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Most corporate growth occurs by internal expansion which takes place when a firm's
existing divisions grow through normal capital budgeting activities However the most
dramatic examples of growth, often the largest increases in firms' stock prices, result
from mergers & acquisition.

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with the buying, selling
and combining of different companies that can aid, finance, or help a growing company
in a given industry grow rapidly without having to create another business entity
The merger and acquisition is a strategic tool available in the hands of the management of
the company to gain competitive advantage by exploiting synergies.
The reasons behind a merger or acquisition are varied, e.g. increasing market share,
entering new markets, developing new products through R&D, or achieving
administrative benefits. Mergers can create economies of scale, in which costs of similar
functions can be reduced.
Merger & Acquisition (M&A) and corporate restructuring are a big part of the corporate
finance world. Every day, Wall Street investment bankers arrange M&A
transactions, which bring separate companies together to form larger ones. When they're
not creating big companies from smaller ones, corporate finance deals do the reverse and
break up companies
Not surprisingly, these actions often make the news. Deals can be worth hundreds of
millions, or even billions, of dollars. They can dictate the fortunes of the companies
involved for years to come. For a CEO, leading an M&A can represent the highlight of a
whole career. And it is no wonder we hear about so many of these transactions; they
happen all the time. Next time you flip open the newspaper’s business section, odds are
good that at least one headline will announce some kind of M&A transaction.
Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this
question, this tutorial discusses the forces that drive companies to buy or merge with
others, or to split-off or sell parts of their own businesses. Once you know the different
ways in which these deals are executed, you'll have a better idea of whether you should
cheer or weep when a company you own buys another company - or is bought by one.
You will also be aware of the tax consequences for companies and for investors.


"In business a MERGER is a combination of two companies into one larger company."
Such actions are commonly voluntary and involve stock swap or cash payments to the
target. Stock swap is often used as it allows the shareholders of the two companies to
share the risk involved in the deal. A merger can resemble a takeover but result in a new
company name, often the combining the names of original companies and in new
branding; in some cases, terming the combination a "merger" rather than an acquisition is
done purely for political or marketing reasons.
The Great Merger Movement was a predominantly U.S. business phenomenon that
happened from 1895 to 1905. During this time, small firms with little market share
consolidated with similar firms to form large, powerful institutions that dominated their
The phenomenon has evolved with the passage of time and today, in most developed
economies, corporate mergers and acquisitions has become a regular feature. In this era
of globalization, merger and acquisition has become a buzzword in the corporate world
today. In mathematics 1 + 1 is always equal to 2 but in corporate world it has always
been an endeavor to make 1+1 =3. This is exactly what we define as synergy effect. It is
the very reason why merger and acquisition have become so popular today.
Other reason behind this transition is that the merged companies can acquire more power,
with which they can operate freely across the borders and influence policies of
governments where they operate.


Economists classify mergers into four types:


A combination of two firms that produce the same type of good and service. Such as
the Nation Bank/ America Bank.

A merger occurs when two firms, each working at different stages in the production of
the same good, combine. Such as an oil producer's acquisition of a petrochemical firm
that uses oil as a raw material.


Congeneric means "allied in nature or action". Where two merging firms are in the
same general industry, but they have no mutual buyer/customer or supplier relationship,
such as a merger between a bank and a leasing company. Example: prudential' acquisition
of Bache & company.

There are two types of mergers that are distinguished by how the merger is financed.
Each has certain implications for the companies involved and for investors:

Purchase mergers - As the name suggests, this kind of merger occurs when one
company purchases another. The purchase is made with cash or through the issue of some
kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with
a tax benefit. Acquired assets can be written-up to the actual purchase price, and the
difference between the book value and the purchase price of the assets can depreciate
annually, reducing taxes payable by the acquiring company.

Consolidation mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.


A merger of companies takes place when the two firms operate in different industry.
Such as Mobil oil/s acquisition of Montgomery Ward.

 A unique type of merger called a reverse merger is used as a way of going public
without the expense and time required by an IPO.


