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ACQUISITIONS VS OTHER
GROWTH STRATEGIES
Acquisitions & Mergers
BY SABI AKTHER 1
What to focus on?
• Reasons for growth by acquisitions
• Synergy
• The impact of mergers and acquisitions on stakeholders
• Reverse takeovers
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Synergy
Regulation of Defences against
Mergers & acquisitions
takeovers takeover
Financing of takeovers
Share for share
Cash
exchange
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Reasons for growth by acquisitions
• Synergy
• Increased market share/power
• Economies of scale
• Combining complementary needs
• Improving efficiency
• A lack of profitable investment opportunities (surplus cash)
• Tax relief
• Reduced competition
• Asset-stripping
• Diversification – to reduce risk 4
• Shares of the target are undervalued.
Reasons for growth by acquisitions
Advantages of organic growth
• Organic growth allows planning of strategic growth in line with stated objectives.
• It is less risky than growth by acquisition – done over time.
• The cost is often much higher in an acquisition – significant acquisition premiums.
• Avoids problems integrating new acquired companies – the integration process is often a
difficult process due to cultural differences between the two companies.
• An acquisition places an immediate pressure on current management resources to learn to
manage the new business
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Reasons for growth by acquisitions
Advantages of growth by acquisition
• Quickest way is to enter a new product or geographical market.
• Reduces the risk of over-supply and excessive competition.
• Fewer competitors.
• Increase market power in order to be able to exercise some control over the price of the product,
e.g. monopoly or by collusion with other producers.
• Acquiring the target company’s staff highly trained staff – may give a competitive edge.
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Reasons for growth by acquisitions
Corporate issues arising on acquisition
• Impact on board structure – a power struggle among the directors will not help the post-
acquisition integration of the two firms.
• Board hostility.
• Impact on corporate governance.
• Culture differences – this can be especially marked when the two companies are based in
different countries.
• Loss of key personnel from target company.
• Integration difficulties – e.g. systems, operations.
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• Adverse PR – especially if there is a threat of job losses as a consequence of the takeover.
Synergy
MV of combined company (AB) > MV of A + MV of B
If this situation occurs we have experienced synergy, where the whole is worth more than the sum
of the parts. This is often expressed as 2 + 2 = 5.
Sources of synergy
• revenue synergy, such as market power and combining complementary resources
• cost synergy, such as economies of scale
• financial synergy, such as elimination of inefficiency.
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Synergy
Revenue synergy
Market power/eliminate competition
Economies of vertical integration
Complementary resources
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Synergy
Revenue synergy
Market power/eliminate competition
Firms may merge to increase market power in order to be able to exercise some control over the
price of the product. Horizontal mergers may enable the firm to obtain a degree of monopoly
power, which could increase its profitability by pushing up the price of goods because customers
have few alternatives.
Economies of vertical integration
Some acquisitions involve buying out other companies in the same production chain, e.g. a
manufacturer buying out a raw material supplier or a retailer. This can increase profits by ‘cutting
out the middle man’, improved control of raw materials needed for production, or by avoiding 10
disputes with what were previously suppliers or customers
Synergy
Revenue synergy
Complementary resources
It is sometimes argued that by combining the strengths of two companies a synergistic result can be
obtained. For example, combining a company specialising in research and development with a
company strong in the marketing area could lead to gains.
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Synergy
Cost synergy
Economies of scale
• fixed operating and administrative costs being spread over a larger production volume
• consolidation of manufacturing capacity on fewer and larger sites
• use of space capacity
• increased buyer power, i.e. bulk discounts
• savings on duplicated central services and accounting staff costs.
Economies of scope
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• May occur in marketing as a result of joint advertising and common distribution
Synergy
Financial synergy
• Elimination of inefficiency
• Tax shields/accumulated tax losses
• Surplus cash
• Corporate risk diversification
• Diversification and financing
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Synergy
Other sources of synergy are:
Surplus managerial talent
Companies with highly skilled managers can make use of this resource only if they have problems
to solve. The acquisition of inefficient companies is sometimes the only way of fully utilising
skilled managers.
