Mergers and aquisitions

The Russian University of Economics International Business School

2012

Mergers and acquisitions

Term Paper Corporate Finance

Student: El-Bashir Rita Group #5203 Professor: Fedunin A.S

 

 

Оглавление

Introduction 3

Chapter 1. The theoretical aspect of mergers and acquisitions 5

1.1 Centralization and concentration of capital 5

1.2 Friendly mergers 7

1.3 Hostile takeovers 9

Chapter 2. Applied aspect of mergers and acquisitions 11

2.1 The company's growth in friendly mergers and acquisitions 11

2.2 Current situation in the Russian market of mergers and acquisitions 16

Conclusion 19

References 20

Application 21

 

 

Introduction

Global integration processes taking place in all sectors of economic activity, could not pass by, and Russia. The processes taking place in the Russian market, suggest that many Russian companies are actively involved in the process of globalization, adopt foreign experience, and use the latest technology for business development. Competition in world markets is escalating, and while in Russia market saturation has not yet reached a critical point, many companies have felt the need to find ways to improve competitiveness and efficiency. Especially because of the possibility of development of the companies only due to the growth of the Russian consumer market at this time almost exhausted.

The long-term competitiveness of most Russian companies, despite the positive changes in recent years, is still low. At this stage, typical of competitive advantage can be considered as a high proportion of the domestic market and knowledge of specific markets. But these factors are timed. If they are not backed up by sustained competitive advantage, the situation can change quickly. If we look at more fundamental competitiveness factors - productivity, output per worker, the rate of new product development, quality, in the end - we can see that in almost all respects our company is seriously lagging behind their foreign opponents.

Even more problematic is the constant lack of financial resources. In this context, diversification can be disastrous strategy for many companies. And without that not the most effective Russian companies are several times smaller than their foreign competitors. This means that the investment of resources they have also several times smaller. Diversification only exacerbates the deficit. As a result, instead of creating a truly competitive and efficient develop several underperforming products or businesses. For the Russian business strategy of concentration and specialization may be a priority.

Therefore, the integration operations are a tool, without which it is difficult to imagine a dynamic business. They allow you to increase the value of the company, to create truly effective business processes, to obtain a unique competitive advantage, consolidating it with the company that is best suited for this purpose.

 

Subject

The object of this work is mergers and acquisitions. Along with friendly and unfriendly takeovers are considered - grips, raiding.

 

Object

Many of today's companies are achieving enormous success through mergers, and this is an indisputable fact. However, whether all mergers and acquisitions are successful and lead to further growth of the company? What factors influence the success of the future merged company? These questions are the subject of this paper.

 

Goal

The aim is to establish what factors and how to influence the success and continued growth of the combined company.

 

The degree of scrutiny

Many books and articles are written about mergers and acquisitions. They cover almost all aspects of the process; tell us about the history and types of mergers, the procedures for and more. There are enough literature which is written by Russians and the foreign ones about friendly and a hostile takeover. For example, "Mergers, acquisitions and restructuring of companies," Patrick Gohan (the book concerns how friendly and unfriendly mergers), "The Art of mergers and acquisitions," Reed Stanley Foster Reed, Alexandra Lajoux. A lot of Russian literature: "Raiding in Russia: the peculiarities of national capture" SN Anisimov, "Mergers and acquisitions: an effective strategy for Russia," S. Guardini, and others.

 

 

Chapter 1. The theoretical aspect of mergers and acquisitions

1.1 Centralization and concentration of capital

 

Development is one of the main objectives of each company. Development is achieved in many ways; I will discuss two ways of consolidation of the enterprise: the centralization and concentration of capital.

Under the capital understood as a set of goods, property, assets used for profit, wealth. Karl Marx gave this definition: "The Capital - this is not a thing, as defined, social belonging definite historical formation of society relation of production, which is represented in the thing and give this thing a specific social character. Capital - this is not simply the sum of material and produced means of production. Capital - is converted into equity capital goods, which by themselves are just as capital, such as gold or silver on their own - money. "

Under the concentration of capital refers to the process of consolidation of individual capital through the capitalization of surplus value. Surplus value here is the main source of growth capital. The concentration of capital is influenced by several factors. Firstly, the amount of surplus value by the number of workers who depend on the capital. From this it follows that the capitalist can increase surplus value, only increasing the size of their capital. Second, because of the development of capitalism and the growth of technology is increasing the minimum size of individual capital necessary to conduct business. Competition is another factor influencing the change in capital requirements. Tendency of the rate of profit to fall and forces the entrepreneur to increase their capital. However, the concentration of capital is a slow and very protracted process. On this occasion, Marx says: "The world still would have remained without railroads, though had to wait until the accumulation not bring some isolated capital to such an extent that they could cope with the construction of the railroad."¹

