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M&A and post M&A operations

Types of acquisition

An acquisition can take the form of a purchase of the stock or other equity interests of the target entity, or the acquisition of all or a substantial amount of its assets.

Share purchases – in a share purchase the buyer buys the shares of the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities.

Asset purchases – in an asset purchase the buyer buys the assets of the target company from the target company. In simplest form this leaves the target company as an empty shell, and the cash it receives from the acquisition is then paid back to its shareholders by dividend or through liquidation. However, one of the advantages of an asset purchase for the buyer is that it can “cherry-pick” the assets that it wants and leave the assets – and liabilities – that it does not. This leaves the target in a different position after the purchase, but liquidation is nevertheless usually the end result.

The terms “demerger”, “spin-off” or “spin-out” are sometimes used to indicate the effective opposite of a merger, where one company splits into two, the 2nd often being a separately listed stock company if the parent was a stock company.

Financing M&A

Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

a. Cash
Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder’s shareholders alone.

b. Financing
Financing cash will be borrowed from a bank, or raised by an issue of bonds. Acquisitions financed through debt are -known as leveraged buyouts -, and the debt will often be moved down onto the balance sheet of the acquired company.

Furthermore, a cash deal would make more sense during a downward trend in the interest rates, i.e. the yield curves are downward sloping. Again, another advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution for the acquiring company. But a caveat in using cash is that it places constraints on the cash flow of the company.

c. Hybrids
An acquisition can involve a cash and debt combination, or a combination of cash and stock of the purchasing entity, or just stock.

Classifications of mergers

Horizontal mergers take place where the two merging companies produce similar product in the same industry.

Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.

Conglomerate mergers take place when the two firms operate in different industries.

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO.

The contract vehicle for achieving a merger is a “merger sub”.

The occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market and what, if any, action could prevent it. Regulatory bodies such as the European Commission and the United States Department of Justice may investigate anti-trust cases for monopolies dangers, and have the power to block mergers.

Accretive mergers are those in which an acquiring company’s earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E.

Dilutive mergers are the opposite of above, whereby a company’s EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.

The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities at one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.

Lean 6 Sigma

Lean Six Sigma Introduction

6 Sigma / Lean (DMAIC) is a data-driven, factual improvement methodology.

It can generate very significant benefits – tens of millions of dollars per year in some industries – when it is applied to issues that are:

  • Important and costly
  • Must be fixed correctly, the first time
  • Where a solution is not generally agreed and / or obvious.

6 Sigma / Lean should not normally be applied to problems that can be fixed via low-cost trial changes, or where the benefits of resolving an issue are minimal. In these cases the cost of applying
6 Sigma / Lean may outweigh the benefits.

Like all tools, applying it at the right time and in the right place makes best use of the tool.

Below are frequently asked questions raised by Management. 

  • Can we use lean or Six Sigma alone?
  • Shall we use Lean and Six Sigma together?
  • If we want to adopt Lean and Six Sigma together, how?
  • Which one goes first?
  • How will we know if we’re doing it right?

Lean tools are traditionally developed by Industrial Engineering to improve productivity and eliminate wastes while Six Sigma tools are originally used by Quality Engineering to improve quality, reliability and defect level of products and services.

The barrier of these two engineering disciplines are diminishing slowly and both are converging into a new powerful and practical discipline, namely as Lean Six Sigma in general and Lean-Sigma Power-Plan and Service Lean Sigma and Lean Sigma Design under our own corporate services.

Past regarding Lean and 6 Sigma was

Lean. Focused in eliminating non-value added waste in a process with goal of reducing process cycle times, improving on-time delivery performance and reducing cost.

Six Sigma. Using statistical techniques to understand, measure and reduce process variation with the primary goal of achieving improvements in service quality and cost.

The today approach meaning

Lean Six Sigma. Is today an integrated and balanced combination of the speed and variation reduction power of both Lean and Six Sigma to achieve business management process full optimization.

Six Sigma is deployed mainly for innovative, breakthrough and continual improvements under the black belt projects led by Black Belts and Master Black Belts while Lean is deployed mainly for daily continual improvements and performance sustaining activities under the lean Kaizen events led by Line Engineers and Supervisors.