Takeovers, mergers and buyouts

Mergers and acquisitions
1a Vocabulary
Match up these words with the definitions below.
backward integration to diversify (diversification) forward integration horizontal integration to innovate (innovation) to merge (a merger) a synergy a takeover bid vertical integration
1 designing new products and bringing them to the market
2 to expand into new fields
3 to unite, combine, amalgamate, integrate or join together
4 buying another company's shares on the stock exchange, hoping to persuade enough other shareholders to sell to take control of the company
5 a public offer to a company's shareholders to buy their shares, at a particular during a particular period, so as to acquire a company
6 to merge with or take over other firms producing the same rype of goods or
7 joining with firms in other stages of the production or sale of a product
8 a merger with or die acquisition of one's suppliers
9 a merger with or the acquisition of one's marketing outlets
10 combined production that is greater than the sum of the separate parts

1b Discussion
Which of the following industries tend to be vertically integrated, either forward backward, or both?
bicycle manufacturers, car (automobile) makers, electricity and water companies, food producers, furniture manufacturers, newspapers, oil (petrol) companies, radio and television manufacturers

1c Discussion
Read the 15 sentences below, and classify them under the following three headings. (One sentence probably falls under two categories.)
A Arguments in favour ol mergers or takeovers
B Arguments against mergers or takeovers
C The advantages of a raid as compared to a takeover bid

1 After a hostile takeover, the former top executives will leave or be replaced, so all that remains is the capital equipment.
2 A larger company will have a stronger position on the market.
3 Conglomerates may become unmanageable and fail to achieve synergy.
4 Contrary to a common belief, a company's optimum market share is rarely very large.
5 Diversification dilutes a company's shared values (such as quality, service, innovation, and so on).
6 Entering new markets with new brands is generally slow, risky and expensive.
7 In many countries, if all the shareholders agree to sell, the bidder is obliged to buy 100% of the shares, and cannot stop at 50% plus one.
8 Individual companies might be more efficient if they didn't have to deal with a conglomerate's central management.
9 Innovation is expensive and risky, and sometimes more expensive than acquiring or metging with other successful innovative firms.
10 In this case, it is not necessary to pay mote than the existing market price.
11 It may permit the rationalization and optimization of the use of production facilities and invested capital, and enable economies of scale.
12 One can attempt to buy a large quantity of shares through several brokers as soon as the market opens, before speculators notice the rising price and join in.
13 Success comes from having a long-term competitive advantage, i.e. producing a cheaper or better product than those of competitots, or focusing on a narrow market segment.
14 This is a way for a company to reduce competition.
15 Traditionally, the best companies have always beaten their competitors rathet than buying them.

