Professional Documents
Culture Documents
Acknowledgement
Last and the most impartially my sincere thanks to my respected father and
mother for this excellent upbringing and seeing a dream in me.
GAURI SHANKAR
(MBA 2ND SEM.)
Preface
A merger is a tool used by companies for the purpose of expanding their operations often aiming at an
increase of their long term profitability. There are 15 different types of actions that a company can take
when deciding to move forward using M&A. Usually mergers occur in a consensual (occurring by mutual
consent) setting where executives from the target company help those from the purchaser in a due
diligence process to ensure that the deal is beneficial to both parties.
Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding
shares of a company in the open market against the wishes of the target's board. In the United States,
business laws vary from state to state whereby some companies have limited protection against hostile
takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise
known as the "poison pill".
Historically, mergers have often failed to add significantly to the value of the acquiring firm's shares
Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off
employees, operating at a more technologically efficient scale, etc.), reducing taxes, removing
management, "empire building" by the acquiring managers, or other purposes which may or may not be
consistent with public policy or public welfare. Thus they can be heavily regulated, for example, in the
U.S. requiring approval by both the Federal Trade Commission and the Department of Justice.
The U.S. began their regulation on mergers in 1890 with the implementation of the Sherman Act. It was
meant to prevent any attempt to monopolize or to conspire to restrict trade. However, based on the
loose interpretation of the standard "Rule of Reason", it was up to the judges in the U.S. Supreme Court
whether to rule leniently (as with U.S. Steel in 1920) or strictly (as with Alcoa in 1945).
Index
Merger …………….4
Introduction ………………….4
Meaning & Definition …………………..4
Economics/Reasons of Merger …………………...4
Objective ………………….6
Type of Mergers ………………….6
Legal & Procedural aspects of Merger……………….6
Costs & benefits of a Merger …………………..7
Acquisition ………………8
Concept …………………..8
Meaning & Definition …………………….8
Five sins of Acquisition ……………….9
Managing an acquisition Programmed ………………..10
i) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the amalgamation.
ii) All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities or the amalgamated company by virtue of the amalgamation.
iii) Shareholders holding not less than nine-tenths in value of the shares in the amalgamating company
or companies (other than shares already held therein immediately before the amalgamation by or by a
nominee for, the amalgamated company by virtue of the amalgamation.
According to the Companies Act, 1956, the term amalgamation includes ‘absorption’. In S.S Somayajula vs. Hop
Prudhommee and Co. Ltd., the learned Judge refers to amalgamation as “a state of things under which either two
companies are joined so as to form a third or one is absorbed into or blended with another.”
Economics/Reasons of Mergers
A number of mergers, take-overs and consolidation have
A
taken place in our country in the recent times. One of the
major reasons cited, for such mergers, is the liberalization of G
the Indian economy. Liberalization is forcing companies to E. OPTIMAL
SCALE OF
enter new businesses, exit from others, and consolidate in C OPERATIONS
some simultaneously. The following are the other important
reasons for mergers or amalgamations.
SIZE OF
Economies of Scale: An amalgamated company will have more resources at its command than the individual
companies. This will help in increasing the scale of operations and the economies of large scale will be availed.
These economies will occure because of more intensive utilization of production facilities, etc. these economies
will be available in horizontal mergers (companies dealing in same line of products) where scope of more intensive
use of resources is greater. The economies will occur only upto a certain point of operations known as optimal
point. It is a point where average costs are minimum. When production increases from this point, the cost per unit
will go up. The optimal point or production is shown with the help of a diagram also (abow).
1) Operating Economies: A number of operating economies will be available with the merger of
two or more companies. Duplicating facilities in accounting, purchasing. Marketing. Etc. will be
management emerging from the amalgamation. The amalgamated companies will be in a better position to
operate than the amalgamating companies individually.
2) Growth and Diversification: As stated earlier, merger/amalgamation of two or more firms has
been used as a dominant business strategy to seek rapid growth and diversification. The merger improves
the competi- tive position of the merged firm as it can command an increased market share. It also offers a
special advantage because it enables the merged firm to leap several stages in the process of expansion. In
a saturated market, simultaneous expansion and replacement through merger/takeover is more desirable
than creating additional capacities through expansion. A merger proposal has a very high growth appeal,
and its desirability should always be judged in the ultimate analysis in terms of its contribution to the
market price of the shares of the merged firm. The merged firm can also seek reduction in the risk levels
through diversification of the business operations. The extent to which risk is reduced, however, depends
on the correlation between the earning of the merging (combining) firms. A negative correlation between
the combining firms always brings greater reduction in the risk whereas a positive correlation leads to less
reduction in risk.
