Strategic Financial Issues In Mergers And Acquisitions – A Case Study

Steps that Manco Plc need to take in order to defend takeover bid by Earling Plc

Questions:

1.What steps should Manco Plc take to defend this particular takeover bid by Earling PLC AND what can Manco PLC do generally to defend the company from other possible takeover attempts.

2. Advise and justify who is the ‘predator’ and who is the ‘target’ in the above case study? Ensure you provide a definition of each term in your answer.

3. Critically advise how Manco might view a potential Management Buyout (MBO) compared to the Earling takeover and analyse the advantages and disadvantages of a MBO.

4. Discuss the three methods of acquiring companies and provide an example of each.

5. Describe how would you classify the acquisition of Manco PLC.

6. Evaluate seven reasons why Earling PLC would consider acquisitions and provide details of a case with which you are familiar, where an acquisition failed?

7. Advise in detail three ways a company can pay for the target company in a take-over and advise how Earling might finance the acquisition, evaluate all 3 methods.

8. Briefly explain the possible risks Manco PLC could face have if a paper offer is extended?

The current study critically evaluates important strategic financial issues that need to be considered in a specific acquisition or merger and analyses exposure of a company to diverse financial risks together with techniques required to handle the same. The present study highlights the given case on Earling Construction Plc that acquired Manco Construction Plc that crumpled due to the crash in the economy. Moving further, the study explains the procedures that can be undertaken by Manco Plc to defend takeover, identification of predator and target as per the given case. Furthermore, this studies critically analyses the way Manco might perhaps view a probable management buy-out (MBO) compared to takeover and evaluates the benefits and limitations of MBO. Moving further, the study elucidates in detail about different methods of acquisition with real life examples, reasons for undertaking acquisition and ways of making payments for the target corporation in a specific take-over. 

Steps that Manco Plc need to take in order to defend takeover bid by Earling Plc

The steps that Manco Plc have the need to undertake in order to defend takeover bid by Earling Plc include implementation of shareholders rights scheme, execution of voting rights plan, green mail, white knight and enhancing debt.

Shareholder’s rights plans can help in defending takeover by activating a prospective acquirer that declared its intentions at that moment. Under this kind of plans, shareholders of Manco Plc can buy supplementary firm stock at a luring discounted price, thereby making the same more difficult for specifically the corporate raider to acquire control (Devi, 2016).

Management of Manco Plc can consider voting rights plans. In this case the targeted corporation Manco Plc might also execute a voting rights scheme that can separate specific shareholders from their voting powers at a pre-ascertained point.

The corporation might think about pursuing the greenmail option by purchasing back its currently acquired stock from a supposed raider at a superior price in a bid to avert a takeover (Brueller et al., 2016).

Definition of predator and target in the above case study

Predator is necessarily regarded as the financially strong corporation in the merger or else acquisition. The weaker targets of acquisition are now and then called “prey” as they can be seized by powerful corporations. Several corporations fall somewhere in the centre of these extremes. Essentially, the target corporation is the one that is the subject matter of a merger or else acquisition effort. Particularly, a takeover effort can be of different types, depending on the outlook of target firm toward specifically the acquirer firm (Boschma & Hartog, 2014).

As per the given case study, the predator is the Earling Construction and the target is the Manco Plc. The company Earling Construction suffered immensely owing to the break down in the economy that was necessarily an outcome of the crumple of the entire construction industry. However, it averted the dire consequences since it prepared itself for the possibility although its rivals suffered hugely due to the crash in the economy and were on the verge of collapse (Kansal & Chandani, 2014). Again, Earling Construction observed that Manco had a distinct value gap and identified Manco as a probable acquisition opportunity. During the year 2007, share price of Earling was €10.50 per share, while share price Manco was €4.75 per share. Therefore, in the end it can be hereby justified that Earling Construction is the predator and Manco Plc is the target.

Management buyout (MBO) engages the management team of a corporation amalgamating resources to obtain all or else attain the company partially. For the most part of the time, the management team of the company acquires entire control as well as ownership, utilizing their proficiency to develop the corporation and move it forward (Popli & Sinha, 2014).

Essentially, for a corporation like a Manco Plc undergoing an alteration in ownership, the route of management buyout delivers benefits to all concerned. Most evidently, this permits for flat transition of company ownership (Davies et al., 2015). As the new owners become conscious of the corporation, there is a reduced failure risk and trading associates become less probable to be concerned and subsisting clients and trading clients are relieved that normalcy will be restored.

Manco can take into consideration a potential management buyout by undertaking the following steps:

• Both the buyer and the seller can agree on a specific sale price, probably counting an independent valuation
• Company’s entire management team that is the management of Manco Plc might consider evaluating the overall amount that they are capable of investing
• Thorough financial evaluation have the need to be undertaken and this includes developing forecast financial replica/model in order to reflect the serviceability of specifically debt as well as return to potential financiers (Xu, 2017).
• Approach to various financiers, a small amount of buyout might possibly include only one financier .whilst in case of larger deals, numerous financiers might handle the process of financing.