2a Reading
Read the following text and underline the arguments for and against leveraged buyouts.
LEVERAGED BUYOUTS
One indication that the people who warn against takeovers might be right is the existence of leveraged buyouts.
In the 1960s, a big wave of takeovers in the US created conglomerates - collections of unrelated businesses combined into a single corporate structure. It later became clear that many of these conglomerates consisted of too many companies and not enough synergy. After the recession of the early 1980s, there were many large companies on the US stock market with good earnings but low stock prices. Their assets were worth more than the companies' market value.
Such conglomerates were clearly not maximizing stockholder value. The individual companies might have been more efficient if liberated from central management. Consequently, raiders were able to borrow money, buy badly-managed, inefficient and underpriced corporations, and then restructure them, split them up, and resell them at a profit.
Conventional financial theory argues that stock markets are efficient, meaning that all relevant information about companies is built into their share prices. Raiders in the 1980s discovered that this was quite simply untrue. Although the market could understand data concerning companies' earnings, it was highly inefficient in valuing assets, including land, buildings and pension funds. Asset-stripping - selling off the assets of poorly performing or under-valued companies - proved to be highly lucrative. Theoretically, there was little risk of making a loss with a buyout, as the debts incurred were guaranteed by the companies' assets. The ideal targets for such buyouts were companies with huge cash reserves that enabled the buyer to pay the interest on the debt, or companies with successful subsidiaries that could be sold to repay the principal, or companies in fields that are not sensitive to a recession, such as food and tobacco.
Takeovers using borrowed money are called 'leveraged buyouts' or 'LBOs'. Leverage means having a large proportion of debt compared to equity capital. (Where a Company bought by its existing managers, we talk of a management buyout or MBO.) Much of the money for LBOs was provided by the American investment bank
Drexel Burnham Lambert, where Michael Milken was able to convince investors that the high returns on debt issued by risky enterprises more than compensated for their riskiness, as the rate of default was lower than might be expected. He created a huge and liquid market of up to 300 billion dollars for 'junk bonds'. (Milken was later arrested and charged with 98 different felonies, including a lot of insider dealing, and Drexel Burnham Lambert went bankrupt in 1990.)
Raiders and their supporters argue that the permanent threat of takeovers is a challenge to company managers and directors to do their jobs better, and that well-ru businesses that are not undervalued are at little risk. The threat of raids forces companies to put capital to productive use. Fat or lazy companies that fail to do this will be taken over by raiders who will use assets more efficiently, cut costs, and increas shareholder value. On the other hand, the permanent threat of a takeover or a buyout is clearly a disincentive to long-term capital investment, as a company will lose its investment if a raider tries to break it up as soon as its share price falls below expectations.
LBOs, however, seem to be largely an American phenomenon. German and Japanese managers and financiers, for example, seem to consider companies as places where people work, rather than as assets to be bought and sold. Hostile takeovers and buyouts are almost unknown in these two countries, where business tends to concentrate on long-term goals rather than seek instant stock market profits. Workers in these companies are considered to be at least as important as shareholders. The idea of a Japanese manager restructuring a company, laying off a large number of workers, and getting a huge pay rise (as frequently happens in Britain and the US), is unthinkable. Lay-offs in Japan are instead a cause for shame for which managers are expected to apologize.

2b Summarizing
Complete the following sentences, which summarize the text above.
1 The fact that many large conglomerates' assets were worth more than their stock market valuation demonstrated that. ..
2 Raiders bought conglomerates in order to ...
3 Raiders showed that the stock market did not. . .
4 Raiders were particularly interested in ..,
5 Investors were prepared to lend money to finance LBOs because . . .
6 Raiders argue that the possibility of a buyout. . .
7 A negative consequence of the threat of a takeover or buyout. . .
8 Hostile takeovers and buyouts are rare in Germany and Japan because . ..

2c Discussion
You have read arguments both for and against leveraged buyouts. Which do you find the most persuasive? Can you think of any further arguments either for or against?

Procurare de indatorii (Achizitie interna pe datorie)

