Merge and acquisition and valuation the case of comeco

MERGE AND ACQUISITION AND VALUATION – THE CASE OF COMECO

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In (specialization)

By

Mr: Nguyen Chi Thanh

ID: MBA03029

International University - Vietnam National University HCMC

August 2013


MERGE AND ACQUISITION AND VALUATION – THE CASE OF COMECO

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In (specialization)
By
Mr: Nguyen Chi Thanh

ID: MBA03029
International University - Vietnam National University HCMC

August 2013
Under the guidance and approval of the committee, and approved by all its members,
this thesis has been accepted in partial fulfillment of the requirements for the degree.

Approved:

---------------------------------------------Chairperson

--------------------------------------------Committee member

---------------------------------------------Committee member

--------------------------------------------Committee member

---------------------------------------------Committee member

--------------------------------------------Committee member


Acknowledgements
I would like to express sincerely thanks to those who have helped me during the
prepeparation process.
I hereby gratefully acknowledge my supervisor who gave me great supports to do
the research and complete this master thesis: Ms. Nguyen Thu Hien, PhD, I just want
to say that you are not only a really wonderful advisor, but also one of the most
amazing lecturers that I have met throughout the time studying in university.
I also would like send my gratefulness to my boss and my colleagues who
supported me a lot and gave me their helps and comments during my study.
I would like to send my special thanks to the faculty of School of Business and
Administration and all of the lecturers of the International University for their

enthusiasm and helpful lessons that I have learnt.
I would like to express my deepest gratitude to my family for their support.
Without their love, encouragement, and trust in me, I would not able to pursue and
complete this program.


Plagiarism Statements
I would like to declare that, apart from the acknowledged references, this
thesis either does not use language, ideas, or other original material from anyone; or
has not been previously submitted to any other educational and research programs or
institutions. I fully understand that any writings in this thesis contradicted to the above
statement will automatically lead to the rejection from the MBA program at the
International University – Vietnam National University Hochiminh City.


Merge and Acquisition and Valuation – The case of Comeco

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Copyright Statement
This copy of the thesis has been supplied on condition that anyone who
consults it is understood to recognize that its copyright rests with its author and that
no quotation from the thesis and no information derived from it may be published
without the author‟s prior consent.
© Nguyen Chi Thanh/ MBA03029/2011-2013


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TABLES OF CONTENTS
LIST OF TABLES ................................................................................................... 7
LIST OF FIGURES ................................................................................................. 8
ABSTRACT ............................................................................................................. 9
CHAPTER I: INTRODUCTION .......................................................................... 11
1.1BACKGROUND: .............................................................................................. 11
1.2RATIONALE FOR THE STUDY: ................................................................... 15
1.3RESEARCH OBJECTIVES: ............................................................................ 16
1.4SCOPE OF THE RESEARCH: ........................................................................ 17
1.5RESEARCH SIGNIFICANCE:........................................................................ 17
CHAPTER II: LITERATURE REVIEW ............................................................. 19
2.1M&A DEFINITION: ........................................................................................ 19
2.2MOTIVATION OF MERGER AND ACQUISITIONS ACTIVITIES: ......... 23
2.2.1.ECONOMIC MOTIVES: ............................................................................. 23
2.2.2.OPERATIONAL SYNERGY: ...................................................................... 23
2.2.3.FINANCIAL SYNERGY: ............................................................................. 24
2.2.4.THEORY OF MARKET POWER: .............................................................. 24
2.2.5.STRATEGIC REALIGNMENT: ................................................................. 25
2.2.6.REGULATORY CHANGE: ......................................................................... 25
2.2.7.TECHNOLOGICAL CHANGE: .................................................................. 25


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2.2.8.MIVALUATION HYPOTHESIC: ............................................................... 26
2.2.9.BUYING UNDERVALUED ASSETS (Q-RATIO):..................................... 26
2.2.10.DIVERSIFICATION: ................................................................................. 27

