Finance Merger waves
Horizontal mergers: These are mergers entailing business entities that produce similar products or services. An example is the formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond
A vertical merger: is one entailing the merging of supplier and distributer of similar products. An example is one between Time Warner Incorporated, a major cable operation, and the Turner Corporation.
Conglomerate mergers: This is a merger between companies that deal in dissimilar products or services. An example is the merger between Walt Disney Company and the American Broadcasting Company.
Congeneric merger: A business merger between business entities that deal in similar businesses but different products. An example is Citigroup’s acquisition of Travelers Insurance.
Friendly merger: occurs when the directors of the merging companies unanimously concur with the terms and conditions of the merger without a conflict. An example is the P&G-Gillette merger.
The defensive merger: This is a strategy employed by a business entity to merge with another to create antitrust or other regulatory problems as a shield to an original takeover
Hostile takeover: This is a takeover where the directors of one of the companies are in conflict with the terms and conditions of the takeover. An example is the Hewlett-Packard’s takeover of Compaq.
A tender offer is whereby a company puts up a fixed price on a large share of the target company. The price is usually higher than the current market prices. An example for this is Microsoft offer of $44.6 billion for the stakes at Yahoo.
A corporate raiding is a strategy whereby the majority of the shares of a company are purchased through a tender offer. This serves as a means of taking away authority of the target company from the current management. An example of this is the planned takeover of yahoo by Microsoft.
Equity carve-out is the sale of a portion of one of its subordinate’s common stock by a public company through an IPO. An example is the one by DuPont’s IPO of Conoco.
A spinout is whereby a company fragments itself into different entities. An example is one by Cenovus Energy was spun out of Encana Corporation
Spin-offs are processes where the main entity deals out a considerable amount of its holdings of stock in a subsidiary to the parent’s shareholders. This is executed based on their percentage holdings in the main company. This is usually on a pro rata basis. An example is AT&T’s divestiture of Lucent Technology.
A leveraged buyout is whereby the authority of an organization is acquired through the purchasing of the majority shares. The capital for the purchase is usually borrowed. An example is Gibson Greeting Cards buy out by a financial group headed by Wesray Capital.
Private equity is a term used in finance to imply an asset class consisting of equity securities in running business entities that are not eligible for trading on a stock exchange. This was practices by Warner Music Group
Shareholder activism is the exercising of the powers of the shareholders to influences corporate policies regarding their companies. An example is the policy influence by Exxon Mobil Corp. regarding the titles of chairman and chief executive officer.
A cross-border merger is a combination of the assets and operations of two different business entities from two different nations to form a new legal entity. An example is the between America Online Inc. (AOL) and Time Warner.
A reverse takeover or reverse merger is process taken by a private company to purchase an already existing public company. The private company engages in this to bypass the lengthy and complex process involved in changing to public. An example is one practiced by Ted turner merging with rice broadcasting
Roll-up this is whereby several public limited partnerships are combined together to form one large public limited partnership. An example is the roll up of WorldCom.
Variable Interest Entity occurs when an investor to a company purchases or acquires than a majority-owned interest
A joint venture is a business agreement between two or more existing companies to develop during the near future, a new business entity by merging assets and contributing equity. An is example is none between Sony and Erickson
A Strategic Alliance is a relationship between two or more business entities structured to meet a common goal or overcome an obstacle while still maintaining their separate legal entities. An example is the one between Toyota Motors Inc. and Fuji Heavy Industries Ltd.
A holding company is a company or any business entity that acquires outstanding shares in another company’s stock. An example is the Berkshire Hathaway
Asset sale occurs when a business entity sells its assets to another investor but the original shareholders continue to claim ownership on the corporate stock or LLC membership interests.
Nationalization is the change of ownership of private corporations and organizations to state ownership. An example s the French government’s seizure of the carmakers Renault
Privatization is the change of ownership of national corporations and organizations to public and private ownership. An example is the Privatization of British Telecom.
Proxy fight or proxy battle is whereby the shareholders and stakeholders to a particular company disagree with some aspect of the corporate governance. This was evident when Hewlett-Packard, management sought to take over Compaq.
2. A) Defense strategies against hostile takeovers
The company can come up with a poison pill that would discourage the hostile buyer from acquisition. This ends up making the possible takeover highly costly to the hostile buyer through giving the existing shareholders the rights to purchase new shares at relatively discounted prices. An example is one between Oracle and PeopleSoft. Establish an exercise price and a dilution adjustment factor. This is through the exercise of the rights of the shareholders whereby the company has to issue shares at a price that is double the current exercise price. An example is the one between Verizon and Vodafone .The Company can defend themselves by Setting up a redemption price. This is whereby a nominal sum is put up for the shareholders’ to redeem the rights. An example is one on Comcast and Disney. Set activation for the implementation of the shareholders rights plan. The plan is to be activated when thee is an offer on the acquisition of the outstanding total shares. An example is one entailing Oracle and PeopleSoft. The terms for the set plans could be restricted to close to ten years.
b) An example of Hostile takeovers is Hewlett-Packard.