3) Utilization of Tax Shields: When a company with accumulated losses merges with a profit
making company it is able to utilize tax shields. A company having losses will not be able to set off losses
against future profits, because it is not a profit earning unit. On the other hand if it merges with a concern
earning profit then the accumulated losses of one unit will be set of against the future profits of the other
unit. In this way the merger will enable the concern to avail tax benefits.
4) Increases in Value: The value of the merged company is greater than the sum of the independent
values of the merged companies. For example, if X Ltd. and Y Ltd. merge and form Z ltd., the value of Z
Ltd. Is expected to be greater than the sum of the independent values of X Ltd. & Y Ltd.
5) Eliminations of Competition: The merger of two or more companies will eliminate competition
among them. The companies will be able to save their advertising expenses thus enabling them to reduce
their prices. The consumers will also benefit in the form of cheaper or goods being made available to
them.
6) Economic Necessity: Economic necessity may force the merger of some units. It their are two
sick units, government may force their merger to improve their financial position and overall working. A
sick unit may be required to merge with a healthy unit to ensure better utilization of resources, improve
returns and better management. Rehabilitation of sick units is a social necessity because their closure
many result in unemployment etc.
OBJECTIVE
The company main objective is Successful merger creates a larger industrial organization than before,
survives and provides a basis for growth. Earnings on capitalization and dividend records determine
the success of merger.
TYPE OF MERGERS
1) Horizontal Merger: When tow or more concerns dealing in same product or service join together,
it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the
units. Besides avoiding competition, there are economies of scale, marketing economies, elimination of
duplication of facilities, etc.
2) Vertical Merger: A vertical merger represents a merger of firms engaged at different stages of
production or distribution of the same product or service. In this case two or more companies dealing in
the same product but at different stages may join to carry out the whole process itself. A petroleum
company may set up its own petrol pumps for its selling. A railway company may join with coal mining
company for carrying coal to different industrial centers.
3) Conglomerate merger: When two concerns dealing in totally different activities join hands it will
be a case of conglomerate merger. The merging concerns are higher horizontally nor vertically related to
each other. E.g a manufacturing company may merge with an insurance company.
1) Analysis of Proposal by the Companies: Whenever a proposal for merger comes up then
managements of concerned companies look into the pros and cons of the scheme. The likely benefits such
as economies of scale, operational economies, improvements in efficiency, reduction in cost , benefits o
diversification, etc. are clearly evaluated. The likely reactions of shareholders, creditors and others are also
assessed. The taxation implications are also studied. After going through the whole analysis work, it is
seen whether the scheme will be beneficial or not. It is pursued father only if it will benefit the interested
parties otherwise the scheme is shelved.
2) Determining Exchange Rations: The merger schemes involve exchange of shares. The
shareholders of amalgamated companies are given shares of the amalgamated company. It is very
important that a rational ratio of exchange of share should be decided. Normally a number of factors like
book value per share, market value per share, potential earnings, and value of assets to be taken over are
considered for determining exchange rations.
3) Approval of Board of Directors: After discussing the amalgamation schme thoroughly and
negotiating the exchange ratios, it is put before the respective Board of Directors or approval.
4) Approval of Shareholders: After the approval of this scheme by the respective Boards of
Directors, it must be put before the shareholders. According to section 391 of Indian companies act, the
amalgamation scheme should be approved at a meeting of the members or class of the members, as the
case may be, of the respective companies representing three-forth in value and majority in number,
whether present in person or by proxies. In case the scheme involves exchange or shares, it is necessary
that is approved by not less than 90 per cent of the shareholders (in Value) of the transferor company to
deal effectively with the dissenting shareholders.
5) Consideration of Interests of the Creditors: The views of creditors should also be taken into
consideration. According to section 391 amalgamation scheme should be approved by majority of
creditors in numbers and three-forth in value.
6) Approval of the Court: After getting the scheme approved, an application is filed the court for its
sanction. The court will consider the viewpoint of all parties appearing, if any, before it, before giving its
consent. It will see that the interests of al concerned parties are protected in the amalgamation scheme. The
court may accept, modify of reject and amalgamation scheme and pass orders accordingly. However, it is
up to the shareholders whether to accept the modified scheme or not.