Essentially, the procedure of MBO can possibly take roughly 6 months that is basically the same time required for trade sale. Therefore, vendors along with the entire management team have the need to be prepared for entirely committing to diverse dealings for that specific frame of time (Titman et al., 2017). However, this can be considered to be very challenging as the company have the need to be operated as normal and monitored whilst the transaction is in progress.

The advantages of MBO refer to the fact that selling a specific business can be considered to be a drawn out procedure as this entails coming across a buyer by means of due diligence as well as onto the transitional time period. However, selling it to the subsisting employees can be regarded to be a quicker process as they are already engaged and are already aware of their ins as well as outs (Reddy et al., 2014). In addition to this, the seller of the company also finds the peace of mind that their own business is getting passed on to the hands a particular group whom they know.Particularly, for the purchasers, it is normally the easiest, fastest as well as least risky manner to get into an ownership role. Essentially, this permits different individuals in fulfilling their aspiration of specifically increasing share of their profits (Rao & Reddy, 2015). The alternative to start a business from the level of scratch can be considered to be very difficult and the same can take longer to understand positive returns.

Again, in certain cases, a potential management buy-out can take the corporation from publicly traded to private. Essentially, this can aid the entire corporation to free itself from variety of legislation, necessities of paperwork.  

-MBOs are hardly straightforward. For example, it is uncommon to get a group of managers who possess adequate financial authority and ability to purchase the business. Supplementary funds obtained from a specific bank or private equity is majority of the time necessary. However, this alters the overall dynamics, establishing extra debt or else distributing equity to make it thinner. Repayment along with dividends can consume profits and at the same time squeeze the entire margins (Rao?Nicholson & Salaber, 2016).   There are many outside financiers who require certain amount of control over the entire business.

Comparison between a potential Management Buyout (MBO) and the Earling takeover

Furthermore, investors often intend to make certain that the team of MBO is entirely committed to the particular cause by demanding that each and every individual delves deep into the capacity to contribute to the process of purchase.

In addition to this, experience at particularly management level does not necessarily translate into the capability to own a specific business. Essentially, the team of MBO have the requirement to make certain that it possesses the appropriate mix of skills to lead a specific business (Rao?Nicholson & Salaber, 2016). Apart from this, certain employees also sometimes get caught for violating insider trading regulations by intentionally permitting the business concern to underperform, in that way, lessening the price of sale during the period of negotiations.

The three different mechanisms of acquisition include:

• Horizontal mergers

Kotapati (2015) recommends that horizontal mergers take place at the time when a company merges otherwise takes over another corporation that delivers the similar or identical lines of product as well as services to the end clients. This refers to the fact that it operates in the similar industry and same phase of production. Corporations, in this specific case, are normally direct rivals.

Examples: in case if a corporation manufacturing cell phones merges with another corporation operating in the sector that manufactures cell phones, then in that case it can be referred to as horizontal merger.

• Vertical Mergers

Rao?Nicholson & Salaber (2016) suggests that a vertical merger is undertaken with the intention of combining two different corporations that are in the similar value chain of manufacturing the same products as well as services. However, only variance exists is the phase of production at which they are functioning.

For instance, in case if a specific clothing shop takes over a specific textile factory then it can be indicated as the vertical merger as the industry is the same (that is the clothing, even though the phases of production is necessarily different), a firm is operating in the territory segment whilst the other operates in the secondary segment.

• Concentric Mergers

A concentric merger normally happens between corporations that serve the identical consumers in a specific industry, although, they do not deliver the identical products as well as services. In essence, their products might be essentially complements, products that can go together although technically they are not the identical products (Rao?Nicholson & Salaber, 2016).

For instance, in case of a corporation that manufactures DVDs merges with another corporation that manufactures DVD players, then this can be referred to as concentric merger.

The acquisition of Manco Plc by Earling Construction can be considered as horizontal merger. As per the given case study, Earling Construction Plc is referred to a registered firm operating in the construction industry that is listed on the Dublin stock exchange. Manco Construction Plc is also an enterprise that too operates in the same industry that is the construction industry. The case study reveals that the share prices of the two different firms were different during 2007. The share prices of Earling Construction Plc were comparatively higher and comparatively lower in case of Manco Construction Plc.

Methods of acquiring companies with examples

In this case, the take-over of Manco Construction Plc by Earling Construction Plc can be regarded as the horizontal merger. This is so because the company Earling Construction merges with another corporation that manufactures similar products as well as services (Xu, 2017).

Different reasons why the company Earling Plc can take into account acquisition include the following:

Enhancing capabilities:

Enhanced capabilities might stem from prolonged research as well as development opportunities or more vigorous manufacturing operations (or else any specific range of core competencies a firm wants to enhance). The companies Earling Plc and Manco Plc might combine to leverage diverse manufacturing functions.