A merger transaction endorsed by the target firm's management and approved by its


A merger in which the target firm's management resists acquisition.


A merger transaction `undertaken to achieve economies of scale.


A merger transaction undertaken with the goal of restructuring the acquired company to
improve its cash flow and unlock its hidden value.


These mergers are those in which an acquiring company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a high price to
earning ratio (P/E) acquires one with a low P/E.


These are the opposite of above, whereby a company's EPS decreases. The company will
be one with low P/E acquiring one with a high P/E.

Companies are now increasingly using their surplus funds for acquiring other
companies, often in the same line of business, to widen product range and to increase
market share. An Acquisition occurs through buying of one company (the ‘target’) by
another, with the intent of more effectively using a core competence by making the
acquired company, a subsidiary in its portfolio of businesses. This activity may be
friendly or hostile, and Acquisition usually refers to a purchase of a smaller firm by a
larger one. termed as a “Takeover” where the target company did not solicit the bid of
the acquiring firm/ company. Sometimes, a smaller firm will acquire management control
of a larger or longer established known and keep its name for the combined entity. This is
known as a reverse takeover.

Acquiring Company:

The company in a merger transaction that attempt to acquire another company.

Target Company:

The company in a merger transaction that the acquiring company is pursing.


• The buyer buys the share of the target company.

• The buyer buys the assets of the target company.

Benefits of Mergers and Acquisitions:
Corporate Mergers and Acquisitions represent part of a corporate/ business strategy used
by many companies to achieve various objectives. There can be a number of motives for
a company to pursue a strategy of Merger. Following motives are generally considered
before Mergers,
 Large enough size to realize economies of scale,
 Diversification to reduce the risk of business,
 Desired synergies,
 Taxation advantage not available without merging,
 Increased efficiencies,
 Reduction in administrative cost and overcoming critical lacks,
 Risk spreading,
 Increased revenue and utilize unutilized market power/ share,
 Eliminating competition and to achieve monopoly benefits,
 Creating opportunities for cross-selling,
 Displacing an existing management,
 Efficient access to capital markets
Odds in the Mergers and Acquisitions Game:
Corporate Mergers and Acquisitions do not always result in the success; indeed many
result in a net loss of value due to certain inherent problems. These problems in achieving
success of mergers interlay includes high social and financial costs, duplication of
activities, incompatibility of systems, people and culture, etc. There might also be a
resistance by workers, directors and shareholders of the target company, and even in
some cases, by the government in the interest of the country. In addition, market of the
target company might resent a sudden take over and consider going to other suppliers for
their goods or services.
However, the companies entering into such arrangements, might overcome or mitigate
these odds by exercising due diligence. Basically, the parameters that need to be
considered while evaluating mergers are strategic, tactical, fiscal and human. One has to
mitigate the risk involved and get the right decision for success of Mergers and

Legal Procedure in Pakistan

In Pakistan, Sections 284 to 289 of the Companies Ordinance, 1984 (the “Ordinance”)
and rules, 55 to 68, contained in the Companies (Courts) Rules, 1997, deals with the
requirements for Mergers and Acquisitions of companies. An application is required to be
made under Section 284 of the Ordinance to the High Court by all the merging
companies for the purpose.
The preparation of a scheme of amalgamation/merger by the companies, which have
arrived at a consensus to merge, is the most critical step towards undertaking the activity.
There is no specific form but it generally contains rationale for activity, financial
information, valuations of shares and involved determinations, any pending litigation, etc
Another focus area for the companies, is the valuation and pricing of shares that must be
fair and reasonable. The purpose of valuation of shares of companies is to ascertain the
swap ratio to be used for the exchange of shares of the merging company or companies
with the surviving company.
Merger and Acquisition Agreement Basics

The acquisition of a business may be structured in a variety of ways, including, an asset

sale, a stock sale, or a merger. The structure and payment terms of the acquisition will be
determined by a variety of accounting, business, legal, and tax considerations.
Regardless of the structure and payment terms of the transaction, acquisition agreements
have the following four common and very important features which are examined in this
article: (a) representations and warranties; (b) pre-closing covenants; (c) conditions
precedent to closing; and (d) indemnification.
Only two are discussed here.
Representations and Warranties