7) Clearance under MRPT Act: Ever scheme of amalgamation or merger requires the approval of
Central Government under MRPT Act. The idea behind this approval is to se that it does not result in
control, ownership and management of important undertakings into a few hands and which is not likely to
be public interest. Any scheme of amalgamation or merger leading to concentration of economic power is
not allowed by the government.
The cost of the merger, from the point of view of firm A, assuming that compensation to firm B is paid in cash, is
equal to the payment made for acquiring firm B less the present value of from B as a separate entity. Thus,
The net present value (NPV) of the merger from the point of view of firm A is the difference between the benefit
and the cost of befined above. So
The net present value of the merger from the point of view of firm b is simply the cost of the merger from the point
of view of firm A. Hence,
Example:- Firm A has a value of Rs. 20 million and firm B has a value of Rs. 5 million. If the two firms merge,
cost savings with a present value of Rs. 5 million would occur. Firm A proposes to offer Rs. 6 million cash
compensation to acquire firm B. Calculate the NPV of the merger to the two firms.
In this example PVA =Rs. 20 million, PVB = Rs. 5 million, PVAB= 25 million, Cash = Rs. 6 million.
Therefore
ACQUISITION
Concept: - As essential feature of merger through absorption as well as consolidation is the combination of the
companies. The acquiring company takes over the ownership of one or more other companies and combines their
operations. However, an acquisition does not involve combination of companies. It is simply an act of acquiring
control over management of other companies. The control over management of another company can be acquired
through either a ‘friendly take-over’ or through ‘forced’ or ‘unwilling acquisition’.
Takeovers have become commonplace in the Indian corporate world. Some of the prominent takeovers witnessed
recently are:
Hindujas : Ashok Leyland
Regulation of Acquisition
Takeover may be regarded as a legitimate device in the market for corporate control provided they as properly
regulated by the following principles:
1) Transparency of the Process: A takeover affects the interests of many parties and constituents
such as shareholders, employees, customers, suppliers, contending acquirers, creditors, and others. Hence
it should be conducted in an open maner. If the process is transparent, takeovers will be regarded by
various parties and consitituents as a legitimate device in the market for corporate control.
2) Interest of small shareholders: in a takeover the ‘controlling block’ which often tends to be
between 20 to 40 per cent is usually acquired from a single seller (occasionally it may be acquired from
many sellers through market purchases). Typically the ‘controlling block’ it bought at a ‘negotiated’ price
which is higher than the prevailing market price. What happens to the other shareholders? The takeover
code should ensure that the other shareholders should not suffer any disadvantage.
3) Realization of Economic Gains: The primary economic rationale for takeovers should be to
improve the efficiency of operations and promote better utilization of resources. In order to facilitate the
realization of these economic gains, the acquirer must enjoy a reasonable degree of latitude for
restructuring operations, widening of product range, redeployment of resources, etc. in addition, suitable
fiscal incentives, particularly when takeovers contribute to rehabilitation of ailing units, must be provided.
4) NO Undue Concentration of Market Power: While the regulatory framework must be
conducive to the realization of economic gains. It must prevent concentration of market power. The
acquirer should not, as a result of the takeover, enjoy undue market power which can be used to the
detriment of customers and others.
5) Financial Support: If takeovers are regarded as useful devices for improving the quality of
management and efficiency of operation, they should not remain the preserve of those who are financially
strong. Suitable financial mechanisms should be developed to enable competent persons, irrespective o
their financial resources, to participate in takeover exercise. Successful entrepreneurs and managers with
proven abilities and trace record should have access to funds provid3d by financial institutions or investors
through the capital market to support their takeover proposals.
1) The acquirer should intimate to the target company and the concrn3d stock exchange as soon as its
holding crosses 5% of the voting capital of the target company.
2) No sooner the holding of the acquire crosses 10% of voting capital of the target company it should
intimate this to the concerned stock exchange. At the same time, it should offer to other shareholders of the
company, through a public announcement, a minimum of 20% of this voting capital of the target company
through an offer document. The offer should not be priced lower than the average price of acquisition
during past one year.
3) The public announcement of offer should contain particulars like the object and terms of the offer.
The identity of the ultimate pers9on seeking to acquire shares, the intention of acquisition, and so on.
The Purpose of these guidelines is to:
The American Management Association examined 54 big mergers in the late 1980s and found that roughly one-
half of them led to fall in productivity or profits or both. Warren Hellman says: “So many mergers fail to deliver
what they promise that there should be a presumption of failure. His burden of proof should be on showing that
anything really good is likely to come out of one”. It appears that acquisitions are plagued by five sins:
1) Straying Too Far Afield: Very few firms have the ability to successfully mange diverse business.
