Mergers and acquisitions of firms in the market. Mergers and Acquisitions: Tax Implications

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MAIN PART

CHAPTER 1. THEORETICAL

1.1 Acquisition and merger - concepts and terms

1.2 Types of acquisitions and mergers

1.4 Methods for assessing the value of a company during acquisitions and mergers

CHAPTER 2. PRACTICAL

2.1 International mergers and acquisitions (M&A)

2.2 Market valuation of the two companies Glaxo Wellcome and SmithKline Beecham before the merger

2.3 Market valuation of the two companies Glaxo Wellcome and SmithKline Beecham after their merger into Glaxo SmithKline.

LIST OF REFERENCES USED

APPLICATIONS

INTRODUCTION

The current active development of market relations in all production and financial sectors of the Russian economy primarily requires the introduction and further development of new organizational and management structures, as well as the development of methods and effective forms of combining the activities of financial companies. Mergers and acquisitions of companies at a certain stage of their evolutionary development are a common component of any economic activity. These actions have a certain significance for the entire international economy in the context of the economies of various countries and significantly influence the development of individual industries and industries.

A thorough analysis and impartial observation of the merger processes of two international companies, especially if this process was successful and a positive overall financial result was achieved, can hardly be overestimated in the sense of accumulating positive experience for similar Russian companies, especially in our difficult times, when in the Russian Federation there is an economic embargo on the part of the United States, as well as the countries of the European Union in response to the consistent and principled policy of the Russian leadership regarding humanitarian support for the peoples of the former Donetsk and Lugansk regions of Ukraine, who have risen to fight against the pro-American anti-people and inherently criminal policy of the current Kiev government, which before to this day, despite the Minsk agreements, it continues ethnic cleansing of the civilian population of Eastern Ukraine and mercilessly destroys its own people to please its overseas masters. Although in fairness it should be noted that the economic sanctions applied by the West against Russia are achieving rather the opposite effect, since at this very time our country is consistently strengthening the domestic economic complex and improving the quality of domestic goods produced, while many manufacturing firms in the European Union countries ( Germany, Italy, the Baltic countries, Poland) are suffering multi-million dollar losses due to a sharp decrease in trade turnover with the Russian Federation.

Pursuing the goals of further expanding its financial activities, an enterprise can use two ways:

Firstly, this is the internal growth of the enterprise, which is characterized by a slow certain pace, but is limited by the financial capabilities of the enterprise and the existing infrastructure;

Secondly, economic effect can be achieved through the merger and acquisition of two or more enterprises of a similar type of activity, while the merger is characterized by a rapid process, but also very uncertain final results, since companies can reorganize not only in their industry, but also in other related ones business areas.

Of course, the merger and acquisition method cannot be considered the only means of improving management methods. If the reorganization as a result of the merger of companies improves the quality of management, then this will be a strong argument in favor of such a reorganization. However, there is always a certain risk that the ability to manage a more complex organization will be overestimated, and managers of the newly formed organization will have to deal with unfamiliar and new technologies and markets.

However, in some economic situations, fundamental changes are the simplest and most effective way to improve the quality of management, since managers of an inefficient company will not be able to make the difficult decision to fire themselves for their own ineffective actions, and shareholders of large corporations will not be able to significantly influence the decision who and how exactly will manage the corporation. Therefore, further development of the enterprise infrastructure requires significant scientific and practical justification. A strong argument in favor of the importance of a merger of companies can be a previous assessment of the coordinated work and functioning of the combined structure, which can be presented by independent experts.

The object of this course work is the consideration and thorough analysis of all processes of corporate mergers and acquisitions in the modern global economic environment.

The subject of the proposed development is cross-border strategies of mergers and acquisitions, which have a certain relevance for similar processes occurring in the Russian market economy.

The purpose of this course work is to study the features of mergers and acquisitions in international business using the example of the merger of the pharmaceutical companies Glaxo Wellcome and SmithKline Beecham.

The goal outlined above predetermines the implementation of the following tasks in this work:

Define what a “merger” and “acquisition” are;

Classify the concepts of mergers and acquisitions;

Characterize the historical aspects of mergers and acquisitions;

Describe types of mergers and acquisitions;

Reveal the motives for mergers and acquisitions;

Briefly describe mergers and acquisitions in international business;

Determine methods for assessing the value of a company during acquisitions and mergers;

Provide existing methods of protection against takeovers and mergers;

Give a market valuation of the two companies before the merger and a market valuation of the new company after the merger;

In the conclusions, provide an assessment of the effectiveness of the methods used during the merger of the companies Glaxo Wellcome and SmithKline Beecham;

In the same place, indicate the choice of the best method for evaluating the new company for this merger.

CHAPTER 1. THEORETICAL

1.1 Acquisition and merger - concepts and terms

Association of companies (“business combination”, which in translation from English means “business combination”) is the process of combining individual organizations (or companies), which can be represented as legal entities, into one economic structure (this can be an enterprise or group of enterprises) as a result of the merger process (or merger process) of one company with another (or with another), or when one company receives (acquires) control over the net assets and control over the activities of another company, or as a result of the so-called. "union of interests".

Therefore, the process of business combinations can be divided into three categories:

Legal merger;

Acquisitions (including reverse acquisition);

Associations of interests.

A legal merger is a combination of two companies in which the following occurs:

One company transfers all its assets and liabilities to another, after which this company ceases to operate as a legal entity (that is, a takeover process occurs here);

Or, both companies transfer all of their assets and liabilities to the new company, after which both original companies cease to operate as legal entities (i.e., a merger occurs).

It is well known that in English the word “merger” can be interpreted in two senses: this is the term “absorption”, this is also the term “merger, association”.

Of course, these words are close in their meanings, but, nevertheless, they are by no means synonyms and have slightly different meanings.

Acquisition - this means a combination of two companies or enterprises in which the enterprise that is the buyer receives or acquires control over the net assets, and also controls the activities of another enterprise that is being purchased or will be acquired, in exchange for the other enterprise transfers to the buyer the rights to transfer assets, assume liabilities, issue or transfer its shares. In this case, a controlling or complete block of shares is purchased, which are exchanged for assets or the buyer's own shares, or simply transferred as debt. Upon completion of this process, both of the above enterprises retain their functions as legal entities, but a special relationship arises between them, which is interpreted as “mother and daughter”.

A reverse acquisition is an acquisition in which the selling enterprise takes ownership (buys) shares of another enterprise in an exchange transaction that involves the issuance of a sufficient number of voting shares and the transfer of them as consideration or for the purchase of shares those owners or shareholders of the enterprise where these shares were located. The "reverse acquisition" process through which this consideration is obtained also results in the exercise of overall control of the combined entity. To put it more precisely, it is rather participation in the exercise of control over the purchasing enterprise, since its “old” shareholders continue to be custodians of their shares, while the purchasing enterprise continues to control the second enterprise, whose shares it bought in exchange for the opportunity issuing its own shares.

Pooling of interests is a type of legal merger or acquisition of companies in which all unrevaluated assets and liabilities are subject to a totalization process, and the company, which acts as a legal entity, issues new shares in the amount of the capital of the company that ceased to exist as a result of this process. In this case, it is necessary to exchange a certain part of the common shares of the company that is absorbing another company for the entire block of shares of the company that is being absorbed, with the subsequent redemption of these shares.

Here, a strict rule must be observed that before the start of the acquisition process, both interested firms must have autonomy, that is, not be in a “family relationship” like “mother and daughter,” and it is not at all necessary that at that time these firms be the same size approximately equal.

This "pooling of interests" method originated in the United States as a counterbalance to the conventional method of buying a company, and as a result of the share exchange discussed in this method, the shareholders of both companies involved retain their financial interests.

This is achieved as follows. A company that acquires another must issue voting shares of common stock in order to subsequently exchange them for a significant portion (but not less than 90%) of the voting common shares of the company being acquired. In the future, the so-called The "issuer" is acquired either in cash or may be borrowed, but not more than 10% of the voting common stock of the company that is being acquired, in order to then pay off 100% of it as a result of the acquisition of that company. Such financial expenses are aimed at paying compensation to dissatisfied shareholders of the acquired company, while retaining the possibility of repurchasing shares and bonus payments to shareholders.

Types of mergers and acquisitions - see Appendix 1

1.2 Types of acquisitions and mergers

Depending on the nature of the association, there are:

Horizontal merge. Companies that operate in the same industry, produce similar products or carry out similar production processes are united. In such mergers, forced methods of mergers and acquisitions of companies are often used (from ousting from the market to raider takeovers).

