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Recent Trends in the French LBO Market

Discuss about the Plurality of Merger and Acquisition Transactions.

In the business environment, many corporate entities went for acquisition and merger to obtain the control of the market position.  Among the last ten years, 2017 has seen the maximum number of mergers and acquisition deals and these deals have been settled or signed in France which had amounted approximately to $245.8 billion (€250 billion). The above figure that has been included in the process of acquisition had been signed in the year of 2016 but had been completed in the year 2017. The domestic and international factors had also sufficiently contributed to the strengthening and attracting the French market. Therefore, this had boosted the confidence of the investor (Greve and Man Zhang 2017). In not only France but global merger and acquisition activity had contributed $ 3.6 trillion on an worldwide basis in the financial year of 2017. In the last three consecutive year, the amount has crossed more than $3 trillion. In the European continent the amount of merger and acquisition contributed $867.5 billion, which is, more than 17% compared to previous year 2016. In France, the amount increased by a percentage of 50% which is more than the previous year. However, the total merger and acquisition amounted to  $245.8 billion.

This particular study aims to analyse the merger and acquisition activities that have been carried out by the corporate entities of TOTAL and DIRECT ENERGIE that have been situated in France.

The merger and acquisition activities are generally carried out by the corporate entities in order to strengthen the business position of the companies. This means that merger and acquisition is a general term, which results in the consolidation of the corporate entities or the assets via the different categories of financial transactions. In case of merger, the boards of director of the two companies that are going to be merged result in a mutual agreement contract along with the seeking of the approval of the shareholders. Moreover, after the merger activities have been carried out the company that has been acquired ceases to exist. The acquired company becomes a part of the acquiring company (Tanriverdi and Uysal 2015). This can be further explained with the help of an instance in which the Digital Computers have been absorbed by the corporate entity of Compaq.

In case of acquisition, the company that is acquiring another company results in the obtaining of the majority of the stake in regards to the firm that has been acquired. Moreover, the company that is acquiring another company undergoes no change in regards to its name or legal structure.

Difference between Merger and Acquisition

The primary difference between a merger and acquisition is that a merger takes place when two separate entities results in the combination of the corporate entities that result in the formation of a joint organization that has been resulted in the creation of equal partners. On the other hand, acquisition refers to the purchasing of an entity by another corporate entity. It must be noted here that the formation of a new company does not take place from the emergence of the acquisition of the acquired company. Acquisitions are often known as takeovers that reflects a negative process. This means that in case of a takeover, the acquiring company taking over the acquired company carries out the process forcibly (Brueller et al. 2018). This is because the target firm displays enough resistance to being bought by the acquired company. Therefore, it can be understood that the process of merger requires two companies for the consolidation of an entirely new entity. This new entity will have a new ownership and a structure of management. Moreover, an acquisition takes place at the time when a single company results in the taking over of the decisions that are operational in nature in regards to the acquired company. It must be stated here that the situation of friendly mergers do not take place often. This is due to the fact that the combination of the forces will result in the transfer of authority. This transfer of authority covers up the benefit of merger and acquisition.

A recent trend that has been observed refers to the fact that the French companies are forcing the merger and acquisition activities in Europe. The situation that has been represented indicates a sustainable and good health in the France LBO market. An oil based company in France named TOTAL has taken steps to acquire the French electricity retailer DIRECT ENERGIE. The companies merge with other companies to build a stronger control over the market or the case might be such that, some companies who are weak have decided to work jointly in the market with the stronger companies in order to survive in the market (Zhang et al. 2015). In some cases, the companies acquire other companies to get a hold of the diversified business opportunities. This means that instead of creating a new company the companies tend to acquire old or weak companies for the purpose of carrying on their business. On the other hand, the companies that fall under the similar industry acquire companies which belong to that industry, in order to make strong market contribution or to outscore it competitors. In the case of TOTAL, which had acquired DIRECT ENERGIE gave it a competitive edge to the state owned company named EDF situated in France.

