Business Finance 2 Dersi 8. Ünite Sorularla Öğrenelim

Mergers And Acquisitions

1. Soru

What is the resource-based view of a firm?

Cevap

Briefly, resource-based view focuses on the competitive advantage concept. According to this view, external business opportunities can be exploited and created by company managers best by using the existing resources of the company, rather than acquiring new skills. Competitive advantage can be achieved by using tangible and intangible assets as internal resources. Intangible assets are seen as a main source of competitive advantage rather than tangible assets, because unlike tangible assets, they are not sold in the market and competitor companies cannot easily buy them.


2. Soru

When does business alliance is formed?

Cevap

Business alliance is formed when two or more firms come together to combine their business activities in different ways. Examples are mergers, acquisitions, joint ventures, strategic alliances, minority investments, franchises, and license agreements.


3. Soru

What does acquisition and divestiture refer to?

Cevap

Acquisition is taking a controlling ownership in another firm, subsidiary of another firm, or business unit of another firm by an acquirer firm. The acquired firm may continue its existence after the acquisition as a subsidiary of the acquirer. In the opposite position, a divestiture is a sale of all of a company or all of a business/product line to another party in exchange for cash or securities. That means that for an acquired firm, the transaction is a divestiture, while for an acquirer it is an acquisition.


4. Soru

What are the variations of business alliances besides M&As?

Cevap

Variations of Business Alliances besides M&As:

Joint Venture: A cooperative business relationship formed by two or more separate parties to achieve common strategic objectives. Joint ventures are generally established for a limited time. The parties joining venture maintain their separate existence (DePamphilis, 2003).

Strategic Alliance: A kind of alliance where there is no new and separate legal entity. It can be an agreement between two or more firms to sell each others’ products to each others’ customers, or to codevelop a technology, product, or process. Such an agreement might be informal (DePamphilis, 2003).

Minority Investment: An investment of a company to another, which managers of the investing company may be in passive manner. It may mean that there is a little need for commitment from the management of the investing company (DePamphilis, 2003).

Equity partnership: A company’s purchase of stock (resulting in a less than controlling interest) in another company or a two-way exchange of stock by the two companies. An equity interest in a partnership is generally accounted for by each partner in the same manner as an equity investment in a corporation, provided that recourse for partnership liabilities is limited to partnership assets (Finnerty, 2007).

Licensing Agreement: An arrangement formalized by a written agreement or contract, by which a local ‘licensee’ acquires the right to manufacture and market goods using patents, processes, designs and sometimes even the trademark of the licensor (Wallace, 2002)

Franchising Alliance: A kind of alliance where a privilege given to a dealer by a manufacturer or franchise service organization to sell the franchiser’s products or services in a given area, with or without exclusivity. Such an alliance can be formed by using a franchise agreement, which may include franchisers’ consultation, assistance, and financing. Franchise is a kind of licensing agreement, which is specialized in selling another firm’s products or services (DePamphilis, 2003).

Network: A firm’s set of relationships, both horizontal and vertical, with other organizations – be they suppliers, customers, competitors, or other entities – including relationships across industries and countries. These networks are composed of interorganizational ties that are enduring, are of strategic significance for the firms entering them and include strategic alliances, joint ventures, long term buyer-supplier partnerships and a host of similar ties (Koleva, 2002).

Outsourcing: The contracting or subcontracting of noncore activities to free up cash, personnel, time, and facilities for activities in which a company holds competitive advantage. Companies having strengths in other areas may contract out data processing, legal, manufacturing, marketing, payroll accounting, or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost. (http:// www.businessdictionary.com/definition/outsourcing.html)

Offshoring: The moving of various operations of a company to another country for reasons such as lower labor costs or more favorable economic conditions in that other country. (http://www.businessdictionary. com/definition/offshoring.html)


5. Soru

What is Joint Venture?

Cevap

Joint Venture: A cooperative business relationship formed by two or more separate parties to achieve common strategic objectives. Joint ventures are generally established for a limited time. The parties joining venture maintain their separate existence.


6. Soru

What does Franchising Alliance mean?

Cevap

Franchising Alliance: A kind of alliance where a privilege given to a dealer by a manufacturer or franchise service organization to sell the franchiser’s products or services in a given area, with or without exclusivity. Such an alliance can be formed by using a franchise agreement, which may include franchisers’ consultation, assistance, and financing. Franchise is a kind of licensing agreement, which is specialized in selling another firm’s products or services.


7. Soru

What is Outsourcing?

Cevap

Outsourcing: The contracting or subcontracting of noncore activities to free up cash, personnel, time, and facilities for activities in which a company holds competitive advantage. Companies having strengths in other areas may contract out data processing, legal, manufacturing, marketing, payroll accounting, or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost.


8. Soru

What does fair value mean?

Cevap

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

9. Soru

What are the disclosures required from acquirer about current business combinations (IFRS 3)?

