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18 Cards in this Set
- Front
- Back
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3 main strategies for growth
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Expansion -
Devt of existing or new markets or products in response to changes in tech/taste/opps. Integration (or related diversification) - Horizontal - add new markets for existing product or new products to its current markets - benefit from economies of scale. Vertical - expands along the supply chain (backwards or forwards) - greater control over industry but more prone to falls in demand. Diversification (unrelated) - Concentric - devt of products that offer synergies w current products - combi means achieve more, poss at lower cost. Conglomerate - devt of products w no marketing/tech/product synergy, but poss mngt synergies. |
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Advantages of diversifcation
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SCUMBAG
Spread risk by operating in diff markets Cash synergies poss – surpluses from 1 bus used in for others Upped/improved profitability poss Move quickly into high-profit area by acquiring firm in that market Better access to funds as resultant larger firm Acquisition of new bus may facilitate withdrawal from existing markets Greater influence in the market & political env as larger firm But – poss referral to CC bc reduced competition in ‘related diversification’ – less likely with conglomerate and concentric diversification. |
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Problems with conglomerate diversification
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PEA
Profits in one subsidiary used to cross-subsidise others making losses with another – deprives successful businesses of resources & allows inefficiencies to persist EPS diluted when co’s w high P/E ratios acquired & risk may be increased rather than reduced Anticipated mngt synergies often not realised in practice |
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9 common reasons to undertake acquisitions and mergers
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AEROSTATS
Acquire new product range or move into a new market Economies of scale in production, purchasing, marketing Reduce competition (CC exists to prevent this) Obtain resources more quickly/cheaply than through internal growth (inc assets undervalued or sold off (‘asset stripping’)) Spread risk by diversifying into countercyclical markets/products – stabilise total sales/profits Tactical – defence against being acquired itself – purchase predator or make itself bigger & harder to take over Acquire cash (if target co v liquid), access to finance, expert staff, mngt expertise, tech, supplies, production facilities Tax advantages (loss-making co – past losses can be set against future profits of combined entity) Shares as consideration for a purchase rather than cash – req’d by a policy of internal growth AEROSTATS Acquire new product range or move into a new market Economies of scale in production, purchasing, marketing Reduce competition (CC exists to prevent this) Obtain resources more quickly/cheaply than through internal growth (inc assets undervalued or sold off (‘asset stripping’)) Spread risk by diversifying into countercyclical markets/products – stabilise total sales/profits Tactical – defence against being acquired itself – purchase predator or make itself bigger & harder to take over Acquire cash (if target co v liquid), access to finance, expert staff, mngt expertise, tech, supplies, production facilities Tax advantages (loss-making co – past losses can be set against future profits of combined entity) Shares as consideration for a purchase rather than cash – req’d by a policy of internal growth |
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10 major problems inherent in acquisitions and mergers
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PUBLICISED
PR problems poss – customer/public boycotting firm if disagree w takeover Unification of dividend policies difficulties Bids often contested – d’s of Tco trying to prevent takeover Logistical problems can arise when acquired sites geographically separate from existing sites Integration of new products/markets/customers/suppliers/mngt/systems can lead to mngt overload Co acquiring Tco may pay over the market value for Tco & stretch its financial resources Integration of workforces diff, poss redundancies S/hs of Tco may be unwilling to sell shares or agree to acquisition Economies of scale, esp in HO functions, often don’t materialise (poss become diseconomies of scale) Detonate/trigger regulatory intervention |
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Reasons why a co’s s/hs & the market may not approve of a takeover or merger
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IFS
Increase in risk due to nature of industry or financial profile of Tco as result of merger Fall in EPS or net asset backing per share as result of merger Social or moral disapproval of Tco |
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3 methods of purchase consideration
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Shares (paper purchase) – advantage of allowing Tco’s s/hs to continue to own equity. May be some dilution of control, but not of earnings – EPS should exceed total of 2 co’s individual EPSs.
