Fusion-acquisition

The expression fusion-acquisition (one speaks sometimes about “fusac”, or M&A for Mergers and Acquisitions ) recovers the various aspects of the repurchase of a company by an economic actor, generally another company, in the fields of Finance of company and management of financial transactions. The acquired company can preserve its integrity, or be amalgamated with the acquiring company. By extension, the definition comprises also and more and more the operations of investment withdrawals (often called in their English term demerger, spin-off, carve out …).

Fusions and acquisition are a tool used by the companies with an aim of increasing their economic activities and of increasing their profit. One speaks then about external growth contrary to a Organic growth (or internal growth) made by the increase in the turnover on the same perimeter of companies.

Type of fusion-acquisitions

Classification

One distinguishes various types of fusion-acquisitions according to the reasons which justify them. One distinguishes the operations of which the economic goal is the vertical Intégration, those which aim at the horizontal Intégration and those which lead to conglomerates aiming at a simple logic of Portefeuille.

When the reasons are primarily strategic and/or productive one speaks about:

* horizontal Integration (repurchase of competitors on the same market)

* vertical Integration (repurchase of customers and/or suppliers)

Conglomerates. The groups of companies which are formed on the basis of financial consideration are often called " conglomérats" (i.e agglomeration of activities not inevitably coherent from a productive point of view). One of the main reasons to be conglomerates is diversification: while diversifying in activities differently affected by the economic conjuncture the financial groups reduce the variability of their performances.

The concentrations observe modes or main tendencies. Thus in the Years 1920, the vertical integrations prevailed, whereas the conglomerates developed in the Années 1960 and 70 with the the United States and in the Années 1980 in Europe.

Character

For the companies dimensioned in purse, there can be:

friendly operation (agreement between the directions of the two companies before submitting the project to the shareholders) or hostile (unilateral proposal of the one of the companies to the shareholders of the other).

Generally, fusions and acquisitions are the result of an agreement between the target and the purchaser, at the end of a process of Due-diligence or not, in order to establish the fair price for the two parts. It is the case for the companies not - dimensioned, and thus on a market private, but also in the major part of the cases for the listed companies. The process with the advantage - in theory at least - of obtaining the approval of the two parts.

However, and primarily for the companies calling upon the public call to the saving (purse), of the hostile offers can be carried out with an aim of acquiring a majority of the capital of a third. The process can prove longer then (recourse legal and media undertaken by the target, time to convince the purchasers…), more expensive (premium of control, budget communication, expenses of lawyers and investment banks more important…), and exposes the whole of the actors (press coverage, criticisms, embrittlement and loss of credibility of the potential buyer in the event of failure but also embrittlement of the target, to see low)

It should be noted that an hostile offer can become friendly. Thus, an offer declared not desired or hostile by its management (Arcelor-Mittal, Saint-Gobain - BPB) can finally become friendly, at the time of the assent of the dirigeants.
More rarely a friendly offer becomes hostile, in particular when the target finds another purchaser.

For the small companies, there does not exist organized procedure, but of the advisers in “Reprise again of company” can play a part of intermediary, just as of the professional organizations (Chamber of commerce…) can count the proposals for acquisition or a transfer.

Markets

Fusions and acquisitions of companies can be done on the government contract, i.e. the purse. It is about the most known type and most media. The essence of the volume of the transactions are done on a private market, private, and relates to primarily values quite less than at the time of stockmarket transactions. However that is to be moderated by the increasing importance of the transactions of Capital-investment.

Reasons to carry out an fusion-acquisition

To decide on a bringing together of companies or a repurchase of credits can be related to different factors, often multiple, inter alia:

Economy of scale. To gather the deterrent force of two companies makes it possible to buy less expensive thanks to handing-over on volumes. In the same way, the sum of the two parts makes it possible to align the tariff conditions at least expensive. Lastly, of the back up with production equipments, of real credits and human resources are often identified.
Saving in vertical integration. To have most of the line production allows to better control the access to the raw materials upstream or the final customer in particular to control the related margins downstream and thus.
Synergies of receipts. For example, a company can be indeed established very well on certain markets where it has a powerful distribution network. The repurchase of a competitor will enable him to sell new products perhaps to with it where the competitor did not lay out of a sufficient sales force (it is typically the case at the time of the repurchase of part of the credits of Seagram by Pernod-Ricard)
tax Raisons. A company having important tax credit is a target interesting for a strongly profit company. By adding the two parts, the purchaser will pay a less heavy tax on these benefit
Réduire competition. Less competitors involves less competition on the prices and thus promises of a better turnover, at least in the medium term.
To control additional resources.
Use of its treasury. When companies are mature and profitable markets but for which it exists little of occasions of development and investment, the surplus treasury can be used to buy new activities rather than to return this treasury to the shareholders by dividends or repurchases of actions.
To eliminate the inefficiences. This by bringing closer the best practices to each part.