The second method of aggregation of capital, as noted above, is the centralization of capital, i.e. process of increasing the capital of one or a group of capitalists in the absorption or the addition of other capitals. The centralization of capital is different from the concentration of the source of its growth. If the concentration is mainly due to the increase of surplus value, the centralization due to the absorption of existing capital. The process of centralization of capital affects only the size of individual capital and does not change the public because it is a reallocation of capital among different owners. "Capital is in the same hands can grow to enormous size, because there, in another place, he left the set of hands. In every industry enterprises centralization would have reached its extreme limit, if all invested in capital it merged into one single capital. In any given society the limit would be achieved only when the entire social capital would have been bound together in the hands of a single capitalist or a single-capitalist society "(Marx). The centralization of capital takes place in two main ways: friendly mergers / acquisitions and hostile takeovers.

An example of consolidation of capital can serve as a financial-industrial group. In this case, the concentration and centralization of capital leads to the formation of multidisciplinary groups. They are more advanced form of consolidation of capital than simply increasing the size of the enterprise. Consumer associations provide many benefits to the owners of the enterprise. First, the economic entity is able to have approximately the same efficiency as a whole, regardless of the crisis in any industry. Second, multi-union saves on distribution costs in the supply of raw materials and companies that are part of the financial and industrial groups to each other. Third, the owner comes the introduction of technical improvements, technology integration companies. Fourth, the owners get the added benefit during economic downturns.

Activity structures with high concentration of capital in various industries, has positive aspects for the economy as a whole. They are reduced mainly to stabilize the country's economic development, better economic crises. However, if the crisis will cover such an organization, the consequences can be extremely unfavorable.

 

1.2 Friendly mergers

 

Merge companies recognized the emergence of a new society by transferring to him all the rights and duties of two or more companies with the termination of the latter. ²There are several types of mergers. The first type - is the merger of forms, i.e. association in which the merged company will cease to exist as an autonomous entity and the taxpayer. The new company takes control and direct management of all assets and liabilities to customers of companies - their constituents, then the last bloom. The second type - is the merger of assets, i.e. association with the transmission owners participating companies as a contribution to authorized capital stock of human control over their companies and conservation activities and the legal form of the latter. In foreign practice, single out one type of merger, which is in accordance with Russian legislation, called the "merger". Joining the society recognizes the termination of one or more companies to transfer all their rights and obligations of another company.³

Under the deal done by the absorption means to establish control over the business entity and carried through the acquisition of more than 30% of capital (stocks, shares, etc.) absorbed by the company, while preserving judicial independence society. Chapter HI.1 FZ on Joint Stock Companies regulates these transactions.

 

Classification of mergers

The main classification of mergers and acquisitions is based on the type of united action. According to this criterion, mergers and acquisitions are divided into:

• Horizontal;

• Vertical;

• Conglomerate.

 

Further, for simplicity we use the term "merger", referring to the activities of mergers and acquisitions.

 

Horizontal mergers involve association of companies operating and competing in one area of ​​activity. This type of merger provides a competitive advantage over other participants in this particular market segment due to economies of scale and capital increase. It should be noted that such mergers as restricting competition can be regulated by the state through a system of antitrust action. Among the most striking recent examples of mergers of this type may be noted the merger of banks Chase Manhattan and Chemical Bank, the union of food industry giants Guinness and Grand Metropolitan.

 

Vertical merger is the union of the companies belonging to different stages of a production process. At the same time takes the form of merger integration "forward" or "integration ago." For example, a factory for the manufacture of metal combined with the machine-tool plants ("forward integration", i.e. the association with the company relating to the next stage of the manufacturing process) or, for example with a company engaged in the production of iron ore ("integration ago," that is merging with a company the previous stage of the manufacturing process).

The most striking examples of the Russian practice - the acquisition of NK "LUKOIL" in 1998, controlling interest in the Romanian oil refinery "Petrotel", the formation of holding company "Siberian Aluminum" around the Sayan Aluminum Plant (which includes plants for the production of aluminum rolled products, manufacture of aluminum foil and aluminum cans) .

