For example, if one company in a merger is dealing with net losses, the profits of the other company can offset these losses. This is obviously enticing to the company with losses, but is only beneficial to the other company if the merger will result in future gains.
Mergers can also be a solution for larger companies looking to lower their tax burden. For example, if the larger company is in a country with a high corporate tax rate, they could merge with a company in a location with a lower rate.
While this tactic is often criticized, it is very effective in lowering a company's taxes. In some cases, a merger or acquisition takes place because a company is trying to fulfill a strategic goal such as:. Ultimately, there are many reasons why companies merge or acquire other companies.
It is important to understand all the potential risks, benefits, and legal implications if you're considering a merger or acquisition. The online data room allows the selling company to provide valuable information in a controlled manner and in a way that helps preserve confidentiality. Importantly, the online data room can be established to allow access to all documents or only to a subset of documents which can vary over time , and only to pre-approved individuals.
Most online data rooms include a feature that allows the seller or its investment bankers to review who has been in the data room, how often that party has been in the data room, and the dates of entry into the data room. This information can be very useful to sellers as an indication of the level of interest of each potential bidder for the selling company, and helps the selling company understand what is most important to each buyer.
Selling companies need to understand that populating an online data room will take a substantial amount of time and require devotion of significant company resources. The selling company should not grant access to the data room until the site has been fully populated, unless it is clearly understood that the buyer is initially being granted access only to a subset of documents. If the selling company allows access before all material documents have been included, adding documents on a rolling basis, potential buyers may become skeptical about whether the selling company has fully disclosed all information and documents that potential buyers deem material.
Access to the online data room is made via the Internet, through a secured process involving a user ID and a protected password. Typically, two-factor authentication will be required to access the data room. As an additional security precaution, any documents printed from the online data room will include a watermark identifying the person or firm that ordered such printing.
Here are some issues that can arise:. Deficiencies of this kind may be so important to a buyer that it will require them to be remedied as a condition to closing. That can sometimes be problematic, such as instances where a buyer insists that ex-employees be located and required to sign confidentiality and invention assignment agreements.
If a buyer could only ask for one representation of a selling company in an acquisition agreement, it is likely the buyer would ask for a representation that the financial statements of the selling company be prepared in accordance with generally accepted accounting principles GAAP , consistently applied, and that the selling company fairly present the results of operations, financial condition, and cash flows for the periods indicated.
Topics of inquiry or concern will include the following:. The best deals for sellers usually occur when there are multiple potential bidders. By leveraging the competitive situation, sellers can often obtain a higher price, better deal terms, or both. Sellers often try to set up an auction or competitive bidding process to avoid being boxed in by a demand for exclusivity by a bidder.
By having multiple bidders, each bidder can be played off against the other to arrive at a favorable deal. If a common focus is lacking, mistrust between the parties will almost inevitably develop, forcing managers on both sides into defensive positions rather than an attitude of cooperation.
We see your XYZ division as our entry into that business. Such clarification helps both the negotiating and the operating managers to sort out the problems and issues that must be addressed. Equally important, clarification provides an external focus for their combined activities and reduces the possibilities of political infighting. In contrast, overly precise statements of performance expectations can backfire and increase rather than decrease the ambiguity and uncertainty in the situation.
Precise definitions of expected results are often based on financial calculations that outside analysts have prepared with neither a detailed operating knowledge of the companies or industry nor a stake in making it work.
If detailed objectives become a straitjacket, they can have serious consequences as business conditions change. While qualitative statements are more ambiguous, postacquisition managers will have more room to maneuver if they have a general framework to guide them in the future. According to our research, a generally unacknowledged factor—the process itself—affects the outcomes of many acquisitions. We are not suggesting that these barriers occur in every acquisition; their frequency varies with the circumstances.
But we have found that hindrances do exist in the acquisition process, and they can have a significant impact on the ultimate success of the deal. Also, understanding how they might affect your particular situation can help minimize their detrimental effects.
Who are the key advisers in this acquisition? How do their analyses address the way in which the business will operate after the deal is closed? What is their incentive to contribute to the integration of the two companies after the acquisition?
Are any of them given precedence in decision making? Are some analyses systematically ignored? Are the decision makers giving adequate attention to operational considerations and nonquantitative issues? What person or group is charged with integrating analyses? Are these people important and respected senior members of the organization? Do the reasons for the acquisition support arguments for speeding up the process? Does only one appropriate candidate exist? Is internal development an option if no acquisitions materialize?
Do environmental factors for example, other bidders or impending regulatory changes make it essential to act quickly? What are the sources of pressure to complete the deal? How is the rush to close affecting the acquisition? Do participants feel rushed and will it affect the quality of the work they do? Do hidden agendas exist among the advocates of the deal? Are reward structures affecting the rush to close?
Are rewards based on acquiring the company or on making the best decision? Do the people involved receive promotions for completing the deal? Will they be evaluated negatively if they suggest pulling out? Does a system of checks and balances exist? Is the board review process for acquisitions as detailed and rigorous as for other matters? Does any other high-level, uninvolved person or group exist that can review the acquisition process and decisions dispassionately?