Vertical merger. Enterprises that operate in different industries, but are connected by a single technological process (for example, mining, metallurgical and construction companies) are united. As in the previous case, along with civilized merger methods, fairly strict merger and acquisition methods can be used;

Generic merger. Associations of companies that produce interrelated goods (for example, a company producing flash memory cards merges with an enterprise producing cameras). Harsh methods of company mergers are used less frequently than in previous cases;

Conglomerate merger. The merger or acquisition of enterprises from different industries that are not connected by any production community. The purpose of such mergers may be to expand the product line or conquer new markets (for example, a manufacturing company acquires supermarkets in the region to create additional sales channels for products. Depending on the attitude of the management of the companies to the merger and on what methods of mergers and acquisitions of enterprises are used in each case, namely:

Friendly merger, in which the agreement is supported by the management and shareholders of both parties;

A hostile merger that is carried out against the wishes of the target company's management.

In order to determine in more detail the future changes and effects of mergers and acquisitions, it is necessary to examine the characteristic forms of these processes and the changes to which they lead (see Table 1.2.1).

Table 1.2.1

Characteristics of forms of merger of enterprises

Forms of merger of enterprises	Change of legal status	Change of managerial powers	Methods for forming subordination ties
Integration	The status changes at both enterprises	Powers are distributed	A new enterprise is created with the subsequent transfer of assets of the enterprises that are being merged.
Absorption	The status of one enterprise changes, but the second does not	The powers of several or one of the participants are terminated	Liquidation of one of the enterprises with further transfer of its assets to other enterprises
Subordination	Status does not change	One of the enterprises loses part of its powers	Obtaining control through the acquisition of shares in an enterprise
Consolidation	Status does not change	Several enterprises are losing some of their powers	Obtaining control through the acquisition of shares of the enterprise or their exchange
Creation of the main enterprise	Status does not change	Part of the powers is transferred to the newly created enterprise	Transfer of shares of merging enterprises to the newly created enterprise

Mergers and acquisitions of enterprises that are diverse in their specificity and size have their own specific characteristics, depending on which country or region of the world this merger takes place. If in the United States mergers or acquisitions occur primarily of relatively large firms, in Europe large companies predominantly absorb small and medium-sized companies, as well as enterprises of small family firms and joint-stock companies that operate in related industries

1.3 Motives for mergers and acquisitions

Obtaining a synergistic effect.

The main reason for changing the structure of a company in the form of mergers and acquisitions is the desire to obtain and even strengthen a synergistic effect (the complementary effect of the assets of the companies that merged).

A synergistic effect can occur due to the following circumstances:

Savings, this is due to the scale of activity;

Combining complementary resources;

Financial savings by reducing transaction costs;

With an increase in market strength through a decrease in competition (which stems from the monopoly motive);

Mutual complementarity in the field of any research and development work.

Economy of scale. It is achieved when the average cost per unit of output decreases as the volume of production increases. One of the key elements of such savings is the distribution of fixed costs over a larger number of products that are produced. The primary idea of economies of scale is that the volume of work increases while using the same production facilities and existing infrastructure, with the same number of workers and with the same system of resource allocation and financial resources. In other words, to use available resources more efficiently. However, one must always take into account that there is a certain limit to the increase in production volume, at which excess production costs can increase significantly, which will subsequently lead to a drop in profitability.

And yet, it should be noted that the absorption of a company into an already existing structure is an extremely complex process. Therefore, some companies, having carried out the merger process, without a unified management policy, continue to “pull the blanket over themselves” and represent a conglomerate of various business units, even continuing to compete with each other, although they are already one company and must carry out one a balanced, targeted policy in order to achieve the stated interests of the merged company, while even if individual management functions are centralized, the economic effect of centralization with this approach of divisions of a single company cannot be achieved. In addition, if a corporation has a complex structure, primarily of a conglomerate type, then, on the contrary, this may entail a significant increase in the number of management personnel and the creation of a significant number of “extra” managers and middle managers.

Complementary resources. A merger may be considered expedient and feasible if the companies intending to merge have complementary resources. If one of the companies has a shortage of certain resources (material, human, scientific), and the other has an excess of them, then this can serve to the general benefit of both companies when they merge and are able to ensure effective operations. Naturally, the value of these companies after the merger will increase significantly, and in total they will cost more, as if they were to arithmetically add up their values before the merger, because each of the companies will receive the necessary resources much cheaper than they would cost this company if it had to create them independently and invest your own funds

A merger in order to obtain complementary resources is typical for both large firms and small enterprises. Most often, it is precisely these small enterprises that become the target of acquisition by large companies, since they can find quick replacements for missing components for further activities in market conditions. Enterprises of small forms of ownership sometimes produce unique and extremely necessary products for the population, but due to their specific nature, they do not have the opportunity to organize large-scale production and sell their products in large volumes. Large companies can independently create the components they need, and they can also get faster access to them if they merge with a company that already produces these products on the common market.

Monopoly motive. Sometimes when companies merge, their management strives to become the main monopolist player in the market. In this case, the merger makes it possible for companies to tame price competition so that in the struggle for a buyer, any of the manufacturers would not be doomed to minimal profits. However, antitrust laws in many countries around the world restrict mergers with the clear intention of inflating prices. Sometimes an enterprise claiming to be a monopolist can buy its competitors "wholesale and retail", and doing so and eliminating price competition seems more profitable than allowing their prices to fall below average variable costs, since this is not at all profitable for the company.

Saving. The benefits of the merger can be used in the form of savings on expensive work, in the development of new technologies and the creation of new, previously unproduced types of products, as well as in attracting significant investment in new technologies and new products. For example, the staff of one of the companies may include many talented engineers, researchers, innovators, managers, programmers, etc., but the company in question does not have the necessary infrastructure and the required capacity to benefit from the new products that they are developing. Another company may have well-established sales channels for its products, but its employees are creatively limited, i.e. “they don’t grab the stars from the sky.” If these companies unite, then together they will be able to solve all the problems posed to them. Through a merger, it is possible to combine advanced scientific ideas and the funds needed to implement these ideas. This type of merger is most typical for creative youth.

Improving the quality of management. Mergers and acquisitions of companies may pursue the goal of achieving differentiated efficiency. This goal is as follows: management recognizes that the assets of one of the firms were poorly managed, but after the merger, administrative and personnel measures are taken to more effectively manage the assets of the corporation.

There are many companies in nature whose performance is hampered by a cumbersome management apparatus that is incapable of thinking creatively. Such companies are likely to be acquired by firms with more modern management systems. Sometimes, more effective management may mean either the need for painful staff reductions, or the need for a significant reorganization of the entire operation of the company in question.

Tax motives. Current modern tax legislation sometimes has a stimulating effect on mergers and acquisitions, which can lead to tax reductions or tax benefits. For example, for a highly profitable company with a significant tax burden, it is beneficial to purchase a company with large tax benefits, as a result of which it will be possible to save on tax payments to the budget due to the rational use of tax benefits, but taking into account the level of its profits, this may turn out to be insufficient advantage.

Diversification of production. In other words, the ability to use excess resources. This is a common reason for mergers and acquisitions - diversification into other types of business. Diversification leads to stabilization of the income stream, which is mutually beneficial for both the employees of the company and consumers, which is achieved through the effect of expanding the range of goods and services. If a company has temporarily free resources, then the motivation to purchase it immediately arises. This motive is usually associated with the hopes of industrialists for a beneficial change for their business in the structure of markets or industries, a change in orientation to the possibility of access to new resources and the latest innovative technologies.

The difference between a company's market price and its replacement cost. Most often, it is much easier to buy an already equipped enterprise, with its own staff and management, than to build a new one and recruit staff for it. This is also appropriate when the market valuation of the target company in monetary terms is significantly less than the cost of replacing its assets.

The difference between liquidation value and current market value. In other words, we can say this: the opportunity to “buy cheap and sell high.” Often, a company's liquidation value is much higher than its current market value. In this case, the company, even if it is acquired at a price higher than previously planned, can later be sold “at retail”, i.e. in parts, with the seller of the company receiving a decent financial income from this event. From the point of view of the expediency of the event, the liquidation of a company should be carried out only in such circumstances when the economic gains significantly outweigh the possible economic costs.

