Mergers, Acquisitions and Corporate Restructurings

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Table of Contents

Introduction
Cash and Securities as payment modes
Private Equity Funds
Employee Stock Ownership Plans
Spin-offs, equity carves-outs, and tracking stocks out
Conclusion
Works Cited

Introduction

Instances of businesses purchasing their competitors or coming together to be more competitive are common occurrences in the business sector. Microsoft’s $45 billion proposed acquisition of Yahoo is one of the largest of such transactions. This venture offers a 62% t premium to present trading value for Yahoo. In the case of mergers, two or more firms join and come up with a new firm. In the case of acquisition, one firm buys another or other companies. Both mergers and acquisitions lead to a restructuring of the company’s administrations and operations. Merges and acquisitions are very strategic transitions for companies to enhance their performances and competitions. Although, initially it may negatively affect the new institution, in the long term it’s very profitable.

Cash and Securities as payment modes

When firms bid for acquisitions of others, they may choose to use cash or securities to settle transactional costs involved in the event a deal is reached. Usage of cash; a more prompt form of payment, is a preference to bidders who want to resolve any uncertainty about the transaction and maybe to gain potential investors confidence or to portray the bidder’s seriousness on the offer (Bruner 535). This could though be interpreted as a lack of confidence by target shareholders in the buyer’s future management of the enterprise if left in their hands and hence a call to the certainty of change of ownership. Securities such as common and preferential stocks whose values are less certain are also used to pay for acquisitions. The stocks may significantly vary in value upon announcement of the merger hence the form of payment calls for investors ready to participate in the future of the newly formed company.

Private Equity Funds

Historically, mergers and acquisitions involved the direct purchase of one operating firm by another. In the current takeover market, private equity funds (PEF) have played various important roles in the acquisition activity such as raising large equity capital from investors (Fruhan par. 4). This is easily attainable since PEFs receive deposits from a large pool of investors and control the type of investments the monies are engaged in. They also bid for and acquire operating firms as an investment using the equity capital together with borrowings that may be several times the equity capital they invest. Private equity funds normally change the acquired company’s management incentive scheme to give the management team a share of any shareholder’s wealth they successfully create. The board of directors of the operating firm gets to be dissolved and replaced by general partners of the PEFs who have a stake in the success of the firm. This is mostly to provide ultra motivation for success making the operating companies be managed in a manner as to generate maximum cash flow, before being resold within three to five years for a large capital gain.

Employee Stock Ownership Plans

Contrary to the common notion that employee stock ownership plans (ESOPs) are normally used for saving troubled companies, only a few of such plans are set up annually. Instead, ESOPs are more frequently used by successful business owners who no longer wish to retain their status in the business as a way of getting out of the company while rewarding employees and ensuring their commitment to the business. This sometimes helps a company generate the required capital for a takeover bid in the acquisition process. ESOP can also be accomplished by allowing the company to buy stock directly or giving stocks as a bonus for work well done. British banks that were bailed out by their government during the recent financial crisis currently use this method to pay for bonuses. Through the process, employees who get the stocks become shareholders and have a say in the decision-making process of the business. In case of a takeover, the employees can support or oppose the move since they have voting rights and are also extra motivated to work for they not only benefit from their salaries but also share the profits as partial owners through dividends (Fruhan par.5).

Spin-offs, equity carves-outs, and tracking stocks out

“A spin-off is the creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company” McClure (par. 1). A carve-out occurs when a business sells a minority stake in its subsidiary as an IPO or a rights issue and the percentage sold off is normally twenty or less. Tracking stock is issued by a company to trade in the stock exchange to measure the independent performance of a particular subsidiary. Businesses that are restructuring their operations can carry out spinoffs with the involved divisions expected to be more worthy independently than as parts of the larger business. Once the spin-off performance is confirmed as satisfactory, the remaining stake then undergoes the same at a later date and higher stock price. If a restructuring firm issues tracking stock, then the subsidiary concern has its entire activities separated from the parent business, and the tracking stock does not portray the entire performance of the company but of the specific division (McClure par. 4).

Conclusion

Based on the above circumstances, restructuring is inevitable in firms and in most cases tuned for the betterment of the specific companies that undertake it. A dynamic and innovative company with versatile employees has a competitive edge in a challenging market environment. Restructuring, therefore, improves performance, and mergers and acquisitions are some of the ways of achieving it.

Works Cited

Bruner, Robert. Applied Mergers and Acquisitions. New Jersey: John Wiley & Sons, 2004. Print.

Fruhan, Williams. “The Role of Private Equity Funds in Mergers and Acquisitions”. Harvard Business School. 2006. Web.

McClure, Ben.”Spinoffs”. Investopedia. 2010. Web.

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