Disadvantage of Acquisition

Marginal success record

Overconfidence in ability
Key employee often lose
Overvalued

Structuring the Deal

Common means of acquisition
Direct purchase of firms entire stock
Bootstrap purchase

Locating acquisition candidate

Accountants
Bankers
Business Associate
Brokers

Mergers

Survival
Requirement
Capital
structure
deterioration
Technological
obsolescence
Loss of raw
material
Market Loss

Protection
against

Diversification

Market
infringement
Lower cost
position of
the
competitor
Product
innovation

Countercyclic
al
International
operations
Multiple
strategic
plans

Fig: Merger Motivations

Gains in
Market
position
Technological
edge
Financial
strength

Pros and Cons

Pros

Economies of scale
R&D
Avoid duplication
Speed to market

Cons
High cost involved
Integration issues
Unrelated diversification

Leveraged Buyouts (LBO)

Borrowed fund to purchase an existing venture for cash
Great amount of external funding required
Long term debt financing
High financial risk

Characteristics of a Good LBO Candidate

Strong, predictable operating cash flows with which the
leveraged company can service and pay down acquisition debt
Well-established business and products and leading industry
position
Moderate CapEx and product development (R&D) requirements
so that cash flows are not diverted from the principle goal of
debt repayment
Limited working capital requirements
Strong tangible asset coverage
Seller is motivated to cash out of his/her investment or divest
non-core subsidiaries, perhaps under pressure to maximize
shareholder value
Strong management team
Viable exit strategy

Pros and Cons

Interest payments on debt are tax deductible, while
dividend payments on equity are not. Thus, tax shields
are created and they have significant value.
Large principal and interest payments can force
management to improve performance and operating
efficiency.
Increase in fixed costs from higher interest payments
can reduce a leveraged firms ability to weather
downturns in the business cycle.