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Mergers and Acquisitions Basics :All You Need To Know

Introduction to Mergers and Acquisitions

The first decade of the new millennium heralded an era of global mega-mergers. Like the mergers and acquisitions (M&As) frenzy of the 1980s and 1990s, several factors fueled activity through mid-2007: readily available credit, historically low interest rates, rising equity markets, technological change, global competition, and industry consolidation. In terms of dollar volume, M&A transactions reached a record level worldwide in 2007. But extended turbulence in the global credit markets soon followed.

The speculative housing bubble in the United States and elsewhere, largely financed by debt, burst during the second half of the year. Banks, concerned about the value of many of their own assets, became exceedingly selective and largely withdrew from financing the highly leveraged transactions that had become commonplace the previous year. The quality of assets held by banks through out Europe and Asia also became suspect, reflecting the global nature of the credit markets. As credit dried up, a malaise spread worldwide in the market for highly leveraged M&A transactions.

By 2008, a combination of record high oil prices and a reduced availability of credit sent most of the world¡¯s economies into recession, reducing global M&A activity by more than one-third from its previous high. This global recession deepened during the first half of 2009¡ªdespite a dramatic drop in energy prices and highly stimulative monetary and fiscal policies¡ªextending the slump in M&A activity.

In recent years, governments worldwide have intervened aggressively in global credit markets (as well as in manufacturing and other sectors of the economy) in an effort to restore business and consumer confidence, restore credit market functioning, and offset deflationary pressures. What impact have such actions had on mergers and acquisitions? It is too early to tell, but the implications may be significant.

M&As are an important means of transferring resources to where they are most needed and of removing underperforming managers. Government decisions to save some firms while allowing others to fail are likely to disrupt this process. Such decisions are often based on the notion that some firms are simply too big to fail

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because of their potential impact on the economy¡ªconsider AIG in the United States. Others are clearly motivated by politics. Such actions disrupt the smooth functioning of markets, which rewards good decisions and penalizes poor ones. Allowing a business to believe that it can achieve a size ¨Dtoo big t o fail¡¬ may create perverse incentives. Plus, there is very little historical evidence that governments are better than markets at deciding who should fail and who should survive.

In this chapter, you will gain an understanding of the underlying dynamics of M&As in the context of an increasingly interconnected world. The chapter begins with a discussion of M&As as change agents in the context of corporate restructuring. The focus is on M&As and why they happen, with brief consideration given to alternative ways of increasing shareholder value. You will also be introduced to a variety of legal structures and strategies that are employed to restructure corporations.

Throughout this book, a firm that attempts to acquire or merge with another company is called an acquiring company, acquirer, or bidder. The target company or target is the firm being solicited by the acquiring company. Takeovers or buyouts are generic terms for a change in the controlling ownership interest of a corporation.

Words in bold italics are the ones most important for you to understand fully;they are all included in a glossary at the end of the book.

Mergers and Acquisitions as Change Agents

Businesses come and go in a continuing churn, perhaps best illustrated by the ever-changing composition of the so-called Fortune 500¡ªthe 500 largest U.S. corporations. Only 70 of the firms on the original 1955 list of 500 are on today¡¯s list, and some 2,000 firms have appeared on the list at one time or another. Most have dropped off the list either through merger, acquisition, bankruptcy, downsizing, or some other form of corporate restructuring. Consider a few examples: Chrysler, Bethlehem Steel, Scott Paper, Zenith, Rubbermaid, Warner Lambert. The popular media tends to use the term corporate restructuring to describe actions taken to expand or contract a firm¡¯s basic operations or fundamentally change its asset or financial structure. Synergy

Synergy is the rather simplistic notion that two (or more) businesses in combination will create greater shareholder value than if they are operated separately. It may be measured as the incremental cash flow that can be realized through combination in excess of what would be realized were the firms to remain separate.

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