Mergers and acquisitions
For The Sopranos episode, see Mergers and Acquisitions
(The Sopranos).
For other uses, see Merge (disambiguation) and
Acquisition (disambiguation).
Mergers and acquisitions (M&A) are transactions in
which the ownership of companies, other business orga-
nizations or their operating units are transferred or com-
bined. As an aspect of strategic management, M&A can
allow enterprises to grow, shrink, change the nature of
their business or competitive position.
From a legal point of view, a merger is a legal consoli-
dation of two entities into one entity, whereas an acqui-
sition occurs when one entity takes ownership of another
entitys stock, equity interests or assets. From a commer-
cial and economic point of view, both types of transac-
tions generally result in the consolidation of assets and
liabilities under one entity, and the distinction between
a merger and an acquisition is less clear. A transac-
tion legally structured as a merger may have the eect
of placing one partys business under the indirect owner-
ship of the other partys shareholders, while a transaction
legally structured as an acquisition may give each partys
shareholders partial ownership and control of the com-
bined enterprise. A deal may be euphemistically called a
"merger of equals" if both CEOs agree that joining to-
gether is in the best interest of both of their companies,
while when the deal is unfriendly (that is, when the man-
agement of the target company opposes the deal) it may
be regarded as an acquisition.
1 Acquisition
Main article: Takeover
An acquisition or takeover is the purchase of one busi-
ness or company by another company or other busi-
ness entity.[1] Specic acquisition targets can be identi-
ed through a myriad of avenues including market re-
search, trade expos, or sent up from internal business
units, among others.[2] Such purchase may be of 100%,
or nearly 100%, of the assets or ownership equity of the
acquired entity. Consolidation occurs when two compa-
nies combine to form a new enterprise altogether, and nei-
ther of the previous companies remains independently. The combined evidence suggests that the shareholders of
Acquisitions are divided into private and public ac- acquired rms realize signicant positive abnormal re-
quisitions, depending on whether the acquiree or merg-
ing company (also termed a target) is or is not listed on
a public stock market. Some public companies rely on
acquisitions as an important value creation strategy.[3]
An additional dimension or categorization consists of
whether an acquisition is friendly or hostile.
Achieving acquisition success has proven to be very dif-
cult, while various studies have shown that 50% of
acquisitions were unsuccessful.[4] Serial acquirers ap-
pear to be more successful with M&A than companies
who only make an acquisition occasionally (see Douma
& Schreuder, 2013, chapter 13).[5] The new forms of
buy out created since the crisis are based on serial type
acquisitions known as an ECO Buyout which is a co-
community ownership buy out and the new generation
buy outs of the MIBO (Management Involved or Manage-
ment & Institution Buy Out) and MEIBO (Management
& Employee Involved Buy Out).
Whether a purchase is perceived as being a friendly one
or hostile depends signicantly on how the proposed
acquisition is communicated to and perceived by the tar-
get companys board of directors, employees and share-
holders. It is normal for M&A deal communications to
take place in a so-called condentiality bubble wherein
the ow of information is restricted pursuant to conden-
tiality agreements.[6] In the case of a friendly transaction,
the companies cooperate in negotiations; in the case of
a hostile deal, the board and/or management of the tar-
get is unwilling to be bought or the targets board has no
prior knowledge of the oer. Hostile acquisitions can,
and often do, ultimately become friendly, as the ac-
quiror secures endorsement of the transaction from the
board of the acquiree company. This usually requires an
improvement in the terms of the oer and/or through ne-
gotiation.
Acquisition usually refers to a purchase of a smaller
rm by a larger one. Sometimes, however, a smaller
rm will acquire management control of a larger and/or
longer-established company and retain the name of the
latter for the post-acquisition combined entity. This is
known as a reverse takeover. Another type of acquisition
is the reverse merger, a form of transaction that enables a
private company to be publicly listed in a relatively short
time frame. A reverse merger occurs when a privately
held company (often one that has strong prospects and is
eager to raise nancing) buys a publicly listed shell com-
pany, usually one with no business and limited assets.
1
2 2 LEGAL STRUCTURES

turns while shareholders of the acquiring company are 1. Improper documentation and changing implicit
most likely to experience a negative wealth eect.[7] The knowledge makes it dicult to share information
overall net eect of M&A transactions appears to be pos- during acquisition.
itive: almost all studies report positive returns for the
2. For acquired rm symbolic and cultural indepen-
investors in the combined buyer and target rms. This
dence which is the base of technology and capabil-
implies that M&A creates economic value, presumably
ities are more important than administrative inde-
by transferring assets to management teams that operate
pendence.
them more eciently (see Douma & Schreuder, 2013,
chapter 13). 3. Detailed knowledge exchange and integrations are
There are also a variety of structures used in securing con- dicult when the acquired rm is large and high
trol over the assets of a company, which have dierent tax performing.
and regulatory implications: 4. Management of executives from acquired rm is
critical in terms of promotions and pay incentives
The buyer buys the shares, and therefore control, to utilize their talent and value their expertise.
of the target company being purchased. Owner-
5. Transfer of technologies and capabilities are most
ship control of the company in turn conveys eec-
dicult task to manage because of complications of
tive control over the assets of the company, but since
acquisition implementation. The risk of losing im-
the company is acquired intact as a going concern,
plicit knowledge is always associated with the fast
this form of transaction carries with it all of the li-
pace acquisition.
abilities accrued by that business over its past and
all of the risks that company faces in its commercial
An increase in acquisitions in the global business environ-
environment.
ment requires enterprises to evaluate the key stake holders
of acquisition very carefully before implementation. It is
The buyer buys the assets of the target company.
imperative for the acquirer to understand this relation-
The cash the target receives from the sell-o is paid
ship and apply it to its advantage. Employee retention is
back to its shareholders by dividend or through liq-
only possible when resources are exchanged and managed
uidation. This type of transaction leaves the target
without aecting their independence.[9]
company as an empty shell, if the buyer buys out
the entire assets. A buyer often structures the trans-
action as an asset purchase to cherry-pick the as-
sets that it wants and leave out the assets and liabil- 2 Legal structures
ities that it does not. This can be particularly im-
portant where foreseeable liabilities may include fu- Corporate acquisitions can be characterized for legal pur-
ture, unquantied damage awards such as those that poses as either asset purchases in which the seller sells
could arise from litigation over defective products, business assets to the buyer, or equity purchases in
employee benets or terminations, or environmen- which the buyer purchases equity interests in a target
tal damage. A disadvantage of this structure is the company from one or more selling shareholders. Asset
tax that many jurisdictions, particularly outside the purchases are common in technology transactions where
United States, impose on transfers of the individual the buyer is most interested in particular intellectual prop-
assets, whereas stock transactions can frequently be erty rights but does not want to acquire liabilities or other
structured as like-kind exchanges or other arrange- contractual relationships.[10] An asset purchase structure
ments that are tax-free or tax-neutral, both to the may also be used when the buyer wishes to buy a particu-
buyer and to the sellers shareholders. lar division or unit of a company which is not a separate
legal entity. There are numerous challenges particular to
The terms "demerger", "spin-o" and spin-out are this type of transaction, including isolating the specic
sometimes used to indicate a situation where one com- assets and liabilities that pertain to the unit, determin-
pany splits into two, generating a second company which ing whether the unit utilizes services from other units of
may or may not become separately listed on a stock ex- the selling company, transferring employees, transferring
change. permits and licenses, and ensuring that the seller does not
compete with the buyer in the same business area in the
As per knowledge-based views, rms can generate future.[11]
greater values through the retention of knowledge-based
resources which they generate and integrate.[8] Extracting Structuring the sale of a nancially distressed company
technological benets during and after acquisition is ever is uniquely dicult due to the treatment of non-compete
challenging issue because of organizational dierences. covenants, consulting[12]agreements, and business goodwill
Based on the content analysis of seven interviews authors in such transactions.
concluded ve following components for their grounded Mergers, asset purchases and equity purchases are each
model of acquisition: taxed dierently, and the most benecial structure for tax