The purpose of all the reasons quoted above are regarded by the financial theory as valid reasons, because are to create financial value. Other reasons are less obvious, even contestable:

To create empires for example
Satisfaction of the ego of the leaders.
to diversify

Strategies of growth by adjacency

The growth by adjacency is the development of the company in fields close to its current sphere of activity. This growth can in particular be done by external growth.

This strategy of external growth is facilitated today by the possible comparisons between branches of industry of different companies, in particular:

sectoral information,
obligation made with the companies manage the Intangible fixed assets.

These obligations give a strong visibility on the line of business through the three components of the immaterial Capital:

Human capital,
Capital relational (Customer S, Partner S),
Capital organisational (information system).

These strategies known as of growth by adjacency can constitute a Occasion for the company, if it is it which is in the beginning, or a Menace, if it is absorbed by a competitor.

It is thus vital for the company (leaders and employees) to know to anticipate these evolutions of growth by adjacency, in order to keep the control of sound informational Patrimoine, by making analyzes by Opportunité/threats on the competitive Avantages which a fusion/acquisition can get. From where importance of the structuring of the Information system.

See: The art of the growth on the site of the Echoes

The six methods of adjacent growth identified by Chris Zook are:

to develop along the Chain of value,
To develop the service S peripherals,
To use novel modes of distribution,
To play the geographical growth,
to address itself to a new target Client by adapting his offers,
to rest on its Compétence S techniques or commercial.

Scissions

The scissions are sales transactions carried out by companies but belong to fusion-acquisitions.

Types of scissions

Spin-out or Spin-off, i.e. a separation of part of the legal perimeter.
Carve out, by separation of part of the activity of a company, which did not constitute until there a clean legal entity.
external Repurchase (funds private equity, competitor…)

Reasons

Various reasons can lead an investor to yield a subsidiary company, a group of subsidiary companies, a financial participation or an activity.

Improvement of the profile of the company. A centring on some trades improves the image of a company near the investors. Those being usually being wary with respect to the too diversified groups (conglomerates) which undergo then rebates of Holding. It is also the case when an activity is regarded as passed of mode. In both cases, these arbitrations on the profile of the company can be completely independent of the contribution to the results of the yielded credits.
less good Results: on the other hand in this case, an investor can want to get rid of a credit deteriorating his profitability.
Effect of aubaine. Certain investors benefit from a high valorization of a sector or a company to resell credits. It can be the case at the time of an effect of mode like the values related to telephony or Internet in 1999 and 2000 (marketing of Wanadoo by France Telecom in 2000). More close to us, in 2006 EDF on the market part of its subsidiary company EDF New Energies put, benefitting from the interest of the market for energy, or, conversely, to put the hand on a company under evaluated like Arcelor in Arcelor-Mittal fusion.
Need for treasury: a too involved in debt investor can need to yield credits to recover fresh money (ex: Vivendi in 2001-2002 with the transfer of many companies like Houghton Mifflin).
Competition: at the request of authorities controlling competition, an investor can be constrained to yield credits. Most famous remainder perhaps the bursting of the Standard Oil in several companies.

Brakes at the market of fusion-acquisitions

Criticisms towards fusion-acquisitions

Destruction of value: 1+1 = 3? Whereas the purpose of fusions are to create additional value with the simple addition of two companies (1+1=3), it happens that the result of a regrouping does not obtain the result discounted, one can then have 1+1 < (lower than) 2. The reasons of these failures are generally too different cultures of company, a bad management of an hostile offer (the humiliated prey feeling) or a disagreement of the leaders.
Social costs: Because of the synergies installation via Reorganization S.
Dissimulation of a lack of strategy: Fusion-acquisitions can also hide a lack of vision or internal growth of a company, trying to dissimulate it by an escape ahead in an expansionist policy.
Creation of conglomerates: As considering higher, the investors do not trust the groups much too diversified. Subjacent reason generally evoked being that the investors estimate more relevant to diversify them same their investments.
Creation of mastodons: The amalgamations can also lead to the creation of unverifiable giants.

Reactions of the financial markets

Within the framework of a dimensioned company, the risks are the reactions of the financial markets and thus the impact on its stock exchange courts, this very often front even official announcement. Sometimes a simple rumor makes it possible to make fall the course of actions when the market estimates that an acquisition is not relevant (too high announced cost, few synergies envisaged, acquisition in a sector too different from the predator, mistrust with respect to a too expansionist policy…).

Indirect brake at the markets of fusion-acquisitions, a badly carried out offer can lead the purchaser to be weakened. That wasted indeed time and money which it could have devoted elsewhere, and in addition loses credibility near the investors. All this combined can make decrease its value and thus put it in its turn in position of potential prey.

In all the cases, the Hedge funds and the companies of purse specialized in the arbitration give the responsability themselves to analyze valorizations of the offers.