As one study revealed. 42% of the acquisitions that turned sour were conglomerate acquisitions in which
the acquirer and the acquired lacked familiarity with each other’s business. The temptation to stray into
unrelated areas that appear exotic and very promising is often strong. However, the reality is that such
forays are often very risky.
2) Striving for Bigness: Size is perhaps a very important yardstick by which most organizations
business or otherwise, judge them. Hence, there is a strong tendency on the part of mangers, whose
compensation is significantly influenced by size, to build big empires. The concern with size may lead to
unwise acquisitions. Hence, when evaluating an acquisition proposal keep the attention focused on how it
will create value for shareholders and not on how it will increase the size of the company.
3) Leaping before Looking: Failure to investigate fully the business of the seller is rather common
the problems here are
a. The seller may exaggerate the worth of intangible assets (brand image, technical know-
how, patents and copyrights, and so on).
b. The accounting report may be deftly window-dressed, and
c. The buyer/may not is able to assess the hidden problems and contingent liabilities nor may
simple brush them aside because of its infatuation with the target company. Veterans in this game
strongly argue that the negotiating parties must searchingly examine the other side’s motivations.
4) Overpaying: in a competitive bidding situation, the naïve ones tend to bid more. Often the highest
bidder is one who overestimates value out of ignorance. Though he emerges as the winner he happens to
be in a way the unfortunate winner. This is referred to as “winner’s curse” hypothesis. As Copeland, et al
says: “In the heat of a deal, the acquirer may find it all too easy to bid up the price beyond the limits of a
reasonable valuation. Remember the winner’s curse. If you are the winner in a bidding war, way did your
competitors drop out?”
5) Failing to integrate well: Even the best strategy can be ruined by poor implementation. A
precondition for the success of an acquisition is the proper post=acquisition integration of two different
organizations. This is a ci\complex task which may not be handled well. As Copeland et al. say:
“Relationships with customers, employers, and suppliers can easily be disrupted during the process; and
this disruption may cause damage to the value of the business. Aggressive acquirers often believe they can
improve the target’s performance by injecting better talent, but end up chasing much of the talent out.”
As the changes of failure in an acquisition can be high, it should be planned carefully. It pays to develop a
disciplined acquisition program me consisting of the following steps:
Step 1: Mange the Pre-Acquisition Phase: A good starting point of a merger and acquisition programme for an
acquiring company is to institute a through valuation of the company itself. This will enable the acquiring
company to understand well its strengths and weaknesses and deepen the acquirer’s insights into the structure of
its industry. It will also help in identifying ways and means of enhancing the value of the acquiring firm so that the
firm can minimize the changes of becoming a potential acquisition candidate itself.
Armed with this knowledge, mangers of the acquiring firm can do brainstorming that will throw up worthwhile
acquisition ideas. An opportunity that strengthens or leverage the core business or provide functional economies of
scale, or result in transfer of skill or technology need to be identified.
Step 2: Screen Candidates: The ideas generated in the brainstorming sessions and the suggestions received from
various quarters (merchant bankers, consultants, corporate planners, and so on) will have to be filtered. Screening
criteria that make sense for the acquiring company’s perspective need to be used. For example. And acquirer may
eliminate companies that are:
Each candidate ought to be valued as realistically as possible. Valuations should not be clouded by wishful
thinking; it should not be vitiated by an obsession to acquire the target company
Step 4: Determine the Mode of Acquisition: As discussed earlier, the three major modes of acquisition are
merger, purchase of assets, and takeover. In addition, one may look at leasing a facility or entering into a
management contract. Though these do not tantamount to acquisition, they give the right to use and manage a
complex of assets at a much lesser cost and commitment. They may eventually lead to acquisition. The choice of
the mode of acquisition is guided by the regulations governing them. The time frame the acquirer has in mind, the
resources and acquirer wishes to deploy, the ddegree of control the acquirer wants to exercise, and the extent to
which the acquirer is willing to assume contingent and hidden liabilities.
Step 5: Negotiate and consummate the Deal: For successful negotiation, the acquiring firm should know how
valuable the acquisition candidate is to the firm, to the present woner, and to other potential acquirers. While
negotiating the deal an acquirer would do well to remember the following advice of Copeland et al. “your
objective should be to pay one dollar more than the value to the next highest bidder, and an amount that is less than
the value to your.” This implies that the acquiring firm should identify not only the synergies that it would derive
bu also what other acquirers may obtain. Futher, the acquiring firm should assess the financial condition of the
existing owner and other potential acquirers.
