Mergers and Acquisitions - International Finance
Acquisition - The purchase of one firm by another
Merger - The combination of two firms into a new legal entity
Amalgamation - A genuine merger in which both sets of shareholders must approve the
Takeover = control is being transferred. Done through an acquisition. One company buys
another and takes over. Usually involves a transfer of cash, sometimes transfer of shares. A lot of
times want to call it a merger because it sounds better.
Merger – 2 equal companies come together and join. Can tell a lot when a company name is
Amalgamation – Canadian term for merger
Related businesses (horizontal relationships)
Transferring competitively valuable expertise
Combining the related activities of separate businesses into a single operation to lower
Exploiting common use of a well-known brand name
To increase the value of the organization. To get us closer to whatever that strategic vision was.
Related – acquire a company that’s in the same industry that we’re in. can be broken down to
-Horizontal – similar type product – often a competitor. Should be a stronger, bigger company if
buy both. Use same distributions. Can use same manufacturing to do both as an example.
Unreleatable – acquire a company that isn’t in the same industry as your company
VERTICAL INTEGRATION STRATEGIES
Vertical integration extends a firm’s competitive scope within same industry
o Backward into sources of supply
o Forward toward end-users of final product
Can aim at either full or partial integration No buying a similar company. Going backwards or forwards in the value chain.
Ex. Can’t find Gucci in stores like The Bay. Usually has their own stores because if you’re paying
that much for something, you better be treated well.
Favors capitalizing on a portfolio of businesses that are capable of delivering excellent
Entails hunting to acquire companies:
o Whose assets are undervalued
o That are financially distressed
o With high growth potential but are short on investment capital
Are good at choosing the right companies to buy and choosing when to sell them. Looking to buy
companies when their assets are undervalued, companies which are in financial distress but they
have the money to turn it around, or companies that are growing (small start ups that are doing
well in small region but don’t have the resources to take it further and expand)
MOTIVATIONS FOR MERGERS AND ACQUISITIONS
Creation of Synergy Motive for M&As
The primary motive should be the creation of synergy.
Synergy value is created from economies of integrating a target and acquiring a
company; the amount by which the value of the combined firm exceeds the sum value of
the two individual firms.
1 + 1 = 3
Syngergy is we’re able to capitalize things. Since we’re doing things together, it’s better than if
we were were working alone.
VALUE CREATION MOTIVATIONS FOR M&As
1. Economies of Scale
2. Economies of Scope
3. Complementary Strengths
Often merging of manufacturing facilities.
Economies of scale – bigger is better.
Economies of scope – based on products. Product line. Pepsie purchased Quaker. Didn’t
purchase it for the oatmeal but they really wanted Gatorade.
Complementary strengths – purchasing a company that has a strength that you don’t have.
Looking for companies that do something well that we don’t Efficiency Increases
New management team will be more efficient and add more value than what the target
The combined firm can make use of unused production/sales/marketing channel capacity
Reduced cash flow variability
Increase in debt capacity
Reduction in average issuing costs
Efficiency increases - Can make use of unused capacity. results in some job loss
Financing synergy – bigger companies tend to be able borrow at cheaper rates, tend to be in the
media a lot more – easier to attract lenders for stock or bond issues. Cheaper to issue shares
Make better use of tax deductions and credits
Permits new strategies that were not feasible prior to the acquisition. The acquisition of
new management skills, connections to markets or people, and new products/services
Strategic realignments – by merging with another company it puts us in a position we did not
have access before. Kraft purchasing Cadbury story
MANAGERIAL MOTIVATIONS FOR M&As
Managers may have their own motivations to pursue M&As. The two most common, are not
necessarily in the best interest of the firm or shareholders, but do address common needs of
1. Increased firm size
More highly rewarded financially for building a bigger business
Many associate power and prestige with the size of the firm.
2. Reduced firm risk through diversification
Managers have an undiversified stake in the business and so they tend to dislike risk
M&As can be used to diversify the company and reduce risk that might concern
Concept of risk – employers put all their risk in one company. If that company doesn’t do well,
you can lose your bonus and maybe your job.
HOW THE DEAL IS FINANCE
The receipt of cash for shares by shareholders in the target company.
The offer by an acquiring company of shares or a combination of cash and shares to the
target company’s shareholders.
Going Private Transaction (Issuer bid)
A special form of acquisition where the purchaser already owns a majority stake in the
Cash transaction – shareholders in acquiring company and in company being acquired. Going to
have to buy my shares to get my company. The company that’s doing the buying, viewed as an
asset purchase. Don’t need to ask shareholders.
Share transaction - Buying company but instead of giving them cash, give them shares. No longer
a Cadbury shareholder, now a Kraft shareholder. Need to ask shareholders if it’s okay.
