Business Finance 2 Dersi 8. Ünite Sorularla Öğrenelim

What is the resource-based view of a firm?

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.

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.

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.

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.

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.

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.

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

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.

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”.

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.

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.

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.

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

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

What does negotiation in M&A activity refer to?

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.

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

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.

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. 

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.