Personal motives of managers. This can also be interpreted as a desire to increase the political weight of the company’s management. There is no doubt that all strong-willed management decisions regarding mergers and acquisitions of companies should be based on economic feasibility and only on it, without any lyrical motives. However, history shows that sometimes the necessary decisions are based more quickly on the personal motives and preferences of managers than on thoughtful and comprehensive economic analysis. This is understandable, since company leaders and all kinds of “powers that be” do not want to share their main prerogative (power), and, moreover, claim higher wages, and both the scale of power and wages are directly proportional to the size of the corporation .

Of course, as the scale of the company increases, the need arises to use various types of bonuses and allowances as a means of long-term incentives for middle management. These payments represent a significant portion of managers' total compensation and are tied to the cost of capital of the company they manage. In this regard, there are direct incentives for managers to continue to use their profits to acquire more and more new assets in any areas of their business.

Expanding the geography of influence. Expanding the company's geography creates good preconditions for entering new markets when the capabilities of the traditional market are close to exhaustion. In addition, by becoming transnational, the company reduces the likelihood of local political and economic risks and strengthens its position in negotiations with the authorities.

Ensuring economic security (an associated motive is strengthening market positions). The motive for ensuring security (including economic security) - regarding the streamlining of the supply of raw materials and the sale of finished products, determining prices for them - serves as a fairly compelling justification for vertical integration.

Transferring capital abroad. In international practice, as a measure that will ensure the safety of capital, the motive for moving money abroad is sometimes used, the screen for which is mergers and acquisitions agreements.

Earnings per share growth. In mergers, the reason for a high PPS/EPS (share price/earnings per share) ratio is that investors are attracted by the expected rapid growth in earnings in the near future.

If a company achieves this growth by acquiring a company with a slow growth rate and low PPS/EPS, then it will have to continue to pursue further mergers to maintain this positive trend.

In addition to traditional motives for integration, there may also be other, extraordinary ones. For example, a merger for Russian companies is one of the few available ways to successfully resist the expansion of more powerful monopolistic competing companies in the current market. In general, the entire merger or acquisition operation in business can be calculated in advance; for this, it is enough just to have some data about the future target company with which the future acquisition will take place. Based on the results of simple calculations, the future takeover strategy is selected. The main motives for mergers and acquisitions - see Appendix 2.

1.4 Methods for assessing the value of a company during acquisitions and mergers

To assess the effectiveness of mergers and acquisitions of companies, different approaches are used, which are based on various criteria. Thus, R. Braley and S. Myers use benefits measured by the net present value (NPV) as a criterion for the effectiveness of mergers and acquisitions. Scientist P. Gohan calls this effect net absorption value (NAV). A. R. Gryaznova and M. A. Fedotova propose to calculate the net present value based on the effect of restructuring. In the theory and practice of business valuation, there is traditionally a classification of approaches to business analysis based on the initial data used: market approach (comparing a given enterprise with similar investments already sold), income approach (based on recalculation of expected income), expense approach (based directly on calculating the value of assets enterprises minus liabilities).

Each of the listed approaches has its own methods and features.

There are three approaches to business valuation: income, expense (or property) and comparative.

A profitable approach to business valuation is based on comparing the investor's future income with current expenses. Comparison of income with expenses is carried out taking into account time and risk factors. The dynamics of the company's value, determined by the income approach, allows managers and owners of enterprises to make the right management decisions.

To evaluate enterprises by income, two methods are used: the capitalization method and the income discounting method.

The capitalization method is used when future net income or cash flows are expected to be approximately at current levels or to grow at a moderate and predictable rate. Moreover, if the income is quite positive, then the business tends to develop steadily. The essence of this capitalization method is to determine the amount of annual income and the capitalization rate corresponding to these income, on the basis of which the price of the company is calculated, while the value of the business will be calculated using the following formula:

Business value = V = I / R, (1.4.1)

where I is net income; R - rate of profit (income).

Discounted cash flow method. This method is widely used within the framework of the income approach to the merger process and makes it possible to realistically assess the future potential of the enterprise. Either net income or cash flow is used as discounted income. It should be noted here that the amount of cash flow by year should be determined as the balance between the influx of cash (net income plus depreciation) and its outflow (increase in net working capital and capital investments). Annual net working capital is defined as the difference between current assets and current liabilities.

The method includes several stages:

1) calculation of forecast indicators for several years;

2) choice of discount rate;

3) applying the appropriate discount rate for income for each year;

4) determining the current value of all future receipts;

5) deducing the final result by adding the residual value of assets minus liabilities to the current value of future receipts.

The expense (property) approach to business valuation is that the value of the enterprise is considered primarily from the point of view of expenses incurred. The book value of assets and financial liabilities of an enterprise undergoing a merger or acquisition, as a result of current inflation, changes in market conditions, and accounting methods used, as a rule, does not correspond to market value. As a result of this, the appraiser is faced with the question of adjusting the balance sheet of the enterprise. In order to perform this task efficiently, the appraiser first carries out the following work:

Assessment of the reasonable market value of each asset on the balance sheet separately;

Determination of the current value of liabilities;

The current value of all its liabilities is subtracted from the reasonable market value of the enterprise's assets. The result shows the estimated value of the enterprise's equity.

Basic formula: Own capital = assets - liabilities.

Calculation of the net asset value method includes several stages:

A market valuation of the enterprise's real estate is carried out based on the calculated justified market value;

The reasonable market value of all machinery, equipment and materials is determined;

A market valuation of intangible assets is carried out;

The market value of financial investments is assessed, taking into account both long-term and short-term investments;

Inventory inventories are converted to current value;

Accounts receivable are assessed;

Expenses for future periods are estimated;

Translated into the current value of the enterprise's liabilities;

The value of equity capital is determined, which is presented as a deduction from the reasonable market value of the amount of assets of the current value of all liabilities.

Liquidation value method.

The assessment of liquidation value is applied when the following circumstances arise:

The company is in bankruptcy or there are serious doubts about its ability to remain a going concern;

If a company is liquidated, its liquidation value may be higher than if it had continued as a going concern.

Liquidation value is the value that the owner of an enterprise can receive upon liquidation of the enterprise through the separate sale of its assets. Calculating the liquidation value of an enterprise mainly includes certain basic steps:

A calendar schedule for the liquidation of various types of assets of the enterprise is being developed: real estate, machinery and equipment, inventory;

The gross proceeds from the liquidation of assets are determined;

The estimated value of assets is reduced by the amount of direct expenses (here we mean payments of commissions to various legal and appraisal companies, taxes, etc.);

The liquidation value of assets is reduced by expenses associated with holding assets for sale; this includes:

Expenses for maintaining inventories of finished goods and work in progress;

Expenses for the preservation of equipment, machinery, mechanisms, real estate;

Administrative expenses to support the operation of the enterprise until its liquidation is completed;

Operating profit (loss) of the liquidation period is added or subtracted;

The following articles that suppress the right to pleasure are deducted:

Severance pay and employee benefits;

Claims of creditors for obligations secured by a pledge of property of a liquidated enterprise;

Arrears on mandatory payments to the budget and extra-budgetary funds;

Settlements with other creditors.

Consequently, the liquidation value of an enterprise is calculated by deducting from the adjusted value of all assets on the balance sheet the amount of current expenses associated with the liquidation of the enterprise, as well as the amount of all liabilities.

Replacement cost method. This is one of the so-called “cost” methods of assessing the value of the assets of the acquired company, based on determining the value of all the costs that are necessary to recreate all the assets that are similar to the assets included in the property of the company being assessed. When applying this method, all types of costs that are associated with the construction and acquisition of each type of asset are calculated (here we mean design work, materials spent, expenses incurred for paying employees, etc.). In conclusion, to obtain a full assessment of the value of the company as a property complex, the balance (difference) between the financial assets and liabilities of the company should be added to the replacement cost of tangible and intangible assets. Thus, the business valuation is based on the costs of completely replacing the assets of the acquired company.

Replacement cost method. This valuation method is very similar to the previous replacement cost method. When applying this method, all costs required to create an exact copy of the company being assessed should be calculated. In this case, these costs are considered as the replacement cost of the company being valued. This method differs from the one discussed earlier in that its application also takes into account the cost of the company’s intangible assets, such as the cost of acquiring copyrights, acquisition patents, company software and other similar costs.

We will also consider a comparative approach to business valuation in the context of mergers and acquisitions, which is presented as the comparable sales method and the multiplier method.

The comparative approach is a set of business valuation methods that are based on comparison of the company being valued with the sales prices of similar enterprises in general or with the sales prices of shares of enterprises of a similar type.

