VALUE CREATION THROUGH MERGERS AND ACQUISITIONS A CASE

RUCHI SUKANRAJ JAIN DPGD/APR12/1125 FINANCE

WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT AND RESEARCH YEAR OF SUBMISSION: FEBRUARY 2 1!

CERTIFICATE FROM THE GUIDE

This is to certify that the project work titled VALUE CREATION THROUGH MERGER AND ACCQUISTION A CASE is a confide work carried out by ASHOK JAIN

"A#$%&&%'( N') DPGD/APR12/1125* a candidate for the Post Graduate Diploma Examination of the Welingkar nstitute of !anagement under my guidance and direction"

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INDE+
PARTICULARS 1 . 0 1 Title page -ertificate from guide ndex ntroduction %c2uisition !erger %d6antage of !erger 7 %c2uisition Distinction between !7% 9usiness :aluation What is :alue #ources of :alue -reation <istory of !erger and %c2uisition !erger 7 %c2uisition laws !erger 7 %c2uisition in 9anking #ector -ertified !erger 7 %c2uisition -ase study PAGE NO) /1 /. /0 /1 /3 /4 13 13 1; .. .0 .4 04 0; 1. 55

5 3 8 4 ; 1/ 11 1. 10 11

INTRODUCTION
We ha6e been learning about the companies coming together to from another company and companies taking o6er the existing companies to expand their business"

With recession taking toll of many ndian businesses and the feeling of insecurity surging o6er our businessmen= it is not surprising when we hear about the immense numbers of cooperate restructurings taking place = especially in the last couple of years" #e6eral companies ha6e been taken o6er and se6eral ha6e undergone internal restructuring= whereas certain companies in the same field of business ha6e found in beneficial to merge together into one company"

n this context it would be essential for us to understand what corporate restructuring and mergers and ac2uisitions are all about" The phrase merger and ac2uisition refers to the aspects of corporate strategy= corporate finance and management dealing with buying= selling and combining of different companies that can aid= finance= or help a growing company in a gi6en industry grow rapidly without ha6ing to create another business entity" The phrase mergers and ac2uisitions refers to the aspect of corporate strategy=

-orporate finance and management dealing with the buying= selling and combining of different companies that can aid= finance= or help a growing company in a gi6en " ndustry grows rapidly without ha6ing to create another business entity"

Thus important issues both for business decision and public policy formulation ha6e been raised" $o firm is regarded safe from a takeo6er possibility" (n the more positi6e side !erger and %c2uisition may be critical for the healthy expansion and growth of the firm" #uccessful entry into new product and geographical markets may re2uire !erger and %c2uisition>s at some stage in the firm?s de6elopment" % 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 mo6e forward using !erger 7%c2uisition" &sually mergers occur by mutual consent setting where executi6es from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties" %c2uisitions can also happen through a hostile takeo6er by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target@s board" n the &nited #tates= business laws 6ary from state to state whereby some companies ha6e limited protection against hostile takeo6ers" (ne form of protection against a hostile takeo6er is the shareholder rights plan= otherwise known as the Apoison pillA" <istorically= mergers ha6e often failed to add significantly to the 6alue of the ac2uiring firm@s shares" -orporate mergers may be aimed at reducing market competition= cutting costs Bfor example= laying off employees= operating at a more technologically efficient scale= etc"C= reducing taxes= remo6ing management= Aempire buildingD by the ac2uiring managers= or other purposes which may or may not be consistent with public policy or public welfare"

A,-.%&%/%'(
%n %c2uisition usually refers to a purchase of a smaller firm by a larger one" %c2uisition also known as a takeo6er or a buyout is the buying of one company by another"

%c2uisition or takeo6ers occur between the bidding and the target company" There may be either friendly or hostile takeo6ers" %c2uisition in general sense is ac2uiring the ownership in the property" n the context of business combination an ac2uisition is the purchase by one company of a controlling interest in the share capital of another existing company"

n the former case= the companies cooperate in

negotiations= in the latter case= the takeo6er

target is unwilling to be bought or the target@s board has no prior knowledge of the offer"

%c2uisition usually refers to a purchase of a smaller firm by a larger one" #ometimes= howe6er= a smaller firm will ac2uire management control of a larger or longer established company and keep its name for the combined entity" This is known as a re6erse takeo6er"

The buyer buys the shares= and therefore control= of the target company being purchased" (wnership control of the company in turn con6eys effecti6e control o6er the assets of the company= but since the company is ac2uired intact as a going business= this form of transaction carries with it all of the liabilities accrued by that business o6er its past and all of the risks that company faces in its commercial en6ironment"

The buyer buys the assets of the target company" The cash the target recei6es from the sellEoff is paid back to its shareholders by di6idend or through li2uidation" This type of transaction lea6es the target company as an empty shell= if the buyer buys out the entire assets"

% buyer often structures the transaction as an asset purchase to AcherryEpickA the assets that it wants and lea6e out the assets and liabilities that it does not" This can be particularly important where foreseeable liabilities may include future= un2uantified damage awards such as those that could arise from litigation o6er defecti6e products= employee benefits or terminations= or

en6ironmental damage"

