Topic two sides of merger and acquisition how does itaffect a corporate finance

The difference between a merger and an acquisition The primary difference between mergers and acquisitions is that a merger is the combining of two organizations into an entirely new ent

NATIONAL ECONOMICS UNIVERSITY

-oOo -SUBJECT: CORPORATE FINANCE

TOPIC TWO SIDES OF MERGER AND ACQUISITION HOW DOES IT

AFFECT A CORPORATE FINANCE?

Lecturer: Tran Phi Long

Major: Banking AEP

Class: Banking AEP 63

Hanoi, 4/2023

TEAM MEMBERS

Ordinal Name Student’s ID Note

4 Nguyễn Thuỳ Linh 11218790

5 Trần Quỳnh Trang 11215912

6 Nguyễn Minh Đức 11218776

7 Lê Hải Anh 11210399

Table of Contents

OVERVIEW 3

A What is Merger and Acquisition (M&A)? 4

1 Definition of Merger and Acquisition 4

2 The difference between a merger and an acquisition 4

3 Common types of mergers and acquisition 5

4 How does M&A work? 7

B Pros and Cons of Merger and Acquisition 9

1 Advantages of Merger and Acquisition 9

2 Disadvantages of Merger and Acquisition 10

C Effects of Merger and Acquisition on a company finance 11

D M&A case: adidas & Reebok 13

1 Background of the acquisition 13

2 Reasons and aims 13

3 Extend of Merger success 14

4 Conclusion 17

RFFERENCES 19

Mergers and acquisitions, also known as M&A, is a relatively new concept in Vietnam, but there have been many successful deals in Vietnam recently, such as Kinh Do Corporation's acquisition of Wall's ice cream brand from Unilever and Daiichi Life Insurance's acquisition of Bao Minh CMG Through such M&A deals, companies not only gain additional financial resources but also establish strategic partnerships, thereby increasing the value of their management capabilities, technology, and product distribution channels These are important factors for most Vietnamese companies today, which are small and medium-sized and need to take steps to become public companies

The overheating development of the economy, Vietnam's accession to the WTO, and fierce competition among companies are favorable signs promoting M&A activities However, this activity also faces many difficulties due to the lack of clarity in legal regulations, lack of knowledge about M&A by companies, and ineffective activities of advisory and brokerage parties In the future, as Vietnam has joined the WTO and competition in the market requires companies to have better scale and competitiveness against competitors, M&A is expected to increase and play an important role in the state's economic strategy

Once again, we can affirm the urgency and significant meaning of researching this topic Therefore, our group has chosen the topic "Mergers and Acquisitions" for research Due to limited knowledge and time constraints, the presentation may not

be perfect Therefore, our group hopes to receive comments from you to improve the topic

A What is Merger and Acquisition (M&A)?

1 Definition of Merger and Acquisition

A merger is an agreement that unites two existing companies into one new company Companies merge to reduce competition, increase market share, introduce new products or services, improve operations, and, ultimately, drive more revenue

An acquisition is a business transaction that occurs when one company purchases and gains control over another company These transactions are a core part of mergers and acquisitions (M&A), a career path in corporate law or finance that focuses on the buying, selling, and consolidation of companies

2 The difference between a merger and an acquisition

The primary difference between mergers and acquisitions is that a merger is the combining of two organizations into an entirely new entity, while an acquisition is when a company absorbs another, but there is no new organization is created after that

Merger Acquisition

Procedure Two or more individual

companies join to form

a new business entity

One company completely takes over the operations of another

Mutual

decision

A merger is agreed

upon by mutual

consent of the involved

parties

The decision of acquisition might not

be mutual; in case the acquiring company takes over another enterprise without the latter’s consent, it is termed

as a hostile takeover

Name of

company

The merged entity

operates under a new

name

The acquired company mostly operates under the name of the parent company

In some cases, however, the former can retain its original name if the parent company allows it

