Mergers and aquisitions

 

The financial benefits

These include the benefits of mobilizing financial resources, the use of surplus resources from the diversification of the economy in tax payments from lower financing costs. Let us examine them in more detail.

So, what is meant by the mobilization of financial resources? Quite often the shortage of mobile assets and low liquidity of participants leads to the decision to merge, because the merger is almost the only way to survive in a competitive environment. Scarcity of funds, stocks of raw materials and finished products can be bridged if the other party to the transaction the company has those resources.

The next type of benefit -is the use of excess resources. Possible situation in which the company generates a significant amount of money, but due to the specifics of its business or the specifics of the current economic situation is not able to use them. Revenues may increase if the combined company pick up a critical mass that will generate revenue not available to any one of the companies individually. Thus, a major Dutch bank ABN AMRO, a merger of ABN and AMRO, has received from other major banks offer jointly provide syndicated loans that never would have had no ABN, nor AMRO.⁸

Through diversification, you can also get some benefits. For example, a positive effect on welfare is the owner of stabilizing yields and reducing risk through diversification of production, work in different regions / countries.

With mergers and acquisitions is likely that companies can obtain tax benefits. Tax planning is intended to ensure that the combined company tax rate does not exceed the tax rates of the two companies before the deal. Typically, companies try not to disclose their know-how, as regulators tend to assume that those who used a completely legal ways of structuring and tax planning in order to avoid additional costs, simply use loopholes in the law. The purpose of the tax structure -is the maximum to avoid the cost of taxes. There are two essential elements - tax exemptions and reduced tax base. In the first case we are talking about the use of benefits of participants who cannot independently and fully use them. An example is the "popular" in the 90s in the Russian business environment, organizations of disabled persons, as well as enterprises using simplified tax system.⁹

Reducing the tax base allows the use of large depreciation or significant losses of previous years to reduce the tax base. Taxpayers who have incurred losses (losses) in the previous fiscal period or in previous tax periods, may reduce the tax base of the current tax period for the full amount received by them or by the loss of this amount (transfer loss in the future). The taxpayer shall be entitled to transfer the loss to the future in a period of ten years following the same tax period, which produced the loss. In the event of termination of the taxpayer by reason of the reorganization of a taxpayer-transferee has the right to reduce the tax base in the manner and conditions set forth in this Article, the amount of damages received by the reorganized agencies until the reorganization.¹⁰

In addition to these benefits the company through the integration of lower financing costs. Cost of capital for each participant individually, as a rule, above. This is due to provision of loans assets of only one party, while the obligations of the newly formed party to ensure that the assets of partners. As a result, the risk to lenders and, therefore, their claims at a cost lower. Sometimes it happens that the absorption of the company being consolidated to such an extent that is able to combine working capital surplus of funds, as well as cover currency positions by offsetting obligations. These benefits can be substantial, when Credit Suisse Group has teamed up with Winterthur, 10% of the predicted income of absorption were obtained by reducing financing costs by optimizing capital management.

 

 

 

Investment gains

Sometimes mergers and acquisitions take place, because the deal promises of certain investment gains. Due to the growth of what can be achieved in this case?

Primarily due to acquisitions. This may be the acquisition of both tangible and intangible assets (such as the acquisition of a successful brand, various licenses and lease rights to the property).

It is also certain benefits promised purchase of tools of control over other party. This takes into account the company acquired ownership stakes / shares, instruments may continue to acquire control of another party (such as a commitment on his part). Or consider the purchase of the company - the registrar, the register of interest of the company. Sometimes absorption carried out in order to obtain control rights, which are absorbed in the company of another company. This is called a double integration. In practice, the situation when there are parallel and venture company created for the ownership rights of control over the enterprise. Russian example may serve as OJSC "Surgutneftegas" and JSC "Surgutneftegas".

Benefits can be obtained with the release duplicated assets and their implementation. For example, companies can get rid of non-core assets. Thus, the assets are sold, allowing for further savings on property tax / land tax in the implementation of buildings / land.

It is possible that the company has some free resources, but it does not have projects of their placement. The absorption in this case is regarded as an investment project to accommodate the excess funds. Companies that have invested in their funds authorized company shall be entitled to receive dividends.

 

Strategic Benefits

These include the benefits of improved coordination of business processes and improve governance, management of the acquisition (of a particular manager or the whole team), from the expansion of customer base, from savings on R & D and others.

Let's start with the coordination of business processes and increase management efficiency. Practice shows that there are always members who are able to reduce costs and improve financial performance by reorganizing the management staff, internal business processes, increase professional level of employees, etc. All this increases the effectiveness of the organization, which can not affect its profitability. Sometimes for the same purposes, the company is seeking services of a manager or a whole team, who showed their competence in managing the company a certain type or in certain situations. Company to attract experienced executives and professionals acquire the company where they work.

