BUS601: Financial Management

M&A also includes the areas of value creation, corporate alliances, private equity, and divestitures.

Learning Objective

• Explain why a company may want to divest itself of an acquisition

Key Points

• Despite the goal of value creation and synergy, results from mergers and acquisitions are often disappointing compared with results predicted or expected.
• A form of corporate cooperation lying between a merger or acquisition and internal growth is called a corporate alliance or strategic alliance.
• From an M&A point of view, a private placement is similar to a merger because it usually involves an institution (rather than numerous public investors) acquiring a stake (assets) in a company.
• A divestiture is the reduction of some kind of asset for either financial or ethical objectives, or the sale of an existing business by a firm.

Terms

• distribution channel

The institutional arrangement by which goods or services are conveyed from producer to user.

• empirical

Pertaining to, derived from, or testable by observations made using the physical senses or using instruments which extend the senses.

• Synergy

Benefits resulting from combining two different groups, people, objects, or processes.

M&A Value Creation

Despite the goal of value creation and synergy, results from mergers and acquisitions are often disappointing compared with results that are predicted or expected. Numerous empirical studies show high failure rates of M&A deals. Some reasons for failed mergers include lack of strategic fit, difference in corporate culture, lack of due diligence, poor integration, over-optimism, and failed valuation leading to too high of a purchase price. Employee turnover also contributes to M&A failures. The turnover in target companies has been found to be double the turnover experienced in non-merged firms for the 10 years following the merger. However, higher success rates have been experienced recently, due to firms gaining more and more experience with the M&A process.

Corporate Alliances

A form of corporate cooperation lying between a merger or acquisition and internal growth is called a corporate alliance, or strategic alliance. This is a relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses, and shared risk.

Private Equity and M&A

When raising funds for a merger or acquisition, firms may not seek funds from public offerings - either out of necessity or by choice. The company may not be big enough; the markets may not have an appetite for their issues; or the company may simply prefer not to have its stock be publicly traded. In such a case, a firm may choose to raise funds through private placements. The process of raising private equity, or debt, changes only slightly from a public deal. Often, one firm will be the sole investor in a private placement. In other words, if a company sells stock through a private placement, usually only one firm or a small number of firms will buy the stock offered. From an M&A point of view, a private placement is thus similar to a merger because it usually involves an institution (rather than numerous public investors) acquiring a stake (assets) in a company.

Private Equity

Private equity firms, such as NBGI, provide funds for companies unable or uninterested in obtaining funds publicly.

Divestitures

A divestiture is the reduction of some kind of asset for either financial or ethical objectives, or the sale of an existing business by a firm. Firms may have several motives for divestitures:

1. A firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best.
2. To obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash.
3. A firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets.
4. To create stability.
5. A division is under-performing or even failing.
6. A divestiture could be forced on to the firm by the regulatory authorities - for example, in order to create competition.
   

Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable or promising. Divestment of certain parts of a company can occur when required by the Federal Trade Commission before a merger with another firm is approved. The largest, and likely most famous, corporate divestiture in history was the 1984 U.S. Department of Justice-mandated breakup of the Bell System into AT&T and the seven Baby Bells.

Source: Boundless.
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