Speed
Acquisitions may be far faster than organic growth in obtaining a presence in a new and growing
market.
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Impact of Mergers on Stakeholders
Impact on acquiring company's shareholders
The existence of synergy has a key benefit to shareholders of an acquisition. All companies have a
primary objective to maximise shareholder wealth, so it is clear that if synergy can be achieved, an
acquisition should benefit the acquiring company's shareholders.
Impact on the target company's shareholders
The acquiring company will often pay a premium to the shareholders of the target company, to
encourage them to sell their shares. Therefore there is also a financial benefit to them when a
takeover happens.
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Impact of Mergers on Stakeholders
Impact on lenders/debt holders
Debt will often be repayable in the event of a change in control. It all depends on whether the bank
borrowings and bonds contain a change in control clause. With bank borrowings they almost
certainly will. The risk profile of the acquirer may be quite different from that of the original
borrower and the bank will not wish to become exposed to a higher credit risk. Bonds may be the
same.
The acquirer is therefore likely to need to arrange new financing, debt and/or equity financing as
appropriate in advance of the takeover
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Impact of Mergers on Stakeholders
Impact on managers and staff
In many acquisitions, an easy way to generate synergy is to make some staff redundant to avoid
there being duplication of roles. Therefore, the managers and employees, particularly of the target
company, often view a takeover with dread. However, the managers of the acquiring company often
see takeovers as an opportunity, to demand higher salaries and bonuses now that they manage a
larger company.
The acquirer may wish to retain many managers whose knowledge and skills may be essential to
the successful continuation of the business, at least in the short term. In such a case, the acquirer
may seek assurance and contractual tie-ins to ensure that such people remain with the business for a
certain period of time. 17
Impact of Mergers on Stakeholders
Impact on society as a whole
Governments monitor takeovers carefully, and if they feel that a takeover will not be in the best
interests of society as a whole, the takeover can be investigated and sometimes stopped.
Competition law in most countries prevents monopolies being created which might be able to
exploit their power to take advantage of customers.
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Impact of Mergers on Stakeholders
Problems with acquisitions
• The fit/lack of fit syndrome
• Lack of industrial or commercial fit
• Lack of goal congruence
• ‘Cheap’ purchases
• Paying too much
• Failure to integrate effectively
• Inability to manage change
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Reverse Takeovers
A reverse takeover is a type of acquisition/merger that is used by private companies that want to
become public companies but want to avoid the high costs (time and money) that normally
accompany stock market listings (initial public offerings, or IPOs).
How a reverse takeover works
First, the private company purchases a majority shareholding in a public company. Typically, the
private company is larger than the public company.
Then, the private company's shareholders exchange their private company shares for shares in the
public company. Effectively, this turns the private company into a public company - its shares can
now be publicly traded.
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Reverse Takeovers
Advantages and disadvantages of reverse takeovers
Reverse takeovers allow a private company to become public without raising capital, which
considerably simplifies the process. While conventional IPOs can take months to organise, reverse
takeovers can be completed much more quickly, saving management time and money.
After the reverse takeover, the company's shareholders should benefit from all the advantages of a
stock market listing (e.g. shares are more marketable, the company's profile is increased).
However, it is sometimes the case that the company's managers are inexperienced in the additional
regulatory and compliance requirements of being a public company. These burdens (and costs in
terms of time and money) can prove significant.
Also, unless the company's performance makes it attractive to stock market investors, there is no 21
guarantee that simply being a public company will make its shares any more marketable.
Summary
1) Reasons for growth by acquisition
• Synergy
• Increased market share/power
• Economies of scale
• Combining complementary needs
2) Issues with acquisition
• Culture differences
• Loss of key personnel from target company
• Integration difficulties
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Summary
3) Synergy
• Revenue synergy
• Cost synergy
• Financial synergy
4) Impact of mergers on stakeholders
5) Reverse Takeovers
• Private company purchases a majority shareholding in a public company. Typically, the private
company is larger than the public company.
• Lower cost than IPO
• Management but me inexperienced with rules 23
Thank You for Watching!!
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