Introduction Mergers and acquisitions (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 individual companies to collectively form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spin offs, carve-outs or tracking stocks. It does not come as a surprise as these actions often make the news. Deals worth hundreds of millions, or even billions, of dollars dictate the fortunes of the involved company’s future.
Meaning of Mergers and Acquisitions
Merger is defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
A mix of the above modes.
Merger is also defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.
Acquisition in general sense is acquiring ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.
Methods of Acquisition:
An acquisition may be affected by
An agreement with the persons holding majority interest in the company management like the members of the board or major shareholders commanding majority of voting power; (b)
Purchase of shares in open market;
To make takeover offer to the general body of shareholders; (d)
Purchase of new shares by private treaty and
Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital.
A ‘Takeover’ is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers.
Trends in M&As
Four periods of economics history have witnessed very high levels of merger activity, which are called as merger waves. These periods were characterized by cyclical activities i.e. large number of mergers followed by relatively fewer mergers. The current period (since 1992) is called as the fifth wave. In the first three waves merger activity was concentrated in the United States of America. The fourth and the fifth waves were global in nature though the impact of the waves is most pronounced in USA. First Wave:
The first merger wave occurred after the Depression of 1883.It peaked between 1898 and 1902 though it began in 1987 and ended in 1904.The merger had the greatest impact of 8 specific industries viz, primary metals, bituminous coal, food products, chemicals, machinery, transportation, equip-ments, petroleum and fabricated metal products. These industries accounted for almost two-thirds of the total mergers during this period. The mergers in the first wave were predominantly horizontal combinations. These resulting giant captured 75% of the steel market of the United States. Similarly Standard Oil owned by John D Rockefeller commanded 85% of the market share. Another feature of this wave was creation of "trusts", where the owners of...
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