Global Mergers and Acquisitions: Insights

Global Mergers and Acquisitions

Insights

Global Mergers and Acquisitions

Insights

By

Gemine Chattopadhyay

Global Mergers and Acquisitions: Insights

Gemine Chattopadhyay

ISBN - 9789361524820

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Preface

This book on Global mergers and Acquisitions is a complete guide to the economy of mergers and acquisitions. Right from the introductory definition of what a merger is to the intricate laws that govern global mergers and acquisitions, this book is equipped to provide knowledge to people and students across the globe and make them economically acknowledged.

This book also section of examples of different mergers and acquisitions, mentioned with the details of substituent companies, their date of occurrence, cause of occurrence and outcome(whether a success or failure) that gives readers a practical insight into this field. We have also included chapters containing abunch of advantages and disadvantages of mergers and acquisitions that would help readers decide whether mergers and acquisitions are beneficial or not.

So, whether you are a business guy or a geek working on setting up his start-up, this book would act as your knowledge weapon.

Hope this book resolves all your queries!!

Happy reading!

Contents

Introduction 1

Chapter 1

What are global mergers and acquisitions? 3

1.1 International Mergers and Acquisitions 3

Questions 21

References 21

Chapter 2

History of global mergers and acquisition 23

2.1 The Great Merger Movement: 1895–1905 23

2.2 Short-run factors 24

2.3 Long-run factors 25

2.4 Objectives in more recent merger waves 26

2.5 Cross-border 28

2.5.1 Introduction 28

2.5.2 In emerging countries 28

2.6 Failure 29

2.7 Conclusion 30

2.8 Questions 31

2.9 References 31

Chapter 3

Why Mergers and acquisition? 33

Questions 53

References 53

Chapter 4

The Regulatory environment in mergers 55

4.1 UNDERSTANDING FEDERAL SECURITIES LAWS 56

4.2 SEC Enforcement Effectiveness 59

4.3 UNDERSTANDING ANTITRUST LEGISLATION 61

4.4 Antitrust Merger Guidelines for Horizontal Mergers 64

4.5 Targeted Customers and the Potential for Price Discrimination 65

4.6 Antitrust Guidelines for Vertical Mergers 66

4.7 Impact of Antitrust Actions on Firm Value 67

4.8 THE IMPLICATIONS FOR M&A OF THE DODD–FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 68

4.9 RESTRICTIONS ON DIRECT INVESTMENT IN THE UNITED STATES 69

4.10 FAIR DISCLOSURE (REGULATION FD) 70

4.11 SPECIFIC INDUSTRY REGULATION 70

4.12 ENVIRONMENTAL LAWS 72

4.13 LABOR AND BENEFIT LAWS 72

4.14 CROSS-BORDER TRANSACTIONS 73

4.15 Conclusion 74

4.16 Questions 74

4.17 References 75

Chapter 5

Takeover Market 77

5.1 CORPORATE GOVERNANCE 78

5.2 UNDERSTANDING ALTERNATIVE TAKEOVER TACTICS 84

5.3 OTHER TACTICAL CONSIDERATIONS 88

5.4 DEVELOPING A BIDDING STRATEGY 89

5.5 ACTIVIST INVESTORS: GAINING INFLUENCE WITHOUT CONTROL 90

5.6 UNDERSTANDING ALTERNATIVE TAKEOVER DEFENSES 91

5.7 THE IMPACT OF TAKEOVER DEFENSES ON SHAREHOLDER VALUE 98

5.8 Conclusion 100

5.9 Questions 100

5.10 References 100

Chapter 6

Some examples of global mergers 103

Questions 114

References 114

Chapter 7

Advantages of global mergers and acquisitions 115

7.1 Advantages 115

7.2 Conclusion 117

7.3 Questions 117

References 118

Chapter 8

Disadvantages of Global mergers and acquisitions 119

8.1 Disadvantages 119

8.2 Conclusion 123

8.3 Questions 123

8.4 References 123

Glossary 125

Index 127

Introduction

Merger and acquisition (M&A) activity globally and in the United States declined in 2016 from the prior year’s pace. According to research firm Dealogic, more than 8000 deals totaling almost $1.9 trillion were announced in 2016 in the United States. Worldwide, announced M&A deals topped $3.7 trillion, well below 2015’s record $4.4 trillion, which exceeded the prior record of $4.6 trillion set in 2007. At the time of this writing, the global recovery remains fragile and spreading geopolitical conflict continues to spark civil wars and mass migrations. China’s economy, the second largest in the world, sputters amid a growing mountain of debt. Growing populism in the United States seeks to insulate home markets through protectionism. Britain’s exit from the European Union and the rise of populism in parts of Western Europe raise concerns about the long-term viability