Mergers & Acquisitions

Theory, Strategy, Finance

Mohammed Ibrahimi

• Publisher: Wiley-ISTE
• Year: 2018
• Print ISBN: 9781786303455
• eBook ISBN: 9781119544272
• Edition: 1
• Topic: Mathematics
• Subtopic: Applied Mathematics
• Index: Mathematics

This book deals with corporate mergers and acquisitions by analyzing the financial and strategic aspects. It starts with a chronological justification of the evolution of external growth operations and ends with case studies in order to put into practice the theoretical contribution of the previous titles. Through this book, we wish to detail the types of mergers and acquisitions, their modes, their motivations, their consequences and their performances. First of all, we propose a panoply of scientific research, methodological explanations and logical structuring to expose a subject of experience considered for a long time as a phenomenon in finance. Then, through a sample of 90 mergers or acquisitions, we analyze the effects of these transactions on French companies.

PART 1
Taxonomy of Mergers and Acquisitions and the Evolution of Managerial Thought

1
Strategic Evolution of Mergers and Acquisitions

This chapter is intended to provide responses to several questions regarding the legal regulation of mergers and acquisitions; the form taken in specific operations; their meaning and role in managerial evolution; and, most crucially, the consequences of this type of operation.

External company growth forms part of a continuous development process, a response to evolutions in the environment intended to guarantee the survival of the business. This external growth is generated by merging with, or absorbing, other companies, and may be preceded by a takeover, in which the characteristics of the buyer company are modified to ensure that the new entity will be greater than the sum of its two constituent parts.

Horizontal external growth has only really taken off in the last two decades; previously, strategy was dominated by the conglomerate and vertical models. This shift justifies the logical evolution in managerial approaches. Over the next few decades, however, it is possible that vertical expansion may become more prevalent, or we may see a return to conglomerate strategy.

Scientific research into the finer details of company mergers and acquisitions has evolved and expanded in a similar manner, promoting the adaptation of these operations to an evolving environment and developing several different combination models.

1.1. Typology of mergers and acquisitions

The first author to discuss diversification was Chandler [CHA 62], followed by Wrigley [WRI 70] and Rumelt [RUM 74], who developed a distinction between related and unrelated diversification. These notions provided the basis for significant later work on the merger/acquisition phenomenon. However, the principle of “related and unrelated transactions” is difficult to define. The problem has been addressed by many authors, comparing the performance of various diversification activities, and by competition authorities, considering the risk of monopoly development and of concentration within sectors.

1.1.1. Horizontal mergers and acquisitions

1.1.1.1. Definition of horizontal mergers and acquisitions

Rumelt [RUM 74] was the first person to attempt to define related diversification, providing the starting point for many other studies. He aimed to connect strategic behaviors, notably relating to growth strategies, with company performance. Rumelt carried out a quantitative study highlighting four different growth strategies. The first strategy involves developing a single business, whilst the second includes diversification while maintaining a dominant activity. The third concerns diversification which remains linked to the original domain, and the fourth is unrelated diversification. For Rumelt, an acquisition is related to the existing activity if it respects at least one of the following four criteria:

• – the purchaser and the target serve the same market;
• – the purchaser and the target use similar distribution channels;
• – the purchaser and the target use similar production technologies;
• – the purchaser and the target carry out similar research and development (R&D) activities.

In a similar vein, Salter and Weinhold [SAL 79] speak of the ease of “transferability” of activities between the purchaser and the target. The authors consider that a transaction may be related if at least one function among research and development, production marketing or distribution is easily transferrable from the purchaser to the target or vice versa. Paturel [PAT 78] defines horizontal mergers/acquisitions as growth manifested by a strengthening of the existing production function within the company, obtained by acquiring an entity with a similar production function.

For Seth [SET 90a], external horizontal growth is the first main option for related diversification, through acquisitions involving the same product and/or the same market. Thiétart [THI 93, p. 162] and Batsch [BAT 93, p. 116] speak of horizontal external growth in terms of specialization, concentration or centered growth. They refer to concepts of dominant activity, industrial units, and easily-dominated niches. Their approach also makes use of the notions of products and markets.

To provide a clear definition of horizontal mergers and acquisitions, we therefore need to focus on the key concepts of product markets. In their book Le contrôle français des concentrations, Cot and De la Laurence [COT 97] note that when defining a product or service market, competition authorities focus on a set of criteria used to characterize the interchangeability of the products involved. Markets are delimited using a set of criteria, within which it may be difficult to establish a hierarchy. The definition of a product market is thus broadly dependent on the definition of the products involved.

When the main resources used to make one product can easily be used to make another product, they can be said to be very similar. This similarity may influence demand when the price of a product changes. For example, if product price increases, demand may be transferred to a similar product. In this case, we speak of high substitutability. The definition of a product therefore depends on the notion of use of this product, its essential criterion, strongly linked to the service which it provides in response to consumer expectations.

A horizontal merger or acquisition is a total or partial, friendly or hostile acquisition of a company which immediately produces resources. These operations involve two companies with identical or very similar dominant activities, serving the same market, or selling similar products. The target market may or may not be situated in the same geographical zone as the buyer. An operation involving two companies working in different territories but selling the same product therefore meets the criteria for horizontal expansion.

1.1.1.2. Concentration as defined by competition authorities

The definition of horizontal mergers/acquisitions put forward by the European Commission involves two elements¹: geographical markets and product markets, and an evaluation of mergers or acquisitions in terms of competition. Market assessment is designed to systematically identify competitive pressures with an immediate effect on the undertaking created by the concentration. The competitive aspect of a merger or acquisition is evaluated with reference to operations which increase a firm’s power over the market, insofar as these operations may have a negative effect for consumers, such as a reduction in product quality, increased prices, or limitation of choice.

To evaluate the impact of concentration operations on a market, competition authorities assess their potential anti-competitive effects and factors which might limit these effects, for example buying power, entry barriers and the potential increase in efficiency cited by the parties involved. The European Commission then decides whether the concentration operation will significantly reduce existing competition by creating or by reinforcing an existing position of dominance.

The Commission uses the Herfindahl-Hirschmann Index (HHI) to measure the degree of concentration, calculating the sum of the squares of the market shares of each firm within the market in question. The index gives more weight to the market shares of larger firms. While it is best to include all companies in this calculation, the absence of information concerning...

Table of contents

• Cover
• Table of Contents
• Introduction
• PART 1: Taxonomy of Mergers and Acquisitions and the Evolution of Managerial Thought
• PART 2: Mergers and Acquisitions Strategies: Cause and Effect
• PART 3: Value Creation and Measurement Methods
• PART 4: The French Market: Analyses and Case Studies
• Conclusion
• Appendix
• Bibliography
• Index
• End User License Agreement