% disad6antage of this structure is the tax that many jurisdictions= particularly outside the &nited #tates= impose on transfers of the indi6idual assets= whereas stock transactions can fre2uently be structured as likeEkind exchanges or other arrangements that are taxEfree or taxEneutral= both to the buyer and to the seller@s shareholders"

The terms AdemergerA= AspinEoffA and AspinEoutA are sometimes used to indicate a situation where one company splits into two= generating a second company separately listed on a stock exchange"

M01201
!erger is defined as a combination of two or more companies into a single company where one sur6i6es and the other lose their corporate existence" The sur6i6or ac2uires all the assets as well as liabilities of the merged company or companies" Generally= the sur6i6ing company is the buyer= which retains its identity= and the extinguished company is the seller"

!erger is also defined as amalgamation" !erger is the fusion of two or more existing companies" %ll assets= liabilities and the stock of one company strand transferred to Transferee -ompany in consideration of payment in the form of

E2uity share in the transferee company Debentures in the transferee company -ash or % mix of the abo6e modes

n business or economics a merger is a combination of two companies into one larger company"

#uch actions are commonly 6oluntary and in6ol6e stock swap or cash payment to the target"stock swap is often used as it allows the shareholders of the two companies to share the risk in6ol6ed in the deal"

THERE ARE DIFFERENT TYPES OF TAKEOVER:

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FRIENDLY TAKEOVER:3 9efore a bidder makes an offer for another company= it usually first informs that company?s board of directors" f the board feels that accepting the offer ser6es shareholders better than rejecting it= it recommends the offer be accepted by the shareholders"

n a pri6ate company= because the shareholders and the board are usually the same people or closely connected with one another= pri6ate ac2uisitions are usually friendly" f the shareholders agree to sell the company= then the board is usually of the same mind or sufficiently under the orders of the shareholders to cooperate with the bidder" This point is not rele6ant to the &G concept of takeo6ers= which always in6ol6e the ac2uisition of a public company"

HOSTILE TAKEOVER % <ostile takeo6er allows a suitor to bypass a target company?s management unwilling to agree to a merger or takeo6er" % takeo6er is considered HhostileD if the target company?s board rejects the offer= but the bidder continues to pursue it= or the bidder makes the offer without informing the target company?s board beforehand" ;

The hostile takeo6er can be considered in se6eral ways" % tender offer can be made where the ac2uiring company makes a public offer at a fixed price abo6e the current market price" Tender offers in the &#% are regulated with the Williams %ct" %n ac2uiring company can also engage in a proxy fight= whereby it tries to persuade enough shareholders= usually a simple majority= to replace the management with a new one which will appro6e the takeo6er"

%nother method in6ol6es 2uietly purchasing enough stock on the open market= known as a creeping tender offer= to effect a change in management" n all of these ways= management resists the ac2uisition but it is carried out anyway" REVERSE TAKEOVER % 'e6erse takeo6er is a type of takeo6er where a pri6ate company ac2uires a public company" This is usually done at the instigation of the larger= pri6ate company= the purpose being for the pri6ate company to effecti6ely float itself while a6oiding some of the expense and time in6ol6ed in a con6entional P(" <owe6er = under % ! rules = a re6erse take Io6er is an ac2uisition or ac2uisitions in a twel6e month period which for an % ! company would*

Exceed 1//J in any of the class testsK or 'esult in fundamental change in its business = board or 6oting controlK or n the case of an in6esting company = depart substantially from the in6esting strategy stated in its admission document or= where no admission document was produced on

1/

admission = depart substantially from the in6esting strategy stated in its preEadmission announcement or= depart substantially from the in6esting strategy

C45&&%6%,5/%'(& '6 $01201&

H'1%7'(/54 $01201& take place where the two merging companies produce similar product in the same industry" <oriLontal mergers are those mergers where the company?s manufacturing similar kinds of commodities or running similar type of businesses merge with each other"

The

principal objecti6e behind this type of mergers is to achie6e economies of scale in the

production procedure through carrying off duplication of installations= ser6ices and functions= widening the line of products= decrease in working capital and fixed assets

in6estment= getting rid of competition= minimiLing the ad6ertising expenses= enhancing the market capability and to get more dominance on the market"

<oriLontal mergers can sometimes result in monopoly and absorption of economic power in the hands of a small number of commercial entities" %ccording to strategic management and

microeconomics= the expression horiLontal merger delineates a form of proprietorship and control" t is a plan= which is utiliLed by a corporation or commercial enterprise for marketing a form of commodity or ser6ice in a large number of horiLontal merger is more pre6alent in comparison to production or manufacturing" markets" n the context of marketing= horiLontal merger in the context of

H'1%7'(/54 I(/0215/%'( #ometimes= horiLontal merger is also called as horiLontal integration" t is totally opposite in nature to 6ertical merger or 6ertical integration" 11

H'1%7'(/54 M'('8'49
% monopoly formed by horiLontal merger is known as a horiLontal monopoly" $ormally= a monopoly is formed by both 6ertical and horiLontal mergers" <oriLontal merger is that condition where a company is in6ol6ed in taking o6er or ac2uiring another company in similar form of trade" n this way= a competitor is done away with and a wider market and higher economies of scale are accomplished" n the process of horiLontal merger= the downstream purchasers and controlled and as a result of this= production expenses can be

upstream suppliers are also decreased"

