Page 39 - FINAL CFA II SLIDES JUNE 2019 DAY 6
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LOS 25.a: Classify merger and acquisition (M&A) activities based
on forms of integration and relatedness of business activities. READING 25: MERGERS AND ACQUISITIONS
Forms of Integration MODULE 25.1: MERGER MOTIVATIONS
Statutory merger, the acquirer takes over all of the target’s assets and liabilities.
Subsidiary merger, the target becomes a subsidiary of the purchaser. Typically occur when the target has a well-known brand that the acquirer wants to retain!
Consolidation, both companies cease to exist in their prior form, and they come together to form a completely new company.
Types of Mergers
Horizontal merger, the two businesses operate in the same or similar industries, and may often be competitors.
Vertical merger, the acquiring company seeks to move up or down the product supply chain. Can be forward integration, where the acquirer is moving up the supply
chain toward the ultimate consumer; or backward when the company is moving down the supply chain toward the raw material inputs.
Conglomerate merger, between two companies that operate in completely separate industries; Expected to be few, if any, synergies!
LOS 25.b: Explain common motivations behind M&A activity.
Synergies: the combined company will be worth more than the two companies would be worth if operating separately (Cost and revenue synergies).
More rapid growth: External growth via M&A activity is usually a much faster way to increase revenues than making investments internally (i.e., organic growth).
Increased market power: Vertical mergers may increase market power by reducing dependence on outside suppliers, thereby influence industry output and market prices.
Gaining access to unique capabilities.
Diversification: This makes no sense for shareholders but may be rational for the managers.
Bootstrapping EPS.
Personal benefits for managers: High correlation between the size of a company and how much a manager is paid (empire building boots managerial ego)
Other reasons include: tax benefits, unlocking hidden value, achieving international business goals, taking advantage of market inefficiencies, working around
disadvantageous government policies, use technology in new markets, product differentiation, provide support to existing multinational clients.
