Corporate Expansion and Contraction Corporate Expansion · Corporate expansion can be achieved by: · Organic growth · Incremental (slow) · Low risk and returns · Mergers and acquisitions ('M&A') · Transformational (rapid) · High risk and returns M&A Definitions · Mergers: · Friendly · Similar sized companies · Pooling of interests in new company · Acquisitions: · Friendly or hostile · Size imbalance · Bidding company acquires: · All of the shares in the target (a takeover) · A subsidiary of the target M&A Classifications · Horizontal expansion • Bidder and target in same sector and at same stage · Vertical expansion · Bidder and target in same sector but at different stage: · Target is a supplier to the bidder (backwards) · Target is a customer of the bidder (forwards) • Diversification ff conglomeration · Bidder and target in different sectors
Motives for M&A fi. To increase the wealth of shareholders in the bidder 2. To gain control of the target company's: • Board of directors · Cash flows · Tangible assets · Intangible assets (i.e. brands ff technology) · Employees · Customers · Suppliers 3. To gain economies of scale fi. Operational and financial benefits related to scale · Eradication of duplicated costs · Higher revenues from increased pricing power · Lower costs from increased purchasing power 4. To gain synergy benefits fi. Operational and financial benefits unrelated to scale · Improved management of the target's businesses · Higher revenues andffor lower costs of existing products · Internalisation of transaction costs 5. To gain entry to new markets (geographical andffor sector) fl. To gain control over supply channels or distribution channels 7. To reduce unsystematic risk 8. Managerial motives: fi. Pay 2. Power 3. Prestige
Risks of M&A · The wealth of shareholders in the bidder can be destroyed when: · Bidder's management overpay to acquire target: · Insufficient due diligence · Forecasts over optimistic · Deal driven by dubious managerial motives · Integration issues: · Failure to gain expected cash flows from economies of scale and synergies · Control issues: · Inappropriate managerial skill-set Typical M&A Process fi. Directors of the bidding company: · Evaluate a potential target company · Approach directors of the target to discuss ff negotiate · Make a formal offer to shareholders of target 2. Directors of the target company recommend that its shareholders either: · Accept the offer (friendly reaction); or · Reject the offer (hostile reaction) 3. Acceptance level (percentage of shares in target): · Below 50% - bidder can increase offer or walk away · 50% or above - offer goes unconditional (succeeds) Target Evaluation · When evaluating a potential target, the directors of the bidding company will consider: · Whether the deal can be funded: · The likely price payable to obtain control of the target · The likely method of funding · The activities of the target: · Scope for economies of scale, synergies & risk reduction · Ability to control and manage effectively · Stakeholder reactions