A merger is the combination of two separate companies into a single company with shareholders of the pre-merged two companies becoming shareholders of the merged company (Coyle, 2000). On the other hand an acquisition or take-over refers to the acquisition of the target company assets by a predator company. The key difference between a takeover and a merger is that in a takeover, the shareholders of the target company lose ownership and control, while in a merger shareholders of both companies become shareholders of the new merged company (Coyle, 2000).
There are several reasons for Mergers and Acquisitions (M&A) but there should be some synergies that will result from the M&A (DePamphilis, 2000). Synergy means that the merged business will generate greater shareholder values than if they were operating separately (DePamphilis, 2000). There are two basic types of synergies, operating synergies and financial synergies. Operating synergies include economies of scale and economies of scope. Economies of scope refer to gains in efficiency that result from improved managerial practices (DePamphilis, 2000).Economies of scale refers to the reduction in fixed costs due to increased production (DePamphilis, 2000).
Financial synergy refers to the reduction in the cost of capital. When two companies with cash flows that are not in tandem merge there is a chance of reduced cost of capital. For instance, a mature company experiencing a decline in growth may generate cash flows in excess of available investment opportunities. Such a company can merge with a young company that is experiencing rapid growth and is unable to generate sufficient cash flows to finance its growth (DePamphilis, 2000). Such a merger could lower the average cost of capital of the combined firms (DePamphilis, 2000).
Diversification means buying firms that are in an unrelated industry. Companies diversify either to reduce the finance costs, or to allow the firm to shift from its primary activities, to markets or activities that have higher prospects for growth (DePamphilis, 2000).
Strategic realignment can be achieved much faster through a merger especially when the firm is faced with rapid changes in the legal and technological environment in which they are operating in. For instance, industries such as the telecommunications, health care, and media have been deregulated (DePamphilis, 2000). De-regulation breaks down operating barriers and makes the industry more open to competition (DePamphilis, 2000).Technological changes bring in new products or new methods of production, for instance, the development of the internet has changed the way videos are marketed and distributed. When faced with such rapid changes, organizations can leap frog by acquiring companies with the necessary capabilities to enable them to compete.
Mergers are financed by cash, shares, debentures, or vendor placing (Coyle, 2000). A share exchange also known as a paper purchase involves the exchange of shares in the target company for shares in the predator company (Coyle, 2000). For a share exchange, an exchange ratio has to be calculated showing how many shares the shareholders of the target company will receive in the predator company for each share they hold.
A cash purchase is simply estimating the value per share of the target company and paying the shareholders of the target company the cash value. Vendor placing involves the predator company issuing shares to the target company shareholders, and then placing the shares with a vendor who in turn sells the shares in order to raise cash for the target shareholders (Coyle, 2000).
Coyle (2000) observes that the target company can adopt various defense tactics to ward off a hostile takeover that include:
Looking for a more friendly company to make a bid (white knight)
Introducing a poison pill, for instance, selling a strategic asset that made it a take-over target
Convincing the shareholders that the offer from the predator company is inferior (Coyle, 2000)
Repurchasing its own shares
An unquoted company can easily rebuff a hostile takeover, however, for a quoted company, some or all the shareholders may want to sell their stake if they view the offer made by the predator company as attractive (Coyle, 2000).
Ernst & Young (2008) categorized the finance function into four roles that help explain the financial controllers role, these are:
Commentator – explaining the numbers, conducting variance analysis, and preparing management reports.
Business partners – focuses on creating value through providing insights, advise, and supports decision making
Scorekeeper – focuses on bookkeeping, reconciling balances, and processing transactions
Custodian – focuses on governance and ensures the organization adheres to all the relevant rules and regulations
In a merger and acquisition the financial controller will play three of the four roles identified above. As a commentator the financial controller will carry out due diligence on the target company and prepare management reports on the suitability of the target company. As a business partner the financial controller will provide insights on the proposed merger and support the board in the decision making. As a custodian, the financial controller will check that the merger process adheres to all relevant rules and regulations.
References
Coyle, B. (2000). Mergers and acquisitions. Chicago: Glenlake Pub. Co.
DePamphilis, D. M. (2010). Mergers and Acquisitions Basics All You Need To Know.
Burlington: Elsevier Science.
Ernest &Young,. (2008). Financial controller network. Retrieved 23 March 2016, from
http://www.ey.com/Publication/vwLUAssets/Changing_role_of_the_financial_controller/$FILE/EY_Financial_controller_changing_role.pdf