purposes is highly situation-dependent. One hybrid form
often employed for tax purposes is a triangular merger,
where the target company merges with a shell company
wholly owned by the buyer, thus becoming a subsidiary
of the buyer. In a forward triangular merger, the buyer
causes the target company to merge into the subsidiary; a
reverse triangular merger is similar except that the sub-
sidiary merges into the target company. Under the U.S.
Internal Revenue Code, a forward triangular merger is
taxed as if the target company sold its assets to the shell
company and then liquidated, whereas a reverse triangu-
lar merger is taxed as if the target companys shareholders
sold their stock in the target company to the buyer.[13]
3 Documentation
The documentation of an M&A transaction often begins
with a letter of intent. The letter of intent generally does
not bind the parties to commit to a transaction, but may
bind the parties to condentiality and exclusivity obliga-
tions so that the transaction can be considered through a
due diligence process involving lawyers, accountants, tax
advisors, and other professionals, as well as business peo-
ple from both sides.[11]
After due diligence is completed, the parties may proceed
to draw up a denitive agreement, known as a merger
agreement, share purchase agreement or asset pur-
chase agreement depending on the structure of the trans-
action. Such contracts are typically 80 to 100 pages long
and focus on ve key types of terms:[14]
Conditions, which must be satised before there is
an obligation to complete the transaction. Condi-
tions typically include matters such as regulatory ap-
provals and the lack of any material adverse change
in the targets business.
Representations and warranties by the seller with re-
gard to the company, which are claimed to be true
at both the time of signing and the time of closing. 4 Business valuation
Sellers often attempt to craft their representations
and warranties with knowledge qualiers, dictating The ve most common ways to value a business are
the level of knowledge applicable and which seller
parties knowledge is relevant.[15] Some agreements
provide that if the representations and warranties by
the seller prove to be false, the buyer may claim
a refund of part of the purchase price, as is com-
mon in transactions involving privately held com-
panies (although in most acquisition agreements in-
volving public company targets, the representations
and warranties of the seller do not survive the clos-
ing). Representations regarding a target companys
net working capital are a common source of post-
closing disputes.
Professionals who value businesses generally do not use
Covenants, which govern the conduct of the parties, just one of these methods but a combination of some of
both before the closing (such as covenants that re- them, as well as possibly others that are not mentioned
3
strict the operations of the business between signing
and closing) and after the closing (such as covenants
regarding future income tax lings and tax liability
or post-closing restrictions agreed to by the buyer
and seller parties).
Termination rights, which may be triggered by a
breach of contract, a failure to satisfy certain con-
ditions or the passage of a certain period of time
without consummating the transaction, and fees and
damages payable in case of a termination for certain
events (also known as breakup fees).
Provisions relating to obtaining required shareholder
approvals under state law and related SEC lings re-
quired under federal law, if applicable, and terms
related to the mechanics of the legal transactions to
be consummated at closing (such as the determina-
tion and allocation of the purchase price and post-
closing adjustments (such as adjustments after the
nal determination of working capital at closing or
earnout payments payable to the sellers), repayment
of outstanding debt, and the treatment of outstand-
ing shares, options and other equity interests).
An indemnication provision, which provides that
an indemnitor will indemnify, defend, and hold
harmless the indemnitee(s) for losses incurred by
the indemnitees as a result of the indemnitors
breach of its contractual obligations in the purchase
agreement[16]
Post-closing, adjustments may still occur to certain provi-
sions of the purchase agreement, including the purchase
price. These adjustments are subject to enforceability is-
sues in certain situations.[17] Alternatively, certain trans-
actions use the 'locked box' approach where the purchase
price is xed at signing and based on sellers equity value
at a pre-signing date and an interest charge.[18]
asset valuation,
historical earnings valuation,
future maintainable earnings valuation,
relative valuation (comparable company and
comparable transactions),
discounted cash ow (DCF) valuation
4 5 FINANCING
above, in order to obtain a more accurate value. The in- They receive stock in the company that is purchasing the
formation in the balance sheet or income statement is ob- smaller subsidiary.
tained by one of three accounting measures: a Notice to
Reader, a Review Engagement or an Audit.
Accurate business valuation is one of the most important
aspects of M&A as valuations like these will have a major
eect on the price that a business will be sold for. Most
often this information is expressed in a Letter of Opinion
of Value (LOV) when the business is being valuated for
interests sake. There are other, more detailed ways of
expressing the value of a business. While these reports
generally get more detailed and expensive as the size of
a company increases, this is not always the case as there
are many complicated industries which require more at-
tention to detail, regardless of size.
Objectively evaluating the historical and prospective per-
formance of a business is a challenge faced by many.
Generally, parties rely on independent third parties to
conduct due diligence studies or business assessments.
To yield the most value from a business assessment, ob-
jectives should be clearly dened and the right resources
should be chosen to conduct the assessment in the avail-
able timeframe.[19]
As synergy plays a large role in the valuation of acquisi-
tions, it is paramount to get the value of synergies right.
Synergies are dierent from the sales price valuation
of the rm, as they will accrue to the buyer. Hence, the
analysis should be done from the acquiring rms point
of view. Synergy-creating investments are started by the
choice of the acquirer, and therefore they are not oblig-
atory, making them essentially real options. To include
this real options aspect into analysis of acquisition targets
is one interesting issue that has been studied lately.[20]
5 Financing
Mergers are generally dierentiated from acquisitions
partly by the way in which they are nanced and partly
by the relative size of the companies. Various methods
of nancing an M&A deal exist:
5.1 Cash
Payment by cash. Such transactions are usually termed
acquisitions rather than mergers because the sharehold-
ers of the target company are removed from the picture
and the target comes under the (indirect) control of the If the buyer pays with stock, the nancing possibilities
