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A Complete Guide to Merger Strategy

A merger is a corporate strategy of combining different companies into a single company in order to enhance the financial and operational strengths of both organizations.

What is Merger Strategy?

Merger strategy represents all the strategic initiatives that are conducted by the top management to enter or exit the mergers.

The main objective of this strategy is to increase the profitability and the market valuation of the corporation while eliminating the competition by acquiring the shares of the target company.

Some of the advantages of merger strategy are given below:

The merger strategy can help to expand the revenues and profits of the company in case you are unable to retain the customers through your existing products. The benefits of merger strategy: A better coordination between the business units of the corporation. An enhanced financial strength of the company as well as the scope to attract the lenders.

The merger strategy can assist the company in achieving the economies of scale without compromising on the quality of the products. The merger strategy helps to identify the right merger targets and also to target the right shareholders of the target for the merger. The merger strategy also helps to secure the right synergies, advantages, and the risks that needs to be taken into consideration. The merger strategy also helps to protect the corporation from the external competition and also to overcome the odds of failure due to the political decision.

i. Agreements to merge

In order to arrive at the agreement to merge, both the parties – the acquiring and the target company – must have some benefits from the proposed transaction. If not then exit strategies are required to be considered.

The agreement to merge usually involves two types of agreements which are as follows:

Definitive Merger Agreement:

This represents the first of the two types of agreements. Here the details of all the aspects that are to be included in the merger deal are discussed.

This is a detailed document which:

Clearly specifies and defines the date of the merger. The share exchange ratio which is the ratio that is used to determine the number of shares that will be exchanged for the acquisition of a target company. The methods that are to be used to determine the fair market value of the shares of the target company. The methods that are to be used to determine the fair market value of all of the assets and the liabilities of the corporation.

The methods that are to be used by the corporation to issue the shares in order to satisfy the fair market value of the target company. The events that are required to occur in order to complete the merger. The events that are required to occur in order to complete the merger. Who is responsible and liable for any non-compliance with the merger procedures?

The definitive agreement should be reviewed by the legal consultants.

The terms and conditions of the agreement are usually documented as an exhibit.

Representations and warranties:

This represents the second of the two types of agreements. Here the acquiring and the target company should make statements and give the warranties of the following to each other:

The company has the right to conduct the merger. All of the transactions that are done by the acquiring company comply with all the laws, regulations as well as the government contracts. The company has the capability to make the financial and operational commitments that are defined in the merger agreement. The assets of the target company accurately reflect the true value of the company. The sales of the company have not been suppressed for the purpose of achieving the merger.

The target company will not defend or claim against the negotiations and agreements made in this merger agreement. The merger agreement has been made after doing all the proper due diligence that was required to be done with regard to the target company. The representations and warranties of the merger agreement are to be fulfilled by the acquiring company as well as the target company in order for the merger to be carried forward.

ii. Due Diligence Report

To further strengthen the merger agreement, the acquiring company can make use of the due diligence report. Here the acquiring company  is given the right to conduct a due diligence investigation of the target company in order to determine the following:

The existence and the value of the assets and liabilities that are combined in the merger agreement and the methods that are used to determine the value of these assets and liabilities. The financial performance of the target company in the past three fiscal years. The sales of the company. The financial condition of the target company. The quality of the products and service offered by the target company. The terms and conditions of the merger and the methods that are used to evaluate the feasibility of the merger.

The capital structure of the target company. The financial statements and the accounting policies that are used by the target company. The accuracy of these financial statements. The management of the target company and their past performances. The operating structure of the target company. The credit worthiness of the target company. The sales channels of the target company. The membership of the target company in the associations, the industry standards, the industry trade groups, and the patent rights that are held by the target company.

Ongoing lawsuits against the target company. The regulatory filings, the government contracts and the laws that are relevant to the operations of the target company. The annual returns, the audited financial statements and the product registration documents which are required by the government. The plans for the expansion of the target company. The plans for the disposal of the liabilities and the assets of the target companies. The managerial competence of the target company. The history and the legality of the directors of the target company.

