MERGERS & TAKEOVERS1) Introduction Mergers and Takeovers (or Acquisitions) are two methods used by corporations within the scope of corporate finance to expand their business structure and activities on the national or international arena. A merger is said to take place when two companies of their own free will combine to form a larger company. There are three basic types of mergers: horizontal mergers, where two companies in the same line of business combine; vertical mergers, that combine a supplier and a user (such as an aero-engine company and an aircraft company); and conglomerate mergers, that join two companies in unrelated businesses.
A merger is financed by a stock swap (called an ‘all share deal’ in U. K) that involves stock deals with neither company paying money. A takeover or acquisition takes place when one company purchases another. In the U. K, takeovers are restricted only to public companies whose shares are traded publicly on the stock exchange. There are two types of takeovers: friendly takeovers, which take place with the full consent of the target company’s board and shareholders; and hostile takeovers, where the bidder bypasses the board (on the grounds that it is not acting in the best interests of the shareholders) and wrests control by purchasing a majority of the target company’s shares in the open market.
A takeover is generally financed by cash, though in some cases the finance takes a dual feature such as a combination of cash and stock, or cash and debt. 11- Wikipedia. (2007). Mergers & Acquisitions. 2) Why are mergers and takeovers attractive to Management? The first reason why mergers and takeovers are attractive to Management is that a near or total monopolistic market domination is created.
The combination of two companies result in more power in the market, effectively shutting out competition, and creating a situation conducive to increasing production and dictating prices at will. In case of vertical mergers, the advantage of cross-selling contributes to a powerful position (for example, a car company that takes over a care tyre company can switch over to using those tyres during its car manufacturing process, as well as strongly promote their sale to customers seeking to replace their car tyres).
This is the result of the synergism phenomenon, wherein two or more entities combine their actions to ensure a result greater than foreseen by knowing only the separate effects of each entity. 2 The second reason is that the company grows healthier financially as a result of the merger or takeover. Overall costs are radically lowered because the economies of scale rule that the production process results in an increase in the number of units produced, while the average cost of each unit drops significantly.
Cost-reduction, combined with increased production and a wider clientele can only have one result – a healthier company making more profit. In case of a takeover, the acquiring company can further increase profit by purchasing a loss-making company and using its tax write-offs to evade or reduce tax payments. 3 The third reason is that the company’s image to outsiders is enhanced. An important