The Acquiring Company: TOTAL S.A

 In this analysis, the acquiring company is oil and exploration based company named TOTAL S.A. It is one of the world’s top seven supermajor oil companies. The company has vast business empire over the globe in regards to the oil chain. The company explores crude oil and natural gas from the oil fields, engages in refining the crude oil, generates electricity, carries out transportation activities and marketing and international crude oil treading. The company is not only doing business on natural resources of energies but it also focuses on the future opportunities. They have established the solar energy and the other renewable energies. The company’s headquarter is situated in Courbevoi, France. The company had been registered on 28 march 1924. The company had also spent a large time span in the oil and energy industry and had resulted in the expansion of the business over the globe (Holburn and Vanden Bergh 2014). The company also engages in the selling of petroleum and the by-products of petroleum like lubrication of the oil, oil grease for the machines, and other chemical products. The company is also focusing on low carbon energies. Low carbon energies are regarded as the sources of energies, which emits low or no carbon dioxide in the environment. The company has good command over the renewable energy sources like solar energy, biomass and others.

The TOTAL S.A remains focused and controlled in the volatile environment of oil business. Where the oil price is falling significantly the company performing exceptionally well.

  • The company will increase the OPEX savings from $3 to $4 billion by 2018.
  • The company contributed in the growth with Capex at a sustainable level of $15 to $17 billion after 2017.
  • The company’s production capacity is growing by 5% every year.

The company is focusing on the activities for a medium term period.

  • The company is trying to lower the breakdown portfolio for of oil. As the oil exploration cost is very high and the cost of setting up of the refineries and transportation as well as distribution has been so high that the breakeven position of the company has become high (Holburn and Vanden Bergh 2014). Therefore, the company is focusing on the various ways to cut down the breakeven point on both upstream and the downstream.
  • The company is trying to acquire the large-scale market on overall oil and fuel gas chains.
  • The company is focusing on the low carbon energy business. In current environment, the dependable source of energy is fossil fuel, which is hazardous for the environment. In the use of fossil fuel, many toxic gases like carbon dioxide, methane, and other gases have contaminated the global environment. The company is very much aware of the fact that in the near future, the storage of the fossil fuels will go empty and then the company will enjoy a better market as they are already have been using the renewable resources of the energy (Bindabel et al. 2017).

Total is one of the world’s leading profit-making organisation. The company has vast number of products that they are offering in the market therefore the company is not dependent on a particular product. Moreover, the company’s portfolio is much divfersified in nature. The company is not cautious about the shortage of the energy resources rather the company has been focusing more on the renewable resources of the future. The company has revealed in its annual report that in the future, the renewable resources will have to be used and for that, the company’s research and development team is trying to identify the various source of energy resources. The company is creating a huge customer base for the future market of the company. The future scope of the company is reliable as the company’s business policy is liberal in terms of adopting the change.

Corporate Development Policies of TOTAL S.A

The company is focused on the management of the building up of the team, producing the variability of the market products, as well as arranging strategic alliance and the identification of the opportunities in regards to merger and acquisition. The company also results in the securing of the corporate financing and the management of the intellectual property. The company wants to grow the marketing service positions by capitalising the customer-focused culture. The company is keen to grow the customer base and to make them reliable by providing good products at a comfortable price. In the current position, the company has a huge customer base but the company wants more customer for securing its business future (Boschma and Hartog 2014). The company has adopted some corporate development policies, which have been listed down as follows:

  • Creation of the value for the shareholders: the company is focusing on lowering the cash flow in relation to the breakeven point. In the previous year, the corporate entity of TOTAL has spent a total of $55 billion for the dividends, resource renewal and cash flow operation of Capex. The company has continued growth in regards to the cash flow. The company has also provided an accurate balance sheet as it has maintained a strong and improved shareholder value by increasing the profitability.
  • The company has an objective to obtain at least 10% return on investment. The company policy is to discontinue scrip dividend by 2017, and the excessive cash flow will be allotted by the buyback of the scrip share. This will boost up the confidence of the shareholders of the company (Koenig et al. 2014). In addition to that, the company president of exploration and production assured the improvement in the operational efficiency and has also resulted in the cutting down of the cost in regards to the growth of the projects. The financial position of the corporate entity has been strengthened but the company is cautious about the share valuations. The company is particularly selecting the merger and acquisition process for the growth and expansion of the company. The company has decided to acquire the 74% steak DIRECT ENERGIE. The acquired company is a renowned company for electricity and gas distribution in France.

