Topic two sides of merger and acquisition how does itaffect a corporate finance

NATIONAL ECONOMICS UNIVERSITY -oOo - SUBJECT: CORPORATE FINANCE TOPIC TWO SIDES OF MERGER AND ACQUISITION HOW DOES IT AFFECT A CORPORATE FINANCE? Lecturer: Tran Phi Long Major: Banking AEP Class: Banking AEP 63 Hanoi, 4/2023 TEAM MEMBERS Ordinal Name Student’s ID Lê Thái Anh 11218600 Trần Quỳnh Anh 11210781 Trần An Khanh 11218269 Nguyễn Thuỳ Linh 11218790 Trần Quỳnh Trang 11215912 Nguyễn Minh Đức 11218776 Lê Hải Anh 11210399 Note Leader Table of Contents OVERVIEW A What is Merger and Acquisition (M&A)? Definition of Merger and Acquisition The difference between a merger and an acquisition .4 Common types of mergers and acquisition How does M&A work? B Pros and Cons of Merger and Acquisition Advantages of Merger and Acquisition Disadvantages of Merger and Acquisition .10 C Effects of Merger and Acquisition on a company finance 11 D M&A case: adidas & Reebok .13 Background of the acquisition 13 Reasons and aims .13 Extend of Merger success 14 Conclusion 17 RFFERENCES 19 OVERVIEW Mergers and acquisitions, also known as M&A, is a relatively new concept in Vietnam, but there have been many successful deals in Vietnam recently, such as Kinh Do Corporation's acquisition of Wall's ice cream brand from Unilever and Daiichi Life Insurance's acquisition of Bao Minh CMG Through such M&A deals, companies not only gain additional financial resources but also establish strategic partnerships, thereby increasing the value of their management capabilities, technology, and product distribution channels These are important factors for most Vietnamese companies today, which are small and medium-sized and need to take steps to become public companies The overheating development of the economy, Vietnam's accession to the WTO, and fierce competition among companies are favorable signs promoting M&A activities However, this activity also faces many difficulties due to the lack of clarity in legal regulations, lack of knowledge about M&A by companies, and ineffective activities of advisory and brokerage parties In the future, as Vietnam has joined the WTO and competition in the market requires companies to have better scale and competitiveness against competitors, M&A is expected to increase and play an important role in the state's economic strategy Once again, we can affirm the urgency and significant meaning of researching this topic Therefore, our group has chosen the topic "Mergers and Acquisitions" for research Due to limited knowledge and time constraints, the presentation may not be perfect Therefore, our group hopes to receive comments from you to improve the topic A What is Merger and Acquisition (M&A)? Definition of Merger and Acquisition A merger is an agreement that unites two existing companies into one new company Companies merge to reduce competition, increase market share, introduce new products or services, improve operations, and, ultimately, drive more revenue An acquisition is a business transaction that occurs when one company purchases and gains control over another company These transactions are a core part of mergers and acquisitions (M&A), a career path in corporate law or finance that focuses on the buying, selling, and consolidation of companies The difference between a merger and an acquisition The primary difference between mergers and acquisitions is that a merger is the combining of two organizations into an entirely new entity, while an acquisition is when a company absorbs another, but there is no new organization is created after that Merger Acquisition Procedure Two or more individual One company completely takes over companies join to form the operations of another a new business entity Mutual decision A merger is agreed upon by mutual consent of the involved parties The decision of acquisition might not be mutual; in case the acquiring company takes over another enterprise without the latter’s consent, it is termed as a hostile takeover Name of company The merged entity operates under a new name The acquired company mostly operates under the name of the parent company In some cases, however, the former can retain its original name if the parent company allows it Comparative The parties involved in The acquiring company is larger and stature a merger are of similar stature, size, and scale of operations financially stronger than the target company Power There is dilution of power between the involved companies The acquiring company exerts absolute power over the acquired one Shares The merged company issues new shares New shares are not issued Common types of mergers and acquisition 3.1 Merger Horizontal: A merger is considered horizontal if the two companies operate in the same industry The merger is typically part of consolidation between two or more competitors offering the same products or services Such mergers are common in industries with fewer firms, and the