Mergers and acquisitions are the consolidations of companies. Mergers are the joining of two firms organizations to form one, while the acquisition is one firm taking over another company. Mergers and acquisition is a key aspect of corporate finance world(Davis 48). The reason for Mergers and acquisition is that two firms joint create additional value compared to being solo. With wealth maximization objective, companies analyzing various opportunities through acquisition and merger route. Mergers and acquisitions can occur by purchase assets or common shares, exchanging shares for assets, or exchanging shares for shares (Davis 48).

Amalgamation or merger may assume two forms; merger through consolidation or merger through absorption. In addition, merger s can be categorized into three types based on economic point of view, and this may depend on the business combinations, whether in a similar industry or not, into vertical (at different value chain or production stages), conglomerate (dissimilar industries), and horizontal (the two companies are in similar industry). From a legal point of view, there are various types of mergers such as a statutory merger, short-form merger, merger of equals, and subsidiary merger (Davis 50).

There are various for Mergers and acquisitions:

• Economies of scale
• Financial synergy especially lower capital cost
• Diversification mainly for higher market or products growth
• Enhancing the performance of a company as well as growth acceleration
• Tax considerations
• Technological change and strategic realignment
• Undervalued target
• Tax considerations
• To increase positioning and share providing broader access to the market.
• Risk diversification

 

There is the value of synergy created when two companies are merged or joined. The synergy value is evident in expenses (reduced expenses), revenues (higher revenues), or the capital cost (lowering the overall capital cost) (Miller et al. 20). Three key factors must be considered during merger and acquisition are :

• The firm must be ready to take all the risk as well as watchfully make investments to benefit entirely from the merger since competitors, and the industry quickly takes heed.
• To minimize and diversify risk, there is a need for multiple bets to zero to business that will be lucrative (M. Ramanuj 132-134).
• The acquiring firm management has to learn to be patient, resilient as well as be in a position to adopt the change due to ever-changing dynamics of business in the industry.

Stages involved in any Merger and acquisition are :

Phase 1 which is the pre-acquisition review consist of self-assessment of company acquisition with regards to the need for merger and acquisition, determine the value and chalk out the plan for growth through the target.

The second phase is the search and screen targets, which involves searching for the potential appropriate takeover candidates. The process majorly scans for an excellent strategy fit for the company acquisition.

The third phase involves target investigation and valuation. Once the right company or firm has been shortlisted through primary screening, a detailed analysis is conducted on the target firm a process also described as due diligence. (J.M. Ramanuj 132-134).

The fourth phase involves target acquisition through negotiations. Once the target firm has been selected, negotiation begins to come into agreement for a bear hug or negotiated merger.  This brings firms to mutually agree to the deal mainly for the long-term working if merger and acquisition.

The fifth phase is the post-merger integration. In the event the four steps described above are successfully completed, there is an official announcement of the merger agreement by both involved companies.

In Canada, there are two common forms employed to structure mergers as well as acquisitions of private business that is assets purchase transactions and share purchase transactions.  In a share purchase transaction, purchasers buy majority or all the issues as well as outstanding shares of the target company from its shareholders. An asset sale usually includes the negotiated assets purchase an in most situation the assumption of particular liabilities of a corporation without acquiring the body that owns them. An asset purchase transaction is usually typical when just one division or property is of interest or when the new owner desires to cap exposure of legacy liability(May, and Boyd).

Based on various conditions, other more convoluted methods of merger and acquisitions might be employed. For instance, where the target has huge number of option holders or shareholders, arrangement or amalgamation under the applicable company statute might be the finest way of completing the process of acquisition. An amalgamation entails the merger of acquiring a company or a subsidiary with the target firm. An arrangement plan is always a quite flexible process allowing property transfers, articles amendment, as well as exchange of shares or other ventures and dealings with the shareholders’ interests and rights offered that the shareholders’ approval ( and in certain situation other securities holders), as well as the approval of the court, has been acquired. A hybrid transaction is another form, and it involves the seller receiving the benefits associated with selling shares and the buyer receiving benefits related to purchasing the assets(May, and Boyd).  For instance, one can structure the transaction such that the buyer profits from the step-up in the price base of tax depreciable assets whereas the seller still capitalize on it following tax cash ensues from the transaction.