Direct Energie is a France based electric generation and Distribution Company. The company also offers natural gas and renewable energy. The company has been incorporated in the year 2003 as an alternative of monopolistic ELECTRICITE DE FRANCE. The company has the chances of potential growth and market improvement. By utilising the gas station, the company produce 800 megawatts electricity for the purpose of consumption. The company is performance is not sufficient to generate profits for its shareholders. In the year, the TOTAL S.A claimed that they have interest to buy 74% of the stocks of the Direct Energie by purchasing directly from the stockholders (Parola et al. 2015).

 In the given case, the Total S.A has adopted a policy to acquire the Direct Energie by acquiring the liquefied natural gas portfolio. The company accepted that they would buy 74.33 percent of the total share capital. The consideration was being settled by 1.4 billion euro ($1.73 billion). The company decided to pay 42 euros for each share purchase and 30 percent security premium. After April 2017 closing market price and 24 percent on the last three months average price (Han et al. 2016). The takeover is will increase the external growth of the company and TOTAL will become the second largest company in the liquefied natural gas sector.

The company had been acquired because of the friendly group policy to expend the circle of gas electricity chain values and to develop low carbon energy fuel. The company is also concerned to outscore the state owned market leader EDF. This acquisition will help the company to acquire 2.6 million new clients (Kansal and Chandani 2014). Total is expecting to become the leading electricity power supplier in France and Belgium by 2022. By the acquiring of the Energie the purchasing company will have more 3.8 million new customer base by the end of December 2017, whereas the rival company holds the 85.5 percent contribution in the power consumption.

The Acquired Company: Direct Energie

In the acquisition of the DIRECT ENERGIE the company will buy 74.33 % of shares form the direct shareholders of the acquired company by paying 1.4 billion euros.

After the acquisition, the TOTAL will issue the remaining share for subscription to the investors for 42 euros per share at a premium, which was unanimously approved by the Direct Energies’ board. Ex- dividends of .35 euro per share.  Total will offer the securities of direct Energies to trade on the Euronext Paris, which at the quoted price of 42 euro per share after the permission of French Financial Market Authority (Autorité des marchés financiers) mandatory tender. The above quoted price represents 30% premium over the Direct Energie’s closing share price on April 17, 2018, a 24% premium above the volume weighted average share price over the last  three months, and 13% above the volume weighted average of last six months share price. The value will be equal to 12.5 times of the EBITDA of the earnings of Direct energies for 2018. In the Direct Energie’s Board of Directors meeting on April 17, they have concluded that the independent expert considers the quoted price and the terms and tender offer to be fair. The board of has suggested the shareholders to tender their share into the offer that will be proposed (Popli and Sinha 2014). The Direct Energies board appointed independent expert to make the acquisition process is co-responding with the all the relevant litigation and the requirements and regulations. By this acquisition, the TOTAL will expand the existing power generation market. The group of subsidiaries of the total will be complementary with the Direct Energie power generation activities. The TOTAL will acquire the 1.35 gig watts - 800 megawatts of gas-fired power generation capacity and will take over the 550 megawatts power generation from the renewable sources. This will be ad joint with the company’s current capacity of 900 megawatt. The applicable laws and employee representative bodies will guide the transaction process. Further Direct Energies books will be acquire by the TOALT after the prior permission of the European commission. Which is a competent authority to control and approve the procedure of merger and acquisition.