Cevap

Disclosures Required from Acquirer about Current Business Combinations (IFRS 3)

Name and a description of the acquire

Acquisition date

Percentage of voting equity interests acquired

Primary reasons for the business combination and a description of how the acquirer obtained control of the acquire

Description of the factors that make up the goodwill recognized, such as expected synergies from combining operations, intangible assets that do not qualify for separate recognition

Acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration

Details of contingent consideration arrangements and indemnification assets Details of acquired receivables

The amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed

Details of contingent liabilities recognized
Total amount of goodwill that is expected to be dedeuctible for tax purposes

Details about any transactions that are recognized separately from the acquisition of assets and assumption of liabilities in the business combination

Information about a bargain purchase
Information about the measurement of non-controlling interests Details about business combination achieved in stages Information about the acquiree’s revenue and profit/loss

Information about a business combination whose acquisition date is after the end of the reporting period but before the financial statements are authorized for issue


10. Soru

What are the forms of M&As?

Cevap

M&As are identified in horizontal and vertical dimensions as well as congeneric and conglomerate forms. They are is also identified in a cross-border type of forms. Horizontal dimension is about the industry. If M&A is between two firms in the same industry, then it is a horizontal combination.Vertical dimension on the other hand, is about the position in the value chain. If M&A occurs between two firms of which one is a supplier, or a customer to another, then it is a vertical combination. The idea is to expand in the value chain either towards customers forward, or towards production factors backward. Congenereic M&A is between related firms in very similar industries, but merging firms are not in any horizontal or vertical relationship.Conglomerate M&A is between unrelated firms in different industries.


11. Soru

What is Cross-border M&A?

Cevap

Cross-border M&A is a form of business combination between two firms in two different countries. In highly competitive global markets, M&A is seen as a strategic tool for creating value. “Firms increasingly acquire targets in foreign countries to increase market power, overcome market entry barriers, enter new markets, reduce competition, change the competitive landscape, increase efficiency, access new and diversified technologies and knowledge, and create new knowledge, products, and services”.


12. Soru

What effects does synergy have as motivation for M&AS?

Cevap

A Dictionary of Business and Management (2016) defines synergy as the added value created by joining two separate firms, enabling a greater return to be achieved than by their individual contributions as separate entities; i.e. the overall return is greater than the sum of its parts. The synergy is usually anticipated and analysed during merger or takeover activities; for example, one firm’s strength in marketing would be complementary to the other firm’s versatility in new product development.

Synergetic benefits from M&A may be in forms of economies of scale, and economies of scope. Benefits from economies of scale involve cost reductions because of producing in large scales or sharing business services. It may be lower cost of labor, lower cost of raw meterials, or lower cost of capital. Benefits are the outcomes of horizontal integration. On the other hand, benefits from economies of scope stem from combining the business with suppliers or customers. Benefits are the outcomes of vertical integration. You may find detailed information on economies of scale and economies of scope in economics books.

Besides economies of scale and economies of scope, synergy may also stem from effectuation between ideas, cooperation, and knowledge sharing. The employees of two combining business entities may bring their background and experiences together to create value, which is bigger than anticipated.


13. Soru

What effects does diversification have as motivation for M&AS?

Cevap

Movement by a manufacturer or trader into a wider field of products is defined as diversification by A Dictionary of Business and Management (2016). Diversification may be achieved by buying firms already serving the target markets or by expanding existing facilities. The rationale of diversification is decreasing risks. It has always been explained as “not putting all the eggs in one basket”. The most important point about this motivation is that diversification should add value to investing firm.


14. Soru

What effects do tax considerations have as motivation for M&AS?

Cevap

Tax may be one of the motivations for engaging in M&A activity. Depending on whether the payment for M&A is in the form of cash or in the form of shares, an acquisition may be taxable, or tax-free for shareholders. The M&A activity has effects on the merged firm’s taxes after the deal is closed. The merged firm is taxed as if the merged firms had always been together when the payment for M&A is in the form of shares. However, the assets of the selling firm are revalued, the result is treated as a taxable gain or loss, and tax depreciation is recalculated on the basis of the restated asset values when the payment for M&A is in the form of cash (Brealey et al., 2014). If depreciation tax shield will be larger than the cash amount to be paid, a firm may seek such an alternative firm to acquire in a taxable way.


15. Soru

What phases does DePamphilis’s Description of M&A Process have?

Cevap

DePamphilis’s Description of M&A Process in 10 Phases;

Phase 1: Building the business plan

Phase 2: Building the merger/acquisition implementation plan

Phase 3: The search process

Phase 4: The screening process

Phase 5: First Contact

Phase 6: Negotiation

Phase 7: Developing the integration plan

Phase 8: Closing

Phase 9: Implementing postclosing integration Phase 10: Conducting a postclosing evaluation


16. Soru

What does negotiation in M&A activity refer to?

Cevap

Negotiation in M&A activity refers to the process of bargaining between the acquiring firm and the target firm aimed at coming to an agreement over the terms, needs and aims of both parties. If the acquiring company’s intention is to continue with the management of the target company after the acquisition, the heart of the negotiation first will be the integration of business activities and management after the closing. Price will be the second theme of the negotiation if both parties have an agreement on the first theme. However, if the acquiring company’s intention is only to have the assets of the target company, then the focal point of the negotiation will be the price. We can say that the intention and approach of the acquirer sets the framework for the process of M&A.