Un indiciu ca oamenii care sunt împotriva preluărilor ar putea avea dreptate, este procurarea de îndatorii.
În anii 1960, un val mare de preluări din SUA, a creat conglomerate- colecţii de afaceri fără legături combinate într-o singură structură corporativă. Mai târziu s-a dovedit că multe din aceste conglomerate conţineau prea multe companii şi insuficienta de sinergie. După recesiunea de la începutul anilor 1980, pe piaţa de actiuni din SUA au existat multe companii mari cu venituri inalte, dar preţuri scăzute stoc. Activele lor valoreaza de mai mult decât valoarea de piaţă a companiilor.
Astfel de conglomerate în mod evident nu maximizau valoarea acţionarului. Întreprinderile individuale ar fi putut fi mai eficiente dacă ar fi fost eliberate de la conducerea centrală. În consecinţă, participanţii au fost capabili de a împrumuta bani, să cumpere corporaţii incorect gestionate, ineficiente şi societăţi cu preţ mic, şi apoi le restructurează, le despart, şi le revand cu un profit.
Teoria convenţională financiară susţine că pieţele bursiere sunt eficiente, în sensul că toate informaţiile relevante despre companii sunt incluse în preţurile acţiunilor lor. Participanţii la incursiuni, în anii 1980 au descoperit că aceasta situatie a fost pur si simplu imposibila. Deşi piaţa ar putea înţelege datele cu privire la câştigurile companiilor, a fost extrem de ineficient evaluarea activelor, inclusiv terenurile, clădirile şi fondurile de pensii. Dezmembrarea activelor - vânzarea activelor societăţilor slab performante sau sub-evaluate - s-au dovedit a fi foarte profitabile. Teoretic, era mic riscul de a inregistra pierderi, cu o achizitie, asa cum datoriile contractate au fost garantate de activele companiei. Tintele ideale pentru astfel de achizitii,au fost companiile cu rezerve uriaşe de numerar, care au permis cumpărătorului să plătească dobânzile la datorii, sau companiile cu filiale de succes care ar putea fi vândute pentru a rambursa, sau companii în domenii care nu sunt elastice la o recesiune, cum ar fi alimente şi tutun.
Preluările folosind bani împrumutaţi sunt numite "procurarea de îndatorii" sau "LBOs". Îndatoriile înseamnă a avea o mare parte a datoriei faţă de capitalul social. (În cazul în care o companie este cumpărată de către managerii săi existenţi, vorbim de o achizitie de management sau de MBO.) Majoritatea banilor pentru procurarea de indatorii au fost furnizati de catre banca de investitii americana Drexel Burnham Lambert, atunci cand Michael Milken a reuşit să convingă investitorii că rata inalta de rentabilitate a datoriilor emise de întreprinderile riscante mai mult decât compensate de gradul de risc , caci rata de default a fost mai mică decât s-ar fi putut de aşteptat. El a creat o piaţă imensă şi de lichiditate de până la 300 de miliarde de dolari pentru "obligaţiunile junk".(Milken mai târziu a fost arestat si acuzat cu 98 de infracţiuni diferite, inclusiv abuz de informaţii confidenţiale, şi Drexel Burnham Lambert a dat faliment în 1990.)
Participantii la incursiune şi susţinătorii lor susţin că ameninţarea permanentă a preluărilor este o provocare pentru managerii companiei şi directori ca sa-si execute lucrul mai bine, şi faptul că afacerile bine gestionate, care nu sunt subevaluate au un risc mic. Ameninţarea la incursiuni a fortat companiile de a folosi capitalul pentru utilizarea productivă. Companiile profitabile sau cu o rata de profitabilitate mai mica care nu reuşesc să facă acest lucru vor fi preluate de către participantii, care vor utiliza activele mai eficient,vor reduce costurile, şi va creste valoarea actiunilor. Pe de altă parte, ameninţarea permanentă a unei preluări sau achizitii este evident un factor descurajant pentru investiţiile de capital pe termen lung, asa cum o companie îşi va pierde investiţia dacă un participant la incursiune încearcă să-l canceleze in data ce preţul actiunilor este mai jos decat aşteptările.
Procurarea de indatorii, cu toate acestea, pare a fi în mare măsură, un fenomen american. Managerii si furnizorii germani şi japonezi, de exemplu, considera companiile mai degraba ca locuri unde oamenii lucreaza, decât ca active care urmează să fie cumpărate şi vândute. Preluările ostile şi achizitiile sunt aproape necunoscute în aceste două ţări, unde afacerile tind să se concentreze asupra obiectivelor pe termen lung mai degrabă decât profituri instantanee de piaţă de stocuri. Lucrătorii din aceste intreprinderi sunt considerati a fi cel puţin la fel de importanti ca acţionarii. Ideea unui manager japonez de restructurare a unei companii, de stabilire a unui număr mare de muncitori, şi obţinerea unei marire de salariu (la fel de frecvent se întâmplă în Marea Britanie şi SUA), este de neconceput. Concedierea din Japonia, sunt în schimb, un motiv de ruşine pentru care managerii e de aşteptat să-si ceara scuze.

Answers:
1a Vocabulary
1. to innovate(innovation)- designing new products and bringing them to the market
2. to diversify(diversification)- to expand into new fields
3. to merge – to unite, combine, amalgamate, integrate or join togheter
4. a takeover bid- buying another company’s shares on the stock exchange, hoping to persuade enought other shareholders to sell to take control of the company
5. a raid- a public offer to a company’s shareholders to buy their shares, at a particular price during a particular period, so as to acquire a company.
6. horizontal integration – a merge with or takeovers other firms producing the same type of goods or services.
7. vertical integration – joining wuth firns in other stages of the production or sale of a product
8. backward integration – a merger with or the acquisition of one’s suppliers.
9. forward integration – a merger with or the acquisition of one’s marketing outlets
10. synergy- combined production that is greater than the sum of the separate parts.

1b Discussion
Backward vertical integration: bicycle manufacturers;
car (automobile) makers.
Forward vertical integration: electricity and water companies;
newspapers;
radio & television manufacturers;
oil (petrol) companies.
Both: food producers;
furniture manufacturers.

