ACQUISITION-OF-MANG-INASAL.pptx

ACQUISITION OF MANG INASAL M&A WL by Warlon Lamsen LEGAL FORM OF ACQUISITION 1 Merger or Consolidation A Merger is a complete absorption of one firm by another. The acquiring firm retains its name and its identity and it acquires all the assets and liabilities of the acquired...

ACQUISITION OF MANG INASAL M&A WL by Warlon Lamsen LEGAL FORM OF ACQUISITION 1 Merger or Consolidation A Merger is a complete absorption of one firm by another. The acquiring firm retains its name and its identity and it acquires all the assets and liabilities of the acquired firm. After a merger, the acquired firm ceases to exist as a separate business entity. An example is the merger of Philippine National Bank (PNB) and Allied Bank, where the former becomes the surviving entity. 2 Consolidation A Consolidation is the same as a merger except that an entirely new firm is created. In a consolidation, both the acquiring firm and the acquired firm terminate their previous legal existence and become part of a new firm. An example is the merger of PCIBank and Equitable Bank, who became Equitable PCI Bank. LEGAL FORM OF ACQUISITION Merger or Consolidation Consolidation The primary advantage of merger is that it A Consolidation is the same as a merger is legally simple and does not cost as much except that an entirely new firm is created. as other forms of acquisition. The firm In a consolidation, both the acquiring firm simply agrees to combine their operations. and the acquired firm terminate their previous legal existence and become part of The primary disadvantage is that a merger a new firm. An example is the merger of must be approved by a vote of the PCIBank and Equitable Bank, who became stockholders of each firm (2/3 votes or Equitable PCI Bank. more) LEGAL FORM OF ACQUISITION 1 Acquisition of Stock 2 Acquisition of Stock It involves the purchase of the firm’s In an acquisition of stock, no voting stock with an exchange of cash, shareholder meetings have to be held shares of stock or other securities. This and no vote is required. If the process will often start with a tender shareholders of the target firm don’t offer to the target firm’s stockholders. like the offer, they are not required to accept it and need not tender their A tender offer is a public offer to buy shares. The target firm’s management shares. It is made by one firm directly and Board of Directors are bypassed. to the shareholders of another firm. LEGAL FORM OF ACQUISITION 1 Acquisition of Stock 2 Acquisition of Stock Acquisition is occasionally unfriendly. Complete absorption of one firm by In such cases, stock acquisition is used another requires a merger. Many in an effort to circumvent the target acquisitions by stock are followed up firm’s management, which is usually with a formal merger later. actively resisting acquisition. Frequently, the minority shareholders will hold out in a tender offer, which may delay realization of merger. LEGAL FORM OF ACQUISITION 1 Acquisition of Assets A firm can effectively acquire another firm by buying most or all of its assets. In this case, however, the target firm will not necessarily cease to exist; it will have just sold off its assets. This type of acquisition requires a formal vote of stockholders of the selling firm. 2 Acquisition of Assets One advantage of this approach is that there is no problem with minority shareholders holding out. However, acquisition of assets may involve transferring titles to individual assets, which can be costly. RATIONALE FOR MERGERS 1 Synergy It is defined as the incremental net gain associated with the combination of 2 firms through a merger of consolidation. Synergistic effects can arise from 4 sources: Operating Economies, which result from economies of scale in management, marketing, production or distribution 2 Synergy Financial Economies, including lower transaction costs Differential Efficiency, which implies that the management of one firm is more efficient and that the weaker firm’s assets will be more productive after the merger 3 Synergy Increased Market Power, due to reduced competition RATIONALE FOR MERGERS 1 Tax Considerations Tax considerations have stimulated a number of mergers. For example, a profitable firm in the highest tax bracket could acquire a firm with large accumulated tax losses which could then be turned into immediate tax savings rather than carried forward and used in the future. RATIONALE FOR MERGERS 1 Revenue Enhancement The combined firm may generate greater revenue than two separate firms. Increase in revenue may come from marketing gains, strategic benefits and increase in market power Purchase of Assets below their Replacement Cost 2 Revenue Enhancement Sometimes a firm will be touted as an acquisition candidate because the cost of replacing its assets is considerably higher than its market value. For example, in the early 1980s, oil companies could acquire reserves cheaper by buying other oil companies than by conducting exploratory drilling. Thus, Chevron acquired Gulf Oil to augment its VALUING THE TARGET FIRM 1 Discounted Cash Flow Analysis It involves the application of capital budgeting procedures to an entire firm rather than to a single project. To apply this method, 2 key items are needed: (1) proforma statements that forecast the incremental free cash flows expected to result from the merger and (2) discount rate or cost of capital to apply to the projected cash flows. Market Multiple Analysis 2 Discounted Cash Flow Analysis A method of valuing a target company that applies a market determined multiple to net income, earnings per share, sales book value and so forth. To illustrate, Company A’s forecasted NI is US$2.4 M in 2014 and it rises to US$7.7 M over the 5-year forecast period. The average P/E ratio for publicly traded companies similar to Company A is 12.5. To estimate Company A’s value using market multiple analysis, multiply US$7.7 M average NI by market multiple of 12.5 to obtain value of US$96.25 M. This is the equity or ownership value of the firm