UNIVERSITY OF ZIMBABWE

FACULTY OF BUSINESS MANAGEMENT SCIENCES AND ECONOMICS

DEPARTMENT OF FINANCE AND ACCOUNTING

ADVANCED CORPORATE FINANCE (BSFB401)

Name: Mambodza Tinashe

Reg. number: R175367E
Program: Finance and banking (HBBSFINBC)
Lecturer: Mr. P. Bhasera

Level: 4.1
Assignment: 1 (individual)
1) As a Senior Investment Banker in the Mergers and Acquisition Department of a leading
merchant bank in Zimbabwe, you have been approached by a brick manufacturing firm that
has been targeted for acquisition by a cement manufacturing firm. The directors of the brick
manufacturing company are doubting the prospects of this arrangement and have
approached you for advice.

a) Explain any four factors you would consider in evaluating whether the acquisition deal is
beneficial to the target company or not (15)
Introduction
Acquisitions have been confirmed to be a key method in achieving organization’s growth,
diversity, and profitability. Several researchers endorse that Acquisitions are appealing to
organization that seek to increase their market share and profit by uniting with or taking over
another one (Chatterjee, et al 1992; Cartwright and Cooper, 1993; Sudarsanam, 1995;
Wullaerts, 2002; Schmidt, 2015; Friedman, et al 2016). However, misconduct of Acquisitions
practices has led to the high failure rates (Krug, Wright, and Kroll, 2014). It is found that “a 1
percent loss in return on investment can lead to hundreds of millions of dollars in lost
shareholder value” (Chanmugam, et al 2005). Thus, the fundamental aspect to accomplishment
of merger and acquisition is a coherent planning for the transition. Organizational vision,
missions, and its new strategic plan should be developed and shared with the acquiring and the
acquired company for an effective and efficient transformation process. It is also claimed that
mergers and acquisitions involve organizational changes be prepared in one or both
organizations for strategic benefits to be recognized (Schweiger, Csiszar, and Napier, 1993).

