Mergers and Acquisitions

Mergers and Acquisitions!

With all of the recent hullabaloo in the market, perhaps you may have found yourself questioning: Oh, my! What if I had to be covering the implosion of Wall Street? I don’t know what any of these terms mean!

Well, seeing as we're students, let’s learn.

Some things that can be equally confusing as bankruptcy are mergers and acquisitions.


MERGER OR TAKEOVER?

There are rarely mergers of equals, when two companies combine into one, so always be cautious of using this term. “Merger” is not synonymous with takeover or acquisition, which are what most of your stories will cover.

There is a checklist you can follow to help determine what kind of deal is taking place and who the major players are.

1. Is one of the companies’ stock being used as the currency?

If yes, that’s usually a sign of an acquisition, not a merger, and that the company is the acquirer.


2. What is the message from the exchange ratio in stock transactions?

It is common for one company to offer shares to its stockholders at a 1-for-1 ratio, and the other will offer for only a percentage of the original value. This means that the first company’s stock is being used as the basis of the transaction.

It could also be the case that this is a merger and that the companies have decided to compensate one company’s stock for differing values, creating a sort of exchange ratio between one company’s stock and the other’s.

3. What is the message from the stock movements after the announcements?

In an acquisition, it is common for the stock of the company being acquired to rise and that of the acquirer to fall. This is because the acquired company, in theory, is joining into a stronger company and the acquiring company is taking in a weaker one.

It is also because most stock buyers pay a premium, or a price elevated above market price. This is to help compensate for the amount of debt being taking in by the acquirer, something investors often worry about.

4. Whose cash is being used to fund the cash portion of a transaction?

If one company’s cash will be used or its existing line of credit will be used to pay for the other company’s shares, it is a strong sign that the first company is the acquirer.

5. Which company’s executives are filling most of the top management roles?

Another key distinction is who gets the CEO position. Be careful, however, as sometimes one CEO will be in charge for a short amount of time and then the other CEO will take over for a longer period of time. This is often a matter of compromise.

6. Which company will end up with the majority of the seats on the new board of directors?

Board control is a good way to distinguish a merger from an acquisition. If one company keeps control of a majority of the board of directors, it’s a good indication of which company is in charge.

Make sure this is a longer-term setup, too, as deals can be struck for members to retire soon, etc.

7. Whose name will be on the big sign outside the headquarters?

This is not always a dead giveaway and there can be several reasons for the leading company to take the name of the acquired. It can be a marketing scheme or even a component of the deal.

8. Where will the company be headquartered?

Again, not always a fair tell, but most CEOs will try not to move.


WHAT NEEDS TO BE COVERED

FULL NAME OF BUYER, size and scope of company

EXPLAIN TERMS of deal

VALUE OF THE DEAL, in simple terms, if possible: Cash, stock, cash/stock?

PROVIDE REASON, if provided

WHAT WILL BE THE OUTCOME: the new company will….

JOB CUTS?

WARN OF EARNINGS DILUTION: more recipients of income, less payout

HEADQUARTERS of both companies

STOCK HISTORIES of both

PREMARKET TRADING before deal was sealed…… Is a premium price being paid? Was this a hostile bid?

INCLUDE (if applicable): antitrust issues, board approval, Gov’t approval, shareholder approval, court approval, break-up fees, non-discolsure/confidentiality agreements

DUE DILIGENCE: acquirer to review internal books/operations of acquired

STAGE OF TRANSACTION: letter of intent, actual agreement terms, etc.

DETAILS on how the takeover will be financed, plans for future, projected effect, etc.

HISTORICAL PERSPECTIVE

Tells more of a story, past deals/activity

WHAT IS THE STOCK TELLING US?

ASSESS THE DEAL'S CHANCES FOR SUCCESS.