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Mergers and takeovers
Mergers, takeovers and joint ventures
In the modern business world, the ownership of companies often changes. This can happen i
different ways:
I a merger: this is when two companies join together to form a new one (e.g. Exxon an,
Mobil, America Online and Time \Tarner).
I a takeover or acquisition: this is when one company buys another one (e.g. Vodafone
Mannesmann, Daimler-Benz and Chrysler). This can happen in two ways. FirstlS a
company can offer to buy all the shareholders' shares at a certain price (higher than tl
market price) during a limited period of time. This is called a takeover bid. SecondlS I
company can buy as many shares as possible on the stock market, hoping to gain a
majority. This is called a raid.
lnvestment banks have mergers and acquisitions
(MSaA) departments that advise companies involved
in mergers and takeovers.
Boap> lHt
Companies can also work together without a
change of ownership. For example, when tvvo or
more companies decide to work together for a
specific project or product, this is called a joint
venture. An example is Sony Ericsson, which makes
mobile phones.
'@9''
"Wellthe merger is oveç now
the takeover starts."
I
E Integration
Horizontal integration is when a company gets bigger by acquiring competitors in the
same field of activity. Vertical integration is acquiring companies involved in other parts
of the supply chain, usually to make cost savings. There are two possibilities: backward
integration is acquiring suppliers of raw materials or components; forward integration is
buying distributors or retail outlets. Companies can also buy businesses in completely
different fields, which is known as diversification. This can be done to reduce the risk
involved in operating in only one industry - but diversifying into completely different
industries is a risk itself.
2
Colonial has agreed to a . ........... takeover by Commonwealth Bank.
'1gr13:1:11}1g1{!i{fî.3ii|..*1]]..:,.-'..'i9-.,..i.::..,i?]:1l].:11]:i1i|....{1'llr::x:l:::lïlg5{:
3,
Mackenzie Financial Corp is planning a huge rights issue as a .................. to fight off ,
C. t. Fund Management's takeover offer.
39.3 Match the newspaper headlines (1-5) with the processes (a-e). Look at C opposite to help you.
a horizontal integration
Shetl Purchases 30 Gas Stations :: b vertical integration
rilllltillliiiiiliiirrtllriatryr{*t1liit::tlia:ilil.:.ri:,::!...i{{rir31i"'it:ru:tuti.L:'l:tçil1:llllrr:''*:"'r:l':*r5l::::'l:'r'':
*ll
c forward integration
d backward integration
Hotel Chain to Buy Furniture I e diversification
Manufacturer to Supply lts New Hotels "
.w'....6d91.,i::t*t*1llx,${::::l*|l:,'l:*'l|.l..l*{î.i'll1...1|ilii.i93|,,i....:.'
re Raiders
If corporate raiders - individuals or companies that want to take over
other companies -
bo..oï money to do so, usually by issuing bonds, the takeover is called a leveraged
After the
buyout or LBO. Leveraled means'largely financed by borrowed capital.
ll ,uk.ou.r, the raider sells subsidiaries of the company in order to
pay back the
bondholders.
Itllt risky: it
pay lor takeovers are usually called lunk bonds because they
are
il' Bonds issued to
subsidiaries at a profit. But, because of the risk, these
may not b. porribl" to sell the
them'
bond, puy u ttign interest rate' so some investors are happy to buy
trl
I
T
management buyout or MBO. If the buyout is
fina.rced by issuing preference shares and
convertibles, this is called mezzanine financing
ۉRpt
{og htt occâsro}'s
as it is, in a sense, halfway between debt and
lilil
ilerQEFs {yosÎaîrott
KFu?-lcY
Q.2 Match the two parts of the sentences. Look at A and B opposite to help you.
1 Large conglomerates formed by takeovers
2 If a conglomerate diversifies and doesn't concentrate on its core business,
3 An inefficient conglomerate's stock market value
4 If a company is worth less than its assets,
5 Raiders do not need to have very much money of their own if
a can be less than the sale value of all its assets.
b can become inefficient, especially if they are very diversified.
c they use leverage, and issue junk bonds.
d there might not be synergies among all its different activities.
e you can make a profit by buying it and selling the parts.
ao.3 Put the sequence of events in the correct order. The first stage is a. Look at B opposite to help you.
a Corporate raiders calculate that a large company is undervalued.
b Investors buy the bonds because they pay a high interest rate.
c The new or,^/ners sell some of the company's subsidiaries.
d The new owners repay the bondholders.
e The raiders buy the company.
f The raiders issue bonds to raise capital to buy the company.
1 6 2 3 a 5 t)