The sales method, or the agreement method, which is based on the use of the purchase price of the enterprise - the analogue as a whole or its controlling stake. The technology of using the sales method practically coincides with the technology of the capital market method. The difference is only in the type of initial price information: the capital market method uses the price of one share as an initial one, which does not provide any elements of control, and the sales method uses the price of a controlling or complete block of shares as an input, which includes a premium for elements of control. Accordingly, the sales method can be used to evaluate the full or controlling interest in an enterprise that is subject to sale.

The comparable sales method is a more complex and time-consuming exercise. It is an analysis of the market prices of controlling stakes in similar companies. Estimating market value using this method usually occurs in several stages:

Collection of information about recent sales of similar similar enterprises;

Carrying out adjustments to the selling prices of enterprises and identifying differences between them;

Calculations to determine the market value of the company being valued, taking into account data on the adjusted value of a similar company

In other words, this method consists of creating a model of the company. At the same time, the model considers companies that must belong to the same industry as the enterprise being valued and be similar in size and form of ownership. Adjustments to the market price of a modeled analogue enterprise should be made after the most important positions:

Date of sale;

Type of enterprise;

Type of industry;

Legal form of ownership;

Part of shares sold;

Date of foundation;

Date of acquisition by last owner;

Number of employed workers;

Total sales volume;

Area of production premises, etc.

1.5 Methods of protection against takeovers and mergers

The term "merger and acquisition", which in English sounds like "Merger & Acquisition" (M&A), means a process that results in a formal or informal transfer of control of a company from one person to another. A takeover is friendly when the acquisition proposal is supported by the management of the target company and the merger occurs based on the common will and benefit of the merger. If the management of the company that is being absorbed opposes the merger, but the takeover occurs anyway, such a case belongs to an unfriendly (hostile) takeover. M&A does not always have a clearly defined economic basis. This is often a way to enter new markets or anticipate synergies.

Mergers and acquisitions that take place in the Russian Federation are distinguished by their national specificity, which is associated, first of all, with the history and methods of the primitive accumulation of capital in the 90s of the last century by domestic oligarchs. The main feature of Russian M&A transactions is the overwhelming use of acquisitions rather than mergers, which is characterized by the acquisition of new assets, markets and distribution channels within an existing market segment. In Russia, the acquisition of property in the form of large or promising companies was often illegal, associated with forgery of documents, bribery of government officials, violation of the criminal code, forceful entry into the territory of enterprises, that is, with actions aimed at depriving the property of the rightful owners through a certain sequence of illegal actions .

In order to protect the company from a hostile takeover, it is advisable to apply precautionary measures not only in cases where there is a risk of the enterprise being taken over, but also in advance, excluding such a scenario. The list of precautions that are part of the absorption protection mechanism includes the following:

Firstly, the company’s management should not contain random, unreliable, untested people who could work for the raider company;

Secondly, company managers should not sign and hand over blank sheets and other documents;

Thirdly, the company must pay off its debts on time;

Fourthly, the constituent and title documents of the enterprise must be properly executed and stored in a safe, secure place.

In the event of a raider attack, the owners and managers of the enterprise should immediately contact law enforcement and other authorities. If specific criminal actions have been committed against an enterprise or facts of corruption and bribery of officials have become known, you should also contact law enforcement agencies with a corresponding statement. Characteristics of friendly and hostile takeovers - see Appendix 1.

Terms like “dawn raid,” “poison pill,” and “shark repellent” might suggest that these are names of operations from James Bond films, but in fact they are names of methods of protecting companies from hostile takeovers. All methods of protection against hostile takeovers that are used by companies on the global market can be divided into two classes - preventive and active methods. The following preventive methods of protection against hostile takeovers have become most popular:

Reorganization: delisting and transformation into a closed joint stock company (LLC);

Buyback of shares from minority shareholders (protection from green blackmail);

- “Freezing out” of minority shareholders (disposal of assets and further repurchase of shares);

Company division;

Liquidation of a company and transfer of its property to a new legal entity (LLC or CJSC);

Transfer of assets to subsidiaries (CJSC or LLC);

Change of registry holder;

Debt load monitoring;

Anti-shark repellent;

Search for the "white knight";

Creation of a strategic alliance.;

Exit to IPO

Let's look at some of the preventive and proactive methods to protect companies from hostile takeovers.

Dawn Raid (original name - “Dawn Raid”). This method is most widespread in the UK. In this method, a firm or investor attempts to acquire equity capital to control the company by instructing brokers to buy certain shares immediately upon opening of the stock exchange, while the buyer (the "Predator") similarly disguises his identity and true intentions.

Golden parachute (original name - “Golden Parachute”). With this method of protection, the management of a company that is threatened with a takeover offers its leading specialists, who may lose their jobs, significant compensation payments and benefits, for example, the right to purchase company shares at preferential prices, various bonuses, etc. This method is expensive (can cost millions of dollars), but is quite effective and is a strong deterrent, and also allows the company to negotiate the price, citing the large personnel costs incurred.

Protection against green blackmail (original name - “Greenmail”). This method of protection is applicable in the case where the hostile company owns a significant block of shares, and consists of buying out shares from minority shareholders to prevent any attempt at a hostile takeover by the predator company. This method is also called “Bon voyage bonus” or “Goodbye kiss”.

Macaroni defense (original name - “Macaroni Defense”). This is a specific tactic in which a company in danger of being taken over issues a certain number of obligations with the guarantee that they can be bought back at a higher price if the company is taken over. Where does this original name come from? What is meant here is that if a company is acquired, its liabilities expand like pasta being boiled in a pot. This is a very useful tactic, but the company must be careful not to issue too many obligations that it cannot financially support.

People's Pill (original name - “People Pill”). If a company is threatened with takeover, the entire management team faces simultaneous dismissal. This leads to the result that they are true professionals, and their departure can seriously bleed the company, causing the predatory company to think twice about the feasibility of taking over. However, this may not work if most of the management was one way or another planned for dismissal, i.e. The human factor plays a major role here.

Poison pill (original name - “Poison Pill”). With this strategy, the company tries to downplay its attractiveness to a possible buyer. There are 2 types of poison pills. In a click-type pill, existing shareholders are encouraged to buy more shares at a preferential price, unless this conflicts with the company's statutes. The purpose of a flip is to dilute the shares held by a possible acquirer, making taking over a company unpredictable and expensive. In a "click kickback" poison pill, existing shareholders are asked to buy more shares of a possible buyer at a discounted price if the merger actually goes through. If investors are unable to financially support this method, the shares will not be sufficiently diluted and a takeover may still occur.

An extreme version of the poison pill is the “Suicide Pill” (the original name is “Suicide Pill”) - it is also a means of protecting a company from an unwanted takeover, but when using this method, catastrophic consequences can occur for the defending company. For example, a company is carrying out a massive replacement of equity capital with borrowed capital. Of course, such actions can scare off a predator company, since the acquisition process will become too expensive for them, but at the same time the financial condition of the company itself will sharply deteriorate, it may be unable to fulfill its financial obligations, and in the future - inevitable bankruptcy for this company .

White Knight (original title - “White Knight”). The White Knight is a friendly company, a kind of "good guy" who makes every effort to protect against capture by the "bad guy" company. The White Knight usually proposes a friendly merger as an alternative to a hostile takeover.

Repeated recapitalization (original name - “Leveraged recapitalization”). Under this protection method, the company extensively recapitalizes its assets, issues financial liabilities, and then buys them back into its ownership, with existing shareholders typically retaining control of the shares. This action makes it much more difficult for the company to be taken over.

Fair price amendment (original name - “Fair price amendment”). In this defense, a fair price adjustment is included as an addendum to the company's Articles of Association, which prevents the acquiring company from offering different prices for different shares held by the company's shareholders in a takeover attempt. This technique thwarts takeover attempts and forces the predatory company to pay a higher price.

Defense "Just say no" (original name - "Just say no" defense). In this method of protecting a company from takeover, its management simply makes every effort to lobby its shareholders not to agree to the most tempting offers from the takeover company.

Staggering the Board of Directors (original name - “Staggered board of directors”). This method of protection works when the directors of the company are elected for a term of no more than one year. Therefore, a potential buyer cannot instantly replace the entire Board of Directors, even if it controls a majority of the votes. At each annual meeting, one third of the directors and nominees will be entitled to shareholder ratification for a 3-year period. The effect of the protection method is that it takes at least 2 years to re-elect 2/3 of the directors and take control of the Board. And, as a rule, a predatory company cannot wait that long.

Restrictive takeover laws (original name - “Restrictive takeover laws”). Under this method of protection, those companies that do not want potentially hostile mergers may consider re-listing with such corporations that have adopted stricter laws against possible takeovers.

