Mergers and acquisitions are created for all of the following reasons except to
M&A can hinder innovation by mismanagement or cultural differences between companies. They can also create bottlenecks when they disrupt the flow of innovation with too many company policies and procedures. Market dominant companies can also be their own demise when presented with an M&A opportunity. Complacency and lack of due diligence may cause the market dominant company to miss the value of a innovative product or service.
Show Functional cookies, which are necessary for basic site functionality like keeping you logged in, are always enabled. Allow analytics tracking. Analytics help us understand how the site is used, and which pages are the most popular. Read the Privacy Policy to learn how this information is used. Save Settings Close Modal2022 Curriculum CFA Program Level II Corporate Finance Mergers and Acquisitions Download the full reading (PDF)Available to members IntroductionCompanies enter into corporate restructuring activities such as mergers and acquisitions for a variety of reasons. Many companies use mergers as a means to achieve growth or gain operational efficiencies. Others seek to acquire unique capabilities or resources, increase market power, or diversify their businesses. In all cases, it is important for both equity and fixed income analysts to understand the motives for mergers and their financial and operational consequences. Merger and acquisition (M&A) activities involve a variety of complexities and risks. Analysts should assess these factors, including the expected value arising from a proposed business combination relative to deal price, in addition to the likelihood that the combination will take place and the intended results will be achieved. They should also consider actions taken by other shareholders, regulators, market participants, and competitors, in addition to transaction specifics, given the potential impact of all these factors on deal completion and valuation. Analysts should be able to answer questions such as: Does the proposed transaction make economic sense and align with management’s stated business strategy? How is the transaction being financed, and how will this financing approach affect company financials? How likely is the deal to take place, and what are associated risks? In the case of a hostile bid, does the target company have options to successfully fend off the unwanted bid? What is the anticipated impact for shareholders? Bondholders? Example 1On 5 December 2018, shareholders of Takeda Pharmaceutical, a 237-year-old company and Japan’s largest pharmaceutical firm, approved the acquisition of Shire, a UK-listed, Irish-headquartered drug maker of similar size with an operational base in the United States. Announced in May 2018, the US$62 billion deal was aimed at transforming Takeda into a top 10 global pharmaceutical company with a sizable US footprint. It was the largest deal announced worldwide for 2018. The deal was also the largest international acquisition ever attempted by a Japanese company. Takeda’s offer consisted of shares and cash. It also involved a US$30 billion increase in balance sheet debt. Takeda’s CEO undertook a nine-month-long campaign to secure the deal. The deal was confirmed in December 2018 with 88% Takeda shareholder approval, despite significant resistance from some Takeda shareholders, including the original Takeda family, who were concerned about the additional risk created by the acquisition. Takeda–Shire Deal Timeline StrategySeptember 2016Takeda’s “Vision 2025” business plan envisions sustaining growth year over year.Rumor28 March 2018Takeda says “considering making an approach to Shire.”6 AprilTakeda, Pfizer, and Amgen viewed as likely bidders for Shire.Courtship29 March 2018Takeda initial offer: £44/share, with £16 in cash.11 AprilTakeda second offer: £45.5/share, £16.75 cash.13 AprilTakeda third offer: £46.5/share, £17.75 cash.14 AprilShire’s board announces it unanimously rejects third offer.20 AprilTakeda fourth offer: £47/share, £21 cash.24 AprilTakeda fifth offer: £49/share, £21.75 cash.Acquisition8 May 2018Shire accepts fifth offer of £49/share, £21.75 cash, valuing deal at US$62 billion.14 MayTakeda announces asset disposals to help fund the acquisition.10 JulyUS Federal Trade Commission grants regulatory approval for Shire deal.14 SeptemberChinese regulator approves Shire deal.18 OctoberJapanese regulator approves Shire deal.20 NovemberEU regulator approves Shire deal.20 NovemberProxy advisors Glass, Lewis & Co. and Institutional Shareholder Services recommend deal.May–November 2018Takeda minority shareholders (including Takeda family) lobby against proposed deal, citing increased risk and loss of Japanese “roots.”Integration5 December 2018Takeda shareholders vote to approve deal.7 January 2019Takeda CEO announces integration “well underway.”8 January 2019Deal closes.Value creation14 May 2019CEO announces 43% increase in original cost synergies anticipated from acquisition.December 2019Takeda’s core earnings margin expected to reach 25%, with long-term earnings margin forecast for 35%, up from an earnings margin of 22% in 2018.March 2020Takeda sales expected to rise 57% year over year.Projection for 2023Divestments of US$10 billion expected to stabilize balance sheet, with the expansion of five key businesses including in neuroscience and in treatments for cancer and rare diseases. Takeda’s motivations for the deal included the potential for sustainable earnings growth believed to be available through Shire’s products and markets. Takeda was at that time projecting declining profitability from existing products and limited growth in the Japanese market. Additionally, synergies through new product development, earnings diversification, and cost savings were anticipated from the deal. Despite positive expectations, in the nine months between Takeda’s announcement in March 2018 and the time the deal closed, Takeda’s share price dropped 26% while Shire’s rose 33%. Following increasing offers in value by Takeda, a series of regulatory approvals post–Shire acceptance, and announcements of a divestments program to help fund the acquisition, the deal finally closed in January 2019. By May 2019, Takeda’s management was reporting significant cost savings and projecting major improvements to core earnings margins in the years ahead. This reading will discuss many of the issues involved in M&A deals, such as form of payment in a merger, legal and contractual issues, and the necessity for regulatory approval. Most importantly, this reading aims to equip you with basic tools and a framework for analyzing such deals. In subsequent sections, we will discuss basic types of M&A, underlying motives, transaction characteristics, governing regulations, and how to evaluate a target company and a proposed merger. Learning OutcomesThe member should be able to:
SummaryMergers and acquisitions are complex transactions. The process often involves not only the acquiring and target companies but also a variety of other stakeholders, including competition law regulatory agencies. To fully evaluate a merger, analysts must ask two fundamental questions: First, will the transaction create value; and second, does the acquisition price outweigh the potential benefit? This reading has made the following important points.
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