Business Management Prepared by: Jamal Chapter 9

MERGERS & ACQUISATIONS

Merger is a business combination that results in the creation of a new reporting entity, formed from the combining parties. No party has substantial control over another party. Takeover is the purchase of a controlling interest in the voting share capital of the company by another company. Reasons for Mergers and Takeover: Synergistic effect Elimination of competition Quality management Diversification Asset backing To fulfill Minimum Capital Requirement To improve quality of earning Improve liquidity and finance To gain economies of scale To reduce the cost To prevent other competitor advantage Economic efficiency

obtaining

Factors Effecting Takeover Decisions: Price Factor: Like cost, future prospects etc Other factors: Desirable effects, purchase consideration, takeover bid, potential problems Conduct of a Takeover: Can be resist by target company, by defensive tactics like issuing a forecast of attractive profit to shareholders, lobbying and finding a white knight ( a company that make a welcome takeover bid), launching advertisement campaign against the takeover bid, making a counter bid, arrange management buy out, introducing a poison-pill ( anti takeover device) etc. Shareholder approval because it might be unattractive to : Reduce EPS Target company operated in a risky industry Danger to going into liquidation Contesting an offer: Directors may decide to contest an offer on following grounds: Offer may be unacceptable because terms are poor Rejection of offer may lead to improved bid Merger or takeover may have no obvious advantage Employees and members may strongly opposed to the bid Payment Methods: Cash purchase Share exchange Convertible loan stock Mezzanine Finance ( short to medium term, unsecured, higher rate of return finance which gives the option to convert into equity) Earn out arrangement ( deferred consideration payable only when target company reaching certain performance targets

Business Management Prepared by: Jamal Chapter 9 POST ACQUISITION INTEGRATION: Druckers Golden Rules: Rule 1: Common core of unity. Same technology & market share by both acquirer and acquiree Rule 2: Cost benefit analysis Rule 3: Give respect to acquirees stakeholders Rule 4: Provide top management skills to acquiree company Rule 5: Cross company promotion of staff within 1 year Jones Integration Sequences: 1. Communicate initial reporting relationship 2. Achieve rapid control of key factors like information channels 3. The resource audit 4. Redefine corporate objectives 5. Revise organization structure Reasons for Failure of Merger & Acquisitions: 1. Failure of strategic plan to produce the expected benefit 2. Over optimization about future market condition and operating synergies 3. Poor integration management 4. Cultural difference and poor attitude of target management 5. Little or no post acquire plan 6. Lack of knowledge of industry of targeted company 7. Poor management and practices in targeted company 8. Little or no experience of acquisition Impact of Merger and Takeover on Stakeholders: 1. Acquiring Companys Shareholder: Decline in profitability 2. Targeted Companys Shareholder: Benefit most. Bidding companys offer significantly more than market price of their share 3. Acquiring Companys Management: Increase status and influence, increase salary & benefits 4. Targeted Companys Management: Golden hand shake, out of jobs, employee turnover 5. Other Employees: Loss of jobs because duplicate service operation are eliminated and loss making division are closed down. 6. Financial Institutions: Outright winners, more complex deal, greater their fees income. JOINT VENTURE, ALLIANCES & FRENCHISING: Consortia: Organizations co-operates on specific business prospectus Joint venture: Two or more entity set up a third organization. Forces join for manufacturing, financial or marketing purposes. Each has share in equity and management Advantages of JV: It permits coverage of a larger no countries since each one require less investment Reduce risk of govt intervention Closed control over operation JV with an indigenous firm provide local knowledge Several benefit in value chain

Business Management Prepared by: Jamal Chapter 9 Alliance can also be a learning exercise It can provide firmed for expansive technology & research project They also arise out of global competition Disadvantages: Conflict of interest Disregard regarding profit sharing and management License Agreements: A license agreement is a commercial contract where by the licenser gives something of value to the licensee in exchange of certain performance or payment Features: The licenser provides any of the following to licensee; a. Right to produce a patent product b. Manufacturing know how c. Technical & marketing advice and assistance d. Right to use a trade mark, brand etc The licenser receives royalty Production is higher with no investment The licensee eventually become competitor The supply of essential material, component and plant Franchising: It is a method of expanding the business on less capital than would otherwise be possible Features: Offer by the franchiser: Name and goodwill associated with it System, business method and support service The franchisee pays the franchiser for being granted these right Franchise has responsibility of running business & for ultimate risk and reward The franchisee supplies capital, personal involvement and local market knowledge