Literature review

4.1 Introduction
Mergers and acquisitions (M&A) happened everyday in Wall street which helps small companies to be big ones. It is one of the biggest parts in corporate finance world. In this chapter, we will discuss the definition, aims of M&A, merit and defect, methods and one example of L’Oreal’s acquisition of YSL.
In order to create a “big L’Oreal”, the company took over a lot of cosmetic companies to expand its business. In 2006, the L’Oreal plc made its acquisition of SkinEthic, the Body Shop, Beauty Alliance, French
Laboratoire Sanoflore. In the year of 2007, the company acquired Beauty Alliance, Pure Ology,
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 Maly’s West. In 2008, the L’Oreal plc took over 100% of Columbia Beauty Supply on January, CollaGenex on February, Le Club des Créateurs de Beauté on May, YSL Beauté on June. Mergers and acquisition is one of the L’Oreal plc’s main strategy to expand its market and enhance its company’s size.(年報16到18)
4.2 Definition
In order to get more market shares and work more efficiently, companies likes to come together. Then mergers and acquisition happened. The meaning of the merger and acquisition likes the easy equation: 1+1=3. If the shareholder value of the together company is higher than one company’s value plus another, they will be happy to get together.
Although Mergers and Acquisitions have the same meaning, they have some important difference. When one company purchases another and become the new owner of the company, it is called acquisition. The one that is taken over will not exist from then on. This often happens between large company and small company. The large one will own all the business and shares of the small one. To be difference, mergers often happen between companies that are the similar size. The companies work together instead of work separately. For example, the merger of company A-X and company B-Y will create a new one A-B. Both A-X and B-Y will give up their shares and issue new ones.
( http://www.investopedia.com/university/mergers/mergers1.asp)
“Merger is a business combination that results in a new reporting entity, formed from combining entities in which the shareholders come together in partnership for mutual sharing of risks and benefits of the combined entity .In such a transaction no party to the combination obtains control or is dominant whether by share ownership, directors control or otherwise” as is reported by International Accounting Standard 22. (IFSR 2008)But another view reported by IFSR 3 that M&A are the business combination which control one or more business. For example “true mergers” and “mergers of equals” are two kinds of Mergers.( IFSR 2008)#p#分頁標題#e#
4.3 Aims of Mergers and Acquisitions
There are several aims of mergers and acquisitions. The main motivations are “synergies” and the “correction of managerial failure.”(資料1p9) In order to gain synergies on operation and finance, companies trend to take over other companies. The operation synergies increase when carry out the scale and scope strategy and “vertical integration”, cancel the repeat actions, share the technology and skills, decrease the agency cost by sharing the whole asset. (Ravenscraft and Scherer 1987, 1989) What’s more, the M&A cut down the production cost and distribution cost, increase the return, and enhance the cash flow of the share holders’. (Comment and Jarrell 1995) Further more, the M&A can diversify the acquisitions, improve the cash flow and reduce the risk of bankrupt. (Lewellen 1971, Higgins and Schall 1975) In addition, it helps to gain the capital and internal capital market at a cheaper price (Bhide 1990) and to reduce the risk of mangers’ employment by using the tax shield. (Amihud and Lev 1981)
Another aim is “hostile acquisitions”, which is a restrict way to control “correct managerial failure”. The hostile acquire for the companies who have bad performance and change the management of poor performance. (Morck et al. 1988, Bhide 1989, Martin and McConnell 1991) A lot of “hostile acquisitions” happened in US, for example Hasbrouck (1985), Palepu (1986), Morck et al. (1989), and Mitchell and Lehn (1990) which indicates that the companies who take M&A were friendly. However, some people did not believed the “hostile acquisition” in UK, for instance, Franks and Mayer (1996). But more and more people who had studied the factors said “hostile acquisitions” was not the private aims. (Ravenscraft and Scherer 1987, Martin and McConnell 1991, Schwert 2000) The debate may caused by the bargain in the process of acquisition (Schwert, 2000) and some directors said that it may not be the long-term strategy to be taken over. (資料1p10)
4.4 The methods of M&A and Choice of payment
With the development of finance, there are many methods of M&A, now I will introduce the main methods of M&A. (1) share acquisition agreement, the acquisition negotiate with the shareholders of the target company, exclude by means of buying stocks from stock exchange, and sign an agreement to acquire the target company’ shares in order to control the target company. It is often very friendly. (2) Tender offer, the acquisition company send an open offer to the shareholders of the target company, then control the target company , this is the majors methods to acquire the company. It is fully market-oriented norm of the acquisition mode , and can protect all shareholders, especially small and medium-sized share holders.(3) Asset replacement, the controlling shareholders of the listed companies use the quality assets or cash replace the sluggish assets of listed companies, #p#分頁標題#e#
Thesis is provided by UK thesis base http://www.ttc-switch.com/or use the main business asset replace the non-main business assets, including the replacement assets as a whole and some form of asset replacement. After the replacement of assets ,the company will be able to adjust the industrial structure, the assets will improve. (4) Directed additional shares, non-public offering, issue the shares to the oriented investors, then control the target company. (5)Stock Repurchase, the company repurchase the shares which are issued in the stock exchange by some ways.(6) Debt restructuring, the Creditors change his claims to the shares of the company.
