2oii0r2017 ‘Acquisition
Acquisition
What is an ‘Acquisition’
‘An acquisitions a corporate action in which 2 company buys most, fnot all,
cof another firm's ownership stakes to assume control fit. An acquisition
‘occurs when a buying company obtains more than 50% ownership in target
company. As partof the exchange, the acquiring company often purchases
the target company’s stockand other assets, which allows the acquicing
company to make declsions regarding the Rewiy acquired assets witholt the
approval ofthe target company’s shareholders. Acquisitions can be pad for
incash inthe acquiring company’sstock or combination of both
BREAKING DOWN ‘Acquisition’
Huge deals dominate the business section of the newspaper, such as Dow
‘Chemical’s purchase of DuPont for for $130 billion in 2015. In any given year,
however, far more small to medium-sized businesses merge with and acquire
‘one another than do large companies.
Why Make an Acquisition?
Companies perform acquisitions for various reasons. They may be seeking to achieve economies of
scale, greater marketshare inreased synergy, cost reductions, ornew niche offerings. they wish
to expand their operations to another country, buying an existing company may be the only viable
‘way to enter a foreign market, or at least the easiest way: The purchased business will already have
itsown personnel both labor and management), a brand name and other intangible assets,
‘ensuring thatthe acquiring company wl start off with a good customer base.
‘Acquisitions are often made as part ofa company’s growth strategy when itis more beneficial to take
‘over an existing firms operations than itis to expanding on its own. Large companies eventually find
it difficult to keep growing without losing efficiency. Whether because the company is becoming too
bureaucratic or itruns into physical or logistical resource constraints, eventually its marginal
productivity peaks. To find higher growth and new profits, the large firm may look for promising
young companies to acquire ad incorporate into its revenue stream.
When an industry attracts too many competitor rms or when the supply from existing fms ramps
‘up too much, companies may look to acquisitions as a way to reduce excess capacity eliminate the
‘competition, or focus on the most productive providers.
Ifa new technology emerges that could increase productivity, a company may decide that itis most
‘cost-efficient to purchase a competitor that already has the technology. Research and development
‘may be too dificult or take too much time, so the company offers to buy the existing assets of
‘company that has already gone through that process.
Nan Acquisition and a Takeover?
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152oii0r2017 ‘Acquisition
"merger, where Doth companies (usually ot roughly equal size) are wiling to Join together, sometimes
toform a third company.
Friendly and Hostile Acquisitions
Acquisitions can be ether rend or hostile. Friendly acquisitions occur when the target fm
‘expresses its agreement tobe acquired, Hoste acquisitions don’t have the same agreement from
the target rm, and the acquiring firm must actively purchase large takes ofthe target company to
sain a major.
Friendly acquisitions often work towards a mutual benefit for both the acquiring and the target
‘companies. The companies develop strategies to ensure that the acquiring company purchases the
appropriate assets, including the review of nancial statements and other valuations, and that the
purchase accounts for any obligations that may come with the assets. Once both partis agree tothe
terms and meet any legal stipulations, the purchase moves forward.
Unfriendly acquisitions, more commonly referred to as hostile takeovers, occur when the target
‘company does not consent tothe acquisition. n ths case, the acquiring company must attempt to
{gather a majority stake to force the acquisition to go forward. To acquire the necessary stake, the
‘acquiring company can produce a tender offer designed to encourage current shareholders to sell
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‘Acquistion
Mergers and Acquistions - M&A
Busted Takeover
‘Acquistion Premium
Acoretive Acquistion
‘Acquison Financing
‘Asset Acquistion Strategy
Acquistion Adjustment
Horizontal Acquistion
‘Acquison Cost
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‘Apurehasing company can finance an acquisition by raising private equity, ecelvinga bankloan or
striking a mezzanine financing deal that involves elements of both debt and equity financing. I's
also common for sellers to finance part ofan acquisition; seller financing s more common in
conjunction witha banktoan.
Ever since the nancial crisis of 2007-2008, when many lenders were badly burned by toxic deb,
ralsing money to acquire a target company has become more dificult. Lenders have modified their
criteria for providing credit by raising down payment requirements and carefully srutinizing
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Equity ancing involves the buyer company seling securities n order to ralse money, then using
that money for both the acquisition transaction and to provide additional cash for the new company.
‘Bank financing takes a varity of forms. The most common Ist receive a cash flow-based loan, in
case the bank scrutinizes the cashflow, debt load and profit margins ofthe target company.
‘The target company's financials are more important than the acquiring firm's; afterall the target
‘company is the asset that eventually generates the returns that are used to pay back the loan f
theres seller financing involved, the target company may take over the actual note ater the
‘acquiring company makes the down payment.
‘Asset based financingis another option. In an asset-based loan, the lender looks atthe collateral,
{the inventory, receivables and fixed assets of the target frm) rather than the cashflow and debt
loan.
Evaluating an Acquisition Candidate
Before making an acquisition, ts imperative fo a company to evaluate whether its target sa good
candidate. Infact, offices of companies have aduciary duty to perform thorough due ailgence
before makingany acuisition.
‘The rst step in evaluating an acquisition candidate s determining whether the asking price Is
reasonable. The metrics investors use to place a value on an acquisition target vary from industry to
Industry, one ofthe primary reasons acquisitions falto take place that the asking price for the
target company exceeds these metrics.
Potential Buyers should also examine the target company's debt load. A company with reasonable
debt ata high interest rate that a larger company could refinance for much less often isa prime
acquisition candidate; unusualy high iablities, however, should send up a red fag to potential
investors. (What's been called the worst dealin the history of U.S. nance, Bank of America's 2008
acquisition of Countrywide Financial, occurred through afallur to recognize such liabilities: See
Why is due dlligence important before a company acquisition?)