Comparative The parties involved in The acquiring company is larger and

stature a merger are of similar

stature, size, and scale

of operations

financially stronger than the target company

Power There is dilution of

power between the

involved companies

The acquiring company exerts absolute power over the acquired one

Shares The merged company

issues new shares

New shares are not issued

3 Common types of mergers and acquisition

3.1 Merger

Horizontal: A merger is considered horizontal if the two companies operate in the

same industry The merger is typically part of consolidation between two or more competitors offering the same products or services Such mergers are common in industries with fewer firms, and the goal is to help companies reduce competition and dominate the market

For example, gas giant Exxon combined with gas giant Mobile back in 1998 to form ExxonMobil At that time, that horizontal deal valued the new company at

$81 billion

Market extension: A market extension merger is a horizontal merger that allows

two companies that sell the same product to operate in a new market Companies that engage in a market extension merger seek to gain access to a bigger market and, thus, a bigger client base

For example, if a U.S regional bank in the east merged with a U.S regional bank

in the west to form the U.S Bank of the East and West, that would be a market extension merger These types of consolidations help companies drive more revenue by expanding where they do business

Vertical: A merger is considered vertical if the two companies operate within each

other’s supply chain Vertical mergers help companies reduce costs because they effectively cut out the middleman

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For example, think of a home construction company purchasing a windowpane manufacturer or a winery buying a glass bottle manufacturer

Conglomerate: A merger is considered a conglomerate acquisition if the companies

operate in separate industries and, at face value, have little to nothing in common from a business perspective Conglomerate mergers open cross-selling

opportunities, market extensions, and increased operational efficiencies

For example, think of a clothing company combining with a snack food

manufacturer

Congeneric: A merger is considered congeneric if the companies offer different

products or services but operate in the same sphere and sell to the same customer base Congeneric mergers allow companies to sell new products, which is why

they’re also known as product extension mergers

So, for instance, famous ketchup manufacturer H J Heinz Co was able to make revenue off of The Kraft Foods Group’s popular macaroni and cheese (and vice versa) once the companies merged to form The Kraft Heinz Company back in

2015

SPAC: A special purpose acquisition company (SPAC) is a publicly traded shell

company made with the singular intent of merging with a private company That merger allows the private company to go public SPACs are an increasingly

popular alternative to a traditional initial public offering (IPO)

3.2 Acquisition

Horizontal: A horizontal acquisition occurs when a company buys another

company that offers similar products or services

So, for instance, if one streaming network were to purchase another streaming

network, that would be considered a horizontal acquisition Real-world examples include:

Facebook purchasing Instagram for $1 billion in 2012; Verizon Wireless

purchasing British telecommunications company Vodafone for $130 billion in cash and stock in 2013; Marriott International forming the world’s largest hotel chain upon acquiring Starwood Hotels and Resorts Worldwide for $13 billion in 2016 Corporate nance 100% (7)

Vertical: A vertical acquisition occurs when a company buys another company that

produces a product in its existing supply chain

So, for instance, if a streaming network purchases a film or television production company, that would be considered a vertical acquisition Real-world examples include:

Swedish furniture company Ikea continually buying acres of forest; CVS Health Corporation’s 2018 $69 billion purchase of Aetna; Online retail giant Amazon purchasing grocer Whole Foods Market for $13.7 billion in 2017

Congeneric: A congeneric acquisition occurs when one company buys another

company that offers different products or services but caters to the same customer base

So, if a streaming network were to buy a smart television manufacturer, that would

be considered a congeneric acquisition Real-world examples include:

Consumer goods giant Procter & Gamble Co purchasing razor-and-battery company Gillette for $57 billion in 2005; Coca-Cola buying Glaceau, the maker of Vitaminwater, for $4.1 billion in 2007

Conglomerate: A conglomerate acquisition occurs when one company buys

another company from a separate industry

So, if a streaming network buys a crayon company, that would be considered a conglomerate acquisition Real-world examples include:

Microsoft acquiring professional networking site LinkedIn for $26.2 billion in 2016; Multinational holding firm Berkshire Hathaway buying Heinz for $23.3 billion in 2013

4 How does M&A work?

4.1 Merger

Mergers are often spearheaded and facilitated by an investment banker They source deals, value companies, forecast outcomes, and make sure both companies have their houses in order (a process known as due diligence) Corporate lawyers also oversee M&A deals, ensuring, among other things, that the transaction complies with federal and state regulations