bidders shareholders. are:
5.2 Stock
Payment in the form of the acquiring companys stock,
issued to the shareholders of the acquired company at
a given ratio proportional to the valuation of the latter.
5.3 Financing options
There are some elements to think about when choosing
the form of payment. When submitting an oer, the ac-
quiring rm should consider other potential bidders and
think strategically. The form of payment might be deci-
sive for the seller. With pure cash deals, there is no doubt
on the real value of the bid (without considering an even-
tual earnout). The contingency of the share payment is
indeed removed. Thus, a cash oer preempts competi-
tors better than securities. Taxes are a second element
to consider and should be evaluated with the counsel of
competent tax and accounting advisers. Third, with a
share deal the buyers capital structure might be aected
and the control of the buyer modied. If the issuance of
shares is necessary, shareholders of the acquiring com-
pany might prevent such capital increase at the general
meeting of shareholders. The risk is removed with a cash
transaction. Then, the balance sheet of the buyer will
be modied and the decision maker should take into ac-
count the eects on the reported nancial results. For
example, in a pure cash deal (nanced from the com-
panys current account), liquidity ratios might decrease.
On the other hand, in a pure stock for stock transaction
(nanced from the issuance of new shares), the company
might show lower protability ratios (e.g. ROA). How-
ever, economic dilution must prevail towards accounting
dilution when making the choice. The form of payment
and nancing options are tightly linked. If the buyer pays
cash, there are three main nancing options:
Cash on hand: it consumes nancial slack (excess
cash or unused debt capacity) and may decrease debt
rating. There are no major transaction costs.
Issue of debt: It consumes nancial slack, may de-
crease debt rating and increase cost of debt. Trans-
action costs include underwriting or closing costs of
1% to 3% of the face value.
Issue of stock: it increases nancial slack, may im-
prove debt rating and reduce cost of debt. Trans-
action costs include fees for preparation of a proxy
statement, an extraordinary shareholder meeting
and registration.
Issue of stock (same eects and transaction costs as
described above).
Shares in treasury: it increases nancial slack (if
they dont have to be repurchased on the market),
may improve debt rating and reduce cost of debt.
7.1 Improving nancial performance or reducing risk
Transaction costs include brokerage fees if shares
are repurchased in the market otherwise there are
no major costs.
In general, stock will create nancial exibility. Transac-
tion costs must also be considered but tend to aect the
payment decision more for larger transactions. Finally,
paying cash or with shares is a way to signal value to the
other party, e.g.: buyers tend to oer stock when they
believe their shares are overvalued and cash when under-
valued.
Parties should also consider their accounting treatment of
M&A transaction costs and ensure they comply with De-
partment of Treasury regulations, including the applica-
bility of the end of the day and next day rules.[21]
6 Specialist advisory rms
M&A advice is provided by full-service investment
banks- who often advise and handle the biggest deals in
the world (called bulge bracket) - and specialist M&A
rms, who only provide M&A advisory, generally to mid-
market, select industries and SBEs.
7 Motivation
7.1 Improving nancial performance or
reducing risk
The dominant rationale used to explain M&A activity is
that acquiring rms seek improved nancial performance
or reduce risk. The following motives are considered to
improve nancial performance or reduce risk:
Economy of scale: This refers to the fact that the
combined company can often reduce its xed costs
by removing duplicate departments or operations,
lowering the costs of the company relative to the
same revenue stream, thus increasing prot margins.
Economy of scope: This refers to the ecien-
cies primarily associated with demand-side changes,
such as increasing or decreasing the scope of mar-
keting and distribution, of dierent types of prod-
ucts.
Increased revenue or market share: This assumes
that the buyer will be absorbing a major competi-
tor and thus increase its market power (by capturing
increased market share) to set prices.
Cross-selling: For example, a bank buying a stock
broker could then sell its banking products to the
stock brokers customers, while the broker can sign
up the banks customers for brokerage accounts. Or,
5
a manufacturer can acquire and sell complementary
products.
Synergy: For example, managerial economies such
as the increased opportunity of managerial special-
ization. Another example is purchasing economies
due to increased order size and associated bulk-
buying discounts.
Taxation: A protable company can buy a loss
maker to use the targets loss as their advantage by
reducing their tax liability. In the United States and
many other countries, rules are in place to limit the
ability of protable companies to shop for loss
making companies, limiting the tax motive of an ac-
quiring company.
Geographical or other diversication: This is de-
signed to smooth the earnings results of a company,
which over the long term smoothens the stock price
of a company, giving conservative investors more
condence in investing in the company. However,
this does not always deliver value to shareholders
(see below).
Resource transfer: resources are unevenly dis-
tributed across rms (Barney, 1991) and the interac-
tion of target and acquiring rm resources can create
value through either overcoming information asym-
metry or by combining scarce resources.[22]
Vertical integration: Vertical integration occurs
when an upstream and downstream rm merge (or
one acquires the other). There are several rea-
sons for this to occur. One reason is to inter-
nalise an externality problem. A common exam-
ple of such an externality is double marginalization.
Double marginalization occurs when both the up-
stream and downstream rms have monopoly power
and each rm reduces output from the competi-
tive level to the monopoly level, creating two dead-
weight losses. Following a merger, the vertically in-
tegrated rm can collect one deadweight loss by set-
ting the downstream rms output to the competitive
level. This increases prots and consumer surplus.
A merger that creates a vertically integrated rm can
be protable.[23]
Hiring: some companies use acquisitions as an al-
ternative to the normal hiring process. This is es-
pecially common when the target is a small private
company or is in the startup phase. In this case, the
acquiring company simply hires (acquhires) the
sta of the target private company, thereby acquir-
ing its talent (if that is its main asset and appeal).
The target private company simply dissolves and few
legal issues are involved.
Absorption of similar businesses under single man-
agement: similar portfolio invested by two dierent
mutual funds namely united money market fund and
6 8 DIFFERENT TYPES