The legality of all the transactions that concern the acquisitions of the target company. The loss of the target company in the foreseeable future. The continuity of the services that are provided by the target company. The labor contracts that are in existence. The environmental issues that may affect the operations of the target company. The laws that will be applicable and the venue of the merger. All the events that should occur in the due course of the merger. All the potential risks that may have a negative impact on the merger.

While performing due diligence, the following should be given by the target company to the acquiring company:

The full and complete access to all the relevant information of the target company All the documents that are required for due diligence. The cooperation of the employees of the target company. The production of all the relevant reports. The presence of the key personnel of the target company for the duration of the due diligence report.

Due diligence usually takes 48 to 72 hours to complete.

iii. Fundamental Analysis

To understand the financial and operational implications of the merger before it takes place, a fundamental analysis is carried out by the acquiring company, as well as by the target company. Fundamental analysis can be defined as an analysis that is carried out by the acquiring company and the target company in order to find out the intrinsic value of the target company as well as the merger synergies. If both the companies are to benefit from the merger, fundamental analysis is very important.

IV. DUE DILIGENCE REPORTS AND EXHIBITS

The due diligence reports are mainly classified into two types:

A. The “Fairness Opinion” given by the Target company:

The target company will appoint a financial consultant to conduct a detailed analysis of the merger. Usually this analyst is a very senior expert in the industry. The value of the target company will be determined after all the required information that is required for the preparation of the due diligence report has been provided to the financial consultant. The financial consultant prepares a report that is also called “fairness opinion” to the target company.

Planning for the merger:

The due diligence report is presented and it may also be attached as an exhibit to the definitive merger agreement. The essential components of the due diligence reports are as follows:

The valuation and the fairness of the merger to the shareholders of the target company. Why the merger is essential for the long term plans of the target company. Why the merger will be beneficial to the target company and the shareholders. The merger proposed by the acquiring company and the target company of the target company. The approval of the board of directors of the target company. The ability of the acquiring company to finance the merger. The risk factors that may affect the merger. The assumptions and the drawbacks involved in the acquisition. The indemnification of the target company in case the present merger or the future acquisition of another company does not work out.

The merger of the company and the restrictions on the capital structure changes and the mergers that may take place in the future. The requirements of the acquiring company and the target company to make an all cash offer for the merger. The limitations on the future acquisition of the target company. The voting rights of the shareholders of the target company. The restrictions on the payment of dividends by the target company. The conditions and the terms of the merger. The desire of the target company to purchase the assets of the acquiring company if the merger does not work out. The restrictions on the merger of the target company. The manner in which the parties agree to carry out the merger.

The number of shares that are issued by the target company to carry out the merger. The cash and stock that the target company issues in order to make the merger take place. The sources of money that are used for this merger. The restrictions on the voting powers of both the target company as well as the acquiring company. The basis of the calculations that have been carried out by both the target company as well as the acquiring company. The sources of information that have been used for the preparation of the due diligence report. The definition of the assets and the liabilities that are going to be left by both the target company as well as the acquiring company.

Why the merger is essential for the long term plans of the target company and for the shareholders of the target company. The due diligence report also contains the following:

Fundamental financial analysis:

The report contains all the financial information required for the fundamental analysis. The report includes the financial statements of the target company and the acquiring company. The report also contains an in depth analysis of the financial statements of the target and the acquiring company. It also contains a report of the information that is related to the target company and any merger synergies. It also includes data that is related to the stock performance of the target company. One may also include data that is related to the covenants that exist in the financial statements of the target company and the acquiring company. It includes the financial ratios that are related to the financial statements of both the target company and the acquiring company.