goal is to help companies reduce competition and dominate the market For example, gas giant Exxon combined with gas giant Mobile back in 1998 to form ExxonMobil At that time, that horizontal deal valued the new company at $81 billion Market extension: A market extension merger is a horizontal merger that allows two companies that sell the same product to operate in a new market Companies that engage in a market extension merger seek to gain access to a bigger market and, thus, a bigger client base For example, if a U.S regional bank in the east merged with a U.S regional bank in the west to form the U.S Bank of the East and West, that would be a market extension merger These types of consolidations help companies drive more revenue by expanding where they business Vertical: A merger is considered vertical if the two companies operate within each other’s supply chain Vertical mergers help companies reduce costs because they effectively cut out the middleman Document continues below Discover more from: Corporate finance 328 documents Go to course 107 Test Bank for Fundamentals of Corporate Finance 10th Edition by Ross Corporate finance 31 97% (66) Test Bank Fundamentals of Corporate Finance 12th edition Chapter Corporate finance 100% (17) TN1 corporate finance 38 Corporate finance 100% (12) Brooks Answers Introductory Econometrics for Finance 56 18 Corporate finance Corporate-Finance-Note-Chapter to Chapter 6, online note with full of useful information Corporate finance 148 94% (17) 100% (7) Ebook Tài doanh nghiệp (Lý thuyết & thực hành quản lý ứng dụng cho doanh nghiệp Việt Nam) Phầ… Corporate finance 100% (7) For example, think of a home construction company purchasing a windowpane manufacturer or a winery buying a glass bottle manufacturer Conglomerate: A merger is considered a conglomerate acquisition if the companies operate in separate industries and, at face value, have little to nothing in common from a business perspective Conglomerate mergers open cross-selling opportunities, market extensions, and increased operational efficiencies For example, think of a clothing company combining with a snack food manufacturer Congeneric: A merger is considered congeneric if the companies offer different products or services but operate in the same sphere and sell to the same customer base Congeneric mergers allow companies to sell new products, which is why they’re also known as product extension mergers So, for instance, famous ketchup manufacturer H J Heinz Co was able to make revenue off of The Kraft Foods Group’s popular macaroni and cheese (and vice versa) once the companies merged to form The Kraft Heinz Company back in 2015 SPAC: A special purpose acquisition company (SPAC) is a publicly traded shell company made with the singular intent of merging with a private company That merger allows the private company to go public SPACs are an increasingly popular alternative to a traditional initial public offering (IPO) 3.2 Acquisition Horizontal: A horizontal acquisition occurs when a company buys another company that offers similar products or services So, for instance, if one streaming network were to purchase another streaming network, that would be considered a horizontal acquisition Real-world examples include: Facebook purchasing Instagram for $1 billion in 2012; Verizon Wireless purchasing British telecommunications company Vodafone for $130 billion in cash and stock in 2013; Marriott International forming the world’s largest hotel chain upon acquiring Starwood Hotels and Resorts Worldwide for $13 billion in 2016 Vertical: A vertical acquisition occurs when a company buys another company that produces a product in its existing supply chain So, for instance, if a streaming network purchases a film or television production company, that would be considered a vertical acquisition Real-world examples include: Swedish furniture company Ikea continually buying acres of forest; CVS Health Corporation’s 2018 $69 billion purchase of Aetna; Online retail giant Amazon purchasing grocer Whole Foods Market for $13.7 billion in 2017 Congeneric: A congeneric acquisition occurs when one company buys another company that offers different products or services but caters to the same customer base So, if a streaming network were to buy a smart television manufacturer, that would be considered a congeneric acquisition Real-world examples include: Consumer goods giant Procter & Gamble Co purchasing razor-and-battery company Gillette for $57 billion in 2005; Coca-Cola buying Glaceau, the maker of Vitaminwater, for $4.1 billion in 2007 Conglomerate: A conglomerate acquisition occurs when one company buys another company from a separate industry So, if a streaming network buys a crayon company, that would be considered a conglomerate acquisition Real-world examples include: Microsoft acquiring professional networking site LinkedIn for $26.2 billion in 2016; Multinational