Unit 1. Mergers and acquisitions

You cannot buy a company merely buying its shares.

Sir James Goldsmith, anglo-french financier (1933–1997)

1. Start up

1. Think of reasons why one company might wish to take over another company.

2. Think of a takeover or merger. What kinds of businesses were involved? Had both companies been successful before it happened? What’s the present situation?

2. Information to study Mergers and Acquisitions

Strategic alliances enable companies to share resources. This creates synergies or advantages and leads to increased market share and greater competitiveness. Public companies also hope to increase shareholder value when they form alliances. There are many kinds of corporate alliances. Corporate partnerships are formed when two or more companies decide to cooperate on one particular project or mission. When companies join together, it is called a merger. When one company makes a successful takeover bid to buy another one, it is referred to as an acquisition.

There are three sorts of mergers between firms: horizontal integration, in which two similar firms tie the knot; vertical integration, in which two firms at different stages in the supply chain get together; and diversification, when two companies with nothing in common jump into bed. These can be a voluntary marriage of equals; a voluntary friendly takeover of one firm by another; or a hostile takeover, in which the management of the target firm resists the advances of the buyer but is eventually forced to accept a deal by its current owners. For reasons that are not at all clear, merger activity generally happens in waves. One possible explanation is that when share prices are low, many firms have a market capitalization that is low relative to the value of their assets. This makes them attractive to buyers. In theory, the different sorts of mergers have different sorts of potential benefits. However, the damning lesson of merger waves stretching back over the past 50 years is that, with one big exception – the spate of leveraged buy outs in the United States during the 1980s – they have often failed to deliver benefits that justify the costs.

There are essential preparatory steps in a successful acquisition.

The first thing to establish is what strategic goals you are trying to achieve through that acquisition and they might be various in terms of market share, some economic benefits with vertical integration or international presence, etc., etc. Having established those strategic goals, it's essential then to establish your target. Who (What) you're going to try and buy, who is that acquisition company you're going to go for? So, there is a lot of preparatory work in identifying the target. Having identified the target, it is obviously essential to put a valuation on that target, and that valuation is obviously absolutely essential in terms of determining how much you are going to pay for it, which in turn will determine the success or failure of that acquisition. Having put together the strategy and identified the target and the valuation of that target, you need to make sure the funders of the acquisition are on board, be they institutions or private funders or banks, etc. They need to fully understand what you are trying to achiever (achieve) and have confidence in the financial data that you've put together.

And once the acquisition has happened, what needs to be done to ensure the successful integration of the new business?

The acquisition and the success of the integration of that acquisition are all about planning in reality. It can be a very complicated, intricate process and it has to be planned very carefully and very precisely and then there are two sides of success. One that is described as hard success criteria and the other as soft success criteria. Both are equally important. It's very hard to establish the hard success criteria without getting soft success criteria correct. By “hard” the financial side of things is meant. So, we are looking at making sure we achieve those strategic and financial goals we set out to achieve. And make sure they happen within a timetable that's acceptable. On the “soft” side of things, it is about communication. I think it's, once you go through an acquisition then people generally think the worst if there's a vacuum of communication, if there's a vacuum of knowledge of what's going on, people will think the worst but then that's human nature. So, communication of what's happening, telling people exactly what's going to happen and by when it is vital to make sure there's a good integration of a business.