The seller and the buyer will make representations and warranties to the other in
the acquisition agreement. The seller’s representations and warranties typically make up
the largest part of the acquisition agreement. Representations and warranties serve three
important purposes. First, they are informational. The seller’s representations and
warranties, coupled with the buyer’s due diligence, enable the buyer to learn as much as
possible about the seller’s business prior to signing the definitive acquisition agreement.
Second, they are protective. The seller’s representations and warranties provide a
mechanism for the buyer to walk away from, or possibly to renegotiate the terms of, the
acquisition, if the buyer discovers facts that are contrary to the representations and
warranties between the signing and the closing. Third, they are supportive. The seller’s
representations and warranties provide the framework for the seller’s indemnification
obligations to the buyer after the closing.
Prior to signing the acquisition agreement, the buyer will want to learn as much as
possible about the seller’s business. Therefore, the buyer will require the seller to make
extensive representations and warranties about its business. Many of these
representations and warranties will be specific to the seller’s industry. However, the
most common representations and warranties include: (a) corporate organization,
authority, and capitalization; (b) assets; (c) liabilities; (d) financial statements; (e) taxes;
(f) contracts, leases, and other commitments; (g) employment matters; (h) compliance
with laws and litigation; (i) product liability; and (j) environmental protection.
From the seller’s perspective, if the buyer is paying the purchase price in cash at
the closing, the most important representations and warranties the seller can elicit from
the buyer are those governing the buyer’s corporate authorization and financial condition
(i.e., the buyer’s ability to pay the purchase price). If the buyer is paying the purchase
price over time or by issuing stock, the seller will require more extensive representations
and warranties from the buyer.
Pre-Closing Covenants

The second major feature of merger and acquisition agreements is the inclusion of
various pre-closing covenants, or promises to do something, or not do something, during
the period between the signing of the acquisition agreement and the closing. Generally,
covenants are absolute; however, some may be subject to a “reasonable efforts”
qualification. Other than covenants relating to corporate approvals and governmental
filings and approvals, compliance with a particular covenant may be waived by the party
that benefits from the covenant.

Distinction between mergers and acquisitions

The terms merger and acquisition mean slightly different things.

 When one company takes over another and clearly establishes itself as the new
owner, the purchase is called an acquisition. From a legal point of view, the target
company ceases to exist, the buyer "swallows" the business and the buyer's stock
continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same
size, agree to go forward as a single new company rather than remain separately owned
and operated. This kind of action is more precisely referred to as a "merger of equals".
Both companies' stocks are surrendered and new company stock is issued in its place.

Whether a purchase is considered a merger or an acquisition really depends on whether

the purchase is friendly or hostile and how it is announced. In other words, the real
difference lies in how the purchase is communicated to and received by the target
company's board of directors, employees and shareholders. It is quite normal though for
M&A deal communications to take place in a so called 'confidentiality bubble' whereby
information flows are restricted due to confidentiality agreements (Harwood, 2005).
 Here we are including an article which tell about the critical pieces to a successful
merger and acquisition.