There are many ways of payment, the way of the payments have the trend of diversification.(1)Cash payment, the acquirers buy the assets or shares of the target company by a certain amount of cash. This is the most commonly used methods payment, it is a direct, simple, rapid way of payment. (2) stock payment, the acquisition of the company by a certain percentage of the target company's equity shares for the cost, then the termination of the target company become a subsidiary of the acquired company. (3) Leveraged to pay, the acquired company use the target company's assets or future cash receipts as collateral to loans from financial institutions, and then acquire the target company's loan payment. So it require the target company has enough cash flow. (4)mixture payment, the acquired company use some methods to pay , such as cash, stocks bonds.
We know the payment is a very crucial aspect in the M&A.A reasonable payment options is not only related to the success of the mergers and acquisitions, it also relate to the income of both parties. So we also consider the factors of the payments. The main factors are as follow:
Mobility, if the asset of the company is more mobility, the company can collect money more easy, so the company may use the cash payment, it may decrease the cost of the mergers and acquisitions , the company also have more ways to collect money, so the mobility is very important.
Financing capacity, if the performance of the company is very well, the profit is very good , so the financing capacity is very good, the company can collect more money from many ways, such the banks.
The stock of the company ,when we want to use the stock payment, we must pay attention to the price of the stock, if the stock price of the company is very low, we may not collect enough money to pay, and the shareholders of the target company may not agree to this payment ,it may make this mergers and acquisitions not success so we expect the more higher of the stock price of the company ,the easier we will collect money. Also the volality of stock price should not very large.
Capital structure, the Capital structure is also very important factors, if the company’s debt is very high ,so it is very harder for us to lend money from banks , we may choose to stock payment, in order to improve the capital structure of the company, it may make the company better.#p#分頁標題#e#
Policy and legislation, if the policy and legislation are not allow the company to issues the stock and bonds ,or the economy is very bad ,the banks are not expect to lend money to the company , so the company may have difficult to collect money. So the policy and legislation also may impact the payment of the company.
Tax, we all know the bond have the function of the tax shield , so we may find the tax may impact the payment of the company, some company may choose to issue the bonds, while not issue stock.
To sum up, the methods of payment of mergers and acquisitions have advantages and disadvantages. The acquirers of the Mergers and acquisitions should get the best benefit for the purposes of mergers and acquisitions, combined with the characteristics of the enterprise's own market position and its position, and choose a reasonable choice of payment in order to design the best M & A program.
4.5 Cash offer by L’Oreal plc for the acquisition of YSL group
L’Oreal group pursued a strong acquisition strategy in history, The
purpose of this strategy was to introduce new business lines, streamline production, and expand the types of products under company control. Over the next few years, the success of these acquisitions will have to be evaluated as the relentless demand for the consumer's loyalty will surely continue. The company acquired o a lot of companies, such as ShuUemura in 2002, Yuxi in 2004, PureOlogy in 2007, YSL group in 2008. Now I will analysis the case of the company acquired the YSL group.