Prominent Corporate raiders include Carl Icahn, Victor Posner, Nelson Peltz, Robert M. Bass, T. Boone Pickens, Harold Clark Simmons, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman.
c) Not really because in Shareholder activism, the shareholders have the power to influence corporate policies. Corporate raiding entails strategy whereby the majority of the shares of a company are purchased through a tender offer. This serves as a means of taking away authority of the target company from the current management.
d) The investors do not want foreign investors exploiting their extensive research gratis. They also shield their vulnerability of being unable to secure cash benefits due to the excessive exploitation of their discovery processes
e) The areas of the private equity market include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. Major players include private equity firms, venture capital firms, or angel investors.
f) The structure of private equity partnership
g) The advantage is that there is a possible enhancement of the administration commitment and effort. This is because they have superior equity venture in the company.
The disadvantage is that if the company’s cash flow and the sale of assets are not enough to shield the accumulated interest on the debt, the company is likely to go under.
h) Michael Robert Milken is an American investor who engaged in the development of the market for high-yield bonds. He was arrested, charged and pleaded guilty for breaking the United States laws regarding securities. He was later released after serving his term in prison. He is now a philanthropist for cancer awareness
Drexel Burnham Lambert was a major Wall Street investment-banking firm, whose success was short-lived due to the illegal dealings by its director, Michael Robert Milken, and later filed for bankruptcy. Its activities entailed dealing in the junk market
i) A management buyout (MBO) is an action where the managers of the company purchase and acquire a considerable amount of the company’s holdings. It is similar to an LBO as both involve the acquisition of the controlling interests in a company’s equity.
j) Under GAAP, an LBO is not considered as the transaction that entail an LBO do not affect the exposure unit since the unit was not in accordance with the general transaction.
k) An LBO is not clearly defined as a type of business combination as structure of the buyout differs. It is arguable that a for a business combination to occur, the company making the purchasing ought to have substantive operations. This lacks in an LBO.
l) Empirical studies have evidence that the acquired firms’ shareholders gain from huge returns after a leveraged buyout
m) A leveraged restructuring is difference from a LBO in that the leveraged restructuring is executed by the company’s directors while in an LBO the buy out involves an external company. The similarities are that both involve a restructuring in the management of the organization.
n) Advantages of Holding Companies
The acquisition of considerable interests in a subordinate firm has been proven to have more gains than a merger. The little investment made entitles one to have control in the operations of the company leading to smaller up-front investment. Some of the considerable risks can be shielded by the subsidiaries. This offloads most of the risks from the main company to the subsidiary thereby sheltering the parent company.
The portfolio of the parent company can be expanded through simple stock purchases in the public market. This means that the procedure of going through the subsidiary’s board of directors is overridden.
Disadvantages of Holding Companies
The holding company model has the following disadvantages:
The parent company pays hefty taxes whenever its total holdings in the subsidiary are less than Eighty percent. These taxes are paid up on the federal, state, and local levels. The dissolution process for a holding company is not as complicated thus is it easily forced into dissolution.
The holding company has several means of increasing. One is through leveraging or debt. This ends up complicating the structure of the company thereby making the realization of its goals impossible. The interest rates on debts are increased thereby creating unnecessary risks to the company.
o) Warren Buffett is a value investor. He is the owner of one of the largest holding companies in the world, Berkshire Hathaway.
p) The difference between a holding company and a mutual fund is that the investments of a holding company are more compact than those of an investment fund.
q) Divestiture is an action entailing the partial or full disposal of an investment or asset by the use of a range of strategies including sale, exchange, closure or bankruptcy. Forms are:
Sell-off entails the sale of one or more of a company’s subsidiaries as a separate entity to another company.
Spin-off is a process whereby a company divests itself of a part of its operations. This is executed by the company replacing its open capital with two or more classes of capital, representing the new, independent operations.
Management buyout: is a form of acquisition where a company’s existing managers acquire a large part or all of the company.
Total liquidation is a process whereby a company disposes off its assets and closes down its operations for cash.
r) Companies divest assets because of the possibility of better investment opportunities on the capital invested thereby bringing better returns.
s) Philips divested its chip division called NXP to shield the company from the risks caused by the unpredictability of the chip market.
AT&T divested to avoid abiding by the terms of the consent decree.
CBS Parks Divestiture was as a means of focusing on advertising-supported media.
t) Off-Balance-Sheet Financing: this is a method of financing a company and the transaction does not reflect on the balance sheet as a liability.
u) The techniques used to keep debt off the balance sheet are Joint Venturing, Operating Leases, and Research and Development Partnerships.
Variable interest entities are mostly used to employ by companies as a means to protect the gains from decreasing and offsetting the current debts.
Strategic alliances allow the companies to avoid the hustle entailed in entering markets of foreign countries. They get to learn technical expertise through the exchange of knowledge from diverse locations.
There are language and cultural barriers to overcome. Dealing with new and diverse market laws and requirements
w) There are four types of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances.
x) The difference is that a joint venture is when two or more companies make an agreement to do business in one specific area. A merger is when two companies come together to form a single company.
y) A joint venture may be organized as a corporation (corporate joint venture), as a partnership, or as undivided interests under which each investor owns an undivided interest in each joint venture asset and is liable for its share of each joint venture liability.
z) A joint venture Sony-Ericsson
A Strategic Alliance: Toyota Motors Inc. and Fuji Heavy Industries Ltd.
3) The merger took place in the year 1989. Glaxo Wellcome acquired SmithKline Beecham and the survivor was SmithKline Beecham. The merging of the Glaxo Wellcome with SmithKline Beecham, was however the only most significant acquisition. The acquisition was financed through a combination of cash and debt. It was a horizontal merger according to the definition. The total cost for the merger was not officially disclosed and was a friendly merger.The total amount of the goodwill was not officially recorded but was considered a bargain purchase.