2.2.11.AGENCY PROBLEM: ............................................................................... 27
2.2.12.HUBRIS OF MANAGEMENT: ................................................................. 27
2.2.13.TAX MOTIVES: ......................................................................................... 27
2.3VALUATION MODEL: ................................................................................... 31
2.3.1.UNDERSTANDING THE INDUSTRY AND INTERNAL OPERATIONS:32
2.3.2.VALUATION: ............................................................................................... 34
CHAPTER III: RESARCH METHODOLOGY .................................................. 40
3.1RESEARCH MODEL: ..................................................................................... 40
CHAPTER IV: BUSINESS ANALYSIS ............................................................... 44
4.1INDUSTRY OVERVIEW: ............................................................................... 44
4.2VIET NAM MARKET OVERVIEW: .............................................................. 46
4.3OPPORTUNITY: .............................................................................................. 48
4.4THREAT: .......................................................................................................... 49
4.5COMPANY PROFILE: .................................................................................... 51
4.6BUSINESS DESCRIPTION: ............................................................................ 53
4.7SWOT ANALYSIS: .......................................................................................... 54
CHAPTER V: VALUATION ................................................................................ 58


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5.1FINANCIAL ANALYSIS: ................................................................................ 58
5.2FORECASTING: .............................................................................................. 64
5.3VALUATION: ................................................................................................... 80
COST OF DEBT: ................................................................................................... 80
COST OF EQUITY: .............................................................................................. 81
COST OF EQUITY CALCULATED BY INDIRECT METHOD IS
DEFINED AS: ............................................................................................................. 84

LONG TERM GROWTH RATE:......................................................................... 86
CHAPTER VI: ACQUISITION OF COMECO BY PVOIL ............................... 89
6.1 VALUATION OF COMECO AS IF IT WERE MERGED INTO
PVOIL: ........................................................................................................................ 89
CHAPTER VII: CONCLUSIONS AND RECOMMENDATIONS ..................... 92
APPENDICE .......................................................................................................... 79
BALANCE SHEET:............................................................................................ 79
INCOME STATEMENT:................................................................................... 87
CASH FLOW STATEMENT............................................................................. 90
BETA BY COMECO LISTED ON HOSE: ....................................................... 94
FORECAST INCOME STATEMENT: ............................................................. 96
FORECAST BALANCE SHEET: ...................................................................... 99
MERGED-FIRM: ............................................................................................. 114

DIFFERENT ASSUMPTION BETWEEN STAND-ALONE FIRM AND MERGED-FI


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FORECAST BALANCE SHEET: .................................................................... 121
BETA BY INDUSTRY SECTOR IN U.S. ........................................................ 127
COUNTRY RISK PREMIUM: ........................................................................ 131
QUESTIONNAIRE OF ACQUISITION ............................................................ 148
REFERENCE ....................................................................................................... 153


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List of Tables
Table1: Price of WTI Crude oil and Viet Nam A92 since 2007 ......................................... 35
Table 2: Sales Revenue, Net Income and World Oil Price of COMECO in years VND ..... 44
Table 3: Short-term Solvency Long-term Solvency of COMECO compared in years ........ 45
Table 4: Long-term Solvency of COMECO compared in years ......................................... 45
Table 5: Profitability ratio of COMECO compared in years ............................................ 46
Table 6: COGs forecast of COMECO in next 10 years ..................................................... 47
Table 7: Comparison the annual growth rate of Revenue and Cost of Goods Sold ........... 48
Table 8: The growth rate COGs, Crude oil and Exchange rate in years ........................... 49
Table 9: Revenue and COGs forecast of COMECO in next 10 years (VND) ..................... 50
Table 10: Selling Expense and Administrative Expense of COMECO forecast in the
next 10years (VND). ........................................................................................................ 50
Table 11: Cash of COMECO forecast in the next 10 years (VND) .................................... 51
Table 12: Inventory Forecasting of COMECO in next 10 years (VND) ............................ 52
Table 13: Forecast of Account Receivable of COMECO in the next 10 years (VND) ....... 52
Table 14: Forecast of Other Current Asset of COMECO in the next 10 years (VND) ...... 53
Table 15: Fixed Assets forecasting of COMECO in the next 10 years (VND) ................... 54
Table 16: Capital Expenditures and Depreciation forecasting of COMECO in the next
10 year (VND) ................................................................................................................. 55
Table 17: Account Payable Forecasting of COMECO in the next 10 years (VND) ........... 55
Table 18: Change in Net Working Capital forecasting of COMECO in the next 10
years (VND) .................................................................................................................... 56