1c Discussion
Read the 15 sentences below, and classify them under the following three headings. (One sentence probably falls under two categories.)

A. Arguments in favour of mergers or takeovers:
2 A larger company will have a stronger position on the market.
6 Entering new markets with new brands is generally slow, risky and expensive.
9 Innovation is expensive and risky, and sometimes more expensive than acquiring or metging with other successful innovative firms.
11 It may permit the rationalization and optimization of the use of production facilities and invested capital, and enable economies of scale.
13 Success comes from having a long-term competitive advantage, i.e. producing a cheaper or better product than those of competitots, or focusing on a narrow market segment.
14 This is a way for a company to reduce competition.

B. Arguments against mergers or takeovers:
1 After a hostile takeover, the former top executives will leave or be replaced, so all that remains is the capital equipment.
3 Conglomerates may become unmanageable and fail to achieve synergy.
4 Contrary to a common belief, a company's optimum market share is rarely very large.
5 Diversification dilutes a company's shared values (such as quality, service, innovation, and so on).
8 Individual companies might be more efficient if they didn't have to deal with a conglomerate's central management.
13 Success comes from having a long-term competitive advantage, i.e. producing a cheaper or better product than those of competitots, or focusing on a narrow market segment.
15 Traditionally, the best companies have always beaten their competitors rathet than buying them.

C. The advantages of a raid as compared to a takeover bid:
7 In many countries, if all the shareholders agree to sell, the bidder is obliged to buy 100% of the shares, and cannot stop at 50% plus one.
10 In this case, it is not necessary to pay mote than the existing market price.
12 One can attempt to buy a large quantity of shares through several brokers as soon as the market opens, before speculators notice the rising price and join in.


2a Reading
The arguments for and against leveraged buyouts:

many of these conglomerates consisted of too many companies and not enough synergy. After the recession of the early 1980s, there were many large companies on the US stock market with good earnings but low stock prices. Their assets were worth more than the companies' market value.

Such conglomerates were clearly not maximizing stockholder value. The individual companies might have been more efficient if liberated from central management. Consequently, raiders were able to borrow money, buy badly-managed, inefficient and underpriced corporations, and then restructure them, split them up, and resell them at a profit.

Although the market could understand data concerning companies' earnings, it was highly inefficient in valuing assets, including land, buildings and pension funds. Asset-stripping - selling off the assets of poorly performing or under-valued companies - proved to be highly lucrative

the high returns on debt issued by risky enterprises more than compensated for their riskiness, as the rate of default was lower than might be expected.

the permanent threat of takeovers is a challenge to company managers and directors to do their jobs better, and that well-ru businesses that are not undervalued are at little risk. The threat of raids forces companies to put capital to productive use. Fat or lazy companies that fail to do this will be taken over by raiders who will use assets more efficiently, cut costs, and increas shareholder value.



2b Complete the following sentences, which summarize the text above.

1. The fact that many large conglomerates’ assets were worth more than their stock market valuation demonstrated that they were clearly not maximizing stockholder value, i.e. giving their stockholders the maximum possible return on their investment.
2. Raiders bought conglomerates in order to strip them of their assets, i.e. to restructure them, split them up, and resell the pieces at a profit.
3. Raiders showed that the stock market did not operate efficient, meaning all relevant information, was not built in share prices, did not evaluate efficiently assets.
4. Raiders were particularly interested in companies with huge cash reserves, companies with successful subsidiaries or companies in fields that are not sensitive to recession.
5. Investors were prepared to lend money to finance LBOs because Michael Milken was able to gain their confidence through high returns on debt issued by risky companies more than compensated for their riskiness.
6. Raiders argue that the possibility of a buyout of making a loss is very small, with a little risk, as the debts acquired were guaranteed by the enterprises assets. The target for such buyouts was companies with a high amount of cash reserves.
7. A negative consequence of the threat of a takeover or buyout is that companies are imposed to establish the capital available for productive use. There is a dispute of administrators and directors in accomplishing their jobs as follows.
8. Hostile takeovers and buyouts are rare in Germany and Japan because business is concentrated on long-term goals instead looking for immediate assets outlet profits, workers should be considered equal important as shareholders.

Posted by Panciuc Daniela and Teişanu Elena.