17. Soru

What items are there in the DePamphilis’s List of Key Topics to Address in a Due Diligence?

Cevap

DePamphilis’s List of Key Topics to Address in a Due Diligence:

1. Corporate matters
- Affiliates, strategic investments, company documents, agreements, press releases, etc.

2. Securities matters
- Number of shares, issuance/resale of equity/debt securities, reports to shareholders, etc.

3. Tax matters
- Income tax returns, foreign income tax returns, evidence of payment of taxes, tax audits, etc.

4. Financial and accounting matters

- Financial statements, listing of inventory, listed of accrued expenses and deferred revenue, sales and cost of sales, etc.

5. Risk management matters
- Liability and property insurances, risk management policies, claims, customer warranties, etc.

6. Assets, real property, and personal property matters

- Domestic and foreign facilities owned, restrictions on real properties, documents on ownership/use of real properties, intangible properties, etc.

7. Conduct of business matters

- Company’s business units’ products and services, sales by product line, largest customers and suppliers, principal competitors, etc.

8. Intellectual property matters
- Domestic and foreign patents and trademarks, copyrights, pending applications to those, etc.

9. Management, labor, and personnel matters

- Management organization, employees by business units, employment agreements, collective bargaining agreements, pension plans, personnel procedures, etc.

10. Legal compliance matters

- Legal and ethical conducts, prior circumstances of recorded payments, prior investigations if any, policies of environmental, safety, and health issues, etc.

11. Ligitation, disputes, and claims matters

- Pending ligitations and claims, any governmental authority against the company, any violation of any regulations, etc.

12. Information systems matters
- Information processing systems, staffing forecasts, software products utilized, etc.


18. Soru

What are the reasons of failure in M&As?

Cevap

There are number of reasons to explain why mergers and acquisitions fail. Starting from building a plan and going to post acquisition stage, in every phase of the process it is possible to find a reason. Poor consequences of mergers and acquisitions are linked to: “inaccurate valuations, inflated prices, poor due diligence, excessive optimism, exaggerated synergies, and failed integration” by Schweiger and Very (2003).

Among all of the reasons, problems in the post acquisition period sound unexpected. Culture clash is a widely used term to describe the failure of management in the post acquisition integration process. Bringing two different sets of fundamental values of employees in all levels and fuctions together in a context of achieving business goals can create problems. This can lead to “very damaging actions from passive resistance and the loss of good staff to sabotage” (Angwin, 2007). Geiger (2010) analyzes motives and merger rationale of machinery manufacturers in Germany.


19. Soru

What are the financing alternatives?

Cevap

Acquiring company may use internal financing or external financing in order to finance M&A. Each alternative has its benefits and costs to consider and compare. An advantage of using internally generated funds to finance M&A is to avoid costs of external financing. However, it brings the disadvantage of increasing risks resulting from abstinence of creditors and shareholders as control mechanisms over managers’ decisions regarding the deal.

On the other hand, financing M&A externally brings advantage of control mechanism of creditors and shareholders over actions of management. Disadvantage is its costs. External financing has two options of debt financing and equity financing. If the acquirer company finances the M&A deal by largely using debt it is called as Leveraged Buyout (LBO). Sometimes debt financing may be up to 90% for a deal. Typically, the target company’s assets are used as a warranty for the loan. 

Baker and Martin (2011) emphasize that the relationship between method of payment and financing alternatives is important to understand because it also tells about how results of these two decisions will affect capital structure of acquiring firm, and also how an acquiring firm should approach to valuation of the target firm. A specific method of payment may result in certain financing alternative, or vice versa, a specific financing alternative may result in specific method of payment.


20. Soru

What are the valuation approaches?

Cevap

Valuation approaches can be grouped in three categories of income-based, market-based, and asset-based valuation.

1. Income-based valuation: Income-based valuation focuses on finding the fair value of the company, depending on the future cash flows. The key of income-based valuation is future cash flows that a company will generate. The value of a company then, is the sum of present value of its future net cash flows. Calculation of future cash flows is not an easy task, though. It includes long-term business plans, growth plans, and risks associated with future cash flows. After calculating net cash flows, they are discounted at an appropriate discount rate.

2. Market-based valuation: Market- based valuation techniques use “market multiples” to calculate the value of the target company. This approach is related to market equilibrium for company assets. Market multiple is a ratio, calculated by dividing estimated or market value of an asset by a measure. In order to use market multiples in valuation, one has to find comparable deals in similar industries, or comparable deals of companies with similar financial or business matters. It is assumed that multiples of these companies can serve as indicators that can be used to find the value of the target company.

3. Asset-based valuation: Asset-based valuation focus on company assets’ acquisition costs reflected in records. Under this approach, value of a business equals the sum of its components. Net asset value is the value of assets minus value of liabilities of a firm.Book value is the value of assets that are recorded at a date, at a value, by accounting records. Liquidation value is the value that could be realized if a company were sold individually and not as part of a going concern. Some adjustments are made to calculate net asset value, net book value, and liquidation value in order to adjust values to fair market value.


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