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Finance applied to dating (5) – Mergers and Acquisitions

The dating-market has crystal clear parallels to so called M&A activity in the financemarket, namely Mergers and Acquisitions. This is where the big bucks in finance lie; this is where the international investment banks make most of their money on more or less poor advice.

In reality we can skip pure acquisitions, since buying a boyfriend to my knowledge is not legal, neither in Norway nor in most other places in the world. That said, some borderline cases can be observed, for instance fat men in their 50’s with lots of money somehow seem to have lovely wives in their 20’s. I suspect that there may have been transactions here that look suspiciously like acquisitions; however they are not covered by current law. And in my case, I don’t even consider it. I am not going to buy myself a handsome your stud aged 25, and that’s all I have to say about that.

I am going for a merger. Between Iskwew Ltd. and some other suitable enterprise.

Different kinds of mergers
A merger is defined as a transaction creating an economic entity from two or more individual entities. I will not consider a merger with more than one company, since that will indeed be polygamy, and therefore illegal under Norwegian law. Moreover I believe that there might be too much of a hassle and very little synergies in such multicompany mergers. I strongly doubt that Iskwew Ltd. is suited for such a merger at all.

Different types of mergers:

Horizontal merger
The joining of two companies operating the same business. Also know as the “Birds of a feather” alternative.

Vertical merger
The joining of two companies operating in different parts of the same value chain.

Conglomerate merger
The joining of two companies in totally different businesses. Also known as the “Opposites attract” alternative.

Iskwew Ltd. wishes a merger with a company which is partly horizontal and partly a conglomerate. “Yes please, both” as Winnie the Pooh would have said it. Heavy on the horizontal emotionally and on the conglomerate mentally. I think there is less profit to be made in a vertical merger. Both companies should be in proper control of their own value chains.

Good reasons to merge and some problem areas
There are several good reasons for a merger. It should however be mentioned that some mergers end up in demergers after some time. This is of course regrettable, and can be for many reasons. Primarily that the companies were not suited for each other to begin with, or because the market outlook for one or both companies changed over time. And maybe because one of the companies got fed up with the other, that one company wanted too much control, or that some of the subsidiaries were so partly owned that it simply got too turbulent for the merging company. Let’s hope it was not because of poor valuation, since the finance literature is full of excellent valuation techniques, thus poor valuation should be totally unnecessary. Right?

Economy of scale
It is usually both more expensive and inefficient to run two individual companies rather than one bigger one. There are so called synergies by merging two companies. After the merger the equation is no longer 1+1=2, it is 1+1=3 or more. Assets are utilised more efficiently, and fixed cost is lower. And I will testify to the fact that it is expensive to run Iskwew Ltd. as a single entity. Especially since the company is located in the western part of the capital.

The exploration of both companies’ intangible assets has the potential to improve substantially, when after a merger the companies can settle down and focus on running the business, rather than running around on different dating scenes and look for a partner to merge with.

Information benefits
During a merger the parties will open their books for each other, and do a so called “Due Diligence”. This means to scrutinise the books in depth, in addition to getting to know and understand each others business and purpose. The theory of information benefits has sub-theories, such as the “Kick-in-the-pants”-theory, which states that both companies will sharpen their assets in the process, and do operational changes which heighten the value of each of the companies. Another sub-theory is the “Sitting-on-a-goldmine”-theory. The market believes that since the companies are in negotiations, the value of the companies is higher than what the market has previously assessed. This is indeed parallel to dating. Yes, you really get your act together when negotiating with at potential partner, and everyone knows that if you are in negotiations with another company, new offers pop up from here, there and everywhere. All of a sudden and in shocking amounts. Something which may of course confuse companies already in serious negotiations, and some may even choose to merge with a totally different company altogether.

Risk reduction
It is likely that a merger will lead to less risk than what would be the case for two individual companies. The companies will settle down, not spend a lot of time on dating with a low rate of success, frog kissing and money on new clothes which may or may not be fashionable next year.

The issue of market power
A merger between twp large companies will in finance theory cause problems, an may lead to competition authorities interfering. This cannot be said to be a problem in this case, as the kind of mergers we are talking about here SHOULD lead to the companies no longer participating in the market at all. Of course, I do know that not all merged companies see it like this, they are more submerged in the market, still participating and not always telling that they are already merged. However, in a situation like this the competition authorities will intervene and demand that the company retracts from the market. Exceptions can be made for companies which have written in the merger-agreement that they can indeed participate in joint ventures with other companies on a shorter or longer term. But such clauses must be explicitly agreed between the parties, and it must be stated to the joint venture partner that the company is indeed already merged.

Taxations issues
Iskwew Ltd. is due to the 100% ownership in the subsidiary Tigercub Ltd. in a low taxation class and receives twice the normal child welfare from Norwegian authorities. In a merger these tax benefits will be gone, and hence their value must be considered. This can be solved by the merged companies keeping separate headquarters.

Declaration of intent to merge with another company from Iskwew Ltd.
Based on the above mentioned advantages of a merger, it is hereby declared that Iskwew Ltd. wishes to merge with a suitable company. Iskwew Ltd. is hence willing to open the company books, when the company has received declarations of said company’s intentions, and after a preliminary agreement has been reached. Iskwew Ltd. understands and intends for such a process to take some time, as it takes a good while to value each other horizontally, vertically and as a conglomerate. The goal is to have a preliminary agreement signed before the summer (which is not likely to be here until July), however for Iskwew Ltd. it is more important to find a valuable partner to merge with, than to hurry the process. Winter and spring may pass, summer and fall too, if necessary.

Inquiries about the company can also be directed to the in-house auditor/legal counsel, Juliet. She has in depth knowledge about the company through years and more than a crisis or two.



Factsheet Iskwew AS
The undersigned, Iskwew, has been CEO of the company since the age of 18, and gradually got greater influence over company direction between the ages of 0 and 18. The company is valuable, and for the most part (with some important exceptions) good decisions have been made, and the values in the company are well managed. Some may say that the company is indeed a mature company, however if you scrutinise the books, you will soon see the potential for expansion in the company.

Company structure:
The company has two wholly owned subsidiaries, Tigercub Ltd., founded in 1999, and Pondus Ltd., founded in 2005.

Balance sheet:
Any financial analyst will see that this company is attractive in the M&A-market. It is just a matter of finding the right partner. The company has low gearing, and there are large values in the form of intangible assets and off balance sheet assets. The numbers here included are fictitious, as no companies in their right min dopens the books before an intent to merge is reaches.

(Originally written in Norwegian)

Iskwew ©

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