The Mergers and
Chapter 1: Introduction to
Mergers and Acquisitions
Chapter Summary and Learning Objectives
The purpose of this chapter is to provide students with an understanding of the underlying dynamics of the M&A process. This includes developing a working knowledge of the relevant vocabulary, the role of various participants in the M&A process, and the various factors affecting M&A activity historically. The chapter also addresses why mergers and acquisitions take place and the common reasons why M&As may fail to achieve expectations.
Chapter 1 Learning Objectives: Providing students with an understanding of
1. What corporate restructuring is and why it occurs;
2. Commonly used M&A vocabulary;
3. Key participants in the M&A process;
4. M&A as only one of a number of strategic options for increasing shareholder value;
5. Common motivations for M&A activity;
6. Historical mergers and acquisitions waves;
7. The Impact of M&A on shareholders and society; and
8. Commonly cited reasons for M&As frequent failure to meet expectations.
Learning Objective 1: Understanding what corporate restructuring is and why it occurs
Corporate Restructuring: This term is a catchall referring to a broad range of activities intended to expand or contract a firm’s basic operations or fundamentally change its asset or financial structure. It is often referred to as either operational or financial restructuring.
Operational restructuring may include the following:
--Downsizing through layoffs or attrition the number of employees required to support specific operations or closing of unprofitable or non-strategic operations;
--The partial or complete divestiture (i.e., sale) or spin-off (i.e., non-taxable transfer of a subsidiary’s stock to parent company shareholders) of a product line or subsidiary; or
--Mergers or acquisitions to enhance the parent’s overall strategic position and long-term profitability.
Financial restructuring may include the following:
--Adding debt to lower the firm’s weighted average cost of capital;
--Adding debt to repurchase outstanding stock to reduce stock in the hands of shareholders most likely to sell to an unwanted acquirer or to reward current shareholders by increasing earnings per share and in turn the share price; or
--Leveraging the firm to distribute a special dividend to make the firm less attractive to potential acquirers and to increase loyalty of existing shareholders.
Learning Objective 2: Understanding commonly used M&A vocabulary.
Statutory Merger: Combination of two corporations in which only one corporation survives in accordance with the statutes of the state in which the surviving firm is incorporated
Subsidiary Merger: A merger of two companies resulting in the target company becoming a subsidiary of the parent (e.g., EDS and GM)
Consolidation: Two or more companies join to form a new company (e.g., Daimler-Benz and Chrysler)
Acquisition: Purchase of an entire company or a controlling interest in a company.
Divestiture: The sale of all or substantially all of a company or product line to another party for cash or securities
LBO: The purchase of a company financed primarily by debt. The term is more often applied to a firm going private financed primarily by debt.
Management buyout: A leveraged buyout in which the managers of the firm to be taken private are also equity investors.
Holding company: A single company with investments in a number of other, often diverse, operating companies
Acquirer: A firm attempting to merge or acquire another company
Target: The firm being solicited by the acquiring firm.
Horizontal merger: Occurs when two firms in the same industry combine.
Vertical merger: Mergers in which the two...
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