holding firm Berkshire Hathaway buying Heinz for $23.3 billion in 2013 How does M&A work? 4.1 Merger Mergers are often spearheaded and facilitated by an investment banker They source deals, value companies, forecast outcomes, and make sure both companies have their houses in order (a process known as due diligence) Corporate lawyers also oversee M&A deals, ensuring, among other things, that the transaction complies with federal and state regulations Mergers are generally funded by cash, equity (stocks), or both When two companies merge, shareholders in each company are issued stock (equal to the value of their old stock) in the new company 4.2 Acquisition There are several different choices for a company that is looking for acquisition financing The most common choices are a line of credit or a traditional loan Favorable rates for acquisition financing can help smaller companies reach economies of scale, which is generally viewed as an effective method for increasing the size of the company's operations A company seeking acquisition financing can apply for loans available through traditional banks as well as from lending services that specialize in serving this market Private lenders may offer loans to those companies that not meet a bank's requirements However, a company may find that funding from private lenders includes higher interest rates and fees compared to bank financing A bank might be more inclined to approve financing if the company to be acquired has a steady stream of revenues, steady or growing EBITDA, which is a cash metrics that would help the acquirer to pay back the debt obligations from the loan on the acquisition, substantial or sustained profits, as well as valuable assets for collateral By comparison, securing bank approval can be problematic when attempting to finance the acquisition of a company that largely has receivables rather than cash flow B Pros and Cons of Merger and Acquisition Advantages of Merger and Acquisition 1.1 It is the fastest way to achieve growth There is no other form of corporate activity that can grow your company’s top line as fast as a merger or acquisition This is why the world’s biggest companies unashamedly use M&A as a means for growth, particularly when it looks as though growth in their existing business is shuddering to a halt Growth is therefore the most common reason for undertaking M&A and underpins most of the other motives 1.2 M&A enables company to enter new markets In a similar vein to growth, there may be no better way to enter a new market than to acquire a company which is already successful in that market This goes for almost every industry Merging with or acquiring a company in an attractive market avoids most of the cultural, regulatory, and commercial issues that can beset companies entering new markets without greenfield ventures 1.3 M&A enables company to change its business model M&A can also be used to transform a company The example of Nokia is a case in point Though starting out as a paper mill, Nokia now is a technology company after many times undertaking M&A A merger between this cableworks company and a television manufacturer in the 1970s was the genesis of Nokia’s cell phone division When the cell phone devices division was sold to Microsoft in 2013, Nokia acquired Alcatel-Lucent to transform itself (yet again) into a network provider 1.4 M&A can be used to acquire new talent Acquiring talent (referred to in some quarters as ‘acquire hiring’) is the most common in high-value-added industries, such as technology, engineering, or advertising Companies like Google, Apple, and Facebook are all considered pioneers in acquire hiring and have made acquisitions in the past decade of small startups principally to get the companies’ founders onto their roster An example of this came in 2017 when Google acquired Halli labs, whose founding teams were considered the world’s best AI and ML (machine learning) engineers 1.5 M&A can be used to generate synergies Synergies are what happens when two companies come together and amount to more than the sum of their parts This usually occurs through operational synergies (i.e., dropping some duplicated operational costs that arise because of the deal) or growth synergies (i.e., where two companies with complementary products join forces to create an enhanced range of products and services) Disadvantages of Merger and Acquisition 2.1 M&A can very easily be conducted for the wrong reasons Because of all the pros that have just been outlined, it can be simple to think of M&A as a quick win That’s one thing that it almost certainly never is As we have said before on these pages, a merger or acquisition is the largest project that any company will take on, so it’s not to be taken lightly 2.2 M&A can distract from the management of a business As much as M&A can add value for a business, the main value creation that goes on in any business should be its