After submitting the Direct energies controlling blocks to the French Financial Markets Authority (Autorité des marchés financiers) the proposed tender could be offered in accordance with the applicable laws and regulations. It is expected that the block of shares will be completed by the third quarter and after blocking the old share, the new tender could be offered. The shares, which is not acted upon the tender, should not exceed 5% of the total issued share capital and voting rights of the Direct Energie. The shareholder who are not willing to purchase the quoted share will be remitted by paying in available cash of the company.

Details of the Acquisition

The company has just started the acquisition procedure. They have obtain the permission form competent authorities. They have fulfilled all the legal criteria. The acquisition process is in the primary stage. The activity of share surrender is expected to be completed by thr third quarter of 2018. After the share surrender, the company will remit the liabilities of the shareholder who are not willing to continue with the company by existing cash reserves of the company.

Conclusion

Form the above analysis, it is derived that the TOTAL S.A has complied with all the required provisions and the acquisition is under process. The acquired company was engaged in the gas energy producer and distributer. The acquired company the DIRECT ENERGIE being a major competitor of state own EDF the purchaser company acquired the acquired company to hold the majority of the market in France and Belgium. Though the acquired company hold, a good market position the company cannot gain the shareholder confidence, as the company is not generating profits. The TOTAL being in the oil exploration and renewable sector business it had emphasis a large portion of the market. The aim of the company is to become a global leader in energy production business. The acquisition of Direct Energie is a step to concur the goal. The company is focusing on the external growth.

References

Bindabel, W., Patel, A. and Yekini, C.O., 2017. The challenges faced by integrating Islamic corporate governance in companies of Gulf countries with non-Islamic companies across border through merger and acquisition.

Boschma, R. and Hartog, M., 2014. Merger and acquisition activity as driver of spatial clustering: The spatial evolution of the Dutch banking industry, 1850–1993. Economic Geography, 90(3), pp.247-266.

Brueller, N.N., Carmeli, A. and Markman, G.D., 2018. Linking merger and acquisition strategies to postmerger integration: a configurational perspective of human resource management. Journal of Management, 44(5), pp.1793-1818.

Greve, H.R. and Man Zhang, C., 2017. Institutional logics and power sources: Merger and acquisition decisions. Academy of Management Journal, 60(2), pp.671-694.

Han, B.S., Park, E.K. and Kang, T.K., 2016. Determinants of Global Merger and Acquisition (M&A) Deals Completion: Focus on the Role of the Firms’ M&A Experience.

Holburn, G.L. and Vanden Bergh, R.G., 2014. Integrated market and nonmarket strategies: Political campaign contributions around merger and acquisition events in the energy sector. Strategic Management Journal, 35(3), pp.450-460.

Kansal, S. and Chandani, A., 2014. Effective management of change during merger and acquisition. Procedia Economics and Finance, 11, pp.208-217.

Koenig, W.P., Kramer, G.A. and Vogel, M.B., Shareholder Representative Services LLC, 2014. System and method of generating investment criteria for an investment vehicle that includes a pool of escrow deposits from a plurality of merger and acquisition transactions. U.S. Patent 8,706,599.

Parola, H.R., Ellis, K.M. and Golden, P., 2015. Performance effects of top management team gender diversity during the merger and acquisition process. Management Decision, 53(1), pp.57-74.

Popli, M. and Sinha, A.K., 2014. Determinants of early movers in cross-border merger and acquisition wave in an emerging market: A study of Indian firms. Asia Pacific Journal of Management, 31(4), pp.1075-1099.

Tanriverdi, H. and Uysal, V.B., 2015. When IT capabilities are not scale-free in merger and acquisition integrations: how do capital markets react to IT capability asymmetries between acquirer and target?. European Journal of Information Systems, 24(2), pp.145-158.

Zhang, J., Ahammad, M.F., Tarba, S., Cooper, C.L., Glaister, K.W. and Wang, J., 2015. The effect of leadership style on talent retention during merger and acquisition integration: Evidence from China. The International Journal of Human Resource Management, 26(7), pp.1021-1050.

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