Ownership can be deluded. Has to be approved by the shareholders. Going private transaction – already own 70% shares and want to buy the rest. Have to get a
fairness opinion – get a 3 party present to see if it’s okay.
GENERAL INTENT OF THE LEGISLATION
Transparency – Information Disclosure
To ensure complete and timely information be available to all parties while at the same
time not letting this requirement stall the process unduly.
To avoid oppression or coercion of minority shareholders.
To permit competing bids during the process and not have the first bidder have special
rights. (In this way, shareholders have the opportunity to get the greatest and fairest price
for their shares.)
To limit the ability of a minority to frustrate the will of a majority. (minority squeeze out
provisions) – balance of needs
Highly regulated industry.
Private companies are generally exempt from provincial securities legislation.
Public companies that have few shareholders in one province may be subject to takeover
laws of another province where the majority of shareholders reside.
Purchase of shares from fewer than 5 shareholders
Private companies are exempt from these rules because they are not listed on the stock market.
Public companies – if most shareholders live in BC, chances are you don’t have to follow Ontario
If the purchase of share is 5 or fewer, they don’t have to follow the rules
The 5% rule
Normal course tender offer is not required as long as no more than 5% of the outstanding
shares are purchased through the exchange over a one-year period of time.
This allows creeping takeovers where the company acquires the target over a long period
If a company only purchases 5% of a companies shares a year, they do not have to follow the
Critical Shareholder Percentages
10%: Early Warning
When a shareholder hits this point a report is sent to OSC
This requirement alters other shareholders that a potential acquisitor is accumulating a
position (toehold) in the firm.
20%: Takeover Bid
Not allowed further open market purchases but must make a takeover bid
This allows all shareholders an equal opportunity to tender shares and forces equal
treatment of all at the same price.
This requirement also forces the acquisitor into disclosing intentions publicly before
moving to full voting control of the firm.
Shareholder controls voting decisions under normal voting (simple majority)
Can replace board and control management 66.7%: Amalgamation
Can approve amalgamation proposals requiring a 2/3s majority vote (supermajority)
90%: Minority Squeeze-out
Once the shareholder owns 90% or more of the outstanding stock minority shareholders
can be forced to tender their shares.
This provision prevents minority shareholders from frustrating the will of the majority.
If a company decides they want to buy everything, it is a slow process. If they start purchasing
shares right off the market. As soon as they hit 10%, they have to send a report to Ontario Stock
Once hit 20% have to stop buying for the year or have to make a takeover bid. Takeover bid –
have to tell the truth, have to tell the world that that they want to buy it all. Takeover has to be
issused at a certain price.
50.1% now in control of that company
66.7% need 2/3 to agree for a merger
90% have the ability to go through a minority squeeze out – force to buy the remaining 10%
THE TAKEROVER BID PROCESS
Moving Beyond the 20% Threshold
Takeover circular sent to all shareholders.
Target has 15 days to circulate letter to shareholders with the recommendation of the
board of directors to accept/reject.
Bid must be open for 35 days following public announcement.
Shareholders tender to the offer by signing authorizations.
A Competing bid automatically increases the takeover window by 10 days and
shareholders during this time can with drawn authorization and accept the competing
If decide want to take over company now have to issue takeover bid.
The target company is the one you want to buy. They have 15 day to write a letter to their current
shareholders for a recommendation. The shareholder can decide. Has to be open for 35 days
Prorated Settlement and Price
Takeover bid does not have to be for 100 % of the shares.
Tender offer price cannot be for less than the average price that the acquirer bought
shares in the previous 90 days. (prohibits coercive bids)
If more shares are tendered than required under the tender, everyone who tendered shares
will get a prorated number purchased.
The acquisition of a target company that is willing to be taken over.
Usually, the target will accommodate overtures and provide access to confidential
information to facilitate the scoping and due diligence processes.
Friendly – company you’re buying really likes the idea of being purchased. Willing to be
purchased. Often lets people know they want to be purchased.
Hostile – don’t want to be bought by that company
The Friendly Takeover Process
1. Normally starts when the target voluntarily puts itself into play.
Target uses an investment bank to prepare an offering memorandum
o May set up a data room and use confidentiality agreements o A signed letter of intent (usually includes a no-shop clause and a termination or
o Legal team checks documents.
2. Can be initiated by a friendly overture by an acquisitor seeking information that will assist in
the valuation process.
Put it out there to see if any company wants to buy them
Invite people to come look at them a little bit closer
Can sign letter of intent saying they will look deeper into it. Can put a no-shop clause meaning
they can’t sell to another buyer in that time. Break free one of them has to pay all the something,
Put these in order in exam**
Think of it as dating.
Go out on dates. Put yourself out there so in information memorandum, putting out best features.
Confidentiality agreement; share personal history, secrets
Letter of intent – two people decide not going to date anyone else. The no-shop clause. The break
free – if you break it