This type of merger provides increased technological efficiency of production, reduce transaction costs (members of the vertically integrated circuits supplying one another object of the intermediate production of a much lower cost or even free), better exchange of information within the combined company, which eventually leads to a significant reduction of intermediate inputs and, finally, the total cost of final products.

 

Conglomerate mergers involve merger of different, unrelated industries or geographic regions.

There are three types of conglomerate mergers:

• Merge to expand product range

There is a union of companies producing different products, having, however, similar symptoms and are able to expand the assortment of products in each other. Thereby greatly increasing the competitive edge formed structure. An example is the recent merger of Boeing, the world's largest manufacturer of civil aircraft and McDonnel Douglas, a leader in defense and space industry of the USA, as well as the union of two companies of the giant operating in the financial services industry - the world-renowned investment bank Morgan Stanley and having well-developed distribution network of Dean Whitter Discovery. As a result, was formed a strong financial structure, working together with private and large institutional clients.

• Merge for geographic expansion

In this case, the merged company, producing the same type of products, but operating in different regions. This scheme can significantly reduce risk through geographical diversification and increase its presence, and hence, competitive advantages, to provide themselves with additional demand for different geographic markets. As an example, the acquisition of the German Volkswagen Group 70% stake in Czech factory Skoda, which allowed him to take advantage of the fast-growing and promising Eastern European market.

• Strictly conglomerate merger

This merger involves merger of completely unrelated and unrelated industries. Example - is the merger of the tobacco company RJ Reynolds and food producer Nabisco Brands, resulting in a company RJR Nabisco.

 

1.3 Hostile takeovers

 

In the previous section discussed the concept and classification of friendly mergers and acquisitions. What makes them hostile takeovers? Who is involved in hostile takeovers? What types of acquisitions occur? What security measures businesses can take the company?

Thus, under the hostile takeover of the company or an asset means the establishment of this company or asset in complete control of how the legal and physical sense against the wishes of management and / or the owner of this company / asset.

Based on the definition we can identify the most characteristic feature of all hostile takeover: it is carried out in addition to someone's will, therefore, the target company (the owner of the asset, the largest shareholders, the company's managers) will always resist the actions of the aggressor.

By itself, a hostile takeover, carried out in accordance with the requirements of current legislation, is not something criminal. On the contrary, if such action to replace old, inefficient owner will come new and more successful, society will benefit from this. The state will receive more tax, the workers - the big salaries, and the enterprise will have a chance for further development. Vesting of assets in this sense is one way of financial and economic recovery of the company.

Despite this, it is necessary to note that in Russia the term "hostile takeover" has acquired a persistent association with the term "illegal occupation". This is due to the fact that hostile takeovers have almost always accompanied by a large number of violations of the law, many of which involve criminal liability.

Who is involved in hostile takeovers? It is clear that as the target can act almost any company.

 

Among the companies-aggressor we can provide 4 main groups⁴.

 

• The oligarchs and financial-industrial groups. Absorb the assets of the company and for themselves, for development or diversification of existing business empires or the creation of new industrial holdings. They are the most dangerous aggressors, because they have considerable financial resources, many times exceeding the capabilities of the target company. These players are actively using the administrative, judicial power and resources. An example would be the kidnapping of his wife and daughter, General Director of "Mostransagentstvo" in 2004. Himself head of the enterprise at this point insistently offered to sell his shares to the aggressors.

 

• Investment companies, for which absorption - the core business. Later absorbed by the company / assets are sold to the highest possible price to interested persons or retained for the diversification of their business. Typically, these players are not as dangerous as the oligarchs and the financial and industrial groups. They tend to act less rigidly, as an asset in respect of which are endless litigation, the problem is and sell it at the highest price possible. For overt aggression company data resorted to only when acquiring assets for themselves, or when the conflict began a corporate cannot be resolved more peacefully.

 

• Investment companies - intermediaries acting in the interests of the customer. Capabilities and tactics of these companies is mainly determined by the possibilities of their customers. They rarely rely on considerable power, judicial and administrative resources, as these tools are too expensive. Although there are exceptions: if the customer - a large oligarchic structure, the possibility of mediation seriously grow up.

 

• Investment companies - professional grinmeylery. They are the most sophisticated and least dangerous in terms of real absorption of the enterprise. This is due to their true goals - they want compensation. However, if grinmeyler acts as a participant in hostile takeover hiding for the time being the dominant player, or in the course of implementing its own strategy understands that surprised himself created the conditions for hostile takeover, its activities may pose a threat to the enterprise.

