Mergers and Acquisitions

1
Mergers and Acquisitions

• Financial Management (EC0506C1)

2
Objectives

• Definitions
• Reason for Merger
• Synergy
• Appraisal of the merger
• Regulation of Mergers
• How a merger is conducted
• Are mergers successful?

3
Definitions

• Merger
• Two firms of a similar size
• General management agreement
• Acquisition
• Unwanted by one party

4
Reasons for Merger

• Investment
• Positive NPV
• It may
• reduce/eliminate competition
• sources of supply
• economies of scale
• access to under-utilised resources
• diversification of risk i.e. markets

5
Synergy

• Benefits arise due to synergy
• Synergy 2 2 5
• The whole is greater than the parts

6
Appraisal of the Merger

• Bidder
• investment appraisal
• cash flows estimated and discounted
• Positive NPV?
• Target shareholders
• investment decision
• Merger Greater benefit (?cash flows ?NPV)?

7
Regulation of Mergers

• Two bodies in the UK
• The Monopolies Commission
• The City Panel on Takeovers and Mergers

8
The Monopolies Commission

• Monopolies Mergers Act (1965)
• Fair Trading Act (1973)
• Outcome of the merger
• Investigation powers
• Merger Outcome? Secretary of State for the
  Department of Trade and Industry
• Q? Is it in the public interest

9
The City Panel on Takeovers and Mergers

• Self regulating body
• Comprises most of the leading financial
  institutions
• Stock Exchange etc
• Protect shareholders interests
• Code rules for mergers
• Followed by both
• Bidder Target

10
How a Merger is Conducted

• Bidder buys shares
• Two stages
• Initial open market purchase
• Formal offer

11
Are Mergers successful?

• Three approaches to determine
• Questionnaire
• Newbould (1970)
• Management costly
• Accounting Profits
• Meeks (1977)
• Profits ?
• Returns to shareholders
• Franks et al (1977)
• Target shareholders gained

12
Why the differing Results?

• Management may have hidden objectives
• Accounting profit not a good performance
  indicator

13
Who are the Main Beneficiaries?

• Target shareholders

14
Summary

• Definition
• Reasons for mergers
• Appraisal
• Regulation of mergers
• Who benefits