The Critical Pieces To A Successful Merger Acquisition

Have you seen your share of mergers and acquisitions in the last couple years to last you
a lifetime? Well, hold on, it won’t be stopping anytime soon. With the ever evolving
real estate industry, costs of doing business on the rise and many other external factors,
merger or acquisition is the only option for many organizations. I’m not here to predict
at what kind of pace, but most certainly I can confidently state that as our business
changes, the pressures of competing while maintaining a healthy organization will
contribute to more mergers and acquisitions.
So, with our current and future reality, who has the manual entitled “The Successful Real
Estate Merger/Acquisition”? Better yet, “How to Sell Your Real Estate Company and
Retain All of Your Agents”. Either of those might come in handy at some time.
I don’t know that I have the manual, but through my experience, I can share with you
what I see as most critical in the process. Here are some of those steps if you are looking
at selling your company.
1. Why?: Well, first of all you better know why you are selling your company.
Secondly, you need to be prepared to tell your agents why. My first tip, don’t sell
them and give them all these great big empty promises of how incredible it’s
going to be for their business. Just tell them the truth of your discovery process
leading to the decision to do so and how you truly feel it can and or will impact
their business. In the truthful process, you need to talk about the importance of
your decision for you and your family, too. If you focus on why it’s good for
them – they feel like they’re being sold. You are part of the equation and they
actually care about you…Tell them the truth and I think you might be surprised at
the support you will receive from your agents. It’s o.k. to let them know that you
want to retire, spend more time with your family or the challenges of competing
in the real estate industry today.
2. What is the value proposition: How is it going to be valuable to the agents
business today and in the future? What does it really mean to them (a
continuation to #1). You need to be able to clearly articulate the value
proposition of the “new organization” as you see it and what is “truly” going to
take place. Do you know the best or worst line used in the acquisition? “Nothing
is going to change” Come on, someone just paid big dollars for a real estate
company that is barely making it on a 3-5% margin and now have debt service for
the acquisition on top of the current financial dynamics of the company being
acquired? Do you think some things are going to change? The biggest trap that I
see broker/owners falling into is not telling the truth. Be responsible in your
communication, but be truthful. By the way, I’ve seen the window for agents to
leave stay open for up to 6 months after the acquisition on average.
3. Re-recruit your agents: I think this should be done on a day-to-day basis in any
real estate brokerage, but more importantly when you are getting ready to sell
your company. Agents are tired of being shuffled around like a piece of property
because they’ve worked hard and feel that they have contributed to the success of
the company. They truly feel like they are being sold. Would you want to feel
like you are being sold and not reaping the financial benefits of that sale? Walk a
mile in the agents’ shoes when you are selling your company. Simply put, be in
relationship with all of your agents and create an environment that encourages
interaction between agents and the leadership team, including ownership.
4. Tell your key agents: You have two choices, keep it a secret and cross your
fingers that it won’t make your agents feel mislead when the announcement is
made or tell a group of your key agents and gain their alignment in your go-
forward plan. My choice would be the latter. You’re rolling the dice by keeping
it a big secret and will alienate your key agents when the announcement takes
place. Tell them why you made the decision and be truthful. Allow them an
opportunity to share their thoughts and feelings and then, ask them to support you
in the retention process after the announcement takes place.
5. Plan strategically: Assemble a transition team months before the transaction
takes place and spend hours in preparation to create a seamless transition. I’ve
seen cases where the company is acquired and naturally changes brands…60 days
later, all of their listings still have the old company sign because no one ordered
the signs or received a listing inventory sheet so that the sign change-out could
take place. One little tip: Do not go out and change the signs prior to your agents
having an opportunity to talk with their sellers.
6. Train your agents: Now what are your agents going to tell their current listing
clients? There is a high likelihood that their current listing clients chose their
company over the acquiring company. This could certainly create for an
uncomfortable conversation for the agent if they are not properly armed. Have
immediate training in place to educate your agents on the true value proposition
of the new organization that has been created due to the acquisition. Take it a
step further and work closely with them around the exact dialogue for them to
have with the owners of their current listings.
7. Start Recruiting: Build an immediate recruiting strategy with your managers.
You may say, “wait a minute Jon, we have so many questions to answer with our
agents and so much busy work involved in the transition, we don’t have time to
recruit”. Well, your time is quite frankly a choice. Here is a reality, the
competition will immediately start bombarding your agents with recruiting calls
once the announcement takes place. The best way to put a stop to that? Recruit
one of their agents. Get your managers on the phone calling recruits immediately
– communicating the exciting news and scheduling a meeting to talk further. The
other option….let the competition attack (as they see this as an opportunity) and
make up all kind of rumors etc. Get on the offense immediately.