How can we classify hostile takeovers? In my opinion, it is possible to classify the degree of illegal actions of the aggressors in the capture of the enterprise.

The first group includes the absorption, when the invaders are trying not to engage in the activity for illegal acts. Such invaders are called white aggressors. They artificially create conflict situations, using manipulation technology, acquire on the basis of legitimate trades stocks, shares and assets.

The second group of seizures during which illegal methods are used: forgery, multiple resale of stolen assets, the armed seizure of buildings and enterprises, the organization of the illegal prosecution of business owners and its managers, blackmail, and even kidnapping to extort stocks, shares, of assets.

 

Chapter 2. Applied aspect of mergers and acquisitions

2.1 The company's growth in friendly mergers and acquisitions

 

The basic principle underlying the theory of mergers is the synergistic effect of the merger. Value of the company, formed through the merger exceeds the sum of values ​​of its components parts, i.e.

2 +2 = 5.

For example, if company A merged with company B, then the formula expressing this is as follows:

 

V (AB)> V (A) + V (B)

 

Where V (AB) - the cost of the new company, formed through the merger of A and B;

V (A) - A company's value;

V (B) - the value of B.

 

Thus, the essence of synergy is that the merger of two companies creates an additional cost of the combined company. Due to what is going on increasing the value of the combined company? It is obvious that the sources of increasing the cost of forming a definite benefit to the participants in mergers / acquisitions, which is the main motivating factor for the mergers and acquisitions. The sources of cost increases include: economies of scale, economies of vertical integration and complementary resources, unused tax benefits, etc.

However, we have shown in the group benefits on the basis of current activities and future development. There are allocated operational, financial, investment and strategic sources of growth companies.

 

Operating profit

To operational benefits, above all, include the savings due to the increase in activities. Participants’ integration typically has a number of similar functional units, such as accounting, finance, marketing, advertising, research and other units. Such duplication can be avoided by creating a uniform for the entire company instead of multiple control centers available. Thereby reducing costs for their content. The higher proportion of fixed costs, the greater the positive effect can be obtained. These savings can be especially significant if the companies involved in acquisitions, working in the same industry and country. For example, SBC Communications (formerly Southwestern Bell) has received considerable savings on costs, when absorbed Pacific Telesis. In the first two years after the absorption of SBC has cut production costs by more than $ 200 million, and tens of millions of dollars on bulk purchases.⁵

Also as part of operating gains distinguish savings from the direction of integration. In horizontal integration of the reduced operating costs by consolidating facilities and eliminating duplicative functions. With vertical integration increases the efficiency of overall production process, reduces transaction costs.

The next type of benefit - is the opportunity to increase resources and market presence by increasing the share of occupied and / or reduces competition. Members shall strive to increase their share of industry sales and marketing to enhance its infrastructure (distribution network) by effectively complement the participants. If there is a market segment where participants compete by price, then they will have the opportunity to conduct more effective pricing.

Also highlight the benefits of complementary resources. Often, participants have complementary resources. This opens up new possibilities and prospects. In this case there is a saving in the first place, due to the cost of these resources, and secondly, by reducing the time and extra costs for them. Some companies are able to independently establish the necessary elements, but a more effective way is to integrate with the company, which already has the item. Such resources may include: production, financial and administrative resources, investment opportunities and technology. It also includes R & D and economic effects of their acquisition / combination. Sometimes a company buys an absorbing target, because that is something particularly good at, and sometimes vice versa: the absorbing company sees that can significantly improve the company a target in a field in which she has succeeded. An example is the takeover ABN AMRO U.S. commercial bank Standard & Federal. Here took place and process improvement, and savings on expenses: mortgage operations S & F have been so successful that he eventually began to carry out all operations of this kind in the combined company.⁶

An example of the absorbing company, which develops processes in the acquired company, may serve as a U.S. company, a newspaper giant - Gannet. The company buying the target company immediately begins to improve the organization of production and sales, thereby reducing the time for delivery of newspaper readers. This increases the revenue Gannet.⁷

The process of developing new products can be improved so as to reduce production costs and expedite bringing to market. An example is the takeover of parts manufacturer Johnson Controls interior of the car Prince Corporation. Prince better understand the needs and expectations of consumers, thus producing highly profitable commodity. In Prince has also been well established product development, which allowed her to move from the design stage to mass production is almost twice as fast as in Johnson Controls, while maintaining a high level of quality. Absorbed Prince, Johnson was able to take advantage of it in the production of its products.