An acquisition occurs when one company takes a controlling ownership interest in another firm,
a legal subsidiary of another firm, or selected assets of another firm such as a manufacturing
facility (DePamphilis, 2003). In other words, an acquisition is the purchase of an asset such as a
plant, a division, or even an entire company (Scott, 2003). For instance, the cement
manufacturing company here has interests to acquire the brick manufacturing company taking
over its ownership and therefore the smaller company is consumed and ceases to exist with its
assets becoming part of the larger company. A target company refers to a company chosen as an
attractive merger or acquisition option by a potential acquirer which is the brick manufacturing
company in this case. An acquisition can have both advantages and disadvantages to the target
company, therefore several are factors have to be considered in evaluating the acquisition deal
before making a decision.
i) Market impact
Market impact is the effect that combining the brick manufacturing company with the
cement manufacturing company will have on market behaviours. For example, being taken
over means the brick company ceases to exist and its name is dissolved, as a result, brand
loyal customers are lost. There might be a very sharp fall in the total sales of bricks at a
given time due to a change in company setup and way of operation. Also, there might be
changes in payment terms for regular customers which may have been offered credit
facilities due to change of management. Consequently, market share of the brick
manufacturing company decreases. However, a combined company may also generate
higher value for customers by offering a broader product line, simplifying terms or raising
the overall quality and service levels in the market.
ii) Company objectives.
The target company may have different objectives than the acquirer. In fact, this is likely,
because the two companies have been operating independently up until the acquisition. For
example, the cement-making company may embrace the objective of expanding in to new
markets, while the brickmaking company may be in pullback mode, with the objective of
reducing costs. There is bound to be resistance if an acquisition comes into fruition
especially when the acquirer tries to spend on marketing initiatives. The target company
should consider the coherence between its strategic goals with that of the cement
manufacturing company. If the goals of the brick manufacturing company perfectly align
with the goals of the cement manufacturing company, then the acquisition will be beneficial
to the target company. However, disparities in strategic goals will result in conflicting
interests and poor synergy which then proves the acquisition not beneficial to the target
company (Jarrel, 1985).
iii) Motive
While an acquisition can create substantial and rapid growth for the brick-making company,
it can also cause some problematic issues along the way. It is crucial to understand the
motive of the acquirer’s in acquiring the brick manufacturing company. The knowledge of
the rationale for the acquisition is pivotal to the target company as it clearly articulates the
intentions or interests of the acquirer in the target firm (Jarrel, 1985). These interests can be
analysed to see if they converge with the interests of the target company. For instance, PPC
 Limited might be interested in MacDonald Bricks (Private) Limited in order to diversify and
enlarge its market by integrating its cement manufacturing with brick manufacturing. They
might also want to make use a significant proportion of the cement they produce by making
concrete blocks as a value addition strategy. In this case, the motive is clear and has
economic benefit to the target company. However, if PPC is on a tax evasion scheme and
tries to acquire a loss making entity to act as a tax shield, assuming MacDonald Bricks is
making losses, the acquisition becomes less economically beneficial to the target company
which might be also trying to aligning its strategies towards making profits.
iv) Economies of scale
The principle of economies of scale states that the joint costs of producing two
complementary outputs are less than the combined costs of producing the two outputs
separately (Casu et al. 2006). The economies of scale come from shared information
technology, supply chain efficiencies, patents and improved research and development
(Kaur, et al 2007). The benefits that will come to the brick manufacturer if the acquisition is
successful include the increased access to capital, lower costs as a result of higher volume,
and better bargaining power with distributors. If the target company finds that the cement
manufacturing firm has the capacity to contribute to the identified economies then the
acquisition will likely be beneficial to the target company. If the increase in scope is likely
to increase cost of doing business, the acquisition should be rejected.
v) Conclusion
In conclusion, target company management needs to look at various factors that would
impact the success or failure of acquisition at various levels. Sensitising managers to these
factors would contribute to the success of an acquisition. It is equally important to have an
adequate performance management system that would assess the success of acquisition
through integration, operational, cultural and financial measures (Wolf, 2003). While
various streams may take a partisan view of measures of success, an integrative assessment
is required to assure the long term success .The target company should due diligence on the
acquisition deal to establish the merits of the acquisition to its overall existence. As such,
factors including company objectives, market impact and economies of scale have been
identified which the target company should consider before accepting or rejecting the
acquisition deal.
b) Assume that the evaluation in (a) above reveals that the acquisition is not beneficial to the
target company, discuss any four defensive tactics the target company may use to block
the planned acquisition (15 marks)
Introduction
Undoubtedly today we live in a time of significant economic change. Mergers and acquisitions
have become common business tools, implemented by thousands of companies in world. Driven
by a philosophy of shareholder value they not only form a new economic, social and cultural
environment, but also enable strong companies grow faster than competitors and provide
entrepreneurs rewards for their efforts, ensuring weaker companies are more quickly
swallowed, or worse, made irrelevant through exclusion. This calls for the brick manufacturer
to perform due diligence on the prospective acquisition. After discerning and determining the
acquisition as an uneconomical stride, there are several strategies they can implement in trying
to stop the acquisition.
i) Crown jewel defence
Crown jewels refer to the most valuable unit(s) of a corporation as defined by characteristics
such as profitability, asset value, and future prospects. This could be the line of business that
produces the most popular item that a company sells, or perhaps the department that holds
all of the intellectual property for a project that is thought to be of great value in the future
once it is finished (Auerbach, and Ruback, 1987). The crown jewel defence strategy
involves selling the most valuable assets of a target company to a third party or spinning off
the assets into a separate entity. For example, Macdonald Bricks might sell their brick-
making machine. The main goal of the crown jewel defence strategy is to make the target
company less attractive to the corporate raider.
ii) Pac-Man defence
The Pac-Man Defense is a strategy used by targeted companies to prevent a hostile takeover.
This takeover prevention strategy is implemented by the target company turning things
around by trying to take over the acquirer (Wasserstein, 1988). The Pac-Man defence occurs
when a target company attempts to acquire its potential acquirer when a takeover bid has
already been received. Just as the acquirer is attempting to buy up a controlling amount of
shares in the target company, the target likewise begins buying up shares of the acquirer in
an attempt to obtain a controlling interest in the acquirer. Of course, such a strategy is only
workable if the MacDonald Bricks has enough financial resources to purchase the required
 number of shares in PPC. The acquirer, seeing control of its own firm threatened, will often
cease attempting to take over the target.
iii) Poison pill
The poison pill defence refers to the creation of securities by the target company that
provide holders with special rights exercisable only after a certain period at the back of a
triggering event (Kidder et al, 1986). The process includes the dilution of shares of the
target company in order to make it more difficult and expensive for a potential acquirer to
obtain a controlling interest in the target. The flip-in poison pill is the issuance of additional
shares of the target company, which existing shareholders can purchase at a substantial
discount. The flip-over poison pill provides an opportunity for target company shareholders
to purchase shares in the acquiring company at a significantly discounted price. A triggering
event can be a tender offer for control or accumulation of a specified percentage of target
shares by the cement manufacturing firm in this context. This threatens to drastically dilute
and devalue the stock of the acquiring company and its ownership interests in the target
company thus making the acquisition tender offer prohibitively expensive. Resultantly, the
acquiring company is forced to offer better terms for the takeover or to scrap the takeover
attempt altogether. However, the stock value dilution requires shareholders of the target
company to purchase new shares just to keep even, failure of which the acquirer can
purchase the majority of shares. Also, the tactic does not block all acquisitions but gives the
target company ground to bargain for more friendly terms.
iv) White knight defence
The white knight defence is a strategy that involves the acquisition of a target company by
its strategic partner, called a white knight, as it is friendly to the target company. This is
generally a strategy of last resort. The target company accepts the fact of being taken over,
but can at least opt to be taken over or merged with a friendly company, as opposed to being
the victim of a hostile takeover. A white knight is a company that acquires another company
that is trying to avoid acquisition by a third party. For example, PPC wants to acquire
MacDonald Bricks such that they take over the latter. MacDonald Bricks feels that PPC is a
hostile bidder and will ruin the company hence as a result, MacDonald Bricks directors go
on the offensive and tell the shareholders that a sale to PPC would not be a good thing.
Lafarge, which has worked with MacDonald Bricks for years and has a good relationship
with the latter’s board, sees an opportunity to "save" MacDonald Bricks from the tense
situation and make a lucrative acquisition at the same time. MacDonald Bricks welcomes
 the Lafarge bid and merges with it to avoid acquisition by PPC. Lafarge is referred to as a
white knight and white knights make acquisitions on friendly terms. White knights are white
because they are associated with goodness and virtue. The white knight is the "saviour" of a
company in the midst of a hostile takeover. Often a white knight is sought out by company
officials for MacDonald Bricks sometimes to preserve the company's core business and
other times just to negotiate better takeover terms. Generally the MacDonald Bricks will be
saved from the hostile takeover and able to negotiate with a favourable company which they
have closely work with and their motives or strategies match.