Cash (cash available or raise cash by stock market issues of shares or loan stock) – generated by BIDSS (bank borrowing; increasing WC; disposal of surplus assets; S&L of equip; staff share purchase schemes or rights issues). Ends involvement of Tco’s s/hs who will be subj to CGT. [Vendor placing – mixture of the 2 – new shares in acq-co placed w/ stockbrokers to raise cash to pay Tco’s s/hs] Debentures (loan capital) – impact is the same for the Tco. Alternatively, Tco s/hs could be offered loans or convertible loans – provide a return with lower risk & option to convert to equity in the future. 3 implications for acq-co: reduce corp tax; increase debt (riskier); won’t lead to dilution of control or earnings in acq-co. NB – in a merger, a share-for-share exchange occurs. |
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Factors to consider when deciding form of consideration
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ACIDIC
Approval by s/hs needed to increase borrowing/share cap CGT when s/hs dispose of shares for cash Issue of new shares may change s/h control Debt funding of takeover cheaper than equity (interest is allowable expense – reduces taxable profit & tax charge) Issue of new shares will affect purchasers’ EPS Consider Tco s/h views – if prefer shares will want to ensure return does not fall – a fall in divs will need to be matched by a CG |
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Anticipated advantages of a merger or takeover may not materialise. Selection of a T-co w following characteristics will help
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BITCHINESS
Balanced customer portfolio Industry positioned in one of growth Techinal know-how Close match w corporate strategic plan High added value In close proximity (location) to acq-co’s business Niche in the market well-defined Establish/provide something firm doesn’t already have Stable and motivated workforce Short production cycle Mngrs need to give suff attention to these things (even if focused on market power/size/reducing comp). Measures of increase EPS & share price - merger effect on EPS depends of relative P/E ratios of 2 co's. 'Boot strap' effect - if acq-co has higher ratio, EPS will rise. |
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Resistance devices – preventing a takeover
(nb City Code – act in best interest of s/hs, e/e/s & creditors) |
DIRK
Dealings in co’s shares kept an eye on Industry position in terms of tech resources & size – if uncompetitive attract takeover. Review market price of shares constantly in relation to earnings & asset values – if undervalued attract takeover Keep contact w range of stockbrokers/analysts/investment bankers – will hear hints/rumours first |
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Resistance tactics
(NB takeover bid succeeds when enough s/hs willing to sell – occurs if attracked by potential CG due to high offer price, or when unhappy w current share price perf) |
CARPACCIOS
Convincing s/hs shares valued too low by circulating profit/div forecasts. Mngt change risky. ‘Defence docs’ & press release. Additional shares issued to a friendly party or as ‘A’ shares to maintain s/h control but increase funds req/d by predator to purchase co Revaluing assets to increase asset backing and encourage upward movement in share price Publicity campaign – highlight strengths/potential Arrange mngt buyout Counter-bid for the predator (if similar size co’s) Campaign advertising against predator, its accounts and methods of operation Inviting a bid fromother ‘friendlier’ co (a ‘white knight’) = defensive merger OFT asked to refer bid CC Sell more attractive assets to make bus unattractive – introduce a ‘poison pill’. Must follow City code on Takeovers and Mergers. |
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Extent of coverage of the Code
(City Code – issued by the Panel on Takeovers and Mergers – all s/hs must receive fair and equal treatment) |
Listed & unlisted plcs, statutory & chartered co’s resident in UK, Channel Islands or Isle of Man
Private co’s of same residency if in prior 10-yr period equity cap listed of SE; dealings in shares have been advertised regularly in newspaper; or filed a prospectus for the issue of equity sh cap at CH. Partial offers and offers by a parent co wishing to acquire shares in its subsidiary. Excludes offers for non-voting, non-equity capital generally. |
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City Code – 6 general principles
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T-co – equivalent treatment to all holders of securities of same class. If control acquired, other holders protected.