Step 6: Manage the Post-Acquisition Integration: Generally after the acquisition, the new controlling group
tends to the much more ambitious and is inclined to assume a higher degree of risk. It seeks to:
2. Encourage a proactive, rather than a reactive, stance towards external developments, and
The post liberalization period was of mergers and acquisitions and still it is continuing as a strategic driver for market
Dominance, Geographical expansion, leverage in resource and capability acquisition, competence, adjusting to
Competition. M&A’s are strategic alliances. People Management plays a critical role in M&A. People issues like staffing
decision, organizational design, etc., are most sensitive issues in case of M&A negotiations, but it has been found that
These issues are often being overlooked.
Geographical Expansion
Companies use acquisitions to extend geographical reach and global market share through new market entry
Leveraging Competence
Companies merge to leverage their competence in NPD, credit risk and debt management, etc.
Resource & Capability Acquisition
Companies also merge to gain resource and capability acquisition, which they may lack, and would otherwise be difficult for
them to build on their own.
Adjusting to Competition
Companies are sometimes forced into acquisitions by the acquisition strategy of their principal competitors.
Phases of Merger
There are three phases of merger: -
Run-up or Pre-Merger
Used to develop an awareness of the likely challenges and pressure points.
Generally, the companies concentrate only on the strategic aspects and legal issues during the pre-M&A planning period.
Human issues like staffing decisions, organizational design, etc., take a back seat.
It is essential to plan and manage these issues at pre-takeover planning period.
Immediate Transition (first 100 days or 6 months)
Different team is used to manage this.
Appointment of new board of directors and key appointments and redundancies.
Effective hand-over is essential between teams.
Extent of integration is defined by the need to maintain the separateness of the acquired business.
It involves integration of the following: -
* Systems
* Processes and procedures
* Strategy
* Reporting systems
* People
Involves re-distribution of power between the merging firms.
Conflict of interests may hinder an effective integration process.
HR Issues & their Implications on Various Stages of M&A
Stage 1: Pre Combination - The HR issues in the pre merger phase are: -
Identifying reasons for the M&A
Forming M&A team leader
searching for potential partners
Selecting a partner
Planning for managing the process of M&A
Planning to learn from the process
The HR implications in this phase are: -
Knowledge and understanding need to be disseminated
Leadership needs to be in place
Composition of team's impact success
Systematic and extensive pre-selection and selection
Conducting thorough due diligence of all areas
Cultural assessment
Planning for combination which minimizes problems at a later stage
Creating practices for learning and knowledge transfer
Stage 2: Combination - The HR issues in this phase are: -
Selecting the integration manager
designing / implementing teams
Creating the new structure strategies and leadership
Retaining key employees
managing the change process
The HR implications in this phase are: -
Selecting the appropriate candidate
Creating team design and selection which are critical for transition and combination success
Communicating the benefits of merger
Polaris Merged with OrbiTech Acquired IPR of OrbiTech range of Orbi Banking product suite.
Acquired global energy practice of American It acquired skilled professionals and a strong customer base in
Wipro
Management Systems The area of energy consultancy.
Wipro Acquired the R&D divisions of Ericsson It acquired specialized expertise and people in telecom R&D.
Wipro GE Medical Systems (India) Turn gave it a platform to expand its offerings in the Indian and Asia Pacific
healthcare IT market.
Expanded its presence in the Japanese and the Chinese markets. It also plans to use it
Mphasis Acquired China-based Navion software
as a redundancy centre for its Indian operations.
Value Deals
£m Done
7,000 120
6,000 100
5,000
80
4,000
60
3,000
2,000 40
1,000 20
0 0
2002 2003 2004 2005 2006
EUROPE
INDIA 40.2%
35%
UK
25.8%
Cum.
Deals Done Deals
Deals
Done Cum. Deals Done
45 300
40
250
35
30 200
25
150
20
15 100
10
50
5
0 0
3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Value of Deal £m
Bibliography
Books
Pandey, I.M., financial management, New Delhi, vikas publishing house pvt. Ltd., 1978.
Khan&Jain, financial management, Tata McGraw hills
Internet sites:
http:// en. Wikipedia. Org/ wiki/ mergers and acquisition
http:// www. Business standard. Com
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