I guess my theme if your company is being acquired would be to do one thing….Drink

your truth serum and tell the truth. Last time I checked there are really no secrets. In
addition, truth and integrity always comes out on top. Manipulation, deception and
misleading always causes fracture…something you don’t want to experience when you
are selling your company.
Source: www.therealestaterecruiters.com

Motives behind the M&A:

The dominant rational used to explain M&A activity is that acquiring firms seek
improved financial performance. The following motives are considered to improve
financial performance:


This refers to the fact that the combined company can often reduce its fixed costs by
removing duplicate departments or operations, lowering the costs of the company relative
to the same revenue stream, thus increasing profit margins.

 Increased Revenue/increased Market Share:

This assumes that the buyer will be absorbing a major competitor and thus increase its
market power (by capturing increased market share) to set prices.

 Cross selling:

For example, a bank buying a stock broker could then sell its banking product to the
stock broker's customers, while the broker can sign up the bank's customers for brokerage
accounts. Or' a manufacturer can acquire and sell complementary products.

 Economies of scale:

For example, managerial economies such as the increased opportunity of managerial

specialization .Another example are purchasing economies due to the increased order size
and associate bulk-buying discounts.

 Taxes:

A profitable company can buy a loss marker to use the target's loss as their advantage by
reducing their tax liability. In the United States and many other countries, rules are in
place to limit the ability of profitable companies to "shop" for loss making companies,
limiting the tax motive of an acquiring company.

 Geographical or other diversification:

This is designed to smooth the earnings results of a company, which over the long term
smoothens the stock price of a company, giving conservative investors more confidence
in investing in the company. However, this does not always deliver value to shareholders.

 Resource transfer:

Resources are unevenly distributed across firms (Barny,1991) and the integration of the
target and acquiring firm resources can create value through either overcoming
information asymmetry or by combining scarce resources.

 Vertical integration:

Vertical integration occurs when an upstream and downstream firm mergers (or one
acquires the other). There are several reasons for this to occur. One reason is to
internalize an externality problem. A common example is such externality is double
marginalization. Double marginalization occurs when both the upstream and downstream
firms have monopoly power; each firm reduces output from the competitive level to the
monopoly level, creating two deadweight losses. By merging vertically integrates firm
can collect one deadweight loss by setting the upstream firm's output to the competitive
level. This increases profits and consumer surplus. A merger that creates a vertically
integrated firm can be profitable.

However, on average and across the most commonly studied variable, acquiring firm's
financial performance does not positively change as a function of their acquisition

Therefore, additional motives for merger and acquisition that add shareholder value


While this may hedge a company against a downturn in an individual industry it fails to
deliver value, since it is possible for individual shareholders to achieve the same hedge
by diversifying associated with a merger.

Manager's Hubris:
Manager's overconfidence about expected synergies from M&A which results in
overpayments for the target company.

Empire Building:

Managers have lager companies to manage and hence more power.

Manger's compensation:

In the past, certain executive management teams had their payout based on the total
amount of profit of the company, instead of the profit per share, which would give the
team a perverse incentive to buy companies to increase the total profit while decreasing
the profit per share (which huts the owners of the company, the shareholder); although
some empirical studies show that compensation is linked to profitability rather than mere
profits of the company.

Business Valuations:

The five most common ways to valuate a business are

 Asset valuation,

 Historical earnings valuation,

 Future maintainable earnings valuation,

 Relative valuation (comparable company & comparable transactions),

 Discounted cash flow (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but a
combination of some of them, as well as possibly others that are not mentioned above, in
order to obtain a more accurate value. These values are determined for the most part
looking at a company's balance sheet and income statement and withdrawing the
appropriate information. The information in the balance sheet or income statement is
obtained by one of the three accounting measures: a Notice to Reader, a Review
Engagement and an Audit.

Accurate business valuation is one of the most important aspects of M&A as valuations
like these will have a major impact on the price that a business will be sold for. Most
often this information is expressed in a letter of Opinion of Value LOV) when the
business is being valuated for interest's sake. There are other, more detailed ways of
expressing the value of a business. These reports generally get more detailed and
expensive as the size of a company increases; however, this is not always the case as
there are many complicated industries which require more attention to detail, regardless
of size.