The selected form to be applied in a given case is a threshold matter established by negotiation between the seller and the buyer as well as is influenced by the input of tax advisers of each party.

Based on tax factors, buyers prefer asset transactions while the sellers often prefer share transactions.  In addition, both parties should not that asset transactions are more multifaceted than share transaction because they need parties to transfer a larger number of diverse assets as well as acquire a larger number of consents(May, and Boyd).  However, the only practical structure especially when parties involved wish to transfer some assets of accompanying, asset transaction. Besides, the extra due diligence needed for a share transaction often imposes longer pre-acquisition periods.

 

Due diligence

Due diligence is a process that a buyer undertakes to familiarize itself with the business and the assets of the target or seller.  Due diligence scope varies based on the business nature under acquisition, the industry wherein the business or company operates as well as other business and legal considerations. Besides, the acquisition structure dictates the due diligence nature. Legal due diligence in share transaction involves:

• Reviewing the records of the Target Company or corporation
• Public searches in link with company status, litigation, and encumbrances
• Reviewing particular governmental records about the target firm that can be accessed only through the written approval of the target company ( related for instance to the environment, employment, or tax);
• Reviewing any agreement or contract to which the target company is actually a party; and
• Other diligence based on the nature of businesses of the target company

Company records require reviewing to confirm the type and the number of issued shares of the target company.  Reviewing the records especially the minute of the board of directors can offer valuable acumen about the business of the target company andcan aid unearth possible liabilities that could be addressed before the acquisition closure(May, and Boyd).

In an asset transaction, due diligence is parallel to share transaction although it focused on issues that are linked to liabilities or assets being assumed/acquired.  Non-legal due diligence focuses on management, operational, financial, accounting/tax matters, and administrative and is undertaken in all acquisitions.

 

 

 

 

Regulatory approvals

1. Competition Act and Investment Canada Act

Investments or acquisitions that surpassed a particular thresholdare bound by the review under Competition Act (pre-notification), and Investment Canada Act. Canadian Merger and acquisition depend on the principles of a free market with least regulatory involvement.

Tax matters

Acquisition vehicle and using Canadian subsidiary

Normally, a non-Canadian buyer willinclude a Canadian subsidiary as the acquisition tool. Using Canadian subsidiary server several business reasons such as protecting the buyer form the target/seller activities, and provides related tax advantages.

The use of a Canadian subsidiary serves a number of business purposes, including protecting the buyer from the activities of the seller/target and offers related tax advantages. The tax benefits may include:

• The facilitation of the interest deduction on the financing for acquiring against the Canadian target income (May, and Boyd).
• The creation of high paid-up capital in Canadian subsidiary shares to facilitate fund repatriation back to  foreign parent company free of the country withholding tax; and
• non-Canadian parent corporation free of Canadian withholding tax; and
• Buyer positioning for a likely “bump” in the tax cost of the Canadian non-depreciable capital property of the target.

To exploit these benefits, it may require performing a subsequent merger of the acquisition tool as well as a Canadian target.  Care should be taken when designing Canadian subsidiary share structure and planning for it to be financed and capitalized properly for acquisition more so in relation to Canadian dumping rules of the foreign rules. Where there is only an acquisition of assets and not shares, it is more critical to use Canadian subsidiary. If the foreign buyer purchases Canadian company assets and continues the business or company directly, it will be fully liable for liabilities and debts incurred in continuing the business operations. In addition, it will be liable for the country tax on the revenue from those assets as well as any business conducted outside Canada as well as is required to file income tax returns of Canada annually, reporting its revenues and incomes from Canadian operations. Acquiring assets with the help of the Canadian subsidiary and conducting the Canadian operations, task the subsidiary with the role of paying tax on the generated income and reporting instead of the foreigner parent.