united growth and income fund, caused the man- buys another health care system. This means that
agement to absorb united money market fund into synergy can be obtained through many forms includ-
united growth and income fund. ing such as; increased market share, cost savings and
exploring new market opportunities.
Access to hidden or nonperforming assets (land, real
estate).
A vertical merger represents the buying of supplier
Acquire innovative intellectual property. [24] of a business. In the same example as above if a
health care system buys the ambulance services from
their service suppliers is an example of vertical buy-
Megadealsdeals of at least one $1 billion in sizetend
ing. The vertical buying is aimed at reducing over-
to fall into four discrete categories: consolidation, capa-
head cost of operations and economy of scale.
bilities extension, technology-driven market transforma-
tion, and going private.[25]
Conglomerate M&A is the third form of M&A pro-
cess which deals the merger between two irrelevant
7.2 Other types companies. The example of conglomerate M&A
with relevance to above scenario would be if health
However, on average and across the most commonly stud- care system buys a restaurant chain. The objective
ied variables, acquiring rms nancial performance does may be diversication of capital investment.[27]
not positively change as a function of their acquisition
activity.[26] Therefore, additional motives for merger and
acquisition that may not add shareholder value include: 8.2 Arms length mergers
Diversication: While this may hedge a company An arms length merger is a merger:
against a downturn in an individual industry it fails
to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversi- 1. approved by disinterested directors and
fying their portfolios at a much lower cost than those
associated with a merger. (In his book One Up on 2. approved by disinterested stockholders:
Wall Street, Peter Lynch termed this diworseica-
tion.)
The two elements are complementary and not substi-
Managers hubris: managers overcondence about tutes. The rst element is important because the di-
expected synergies from M&A which results in rectors have the capability to act as eective and ac-
overpayment for the target company. tive bargaining agents, which disaggregated stockholders
do not. But, because bargaining agents are not always
Empire-building: Managers have larger companies eective or faithful, the second element is critical, be-
to manage and hence more power. cause it gives the minority stockholders the opportunity
to reject their agents work. Therefore, when a merger
Managers compensation: In the past, certain exec-
with a controlling stockholder was: 1) negotiated and
utive management teams had their payout based on
approved by a special committee of independent direc-
the total amount of prot of the company, instead
tors; and 2) conditioned on an armative vote of a ma-
of the prot per share, which would give the team
jority of the minority stockholders, the business judg-
a perverse incentive to buy companies to increase
ment standard of review should presumptively apply, and
the total prot while decreasing the prot per share
any plainti ought to have to plead particularized facts
(which hurts the owners of the company, the share-
that, if true, support an inference that, despite the facially
holders).
fair process, the merger was tainted because of duciary
wrongdoing.[28]

