mergers and acquisition

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Mergers and Acquisitions

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Acquisition The purchase of one firm by another Merger The combination of two firms into a new legal entity A new company is created Both sets of shareholders have to approve the transaction.

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Cash Transaction The receipt of cash for shares by shareholders in the target company. Share Transaction The offer by an acquiring company of shares or a combination of cash and shares to the target company’s shareholders.

Securities Laws Pertaining to Mergers and Acquisitions:

Securities Laws Pertaining to Mergers and Acquisitions

General Intent of the Legislation:

General Intent of the Legislation Transparency – Information Disclosure To ensure complete and timely information be available to all parties (especially minority shareholders) throughout the process while at the same time not letting this requirement stall the process unduly. Fair Treatment To avoid oppression or coercion of minority shareholders. To permit competing bids during the process and not have the first bidder have special rights. (In this way, shareholders have the opportunity to get the greatest and fairest price for their shares.) To limit the ability of a minority to frustrate the will of a majority. (minority squeeze out provisions)

Exempt Takeovers:

Exempt Takeovers Private companies are generally exempt from provincial securities legislation. Public companies that have few shareholders in one province may be subject to takeover laws of another province where the majority of shareholders reside.

Exemption from Takeover Requirements for Control Blocks:

Exemption from Takeover Requirements for Control Blocks Purchase of securities from 5 or fewer shareholders are permitted without a tender offer requirement provided the premium over the market price is less than 15%

Creeping Takeovers The 5% Rule:

Creeping Takeovers The 5% Rule The 5% rule Normal course tender offer is not required as long as no more than 5% of the outstanding shares are purchased through the exchange over a one-year period of time. This allows creeping takeovers where the company acquires the target over a long period of time.

The Takeover Bid Process Moving Beyond the 20% Threshold:

The Takeover Bid Process Moving Beyond the 20% Threshold Takeover circular sent to all shareholders. Target has 15 days to circulate letter to shareholders with the recommendation of the board of directors to accept/reject. Bid must be open for 35 days following public announcement. Shareholders tender to the offer by signing authorizations. A Competing bid automatically increases the takeover window by 10 days and shareholders during this time can with drawn authorization and accept the competing offer.

The Takeover Bid Process Prorated Settlement and Price:

The Takeover Bid Process Prorated Settlement and Price Tender offer price cannot be for less than the average price that the acquirer bought shares in the previous 90 days. (prohibits coercive bids) If more shares are tendered than required under the tender, everyone who tendered shares will get a prorated number purchased.

Classifications Mergers and Acquisitions:

Classifications Mergers and Acquisitions Horizontal A merger in which two firms in the same industry combine. Often in an attempt to achieve economies of scale and/or scope. Vertical A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. Often in an attempt to control supply or distribution channels. Conglomerate A merger in which two firms in unrelated businesses combine. Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams Cross-border (International) M&As A merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target company.

Mergers and Acquisition Activity:

Mergers and Acquisition Activity M&A activity seems to come in ‘waves’ through the economic cycle domestically, or in response to globalization issues such as: Formation and development of trading zones or blocks (EU, North America Free Trade Agreement Deregulation Sector booms such as energy or metals

M&A Activity in Canada:

M&A Activity in Canada

Motivations for Mergers and Acquisitions Creation of Synergy Motive for M&As:

Motivations for Mergers and Acquisitions Creation of Synergy Motive for M&As The primary motive should be the creation of synergy. Synergy value is created from economies of integrating a target and acquiring a company; the amount by which the value of the combined firm exceeds the sum value of the two individual firms.

Value Creation Motivations for M&As Operating Synergies:

Value Creation Motivations for M&As Operating Synergies Operating Synergies Economies of Scale Reducing capacity (consolidation in the number of firms in the industry) Spreading fixed costs (increase size of firm so fixed costs per unit are decreased) Geographic synergies (consolidation in regional disparate operations to operate on a national or international basis) Economies of Scope Combination of two activities reduces costs Complementary Strengths Combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another.

Value Creation Motivations for M&A Efficiency Increases and Financing Synergies:

Value Creation Motivations for M&A Efficiency Increases and Financing Synergies Efficiency Increases New management team will be more efficient and add more value than what the target now has. The combined firm can make use of unused production/sales/marketing channel capacity Financing Synergy Reduced cash flow variability Increase in debt capacity Reduction in average issuing costs Fewer information problems

Value Creation Motivations for M&A Tax Benefits and Strategic Realignments:

Value Creation Motivations for M&A Tax Benefits and Strategic Realignments Tax Benefits Make better use of tax deductions and credits Use them before they lapse or expire (loss carry-back, carry-forward provisions) Use of deduction in a higher tax bracket to obtain a large tax shield Use of deductions to offset taxable income (non-operating capital losses offsetting taxable capital gains that the target firm was unable to use) New firm will have operating income to make full use of available CCA. Strategic Realignments Permits new strategies that were not feasible for prior to the acquisition because of the acquisition of new management skills, connections to markets or people, and new products/services.

Managerial Motivations for M&As:

Managerial Motivations for M&As Managers may have their own motivations to pursue M&As. The two most common, are not necessarily in the best interest of the firm or shareholders, but do address common needs of managers Increased firm size Managers are often more highly rewarded financially for building a bigger business (compensation tied to assets under administration for example) Many associate power and prestige with the size of the firm. Reduced firm risk through diversification Managers have an undiversified stake in the business (unlike shareholders who hold a diversified portfolio of investments and don’t need the firm to be diversified) and so they tend to dislike risk (volatility of sales and profits) M&As can be used to diversify the company and reduce volatility (risk) that might concern managers.

Accounting for Acquisitions :

Accounting for Acquisitions Historically firms could use one of two approaches to account for business combinations Purchase method and Pooling-of-interest method (no longer allowed) While more popular in other countries, the pooling of interest is no longer allowed by: CICA in Canada Financial Accounting Standards Board (FASB) in the U.S. and International Accounting Standards Board (IASB)

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