While most businesses face a lawsuit once in awhile - huge companies such as Walmart get sued
several times dally~ a good acquisition canldate is one that isn’t dealing with a level o tigation
that exceeds whats reasonable and normal for its industry and sie,
‘Agood acquisition target has clean, organized financial statements. This makes it easier forthe
investor to dots due diligence and execute the takeover with confidence it also helps prevent
‘unwanted surprises from being unveiled after the acquisition is complete.
Three of Finance History's Largest Acquisitions
“The late 1980s experienced a series of mult-illon-dollar acquisitions not previously seen. From
Yahoos 1999 $6 bilion purchase of Broadcast. com to @Hiome's almost $7billon purchase of Excite,
‘companies were interested in growth now, profitably later if evr) In the rst few weeks of 2000,
such acquisitions reached their zenith,
AOL and Time Warner
‘AOL, the most publicized online service ofits day, had bulltathen-remarkable subscriber base of 30,
million people by offering a software suite (avallable on compact discs!) that entitled users to
hundreds of free hous. Yes, internet usage was measured in hours back then, and you'd have touse
the service 24/7, fora month ata time, to take advantage ofthe offer in its entirety.
Meanwhile, Time Warner was decried as an "old media" company, despite having tangible
businesses (publishing, television, etal) and an enviable income statement. Ina masterful dsplay of
‘overweening confidence, the young upstart purchased the venerable giant for $164 lion, dwarfing
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billion, or significantly more than the size ofthe original acquisition. AOL would have been better off
withdrawing 350 milion $100 bills and setting them all on fire. few years later, the companies cited
Inreconcilabe differences and ended the mariage. Today Time Warners a$60.0bilion company; Its
erstwhile purchaser was acquired by Verizon in 2015 for $44 billion,
Vodafone and Mannesmann
Yet AOL's ephemeral takeover of Time Warners merely the Western Hemisphere's record holder. A
{ew months earlier, British telecommunications company Vodafone completed a rancorous if not
completely hostile takeover of German wireless provider Mannesmann. The Vedafone/Mannesmann
deal cost $183 billion, in 1999 dollars—or more precisely, $183 billion in 1998 Vodafone stock.
Vodafone offered and Mannesmann ultimately accepted. The deal would have been historic even
without the superlative currency figure, ast represented the first foreign takeover in modern
German history. Today, Mannesmann survives under the name Vodafone D2, operating exclusivelyin
Germany asthe wholly owned subsidiary ofits UK. parent.
Express Scripts and Medco
Worldwide acquisitions taled off considerably in the ensuing decade. The value of ll corporate
‘acquisitions in 2011 was lower than the corresponding number from 14 years earlier. Infact, the
largest proposed acquisition ofthe period never even got off the ground, Similar to the
\odafone/Mannesmann deal, it would have Involved America's second-largest mobile provider,
‘ATT, buying number four T-Mobile for $39 billion, (Continuing the parallel, T-Mobile Is a subsidiary
‘of Germany's Deutsche Telekom) Even though the deal was endorsed by partes as diverse as major
special interest groups, most state attorneys general and multiple labor unions, the U.S. Department
of Justice cited antitrust reasons and sued. The principals pulled out, leaving afar less publicized
deal as the biggest buyout of the yea,
In 2012, St Lous-based Express Scripts purchased Medco for $29 billion. Both companies administer
prescription drug programs, process and pay claims, and indirectly act as bulk purchasers for thelr
millions of customers. Since the acquisition, it's estimated that one in three Americans now falls
under the Express Scripts aegis.
After the Acquisition
Most ofthe attention during an acquisition goes towards valuation, market shares and legalities.
Little notice is given to what happens inthe aftermath, eventhough the success of an acquisition
usualy hinges on how the new company handles its many responsibilities. Anew, logical corporate
structure needs to be established. Resources need tobe reallocated towards their most valuable
‘ends. Accounting processes and information have to be combined ina legal, tax-efficent way. Pre
‘existing business relationships should be re-assessed — including relationships with staff
Except in rare cases, the acquiring company has to learn new operations, new customers and new
suppliers. Fist and foremost, the new ownership needs to meet itsnew employees. These
‘employees are likely tobe anxious about theirjob status and a changing culture I's the
responsibility of new leadership to communicate effectively, make honest and fair decisions, and try
‘to-minimize the risks and costs involved inthis transition.
‘The immediate nancial information has probably been carefully considered, but now the realty of
actually operating anew business front and center. There are new logistics fr the delivery of
‘goods and services and forthe integration of technology. When mergers involve large numbers of
new employees, a new business command structure needs to be designed, articulated and
executed,
‘Some companies decide to bring in third-party help to smooth this transition. Some consultants
specialize in merger and acquisition (M&A) transitions and accounting integration. This can be
«especially helpful for management that has never been involved in an acquisition before.
Ultimately, the successor failure ofan M&A deal hinges on the reaction of shareholders and
Itmoney in shareholders! pockets and the customers’
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EPS ts lower following an acquisition t's considered aiutve.
Mergers and Acquisitions -
M&A
Video Definition
a) “8
Mergers and acquisitions (MBA) isa general term that refers tothe consolidation of companies or
‘aseets. MBA can include a numberof different transactions, such as mergers, acquisitions,
consolidations, tender offers, purchase of assets and management acquisitions. n all cases, two
‘companies ae invelved, The term Mas also refers to the department a financial institutions that
deals with mergers and acquisitions.
‘Mergers and Acquisitions - M&A’
Breaking Down Mergers & Acquisitions
NBA can include a umber of different transactions detailed below.
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