Buying and
selling business
Both private and public companies regularly change hands—they are bought,
sold, and restructured to reflect changing business conditions. These deals
all come under the umbrella term of mergers and acquisitions (M and A).
Acquisition financing is usually needed to pay for the purchase of another
company, often in the form of a loan or venture capital.
How to acquire a company
A company is typically acquired in one of two ways—either by
a management team or by another company. When a company
is buying, the result can be a merger, in which two companies
join forces, an acquisition (outright purchase), or a divestiture,
in which part of a company is hived off and sold. Management
team purchases are often funded by private equity.
Management team acquiring
Private equity firms look for companies
to buy and then sell their shares when
profits have maximized. They fund the
management team. See pp.48–49.
Buy-out
The existing management team buys out
the company they work for.
Buy-in
An external management team buys into
the company.
T
a
r
g
e
t
c
o
m
p
a
n
y
For
sale
Divestiture
Part of company
is split off to form
new company; may
become acquisition
target. See pp.44–45.
US_040-041_Buying_Selling_Business_OVERVIEW_Steve.indd 40 15/12/2014 12:55
40 41
SIZING UP M AND A’S
HOW COMPANIES WORK
Buying and selling business
Small Under $500 million
Mid-market $500 million
to $2 billion
Large $2 billion to
$10billion
Megadeal
Above $10 billion
Measuring a big deal
The corporate world categorizes acquisition
deals according to the capitalization size (the
value of the company’s shares).
Due diligence
Before any company sale, the potential buyers
see a detailed report prepared by lawyers,
covering key aspects of the target business.
Financial Identifies problem
areas that could affect the
future value of the company.
Legal Gauges possible legal
risks attached to corporate
status, assets, securities,
intellectual property, and
employee reshuffling.
Commercial Includes industry
trends, market environment,
the company’s capabilities,
and the competition.
Environmental Uncovers
potential liabilities such as land
or water contamination and
estimates remediation costs.
$311.5
mil lion
the average size of M and A
deals, globally, in 2013
T
a
r
g
e
t
c
o
m
p
a
n
y
Another company acquiring
Companies may want to expand by
joining with another business.
Merger
The company combines with
another company. See pp.42–43.
Acquisition
Horizontal The company buys
another company that makes
similar products.
Vertical The company buys
another company that makes
different products.
See pp.46–47.
$
$
$
$
$
$
$
$
$
$
$
US_040-041_Buying_Selling_Business_OVERVIEW_Steve.indd 41 21/11/2014 14:23
40 41
SIZING UP M AND A’S
HOW COMPANIES WORK
Buying and selling business
Small Under $500 million
Mid-market $500 million
to $2 billion
Large $2 billion to
$10billion
Megadeal
Above $10 billion
Measuring a big deal
The corporate world categorizes acquisition
deals according to the capitalization size (the
value of the company’s shares).
Due diligence
Before any company sale, the potential buyers
see a detailed report prepared by lawyers,
covering key aspects of the target business.
Financial Identifies problem
areas that could affect the
future value of the company.
Legal Gauges possible legal
risks attached to corporate
status, assets, securities,
intellectual property, and
employee reshuffling.
Commercial Includes industry
trends, market environment,
the company’s capabilities,
and the competition.
Environmental Uncovers
potential liabilities such as land
or water contamination and
estimates remediation costs.
$311.5
mil lion
the average size of M and A
deals, globally, in 2013
T
a
r
g
e
t
c
o
m
p
a
n
y
Another company acquiring
Companies may want to expand by
joining with another business.
Merger
The company combines with
another company. See pp.42–43.
Acquisition
Horizontal The company buys
another company that makes
similar products.
Vertical The company buys
another company that makes
different products.
See pp.46–47.
$
$
$
$
$
$
$
$
$
$
$
US_040-041_Buying_Selling_Business_OVERVIEW_Steve.indd 41 21/11/2014 14:23
Improved economies of scale
Wider operations streamline
production and sales.
Bigger market share
Combining the existing markets
expands share of the total market.
Diversification A different
product lineup gives the chance
to cross-sell or create more
efficient operations if the
products are complementary.
REASONS TO PURSUE
M AND A
How it works
Mergers and acquisitions (M and A)
is a general term used to describe
the ways in which companies are
bought, sold, and recombined. In
the case of either a merger or an
acquisition, two separate legal
entities are unified into a single
legal entity. While a merger
combines two companies on
a reasonably equal footing to
create a new company, which will
make both parties better off, an
acquisition is usually a purchase
of a smaller company by a larger
one. This benefits the company
making the purchase but may
not necessarily benefit the target
company. M and A can be friendly
or hostile—agreed to or imposed.
Mergers and
acquisitions
Two of the quickest ways to accelerate expansion are
for a business to buy out another—an acquisition—or
to amalgamate with another business in a merger.
A
A B
B
takes over
Company B
manufactures
luxury cars in Italy.
Company A
manufactures luxury
cars in the US.
Company A produces movies. Company B creates animations.
Merger
Acquisition
merges with
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42 43
how companies work
Buying and selling business
Pacman strategy The target
company tries to take over the
very company attempting the
hostile buyout
Swap ratio An exchange
rate between the value of
the shares of two companies
when merging
Defensive merger Undertaken
to anticipate a merger or takeover
attempt that threatens a company
Economies of scale Benefit to
company of M and A expansion
The target company’s board of
directors and management agree
to be bought out.
