Hostile Takeover as a Type of Corporate Acquisition or Merger - Assignment Example

Introduction

Hostile takeover refers to a special type of corporate acquisition or merger which usually takes place against the will of the board of directors and the company management of the target company. One of the hostile takeover attempts in the music industry took place in the year 2016 where Robert Coury, (an executive chairman of Mylan) led the Parma firm's unsuccessful attempt to acquire Pergo. This attempt was one of the largest hostile takeover battles between Pergo and Parma Digital Music Distribution Company where the management team of Pergo Company (Victim Company) strongly resisted the attempt to acquire their music company. This paper seeks to analyze the hostile takeover attempt between Parma and Pergo Music distribution companies looking through the strategies employed by the management teams of the two companies. The paper also seeks to provide SWOT analysis of Parma Digital Music Distribution Company (acquirer) looking through the financial analysis of the Pergo Company (target company).

Parma Digital Music Distribution Company would wish to be a world class music company that offers their customers the best kind of music entertainment experience from the start to the end with easy-to-follow instructions and quality delivery. The company is therefore forced to work tirelessly to continuously improve various aspects of music entertainment in all aspect of the world where people operate so as to create a better tomorrow than today. Despite these efforts, there are a lot of issues surrounding firms in the music industry among which are like stiff completion among the firms in industry, scarce resources for example funds, piracy among many other issues. These are some of the challenges that forces Companies like Parma to employ strategies of hostile takeovers of other firms so as to mitigate any emerging challenge of similar nature in the future. Also, the company employs the strategy of acquisition through hostile takeovers so as to develop a good capital base and a good customer base that will help it in competing favorably in the industry.

Among the strategies employed by the management team of Parma Company were; to use down raids strategy where they aim to purchase a substantial holding in the Pergo Company's equity through instructing the brokers to purchase the shares once the stock markets open up. Through the use of brokers to conduct the purchase of shares in the Pergo Company, the Parma (the acquirer) Company tries to mask its identity and thus its intent (Cross, 2009). Parma Company then gets the opportunity to build a substantial stake in its target especially in the going stock market prices; the plan is executed in the morning, and therefore management team of Pergo Company does not get the information about the purchase until it is late thus Parma Company possess the controlling interest.

Parma Digital music distribution company strive to offer the most attractive record labels and artist effective delivery solutions through the use of musical tools that would ensure that there is unparalleled support of the customers (Philip, 2007. The company believes in the freedom of creativity and that of music, and therefore, they want to provide musical tools to the artist so as to empower them to make music they love and offer them an opportunity to take control of their career. Secondly, they would wish to increase the annual music events and attendance by approximately 60% through mailing out other more invitations to the program sponsors and even volunteers. Lastly, to increase brand awareness to the target population especially the teenagers between the age of 18-35 through exhibiting a lot of upcoming community events at least three times a year.

SWOT analysis of Parma Digital Music Distribution Company (acquirer)

Strengths

Parma Digital music distribution Company has a lot of cost advantage with new technologies coming up from the digital revolution in the world of music. The company not only enjoys the cheaper cost of assembly of the studio equipment, but it also enjoys less cost of duplication of CDs, storage and shipping of the music equipment.

The position of the Parma Digital music distribution Company is a distinctive market niche following the fact that it is a micro-label recording company that has a lot of specialization majorly on both traditional and classic instrumental music. Also, Parma Digital music distribution Company also experiences growing customer base and customer loyalty that results in increased sales volume of the company especially among the target market groups. This growth experienced in the customer base is as a result of increased product lines characterized by emergence of new product lines and good geographical coverage of the listeners.

Weaknesses

Parma Digital music distribution Company has no clear strategic vision that it, the company needs a long-term vision that covers all aspects of business starting from marketing and management to distribution of the products.

Parma Digital music distribution division has a lot of competitive disadvantages following the fact it cannot enter the retail market because of its current situation of sales volume. Most of its competitors, therefore, takes the advantage of their position to attract more market power and influence thus they are capable of specifying when their music should be played and negotiate bigger contracts.

Opportunities

Parma Digital music distribution Company has got the chance of serving additional customer groups and as a result, they are capable of expanding their co-operation with other artists so as to enlarge their acoustic therapy and other product lines.