8 Dierent types
8.3 Strategic mergers
8.1 By functional roles in market
A Strategic merger usually refers to long term strategic
The M&A process itself is a multifaceted which depends holding of target (Acquired) rm. This type of M&A
upon the type of merging companies. process aims at creating synergies in the long run by in-
creased market share, broad customer base, and corpo-
A horizontal merger is usually between two compa- rate strength of business. A strategic acquirer may also
nies in the same business sector. The example of be willing to pay a premium oer to target rm in the
horizontal merger would be if a health care system outlook of the synergy value created after M&A process.

8.4 Acqui-hire
The term acqui-hire is used to refer to acquisitions
where the acquiring company seeks to obtain the target
companys talent, rather than their products (which are
often discontinued as part of the acquisition so the team
can focus on projects for their new employer). In recent
years, these types of acquisitions have become common
in the technology industry, where major web companies
such as Facebook, Twitter, and Yahoo! have frequently
used talent acquisitions to add expertise in particular ar-
eas to their workforces.[29][30]
8.5 Merger of Equals
Merger of equals is often a combination of companies of
a similar size. Since 1991, there have been more than 600
M&A transactions announced as mergers of equals with
a total value of USD 2'126 bil.[31] Some of the largest
mergers of equals took place during the dot.com bubble
of the late 1990s and in the year 2000: AOL and Time-
Warner (USD 164 bil.), SmithKline Beecham and Glaxo
Wellcome (USD 75 bil.), Citicorp and Travelers Group
(USD 72 bil.). More recent examples this type of com-
binations are DuPont and Dow Chemical (USD 62 bil.)
and Praxair and Linde (USD 35 bil.).
9 Research and statistics for ac-
quired organizations
An analysis of 1,600 companies across industries revealed
the rewards for M&A activity were greater for consumer
products companies than the average company. For the
period 2000-2010, consumer products companies turned
in an average annual TSR of 7.4%, while the average for
all companies was 4.8%.[32]
Given that the cost of replacing an executive can run
over 100% of his or her annual salary, any investment
of time and energy in re-recruitment will likely pay for
itself many times over if it helps a business retain just a
handful of key players that would have otherwise left.
Organizations should move rapidly to re-recruit key man-
agers. Its much easier to succeed with a team of quality
players that one selects deliberately rather than try to win
a game with those who randomly show up to play.
10 Brand considerations
Mergers and acquisitions often create brand problems,
beginning with what to call the company after the trans-
action and going down into detail about what to do about
overlapping and competing product brands. Decisions
7
about what brand equity to write o are not inconsequen-
tial. And, given the ability for the right brand choices to
drive preference and earn a price premium, the future
success of a merger or acquisition depends on making
wise brand choices. Brand decision-makers essentially
can choose from four dierent approaches to dealing with
naming issues, each with specic pros and cons:[33]
1. Keep one name and discontinue the other. The
strongest legacy brand with the best prospects for the
future lives on. In the merger of United Airlines and
Continental Airlines, the United brand will continue
forward, while Continental is retired.
2. Keep one name and demote the other. The strongest
name becomes the company name and the weaker
one is demoted to a divisional brand or product
brand. An example is Caterpillar Inc. keeping the
Bucyrus International name.[34]
3. Keep both names and use them together. Some
companies try to please everyone and keep the
value of both brands by using them together. This
can create an unwieldy name, as in the case of
PricewaterhouseCoopers, which has since changed
its brand name to PwC.
4. Discard both legacy names and adopt a totally new
one. The classic example is the merger of Bell At-
lantic with GTE, which became Verizon Communi-
cations. Not every merger with a new name is suc-
cessful. By consolidating into YRC Worldwide, the
company lost the considerable value of both Yellow
Freight and Roadway Corp.
The factors inuencing brand decisions in a merger or ac-
quisition transaction can range from political to tactical.
Ego can drive choice just as well as rational factors such as
brand value and costs involved with changing brands.[34]
Beyond the bigger issue of what to call the company after
the transaction comes the ongoing detailed choices about
what divisional, product and service brands to keep. The
detailed decisions about the brand portfolio are covered
under the topic brand architecture.
11 History
Most histories of M&A begin in the late 19th century
U.S. However, mergers coincide historically with the ex-
istence of companies. In 1708, for example, the East In-
dia Company merged with an erstwhile competitor to re-
store its monopoly over Indian trade. In 1784, the Italian
Monte dei Paschi and Monte Pio banks were united as the
Monti Reuniti.[35] In 1821, the Hudsons Bay Company
merged with the rival North West Company.
8 11 HISTORY

11.1 The Great Merger Movement: 1895 prices, in order to spread out the high xed costs these
1905 producers faced (i.e. lowering cost per unit) and the de-
sire to exploit eciencies of maximum volume produc-
The Great Merger Movement was a predominantly U.S. tion. However, during the Panic of 1893, the fall in de-
business phenomenon that happened from 1895 to 1905. mand led to a steep fall in prices.
During this time, small rms with little market share con- Another economic model proposed by Naomi R. Lam-
solidated with similar rms to form large, powerful insti- oreaux for explaining the steep price falls is to view
tutions that dominated their markets. It is estimated that the involved rms acting as monopolies in their respec-
more than 1,800 of these rms disappeared into consoli- tive markets. As quasi-monopolists, rms set quantity
dations, many of which acquired substantial shares of the where marginal cost equals marginal revenue and price
markets in which they operated. The vehicle used were where this quantity intersects demand. When the Panic of
so-called trusts. In 1900 the value of rms acquired in 1893 hit, demand fell and along with demand, the rms
mergers was 20% of GDP. In 1990 the value was only marginal revenue fell as well. Given high xed costs,
3% and from 1998 to 2000 it was around 1011% of the new price was below average total cost, resulting in
GDP. Companies such as DuPont, US Steel, and General a loss. However, also being in a high xed costs industry,
Electric that merged during the Great Merger Movement these costs can be spread out through greater production
were able to keep their dominance in their respective sec- (i.e. Higher quantity produced). To return to the quasi-
tors through 1929, and in some cases today, due to grow- monopoly model, in order for a rm to earn prot, rms
ing technological advances of their products, patents, and would steal part of another rms market share by drop-
brand recognition by their customers. There were also ping their price slightly and producing to the point where
other companies that held the greatest market share in higher quantity and lower price exceeded their average to-
1905 but at the same time did not have the competitive tal cost. As other rms joined this practice, prices began
advantages of the companies like DuPont and General falling everywhere and a price war ensued.[36]
Electric. These companies such as International Paper
and American Chicle saw their market share decrease sig- One strategy to keep prices high and to maintain prof-
nicantly by 1929 as smaller competitors joined forces itability was for producers of the same good to collude
with each other and provided much more competition. with each other and form associations, also known as
The companies that merged were mass producers of ho- cartels. These cartels were thus able to raise prices right
mogeneous goods that could exploit the eciencies of away, sometimes more than doubling prices. However,
large volume production. In addition, many of these these prices set by cartels only provided a short-term so-
mergers were capital-intensive. Due to high xed costs, lution because cartel members would cheat on each other
when demand fell, these newly merged companies had by setting a lower price than the price set by the cartel.
an incentive to maintain output and reduce prices. How- Also, the high price set by the cartel would encourage new
ever more often than not mergers were quick mergers. rms to enter the industry and oer competitive pricing,
These quick mergers involved mergers of companies causing prices to fall once again. As a result, these cartels
with unrelated technology and dierent management. As did not succeed in maintaining high prices for a period
a result, the eciency gains associated with mergers were of more than a few years. The most viable solution to
not present. The new and bigger company would actually this problem was for rms to merge, through horizontal
face higher costs than competitors because of these tech- integration, with other top rms in the market in order to
nological and managerial dierences. Thus, the mergers control a large market share and thus successfully set a
were not done to see large eciency gains, they were in higher price.
fact done because that was the trend at the time. Com-
panies which had specic ne products, like ne writing 11.1.2 Long-run factors
paper, earned their prots on high margin rather than vol-
ume and took no part in Great Merger Movement. In the long run, due to desire to keep costs low, it was ad-
vantageous for rms to merge and reduce their transporta-
tion costs thus producing and transporting from one loca-
11.1.1 Short-run factors
tion rather than various sites of dierent companies as in
the past. Low transport costs, coupled with economies
One of the major short run factors that sparked The Great of scale also increased rm size by two- to fourfold dur-
Merger Movement was the desire to keep prices high. ing the second half of the nineteenth century. In addi-
However, high prices attracted the entry of new rms into tion, technological changes prior to the merger move-
the industry. ment within companies increased the ecient size of
A major catalyst behind the Great Merger Movement was plants with capital intensive assembly lines allowing for
the Panic of 1893, which led to a major decline in de- economies of scale. Thus improved technology and trans-
mand for many homogeneous goods. For producers of portation were forerunners to the Great Merger Move-
homogeneous goods, when demand falls, these produc- ment. In part due to competitors as mentioned above, and
ers have more of an incentive to maintain output and cut in part due to the government, however, many of these
12.2 M&A in emerging countries 9

initially successful mergers were eventually dismantled. necessity for agencies such as the Mergers and Acquisi-
The U.S. government passed the Sherman Act in 1890, tions International Clearing (MAIC), trust accounts and
setting rules against price xing and monopolies. Start- securities clearing services for Like-Kind Exchanges for
ing in the 1890s with such cases as Addyston Pipe and cross-border M&A. In 1997 alone, there were over 2,333
Steel Company v. United States, the courts attacked large cross-border transactions, worth a total of approximately
companies for strategizing with others or within their own $298 billion. The vast literature on empirical studies over
companies to maximize prots. Price xing with com- value creation in cross-border M&A is not conclusive, but
petitors created a greater incentive for companies to unite points to higher returns in cross-border M&As compared
and merge under one name so that they were not competi- to domestic ones when the acquirer rm has the capa-
tors anymore and technically not price xing. bility to exploit resources and knowledge of the targets
rm and of handling challenges. In China, for example,
The economic history has been divided into Merger
Waves based on the merger activities in the business world securing regulatory approval can be complex due to an
extensive group of various stakeholders at each level of
as:
government.[39] In the United Kingdom, acquirers may
face pension regulators with signicant powers,[40] in ad-
11.1.3 Objectives in more recent merger waves dition to an overall M&A environment that is generally
more seller-friendly than the U.S.[41] Nonetheless, the
During the third merger wave (19651989), corporate current surge in global cross-border M&A has been called
marriages involved more diverse companies. Acquirers the New Era of Global Economic Discovery.[42]
more frequently bought into dierent industries. Some- In little more than a decade, M&A deals in China in-
times this was done to smooth out cyclical bumps, to di- creased by a factor of 20, from 69 in 2000 to more than
versify, the hope being that it would hedge an investment 1,300 in 2013.[43]
portfolio.
In 2014, Europe registered its highest levels of M&A
Starting in the fth merger wave (19921998) and con- deal activity since the nancial crisis. Driven by U.S.
tinuing today, companies are more likely to acquire in the and Asian acquirers, inbound M&A, at $320.6 billion,
same business, or close to it, rms that complement and reached record highs by both deal value and deal count
strengthen an acquirers capacity to serve customers. since 2001.[44] Approximately 23 percent of the 416
Buyers arent necessarily hungry for the target compa- M&A deals announced in the U.S. M&A market in 2014
[45]
nies hard assets. Some are more interested in acquir- involved non-U.S. acquirers.
ing thoughts, methodologies, people and relationships. For 2016, market uncertainties, including Brexit and the
Paul Graham recognized this in his 2005 essay Hiring potential reform from a U.S. Presidential election, con-
is Obsolete, in which he theorizes that the free market tributed to cross-border M&A activity lagging roughly
is better at identifying talent, and that traditional hiring 20% behind 2015 activity.[46]
practices do not follow the principles of free market be-
cause they depend a lot upon credentials and university Even mergers of companies with headquarters in the
degrees. Graham was probably the rst to identify the same country can often be considered international in
trend in which large companies such as Google, Yahoo! scale and require MAIC custodial services. For ex-
or Microsoft were choosing to acquire startups instead of ample, when Boeing acquired McDonnell Douglas, the
hiring new recruits.[38] two American companies had to integrate operations in
dozens of countries around the world (1997). This is
Many companies are being bought for their patents, li- just as true for other apparently single-country merg-
censes, market share, name brand, research sta, meth- ers, such as the 29 billion-dollar merger of Swiss drug
ods, customer base, or culture. Soft capital, like this, is makers Sandoz and Ciba-Geigy (now Novartis).
very perishable, fragile, and uid. Integrating it usually
takes more nesse and expertise than integrating machin-
ery, real estate, inventory and other tangibles. 12.2 M&A in emerging countries
M&A practice in emerging countries diers from more
12 Cross-border mature economies, although transaction management and
valuation tools (e.g. DCF, comparables) share a common
basic methodology. In China, India or Brazil for exam-
12.1 Introduction ple, dierences aect the formation of asset price and on
the structuring of deals. Protability expectations (e.g.
In a study conducted in 2000 by Lehman Brothers, it was shorter time horizon, no terminal value due to low visibil-
found that, on average, large M&A deals cause the do- ity) and risk represented by a discount rate must both be
mestic currency of the target corporation to appreciate properly adjusted.[47] In a M&A perspective, dierences
by 1% relative to the acquirers local currency. between emerging and more mature economies include:
The rise of globalization has exponentially increased the i) a less developed system of property rights, ii) less reli-
10 15 SEE ALSO

able nancial information, iii) cultural dierences in ne- 13 Failure

gotiations, and iv) a higher degree of competition for the
best targets. Despite the goal of performance improvement, results
from mergers and acquisitions (M&A) are often disap-
pointing compared with results predicted or expected.
Property rights:[48] the capacity to transfer prop- Numerous empirical studies show high failure rates of
erty rights and legally enforce the protection of such M&A deals. Studies are mostly focused on individual de-
rights after payment may be questionable. Property terminants. A book by Thomas Straub (2007) Reasons
transfer through the Stock Purchase Agreement can for frequent failure in Mergers and Acquisitions[51] de-
be imperfect (e.g. no real warranties) and even re- velops a comprehensive research framework that bridges
versible (e.g. one of the multiple administrative au- dierent perspectives and promotes an understanding of
thorizations needed not granted after closing) lead- factors underlying M&A performance in business re-
ing to situations where costly remedial actions may search and scholarship. The study should help man-
be necessary. When the rule of law is not estab- agers in the decision making process. The rst important
lished, corruption can be a rampant problem. step towards this objective is the development of a com-
mon frame of reference that spans conicting theoreti-
cal assumptions from dierent perspectives. On this ba-
Information:[49] documentation delivered to a buyer
sis, a comprehensive framework is proposed with which
may be scarce with a limited level of reliability. As
to understand the origins of M&A performance better
an example, double sets of accounting are common
and address the problem of fragmentation by integrat-
practice and blur the capacity to form a correct judg-
ing the most important competing perspectives in respect
ment. Running valuation on such basis bears the risk
of studies on M&A. Furthermore, according to the ex-
to lead to erroneous conclusions. Therefore, build-
isting literature, relevant determinants of rm perfor-
ing a reliable knowledge base on observable facts
mance are derived from each dimension of the model.
and on the result of focused due diligences, such as
For the dimension strategic management, the six strate-
recurring protability measured by EBITDA, is a
gic variables: market similarity, market complementar-
good starting point.
ities, production operation similarity, production oper-
ation complementarities, market power, and purchasing
Negotiation: Yes may not be synonym that the power were identied as having an important eect on
[50]