With the expansion of its customer base as a result of the merger have the opportunity of digging, especially in situations of growth inhibition and the threat of losing the market. Clients are often treated as an intangible asset of the company, bringing considerable revenue. To meet customer requests and to increase their own income, companies are integrating with organizations that work in other geographic regions. The company gets a chance to enter new markets, expand production and customer base.

Sometimes integration is considered as venture capital investment, the essence of which consists of placing long-term investment, with a relatively high risk, respectively, in anticipation of higher profits. Projects are focused on the practical use of technological innovations, the results of scientific achievements. The venture business is the basis for some market participants for corporate control, and they use it processes in its core business. Before exercising such investments and to enter the market participants are able to conduct market research from the inside by means of integration with the parties represented in this market. You can call it one of the first stages of market entry. Another way to enter the market may be to integrate with Party with a known name, reputation, history, etc. Such a partnership is beneficial both to the initiator, in terms of reaching a new level of business, and for an "authoritative" partner as the acquisition of technology and experience.

In practice, sometimes there are merger / acquisition undertaken for its own sake, for the sake of a financial empire, acquiring importance in the economic community. This factor leads to build the economic base and the transformation of the base of political power.

 

2.2 Current situation in the Russian market of mergers and acquisitions

 

Consider the situation in the Russian market of mergers and acquisitions.

During the first nine months of 2008 was 7% decrease in the number of transactions compared to same period of 2007 - 888 transactions (951 deals against in 2007.). The value of the Russian market for mergers and acquisitions fell by 3% to $ 91.9 billion ($ 94.6 billion in January-September 2007). Significant activity was noted in the transactions of Metallurgy and Energy - 52% of the value of the market. Leader in the number of transactions each year continues to be a service industry and trade.

 

Market growth drivers are:

• One of the largest M & A transactions in Russia: RUSAL - Norilsk Nickel.

• The restructuring of energy companies in 2008, completed the sale of state-owned and placement of additional emission at TGC-1, TGC-3, TGC-7, TGC-8, TGC-9, TGC-10

• The volume of acquisitions of foreign companies, Russian increased from $ 12.7 billion to $ 16.6 billion (Rosbank, TGK-10, RESO, AvtoVAZ, Polymetal).

• Evraz Group, Severstal and TMK performed the acquisition of foreign assets.

 

Factors reduce the market are:

• Reduce the volume of cross-border transactions in the III quarter of 2008 - 55 transactions totaling $ 7.3 billion, compared with 74 deals for $ 18.6 billion in 2007.

• Disruption / transfer of a number of transactions (OGK-1, Tape, John Maneely Company, etc.)

 

Statistics for the period from January to September 2008¹¹

• 888 transactions - a quantitative assessment of mergers and acquisitions market in Russia.

• $ 91.9 billion - the valuation of mergers and acquisitions market in Russia.

• $ 121.1 million - the average transaction price in Russia

• 125 deals worth more than $ 100 million

• 1% and 2% of the value of quantitative volume of the market is to buy shares in the management of

• 34% of the value and quantity of 5% of the market occupied by transactions in the metals sector

• 26% cost and 47% of the quantitative amount of the market occupied by the transaction in the form of a full acquisition (100% of shares)

• 12% of the quantity and 19% of the value of the market are acquiring foreign companies, Russian

 

 

Cost characteristics

The average transaction of value in January-September 2008 was $ 121 million, which is comparable with the results of the same period of 2007.

 

Graph #3

 

In terms of value, the integration process can be divided into groups. Mega integration - a deal that cost is greater than or equal to $ 1 billion, the largest - from $ 500 million to $ 1 billion, above the average - from $ 100 million to $ 500 million, the average - from $ 50 million to $ 100 million, below the average - $ 10 million to $ 50 million, a small $ 1 million to 10 million mini-integration - less than $ 1 million (see Chart 1 and 2 in Appendix)

Mega and major integration took 6% quantitative and 70% of the value of the market. The largest proportion of small quantitative transactions – is 27.8% of total transactions.

The decisive importance of the transaction value of over $ 500 million (70.60% of the total cost share of transactions) in the presence of high-intensity trades for less than $ 50 million (76% of the total number of transactions). (See table 1 in annex.)

Industry-specific processes and ethnicity M & A

Number of deals is leading the services and trade (15.30%), followed by telecommunications (13.70%), food industry (11.30%) and construction (11.30%). In terms of the cost allocated metallurgy (34% of the total value of all transactions) and energy (18.3% of the total value of transactions). (See table 2 in annex.)

In summary, the market situation is as follows: to quantify the market is dominated by small deals in the telecommunications and services, and lead to cost share in metallurgy big deal, and energy industries.

 

 

Has the crisis in the market for mergers and acquisitions?

Certainly, however, despite the stock panic, September M & A market as compared to August rose by nearly 106.2%. Most likely this growth has affected the opening of the new business season, when business people have completed the planned transaction. And they are not corrected their plans with the crisis in the economy. This is confirmed by the fact that as soon as business owners who are ready to sell, take these phenomena into account, the volume of transactions was sharply reduced.