The main private acquisition document includes:

• Disclosure schedules that qualify the warranties and representations in the purchasecontracts created by the seller.
• The purchase agreement of an asset or share, typically prepared by the buyers, except in the auction case where the seller actually original template.
• Conveyance documents prepared by the buyer
• Based on conditions, a transition services agreement, drafted by the buyer.

The main substantive clauses in an acquisition contract in Canada revolve around the asset or share purchase agreement are:

• The amount and type of consideration being paid as well as payment timing and manner.
• Warranties and representations covering a diverse financial and business matter
• A mechanism for the adjustment of purchase price
• The parties pre-closing covenant with regards to the company during that time
• Applicable post-closing covenants.
• Indemnification provisions

Game theory is basically a mathematical structure created to address issues with cooperating or conflicting parties who can make decisions which are rational. The theory mainly revolves with the finding of the optimal rational decisions in different cases.  Many corporations are turning to game theory to assist them to make strategic decisions. Game theory involves using advanced mathematical models in assessing various game situations available to various parties such as regulators, suppliers, and competitors to predict the possible outcomes. Game theory is an old concept.  Political scientists, military, and economist have employed Game theory principles since the 1950s. In the 1980s, businesses started using game theory to assist them to make Merger and acquisition, labor negotiation, product, and pricing decisions. While the math may seem obscure as well as divorced from corporate reality, it is apparent that game theory tool is usually great decision support tools.

Merger and acquisition transaction that involve many participants, as well as biddings strategies, are perfect applications of game theory because the decisions bled both financial and strategic inputs as well as consideration.  Potential Merger and acquisition deals use sequential games, which would be played, gradually over a span of time. In such a scenario, the potential players’ number, as well as the actions they would assume, might produce multiple possible results for the management to contemplate. To deal with this intricacy, a sophisticated but a simple to understand software algorithm which models the type of decision that a corporation should take— taking into account the possible behavior of others— to achieve its goals.

The merger and Acquisition, model with two individuals is piecemeal information on a game between the acquirer and target. In this case, both players should agree to an acceptable price to purchase the target firm by the acquirer. The detailed type of this game explains three stage games between the target and acquirer or seller.  In this target game, target selects either reduced bid strategy or increased bid strategy. The game induces tow possible rides. These are connected to likelihoods associated with the predicted behavior the acquire in which it is either risk-averse or risk-taking or not and whether the target is pessimistic or optimistic (Agarwal et al., 10).

Based on the anticipated behavior the target or acquirer can display likelihoods are assigned. If such likelihoods change, then the game equilibrium point also changer. Before moving to detailed analysis, it must be notedfirst that pay off for very strategy is relative to another strategy. Thus, the increase bid strategy can have a ±1 payoff. Prospect theory can be applied I these cases, according to the theory, people prefer positive events two times as much as negative events (Jiang et al. 4).

A game theory analysis is especially instrumental at early stages of Merger and Acquisition planning. Open options have assisted companies to expect reactions of competitors when taking into account acquisitions as well as divestitures. In addition, the open option has assisted firms influenced industry mergers to optimize their ultimate position.

 

Two-person M & A model with complete/full information

This is a two-person game between the seller (target) and the buyer (acquirer). Under the game, the buyer gives a price to buy the target (which is referred to both the target and acquirer in the complete information game) as well as it is possible to negotiate the price (that is reduced or increased) by the buyer and (kept stable or increased by the) seller until the attainment of a final price.  Under the model, just three  negotiations iterations are considered: the buyer will commence at a price from which he will either decrease or increase the offer, the seller can the request for an increase— since the seller would prefer to be paid more to sell— or maintain the same price (where the seller cannot obtain a higher selling price).  Lastly the acquirer or buyer can increase if he requires to pay more to buy the target or reduce the price if the buyer can decrease the price because of a negative change in the situation of the target, as might take place in business practice in an acquisition or merger case (Baker et al. 56).