Restricted voting rights (original name - “restricted voting rights”). Under this method of protection, the company adopts a legal mechanism that limits the ability of shareholders to vote their shares if their ownership is above a certain threshold level (for example, 15%). This method encourages potential acquirers to negotiate with the Board of Directors, since it can relieve its shareholders from these restrictions.

Pearl of Defense (original name - “Crown Jewel Defense”). With this method, a company can sell off its most attractive assets to a friendly third party or consolidate valuable assets into a separate legal entity. In this case, the unfriendly bidder is less attracted to the target assets.

Pac-man Defense (original title - “Pac-man Defense”). The name of the protection method comes from the name of a computer game that was popular in the 80s of the 20th century. At the same time, the target company uses all methods to prevent the predator company from imposing a tender offer on it, while making a profitable counter-offer to the potential buyer.

White Esquire Defense (original name - “White Square Defense”). This method is quite similar to the White Knight method, except that this friendly company does not own a majority stake, but rather a significant minority stake. The Esquire always has the so-called. A "white squire" who has no intention of taking over the company, but is used as a figurehead to protect against a hostile takeover. A White Esquire can often obtain special voting rights for its shares.

What is M&A and what are its features?

An M&A transaction is one of the most popular types of transactions in the field of entrepreneurship. The abbreviation stands for “mergers and acquisitions,” which means mergers and acquisitions.

M&A is a set of tasks that are aimed at smoothly merging one company with another or several enterprises into one. Such deals can be signed for a variety of purposes - in order to expand an existing company, open new branches in other cities or countries, or better optimize production. Most often, this helps solve a problem such as a poor system for delivering a product to the consumer, for example, when increasing production volumes.

There are several types of M&A:

Horizontal. These types of mergers and acquisitions occur between businesses that make similar products. This task is carried out with the aim of increasing production volumes and sales of goods in new territories. Often this task will be performed in order to “displace” regional competitors in the market, which may eventually develop into a larger firm. For example, a large chain of stores operates in several regions of Kyiv. They sell sporting goods, but to expand their activities they buy a large store from another company. After this, the company changes its sign, introduces new operating standards, rebrands and launches the same store with the same product (or supplements the range with its own products). Thus, the company will not have to open from scratch, search for clients and look for its niche in the market.
Vertical. The process of acquisitions and mergers involving firms with similar, but not identical, areas of activity. For example, a dairy products company decides to buy a plant that produces milk packaging. This will be beneficial for the company because it will not have to depend on deliveries and suppliers. In addition, it will be possible to reduce the cost of the final product, because the cost of goods will be lower.
Parallel. Acquisition occurs between firms that are engaged in the same process in different places. For example, a coal mining company, as well as a related enterprise for its enrichment. This will also simplify the procedure as much as possible and reduce the cost of the goods.
Conglomerates is a network of companies that deal with a wide variety of goods and services. Most often they are completely unrelated to each other. Examples would be the organizations of Elon Musk or Richard Branson. In one company, under the leadership of one person, there are several companies - charity centers, marketing agencies, factories for the production of jet aircraft, and more. This is very convenient, because if one enterprise is closed, the main company will not suffer significant losses, but will remain on the market.

How to avoid mistakes during M&A transactions?

If you carry out an M&A transaction without adequate preparation or do not monitor the process sufficiently, then the merger can bring you a huge number of problems. To get the most benefit, you need to avoid small mistakes.

Team reaction. Naturally, after purchasing another company, the manager may face a negative reaction from the team. They may not understand or accept the new management system or support your firm's policies. You should not ignore the problem, because employees may not do their job well, and you will notice the result only after a few months, when losses exceed income. Use different ways of communicating with your team - psychological approaches, retraining specialists, and even dismissing those who cannot do their job.
Understanding the basics of business. Leaders of large companies today will not be able to fully function in the market without a minimum understanding of business. And if you start concluding deals without this knowledge, this will lead to the fact that potential partners can make the agreement more profitable for themselves.
The question of the acquired brand after the merger. Often one company buys another, which is more popular and has a “loud” brand. Then you have to make a decision - leave it or replace it with your own. If you are performing a horizontal merger method, it would be better to replace the company name with your own, and vice versa in a vertical merger. In the second option, you were not competitors, and the area of work of the other company is slightly different, so most likely it already has a certain reputation and regular customers.

An M&A transaction is an excellent opportunity to expand your company, gain partners and increase your scope of activity.

Merger is the union of two equal companies. Acquisition is the buyout of one company by another. The goal of mergers and acquisitions is synergy, i.e. benefits from joint activities.

Mergers and acquisitions(eng. mergers and acquisitions, M&A) of companies - sets of actions aimed at increasing the total value of assets through synergies, i.e. benefits of joint activities. To put it simply, then mergers and acquisitions describe the transformation of two companies into one. A merger is the emergence of a new company as a result of the combination of two equal companies, and an acquisition is the buyout of the absorbed company by the absorbing company, as a result of which the absorbed company ceases to exist, and the absorber increases. A striking example of a takeover in Ukraine is UMC → MTS: the larger Russian company MTS bought out most of another company (UMC) and rebranded.

There are different theories that acquisitions and mergers are aimed at eliminating competitors, etc., but they are far from the truth. home The goal of any merger or acquisition is for the result to be greater than the sum of its parts(i.e. 1+1=3). In other words, companies that participate in the process hope to save costs and increase efficiency. Often, the productivity of a new/renovated company increases precisely by reducing costs.

Difference between acquisitions and mergers

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Terms " merger" (English merger) and " absorption"(English acquisition) are often confused or used as synonyms. Despite the fact that their meanings are very close and they always go in pairs, in fact mergers and acquisitions describe different concepts. From the terms themselves it is clear what the difference is; Let's take a closer look.

Acquisition of one company by another company

As in the example with the Russian telecom operator MTS, when one company buys out and “eats” another, often smaller company, this is called company takeover. (The image of smaller companies being swallowed gave rise to the term “business shark.”) Once a smaller company is “eaten,” it naturally ceases to exist in the legal sense.

In this scenario, all assets of the acquired or "eaten" company are transferred to the ownership of the acquiring company. As a result of the absorption, more a big company becomes even bigger.

For example, Google is a very aggressive consuming shark that has already swallowed up more than 100 companies, including YouTube, Begun (Russian company), FeedBurner, AOL and many other companies around the world.

There are both aggressive and friendly takeovers.

aggressive takeover occurs when a smaller company does not want to be “eaten up”, but the acquiring company simply buys back a huge number of shares, and leaves no choice
friendly takeovers occur when both parties agree and are in a good mood for takeover.

It often happens that Acquiring companies do not want to advertise the actual takeover, and pretend that an equal merger has occurred. An example of such a takeover would be DaimlerChrysler: Daimler-Benz bought Chrysler, but presented the deal as an equal merger. (Due to failures in working together, Chrysler was later sold back to the Americans.)

Merger of companies

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Merger of companies is an association of equal companies that gives rise to a new company. Usually, the companies in the merger are approximately equal by number of assets.

It is important to understand that actual merger of companies is a rare occurrence. As described above, most often what is called a merger is actually an acquisition behind the guise of a merger, as in the example with DaimlerChrysler.

Synergy is the goal of acquisitions and mergers

The main point of mergers and acquisitions is synergy. Synergy is the advantage of joint activities. After all, this is obvious: when two companies become one, you need one accounting department, not two, one advertising department, not two, etc. When two companies become one, the benefits can be as follows:

staff reduction(eng. downsizing, rightsizing): as mentioned above, the number of employees from such support departments as finance, accounting, marketing, etc. is reduced. Also one of the manuals becomes unnecessary.
economies of scale: due to a quantitative increase in purchases, transportation, etc., the new company saves on wholesale terms. You also need to remember about everything that is needed, one thing per company: for example, server protection systems, a program for accounting for goods and personnel, etc.
increase in market share: When companies merge, the new company has a larger market share and brand awareness also increases. The advantage is that it is easier to win new market shares with a large share than with a small one. The conditions of creditors are also improving, because There is more trust in a big company.

But it is important to understand that Not every merger or acquisition has synergies. It often happens that conflicts occur in a new company, as happened with DaimlerChrysler, where the internal charters of the companies fundamentally did not coincide. Unfortunately, unsuccessful mergers and acquisitions are not uncommon.

Types of company mergers

There are many different ways of company mergers. These types of mergers are divided into 2 main groups: by the relationship between the companies and by the type of financing.