of the European Union. The limits of expansionary monetary policies are evident. Countries engage in thinly disguised currency manipulation by driving interest rates into negative territory. By the end of 2016, more than $13 trillion worth of government bonds showed negative returns creating unprecedented financial market conditions and a murky outlook. In this highly uncertain environment, corporate decision making is increasingly difficult. Strategic questions abound. Should excess cash flows be reinvested in the firm or distributed to shareholders? Does restructuring through a combination of divestitures and spin-offs make sense? Should firms continue to buy growth through M&As and run the risk of overpaying, making achieving required shareholder returns more challenging? Should corporate executives stay with what they know or diversify? Should firms downsize their operations to better focus on markets in which their core competencies give them a competitive advantage? These are important questions with no easy answers. While this book does not promise quick answers to these demanding questions, it does offer insight into all aspects of the corporate restructuring process from takeovers and joint ventures to divestitures and spin-offs and equity carve-outs and reorganizing businesses inside and outside the protection of the bankruptcy court. Consequently, virtually all of the material covered in this book can be viewed as part of the corporate restructuring process. This part discusses the context in which mergers, acquisitions, and corporate restructuring occur, including factors often beyond the control of the participants in the M&A process. Chapter 1 provides an overview of M&As of basic vocabulary, the most common reasons why M&As happen, and how such transactions occur in a series of somewhat predictable waves. Alternatives to M&As and participants in the M&A process, from investment bankers to lenders to regulatory authorities, are discussed in detail. The chapter also addresses whether M&As benefit shareholders, bondholders, and society, with conclusions based on recent empirical studies. The tangle of regulations that impact the M&A process are covered in Chapter 2, including recent changes in US federal and state securities and antitrust laws as well as environmental, labour, and benefit laws that add to the increasing complexity of completing deals. The implications of cross-border transactions, which offer an entirely new set of regulatory challenges, also are explored here and elsewhere in this book in the setting in which they commonly occur. Viewed in the context of a market in which control transfers from sellers to buyers, Chapter 3 addresses common takeover tactics employed as part of an overall bidding strategy, the motivation behind such tactics, and the defenses used by target firms to deter or delay such tactics. Bidding strategies are discussed for both friendly and unwanted or hostile business takeovers. In hostile deals, the corporate takeover is viewed as a means of disciplining underperforming management, improving corporate governance practices, and reallocating assets to those who can use them more effectively. While such takeovers occur infrequently, the mere threat of hostile takeovers often encourages incumbent managers to change their behavior. This chapter also addresses the growing role activists are taking in promoting good corporate governance and in disciplining incompetent or entrenched managers. The reader is encouraged to review deals currently in the news and to identify the takeover tactics and defenses employed by the parties to the transactions. One’s understanding of the material can be enriched by attempting to discern the intentions of both the acquiring and target firms’ boards and management, if the proposed business combination makes sense, and thinking about what you might have done differently to achieve similar goals. While completed deals tend to make the headlines, much can also be learned by examining those that fail.

Chapter 1 What are global mergers and acquisitions?

1.1 International Mergers and Acquisitions

According to the Institute for Mergers, Acquisitions, and Alliances, 49,000 international mergers and acquisitions occurred in 2018 alone with an estimated value of $3.8 trillion. Over a third of the value of these transactions involved U.S. companies.

