1.1 General
In 2017, about 15,000 merger and acquisition deals were announced in the United States, representing about $2 trillion in total value.1 Business expansion occurs mainly through mergers and acquisitions. Mergers are one means by which firms can improve their ability to compete.2 According to information collected by the leading M&A database Zephyr, global markets announced 89,440 global deals worth $6.1 trillion. Globally, the United States, China, the UK, Ireland, the Netherlands, Hong Kong, and Australia received the most M&A activity. US targets topped the rankings by both volume and value in 2015. In all 14,357 deals worth USD 1,942,778 million were announced over the 12 months.3 Top two deals boost M&A value: (i) the Pfizerâs agreement to acquire Irish pharmaceuticals maker Allergan for USD 160,000 million4 and (ii) the Anheuser-Busch InBevâs USD 131,730 million acquisition of UK-based beer manufacturer SABMiller, to create a brewing giant that would produce about a third of all beer consumed globally.5 Despite the differences in purposes, objectives, and policies, mergers and acquisitions review process presents similarities in the three main economic blocks.
All the three major marketsâUnited States, EU, and Chinaâsubject cross-mergers to their competition and national security reviews. The purposes of competition review seem broadly identical, while the stated purposes of the national security introduced respectively a perceived hypocrisy of protectionism.
The reference to domestic enterprises related to national security in a broad range of areas clearly provides an opportunity for government authorities to reject, on security grounds, a transaction which would be otherwise be permissible (or even encouraged) under the Foreign Investment Industries Catalog.6
The vagueness of the concept of ânational securityâ provides discretion in assessing and deciding on foreign investment attempts by foreign businesses.
1.2 Methods of Business Combination
A business combination is a transaction in which the acquirer obtains control of another business (the acquiree). Business combinations are a common way for companies to grow in size, rather than growing through organic (internal) activities. There are several methods for achieving a business combination.
- Acquisition
An acquisition usually refers to the purchase of one corporation by another, through either the purchase of its shares, or the purchase of its assets. That is, an acquisition can take the form of a purchase of the stock or other equity interests of the target entity, or the acquisition of all or a substantial amount of its assets. In a share purchase the buyer buys the shares of the target company from the shareholders of the target company. The buyer then takes on the company with all its assets and liabilities. However, in an asset purchase the buyer buys the assets of the target company from the target company. In simplest form this leaves the target company as an empty shell, and the cash it receives from the acquisition is then paid back to its shareholders by dividend or through liquidation. One of the advantages of an asset purchase for the buyer is that it can âcherry-pickâ the assets that it wants and leave the assetsâand liabilitiesâthat it does not.
- Merger
A merger is a corporate strategy of combining different companies into a single company in order to enhance the financial and operational strengths of both organizations. In a merger, two separate companies combine and only one of them survives. In other words, the merged (acquired) company goes out of existence, leaving its assets and liabilities to the acquiring company. The three main types of mergers are: (i) horizontal mergers which increase market share, (ii) vertical mergers which exploit existing synergies, and (iii) concentric mergers which expand the product offering.
- Consolidation
A consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. Shares of the new company are exchanged for shares of the merging ones. Two similarly sized companies usually consolidate rather than merge. Although the distinction between merger and consolidation is important, the terms are often used interchangeably, with either used to refer generally to a joining of the assets and liabilities of two companies. In general, the consolidation process allows a business to rethink their functions and systems in a more efficient way in order to reduce the operating costs. For instance, the acquisition of goods and services can be centralized, which helps the merged company adopt a corporate-wide pricing policy.
- Leveraged buyout
A leveraged buyout (LBO) is a type of acquisition that occurs when a group of investors, sometimes led by the management of a company (management buyout or MBO), borrows funds to purchase the company. Put differently, a LBO is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The assets and future earnings of the company are used to secure the financing required to purchase the company. Sometimes employees are allowed to participate through an employee stock ownership plan, which may provide tax advantages and improve employee productivity by giving employees an equity stake in the company.
- Holding company
A holding company is a company that owns sufficient voting stock to have a controlling interest in one or more companies called subsidiaries. Effective working control or substantial influence can be gained through ownership of as little as 5 percent to as much as 51 percent of the outstanding shares, depending on how widely the shares are distributed. A holding company that engages in the management of the subsidiaries is called a parent company. A holding company usually does not produce goods or services itself; rather, its purpose is to own shares of other companies to form a corporate group.
- Divestitures
A divestiture involves the sale of a portion of a company. Two popular means of divestiture are spin-offs and equity carve-outs. The injunction of divestiture is very often the remedy chosen to resolve competition problems arising from mergers and acquisitions. For instance, in the Ciba-Geigy case, the purpose of the divestiture of the Sandoz Corn Herbicide Business was to ensure the continuation of the Sandoz Corn Herbicide Business as an ongoing, viable enterprise engaged in the research, development, manufacture, distribution, and sale of corn herbicides independent of Ciba, Sandoz, and Novartis and able to compete with Ciba, Sandoz, and Novartis and to remedy the lessening of competition alleged in the Commissionâs complaint.7
- Hostile versus Friendly combinations
Acquisitions can either be hostile or friendly. In a hostile acquisition, the acquiring, or bidder, company makes an offer to purchase the acquired or target company, but the management of the target company resists the offer. At that point, the bidder often tries to take control of the target through a tender offer, whereby the bidder offers to purchase a majority of the targetâs stock at a predetermined price, set sufficiently higher than the current market price to attract the shareholdersâ attention. Hostile acquisitions are typically more expensive for both parties since they involve more time and negotiations, fees to experts such as attorneys and investment bankers, and may result in a bidding war where multiple bidders enter the contest for control. The large number of hostile acquisitions in the 1980s led to the coining of the term âmarket for corporate control.â This terminology reflects the view that acquisitions are really market-based contests whereby corporate managers bid to control corporate assets, with the highest bidder receiving control. Though hostile acquisitions receive much of the media attention surrounding acquisitions, the great majority of acquisitions are friendly. In a friendly acquisition, the management of both companies come to an agreement over the terms of the acquisition. Many acquisitions that begin as hostile end up being completed on a friendly basis.
1.3 Motives for Acquisitions
The overriding motive for any acquisition should be to maximize shareholder value. There has been increasing emphasis on maximizing shareholder value and managers are under more and more pressure to do so. The threat of a hostile takeover places pressure on all corporate managers to manage their companies to maximize value, or risk being taken over and restructured by another management. Increasingly competitive global capital markets, active institutional investors, active and independent boards of directors, and better informed market participants have all led to an increased focus by shareholders on shareholder value, and have placed increased pressure on corporate managers to maximize shareholder value. Acquisitions are a means of creating shareholder value by exploiting synergies, increasing growth, replacing inefficient managers, gaining market power, and extracting benefits from financial and operational restructuring. However, for value to be created, the benefits of these motives must exceed the costs.
These motives are considered to add shareholder value:
- Economies of scale: This refers to the fact that the combined comp...