The form of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real value of the bid without considering an eventual earnout. The contingency of the share payment is indeed removed.
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Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyer's capital structure might be affected and the control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders.
The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results.
For example, in a pure cash deal financed from the company's current account , liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction financed from the issuance of new shares , the company might show lower profitability ratios e. However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked.
If the buyer pays cash, there are three main financing options:. The following motives are considered to improve financial performance or reduce risk:. However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. The first element is important because the directors have the capability to act as effective and active bargaining agents, which disaggregated stockholders do not. But, because bargaining agents are not always effective or faithful, the second element is critical, because it gives the minority stockholders the opportunity to reject their agents' work.
Therefore, when a merger with a controlling stockholder was: 1 negotiated and approved by a special committee of independent directors; and 2 conditioned on an affirmative vote of a majority of the minority stockholders, the business judgment standard of review should presumptively apply, and any plaintiff ought to have to plead particularized facts that, if true, support an inference that, despite the facially fair process, the merger was tainted because of fiduciary wrongdoing.
A Strategic merger usually refers to long term strategic holding of target Acquired firm. The term "acqui-hire" is used to refer to acquisitions where the acquiring company seeks to obtain the target company's talent, rather than their products which are often discontinued as part of the acquisition so the team can focus on projects for their new employer. In recent years, these types of acquisitions have become common in the technology industry, where major web companies such as Facebook , Twitter , and Yahoo!
Merger of equals is often a combination of companies of a similar size. For the period , consumer products companies turned in an average annual TSR of 7. Organizations should move rapidly to re-recruit key managers. It's much easier to succeed with a team of quality players that one selects deliberately rather than try to win a game with those who randomly show up to play.
Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential.
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And, given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons: . The factors influencing brand decisions in a merger or acquisition transaction can range from political to tactical. Ego can drive choice just as well as rational factors such as brand value and costs involved with changing brands.
Beyond the bigger issue of what to call the company after the transaction comes the ongoing detailed choices about what divisional, product and service brands to keep.
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The detailed decisions about the brand portfolio are covered under the topic brand architecture. However, mergers coincide historically with the existence of companies. In , for example, the East India Company merged with an erstwhile competitor to restore its monopoly over the Indian trade. The Great Merger Movement was a predominantly U. It is estimated that more than 1, of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated.
The vehicle used were so-called trusts. Companies such as DuPont , U. Steel , and General Electric that merged during the Great Merger Movement were able to keep their dominance in their respective sectors through , and in some cases today, due to growing technological advances of their products, patents , and brand recognition by their customers. There were also other companies that held the greatest market share in but at the same time did not have the competitive advantages of the companies like DuPont and General Electric. These companies such as International Paper and American Chicle saw their market share decrease significantly by as smaller competitors joined forces with each other and provided much more competition.
The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. In addition, many of these mergers were capital-intensive. Due to high fixed costs, when demand fell, these newly merged companies had an incentive to maintain output and reduce prices. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present.
The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains, they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in the Great Merger Movement. One of the major short run factors that sparked the Great Merger Movement was the desire to keep prices high.
However, high prices attracted the entry of new firms into the industry. A major catalyst behind the Great Merger Movement was the Panic of , which led to a major decline in demand for many homogeneous goods. For producers of homogeneous goods, when demand falls, these producers have more of an incentive to maintain output and cut prices, in order to spread out the high fixed costs these producers faced i.
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However, during the Panic of , the fall in demand led to a steep fall in prices. Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to view the involved firms acting as monopolies in their respective markets. As quasi-monopolists, firms set quantity where marginal cost equals marginal revenue and price where this quantity intersects demand.
When the Panic of hit, demand fell and along with demand, the firm's marginal revenue fell as well. Given high fixed costs, the new price was below average total cost, resulting in a loss. However, also being in a high fixed costs industry, these costs can be spread out through greater production i. To return to the quasi-monopoly model, in order for a firm to earn profit, firms would steal part of another firm's market share by dropping their price slightly and producing to the point where higher quantity and lower price exceeded their average total cost.
As other firms joined this practice, prices began falling everywhere and a price war ensued.
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One strategy to keep prices high and to maintain profitability was for producers of the same good to collude with each other and form associations, also known as cartels. These cartels were thus able to raise prices right away, sometimes more than doubling prices. However, these prices set by cartels provided only a short-term solution because cartel members would cheat on each other by setting a lower price than the price set by the cartel. Also, the high price set by the cartel would encourage new firms to enter the industry and offer competitive pricing, causing prices to fall once again.
As a result, these cartels did not succeed in maintaining high prices for a period of more than a few years. The most viable solution to this problem was for firms to merge, through horizontal integration , with other top firms in the market in order to control a large market share and thus successfully set a higher price.