Mergers are generally funded by cash, equity (stocks), or both When two

companies merge, shareholders in each company are issued stock (equal to the value of their old stock) in the new company

4.2 Acquisition

There are several different choices for a company that is looking for acquisition financing The most common choices are a line of credit or a traditional loan Favorable rates for acquisition financing can help smaller companies reach economies of scale, which is generally viewed as an effective method for

increasing the size of the company's operations

A company seeking acquisition financing can apply for loans available through traditional banks as well as from lending services that specialize in serving this market Private lenders may offer loans to those companies that do not meet a bank's requirements However, a company may find that funding from private lenders includes higher interest rates and fees compared to bank financing

A bank might be more inclined to approve financing if the company to be acquired has a steady stream of revenues, steady or growing EBITDA, which is a cash metrics that would help the acquirer to pay back the debt obligations from the loan

on the acquisition, substantial or sustained profits, as well as valuable assets for collateral

By comparison, securing bank approval can be problematic when attempting to finance the acquisition of a company that largely has receivables rather than cash flow

B Pros and Cons of Merger and Acquisition

1 Advantages of Merger and Acquisition

1.1 It is the fastest way to achieve growth

There is no other form of corporate activity that can grow your company’s top line

as fast as a merger or acquisition

This is why the world’s biggest companies unashamedly use M&A as a means for growth, particularly when it looks as though growth in their existing business is shuddering to a halt Growth is therefore the most common reason for undertaking M&A and underpins most of the other motives

1.2 M&A enables company to enter new markets

In a similar vein to growth, there may be no better way to enter a new market than

to acquire a company which is already successful in that market

This goes for almost every industry Merging with or acquiring a company in an attractive market avoids most of the cultural, regulatory, and commercial issues that can beset companies entering new markets without greenfield ventures

1.3 M&A enables company to change its business model

M&A can also be used to transform a company The example of Nokia is a case in point Though starting out as a paper mill, Nokia now is a technology company after many times undertaking M&A

A merger between this cableworks company and a television manufacturer in the 1970s was the genesis of Nokia’s cell phone division When the cell phone devices division was sold to Microsoft in 2013, Nokia acquired Alcatel-Lucent to

transform itself (yet again) into a network provider

1.4 M&A can be used to acquire new talent

Acquiring talent (referred to in some quarters as ‘acquire hiring’) is the most common in high-value-added industries, such as technology, engineering, or advertising

Companies like Google, Apple, and Facebook are all considered pioneers in acquire hiring and have made acquisitions in the past decade of small startups principally to get the companies’ founders onto their roster

An example of this came in 2017 when Google acquired Halli labs, whose founding teams were considered the world’s best AI and ML (machine learning) engineers

1.5 M&A can be used to generate synergies

Synergies are what happens when two companies come together and amount to more than the sum of their parts

This usually occurs through operational synergies (i.e., dropping some duplicated operational costs that arise because of the deal) or growth synergies (i.e., where two companies with complementary products join forces to create an enhanced range of products and services)

2 Disadvantages of Merger and Acquisition

2.1 M&A can very easily be conducted for the wrong reasons

Because of all the pros that have just been outlined, it can be simple to think of M&A as a quick win That’s one thing that it almost certainly never is

As we have said before on these pages, a merger or acquisition is the largest project that any company will take on, so it’s not to be taken lightly

2.2 M&A can distract from the management of a business

As much as M&A can add value for a business, the main value creation that goes

on in any business should be its day-to-day operations

Thus, pulling managers away from the operations of the company can be a major distraction from their performing their day-to-day tasks

This defeats the purpose of what M&A is for, so a good plan must be put in place before any deal to ensure that the correct time is allocated for each manager’s participation in the process

2.3 M&A can destroy value as well as create it

More than one company has had value destroyed because of mismanagement at some part of the M&A process

Unfortunately, if managers don’t keep their eye on the ball, this can even happen when two companies appear to be a near-perfect match

Without the proper care at every stage of the deal - be that origination,

negotiations, due diligence, deal closing, or integration - value can be destroyed without good planning and implementation

2.4 M&A valuations are not an exact science