Agreed by the Board of Directors in January 23 of 2008, L’Oreal group send an open offer to the Pinault Printemps-Redoute (PPR) Group in the some day, the agreement as follow: the L’Oreal group acquired the YSL Beaute which include the Roger&Gallet ,the value of this acquisition will reach to £1.15billion , in accordance with market practice, the company will acquire the Yves Saint and Boucheron brands in the field of perfume and cosmetics on a global long-term, exclusive right to use the L’Oreal make-up brand. Takeovers the business license of the stellamccartney, oscardelarental and ermenegildozegna brands in the field of perfume and cosmetics .according to this offer , PPR group had given the Exclusive bargaining right to the L’Oreal group.
In July 1th of 2008, the L’Oreal group claimed that they had signed the final agreement with YSL group, and the YSL group will in the consolidated statements of the L’Oreal group since June 30. The payment of this acquired were cash ,and the company lend money from bank.
YSL Beauté made sales of around €650 million in 2007with its Yves Saint Laurent brand as well as with its Roger &Gallet, Boucheron, Stella McCartney, Oscar de la Renta and Ermenegildo Zegna brands. The main items of the provisional acquisition balance sheet of YSL Beauté at June 30th, 2008 are as follows:
€ millions
Non-current assets 135.1#p#分頁標題#e#
Current assets 319.5
Non-current liabilities -84.3
Current liabilities -277.3
Total net equity acquired 93.0
This acquired increased the good of the company was€588.5 millions. From the balance sheet of YSL Beauté at June 30th, 2008,we know the L’Oreal group pay the premium of €10.93 millions. While compared to the market value ,I think it was a good deal. Especially when we use the DCF model to value this acquired, I think it will be precisely , YSL Beauté made sales of around €650 million in 2007, and€630million in 2006, we can forecast the growth of the sale may stably ,maybe it will be 5%, so I think the price (€11.5billion)was a good price. We also can see the response of the stock market, the stock price of these companies were increase, so I think investors had a good expect of this acquired.
The acquisition was applauded by industry observers. This acquisition will provide a great opportunity for the hign-end cosmetics of the L’Oreal group, and the brands of the YSL group will have the complement with the brands of the L’Oreal group . it was not only accelerate the development of it own , but also this strategic agreement would reinforce the L’Oreal group in the high-end cosmetics market.
A good move for L’Oréal since it adds scale (50%+) to their Prestige business, with a useful new brand franchise in Yves Saint Laurent, which complements – but doesn’t upstage – their current portfolio of Lancôme, Armani, Ralph Lauren, etc. from L’Oréal’s point of view, a more U.S. focus would have been nice (70% of YSL sales are in Europe). But the opportunity is probably too good to miss.It would have suited Estée Lauder down to the ground, giving them much needed scale in both Europe and Fragrance at a stroke, but the deal was evidently too rich for them.
From the analysic above, I think it was really a good trade, firstly they may have a Synergy, and complement each other, secondly, the ysa group can epand to international markets by this way, especially use the sales channels of the L’Oreal group, while the L’Oreal can entry into the high-end market. The high-end market of the Perfume and cosmetics have a higher gross margin, it would increase the value of the company.Thirdly, it may decrease the cost, such as manage cost, sales expense, increase the profit of the company. In summary, I think this acquired was a good trade.http://www.ttc-switch.com

參考網址：
http://guide.ppsj.com.cn/art/9063/2007nolyjtzysjgy/
資料：
A mILEStOnE YEAR WItH tHE ACquISItIOn OF YVES SAInt LAuREnt BEAutÉ
the Luxury Products Division significantly enhanced its portfolio in 2008 with the acquisition of YSL Beauté,
consolidated since June 30th, 2008. Reinforcing its leadership in fragrances, where it is number 1, not only in the men’s but #p#分頁標題#e#
now also in the women’s market, it isThesis is provided by UK thesis base http://www.ttc-switch.com/
 consolidating its strategic positions in make-up with the Yves Saint Laurent brand.
through this acquisition, the group now has the opportunity of becoming world number 1 in the luxury cosmetics market,
with an extensive array of complementary brands with strong identities. Backed up by the group’s research and
a considerable international presence, the division is opening up attractive future growth prospects for the YSL brands.