Posts Selected From the Category "Strategic Management"

Irrespective of the type of merger, there are at least two firms involved. One, the buying company that acquires the other company, and survives after merger. This firm is known as an acquiring firm or transferee company. The other is the company, which is merged and loses its identity in the process. This is called the acquired company, or transferor company or the target firm. There are various modes in which the acquiring firm can attempt a merger move and therefore, merger can also be classified on the basis of initiative style or the procedure adopted by the acquiring firm. These are as follows:

1. Negotiated Merger

It is also called friendly merger. In this case, the management/owners of both the firms sit together and negotiate for merger. The acquiring firm negotiates directly with the management of the target firm. So, the willingness of the management of the target firm is implied here. If the two firms reach an agreement, the proposal for merger may be placed before the shareholders of the two companies.…

A merger, which results in meeting the test of increasing the wealth of the shareholders, is said to contain synergistic properties. Synergy is the increase in value of the firm combining two firms into one entity i.e., it is the difference value between the combined firm and the sum of the value of the individual firms. There may be various sources for this extra value arise i.e., the increase in wealth of the shareholders as a result of merger. The key to the existence of synergy is that the target firm controls a specialized resource that becomes more valuable when combined with the bidding firm’s resources. The sources of synergy of specialized resources will vary depending upon the merger.

In case of horizontal merger, the synergy comes from some form of economies of scale, which reduce costs, or from increased market power, which increases profit margins and sales. There are several ways in which the merger may generate operating economies.…

A firm having all or any of the following features may provide a temptation to an acquiring firm to take-over the former:

1. The target firm has under performed other shares and the overall market in terms of return the shareholders in the preceding years.
2. The target firm has been less profitable than other firms, and
3. The promoter/owner group has lower shareholding in the target firm and the public has a higher portion.

If an acquiring firm makes an offer for negotiated merger to the management of the target firm, it is up to the latter to accept or not to accept the offer. The target firm may not find the offer to be attractive and hence it may reject the offer. However, the acquiring firm may still persists with the idea either by making a tender offer or attempting a hostile take-over bid. In such a case, it is the responsibility of the management of the target firm to take defensive measures to thwart away any bid for take-over.…

An Equity Carve-Out (ECO) is a partial public offering of a wholly owned subsidiary. Unlike spin-offs, ECOs generate a capital infusion because the parent offers shares in the subsidiary to the public through an Initial Public Offering (IPO), although it usually retains a controlling interest in the subsidiary. Like spin-offs, ECOs have become increasingly popular in the last several years.

An equity carve-out involves conversion of an existing division or unit into a wholly owned subsidiary. A part of the stake in this subsidiary is sold to outsiders. The parent company may or may not retain controlling stake in the new entity. The shares of the subsidiary are listed and traded separately on the stock exchange. Equity carve-outs result in a positive cash flow to the parent company. An equity carve-out is different from a spin-off because of the induction of outsiders as new shareholders in the firm. Secondly equity carve-outs require higher levels of disclosure and are more expensive to implement.…