Q1 What are the different types of Merger?
Answer:
- A Horizontal Merger is usually between two companies in the same business sector. The example of horizontal merger would be if a health care system buys another health care system. This means that synergy can be obtained through many forms including such as; increased market share, cost savings and exploring new market opportunities.
- A Vertical Merger represents the buying of supplier 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 buying. The vertical buying is aimed at reducing overhead cost of operations and economy of scale.
- Conglomerate Merger is the third form of M&A process which deals the merger between two irrelevant companies. The example of conglomerate M&A with relevance to above scenario would be if the health care system buys a restaurant chain. The objective may be diversification of capital investment.
- Congeneric Merger is a merger where the acquirer and the related companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquirer. These mergers represent an outward movement by the acquirer from its current business scenario to other related business activities.
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Q2 Write short notes on Friendly and Hostile takeover.
Answer:
Friendly takeover
The acquisition of one firm by another where the owners of both firms agree to the terms of the takeover transaction is known as friendly takeover.
Hostile takeover
A hostile takeover of a corporation results from a takeover that is opposed by the target corporation's directors. In a tender offer, an acquiring entity offers the target corporation's shareholders cash in exchange for their shares. If the acquiring corporation obtains enough shares, it can approve a merger resolution or, alternatively, simply operate the corporation as its subsidiary by replacing its directors and officers with its own appointees and direct corporate affairs in this manner.
Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders.
Q3 What are the various antitakeover strategies? or What do you mean by Defending against takeover bid?
Answer:
Takeover defenses include actions by managers to resist having their firms acquired by other companies. There are several methods to defend a takeover.
1. Crown Jewel Defense: The target company has the right to sell off the entire or some of the company’s most valuable assets when facing a hostile bid in the hope to make the company less attractive in the eyes of the acquiring company and to force a drawback of the bid.
2. Poison Pill: The logic behind the pill is to dilute the targeting company’s stock in the company so much that bidder never manages to achieve an important part of the company without the consensus of the board.
3. Poison Put: Here the company issue bonds which will encourage the holder of the bonds to cash in at higher prices which will result in Target Company being less attractive.
4. Greenmail: Greenmail involves repurchasing a block of shares which is held by a single shareholder or other shareholders at a premium over the stock price in return for an agreement called as standstill agreement. In this agreement it is stated that bidder will no longer be able to buy more shares for a period of time often longer than five years.
5. White Knight: The target company seeks for a friendly company which can acquire majority stake in the company and is therefore called a white knight. The intention of the white knight is to ensure that the company does not lose its management. In the hostile takeover there are lots of chances that the company acquired changes the management.
7. Golden Parachutes: A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. This will discourage the bidders and hostile takeover can be avoided.
7. Golden Parachutes: A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. This will discourage the bidders and hostile takeover can be avoided.
Q4 What do you mean by Takeover by reverse bid or Reverse Bid or Reverse Merger ?Acquirer Company and let the Acquirer Company defense itself which will call off the proposal of takeover. 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 financing) buys a publicly listed shell company, usually one with no business and limited assets.
Q4 What do you mean by Takeover by reverse bid or Reverse Bid or Reverse Merger?
Answer:
"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm 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 financing) buys a publicly listed shell company, usually one with no business and limited assets.
Three test requirement for takeover by reverse bid
1. The assets of the transferor company are greater than the transferee company.
2. Equity capital to be issued by the transferee company for acquisition should exceed its original share capital.
3. There should be a change of control in transferee company by way of introduction of a minority holder or group of holders
Q5 Write short note on Chop Shop Method.
Answer:
Chop shop methods seeks to identify the companies having different segments of operations which if separated can fetch more value. It’s simple
1. Find out the different business segments of the target company.
2. Calculate the value of the each of the basis (sales, assets etc.). It is the sum total of the (basis x applicable capitalization ratio).
3. Averageoftheallthebasiswillbetheaveragetheoreticalvalueofthetargetcompany.
Q6 Write short note on Leverage Buy Out (LBO).
Answer:
A leveraged buyout (LBO) is an acquisition (usually of a company, but can also be single assets such as a real estate property) where the purchase price is financed through a combination of equity and debt and in which the cash flows or assets of the target are used to secure and repay the debt.
A management buyout(MBO) is a form of acquisition where a company's existing manager acquires a large part or all of the company from either the parent company or from the private owners. of capital than the equity, the returns on the equity increase with increasing debt. The debt thus effectively serves as a lever to increase returns which explains the origin of the term LBO. LBOs can have many different forms such as Management Buy-out (MBO), Management Buy-in (MBI), secondary buyout and tertiary buyout, among others, and can occur in growth situations, restructuring situations and insolvencies.