Compete with

Protections against fusions acquisitions

One or more protections can be effective for a company to avoid being repurchased. See too ====Contrôle of the capital==== The control of the capital by a stable actor and confidence is the most traditional guarantee.

Majority of the majority of the capital (Casino)
Majority of the rights to vote (grace the emission of rights to vote doubles for example)
Limitation of the rights to vote of a third. Failing to control the rights to vote of a company, it is possible to prevent one of the shareholders of the company from having control by blocking the percentage of rights to vote. That in particular was the case when the Italian State limited (date, source the Platform day) the rights to vote of EDF in the Italian energetician Edison.

cross Participations. In France for example, this type of defense was popularized by the Gouvernement Chirac of 1986 under the impulse of the Minister for Finance Edouard Balladur. The lately privatized companies were protected from acquisition nondesired thanks to a system of participations crossed between friendly companies, bringing to the creation of " cores durs" (stable shareholders) controlling a big part of the capital. Such was the case between BNP and UAP.

Poisoned pills ( poison pills )

The statutes of certain companies can hold particular clauses intended to prevent or at least strongly to handicap the chances of an hostile offer against them. This kind of defense is in general little appreciated financial markets insofar as they attach the speculation on the companies with dimensions. These defenses are commonly called poisoned pills. They can take various forms, inter alia:

Limitation of the rights to vote
Authorization of emissions of titles or obligations

To block certain credits. Within the framework of the hostile offer of Mittal on Arcelor, this one had made the decision to create a foundation Dutchwoman which would hold the capital of an American subsidiary company: Dofasco. Indeed, Mittal had announced to want to resell the company states-unienne at once after the repurchase of Arcelor.

Legislations

Law. The laws of a country or a state can also block intentions of repurchase. Certain strategic sectors such as defense or air transport. In the United States, the legislator thus made impossible the purchase of ports American by the company Dubai Ports in 2006.
Concurrence. An offer can be refused or amended by the authorities controlling competition. It was the case a posteriori during the acquisition of Legrand by Schneider. It was also the case but before even the launching of the purchase offer of General Electric on Honeywell, following the refusal of the European commission

Political and media lobbying

The political actors can also use to be able to them to ruin a project which they consider contrary with the national interests, sometimes even without having to make pass from laws or decrees. That in particular was the case at the time of rumors of tender offer on the French group Danone in 2005.

A target can call upon the media power to ruin an offer. It was the case in 1999 when the General society succeeds in ruining an attempt at purchase on behalf of BNP.

Strategies of active defense

Knights white

A company on the way to be bought by a nondesired competitor can call upon another friendly company. It was the case of the AGF which chose Allianz as majority shareholder rather than Generali.

Reverse take-over or strategy of the Pacman

Another strategy of defense consists in countering the offer of its adversary by also carrying out an offer against him. It was the case in 1999 when the Total tanker launched a APERTURE on Elf Aquitaine (Elf-Total).

Market of the M&A

Weight, history, health

Actors

Purchasing: the companies are usually the principal predatory ones and purchasers but the companies of capital-investment are it more and more frequently. In 2006, the funds of investment exceeded the 600 billion dollars of transactions in the world and in Europe, they carried out 18,5% of the operations of fusion-acquisitions
Investment banks. Also called banks of investment.

Source: Classification Thomson Financial in the platform of December 21st, 2006

Law firms and lawyers
Cabinets of audit (Big furnace, due diligence)
Agencies of communication (example in France: Arranges 7, Euro RSGC Corporate)
Lobbyistes, Cabinets of economic intelligence (at the time of the first months of the purchase offer of Mittal on Arcelor, this last had dispatched the Kroll cabinet according to various press articles)

famous Fusion-acquisitions

Daimler-Chrysler. Mittal-Arcelor. BNP-Paribas Alcatel - Lucent

Accounting treatment and financial

Financing

There exist two great types of financing of an operation of acquisition:

Purchase by exit of treasury. In this case, the purchaser can call upon his equities or to have recourse to whole or part of debt.
Purchase in title. The purchaser can also exchange part of his own titles against those of his prey. Out of purse, one speaks then about APERTURE or Public offering of Exchange.

These offers can be hybrid, i.e. to comprise part of liquidities and part of actions. Each one has its advantages and defects: a purchase in titles avoids an exit of liquidity and to exceed too high thresholds of debt, on the other hand it obliges with a dilution of the rights to vote and financial interests of the current shareholders to make a place with the capital with the new shareholders. Moreover an acquisition in titles is often more expensive than an acquisition by payment of treasury because it is advisable to pour a premium corresponding to the riskier profile of titles compared to cash.

Accounting treatment

Fusion-absorption
Acquisition

Simple
Renversé (girl repurchases the mother, for example for tax reasons: ex Schneider-Spie)

Treatment of the Goodwill
IFRS 5
the United States: pooling and purchase off assets

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