day-to-day operations Thus, pulling managers away from the operations of the company can be a major distraction from their performing their day-to-day tasks This defeats the purpose of what M&A is for, so a good plan must be put in place before any deal to ensure that the correct time is allocated for each manager’s participation in the process 2.3 M&A can destroy value as well as create it More than one company has had value destroyed because of mismanagement at some part of the M&A process Unfortunately, if managers don’t keep their eye on the ball, this can even happen when two companies appear to be a near-perfect match Without the proper care at every stage of the deal - be that origination, negotiations, due diligence, deal closing, or integration - value can be destroyed without good planning and implementation 2.4 M&A valuations are not an exact science 10 More than one book on M&A has called it ‘part science, part art’ Another way of saying this is, even the most analytical of us can get M&A horribly wrong Amazon’s acquisition of Whole Foods, to take one example, was seen in many quarters as a deal that would generate significant value for both companies, giving Amazon a high-end distribution chain for its grocery fulfillment efforts, and giving Whole Foods access to the world’s most potent e-commerce engine However, the deal hasn’t been a roaring success, proving that even if everything is in place for a deal to be a success, it doesn’t mean for sure that it will be 2.5 M&A due diligence is a complex and time-consuming task DealRoom, a company that offers virtual data rooms for M&A due diligence, has been involved in hundreds of deals over the past ten years They have observed that comprehensive due diligence is strongly associated with deal success In fact, the most successful deals were typically those in which the M&A lifecycle management platform was used extensively, by a larger number of participants, for an extended period C Effects of Merger and Acquisition on a company finance Mergers and acquisitions (M&A) can have various effects on a company's finance, depending on the specific circumstances of the deal Here are some potential impacts: Financial Statement Implications: M&A can impact a company's financial statements, including balance sheet, cash flow statement, and income statement For example, if a company acquires another firm that has substantial debt, the acquiring company's balance sheet will reflect an increase in liabilities Cost-saving Opportunities: M&A can create cost-saving opportunities for companies by consolidating operations and reducing redundancy However, sometimes, the costs of merging two companies like expenses for training, rebranding, and restructuring can outweigh the savings Changes in Cash flows: If the two companies conduct typical mergers and acquisitions, their total assets will expand primarily Second, as profitability improves, the additional profits will be transferred in the form of liquid cash flows for reinvestment in daily operations When a private equity firm replaces the 11 management board after the acquisition, cash flow performance is also strengthened Increased or Decreased Revenue: M&A can bring about increased or decreased revenue, depending on the type of transaction For example, if a company acquires a new product line or enters a new market through acquisition, it may see increased revenue On the other hand, if a company divests a non-core business unit, it may see decreased revenue Impact on Stock Prices: M&A can impact a company's stock price, depending on the terms of the deal and the market's perception of the transaction A highly valued strategic acquisition can lead to a stock price surge, while a poorly executed deal can lead to a decline in stock price Tax implications: Merged business usually seeks to get tax benefits by pretending there is negative turnover If lucrative corporations target to acquire indebted companies, the year-end profit of post-merged business will turn into loss, resulting in a lower tax burden Changes in debt and equity structure: In an M&A deal, the acquiring company typically assumes the debt and equity structure of the acquired company, which can affect the merged company's financial ratios; M&A deals are often financed through debt, which can increase the debt levels of the merged company and affect its credit rating and borrowing capacity Impacts on shareholder value: M&A deals can result in changes in stock prices and shareholder value, depending on the perceived value of the transaction and how well the merged company performs D M&A case: adidas & Reebok Background of the acquisition Adidas-Salomon AG on 3rd August 2005 announced its plan to acquire Reebok at an estimated value of 3.1 billion ($3.78 billion) Adidas offered to pay $59.00 per share in cash 34.2 percent premium over last (2 August 2005) closing price for Reebok shares 12 Adidas and Reebok