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‘Merger and acquisition’

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‘Merger and acquisition’

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‘Merger and acquisition’

  1. 1. Presentation on ‘Merger and acquisition’
  2. 2. A merger is a transaction that result in the transfer of ownership and control of a corporation. When one company purchases another company of an approximately similar size. The two companies come together to become one. Two companies usually agree to merge when they feel that they can do something together that they can not do one their own.
  3. 3. A merger occurring between companies producing similar products, goods and offerings similar services. This type of merger occurs frequently as a result of larger companies attempting to create more effective economies of scale. Example- Boeing-McDonnell Douglas
  4. 4. A merger between two companies producing different goods and services for one specific finished products. The merger of the firm that have actual or potential buyer-seller relationship. Example- Car manufacture purchasing a tire company.
  5. 5. A merge between firms that are involved in totally interrelated business activity. Two types of conglomerate merger are: Pure conglomerate merger- It involve firms with nothing common. Mixed conglomerate merger- It involves firms that are looking for product extensions or market extensions. Example- PepsiCo-Pizza Hut; Proctor & Gamble-Clorox.
  6. 6. Ways of merger – A merger can take place in following ways: By purchasing of assets  By purchase of common shares  By exchanging of shares for assets  By exchanging of shares for shares
  7. 7. Acquisition When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist.
  8. 8. Acquisition & Takeover When Acquisition is unfriendly or hostile It may be called Takeover
  9. 9. Types of Acquisition • Horizontal acquisition: When the acquirer and the target are in the same industry. • Vertical acquisition: When the acquirer and the target are at different stages of the production process; example: an airline company acquiring a travel agency. • Conglomerate acquisition: The acquirer and the target are not related to each other.
  10. 10. Friendly Acquisition The acquisition of a target company that is willing to be taken over. Hostile Takeovers A takeover in which the target has no desire to be acquired and refuses to provide any confidential information.
  11. 11. 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.
  12. 12. Creation of Synergy Motive for M&As Synergy is the additional value created (∆V) : Where: VT = the pre-merger value of the target firm VA - T = value of the post merger firm VA = value of the pre-merger acquiring firm )V-(VVV TATA   [ 15-1]
  13. 13. Accounting for Acquisitions Historically firms could use one of two approaches to account for business combinations 1. Purchase method and 2. Pooling-of-interest method (no longer allowed)
  14. 14. Accounting for Acquisitions The Purchase Method One firm assumes all assets and liabilities and operating results going forward of the target firm. How is this done? All assets and liabilities are expressed at their fair market value (FMV) as of the acquisition date. If the FMV > the target firm’s equity, the excess amount is goodwill and reported as an intangible asset on the left hand side of the balance sheet. Goodwill is no longer amortized but must be annually assessed to determine if has been permanently ‘impaired’ in which case, the value will be written down and charged against earnings per share.
  15. 15. Accounting for Acquisitions The Purchase Method One firm assumes all assets and liabilities and operating results going forward of the target firm. How is this done? All assets and liabilities are expressed at their fair market value (FMV) as of the acquisition date. If the FMV > the target firm’s equity, the excess amount is goodwill and reported as an intangible asset on the left hand side of the balance sheet. Goodwill is no longer amortized but must be annually assessed to determine if has been permanently ‘impaired’ in which case, the value will be written down and charged against earnings per share.
  16. 16. CHAPTER 15 – Mergers and Acquisitions 15 - 17 Example of the Purchase Method Accounting for Acquisitions Acquisitor purchases Target firm for $1,250 in cash on June 30, 2006. Acquisitor Pre- Merger Target Firm (Book Value) Target Firm (Fair Market Value) Current assets 10,000 1,200 1,300 Long-term assets 6,000 800 900 Goodwill Total Assets 16,000 2,000 2,200 Current liabilities 8,000 800 800 Long-term debt 2,000 200 250 Common stock 2,000 400 1,250 Retained earnings 4,000 600 Total Claims 16,000 2,000 2,300
  17. 17. Example of the Purchase Method Accounting for Acquisitions Acquisitor Pre- Merger Target Firm (Book Value) Target Firm (Fair Market Value) Acquisitor Post Merger Current assets 10,000 1,200 1,300 11,300 Long-term assets 6,000 800 900 6,900 Goodwill 100 Total Assets 16,000 2,000 2,200 18,300 Current liabilities 8,000 800 800 8,800 Long-term debt 2,000 200 250 2,250 Common stock 2,000 400 1,250 3,250 Retained earnings 4,000 600 4,000 Total Claims 16,000 2,000 2,300 18,300 Book Values are not relevant. Acquisitor Value pre merger + Target Firm (FMV) = Acquisitor Post MergerGoodwill = Price paid – MV of Target firm Equity = $1,250 – (MV of target assets – MV of target Liabilities) = $1,250 – ($2,200 - $1,050) = $100

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