Types of mergers according to relations between companies

Basic types of mergers by type of relationship between the merging companies are as follows:

horizontal merge: a merger of two competing companies that do the same thing and are in the same niche
vertical merger: association of supplier and consumer; for example, a furniture manufacturer and a manufacturer of raw materials (i.e. boards, plywood, etc.)
merger to expand the sales market: an association of companies that are in the same industry, but sell goods in different markets
merger of companies related by sales line: an association of companies selling related products on one market

The modern economy is characterized by constant changes in the conditions of the internal and external environment. Enterprises of various forms of ownership are developing. In many areas, the consumer market is divided between large players and competition is quite high. Companies are constantly looking for new ways to increase profits and increase profitability. Of particular interest is the trend of recent decades - mergers and acquisitions of companies as one of the ways to consolidate a business.

Mergers of Companies: Definition and Types

By merger we mean merger of several (two or more) business entities into a new enterprise. That is, as a result of the merger of separate legal entities, a new company is formed. Previous firms are ending their independent existence. The types of such associations are as follows:

Merger of enterprise forms. Another name is complete fusion. The created company fully controls all the assets and activities of the former entities, and also assumes all obligations to creditors and clients of the merged companies.
Merger of company assets. Owners of old enterprises transfer control rights as a contribution to the authorized capital of these entities to a new legal entity. At the same time, the existing form of ownership is preserved, but the activities of the merged companies become controlled by the newly created enterprise.
Merger of one or more enterprises to another. With this type of merger, the joining entities cease to exist. And the company that joins them takes over the management and obligations of the previous companies.

Acquisition of companies

Absorption- these are transactions of acquisition by the acquiring company of at least 30% of the authorized capital - in the form of shares or shares - of the target company (the one that is being acquired). Both parties to the transaction retain their legal independence. In this way, ownership rights are transferred to the new owner.

In business, this form of reorganization is more often understood as acquisition of one enterprise by another– smaller and often lagging behind in the market. The acquiring company controls the assets and activities of the target companies, which in some cases may eventually cease to exist.

Abroad, unlike Russia, there is no clear distinction between the terms “merger” and “acquisition”. The formation of one enterprise (not necessarily a new one) from two or more economic entities is considered a merger.

Main types

It is convenient to classify all existing types of mergers and acquisitions according to a number of criteria:

Nature of the company combination th:
- horizontal merge– enterprises operating in the same business area and producing the same products are united;
- vertical merge– enterprises at different stages of the technological chain of the production process are connected (for example, ore miners with metallurgical plants);
- parallel (generic) merger– an association of companies producing interrelated goods (manufacturers of computers and motherboards);
- ToOglomerate (circular) fusion– a connection of companies that are not interconnected by stages of production, sales markets and other economic relations. The purpose of such consolidation is to sell assets in the future at a higher price or to diversify the business. There are 3 types of conglomerates:
  - with the expansion of the product range (products with a similar production process and sales markets, for example, powders and bleaches);
  - with the expansion of the consumer market (gaining access to new territories, customer segments);
  - pure conglomerates (have no commonality).

Advantages and disadvantages

Expanding a business and increasing capital in these ways has the following advantages:

Weakening competition;
The ability to quickly acquire key assets (often intangible, for example, patents, databases, trademarks);
Increase profits, profitability and other economic indicators;
Development of new markets and new products;
An established sales infrastructure is acquired;
Opportunity to profitably acquire undervalued assets from a target company.

At the same time, mergers and acquisitions also have flaws, often veiled. These include:

the risk of overpayment and underestimation of all the consequences of such associations;
complex integration process when companies operate in different business areas;
underestimation of additional investments for a full merger of enterprises;
possible incompatibility of corporate cultures;
risk of losing key employees.

Ways to protect against capture

With the intention of a hostile takeover, the acquiring company, bypassing top managers, immediately turns to the owners of the company of interest. The target company, in turn, takes a number of protective measures.

Basic defense techniques before the announcement of a public transaction:

« Anti-shark» changes in the charter:
- dividing the board of directors into parts and annually electing only a certain number of the governing board. It takes many votes to elect a new director.
- To make a decision on a merger, 2/3 or more positive votes of shareholders are required;
- fair price – for shareholders who have a large share of shares outstanding, a fixed price bar for their shares in the event of a sale is established;
Change of place of registration company: taking into account the difference in the legislation of individual regions and countries, it will be easier for the target company to take other anti-takeover measures and defend itself in court.
"Poison Pill"– measures aimed at significantly reducing its attractiveness for the acquiring company. These include:
- sale of the most attractive assets for the “captor”;
- the current shareholders of the target company receive the right to purchase ordinary shares of the acquiring company at half the market price if it buys a significant share of the shares from the “victim”;
- “pasta defense” - issuing bonds with the condition of early return of funds in the event of a change in the key shareholders of the enterprise.
- “golden parachutes” - concluding contracts with the managers of the target company to pay them large severance payments in the event of their dismissal as a result of the takeover. Thus, the cost of the transaction will increase significantly.
Issue of shares with higher voting rights– managers of the target firm receive a majority of votes without owning many shares.
Defensive absorption– the target company is actively absorbed by other companies, which makes its value several times higher.
Deliberate buyout of the entire company or part of it by other investors (possibly managers of the company itself) using borrowed funds. Subsequently, the shares are no longer allowed to be publicly traded.

If these measures do not bring results and the takeover deal is announced publicly, then the target company takes the following ways to disrupt the impending unification:

Pacman's defense is a counterattack on the shares of the acquiring company.
Lawsuits – filing an application in court against the “invader” for non-compliance with antimonopoly legislation.
“Green armor” is an offer to the acquiring company to repurchase its shares (if they have already been purchased) at a price higher than the one for which they were acquired, subject to the condition that the controlling stake remains intact for a certain period.
Asset restructuring is the acquisition of assets that are unattractive to the invader.
Restructuring of liabilities - issuing shares to third-party companies and increasing the number of shareholders, as well as the repurchase of securities at a premium by top managers of the target company from existing shareholders.

Reasons and goals

Main reasons, according to which enterprises enter into such transactions:

The possibilities for further economic growth, cost reduction, and increased profits for a particular company under current market conditions are practically exhausted.
The real market price of the target company, according to forecasts, turns out to be lower than its book value, that is, the connection of companies for the “invader” will be quite profitable.
The liquidation value of the company of interest is higher than its market value. You can buy this company entirely, and then sell it in parts at random for a profit.
Personal motives of the management of the acquiring company. In particular, the desire for power and increasing one’s salary.
Availability of a large amount of free funds.
Make it difficult for foreign competitors to enter the existing market.

Conducting mergers and acquisitions pursues one or more goals. These include:

Synergistic effect– when adding up the assets of two or more companies, the final result will far exceed the sum of the results of these enterprises separately. This is due to:
- cost savings by expanding the scale of activity;
- the presence of complementary resources among companies;
- strengthening of monopoly position in the market;
- economy and complementarity in the development of new technologies and products.
Increasing the efficiency and quality of management in the merging enterprises.
Obtaining tax benefits.
Diversification of production means an increase in the range and, as a result, more stable revenue.
Eliminating competitors.
Increasing liquidity, solvency and reliability ratings for potential investors and creditors.
Consolidation of top managers in certain political and business circles.

Main stages of processes

The process of combining companies through merger or acquisition takes place 8 main stages:

Determining the strategic goals of the enterprise, taking into account the conditions of the external and internal environment. The economic feasibility of connecting with another company is assessed. Internal methods of achieving these goals are also considered (introduction of new technologies, improvement of logistics connections, measures aimed at increasing labor productivity, etc.).
Selection of qualified specialists for the transaction. Not only employees of the company itself participate, but also a banker, tax consultant, lawyer, auditor, and outside economist are invited. It is important that further actions are analyzed by different specialists.
The criteria for selecting the required company are determined:
- industry;
- products;
- volume of revenue;
- type of ownership;
- sales market.
Direct search for a company. The object must satisfy the original purposes. Both active actions (personal connections, databases, Internet, brokers) and passive ones (submitting an advertisement) are used.
Negotiations with selected candidates. Exchange information and weigh your own expectations from the merger or acquisition with the data received. The financial and economic state of attractive companies is analyzed, hidden reserves, undervalued assets, possible additional investments, etc. are identified. As a result, the cost of the transaction is determined
Making the final decision and legal preparation of documents with the desired company.
Integration of enterprises is the unification of economic entities into a single whole.
Evaluation of achieved results and comparison with planned strategic goals.

