DIVESTURES

ASSIGNMENT
1) MOTIVES FOR MERGERS AND ACQUISITIONS

a) Value Creation: Companies may engage in mergers to enhance shareholder wealth. This often
results in synergies that elevate the value of the combined entity beyond the sum of the individual
companies. There are two main types of synergies:
o Revenue synergies: Improving revenue-generating capabilities through factors like market
expansion and R&D activities.
o Cost synergies: Reducing costs through economies of scale, access to new technologies, and
eliminating certain expenses.
b) Diversification: Mergers are frequently pursued for diversification purposes, allowing companies to
enter new markets or offer new products and services. Managers may seek mergers to diversify
operational risks, though shareholders may not always favor this if it adds complexity and risk
compared to simpler risk-diversification methods.
c) Acquisition of Assets: Mergers can be driven by the desire to acquire unique or time-consuming
assets. Access to new technologies is a common objective in such transactions.
d) Increase in Financial Capacity: Companies may merge to overcome financial limitations,
enabling a consolidated entity to have a higher financial capacity for future business development.
e) Tax Purposes: Merging with a company holding substantial carry-forward tax losses can
significantly reduce the total tax liability of the consolidated entity compared to operating
independently.
f) Incentives for Managers: Managers may pursue mergers based on personal interests and goals.
This could involve seeking more power, and prestige, or engaging in "empire building" to create the
largest company in the industry. Additionally, larger companies can offer higher salaries and
bonuses, which may be appealing to managers as their compensation is often correlated with the
size of the company.
Mergers and acquisitions serve various strategic purposes, and the motives behind them can be
multifaceted. Shareholder value creation is a fundamental driver, with synergies playing a crucial role.
Diversification and the acquisition of unique assets or technologies contribute to the strategic positioning
of the merged entity. Financial considerations, such as overcoming limitations and achieving tax
efficiency, provide additional rationale.
Notably, the role of managerial incentives adds a human dimension to mergers. Managerial interests, ego,
and a desire for industry dominance can influence strategic decisions. The correlation between company
size and managerial compensation underscores the importance of considering not only financial but also
personal motivations when analyzing mergers and acquisitions.
In essence, mergers are complex transactions influenced by a combination of financial, strategic, and
personal factors. Understanding these diverse motives is crucial for stakeholders, as it provides insights
into the potential benefits and challenges associated with mergers and acquisitions.
2) DEFENSIVE MECHANISMS FOR MERGERS AND ACQUISITIONS

In the context of mergers and acquisitions (M&A), various defensive mechanisms are employed to
safeguard target companies from hostile takeovers and to increase the overall cost of acquisition for
potential acquirers.
 POISION PILL a tactic used by a target company to make its stock less attractive to potential
acquirers. This is typically achieved by issuing additional shares of stock to existing shareholders,
diluting the value of the stock and making it more expensive for the acquirer to gain a controlling
stake. It can be an effective way for a target company to protect itself from hostile takeovers, they
can also make it more difficult for acquirers to negotiate a deal, ultimately prolonging the M&A
process.
 DIVESTURES wherein a firm sells assets or a division to the highest bidder on the sale it
receives cash which is reinvested in new assets or returned to stockholders as dividends or go for
stock buy backs. By doing so the target firm creates value for the shareholders and makes the
company less attractive for the acquirer.
 SPIN-OFFS a firm separates assets or a division and creates new shares with a claim on this
portion of the business. Existing stockholders in the firm receive these shares in proportion to
their original holdings they can choose to retain these shares or they can sell them in market.
 SPLITUPS which can be considered as an expanded version of a spin-off the firm splits into
different lines of businesses and distributes shares in these business lines to the original
stockholders in proportion to their original ownership in the firm. It is similar to spin-off in so far
as it creates new shares in the undervalued business line in this case however the existing
stockholders are given the option to exchange their parent company stock for these new shares
which change the proportional ownership in the new structure making it difficult for acquirer.
 GOLDEN PARACHUTES where target firms make large payments to the managers of a firm if
it is acquired which in turn will lead to Cash drain from these payments would render the
acquisition or merger in feasible which if acquired will leave the acquirer with a huge debt level
 CROWN JEWELS a target firm sells major assets (crown jewels) when faced with a takeover
threat this is sometimes referred to as the Scorched earth strategy by doing so the target firm
again makes the deal unattractive
 WHITE SQUIRE an individual or company who is friendly to the current management is asked
to buy enough of the target firm shares to block a hostile takeover making it almost impossible
for the acquirer. Other methods include trying to convince the target firm's shareholders that the
price offered is too low.
Defensive mechanisms are an important aspect of the M&A process and can have a significant impact on
the outcome of a deal. While these mechanisms can be effective in protecting a target company from
hostile takeovers and preserving the interests of its shareholders, they can also have the unintended
consequence of deterring potential acquirers and prolonging the M&A process.
In navigating the complex landscape of M&A, companies must carefully consider the deployment of
defensive mechanisms, weighing the benefits of protection against the potential drawbacks of deterring
acquirers and prolonging the deal process. Striking a balance between safeguarding shareholder interests
and facilitating a smooth M&A process is crucial for maximizing the positive outcomes of these strategic
maneuvers. Ultimately, the effectiveness of defensive mechanisms lies in their ability to secure favorable
terms for all stakeholders involved.

DIVESTURES

Uploaded by

Copyright:

Available Formats

DIVESTURES

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

DIVESTURES

Uploaded by

Copyright:

Available Formats

ASSIGNMENT

1) MOTIVES FOR MERGERS AND ACQUISITIONS

2) DEFENSIVE MECHANISMS FOR MERGERS AND ACQUISITIONS

You might also like