Financing Merger & Acquisition:

Mergers are generally differentiated from acquisitions partly by the way in which they
are financed and partly by the relative size of the companies. Various methods of
financing an M&A deal exist:

1. Cash:

Such transactions are usually termed acquisitions rather than mergers because the
shareholders of the target company moved from the picture and the target comes under
the (indirect) control of the bidder's shareholders alone.

A cash deal would make more sense during a downward trend in the interest rates.
Another advantage of using cash for an acquisition is that these trends to lesser chances
of EPS dilution for the acquiring company. But a caveat in using cash is that it places
constraints on the cash flow of the company.

2. Debt Financing:

Financing capital may be borrows from a bank, or raised by an issuing of bonds.

Alternatively, the acquirer's stock may be offered as consideration. Acquisitions financed
through debt are known as leveraged buyouts if they take the target private, and the debt
will often be moved down onto the balance sheet of the acquired company.

3. Hybrids:

An acquisition can involved a combination of cash and debt, or a combination of cash

and stock of the purchasing entity.

4. Factoring:
Factoring can provide the necessary extra to make a merger or sale work, it is out right
sale of account receivables.

Specialist M&A advisory firms:

Although at present the majority of M&A advice is provided by full-service investment

banks, recent years have seen a rise in the prominence of specialist M&A advisors, who
only provide M&A advice (and not financing). To perform these services in the US, an
advisor must be a licensed broker dealers and subject to SEC (FINRA) regulation. More
information on M&A advisory firms is provided at corporate advisory.

M&A Marketplace Difficulties:

No marketplace currently exists in many states for the mergers and acquisitions of
privately owned small to mid-sized companies. Market participants often wish to
maintain a level of secrecy about their efforts to buy or sell such companies. Their
concern for secrecy usually arises from the possible negative reactions a company's
employees, bankers, suppliers, customers and other might have if the effort or interest to
seek a transactions were to become known .This need for secrecy has thus far thwarted
the emergence of a public forum or marketplace to serve as a clearinghouse for this large
volume of business. In some states, a multiple listing service (MLS) of small businesses
for sale is maintained by organization s such as business brokers of Florida (BBF).
Another MLS is maintained by international Business Brokers Association (IBBA).

At present, the process by which a company is bought or sold can prove difficult, slow
and expensive. A transaction typically requires six to nine months and involves many
steps. Locating parties with whom to conduct a transaction forms one step in the overall
process and perhaps the most difficult one. Qualified and interested buyers of
multimillion dollar corporations are hard to find. Even more difficulties attend brining a
number of potential buyers forward simultaneously during negotiations. Potential
acquirers in an industry simply cannot effectively "monitor" the economy at large for
acquisition opportunities even though some may fit well within their company's
operations or plans.
One part of the M&A process which can be improve d significantly using networked
computers is the improved access to "data rooms" during the due diligence process
however only for large transaction. For the purposes of small-medium sized business,
these data rooms serve no purpose and are generally not used. Reasons for frequent
failure of M&A was analyzed by Thomas Straub in Reasons for frequent failure in
mergers and acquisition- a comprehensive analysis, DUV Gabbler Edition, 2007.

Major M&A in the 2000s:

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2009:

Transaction value (in mil.

Rank Year Purchaser Purchased

Fusion: America
1 2000 Time Warner 164,747
Online Inc. (AOL)

2 2000 Glaxo Wellcome Plc. 75,961
Beecham Plc.
Royal Dutch Shell Transport &
3 2004 74,559
Petroleum Co. Trading Co
4 2006 AT&T Inc. 72,671

AT&T Broadband &

5 2001 Comcast Corporation 72,041
Internet Svcs

6 2004 Sanofi-Synthelabo SA Aventis SA 60,243

Spin-off: Nortel
7 2000 59,974
Networks Cop
8 2002 Pfizer Inc. 59,515
JP Morgan Chase &
9 2004 Bank One Corp 58,761

10 2008 Inbev Inc. 52,000
Companies, Inc