T-co – suff time & info must be allowed & board must give its view on effects. T-co – board must act in interest of co as a whole. Must not create false markets in securities of T-co, predatore co or any other co concerned w bid so that rise/falls become artificial & normal functioning of market distorted. Predator – must announce bid only after ensuring can fulfil full cash consideration & reasonable measures to secure implementation of other types T-co – must not be hindered in conduct of its affairs by a bid for longer than reasonable. Conflicts of interest may arise for financial advisors involved – decline to act or careful segregation of bus (building a Chinese wall) |
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City Code (38 rules)
Approach, announcements & ind advice |
Offer proposed to the board in first instance.
Potential predator must be disclosed at the outset + must be satisfied that has resources to implement the offer. Announcement made as soon as suff details decided – discloses terms; identify predators & details of existing shareholding; conditions to which offer is subj; details of any arrangements which may be inducement to deal/not deal in the shares. After start of offer period, P-board must sent copy of announcement to its s/hs. If stmnt made that don’t intend to formulate an offer for a co, usually bound by it. Stmnts should be clear & unambiguous. T-co must obtain competent ind advice on any offer & this is comm to s/hs, esp in mngt buyout cases. Inappropriate for ind financial advice to be given to predator by person in same group as f-adviser or substantial interest in either P-co or T-co. |
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City Code (38 rules)
Dealings & restriction on acq of shares & rights over shares |
Restricted dealings in securities of T-co by any person other than P-co if access to confidential, price-sensitive info. Also restricted dealing in P-co shares where offer is price-sensitive in terms of its effect on P-co securities.
Restricts sale of securities in T-co by P-co during offer period unless Panel approved. No further purchases after consent and notice. Limits opp for persons to contact private/small corp s/hs w view to seek irrevocable commitments to accept/reject offer. 30%+ of VRs, must make a cash offer to all other /shs at highest price paid in 12 months before offer announced. When offer contemplated & P-co acquired shares in T-co during 3 months prior to offer, subsequent offers must not be on less favourable terms w/out Panel consent. If P-co purchases shares at higher price than offer price during open offer, offer price must be increased. Also immediate disclosure re no. of shares acq’d & price paid as soon as acq at higher price agreed. Immediate announcements req/d should terms of offer req amendment. Dealings by parties to a takeover or their associates must be disclosed to SE daily by noon. Also req’d where purchases/sales made by associates for the a/c of non-discretionary clients who are themselves not associated. Intermediaries may be req/d to disclose names of their clients. |
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City Code (38 rules)
Conducting an offer |
Equality of info for all s/hs
Advertisements must be cleared by the Panel Details of all docs & announcements must be lodged with the Panel No actions taken if would mislead s/hs or markets Transfers by the T-co must be promptly registered Special care must be exercises w all docs, & terms detailed in writing. Docs available & on display. Specific rules govern way in which profit forecasts are stated and assets valued. Offer doc posted w/in 28 days of announcement of a firm intention to make an offer (usually). Offer must be open for at least 2 1days after posted (may be extended by further notice). |
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City Code (38 rules)
(i) The mandatory offer and its terms (ii) Substantial acquisition of shares |
(i) Time limits in respect of acceptances, counter-offers, etc – no details, but be aware they exist & must be adhered to.
(ii) Rules re speed at which person/person acting in concert may increase shareholdings between 15% and 30% VRs. Invokes accelerated disclosure of acquisitions of shares/rights over shares re to such holdings. |
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Statutory backing
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Principle currently underlying UK merger law codified in Enterprise Act 2002 – mergers judged by whether they ‘substantially lessen competition’.
Mergers referred by OFT to CC for decisions. Comp Appeal Tribunal for appeals. EC Merger Regulation test for whether merger subject to regs – whether a merger ‘significatnly impedes effective competition’. CJA 93 – insider dealing provisions – applies to prohibited dealings part of the Code CA 06 – s552 (no financial assistance) & ss979-982 (allows co which holds 90% following a bid to compulsorily purchase remaining shares on same terms & remaining s/hs can insist on their shares being bought). Regs now on a staturoty rather than self-regulating basis. Panel is the supervisory authority re takeovers (pursuant to 2004 EU Directive on Takeover Bids). Statutory functions set out in Part 28 of CA 06. Staturoty authority of the Takeover Code from Takeovers Directive (Interim Implementation) Regs 06. |