Have acquiring executives clarified what the company expects from the new subsidiary? Have they defined minimum acceptable expectations for it? Have they stated these requirements clearly as nonnegotiable points? Have they also recognized and accepted the nonnegotiable concerns of the target company? Have both parties identified negotiable items that operating managers can resolve after the deal has gone through?
Have the planners communicated to both organizations the basic motivation for the acquisition as well as the financial targets for its performance? How much uncertainty exists between the two parties? Are people assuming that the goals and guidelines established during the preacquisition bargaining will remain the same after the acquisition?
Some managers may decide that the impact of these barriers is an incidental cost of doing business and they can ignore them in their acquisition strategy. Other executives may take steps to reduce the costs of the barriers. We recognize that some of these problems may be insurmountable; sometimes institutionalized forces in the acquisition process are stronger than any of the recommendations we have made.
We have no illusions about how difficult this is to do. Our suggestions are only the first step. Beyond that, it may be time for senior managers to rethink their expectations about acquisition activity in fundamental ways. Developing a better understanding of the subtle yet powerful role that the acquisition process plays in acquisition outcomes is an important part of that reassessment.
Like flocks of birds or of packs of wolves, mergers come in waves. Why mergers have bunched together periodically rather than spread themselves more evenly over the years is not fully understood. Theories which seem to explain one wave do not explain other waves. Only two characteristics unequivocally link the waves, their identifiable existence and the undistinguished profits record of merged firms.
On four occasions in the last one hundred years Americans have witnessed the business community engaging in intense merger activity. Each of these merger waves is often identified with certain characteristic transactions.
The first wave, which peaked between and , is remembered for mergers that created monopolies. The second wave, which crested from around to the late s, was characterized by acquisitions of related firms suppliers, customers, and competitors , but these mergers did not create monopolies.
From through , a third wave produced large conglomerate firms composed of unrelated business. Finally, since the incidence of megamergers between large firms has dramatically increased and allowed these firms to diversify their holdings…. Three prime characteristics mark the period of the megamergers as a distinct chapter in the history of American mergers: 1 the large size of target firms, 2 the equally large size, prior success and prominence of the acquiring firms, and 3 the use of hostile takeover tactics.
I mark its beginning in Although recorded few large mergers, two of them were portents of things to come. From this point on, established companies would use the surprise takeover tactics of the conglomerate upstarts and the advantage of greater resources to outbid other firms. See, for example, Michael C. Jensen and Richard S. Mueller, ed. See, for example, Malcom S. Salter and Wolf A.
Admittedly, DCF is tricky to get right, but few tools can rival this valuation method. In a few cases, acquisitions are based on the cost of replacing the target company.
For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property, and purchase the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry wherein the key assets people and ideas are hard to value and develop.
In general, "acquisition" describes a transaction, wherein one firm absorbs another firm via a takeover. The term "merger" is used when the purchasing and target companies mutually combine to form a completely new entity. Because each combination is a unique case with its own peculiarities and reasons for undertaking the transaction, use of these terms tends to overlap.
Two of the key drivers of capitalism are competition and growth. When a company faces competition, it must both cut costs and innovate at the same time. One solution is to acquire competitors so that they are no longer a threat.
Companies may also look for synergies. By combining business activities, overall performance efficiency tends to increase, and across-the-board costs tend to drop as each company leverages off of the other company's strengths. Friendly acquisitions are most common and occur when the target firm agrees to be acquired; its board of directors and shareholders approve of the acquisition, and these combinations often work for the mutual benefit of the acquiring and target companies.
Unfriendly acquisitions, commonly known as hostile takeovers, occur when the target company does not consent to the acquisition. Hostile acquisitions don't have the same agreement from the target firm, and so the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest, which forces the acquisition.
Generally speaking, in the days leading up to a merger or acquisition, shareholders of the acquiring firm will see a temporary drop in share value. At the same time, shares in the target firm typically experience a rise in value. This is often due to the fact that the acquiring firm will need to spend capital to acquire the target firm at a premium to the pre-takeover share prices. After a merger or acquisition officially takes effect, the stock price usually exceeds the value of each underlying company during its pre-takeover stage.
In the absence of unfavorable economic conditions , shareholders of the merged company usually experience favorable long-term performance and dividends. Note that the shareholders of both companies may experience a dilution of voting power due to the increased number of shares released during the merger process.
This phenomenon is prominent in stock-for-stock mergers , when the new company offers its shares in exchange for shares in the target company, at an agreed-upon conversion rate. Shareholders of the acquiring company experience a marginal loss of voting power, while shareholders of a smaller target company may see a significant erosion of their voting powers in the relatively larger pool of stakeholders.
Horizontal integration and vertical integration are competitive strategies that companies use to consolidate their position among competitors. Horizontal integration is the acquisition of a related business.
A company that opts for horizontal integration will take over another company that operates at the same level of the value chain in an industry—for instance when Marriott International, Inc. Vertical integration refers to the process of acquiring business operations within the same production vertical.
A company that opts for vertical integration takes complete control over one or more stages in the production or distribution of a product. Apple, for example, acquired AuthenTec, which makes the touch ID fingerprint sensor technology that goes into its iPhones.
Marriott International. Securities and Exchange Commission.
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