The acquiring company makes an
offer of cash or stock to the target
company’s board and management.
The stock or cash offer is set at a
premium level.
Because the offer is above actual
market level, shareholders usually
agree to it.
The acquiring company bypasses
management and goes straight to
the target company’s shareholders.
The target company’s management
fight the deal.
The buying company convinces
shareholders to vote out the
management (a proxy fight) or it
makes an offer to shareholders to
buy shares at an above-market price
(a tender offer).
a
a + B
New company A + B now has
an expanded market spanning
Europe and North America.
Expanded
company A
now has
in-house
expertise for
producing
animated films.
need to know
Friendly and Hostile
$112
billion
the record annual
spend by Japanese
companies on
overseas mergers
and acquisitions,
in 2012
US_042-043_Mergers_And_Aquisitions.indd 43 15/12/2014 12:55
42 43
how companies work
Buying and selling business
Pacman strategy The target
company tries to take over the
very company attempting the
hostile buyout
Swap ratio An exchange
rate between the value of
the shares of two companies
when merging
Defensive merger Undertaken
to anticipate a merger or takeover
attempt that threatens a company
Economies of scale Benefit to
company of M and A expansion
The target company’s board of
directors and management agree
to be bought out.
The acquiring company makes an
offer of cash or stock to the target
company’s board and management.
The stock or cash offer is set at a
premium level.
Because the offer is above actual
market level, shareholders usually
agree to it.
The acquiring company bypasses
management and goes straight to
the target company’s shareholders.
The target company’s management
fight the deal.
The buying company convinces
shareholders to vote out the
management (a proxy fight) or it
makes an offer to shareholders to
buy shares at an above-market price
(a tender offer).
a
a + B
New company A + B now has
an expanded market spanning
Europe and North America.
Expanded
company A
now has
in-house
expertise for
producing
animated films.
need to know
Friendly and Hostile
$112
billion
the record annual
spend by Japanese
companies on
overseas mergers
and acquisitions,
in 2012
US_042-043_Mergers_And_Aquisitions.indd 43 15/12/2014 12:55
How it works
The typical scenario for a divestiture
is a company that is struggling
to pay off debt it has taken on to
expand into new areas of business
that are not yet profitable. To
save the rest of the company from
the burden of debt, management
decides to start a divestiture.
Generally, the goal is to shed the
least profitable areas of operation,
or from the potential buyer’s point
of view, those which have promise
but are not yet profitable. The
process of restructuring by
divestiture is designed to free
the company of divisions with
low return, to reduce debt and
financing requirements, and to give
the shareholders a stronger return.
The market price of the parent
company’s shares often bounces
back strongly and its spin-off
companies may thrive too.
While a merger results in a bigger company, a divestiture reduces
the size of a business by breaking it down into smaller components
or divisions, which are then sold off or dissolved.
Divestitures
Divestiture in practice
Smith Industries Inc. is one example of an industrial paint conglomerate that has grown
rapidly over the past five years, due to an increase in profits from its expanding sales in
China. It diversified into agricultural chemicals, textiles, and biotechnology, and set up a
separate division for each. Share prices fell in response to poor financial performance.
Making a decision
Faced with a downturn in business, the company
divests the newer business areas that have not yet
shown strong returns despite positive signs of growth.
Announcing the sale
Smith Industries Inc. now announces the sale of its
three remaining divisions: agricultural chemicals,
textiles, and biotechnology.
Mondelez The spin-off of Kraft
Foods owns snack foods Oreos,
Ritz, and Trident.
Coach Sara Lee food’s spin-off
makes luxury leatherware.
Expedia Media company IAC
hived off online travel to Expedia.
SUCCESSFUL
SPIN-OFFS
Smith Industries Inc.
Smith Industries Inc.
TEXTILESAGRICULTURAL
CHEMICALS
BIOTECHNOLOGY
INDUSTRIAL
PAINT
INDUSTRIAL
PAINT
TEXTILES
AGRICULTURAL
CHEMICALS
BIOTECHNOLOGY
for salefor salefor sale
US_044-045_Demergers.indd 44 21/11/2014 14:24
44 45
how companies work
Buying and selling business
52%
the potential
rise in a parent
company’s
share price
following a
divestiture
One company becomes four
The three divisions are sold off to separate
investors and become three separate
companies. Shares for each are sold on the stock
market. The parent company is reduced to its
core business. Its share price rebounds.
The shareholders benefit
Shareholders in the original company also receive the same
percentage holding in shares from the three new companies.
Spin-off New company formed as
the result of a divestiture; also called
a hive-off
Tracking stock Special type
of shares issued by a parent
company for the division or
subsidiary they will sell; tracking
stock is tied to the performance
of the specific division rather than
the company as a whole; also known
as targeted stock
Letter of intent Letter stating
serious intention to do business,
often concerning M and A
Reverse merger Not to be
confused with a divestiture, this
is a quick and cheap method
for a private company to go
public by buying a shell stock—
a public company that is no
longer operating because it went
bankrupt or was simply closed.
Demerger Term commonly used
in the UK for divestiture
NEED TO KNOW
TEXTILESAGRICULTURAL
CHEMICALS
INDUSTRIAL
PAINT
BIOTECHNOLOGY
Smith Industries Inc.
West Inc.
Jones Inc. Brown Inc.
US_044-045_Demergers.indd 45 21/11/2014 14:24
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