Acquiring a competitive advantage and larger share of the market

The companies Earling Plc and Manco Plc might intend to combine for gaining a superior distribution or else marketing network (Xu, 2017)

Diversification firm’s products as well as services

These two corporations might decide to combine products as well as services in order to acquire a competitive edge over others in the place of market.

Replacement of leadership

Earling Plc might decide acquisition of Manco Plc as the management of the firm failed to recognize a leader within the firm who could help in succeeding (Davies et al., 2015)

Reduction of costs

The two firms have identical products therefore combing can help in creating opportunity to lessen costs.

Surviving

During the period of financial crisis, these companies combined in a bid to deleverage Manco Plc’s failing financial statements

Synergy

The decision to acquire Manco plc can help in synergy. This is the notion that by combining various business actions overall performance will rise and at the same time costs will decline (Davies et al., 2015).

A familiar case where acquisition tactic failed for particularly acquirer is as mentioned below:-

During the year 2005, eBay Inc purchased Skype for a specific amount of $2.6 billion. Particularly, the price of purchase was enormously high taking into account that the firm Skype only had $7 million as their revenue. Essentially, the CEO of the firm e-bay Meg Whiteman, validated that acquirement by arguing that the firm Skype would enhance the site of auction by providing its end users a superior platform for the purpose of communication. Finally, the users of e-bay discarded the technology of Skype as redundant for undertaking auctions and the grounds for the purchase dissolved. Again, it was seen that after two years of acquirement, the company e-bay declared its shareholders that it would necessarily write down the entire value of business concern Skype by around $900 million. During the year 2011, the firm e-bay was privileged to acquire a higher bidder for particularly Skype. In particular, it marketed Skype to firm Microsoft and thereafter realized profit amount of approximately $1.4 billion. Whilst the merger of eBay and Skype failed as eBay erroneously enumerated the demand of their customers for the product of Skype and other deals of M&A have failed for entirely different causes (Titman et al., 2017).

Payment for acquisition using stock

The shareholders of selling business entity can swap firm’s shares for acquirer’s shares (Xu, 2017). Again, exchange process of stock-for-stock can be considered to be effective for the particular seller when the shareholders do not want to identify taxable gains.

Classification of the acquisition of Manco PLC

Payment for acquisition using debt

The acquirer might include debt in the form of its deal to purchase acquiree. Essentially, this can prove to be beneficial to specifically shareholders of the seller as they do not disburse income taxes until they accept the debt disbursement (Xu, 2017).

Payment for acquisition using cash

The primary method for making disbursements is using cash chosen by the shareholders of acquires. This is essentially appreciated by various shareholders who are not capable to market their stock by other ways (Xu, 2017). 

Purchasing a business often entails buying of real estate or else any other equipment (Kansal & Chandani, 2014). There are fixed assets that have the tendency to maintain value over a period of time and can be utilized as collateral.

The management of Earling Plc can secure conventional financing and in case if they do not want to dilute the terms of ownership, then in that case mezzanine financing can be used (Kansal & Chandani, 2014). This specific way of financing delivers flexible terms as well as conditions and calls for little otherwise no collateral.

Based on the current circumstances and the total amount of money to be raised, it is important to look for equity investment from a specific venture capitalist, angel financiers as well as private equity financiers (Boschma & Hartog, 2014).  

A specific takeover bid in which the purchasing corporation Earling Plc offers their own shares in exchange for shares in the corporation that is necessarily taken over (that is, Manco Plc). This is delivered in place of cash offer. As per the case study, Earling Plc privately regarded to present a paper offer of share-for-share in case the cash offer was discarded.

In this stock-for-stock process of exchange for take-over, the seller essentially shares with specific acquirer firm particular risk that benefits of acquirement might not get realized and attained (Kansal & Chandani, 2014). Therefore, in case if the acquirer deduces a price for purchase founded on realization of gains from synergy along with the gains that are not attained, then it is fairly possible that the specific market might perhaps force in bringing down the price of the shares. Again, in case if the shareholders of the seller firm own a number of these shares, then the overall value of the disbursement made to them might decline.

Conclusion

The above mentioned study helps in gaining comprehensive understanding as regards merger and acquisition with special orientation to the given case of Earling Construction Plc and Manco Construction Plc in the backdrop of financial crisis. This study also helps in acquiring deep insight regarding takeover, ways to defend takeovers, specific financial issues in an acquisition and helps in identification of exposure of the corporation to financial risk with special reference to the given case. In addition to this, this study also helps in gaining comprehensive understanding regarding the techniques that are essential to deal with the risks. The current case is analysed analytically to evaluate takeover bid, target and predator firms, reasons for considering takeover by Earling and the ways that could have been adopted by Manco for defending the same.

References

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