The purpose of the two-person merger & acquisition model with incomplete/ complete information is to establish the saddle point of this game that would establish as well as explain the suitable to target and acquirer to complete this deal. The saddle point is basically strategies set that conform to the stable equilibrium state that players would play to best their optimal outcome (Agarwal, and Zeephongsekul 34)

Two-person Merger and Acquisition model with incomplete information

Considering a two-person merger and acquisition game where there is incomplete information with the conditions that both acquirer and target are unaware of the type of other parties that is the likelihood that the buyer will select reduce bid or increase bid or the seller will select stable bid or increase bids. In daily business practice, target and acquirer firms do not disclose their expected offer as well as bid prices since they prefer to keep their opponents guessing how much they are willing to pay or the total amount they want before accepting the offer (Van den Honert 45).  This can happen because of multiple factors such as the seller is unwilling to provide a low price since it can obtain a higher price in the case the buyer can pay more. On the same note, the buyer is unwilling to disclose his projected offer price due to his aversion to paying too much for buying the target firm.  Bother the target and acquirer firm will make an effort to find out exactly what the anticipated bid and offer price their rival has in mind and then they will attempt to offer a price that suits them and they will negotiate their way to an equilibrium price (Agarwal, and Zeephongsekul 34)

 

References List

Agarwal, Nipun et al. “Behavioral Merger And Acquisition Pricing: Application To Verizon Mergers With AOL And Yahoo.” Strategic Change, vol 27, no. 1, 2018, pp. 9-21. Wiley, doi:10.1002/jsc.2176.

Agarwal, Nipun, and PanlopZeephongsekul. “Psychological Pricing In Mergers & Acquisitions Using Prospect Theory.” Studies In Economics And Finance, vol 30, no. 1, 2013, pp. 22-30. Emerald, doi:10.1108/10867371311300937.

Baker, Malcolm et al. “The Effect Of Reference Point Prices On Mergers And Acquisitions.” Journal Of Financial Economics, vol 106, no. 1, 2012, pp. 49-71. Elsevier BV, doi:10.1016/j.jfineco.2012.04.010.

Davis, Danny. M & an Integration-How to Do It: Planning and Delivering M &an Integration for Business Success. Chichester, Sussex, UK: Wiley, 2012. Internet resource.

J.M. Ramanuj, J.M. Ramanuj. “Introduction Of Merger, Acquisition And Divestitures”. Paripex – Indian Journal Of Research, vol 3, no. 6, 2012, pp. 132-134. The Global Journals, doi:10.15373/22501991/june2014/42.

Jiang, Yanqing et al. “A Game Theoretic Study Of Enterprise Mergers And Acquisitions: The Case Of RJR Nabisco Being Acquired By KKR.” Business And Management Studies, vol 2, no. 2, 2016. Redfame Publishing, doi:10.11114/bms.v2i2.1552.

May, Neill, and Leah Boyd. “Private Mergers And Acquisitions In Canada: Overview”. Content.Next.Westlaw.Com, 2015, https://content.next.westlaw.com/Document/Ie81daf341f1d11e598db8b09b4f043e0/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true&bhcp=1.

Miller, Edwin L, and Lewis N. Segall. Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. Hoboken, New Jersey: Wiley, 2017. Print.

Van den Honert, Robin Charles. “GAME-THEORETIC MODELS FOR MERGERS AND ACQUISITIONS.” UNIVERSITY OF CAPE TOWN DEPARTMENT OF STATISTICAL SCIENCES, 1995, https://open.uct.ac.za/bitstream/handle/11427/22556/thesis_sci_1995_van_den_honert_robin_charles.pdf?sequence=1. Accessed 20 Jan 2019.

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