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List of Figures
Figure 1: Historical data on M&A Activity – Vietnamese Targets .................................... 11
Figure 2: Viet Nam Oil Production and Consumption, 1990-2011.................................... 12
Figure 3: Model Of Business Analysis And Valuation ....................................................... 22
Figure 4: SWOT Analysis Framework .............................................................................. 24
Figure 5: Equity valuation with FCFE ............................................................................. 28
Figure 6: Equity valuation with FCFF ............................................................................. 29
Figure 7: Model of Methodology ...................................................................................... 30
Figure 8: Common Theories of What Causes Mergers and Acquisitions ........................... 31
Figure 9: World liquid fuels consumption, world GDP, and WTI crude oil price .............. 34
Figure 10: Materials-Petroleum Joint Stock Company (COMECO)’s ownership
structure 2011 ................................................................................................................. 39
Figure 11: Viet Nam Real GDP growth rate and Inflation rate. ........................................ 48
Figure 12: Inventory Forecasting of COMECO in next 10 years (VND) ........................... 63


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Abstract
In recent years, Merger and Acquisition (M&A), has been developing very fast in the
value and number of deals. The aim of this research is to investigate the competition
between Vietnam Oil Corporation (PVOIL) and Sai Gon Petro Company Limited
(SGP) in acquiring Materials-Petroleum Joint Stock Company Oil (COMECO),
specifically about the acquisition decision between PVOIL and COMECO. Several
models and methods are applied in order to find the intrinsic value of COMECO as a
stand-alone firm and as a merged firm. Being merged into PVOIL, COMECO may
receive potential additional value from the acquisition by PVOIL. The analysis and
valuation based mainly on the data and information sources given by the valuation

process and the interviews with key personnel in PVOIL.
The findings of the research are that the merge may bring significant benefit to
COMECO. The discussion further expands to the fact that price fluctuation after the
announcement has not reached to reflect the premium due to the nature of the
negotiation process, the bargaining power of PVOIL and its timing of the market.
This research with its interesting findings, are expected to give the managers of
COMECO and PVOIL clearer views about valuation, benefits and costs realized from
the acquisition, so that they can proceed with suitable strategies to make more benefit
from the deal.


Merge and Acquisition and Valuation – The case of Comeco

Abbreviations

APEC

: Asia-Pacific Economic Cooperation

ASEAN

: Association of South East Nations

COGS

: Cost of Goods Sold

COMECO

: Materials-Petroleum Joint Stock Company Oil

EIA

: Energy Information Administration

GDP

: Gross Domestic Product

M&A

: Mergers and Acquisitions

OPEC

: Organization of the Petroleum Exporting Countries

PETEC

: Petec Trading & Investment Corporation

Petechim

: Petro Vietnam Trading Company

Petrolimex

: Vietnam National Petroleum Group

PVOIL

: Vietnam Oil Corporation

SGP

: Sai Gon Petro Company Limited

WTI

: West Texas Intermediate

WTO

: World Trade Organization

10


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Chapter I: Introduction
1.1

Background:
In the Sixth National Party Congress in December 1986, Viet Nam launched

“Doi Moi”, popularly known as renovation policy which officially abandoned the
central planned system and shifted Viet Nam to a market-oriented economy under a

