IN the popular novel American Psycho, the central character works in mergers and acquisitions, which he refers to as “murders and executions”.
While touted as a means of enhancing shareholder value, it is astonishing how studies have proved the high fail rate of merger and acquisition deals. The concept is that the new sum will be far greater than all the previous parts, but the general outcome is that eight out of 10 deals fail to improve shareholder value.
While the line between and merger and acquisition is increasing becoming blurred, there are technical and legal differences. An acquisition occurs when one company purchases another and is clearly the new owner and the acquired company ceases to exist.
In the case of an acquisition, the buyer’s stock would continue to trade. Purchases can be made by cash, the acquiring company’s stock or a combination of both. Alternatively, the acquiring company may chose to purchase all the assets of the target company, the shareholders being paid cash, net liabilities, through a dividend or by simply liquidating the company.
When a smaller company acquires management control of a larger or more established company and keeps the name of the acquired company, this is known as a reverse takeover. A reverse merger occurs when a private company buys a publicly listed company, allowing the company to become publicly listed as a new corporation with tradable shares.
Acquisitions are categorized as friendly or hostile depending upon how it is communicated and executed. An acquiring company normally accumulates a permitted percent of the outstanding shares of the targeted company, subject to regulatory reporting thresholds, in order to build a base position.
Once a certain level is reached, most jurisdictions require the acquiring company to declare how many shares it owns and whether it intends to purchase the company or hold the shares as an investment.
If the acquiring company wishes to proceed in purchasing the target, a tender offer, stating the terms and price is communicated to the target’s shareholders. If the terms are eventually accepted by the management and shareholders, the deal can proceed on a friendly basis. If not, hostile tactics such as poison pills and finding alternative buyers, known as white knights, may be employed.
A merger occurs when two or more companies, generally through mutual agreement, become a single new company, either by offering the stockholders of the target company securities in the acquiring company in exchange for the surrender of their stock, or by surrendering both companies’ stock and issuing new company stock.
Mergers are generally acclaimed as “mergers of equals”, in order to avoid any suggestion of one party talking over another, and thus ensuring consensus and harmony among the stakeholders.
The main reasons for mergers and acquisitions are to enhance shareholder value and improve financial performance. The motives may include the desire to gain economies of scale by removing fixed costs the combined companies may have, increased revenue and market share, the capacity to cross-sell products, broaden geographic scope and diversification, vertical integration, and even to acquire human resource talent from the target company.
It is also felt management egos, flawed grandiose plans and aggressive lawyer and bankers seeking generous fees, also play a significant part.
A 1999 KPMG study showed that only 17 percent of deals increased shareholder value, 30 percent were unchanged, and 53 percent decreased shareholder value. A McKinsey study demonstrated that less than 25 percent generated excess returns on investment.
One of the largest deals in history, the US$164 billion takeover by AOL of Time Warner is viewed as one of the greatest failures in M&A history. Sometimes it is indeed wise to go it alone.
Anthony Galliano is chief executive of Cambodian Investment Management.