LSBF ACCA P4: Introduction to Mergers and Acquisitions

in this module we are look at mergers and acquisitions and we need to understand why companies would want to merge together what are the potential benefits of this and then we're going to look at how we're going to decide how much money we're going to pay for particular company and how we're going to make that transaction happen we must first of all understand the basic reasons why two companies choose to come together and stop being separate entities and decide to act as one new business and the fundamental reason why they're going to do this is the belief that is going to create synergy as a result of the two firms coming together we must understand that what we're still trying to do is maximize the wealth of our shareholders it's just that now we have two types of shareholders to consider the shareholders of the initial company and the shareholder of the company that's going to be merged with now even though in the real world there is a technical difference between a merger and an acquisition for the most part on this particular paper as long as we consider two separate companies merging together into one company it's effectually going to be the same whether it is a takeover or whether it's an equal partnership is not going to make much difference on this particular paper but what we need to consider is we have to maximize the wealth of both companies both shareholders both sets of shareholders need to be better off as a result of coming together otherwise which other set of shareholders aren't going to be better off they will resist it to this particular move now very often you will see quoted that the basic definition of synergy is where two plus two equals five this is very often quoted in text books however be very very wary of making a statement like this in the exam because unless you go on to actually explain exactly what that means that does not make any sense and does not indicate the markers that you actually understand what synergy is a better clearer way to define synergy would be to put the market value of Company A plus the market value of Company B is less than the market value of Company A B what you then need to do is explain what this means in words and what this is fundamentally saying if you were to value Company A independently and then add it on to the value of Company B valued independently the sum of those two values would be less than the value of the company when both of these businesses merged together and what he's trying to say is there is extra value created when these two entities merge as one that simply was not there when these two companies were acting independently and what we need to do now is think about what sort of synergies are created when two companies can come together fundamentally there are three basic types of synergies revenue synergy costs energy and financial synergy revenue synergy includes market power being a bigger company you will tend to attract proportionately more customers than you did before there's the basic concept that people will choose to go to a company they have heard of as opposed to a company they've never heard of even the other companies cheaper simply because you feel that you know what you are going to get with the larger business therefore by merging with somebody else you will develop a bigger brand awareness more people know who you are and you will tend to attract a lot more customers as a result of it the second thing to consider are complementary products you may merge with another company that still sells products that complement your own products and as a result of coming together you very often find that you can increase the sales of both products at the same time a major advantage of merging with another customer AB under the company is the fact that you could potentially be reducing competition if it is another firm that sells a competitive product to what you sell you will no longer be competing with those people and that's going to have the massive advantage of splitting the market in the sense that customers will no longer have to choose between somebody's products or the alice's products and yours is simply going to be yours and potentially just one other person which therefore could increase that let the market power that you actually have and therefore channel more business towards your company the next type of synergy to consider is costs energy if by merging together with another business you should be able to reduce your overall costs now first of all you should be able to benefit from bulk discounts you can be buying more raw materials as a result of this you should be able to argue a much much better price from your suppliers you should also be able to benefit for market efficiency in the sense that when you are advertising you probably won't have to advertise quite as much now simply because you can advertise as one end to today as opposed to two entities doing it separately and depending upon the business you may also be able to benefit from reduced fixed overheads your head office function and your support functions arguably won't need to be as big both the companies will probably have a human resources department - the Canton C function and when these two businesses come together there will almost certainly be some sort of overlap which will allow you to shed some of those costs and therefore become more efficient finally we can consider financial synergies first of all companies that are larger should be able to borrow in bulk and therefore be able to get a much better rate on all of their borrowings for two reasons first of all you are simply borrowing a larger amount of money and therefore you will tend to get a better rate secondly the company will now have a greater asset base and therefore can offer greater security which will again reduce the rate that they are charged the opposite side of that they should be able to save in bulk they may potentially have greater savings and then again they should be able to get a much much better rate on their deposits also depending on the types of business they could be a diversification of risk as we saw previously when looking at the capital asset pricing model the more companies that you introduce into your portfolio you will tend to reduce your own systemic risk and therefore the whole business now should be less risky than it was before which could ultimately be reducing your weighted average of capital and thus increasing the overall value of the business but also think about not just in terms of overall risk think about the risk of reduced cash flows if you've got two businesses with different fluctuating cash flows one business could have a cash surplus at one moment in time the other company might have a cash deficit and we could therefore offset these two amounts and ultimately save ourselves from interest charges there could also be the benefit of offsetting tax losses if one company has a tax loss that they can't offset against any profit whereas the other company has text to pay on their profit but I'm merging the two together you can claim the full benefit of those tax savings immediately as opposed to waiting for future profits to do so so what we have here is a range of possible reasons why we think this merger between the two companies could be beneficial these are the type of synergies that you could possibly create what we need to do in the real world is consider the true value of these synergies to try to work out whether this merger is actually going to be worthwhile or not

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Id: BnEZ4-mp_P4

Length: 9min 16sec (556 seconds)

Published: Wed Aug 18 2010