Q7 Write short note on Management Buy Out (MBO).
Answer:
A management buyout(MBO) is a form of acquisition where a company's existing manager acquires a large part or all of the company from either the parent company or from the private owners.
Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the position of the buyers as managers of the company, An MBO can occur for a number of reasons
1. The owners of the business want to retire and want to sell the company to the management team they trust (and with whom they have worked for years).
2. The owners of the business have lost faith in the business and are willing to sell it to the management (who believes in the future of the business) in order to get some value for the business.
3. The managers see a value in the business that the current owners do not see and do not want to pursue.
Q8 Write short note on Financial Restructuring.
Answer:
Financialrestructuring,iscarriedoutinternallyinthefirmwiththeconsentofitsvariousstakeholders. Financial restructuring is a suitable mode of restructuring of corporate firms that have incurred accumulated sizable losses for / over an umber of years. As as equal, the share capital of such firms, in many cases, gets substantially eroded/lost; in fact in some cases, accumulated losses over the years may be more than share capital, causing negative net worth. Given such a dismal state of financial affairs, a vast majority of such firms are likely to have a dubious potential for liquidation. Can some of these firms be revived? Financial restructuring is one such a measure for the revival of only those firms that hold promise/prospects for better financial performance in the years to come. To achieve the desired objective, such firms warrant/merit a restart with a fresh balance sheet, which does not contain past accumulated losses and fictitious assets and shows share capital at its real / true worth.
Q9 Write short note on Demerger.
Answer:
Demerger:
The word ‘demerger’ is defined under the Income-tax Act, 1961. It refers to a situation where pursuant to a scheme for reconstruction/restructuring, an ‘undertaking’ is transferred or sold to another purchasing company or entity. The important point is that even after demerger, the transferring company would continue to exist and may do business.
Demerger is used as a suitable scheme in the following cases:
• Restructuring of an existing business
• Division of family-managed business
• Management ‘buy-out’.
While under the Income tax Act there is recognition of demerger only for restructuring as provided for under sections 391 – 394 of the Companies Act, in a larger context, demerger can happen in other situations also.
Q10 Write short note on ‘Economic Value Added’.
Answer:
✓ Economic Value Added method (EVA): It is defined in terms of returns earned by the company in excess of the minimum expected return of the shareholders. EVA is calculated as
follows:
✓ EVA = EBIT – Taxes – Cost of funds employed= Net operating profit after taxes – Cost of Capital employed.
✓ Where, net operating profit after taxes = Profit available to provide a return to lenders and the shareholders.
✓ Cost of Capital employed = Weighted average cost of capital x Capital employed.
✓ EVA is a residual income which a company earns after capital costs are deducted. It measures the profitability of a company after having taken into account the cost of all capital including equity. Therefore, EVA represents the value added to the shareholders by generating operating profits in excess of the cost of capital employed in the business. EVA increases if:
(i) Operating profits grow without employing additional capital.
(ii) Additional capital is invested in projects that give higher returns than the cost of incurring new capital and
(iii) Unproductive capital is liquidated i.e. curtailing the unproductive uses of capital.
Q11 Explain synergy in the context of Mergers and Acquisitions rest and and evaluate financial performance of a company. Several Companies have started showing EVA during a year as a part of the Annual Report. Infosys Technologies Ltd. and BPL Ltd. are a few of them.
Q11 Explain synergy in the context of Mergers and Acquisitions
Answer:
Synergy May be defined as follows:
V (AB) >V(A)+ V (B).
In other words the combined value of two firms or companies shall be more than their individual value. This may be result of complimentary services economics of scale or both.
A good example of complimentary activities can a company may have a good networking of branches and other company may have efficient production system. Thus the merged companies will be more efficient than individual companies.
On Similar lines, economics of large scale is also one of the reasons for synergy benefits. The main reason is that, the large scale production results in lower average cost of production e.g. reduction in overhead costs on account of sharing of central services such as accounting and finances, Office executives, top level management, legal, sales promotion and advertisement etc. These economics can be “real” arising out of reduction in factor input per unit of output, whereas pecuniary economics are realized from paying lower prices for fact or inputs to bulk transactions.
Corporate actions.
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This was a fantastic post! These were great questions and answers regarding mergers and acquisitions.