Mergers and Acquisitions by Calvella

1. Mergers and Acquisitions by Calvella

2. What Is Merger? A merger involves the total absorption of a target firm by the acquirer. As a result, one firm ceases to exist and only the new firm (acquirer) remains.

3. What is Acquisition? An acquisition involves one firm buying only a portion of another firm. The acquisition may happen to acquire assets or an altogether different segment of the other firm.

4. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies are involved. The term M&A also refers to the department at financial institutions that deals with mergers and acquisitions. The following will review some of the different kinds of financial transactions that occur when companies engage in mergers and acquisitions activity. Merger means “to combine”, Acquisition means “to acquire.”

5. M&A includes a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies are involved.

6. Merger: In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. Acquisition: In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or legal structure.

7. Consolidation: A consolidation creates a new company. Stockholders of both companies must approve the consolidation, and, subsequent to the approval, they receive common equity shares in the new firm.

8. Tender Offer: In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors.

9. Acquisition of Assets: In an acquisition of assets, one company acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firm(s).

10. Management Acquisition: In a management acquisition, also known as a management-led buyout (MBO), the executives of a company purchase a controlling stake in another company, making it private. Often, these former executives partner with a financier or former corporate officers in order to help fund a transaction. Such an M&A transaction is typically financed disproportionately with debt and the majority of shareholders must approve it.

11. Types of Mergers & Acquisition

12. Horizontal Merger: Two companies that are in direct competition and share the same product lines and markets.

13. Vertical Merger: A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

14. Market-Extension Merger: Two companies that sell the same products in different markets.

15. Product-extension Merger: Two companies selling different but related products in the same market.

16. Purchase Mergers: As the name suggests, this kind of merger occurs when one company purchases another company. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

17. Consolidation Mergers: With this merger, a brand new company is formed, and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

18. A typical 10-step M&A deal process includes: • Develop An Acquisition Strategy – Developing a good acquisition strategy revolves around the acquirer having a clear idea of what they expect to gain from making the acquisition – what their business purpose is for acquiring the target company (e.g., expand product lines or gain access to new markets). • Set The M&A Search Criteria – Determining the key criteria for identifying potential target companies (e.g., profit margins, geographic location, or customer base).

19. Search For Potential Acquisition Targets – The acquirer uses their identified search criteria to look for and then evaluate potential target companies. • Begin Acquisition Planning – The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is.

20. Perform valuation analysis – Assuming initial contact and conversations go well, the acquirer asks the target company to provide substantial information (current financials, etc.) that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target. • Negotiations – After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer; Once the initial offer has been presented, the two companies can negotiate terms in more detail

21. M&A due diligence – Due diligence is an exhaustive process that begins when the offer has been accepted; due diligence aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc. • Purchase and sale contracts – Assuming due diligence is completed with no major problems or concerns arising, the next step forward is executing a final contract for sale; the parties will make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase.

22. Financing strategy for the acquisition – The acquirer will, of course, have explored financing options for the deal earlier, but the details of financing typically come together after the purchase and sale agreement has been signed. • Closing and integration of the acquisition – The acquisition deal closes, and management teams of the target and acquirer work together on the process of merging the two firms.

23. Differences between Merges & Acquisition • ACQUISITION • When one entity purchases the business of another entity, it is known as Acquisition. • Friendly or hostile decision of acquiring and acquired companies. • Minimum 3 Companies are being involved. • MERGER • The merger means the fusion of two or more than two companies voluntarily to form a new company. • The mutual decision of the companies going through mergers. • Minimum 3 Companies are being involved.

24. ACQUISITION • The purpose is for Instantaneous growth. • The size of the acquiring company will be more than the size of acquired company. • MERGER • The purpose is to decrease competition and increase operational efficiency. • Generally, the size of merging companies is more or less same.

25. Advantages of Mergers and Acquisitions • Synergy- The synergy created by the merger of two companies is powerful enough to enhance business performance, financial gains, and overall shareholders value in long-term. • Cost Efficiency- The merger results in improving the purchasing power of the company which helps in negotiating the bulk orders and leads to cost efficiency. The reduction in staff reduces the salary costs and increases the margins of the company. The increase in production volume causes the per unit production cost resulting in benefits from economies of scale.

26. Competitive Edge- The combined talent and resources of the new company help it gain and maintain a competitive edge.. New Markets- The market reach is improved by the merger due to the diversification or the combination of two businesses. This results in better sales opportunities.

27. Disadvantages of Mergers and Acquisitions • Bad for Consumers-With the merger, competition can reduce the industry and the new company may have higher pricing power. • Decrease in Jobs-A merger can result in job losses. An acquiring company may shut down the under-performing segments of the company.

28. Sometimes Dis-economies of Scale- The increased size may lead to dis-economies of scale for the new company. It may not have the control required for running a bigger company.

29. We at Calvella helps businesses to overcome challenges in an ever-increasing competitive market place. Calvella’s consultants develop comprehensive business strategies as well as several effective ways for the expansion of the organisations of our clients. Calvella prides itself in working with an associate team of global business advisors with exceptional industry expertise. Innovation is at the heart of Calvella, and it is how we develop solutions for our clients. Our approach to innovation includes straightforward and effective solutions across organisations from Manufacturing, Logistics, Energy, Car Hire, Travel, Packaging, Pharma, Health Care and FMCG sectors. We have specializationin Mergers & Acquisitions, ERP systems, CRM, Business Transformation, Business Turnarounds, Finance Solutions, Organisational Design, Sales and Marketing.

30. Call us: +44 (0) 77991 33349 Mail us: toby.tarczy@calvella.com