Socialist Orientation, aiming to restructure and modernize the economy to encourage
foreign investment. The main elements were the state‟s recognition of private
ownership and multi-sector development, the liberalization of foreign trade and FDI,
and the implementation of the socio-political and economic reforms (des Lestrange &
Richet 1998; Mai, Bilbard, & Som 2009.
For more than two decades, Viet Nam has been becoming a true emerging
market, growing opportunities for investors and integrating into the world economy
ever since. Viet Nam is involved in several ongoing economic integration processes
when becoming a full member of Association of South East Nations (ASEAN) in
1995, the Asia-Pacific Economic Cooperation (APEC) in 1998 and World Trade
Organization in January 2007, negotiated a trade treaty with the European Union
and US in 2001. The overall cumulative impacts of economic integration process
have been very positive for economic growth and development in Viet Nam and the
inflation rate was reduced sharply to around 20 percent in 1990s.The whole
economy has gained high development when the GDP growth rate achieved 9.5 per
cent and 9.3 per cent in 1995 and 1996 before the Asian crisis and continued
growing up from 4.8 per cent in 1999 to 8.5 per cent in 2007.Because of the global
economic crisis, the GDP growth rate reduced to 6.3 percent and 5.3 percent in 2008
and 2009 respectively before returned 6.8 percent in 2010 and fell down to 5.9
percent in 20111.Because of the crisis, Viet Nam‟s economy had faced many


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difficulties such as the credit crunch and high interest rate which caused the
economic and financial crises which significantly affected on Vietnamese stock
market. As a result, many stocks are being traded undervalue and even below par
value. In addition, more than 90 per cent of companies in Viet Nam are small-and

medium sized enterprises, which may have low competitive advantage, small scale,
low technology, poor management skill, etc.., that make them become the target in
industry restructuring in Viet Nam. Because of the economic downturn, many
companies faced difficulties in operation and capital access so they were forced to
be bankrupt or sell to others. Merger and Acquisition (M&A) have made immediate
contribution to restructuring of the trouble economies such as operational
restructure, more productive re-allocation of physical and financial resources in the
economy. The total deal volumes plunged from 41 deals in 2003 to 23 deals in 2004
and further to 22 deals in 2005. But the number of deals recovered in 2006 and
reached 413 deals in 2011, set a new record, with impressive growth of 135 per cent
and worth $ 4,700 billion (See Figure 1). 1
Total Value of Deal
Year

Number of Deals
(US Million)

2012(Q1)

1

1,500

2011

413

4,700

2010

345

1,750

2009

295

1,138

2008

167

1,117

Stock Plus, Viet Nam M&A Research Report, Issue 2, 15 May 2012, Opportunities in Distressed
Companies and increase deal flow from Japan


Merge and Acquisition and Valuation – The case of Comeco

2007

108

1,719

2006

38

299

2005

22

61

2004

23

34

2003

41

118

13

Figure 1: Historical data on M&A Activity – Vietnamese Targets
(Source: Thomson Reuters, PricewaterhouseCoopers research)
The value of Viet Nam M&A deal was USD 1,5 billion in the first quarter of
2012 , grew by 270 per cent compared to the same period last year and ranked 8th in
deal value in Asia Pacific 2.Because of restructuring and seeking capital after

economic crisis, the M&As in Viet Nam will increase quickly in the next few years
and many foreign investors, private equities many divest in Viet Nam market through
M&As which create more opportunities for other companies to expand their
business. The consulting firms and professional brokers will take more important
role in linking the transactions. M&As activities in Viet Nam are forecasted to
continue rising in many sectors, ranging from finance, banking, consumer goods to
even in importing and distributing petroleum products. Even Viet Nam does not
intend to sell stake in petroleum distribution companies to investors and this sector is
dominated by state-owned, the high economic growth rate and demand on energy
consumption , is forecasted increase 5 percent to 7 percent at annual rate which is
highly potential for many investor and distributors
. The distributors and retailer energy in Viet Nam is dominated by the State, this
means there is minimal competition in the domestic market. Furthermore, the high
2

Viet Nam Investment Review 2012


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economic growth rate and demand on energy consumption in Viet Nam, is forecast
to increase 5%-7% at annual will be very potential for many investors and
distributors to acquire other company to expand their business. (See Table 2)