Analysis of the effectiveness of the procedure

A comprehensive assessment of the results of company mergers helps to understand the correctness of this management decision and plan future performance. And also adjust your current activities if negative aspects of the transaction are identified. Basicdirectionsefficiency analysis:

Evaluating stock performance. Comparison of stock quotes before and after a merger or acquisition (for joint-stock companies). The dynamics of the stock price are monitored over a period of several weeks, months, and 1 year. The amount of dividends per 1 share is compared.
Analysis of financial indicators and their dynamics: net profit, return on assets, sales and equity, cost and asset turnover and others. The achievement of a synergistic effect is assessed.
Analysis of changes in the company itself, the external environment and other costs. This includes: consumer market share, headcount, R&D costs and returns, changes in the structure of suppliers and buyers.
Survey of company managers. Management fills out a special questionnaire, from which conclusions are drawn on how well the expectations from the merger of companies were met.
Evaluation by third-party analysts and experts. In addition to assessing the economic viability of the transaction, this gives an idea of the company's credibility in business circles.

The impact of these processes on the economy

There is still no clear opinion about whether these forms of associations have a positive or negative impact on the economy. A number of economists believe that mergers and acquisitions are normal in market conditions, leading to increased efficiency, labor productivity and the country's GDP. Applicable to the most “monetary” industries in Russia (fuel, metallurgical, mechanical engineering), we can agree with this. Large players control a large share of the domestic market and keep out foreign competitors. With the right approach, there is a noticeable synergistic effect

Other economists believe that such forms of business combinations lead only to a monopoly and oligopoly market and impede free competition. Additional company funds are diverted to protect against takeovers. Gaps in legislation, especially in the area of securities turnover and taxes, allow us to partly agree with this point of view.

If in the late 90s. was clearly expressed trend is profitablebuycheap assets Without an in-depth analysis of the transaction, now investors are more carefully selecting an object. This is especially true for the sphere of medium and small businesses, detailed information about which is often hidden.

The average value of transactions has been growing in recent years, sometimes exceeding the real value of assets. This is largely due to the presence of particularly valuable intangible assets in some companies, which bring significant profits to their owners.

Liquidation of an LLC by merger: step-by-step instructions

Liquidation procedureII LLCthrough merger carried out in several steps:

Meeting of owners separately in each company. It is necessary to make a positive decision about the merger.
General meeting of owners of all enterprises participating in the operation. A decision on agreement to the transaction is made by voting. Minutes of the general meeting are drawn up.
A merger agreement is drawn up and signed by all parties. A draft charter of the new enterprise is being developed and a transfer act is being drawn up.
Through a statement forms P12001 the tax authority at the location of the new company is notified of the start of the reorganization. The document is certified by a notary. An agreement on the decision made to carry out this form of reorganization must also be presented. Messages about the merger of form C-09-4 must be sent to the tax authorities at the place of registration of the previous companies.
The tax office makes an entry in the Unified State Register of Legal Entities about the beginning of the reorganization and issues a confirming certificate. After this, all creditors (if there are debts) must be notified of the merger within 5 business days. Debt to the Pension Fund, tax, and extra-budgetary funds must be repaid.
Publication of messages in the media about the beginning of a merger of companies. Produced in the journal “Bulletin of State Registration” 2 times with an interval of 1 month.
Obtaining approval of the transaction from the antimonopoly service. This step is carried out in the case when the value of all assets according to the latest balance sheets exceeds 3 billion rubles. or revenue for the previous year is above 6 billion rubles. And also if one of the parties was previously a violator of antitrust laws.
Inventory of property and signing of the transfer deed (assets transferred to the new company, debts of debtors and creditors are reflected). It is signed by all parties. Next, the state fee is paid.
Submission to the tax authority of all collected and endorsed documents from the previous steps.
After 5 days, the registration authority issues documents confirming the liquidation of the LLC and the creation of a new legal entity.

The entire procedure takes 2–6 months, depending on the scale and specifics of each enterprise.

May 2, 2017

M&A transactions (Mergers and acquisitions) can last for months and sometimes years. Not all of them reach successful completion. And even if the documents are signed, the work cannot be considered completed. What should a CFO pay attention to at each stage of M&A? How can other participants in the process help the merging companies, and at the same time improve their own status?

Mergers and acquisitions are a type of economic transactions whose purpose is the transfer or combination of company assets for growth, downsizing, changing the content of a business or market position. At the same time, participants in such transactions can be companies that are interested in small transactions, starting from a million dollars, and companies that make mega-transactions worth tens of billions of dollars.

About the author: Stanislav Skakun has been working at Intercomp for more than 9 years. During this time, he participated in 4 M&A transactions on both sides. He completed internships at the Ministry of Foreign Affairs and in the control and accounting bodies of the Russian Federation, has the qualifications of DipIFR, CMA (U.S. Certified Management Accountant) and PMP (U.S. Project Management Professional), and has a PhD in Economics.

Stanislav Skakun

Director of Economics and Finance Intercomp

M&A market

Today, the world is experiencing record levels of mergers and acquisitions. In 2015, the amount of transactions exceeded $4.7 trillion, which is higher than the previously set record of 2007 – $4.6 trillion. 2015 was also a record year for the number of megadeals (transactions, the amount of each of which exceeds $5 billion) in total About 100 such transactions were recorded. Approximately 8% of global GDP thus changed its owners through the M&A mechanism.

M&A volume, billions, (Sources: KPMG, AK&M)

Year	2013	2014	2015	2016
World	2760	3640	4761	3405
Russia	115	71	56	42
Russia's share, %	4,2%	2,0%	1,2%	1,2%

Experts predict that M&A activity will continue to increase and peak in 2017 in developed countries and in 2018 in developing countries, with the fastest growth rates expected in China, Hong Kong, the Netherlands, Mexico and India. The most interesting countries for investment will be European countries - Great Britain, Germany and Spain, while healthcare, information and telecommunications technologies will remain promising sectors.

In Russia, since 2014, there has been a decrease in the volume of transactions; from a fairly impressive 4% of the world market, Russia’s share has fallen to 1%. In 2016, 450 transactions were completed in Russia. However, at the beginning of 2017, according to statistics from the AK&M Mergers and Acquisitions Market bulletin, the M&A market with the participation of Russian companies showed growth for the first time since the beginning of the crisis. The total value of transactions for January and February reached almost $7 billion - 2.5 times more than for the same period last year.

Why are M&A transactions carried out in Russia? A number of industries are demonstrating extremely low rates of organic growth, and competition is intensifying. If the market is not growing, then one possible strategy is to increase market share through M&A. This also partially solves the problem of competition.

On the other hand, many companies are still unable to overcome the crisis, and M&A is a good way to exit the market. M&A in Russia today is an alternative to competition.

Who conducts M&A transactions?

M&A transactions are professionally handled by Private Equity - direct investment funds. Currently, the total assets under management of PE funds worldwide exceeds $4 trillion. By specializing in certain sectors, the funds identify private, high-growth companies with strong management teams capable of generating high returns on invested capital, enter the capital of the companies as medium-term investors and participate in their management until they achieve the desired indicators. The fund then exits capital through an IPO or through the sale of a stake to a strategic or financial investor at a profit for itself.

Private Equity (funds) - do this professionally.

And in the end, they will most likely resell it.

But funds are not strategists. They buy companies to “package” them and resell them.

In ordinary companies, especially in medium-sized companies, it is not possible to employ M&A specialists on a permanent basis. Most often, a company creates a working group consisting of the CEO, CFO, and COO. Later, lawyers, security services, personnel services and other colleagues get involved.

At the moment when a company begins to think about participating in an M&A transaction from one side or another, all top managers have an excellent opportunity to look at the company through the eyes of shareholders and see how, in their profession, they can increase the value of the company and become a full-fledged business. partner, focus on strategic issues instead of operational management. This contributes to the evolution of back-office functions towards business partnerships, when functions that were previously seen as supporting, for example, HR, the financial function, begin to take on key, strategic importance in creating the value of the company.

Stages of an M&A transaction

Traditionally, M&A transactions include the following stages:

Preparing the deal

Signing Termsheet

Risk assessment (Due Diligence)

Transaction structuring

Closing the deal

Transition period

Final payment

Realization of synergy

Stage 1: preparation of the transaction

Once the parties have met and all presentations have been successfully completed, it is time to sign the first document. Basically, it will be rather “notional”, not binding on the parties. But there will still be several important provisions, for violation of which financial sanctions will most likely be provided. From the buyer's point of view, these are basically the principles on which he would like to evaluate the target company. For example, it will be agreed that the basis of measurement is revenue. The company will be acquired for 1, 2 or more of its annual revenue. In this case, the buyer will naturally want to stipulate what risks he would like to deduct from this cost.