The emergence of the internet has made it possible for the company to carry out e-commerce and release a lot of MP3s and as a result increasing their sales volume globally.

Threats

There are a large number of new market entrants and growth of many smaller labels as a result of the digital revolution and because of this, Parma Digital music distribution Company has lost sales to substitute products like internet downloads.

Because of its weak market position, Parma Digital music distribution division is very vulnerable to industry driving forces following the fact that the company occupies micro-label market segment, and its major returns come as a result of the lower cost of the digital recording.

Financial analysis of Pergo Digital Music Distribution Company (target)

Balance sheet for Parma DigitalMusic Distribution Company

As at 31/12/2012

DRCR

Current assets$15,659,000

Cash and Cash Equivalents$20,284,000

Short-Term Investments$81,869,000

Net Receivables$7362000

Other Current Assets$o

Total Current Assets$125,174,000

Long-term assets

Long-Term Investments$3,246,000

Fixed Assets$40,245,000

Goodwill$0

Intangible Assets$0

Other Assets$5,556,000

Deferred Asset Charges$15,185,000

Total Assets$189,406,000

Current Liabilities

Accounts Payable$19,308,000

Short-Term Debt / Current Portion of Long-Term Debt$0

Other Current Liabilities$0

Total Current Liabilities$19,308,000

Long-Term Debt$105,058,000

Other Liabilities$48,259,000

Deferred Liability Charges$470,000

Misc. Stocks$322,000

Minority Interest$42,000

Total Liabilities$173,459,000

Stock Holders’ Equity

Common Stocks$40,000

Capital Surplus$20,976,000

Retained Earnings$18,077,000

Treasury Stock($292,000)

Other Equity$22,854,000)

Total Equity$15,947,000

Total Liabilities & Equity$189,406,000

Analysis of the ratios

Liquidity ratios

Current Ratio

=current assets/current liabilities*100

=125174000/19308000*100

=648%

Quick ratio= cash + cash equivalent+ short term investment+ current receivables

Current liabilities

=$20284+ $5806487/$19,308,000*100

Quick ratio=610%

This ratio indicates the ability of the company to pay off is current liabilities using its quick assets and when it is more than one, the company can service the liabilities using only its quick assets comfortably.

Cash ratio=cash + cash equivalent

Current liability

=$20,284,000/19308000*100

Cash ratio=105%

Cash ratio indicates how well the company can service its current liabilities using only cash and cash equivalent to do that; when the ratio is more than one, it means that the company can pay off all it current liabilities through the use of cash and cash equivalent

Profitability ratio

Profit margin=4%

Refers to the differences between net sales and the cost of goods sold, when the ratio is more than one as in this case then it means that the company have sold more goods that are good enough to service the cost involved in the sales.

Gross sales of Parma Digital Music Distribution Company=$ 320000

Return inwards=$12000

Total revenue=$10000

Total expenses=$5000

Net sales=gross sales-returns

=$32000-$12000

=20000

Nat income=total revenue- Total expenses

=$10000-$5000

=$5000

Profit margin ratio= Net Income/Net sales

Profit margin therefore=$20000/$5000*100%

Profit margin=4%

The profit margin ratio is used to measure the percentage of sales a company has made up of its net income that is, it measures the amount of profit produced at a certain level of sales. The ratio also indicates how well the company can manage its expenses about its net sales, and this becomes a sole reason why companies strive to attain higher profit margin ratios. They achieve this through generating a lot of revenues from sales of products or services as it keeps expenses low.

Conclusion

In this strategy, the board of directors especially of the target company rejects the offer of coming together, but the bidder company continues to pursue their interest in the acquisition. The bidder company may start the process of hostile takeover through an offer tender method where the raider company proposes to purchase the stocks of the target company at a fixed price that is above the going market rates. The hostile takeover may also take the form of acquisition where the raiding company tries to acquire the majority of interest especially in the stock of the company on the open market. If this proves to be very difficult or even expensive, then the bidder company may be forced to start the proxy fight where it persuades enough shareholders to try to replace the management team of the company with one which will support and approve the acquisition.

Reference

Cross, M. (2009). The legal environment of business: text and cases. Washington DC: Department of Business mamanegement press.

Philip, G. (2007). Business acounting. Newzealand journal of business studies, 4(2), 89-98.