Figure 2: Viet Nam Oil Production and Consumption, 1990-2011
(Source: EIA International Energy Statistics)
Viet Nam‟s oil is running by state-owned Viet Nam Oil & Gas Corporation
(Petro Viet Nam), under the Authority of Ministry of Industry and Trade who control

fully the operator and regulator in the industry and contributes a quarter of the state
budget. The two state-own companies, Vietnam National Petroleum Group
(Petrolimex) who accounts for 60 per cent and Vietnam Oil Corporation (PVOIL)
holds 20 per cent of market share in petroleum distribution network. Sai Gon Petro
Company Limited (SGP) and Petec Trading & Investment Corporation (PETEC)


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currently who hold 12-15 percent individually in market 3.Because of the domination
of Petrolimex under government-support in Viet Nam whole sale and retails in
petroleum market, the two major stated -owner, PVOIL and SGP are trying to
compete and open more market size. Although in Vietnam oil sector is still
exclusively imported and domestic petroleum business, but whether after the end of
2018, will this monopoly end? At that time, retailers can negotiate directly with the
distributors on price, would have more competition on market and distribution
system. This is probably why PV Oil has been purchasing additional shares of
Materials- Petroleum Joint Stock Company Oil (COMECO) - a listed company
specializing in supplying and distributing petrol and oil.
1.2

Rationale for the study:
After 1975, Gas and oil control department of Public Traffic office formed to

function as managing and providing petroleum product in HCMC, then renamed to
Gas and oil supply department, being a former of Materials-Petroleum Joint Stock
Company Oil (COMECO). In August 2006, COMECO company‟s shares firstly were
exchanged in HCM securities trading center. COMECO developed an infrastructure

system to receive, store and distribute petroleum, oil products to Ho Chi Minh City
(HCMC) and other regions in the South. Until now, company has retail distribution
network, mostly located in prime locations and the storage being built in Dong Nai
and the COMECO building located on Dien Bien Phu street, Ho Chi Minh.
In particular, COMECO owned retail distribution network throughout Ho Chi
Minh City with 33 petrol stations, and continue expanding more network by
expanding distribution network. This is believed to be the reason for why PVOIL and
SGP want to acquire COMECO in order to expand the retail distribution network in
3

US Energy Information –Country Vietnam-Last updated May 2012


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Ho Chi Minh to compete with Petrolimex which holds 60 per cent of the market in
Viet Nam. The reports on retail market share of COM showed that the company
stands just behind Petrolimex Company in Ho Chi Minh. In late 2011, PV Oil and
SGP has been competing to buy shares COMECO and the ownership of PVOIl in
June 2012 of COMECO was 31.4 per cent compared with 30 per cent last year and
the shares of SGP about 26.6 per cent. Especially, PVOIL and SGP have two people
in Board of Director of COMECO at the annual shareholders‟ meeting of COMECO
in April 2012. Currently, PV Oil has registered to buy 494,039 shares to raise
ownership up 34.9 per cent from June 2012 to July 2012 by purchasing on stock
exchange. In the trading report in August 2012, PVOIL hold 31.5 percent and
continues register buying in order to increase up to 33.99 percent.
Furthermore, PVOIL can take advantage of the ownership of PETEC, who is
the subsidiary of National Oil Corporation of Viet Nam (PVN), in COMECO of 3.4

percent. Taking this into account, the ownership of PVOIL in COMECO could be
more than 10 percent than that of Saigon Petro. (Cafef 2012)
The announcement of acquisition of COMECO by both PVOIL and SGP,
which is called "a campaign for the COMECO target", however has not ended yet.
PVOIL has tried hard for the target. Whether the decision to purchase and take full
control of COMECO is a strategically wise? What are the motivations behind the
transaction? If this is a wise strategic step for PVOIL to take full control over
COMECO, what should be an appropriate offer price for the deal? This research aims
to answer the above question.
1.3

Research objectives:

This research aims to perform following objectives:


Merge and Acquisition and Valuation – The case of Comeco



17

Analyze the motivations behind the acquisition of COMECO on the point of
views of PVOIL and verify whether the acquisition is a good decision.



Perform business analysis and valuation of COMECO to come up with a
reasonable price on the point of views of PVOIL.

