Summary Take over Processess

Chapter 1 Takeover Processes

1.         Introduction

During 1980s, merger activity was considered to be at an all-time high. The peak year during the year 1980s was 1988, when merger activity (in 1996 dollars) was $308 billion. This period has been studied extensively and is viewed as one of the greatest merger booms ever. Yet, the late 1990s, broke numerous records with respect to merger and acquisition activity. For example, the 1999 level (in constant dollars) was more than four times that of the peak year of the 1980s. even in 2001, when merger activity dropped considerably, the constant dollar amount was more than twice as high as that in 1988.

Although merger activity during 2001 and 2002 dropped considerably compare in the 1990s, the daily newspaper and wire services continue to be filled with case studies of Merger & Acquisitions (M&As), tender offers, spin-offs, equity carve-outs, corporate recapitalization, divestitures and restructuring, changes in ownership structures and struggle for corporate control. Investors are continually increasing their role in monitoring management with respect to merger plans. Even small retail investors, who have been empowered via a wealth of information from the Internet, are starting to scrutinize mergers rather than simply going along with management on every deal.

1. Change Forces

Merger activities throughout history have been related to the economic and cultural characteristics of their time and place. The increasing pace of merger activity during the past two decades is related to the powerful change forces, which are:

1. Technological change (computer, software, servers, internet, etc)
2. Economies of scale (spread the large fixed costs investing in machinery over large number of units), economies of scope (cost reductions from operations in related activities, complementarily, and the need to catch up technologically
3. Globalization and freer trade
4. Changes in industrial organization
5. New industries
6. Deregulation and regulation
7. Favorable economic and financial conditions for much of the past two decades
8. Negative trends in certain individual economies and industries
9. Widening inequalities in income and wealth
10. Relatively high valuations for equities during the 1990s

1. Issues Raised by M&A Activity

Mergers and industrial restructuring activities have raised important issues for business decisions and for public policy for formulation. No firm considered safe from the possibility of takeover. Merger and acquisitions can be critical to the healthy expansion of business firm as they evolve through successive stages of growth and development.

Some have argued that mergers increase value and efficiency and move resources to their optimal uses, thereby increasing shareholder value. Others are skeptical. They argue that acquired companies are already efficient and that their subsequent performance after acquisition is not improved. Yet others aver that the gains to shareholders merely represent redistribution away from labor and other stakeholders. Another view is that the merger and acquisition activity represents the machinations of speculators who reflect the frenzy of a “casino society. This speculative activity is said to increase debt unduly and to erode equity, resulting in an economy highly vulnerable to economic instability.

1. Merger and Tender Offer Terminology

1. Types of Merger from an Economic Standpoint

1. Horizontal Mergers

Involves two firms that operate and compete in the same kind of business activity. Some companies choose this merger in order to decrease number of firms in an industry, possibly making it easier for the industry members to collude for monopoly profits and the others reason related about benefits of economies of scale.

1. Vertical Mergers

Involves firms in different stages of production operation. Firm choose this merger for some reasons such as technological economies (transportation costs), eliminate the costs of searching for prices, contracting, payment collecting, advertising and also reduce the cost of communicating and coordinating production.

1. Conglomerate Mergers

Involve firms engaged in unrelated types of business activity.

There are three types of conglomerate mergers:

1. Product extension mergers/concentric mergers means:  broaden the product lines of firms.
2. Geographic market extension merger means: two firms whose operations have been conducted in non-overlapping geographic areas.
3. Pure conglomerate mergers means: unrelated business activities.

Investment Companies

Contrasting 4 categories of companies, the economic functions of conglomerate mergers may be illuminated:

1. Investment companies such as mutual funds.
2. Financial conglomerates that operate as internal capital markets.
3. Managerial conglomerates in which staff groups in general management functions such as research, legal, and HR provide services to diversified segments of operations.
4. Concentric companies in which diversified activities are related to core activities.

Economic function of investment companies: to reduce risk by diversification, because combines resources from many sources and provide professional selection form among investment alternatives.

Within this broader category, 2 types of conglomerate firms can be distinguished: