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Unit 12: HRM in Cross-border Mergers and Acquisitions

12.1 Mergers and Acquisitions (M&A) Notes

Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and
management dealing with the buying, selling and combining of different companies that can
aid, finance, or help a growing company in a given industry grow rapidly without having to
create another business entity.
An acquisition is the buying of one company (the ‘target’) by another. It is also known as a
takeover or a buyout. An acquisition may be friendly or hostile.

1. In friendly, the companies cooperate in negotiations.
2. In hostile acquisition, the takeover target is unwilling to be bought or the target’s board
has no prior knowledge of the offer.

3. When a smaller firm will acquire management control of a larger or longer established
company and keep its name for the combined entity, it is called reverse takeover.
4. When a deal enables a private company that has strong prospects and is eager to raise
financing buys a publicly listed shell company, usually one with no business and limited
assets to get publicly listed in a short time period, it is called reverse merger.
Achieving acquisition success has proven to be very difficult as it is a complex process with
many dimensions influencing its outcome:
1. The buyer buys the shares and control of the target company it purchases. Ownership
control of the company conveys effective control over the assets of the company.
Simultaneously, it carries with it all of the liabilities accrued by that business over its past
and all of the risks that company faces in its commercial environment.
2. The buyer buys the assets of the target company for which they pay cash to the target
company. The cash the target receives from the sell-off is paid back to its shareholders by
dividend or through liquidation. This type of transaction leaves the target company as an
empty shell, if the buyer buys out the entire assets.
3. A buyer often structures the transaction as an asset purchase to “cherry-pick” the assets
that it wants and leave out the assets and liabilities that it does not. This can be particularly
important where foreseeable liabilities may include future, unquantified damage awards
such as those that could arise from litigation over defective products, employee benefits
or terminations, or environmental damage.
4. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the
United States, impose on transfers of the individual assets, whereas stock transactions can
frequently be structured as like-kind exchanges or other arrangements that are tax-free or
tax-neutral, both to the buyer and to the seller’s shareholders.

!
Caution Merger is a combination of two companies into one larger company. It is
commonly voluntary and involves stock swap or cash payment to the target. A merger
can resemble a takeover but result in a new company name (often combining the names of
the original companies) and in new branding. There are various types of mergers:

1. Horizontal merger: Two companies that are in direct competition and share similar
product lines and markets (example: Sirius/XM)
2. Vertical merger: A customer and company or a supplier and company. (Example: an
ice cream maker merges with the dairy farm whom they previously purchased milk
from; now, the milk is ‘free’)

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