v) Conclusion
From the buyer point of view, strategic motives to undertake Acquisitions deals are primary
related to decision quickly grow (as opposed to slow growth through their own resources)
and to get the access to intangible assets, namely, human capital, structural capital and
customer capital. Other additional motives include the achievement of synergies, adjustment
to changes, undervalued assets, mismanagement problems, and tax savings. From the seller
point of view, the strategic motives to sell the business include the decision to turn equity
into cash, growth maximization, and peak in valuation, owner’s retirement, lack of access to
capital (Tamosiuniene, and Duksaite, 2009). Corporations have many hostile takeover
defence mechanisms at their disposal hence the corporates should encourage the
management to put in place pre-emptive corporate takeover mechanisms even if their
company is not currently being considered for acquisition. Managers of firms can
implement a plethora of defences in a bid to block the planned acquisition by the hostile
company. The identified defences above namely poison pill, super majority, staggered board
and golden parachutes vary in their effectiveness of defending the target company against a
potential acquisition.
References

1) Casu B., Giradone C. and Molneux P. (2006) Introduction to Banking, 1st Ed, and Pearson
Education Limited. United Kingdom.
2) Flyvbjerg, B., (2006) From Nobel Prize to Project Management: Getting Risks Right. Project
Management Journal, vol. 37, no. 3, August 2006, pp. 5–15

3) Hopkins H. T. (1989) Profitable Acquisitions, Kluwer Academic Publishers, Norwell.

4) Jarrel G. A. (1985) The Wealth Effects of Litigation by Targets: Do Interests Diverge In a
Merge? Journal of law and Economics 28(April): 151-77
5) Kidder P. et al. (1986) Impact of Adoption of Stakeholder Rights Plans on Stock Price. June.
6) Lambert R. A. (1985) Golden Parachutes: Executive Decision Making and Shareholder
Wealth. Journal of Accounting and Economics 7: 179-2013
7) Mikkleson W. and Ruback S. (1985b). Takeovers and Managerial Compensation: A
Discussion. Journal of Financial Economics 14 (December): 523-53.
8) Andrade, G., Stafford, E. 2004. Investing the economic role of mergers, Journal of Corporate
Finance 10: 1-36.
9) Cassiman, B., Colombo M.G. 2006. Mergers and Acquisitions: the Innovation Impact.
Edward Elgar Publishing.
10) DePamphilis, D. 2003. Acquisitions and Other Restructuring Activities: An Integrated
Approach to Process, Tools, Cases, and Solutions. Butterworth-Heinemann.
11) Faulkner, D.O., Campbell, A. (2003). Oxford Handbook of Strategy, Volume II: Corporate
Strategy. Oxford University Press.