At this stage, it is important to choose a successful valuation formula, because later, at those stages, when some risks already appear, bargaining begins, it will be quite difficult to break the seller’s position and change the valuation formula. Of course, this depends in principle on the seller’s negotiating position, but the correct choice of formula at this stage solves a lot of problems later.

A simple example. We decided to subtract tax risks from the value of the company, and are assessing the quality of documents in order to understand what level of possible additional charges awaits us in the event of a sudden audit. But what if due diligence revealed violations of currency laws that are a multiple of the revenue received by the company? And this is not exactly a tax segment, and disagreement may arise here. Therefore, it is better to define these deductions in more general terms and say that we want to deduct any possible liabilities that may arise, for example, in the event of a regulatory audit. This definition will be more durable. It will survive the later stages of the deal.

What to pay attention to:

To the buyer

Search for target companies: development of uniform evaluation criteria. Shortlist for shareholder consideration. Segment definition.
Financial modeling based on open sources: synergies, payback periods, main hypotheses

To the seller

Search for an investor: Usually done on the side of the CEO, but the CFO can also participate.
“Business packaging”: Preparation of “road show”, “management presentation”. Working with invited consultants.

Stage 2: Termsheet

Termsheet (transaction, declaration of intent) is a document that reflects the main agreements of the parties regarding the legal and financial parameters of the upcoming investment transaction.

There are a number of important points that it is advisable to include in the termsheet:

Parties to the transaction
Contributions to the company (specification by form and time)
The ratio of shares (shares) before and after making deposits
Share price
Conditions for closing a deal
Confidentiality

Of course, the seller wants to protect their confidential information. He understands that he will have to provide very sensitive data about the company. But the buyer wants only him to be listened to, and he wants exclusivity. These points must be written down in the term sheet.

What to pay attention to:

To the buyer

Agreement on Basic Terms
It is important to correctly define the principles of assessment. Identify revision opportunities.
Agree on exclusivity!

To the seller

Agreement on Basic Terms
Protect your confidential information!

Stage 3: Due Diligence

Due Diligence is a procedure for drawing up an objective picture of an investment object, which includes an assessment of investment risks, an independent assessment of the investment object, a comprehensive study of the company’s activities, a comprehensive check of its financial condition and market position.

At this stage, there is often a desire to carry out the entire check yourself. After all, top management understands their business like no one else. The CFO may want to understand for himself what makes up EBITDA. Involve lawyers to assess tax risks, HR directors to assess human capital, etc. But it is better to hire a specialist who specializes in due diligence. After all, any mistake made at this stage, if made alone, will be your mistake to the shareholder. And as we know, not a single deal goes as planned on paper. Therefore, it is better to enlist the help of an external professional. Of course, involve your entire team, everyone you consider competent in assessing this data. At this stage, many risks can be identified, and it is better to look at the company being purchased in a team of strong experts.

And from the seller’s point of view, there is an important point - not to give more information than the Buyer asked for. Any “extra” document that is provided during Due diligence may raise unnecessary questions and will certainly be used to identify risks, that is, it will be used against the Seller for additional bargaining.

Example. The practice of successfully increasing prices seems to indicate customer loyalty and a strong position. But the buyer may take the position that the Seller is taking a risk by raising prices and will likely experience customer churn. Data will be requested on customer churn resulting from price increases. By showing a practice that works well in your company, you are tasked with measuring how it affects your business. But you may not have such data, or it may be too labor-intensive to obtain.

What to pay attention to:

To the buyer

Tax, financial, legal, technological due diligence.
How to do it: outsourcing vs inhouse?
Sectors of inspection: large counterparties, intellectual property, key personnel, stability of the client base, technological aspects.

To the seller

The actual support for data transfer is a virtual data room, strict documentation of all transferred information, access logging, inventories, etc.
Do not give more than requested. Minimize costs. Minimize the risk of staff anxiety. Anonymize critical data.

Stage 4: Structuring the deal

Once we have assessed the risks and confirmed the correctness of our formula for valuing the company, we can begin legal preparation and understanding of the structure of the transaction.

Maybe at the first stage it was supposed to buy a group of companies, but the situation is such that only one company in the group matches your risk profile. The rest have some tax problems and potential additional charges.

Maybe during the transaction you realized that withdrawing funds, for example, in a jurisdiction under British law, would be inconvenient for you. And you would like to make a transaction in Russian law, which, by the way, is now gaining more and more popularity. 3 years ago, changes came into force in the civil code, which make it possible to prescribe all the same points that are usually prescribed in British law. The Russian Civil Code was copied from good British designs. The only drawback of Russian law is that it does not yet have extensive judicial practice on M&A. But you will not, for example, pay tax on dividends in order to withdraw money to British jurisdiction, and paperwork in Russian courts is much cheaper than in foreign ones. Therefore, weigh the pros and cons and decide under what law the transaction will be made.

It is important for the seller to state here how he sees the structure of payments, i.e. how long will the transition period be, what will these obligations be during the transition period, and of course what will be the proportion of division of payments: 30/70, 80/20, etc., which will most likely depend on the number of risks identified during Due Diligence. Everything at risk will be delivered as payment at the end of the transaction.

What to pay attention to:

To the buyer

What are we buying: a business, a legal entity or a group of companies?
Transfer period?
Guarantees?
Applicable right?
Financing – the bank will not provide 100% coverage.

To the seller

Payment structure (first payment, deferred payment, guarantee, etc.) Transfer period – how long?
What responsibilities are assigned to the seller, because his team will have to perform them? How to avoid disrupting your business during the transfer process?

M&A deals that failed at the structuring stage

At the structuring stage, deals often fall through. Because moments arise that the participants do not think about at the beginning. Here are just a few examples.

Stage 5: Closing the deal

After the deal closes, the CFO's stress drops dramatically. Funding has been raised, all documents have been signed, financial models have been verified, and the financial director agrees with them. Is it really possible to retire at this stage? The answer is, of course, “no.”

What to pay attention to:

To the buyer

Problems of systems integration and team retention.

To the seller

Fulfillment of transition period obligations.
Transfer to the management of a new owner.
New opportunities.

Financial models don't work

Not a single M&A transaction proceeds as it looked in the process of financial modeling “on paper”. The reasons may be different:

Team Integration Issues
Key customer loyalty
"Unknown negative event"

Why do deals often not go the way they were supposed to? This is a difference in cultures, a difference in the work teams that manage companies, because this is the most important value. The problem of team integration is the first reason why deals don’t go as expected. It would seem that team integration is beyond the responsibility of the financial director; this should be handled by the HR director or someone else.

But the good news is that the difference between teams, cultures, etc. The financial director can measure at the Due Diligence stage by receiving answers to, for example, the following list of questions:

Is the talent pool sufficient for the combined business?
How does the recruitment process work?
What is the turnover?
What do corporate benefit packages look like: What will have to be added/cancelled?
How do salaries compare for similar positions?
Are motivational schemes structured correctly? Do they encourage optimal behavior?
Which executives will occupy key positions in the merged company?
What training programs will be required during the integration phase?
What technology systems will be used by the combined company?

This is all digital information that gives an objective view of how companies compare. In one company the turnover may be 8%, i.e. people work on average for more than 10 years, and in another company the turnover is 40%, i.e. it has a completely different culture and, apparently, if it has been in the market for so long, then it has different mechanisms in its corporate culture.

We can buy a company with 100% the same business as ours, with a client portfolio of the same structure, but in reality it will be a completely different company, a different business. Don’t think that if she is smaller than you, and she meets the criteria of the same client portfolio, the same service, then everything will be simple. It just won't happen.

Therefore, the financial model must take into account the integration model. And the potential benefits of a well-planned integration effort are very high. According to Harvard Business Review, the top 10% of successful companies earn 11 times more on M&A than the bottom 10%.

It is very important to involve the HR director in a timely manner so that he, as an expert, can help you, the financial director, evaluate the corporate culture of the acquired company, and think for your part about how the integration will proceed. Even when all the documents are signed, when you can no longer change anything, it is better to stay informed about how the business is being integrated, and use all your capabilities and talents to properly integrate the company, because it is your loans, your budget that you have to fulfill. If an M&A transaction leaves a hole in your budget, then, unfortunately, no one will compensate you for it.