Growing Trend

Deloitte predicts merger and acquisition activity will increase, in both the number of transactions and deal size. Their recent survey indicated 79 percent of companies expect to increase the number of international mergers and acquisitions they’ll close this year. That’s up 9 percent from last year.

Advantages of International Mergers and Acquisitions

International mergers and acquisitions blend company resources, assets, and personnel to help a business improve in many ways. The advantages include:

Increase overall performance efficiency – each company can leverage the others’ strengths and reduce redundancy. Synergy creates opportunities that would not have otherwise been available to the companies operating individually.

Stimulate growth – the acquiring company not only buys the company but its client base and market share, without the heavy lifting.

Gain competitive advantage – an M&A deal may allow a company to buy up the competition or acquire a substantially larger market share for greater competitiveness.

Strengthen the supply chain – a company can effectively cut out the middleman and lower costs when they buy out a supplier. They may also reduce shipping costs when they absorb a distributor.

Mergers vs. Acquisitions

Mergers and acquisitions are usually bundled into one term, but they’re fundamentally very different.

In a merger, one company absorbs the other and it ceases to exist. For instance, the pharmacy chain and benefits manager CVS Health merged with the health insurer Aetna. The merger allows CVS to convert itself into a healthcare company and Aetna no longer exists.

In an acquisition, one company obtains a majority stake in another company, through a cash sale, shares, or equity. However, the target business retains its name and legal structure.

As an example, the Meredith Corporation acquired Time, Inc. in to increase their readership, monthly unique visitors to their website, and expand their reach and paid circulation. Time, Inc. still operates under its business name.

Complexities of Buying a Foreign Company

Fig 1.1

Buying a company is always a complicated matter, especially when that company is in a foreign country.

Buyers need to consider the cash, stock, or payable note mix they’ll offer the seller and fluctuating currencies can negatively impact a purchase when handled improperly.

Mergers and acquisitions also require regulatory compliance in the host and seller countries. Legislation often varies drastically between the two and non-compliance can have negative impacts. These include damaging a business’s reputation, consuming time and resources, and even killing a deal.

The accounting considerations of a merger or acquisition are equally daunting, especially when purchasing equipment, property, or stocks. Depreciation, amortization, goodwill, and of course taxes all come into play.

International Mergers and Acquisitions Due Diligence

Any company considering buying a foreign company or merging with a foreign company must undertake an extensive due diligence process. The adage buyer beware has never been more apt.

Before committing to the transaction, your company needs to know precisely what it is buying. This not only includes its attractive assets, but also the obligations, risks, liabilities, and contracts your business will assume. This is especially true when buying a private company whose operations and financials have not been scrutinized by outside parties.

Unfortunately, mergers and acquisitions may lead to litigation when the buyer does not conduct careful due diligence. Issues such as incomplete or inaccurate financial statements, employment law violations, and intellectual, data, or cybersecurity issues can come back to haunt the buyer.

Many M&As Fail, Unnecessarily

Fig 1.2

Regrettably, many mergers and acquisitions fail unnecessarily. According to A Comprehensive Guide to Mergers & Acquisitions, most failures are usually due to:

Lack of planning

Lack of knowledge

Cultural, managerial and organizational differences

Negotiation errors

Improper integration approach

Limited synergies

Diving into such complicated transactions without proper planning is an avoidable mistake. Companies can closely analyze what they need to improve their business and then plot the path to achieve it. However, trying to do so without assistance may not be wise.

Gaining the knowledge needed for a successful merger or acquisition is equally attainable, but seldom executed. You can buy a business, but is it the right business, in the right location, at the right time? That takes in-depth knowledge. However, it is achievable with the help of a seasoned mergers and acquisitions leader.

Understanding potential cultural, managerial, and organizational differences in the host country are difficult to achieve unless you work with an in-country expert. They already operate in the region, understand potential issues, and can help you avoid common problems.

Approaching international mergers and acquisitions without prior experience is brave, but ill-advisable. There are far too many variables and working with business owners abroad is often much different than in your own country.