are facing tough competition from their rival firm Nike Nike had about 36 percent, Adidas 8.9 percent and Reebok 12.2 percent market share in the athletic footwear market in North America Although, Adidas holds the second position globally in sporting goods The US ranks the world’s biggest athletic shoe market, accounting for 50 percent of $ 33 billion spent globally In order to compete with Nike, which has very strong market share in North America and globally, Adidas announced the plan to acquire Reebok on 3rd August 2005, and the deal was finalized on 31st January 2006 As the deal seems to be very effective, on the date of acquisition announcement, share price of Reebok went up by 30 percent from $43.95 on August 2, 2005, to $ 57.14 on August 3, 2005, on the New York stock exchange And Adidas share price rose by 7.4 percent from 147.52 on august 2, 2005 to 158.45 on august 3, 2005, on the Frankfurt stock exchange Reasons and aims Adidas wanted to compete with Nike in the North American market Nike leads the US market as well as the global market by giving a tough competition to Adidas and Reebok, which were competing for the second and third positions Adidas wanted to extend their global reach In Europe and Asia, Adidas holds a better marketing position and brand recognition, and this could be used to expand Reebok market in Europe and Asia On the other hand, the merger will help Adidas to capture Asian fashion-oriented market where Reebok already had its presence through marketing tie ups in China with Yao Ming Broader portfolio of world-renowned brands Adidas and Reebok together will have a more complete portfolio of brands that fulfill the need of a global customer base Well defined and complementary brand, i.e., Adidas which is European based company is a leader in sports performance and Reebok which is American leader in sports and lifestyle products With its broad portfolio of brands, including Adidas, Reebok, TaylorMade, Rockport, Greg Norman Collection, MAXFLI, CCM, Jofa and Koho, the Adidas Group will be able to offer footwear, clothing and hardware products based on cutting-edge technology, trend-setting street wear and classic design A more complete product offering in key sports categories The merger will help to have a stronger presence in American sports and a complete product offering that 13 addresses key sports categories, including running, tennis, hockey, soccer, basketball, training, outdoor, American football, and golf Stronger presence across teams, athletes, events, and leagues Merger will provide Group with a strong presence across teams, athletes, events, and leagues This will improve the worldwide recognition of the brands The Group’s supporting contract includes many of the world’s elite teams, such as Real Madrid, Milan AC, Bayern Munich and Liverpool FC, and athletes, such as David Beckham, Tracy McGrady, Yao Ming and Allen Iverson, as well as high-profile global events, such as the 2006 FIFA World CupTM and the Beijing 2008 Olympics Licensing relationships with the UEFA Champions LeagueTM, more than twenty National Olympic Committees and five premier sporting leagues – the NFL, NBA, NHL, MLB, and MLS Extend of Merger success After the acquisition Adidas group financial accounts show significant improvements The Adidas Group’s 2006 half year result after the acquisition was fantastic, as a result of acquisition and 2006 FIFA world cup Adidas sales revenue increased by 17 percent in euro terms 3308 million in the first half of 2006 as compared to 2816 million in the first half of 2005 While the 2006 complete annual report shows a fabulous result for the Adidas group Sales revenue increased by 52 percent from 6636 billion in 2005 to 10084 billion in 2006, representing the highest organic growth of the Adidas group within the last eight years It was the first time in the group’s history that it crossed the benchmark of 10 billion 2006’s growth in sales revenue carried on in 2007 and 2008 also The firm in 2007 reported 2.1 percent from 10084 billion in 2006 to 10299 billion in 2007 in euro terms And in 2008 the group recorded percent growth in euro terms from 10.299 billion in 2007 to 10799 billion in 2008 adidas Reebok TaylorMade- 2006 2005 € in millions 6,626 2,473 856 € in millions 5,861 2,718 709 14 Change y-oy in euro terms in % 13 (9) 21 Change y-o-y currencyneutral in % 14 (9) 22 adidas Golf HQ/Consolidatio n Total adidas Reebok TaylorMadeadidas Golf HQ/Consolidatio n Total 129 66 96 97 10,084 6,636 52 53 2007 2006 € in millions 7,114 2,333 804 € in millions 6,626 2,473 856 Change y-oy in euro terms in % (6) (6) Change y-oy currencyneutral in % 12 48 129 (62) (60) 10,299 10,084 2 Sale in 2005 - 2007 Financial aim of the merger to reduce the operating cost through substantial operational synergies seemed to be achieved as the firms had improved its gross and operating profit margin after the merger Adidas group gross