1.4

Scope of the research:
The scope of research is to study be the decision to acquire COMECO by

PVOIL and the valuation of COMECO by collecting data for the period from June
2006, when the company initially listed on the stock market.
1.5

Research Significance:
This research might be helpful to PV Oil in a way that its findings and analyses

help the company to reconsider benefits and costs of the acquisition of COMECO.
Also, it helps to reconsider the fundamental factors impacting on the future growth of
COMECO and helps to estimate a reasonable price for COMECO, avoiding
overpaying for the target.
Furthermore, the fact that Vietnam is being a WTO member will bring some welldefined obligations requiring furthering more open markets to foreign competition,
which would impress more competition on Petroleum market and distribution system.
It is expected that the market for oil and gas distribution network be more and more
fierce in the near future when foreign investors are allowed to enter the local market.
Building distribution network cannot be done in a short period of time. Merger and
acquisition in this case is a helpful tool for vertical expansion. The fact that Dung
Quat Refinery factory, which is currently wholly state owned, is to be privatized and
sold out to foreign investors its 49 percent of ownership shows a potential increasing
trend of merger and acquisition activities in oil and gas distribution sector. How to
value local distribution companies who enjoy across provinces gas stations, storages,


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and transportation vehicles requires a deep industry understanding. This research aims
at analyzing business opportunities in oil and gas distribution sector to allow
achieving a reasonable valuation of local distribution companies.
1.5

Methodology:
This research applies both qualitative and quantitative approaches to achieve

the research objectives.
In analyzing the acquisition transaction to explore the motivations and benefits
of the transaction to PVOIL, qualitative research will be conducted through
interviewing the key personnel of PVOIL, collecting published news, articles, about
the acquisition and some previous relevant report. The author will search information
first by indentifying the motivation of the acquisition that happening in the market
and then investigating such information about the deal based on theoretical model for
merger and acquisition motivations and benefits to conduct the qualitative research.
In analyzing the target firm to arrive at a reasonable price for COMECO,
theories for business analysis and valuation will be applied. Firstly, discounted cash
flow valuation will be used in order to find the intrinsic value of firm in case of
operating independently. Thereafter, the author will analyze the advantage and
disadvantage of COMECO being acquired by PVOIL, in which discounted cash flow
model is used to value the firm as if the company were fully merged into PVOIL.
From this point, the deal premium coming from synergy of acquisition will be
recommended for both investors and target firm.


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Chapter II: Literature Review
2.1 M&A Definition:
Mergers and acquisitions (M&As) and corporate restructuring have become the
most popular methods of growth companies in corporate finance world. Merger refers
the combination of two companies into one business entity and when a small
company is purchased by one firm by paying shares, cash or other assets is called the
acquisition.
According to Gaughan (2007) “A merge is a combination of two corporations in
which only one corporation survives and the merged corporation goes out of the existence”
(p.12).
Black‟s Law Dictionary defines mergers and acquisition as the following:
Merger: The union of two or more corporations by the transfer of property of
all, to one of them, which continues is existence, the others being swallowed or
merged therein
Acquisition: The act of becoming the owner of a certain property
Divestiture: to deprive; to take away; to withdraw
Merge can be defined as an arrangement the assets of two or more firms
become one, or under the control of a company. In other words, merge is the
combination of two companies to become a large firm and considered to be successful
if it increases the acquiring firm‟s value. The activities include the conversion or
payment in cash for the target firm. In case of merge between two companies, there
often is an exchange of stock by one firm issues new share to the shareholders of the
other firm at a certain ratio. The firm has the share continue to exist is referred to as
the acquiring firm, even if that occurs under an alternate company name and the firm


