONLINE CHAPTERS
SUMMARY
■ Corporate control transactions refer to
transactions where the control and decision
making power of an entity are altered by
another entity. For example, a takeover occurs
if the control of one entity is taken over by
another entity. An acquisition can refer to
such a situation, or may be related specifically
to one entity acquiring control of some of the
assets of the selling entity. In such examples,
the target business may be split up. Where
two or more businesses are integrated, the
transaction is typically referred to as a merger.
(However, large-scale mergers can take many
years to ‘bed down’, and the end result can
be significant rationalisation of one business- suggesting that is was actually a takeover
couched as a merger.)
■ Due to concerns about potential antitrust
provisions and political or nationalistic
interests, some takeovers by foreign bidders
may also be couched as mergers.
■ Mergers and acquisitions tend to occur in
waves. Merger waves may occur because
of technological or regulatory changes,
fluctuations in the cost and availability of
funding or widespread misvaluations in the
market. Cross-border M&A activity has been
increasing over time.
■ Horizontal mergers occur between companies
that operate in the same space, proving the
same, or similar goods or services. This is one
way to increase market share and supplier power.
■ Vertical mergers involve companies merging
with a customer or supplier, to reduce their
costs of production across the supply chain
involved with taking a product or service to
market. For example, in the financial services
industry, financial product developers such
as insurance businesses and superannuation
providers may merge with banks so that they
can distribute products to bank customers.■ Conglomerate mergers involve multi-faceted
business that merge with others. Usually,
the motivation is to increase overall market
power and potentially achieve economies of
scale or scope. These mergers can also assist
the business with diversifying its exposure to
different markets.■ Mergers and acquisitions can be financed
with debt, cash (drawn from accumulated
profits) or equity. Often, acquisitions may
be financed by a combination of methods,
and these are called mixed offerings. Where
an acquisition is solely financed via equity,
shareholders from the target company
receive shares in the acquiring company.
Such takeovers are referred to as share-swap
mergers, pure share mergers or scrip bids.■ The most common methods used by a
bidder to value a potential target include
discounted cash flow valuation, the use
of valuation multiples for comparable
companies or precedent transactions
multiples.
■ Mergers tend to create value for target
shareholders, but much less frequently
create value for bidder shareholders.
■ The justifications for M&A activity given by
managers include driving growth, capturing
synergies, improving the bidder’s market
position or enhancing its relative valuation,
diversifying the company’s operations
and increasing earnings per share. It is
important to keep in mind that, whatever the
motivation for a merger might be, it should
only be conducted if it leads to higher value
for shareholders.
■ Target company managers may be averse to
bids because an acquisition can jeopardise
their employment. Target companies (and in
particular their directors and managers) that
want to remain independent have a wide
range of defensive tactics that they can use
to discourage bidders.■ Antitrust regulations govern merger and
acquisitions and are important to help stem
a reduction in competition. With the growth
of international conglomerates, international
regulatory authorities, especially in the EC,
have started to protect domestic consumers
by invoking these regulations. Antitrust
regulations sometimes become a barrier to
the consummation of a deal if regulators
believe that deal would adversely affect
competition in a particular market.LO21.1 LO21.3LO21.2LO21.4LO21.5