Already in October the volume of Russian M & A market has decreased in relation to September of 12.1% (to $ 5.0 billion), and in November - has fallen by 52.6% compared with September. Total - the market for two months lost 64.7% of its volume!

 

Conclusion

 

Managers of companies around the world pay special attention to the integration process and the search for effective institutional forms of association. In the modern corporate governance key to victory in the competition is mergers and acquisitions. For some, this is the way the market gains, for others - access to financial resources. Become apparent that it allows quick integration to achieve their goals and dynamically react to changes in the environment and get a multiplier effect, inaccessible to the company alone.

The work revealed that the value of the company, formed through the merger exceeds the sum of values ​​of its component parts. Sources, which provide added value, are: economies of scale, economies of vertical integration and complementary resources, unused tax benefits and some others. Also, there are sources which, while not increasing the value of established company, but lead to more efficient use of company resources to its growth. These include sources such as better coordination of business processes and increase management efficiency, expand its client base.

World experience shows that fundamental to the success of leading the way to becoming a competitive industrial structures - the concentration of capital and production capacities, integration of technology vertical or horizontal competitive basis. This fact is of fundamental importance and is particularly relevant in terms of our economy, which will find its way to achieve a highly competitive position in the global market. Also in today's economic crisis, one way to save the company may be mergers and acquisitions.

However, since the Russian legislation on mergers and acquisitions are not clearly and in detail the phenomenon of regulated capture has become widespread. In Russia there are no civilized rules of the settlement of corporate conflicts, so the bulk of the conflict takes place "on the brink." The parties shall use in its fight almost any means at hand. The only limiting factor is the ethical component. Recently, this factor was added to the risk of criminal prosecution. The current practice is a powerful deterrent in terms of increased investment activity in the normal sense of the word. No one shareholder, even having a controlling interest of participation cannot be guaranteed by the fact that his business will not be absorbed without his consent.

 

References

1. Federal Law of 26.12.1995 N 208-FZ (as amended on 30.12.2008) "On Joint Stock Companies"

2. Tax Code (as of January 15, 2009), Omega-L Publishing, 2009

3. Iontsev MG "Corporate takeovers: mergers, acquisitions, grinmeyl" Publisher "Axis-89", 2008.

4. K. Marx, "Capital" v.3

5. "Mergers and Acquisitions», Harvard Business Review, Alpina Business Books publishing house, 2007

6. www.mergers.ru

7. www.ma-journal.ru

 

Application

Graph #1

Graph #2

Table 1. The cost classification.

Форма сделки	Количественная доля	Стоимостная доля
Мега	2,40%	50,40%
Крупная	3,60%	20,20%
Выше среднего	11,40%	20,00%
Средняя	6,80%	3,50%
Ниже среднего	26,00%	4,90%
Небольшая	27,80%	0,90%
Мини	22,00%	0,10%

 

 

Table 2. Classification by industry

Вид сделки	Количественная доля	Стоимостная доля
Нефть, Газ, Уголь	4,50%	5,80%
Лесная и целлюлозно-бумажная	1,40%	0,10%
Лёгкая промышленность	0,30%	0,10%
Энергетика	3,90%	18,30%
Телекоммуникации	13,70%	10,10%
Машиностроение	5,70%	3,30%
Пищевая промышленность	11,30%	3,10%
Финансы, инвестиции, страхование  и кансалтинг	8,70%	7,40%
СМИ, Спорт, Реклама	9,30%	1,30%
Услуги, Торговля	15,30%	7,80%
Транспорт	5,20%	2,00%
Строительство	11,30%	4,80%
Химия, Фармацевтика	4,30%	2,10%
Металлургия	5,10%	34,00%

 

¹ Marx K.Kapital. т.3, гл.48, p. 886-887

² The federal act from 12/26/1995 N 208-FZ (ред. From 12/30/2008) "About joint stock companies", item 16, item 1.

³ The federal act from 12/26/1995 N 208-FZ (ред. From 12/30/2008) "About joint stock companies", item 17, item 1.

⁴ Iontsev M. G «Corporate captures: merges, absorption, гринмейл», Publishing house "Ось-89", Moscow. 2008, with. 38-40

⁵ Harvard Business Review, Merges and acquisition, with. 54-55.

⁶ Harvard Business Review, Mergers and acquisition, p.57

⁷ Harvard Business Review, Mergers and acquisition, p.58

⁸ Harvard Business Review, Mergers and acquisition, p.57

⁹ The tax code of the Russian Federation (as of January, 15th, 2009), Publishing house the Omega-l, 2009, item 381, item 3.

¹⁰ The tax code of the Russian Federation (as of January, 15th, 2009), Publishing house the Omega-l, item 283.

¹¹ www.mergers.ru, the Project Mergers.ru / Merges and acquisition in Russia.

MOSCOW @2012