parties have reached an agreement. Getting imme- M&A performance. For the dimension organizational
diately to the point may not be considered appropri- behavior, the variables acquisition experience, relative
ate in some cultures and even considered rude. The size, and cultural dierences were found to be impor-
negotiations may continue to the last minute, some- tant. Finally, relevant determinants of M&A perfor-
times even after the deal has been ocially closed, mance from the nancial eld were acquisition premium,
if the seller keeps some leverage, like a minority bidding process, and due diligence. Three dierent ways
stake, in the divested entity. Therefore, establish- in order to best measure post M&A performance are rec-
ing a strong local business network before starting ognized: synergy realization, absolute performance, and
acquisitions is usually a prerequisite to get to know nally relative performance.
trustable parties to deal with and have allies. Employee turnover contributes to M&A failures. The
turnover in target companies is double the turnover expe-
rienced in non-merged rms for the ten years following
Competition: the race to acquire the best companies the merger.
in an emerging economy can generate a high degree
of competition and inate transaction prices, as a
consequence of limited available targets. This may
push for poor management decisions; before invest- 14 Major
ment, time is always needed to build a reliable set of
information on the competitive landscape. Main article: List of largest mergers and acquisitions

If not properly dealt with, these factors will likely have

adverse consequences on return-on-investment (ROI) and 15 See also
create diculties in day-to-day business operations. It is
advisable that M&A tools designed for mature economies
Competition regulator
are not directly used in emerging markets without some
adjustment. M&A teams need time to adapt and under- Consolidation (business)
stand the key operating dierences between their home
environment and their new market. Control premium
 11

Corporate advisory [8] Rumyantseva, Maria, Grzegorz Gurgul, and Ellen Enkel.
Knowledge Integration after Mergers & Acquisitions.
Divestiture University of Mississippi Business Department. Univer-
sity of Mississippi, July 2002.
Factoring (nance)
[9] Ranft, Annette L., and Michael D. Lord. Acquiring
Fairness opinion new technologies and capabilities: A grounded model of
acquisition implementation. Organization science 13.4
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List of bank mergers in United States [10] Moore, Jim. Get acquired! An idiots guide to technol-
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[11] Mergers & Acquisitions Quick Reference Guide (PDF).
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[12] Gilbert, Katherine. Transaction Structure Issues Regard-
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[13] Grin, William F. Tax Aspects of Corporate Mergers
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[14] Barusch, Ronald. WSJ M&A 101: A Guide to Merger
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[15] Avery, Daniel; Crossley, Kyle. Use of Knowledge Qual-
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[16] Huang, Lilly. Trends in M&A Provisions: Stand-Alone
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DiC Entertainment (Merged Into Cookie Jar Group)
[17] Stark, Lisa; Pearlman, Jessica. Drafting Around Land-
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Rovio Entertainment Merged With Western Enter-
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16 References [19] Wikel, Daniel; Kazin, Matthew; Sweigart, Lee.

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[3] Derek van der Plaat (9 September 2013). Four Com-
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[6] Harwood, 2005 [23] Maddigan, Ruth; Zaima, Janis (1985). The Protability
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[7] The Economist, 'The new rules of attraction', 15 Nov 2014 nomics. 6 (3): 178179. doi:10.1002/mde.4090060310.
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[25] Fisher, Rob; Nahass, Gregg; Neely, J. Megadeals:
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[26] King, D. R.; Dalton, D. R.; Daily, C. M.; Covin, J. G.
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[27] An Overview of the Dierent Types of Mergers and Ac-
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[28] In re Cox Communications, Inc. Shareholders Litig., 879
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[31] M&A by Transaction Type - IMAA-Institute. IMAA-
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[32] Meacham, Matthew; Van Den Branden, Jean-Charles;
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[33] NewsBeast And Other Merger Name Options Mer-
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[34] Caterpillars New LegsAcquiring the Bucyrus Interna-
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[35] Monte dei Paschi di Siena Bank | About us | History | The
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[36] Lamoreaux, Naomi R. The great merger movement in
American business, 1895-1904. Cambridge University
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[37] http://www.kpmg.com/ZA/en/IssuesAndInsights/
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[38] Hiring is Obsolete. Retrieved 18 February 2015.
[39] Yang, Veronique; Liang, Rick; Walters, Je; Hsu, Hubert;
Kengelbach, Jens; Hammoud, Tawk. M&A In China:
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[40] Postill, Stephen. M&A: Navigating the Pensions Issue.
Transaction Advisors. ISSN 2329-9134.
[41] Plant, Nicholas; Gajer, Paul A.; Rist, Steven L.; Johnson,
Andrea C. Private Equity Transactions in the UK. ISSN
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17 FURTHER READING
[42] Ayisi-Cromwell, M. The New Era of Global Economic
Discovery: Opportunities and Challenges. Thomson
Reuters Emerging Markets Investment Forum. New
York, NY. 19 Sep. 2012. Chairmans Opening Remarks.
[43] Luedi, Thomas; Sun, Jian; He, Sherri L.; Leung, Frankie;
Rothenbecher, Jrgen; Graef, Andreas; Sauerberg, Bas-
tian; McCool, Michael. Creating More Value for Chinas
M&A. Transaction Advisors. ISSN 2329-9134.
[44] Corte, Lorenzo; Grumberg, Armand; Horbach, Matthias;
Attar-Rezvani, Arash. The Newfound Attractiveness of
European M&A. Transaction Advisors. ISSN 2329-
9134.
[45] Gerstein, Mark; Allinson, David; Faris, Bradley.
Acquiring a U.S. Public Company: An Overview for the
Non-U.S. Acquirer. Transaction Advisors. ISSN 2329-
9134.
[46] Casey, George; El Guindy, Arslan; Kochman, Cary;
Jaehnert, Frank; Bialek, Jerry. Current Issues Asso-
ciated with the Planning, Negotiation and Execution of
Cross-border Transactions. Transaction Advisors. ISSN
2329-9134.
[47] Donald R. Lessart. Incorporting Country risk in the valu-
ation of oshore projects, MIT, Journal of Applied Cor-
porate Finance, volume 9, number 3, 1996
[48] Alchian, Armen, and Harold Demsetz. The Property
Rights Paradigm. Journal of Economic History 33, no.
1 (1973): 1627
[49] Feng Chen, Ole-Kristian Hope, Qingyuan Li, Xin Wang.
The Property Rights Paradigm.Financial Reporting
Quality and Investment Eciency of Private Firms in
Emerging Markets, working paper, University of Toronto,
Wuhan University Chinese University of Hong Kong, July
6, 2010
[50] as an illustration, Laurence J. Brahm. The art of the deal
in China. Tuttle Publishing, April 2007, 160 pages, ISBN
0804839026
[51] [Straub, Thomas (2007). Reasons for frequent failure
in Mergers and Acquisitions: A comprehensive analy-
sis. Wiesbaden: Deutscher Universitts-Verlag (DUV),
Gabler Edition Wissenschaft. ISBN 978-3-8350-0844-
1.]
17 Further reading
Denison, Daniel, Hooijberg, Robert, Lane, Nancy,
Lief, Colleen, (2012). Leading Culture Change in
Global Organizations. Creating One Culture Out
of Many, chapter 4. San Francisco: Jossey-Bass.
ISBN 9780470908846
Aharon, D.Y.; Gavious, I.; Yosef, R. (2010).
Stock market bubble eects on mergers and
acquisitions (PDF). The Quarterly Review of
Economics and Finance. 50 (4): 456470.
doi:10.1016/j.qref.2010.05.002.
 13

