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Univesity of Business Technology

Merger & Acquisition (Graduate Program)


June 2011 Dr. Mohammd Bazaz Test #1 Time 1 hours Student Name: DRITA RATKOCERI Please answer the following questions in detail on your paper 1. Define three different types of Mergers and make a real example for each one. Mergers appear in three forms based on the competitive relationships between the merging parties. The first form is known as the Horizontal Merger whereby one firm acquires another firm that produces and sells an identical or similar product in the same geographic area and thereby eliminates competition between the two firms. To relate to the field of work I am currently in, I can say that an example would be if Raiffeisen Bank Kosovo acquired the business of another Retail Bank in Kosovo for instance Pro Credit Bank. The second form is the Vertical Merger whereby a company buys a customer or even a supplier or the raw material of the supplier or even specific expertise of the other company so that both companies benefit. An example would be if a company producing dairy products in Prishtina buys another company that deals with farming of the animals in Tirana for instance. The third form is known as the Conglomerate Merger whereby one firm acquires the business of another firm in a completely different field of business. It usually involves merging firms that work in different markets and thus the opportunity to expand the business and increase their market share in the designated market is higher.
2. Identify as many different motivations as you can for M&A.

There are a number of possible motivations that may result in a merger or acquisition.
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One of the most known ones is to achieve economies of scale which may be defined as the lowering of the average cost to produce one unit due to increase in the total amount of production. Another motivator can be the integration into the market to achieve greater market presence or market share by acquiring firms through which the parent firm currently conducts normal business operations such as a supplier or distributor but also to compete effectively through volume sales with lower profit margins. The shared talents of the combined firms may mean competitive advantages versus other smaller competition. Another motivator involves excess cash balances (over liquididity as Raiffeisen Bank Kosovo was at beginning of 2010 and immediate actions were taken in order to decrease liquidity by transferring some of the funds to other network banks in the region) meaning that a firm may be mature in the business industry it operates but has little opportunities for future investment beyond the existing business line. Usually excess cash is a primary motivation for corporate acquisition activity. Another feature that makes firms attractive as potential merger partners is the presence of unused tax shields. The corporate tax code allows for loss carry forwards, if a firm loses money in one year, the loss can be carried forward to offset earned income in subsequent years. Another motivation factor can be the merging of two firms to boost earnings per share. Two companies can be merged if for instance a particular company is very good at administration while some other company is good at marketing strategies or in operations. If the expertise of both companies is amalgamated, it produces synergy. And the new formed company has a much higher potential and superiority to what the individual companies previously had.

3. Statistics show that majority of M&A are failed in achieving their

objectives. Identify and explain in detail as many factors for these failures as you can. If you have any personal experience for a failure merger you may indicate here. There are a few factors causing failure of mergers and acquisitions. These are: - A poor strategic rationale for the merger and acquisition deal; - Overpayment for the acquisition based on an overestimation of its value;
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Inadequate integration planning and execution; A void in executive leadership (poor management); Poor strategic communications; A severe cultural mismatch, different management style on global organizations, the question of centralization or decentralization; Unfortunate circumstances bad luck; Poor post-acquisition integration; Unsatisfied human resources (people leaving the company);

4. Management of a firm approached you and asked you as an expert to

value a target firm that like to acquire. Identify at least two techniques of valuation and explain in detail how will you come up with the value of a firm. There are several alternative methods that may be used to value a firm targeted for merger or acquisition. One method involves discounted cash flow analysis. First, the present value of the equity of the target firm is established. Next, the present value of the expected synergies from the merger, in the form of cost savings or increased after-tax earnings, is evaluated. And finally, the summation of the present value of the existing equity with the present value of the future synergies results in a present valuation of the target firm. Another technique that is sometimes employed is valuation in relation to book value, which is the difference between the net assets and the outstanding liabilities of the firm. A related idea is valuation as a function of liquidation, or breakup, value. Breakup value can be defined as the difference between the market value of the firm's assets and the cost to retire all outstanding liabilities. The difference between book value and liquidation value is that the book value of assets, taken from the firm's balance sheet, is carried at historical cost. Liquidation value involves the current, or market, value of the firm's assets. Some valuations are based on replacement cost. This is the estimated cost of duplicating or purchasing the assets of the division at current market prices. Obviously, some premium is usually applied to account for the value of having existing and established business in place.

5. Two categories of preventive and active measures of antitakeover presented in this course. Define each and offer several antitakeover defensive actions that you may have for each of these two categories. Antitakeover defenses can be divided into two categories: - Preventive Antitakeover Defenses - Active Antitakeover Defenses. Preventive Antitakeover Defenses are designed to reduce the likelihood of a financially successful hostile takeover. Poison Pills Poison Pills is a technique used to raise the cost of takeover. There are two types of poison pills: flip over and flip in. While the poison pill defense may help ward off unwanted suitors, it also makes it more difficult for shareholders to profit from the announcement of a takeover. Rights issued to existing shareholders can effectively thwart a takeover by diluting the acquirer's ownership percentage, making a takeover more expensive and preventing or delaying control of the board and the company. Shareholders Rights Plan The most common form of takeover defense is the shareholders' rights plans, which activates at the moment a potential acquirer announces its intentions. Under such plans, shareholders can purchase additional company stock at an attractively discounted price, making it far more difficult for the corporate raider to take control. Voting Rights Plans Targeted companies may also implement a voting-rights plan, which separates certain shareholders from their full voting powers at a predetermined point. For instance, shareholders who already own 20% of a company may lose their ability to vote on such issues as the acceptance or rejection of a takeover bid. The presence of corporate predators may also trigger super-majority voting, which requires that a full 80% of shareholders approve a merger, rather than a simple 51% majority. This requirement can make it difficult - if not impossible - for a raider to gain control of a company Active Antitakeover Defenses are employed after a hostile bid has been attempted. Greenmail
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A company may also pursue the greenmail option by buying back its recently acquired stock from the raider at a higher price in order to avoid a takeover. Because the shares must be purchased at a premium over the takeover price, this payout strategy is a prime example of how shareholders can lose out even while avoiding a hostile takeover. White Knight If a determined hostile bidder thwarts all defenses, a possible solution is a white knight, a strategic partner that merges with the target company to add value and increase market capitalization. Such a merger can not only deter the raider, but can also benefit shareholders in the short term, if the terms are favorable, as well as in the long term if the merger is a good strategic fit. Although a white knight defense is generally considered beneficial to shareholders, this is not always the case when the merger price is low or when the synergies and efficiencies of the combined entities do not materialize. Increasing Debt Increasing debt as a defensive strategy has been deployed in the past. By increasing debt significantly, companies hope to deter raiders concerned about repayment after the acquisition. However, adding a large debt obligation to a company's balance sheet can significantly erode stock prices. Making an Acquisition Perhaps a better strategy for target shareholders is for the company to make an acquisition, preferably through stock swaps or a combination of stock and debt. This has the effect of diluting the raider's ownership percentage and makes the takeover significantly more expensive. Although stock prices may drop upon the target's acquisition of the third party, shareholders can benefit in the longer term from operational efficiencies and increased revenues. Acquiring the Acquirer Pac-Man Defense A takeover defense that has been successful in the past is to turn the tables on the acquirer and mount a bid to take over the raider. This requires resources and shareholder support, and it removes the possibility of activating the other defensive strategies. This strategy, called the PacMan defense very rarely benefits the shareholders.