Negotiating for the best possible terms is also vital to success. However, it is more difficult to do so when cultural norms and legal responsibilities vary so greatly. Unless your business thoroughly understands what’s involved in brokering a deal, you may over-pay.

It is important your company carefully analyses whether the purchase is worth it or not. If the combined value and performance of the two companies are not greater than the sum of the two parts, you’ll waste time and money.

Even if your business successfully closes the deal, you need to understand the best possible way to integrate the two to reach your business goals. Mergers and acquisitions entail many costs that can easily exceed benefits if the integration isn’t well-planned.

Luckily, all of these problems are avoidable.

Mergers vs. Acquisitions: An Overview

Mergers and acquisitions are two of the most misunderstood words in the business world. Both terms often refer to the joining of two companies, but there are key differences involved in when to use them.

A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.

Mergers

Legally speaking, a merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition). Mergers require no cash to complete but dilute each company’s power.

In practice, friendly mergers of equals do not take place very frequently. It’s uncommon that two companies would benefit from combining forces with two different CEOs agreeing to give up some authority to realize those benefits. When this does happen, the stocks of both companies are surrendered, and new stocks are issued under the name of the new business identity.

Typically, mergers are done to reduce operational costs, expand into new markets, and boost revenue and profits. Mergers are usually voluntary and involve companies that are roughly the same size and scope.

Acquisitions

In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist with its assets becoming part of the larger company. 

Acquisitions, sometimes called takeovers, generally carry a more negative connotation than mergers. As a result, acquiring companies may refer to an acquisition as a merger even though it’s a takeover. An acquisition takes place when one company takes over all of the operational management decisions of another company. Acquisitions require large amounts of cash, but the buyer’s power is absolute.

Companies may acquire another company to purchase their supplier and improve economies of scale–which lowers the costs per unit as production increases. Companies might look to improve their market share, reduce costs, and expand into new product lines. Companies engage in acquisitions to obtain the technologies of the target company, which can help save years of capital investment costs and research and development.

Since mergers are so uncommon and takeovers are viewed in a negative light, the two terms have become increasingly blended and used in conjunction with one another. Contemporary corporate restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply a merger or acquisition. The practical differences between the two terms are slowly being eroded by the new definition of M&A deals.

Real-World Examples of Mergers and Acquisitions

Although there have been numerous mergers and acquisitions, below are two of the most notable ones over the years.

Merger: Exxon and Mobil 

Exxon Corp. and Mobil Corp. completed their merger in November 1999 following approval from the Federal Trade Commission (FTC). Exxon and Mobil were the top two oil producers, respectively in the industry before the merger. The merger resulted in a major restructuring of the combined entity, which included selling more than 2,400 gas stations across the United States. The joint entity continues to trade under the name Exxon Mobil Corp. (XOM) on the New York Stock Exchange (NYSE).

Acquisition: AT&T Buys Time Warner

On June 15, 2018, AT&T Inc. (T) completed its acquisition of Time Warner Inc., according to AT&T’s website. However, due to intervention by the U.S. government to block the deal, the acquisition went to the courts, but in February 2019, an appeals court cleared AT&T’s takeover of Time Warner Inc.

The $42.5 billion acquisition will realize cost savings for the combined entity of $1.5 billion and revenue synergies of $1 billion, which are expected to be realized within three years of the close of the acquisition.

 On May 17, 2021, AT&T announced that it would spin off its Warner Media business and merge it with Discovery.

The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major business assets through financial transactions between companies. A company may purchase and absorb another company outright, merge with it to create a new company, acquire some or all of its major assets, make a tender offer for its stock, or stage a hostile takeover. All are M&A activities.

The term M&A also is used to describe the divisions of financial institutions that deal with such activity.

Understanding Mergers and Acquisitions

The terms mergers and acquisitions are often used interchangeably, however, they have slightly different meanings.

When one company takes over another and establishes itself as the new owner, the purchase is called an acquisition.1

On the other hand, a merger describes two firms, of approximately the same size, that join forces to move forward as a single new entity, rather than remain separately owned and operated.1 This action is known as a merger of equals. Case in point: Both Daimler-Benz