Cartwright, Susan; Schoenberg, Richard (2006).
Thirty Years of Mergers and Acquisitions Re-
search: Recent Advances and Future Opportuni-
ties. British Journal of Management. 17 (S1): S1
S5. doi:10.1111/j.1467-8551.2006.00475.x.
Bartram, Shnke M.; Burns, Natasha; Helwege,
Jean (September 2013). Foreign Currency Expo-
sure and Hedging: Evidence from Foreign Acquisi-
tions. Quarterly Journal of Finance. forthcoming.
and lawful proposals: The ex-ante and ex-post
'lookup'". Journal of Policy Modeling. 35 (4): 601
622. doi:10.1016/j.jpolmod.2012.12.001.
Reddy, K.S.; Agrawal, R.; Nangia, V.K. (2013).
Reengineering, crafting and comparing business
valuation models-the advisory exemplar. Inter-
national Journal of Commerce and Management.
23 (3): 216241. doi:10.1108/IJCoMA-07-2011-
0018.

Close, John Weir. A Giant Cow-tipping by Savages:
The Boom, Bust, and Boom Culture of M&A. New
York: Palgrave Macmilla. ISBN 9780230341814.
OCLC 828246072.
Coispeau, Olivier; Luo, Stephane (2015). Mergers
& Acquisitions and Partnerships in China. Sin-
gapore: World Scientic. p. 311. ISBN
9789814641029. OCLC 898052215.
DePamphilis, Donald (2008). Mergers, Acquisi-
tions, and Other Restructuring Activities. New York:
Elsevier, Academic Press. p. 740. ISBN 978-0-12-
374012-0.
Douma, Sytse & Hein Schreuder (2013). Eco-
nomic Approaches to Organizations, chapter 13.
5th edition. London: Pearson. ISBN 0273735292
ISBN 9780273735298
Reifenberger, Sabine (28 December 2012). M&A
Market: The New Normal. CFO Insight
Rosenbaum, Joshua; Joshua Pearl (2009). Invest-
ment Banking: Valuation, Leveraged Buyouts, and
Mergers & Acquisitions. Hoboken, NJ: John Wiley
& Sons. ISBN 0-470-44220-4.
Scott, Andy (2008). China Brieng: Mergers and
Acquisitions in China (2nd ed.).
Straub, Thomas (2007). Reasons for frequent fail-
ure in Mergers and Acquisitions: A comprehen-
sive analysis. Wiesbaden: Deutscher Universitts-
Verlag (DUV), Gabler Edition Wissenschaft. ISBN
978-3-8350-0844-1.

Fleuriet, Michel (2008). Investment Banking ex-

plained: An insiders guide to the industry. New
York, NY: McGraw Hill. ISBN 978-0-07-149733-
6.

Harwood, I. A. (2006). Condentiality con-

straints within mergers and acquisitions: gain-
ing insights through a 'bubble' metaphor. British
Journal of Management. 17 (4): 347359.
doi:10.1111/j.1467-8551.2005.00440.x.

Locke, Bryan; Singh, Harsh; Chung, Joanna; Fer-

guson, John J. Selling Acquisitions to Institutional
Investors, Proxy Handlers, Regulators, and the Fi-
nancial Media. Transaction Advisors. ISSN 2329-
9134.

Popp, Karl Michael (2013). Mergers and Acquisi-

tions in the Software Industry - foundations of due
diligence. Norderstedt: Books on demand. ISBN
978-3-7322-4381-5.

Reddy, K.S., Nangia, V.K., & Agrawal, R. (2014).

The 2007-2008 global nancial crisis, and cross-
border mergers and acquisitions: A 26-nation ex-
ploratory study. Global Journal of Emerging Mar-
ket Economies, 6(3), 257-281. http://eme.sagepub.
com/content/6/3/257.short

Reddy, K.S.; Nangia, V.K.; Agrawal, R. (2013).

Indian economic-policy reforms, bank mergers,
14 18 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

18 Text and image sources, contributors, and licenses

18.1 Text
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