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whose shares are being replaced by the acquiring firm usually called the target firm. ).
According to KPMG‟s report4, six periods of high merger activity, often called
merger waves, have taken in the history of the world by categorizing types of M&A‟s.
The First Wave (1893-1904) was known as major horizontal mergers in the
manufacturing and transportation industries. After that, in the Second wave in 19191929 bring the consolidation of the industries which created by the first Wave. The
third Wave (1955-1970) indicated the new picture of expansion and diversification
which was helpful for firm entering in new markets. In the Fourth Wave (1974-1989)
was known as the leveraged taker over and the collapse of bank‟s capital structure
because of the large investment bank financed this transactions, commonly in “hostile
takeover”. The Fifth wave (1993-2000) was one of major appetite for larger
economies of scale and made multinational conglomerates. The Sixth Wave (20032008) was the picture of the globalization of firms needs to create a multi-national
reach
A merger activity is occurring when the two firms are in the same industry and
agreeing to combine in new business with the greater scale and higher
competitiveness. Considering the financial structure, a merge differs from a
consolidation and are sometime used interchangeably. The consolidation happens
when two or more companies are merged under new legal entity and formed an
entirely new company whose name is a combination of the names of the merged
companies. A Merger between Lien Viet Bank and Viet Nam Postal Saving service
Company created Lien Viet Post Commercial Joint Stock Bank in 2011. Vietnam
Postal Saving Service had fund raising from the public but was not allowed to lend
meanwhile Lien Viet Bank was a young bank and wanted to invest and develop their
4

KPMG;The Seventh Wave of M&A (2011)


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branches and transaction office network. The merge had saved a huge amount of
money of Lien Viet Bank by using nearly 10,000 outlets of the postal company to
expand its banking services. 5.
According to the Law on enterprises 2005, the consolidate enterprise is “Two or
more enterprises transfer all the assets, rights and liabilities, and legal interests to
form a new enterprise, simultaneous cease the exits of consolidating enterprises”
(Article 17 Competition Law). In case of one company has consolidated market share
since 30 per cent to 50 per cent of relevant market, the legal representative of
company being consolidate must notify the agency managed competition before
proceeding consolidate. However, the competition law prohibits the consolidation of
market shares of enterprises participating in economic concentration account for over
50 per cent on the relevant market, except of bankruptcy or the consolidation which
contributes the socio-economic development, technical and technological advance5 (
Article 18,19 Competition Law )
Like mergers, the term “acquisition” tends to be used when larger firm absorbs a
smaller firm for seeking advantage of synergies such as economies of scale,
efficiencies and enhanced market visibility from this acquisition .Unlike all mergers,
all the acquisition involves one firm purchasing another can integrate or create a
larger company from two smaller companies (Adward & Gerald, 2005).The term
acquisition is used instead of takeover, to replace of owner ship or by acquiring the
right to control the management by an individual, group or individual company. In
take over activities, the company owner has the right to alter the Executive Committee
and redirect the business of the target company. The brand name of target companies
can be retained or changed depending on the acquiring firm and it increases efficiency
5

Stoxplus 2011

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of business, market share and especially the competitiveness. The activities include
not only the purchasing firm in cash, shares or combination of both, but also by
buying all the assets of the purchased company. An acquisition may be friendly or
hostile. In case of hostile, the two companies‟ proceed negotiations, but the target
company is either not willing to sell or the management of Target Company being
unaware of intention of the buyer. Takeovers can occur in many ways such as merger,
tender offer, or proxy contest and the combination of all activities. In case of merger
through tender offer, the buyer will proceed to buy common stock of target firm at a
price which could be over the market value by bidding firm who will negotiated and
approved by target‟s board of directors before voting of target shareholder for
approval. The tender refers the buying of shares directly with the shareholders of
target firm who are to sale stocks to the bidding firm. In addition, the proxy contests
indicate the group of dissatisfied manager or large stockholder try to take control on
the board of directors.(Jensen and Ruback ,1983)
There are three types of mergers and acquisition and classified into horizontal,
vertical, and conglomerate. The horizontal refers the synergies or economies of scale
of competing companies in the same industry, which reduce competition and gain
greater market power. Vertical is between the firms have buyer – seller relationship or
in the value chain in order to reduce uncertainty and transaction costs and control the
whole value chain. The advantage of vertical merger is to ensure and control the
quality of raw materials or products, reduce the intermediaries cost and manage
source of competitor's outputs. When two or more companies are not in the same
business but want to diversify and expand their business activities in the other area,
the transaction is called a conglomerate merger. It provides the advantage of

decentralization and autonomy of the acquired. (Gaughan,2007)