Acquisition analysis:

The report contains all the data related to the historical and projected cash flow statements of both the target company and the acquiring company. The report also contains the an in depth analysis of the cash flow statements. It also contains the fundamental data that is related to the companies such as the debt to equity ratios, the current ratio and the debt coverage ratio. The report also includes the data related to the metrics that are used in the fundamental analysis of the companies such as the growth, the return on invested capital and the growth of the sales per working capital. The report also includes the data that is related to the asset turnover.The report includes the data that is related to the historical as well as the projected balance sheets of both the target company as well as the acquiring company. It also includes the data that is related to the metrics that are used in the fundamental analysis such as the return on assets, the cash flow margins and the asset turnover.

A “fairness opinion” is a report that is prepared by a financial advisor who is appointed by the target company to analyze the fairness and the value of the merger. This report is required to be submitted by the target company to the acquiring company and also the acquirer must accept the terms of the merger based on the fairness opinion report.

When an analysis is conducted on a financial proposal, it is done with the help of different parameters. If you are prepared to invest in a company, always apply a financial analysis to understand whether you are gaining value for what you are investing.

The first parameter that is used for an analysis is the historical financial statements of the company. This includes an analysis of the balance sheet, income statement, and cash flow statement. It also includes the analysis of the financial statements of the company, and also the various ratios are calculated. The researchers also analyze the past records and present records so that they get a better idea of what is happening to the company. Later on, the financial statements are compared with the industry standards, and the same are also compared with that of the rivals so that a comparison is drawn about the company.

The second parameter that is used in the analysis is the estimation of future growth of the company. This is also known as the comparative analysis and is very important as without the future growth of the company, it is not of any use for the investors and also for the company to grow. The future growth of the company is analysed with different tools that are available such as the beta values, the financial ratios as well as the capital asset pricing model. The estimation of the future growth of the company is based on the company’s different factors such as the management of the company, the industry growth, as well as the market potential of the company. But the estimation of the future growth of the company should always be between these 2 limits – over estimation and under estimation, neither should there be any misinterpretation of the tool or the method used to give the estimation.

The third and the last parameter that is used for an analysis is the comparative financial analysis of the company which is also known as benchmarking. This is done by analyzing the data of one company with that of another company so that a comparison of the financial performance of different companies is made.

A community development organization is an organization dedicated to developing, improving, or maintaining the community. There are many different types of community development, ranging from improving the vitality and economic resilience of low-income neighborhoods to improving the standards of living in developing countries. There are many different types of community development with each having their own subtypes. In addition to being categorized by type, community development organizations are also categorized by level (local, regional, state, national, international) and outcome (institutional, individual, community).

Community development has come to mean so many different things to many different people. From physically improving a community, to helping people in a community achieve personal goals, community development is not agreed upon in meaning. To some, community development is all about physical improvements to neighborhoods (hard community development), while to others, it is about helping the poor become successful by providing them with a mentor or teaching them how to manage money (individual development).

Traditionally, community development organizations were not focused on the poor but rather on helping adults and families achieve a certain level of economic success. This is not to say that they do not work with low-income families. These organizations now view the low-income community as their niche market and have come to realize that improving the communities with the lowest standards of living will increase the economic status of the entire community.

For example, if an area has low average per capita income, the community development organization must use that as the evaluation. If the organization provides services and makes improvements that increase the incomes of the lowest income families in the community, all of the incomes in the community will improve due to the “trickle-down” effect. Even wealthy families will benefit from the positive changes. However, if an organization only serves the slightly low-income families and does nothing to improve the overall economic status of the community, the upper-middle and upper income families will not gain from an improvement. Especially in urban areas, poverty, crime, and general economic status are often used to create areas that are unattractive to many potential home buyers.

In order to sell properties in a community, up and coming areas have to have a reputation as a potential place that people would want to live, buy a home, and invest in. If not, people will stay away. A community development program targeted to the low income level is necessary to improve their overall economic status, then the reputation of the community will improve and will create opportunities for upper income levels to move in as well.

Since community development organizations are making such a large impact on the communities they serve, the community development organization needs to be evaluated carefully. There are many different forms of community development organizations that each has their own evaluation process. Different type of community development organizations include urban redevelopment agencies, housing agencies, community development financial institutions, and microfinance lending institutions.

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