profit increased by 41 percent in 2006 as compared to 2005 from 3.197 billion in 2005 to 4495 billion in 2006 And operating profit increased by 24.5 percent from 707 million in 2005 to 881 million in 2006 Despite increase in profit groups, gross profit margin declined by 3.6 percent to reach 44.6 percent of sales in 2006 as compared to 48.2 percent in 2005 and operating profit margin declined by 1.9 percent from 10.7 percent in 2005 to 8.7 percent of sales in 2006 This declination was reported due to first time consolidation of the Reebok business, which carried a significantly lower operating margin than the group average In 2007 and 2008 companies gross profit margin and operating profit margin increased due to cost saving which resulted from the combination of Adidas and Reebok sourcing activities as well as underlying improvement in all segments As a result, gross profit margin increased by 2.8 percent in 2007 reaching 47.4 percent as compared to 44.6 percent in 2006, and in 2008 it increased by 1.3 percent from 47.4 percent in 2007 to 48.7 percent in 2008, this is the highest annual gross margin from the group since the IPO in 1995 Group gross profit also increased by 15 percent in 2007 and percent in 2008 reaching a level of 4.882 billion in 2007 and 5.256 billion in 2008 The group's operating profit margin increased by 0.5 percent in 2007 reaching 9.2 percent as compared to 8.7 percent in 2006, and in 2008 by 0.7 percent from 9.2 percent in 2007 to 9.9 percent in 2008 Groups operating profit has increased by percent in 2007 from 881 million in 2006 to 949 million in 2007 and by 13 percent in 2008 reaching a level of 1.070 billion Adidas aimed to extend their global reach Merger’s aim to expand in Asia market and to generate more revenue from Asia market seemed to succeed as the sales revenue from Asia market improved In 2005 sales from Asia contributed 22.95 percent of the group total revenue which increased to 24.65 percent in 2008 Otherwise, sale has increased significantly in Latin America which had contributed only 4.88 percent of total revenue in 2005, increased to 8.26 percent in 2008 Company’s main aim to compete with Nike in the North America market didn’t hit the target, as the revenue generated from North America went down Although in 2006 group revenue from North America increased significantly 1561 million in 2005 to 3234 million which means 107 percent growth, but this was mainly due to 2006 FIFA world cup and group revenue from North America declined thereafter In 2007 it decreased by percent reaching 2929 million by 14% in 2008 touching 2520 million In addition, after acquisition both Adidas and Reebok lost US market share of athletic shoes Adidas held 10.62 percent market share in 2006 which went down to 6.93 percent in 2007 and 5.86 percent in 2008 And Reebok held 4.68 percent market share in 2006 which went down to 4.43 percent in 2007 and 2.66 percent in 2008 On the contrary Nike’s market share has increased from 29.73 percent in 2006 to 31.52 percent in 2007 and 34.61 percent in 2008 Europe North America Asia 2006 2005 € in millions 4,162 3,234 2,020 € in millions 3,166 1,561 1,523 16 Change y-oy in euro terms in % 31 107 33 Change y-oy currencyneutral in % 32 107 35 Latin America Total Europe North America Asia Latin America Total 499 10,084 319 6,636 2007 2006 € in millions 4,369 2,939 2,254 657 10,299 € in millions 4,162 3,234 2,020 499 10,084 56 52 53 53 Change y-oy in euro terms in % (9) 12 32 Change y-oy currencyneutral in % (2) 18 38 Sales in all regions 2005-2007 Other shortfall of the acquisition can be seen from the declined sales revenue of Reebok Reebok sales went down by percent in 2006 from 2718 million in 2005 to 2473 million in 2006, it decreased by percent in 2007 reaching 2333 million and declined by percent in 2008 reaching a level of 2148 million As compared to 2005 Reebok sales declined by about 21 percent after the merger till 2008 and showed very poor performance by Reebok and Adidas group’s inability to maintain Reebok efficiently Conclusion Adidas and Reebok merged to compete with Nike in North America and to increase their sales revenue and reduce operating costs through synergy of operation and to expand into Asia’s market Merger’s main aim to compete with Nike in North America market was a failure as both Adidas and Reebok lost their market share after the merger But at the same time the merger was successful in its other prospects of increasing sales, cost reduction and expansion into new markets, creating a new value to the merger 17 RFFERENCES Kison Patel 2022 10 Major Pros and Cons of M&A UKEssays 2018 Case Study: Reebok Acquisition by Adidas adidas Group 2005 Financial Result adidas Group 2006 Financial Result Jeanine Skowronski 2023 What is a Merger? Definition, Types, and Examples Jeanine Skowronski 2023 What Is an Acquisition? Definition, Types, and Examples CFI Team 2022 Merger vs Acquisition 18