H'1%7'(/54 E:85(&%'(
%n expression which is intimately connected to horiLontal merger is horiLontal expansion" This refers to the expansion or growth of a company in a sector that is presently functioning" The aim behind a horiLontal expansion is to grow its market share for a specific commodity or ser6ice"

E:5$840& '6 H'1%7'(/54 M01201&

)ollowing are the important examples of horiLontal mergers* The formation of 9rook 9ond

,ipton ndia ,td" through the merger of ,ipton ndia and 9rook 9ond The merger of 9ank of !athura with - - B ndustrial -redit and n6estment -orporation of merger of 9#E# B9ombay #uburban Electric #upplyC ,td" ndiaC 9ank with (rissa The Power

#upply -ompany"

1.

V01/%,54 $01201& occur when two firms= each working at different stages in the production of the same good= combine"

C'(20(01%, $01201& occur where two merging firms are in the same general industry= but they ha6e no mutual buyer+customer or supplier relationship= such as a merger between a bank and a leasing company" Example* Prudential@s ac2uisition of 9ache 7 -ompany"

C'(24'$015/0 $01201& Two companies that ha6e no common business areas"%s per definition= a conglomerate merger is a type of merger whereby the two companies that merge with each other are in6ol6ed in different sorts of businesses" The importance of the conglomerate mergers lies in the fact that they help the merging companies to be better than before"

T980& '6 ,'(24'$015/0 $01201& Pure conglomerate merger !ixed conglomerate merger

P.10 ,'(24'$015/0 $01201 The pure conglomerate merger is one where the merging companies are doing businesses that are totally unrelated to each other"

M%:0# ,'(24'$015/0 $01201 10

The mixed conglomerate mergers are ones where the companies that are merging with each other are doing so with the main purpose of gaining access to a wider market and client base or for expanding the range of products and ser6ices that are being pro6ided by them " there are also some other subdi6ision of conglomerate mergers like the financial conglomerate the concentric companies and the managerial conglomerates"

R05&'(& 6'1 ,'(24'$015/0 $01201 There are se6eral reasons as to why a company may go for a conglomerate merger" %mong the more common reasons are adding to the share of the market that is owned by the company and indulging in cross selling" The companies also look to add to their o6erall synergy and producti6ity by adopting the method of conglomerate mergers"

B0(06%/& '6 ,'(24'$015/0 $01201& There are se6eral ad6antage of the conglomerate mergers" (ne of the major benefits is that conglomerate mergers assist the companies to di6ersify" %s a result of conglomerate mergers the merging companies can also bring down the le6els of their exposure to risks"

A,,10/%;0 $01201& are those in which an ac2uiring company@s earnings per share BEP#C increase" %n alternati6e way of calculating this is if a company with a high price to earnings ratio BP+EC ac2uires one with a low P+E"

D%4./%;0 $01201& are the opposite of abo6e= whereby a company?s EP# decreases" The company will be one with a low P+E ac2uiring one with a high P+E" The completion of a merger

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does not ensure the success of the resulting organiLationK indeed=

many mergers Bin some -orrecting problems cultureM di6erts

industries= the majorityC result in a net loss of 6alue due to problems"

caused by incompatibilityMwhether of technology= e2uipment= or corporate

resources away from new in6estment= and these problems may be exacerbated by inade2uate research or by concealment of losses or liabilities by one of the partners"

(6erlapping subsidiaries or redundant staff may be allowed to continue= creating inefficiency= and con6ersely the new management may cut too many operations or personnel= losing expertise and disrupting employee culture" These problems are similar to those encountered in takeo6ers" )or the merger not to be considered a failure= it must increase shareholder 6alue faster than if the companies were separate= or pre6ent the deterioration of shareholder 6alue more than if the companies were separate"

ADVANTAGES OF MERGERS AND ACQUISITIONS

!ergers and takeo6ers are permanent form of combinations which 6est in management complete control and pro6ide centraliLed administration which are not a6ailable in combinations of holding company and its partly owned subsidiary"

#hareholders in the selling company gain from the merger and takeo6ers as the premium offered to induce acceptance of the merger or takeo6er offer much more price than the book 6alue of shares" #hareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to Hboots trapping earningsD"

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D%&/%(,/%'( <0/=00( M01201& 5(# A,-.%&%/%'(&

%lthough they are often uttered in the same breath and used as though they were synonymous= the terms merger and ac2uisition mean slightly different things"

1C When one company takes o6er another and clearly established itself as the new owner= the purchase is called an ac2uisition" )rom a legal point of 6iew= the target company ceases to exist= the buyer AswallowsA the business and the buyer@s stock continues to be traded"

.C n the pure sense of the term= a merger happens when two firms= often of about the same siLe= agree to go forward as a single new company rather than remain separately owned and operated" This kind of action is more precisely referred to as a Amerger of e2ualsA" 9oth companies@ stocks are surrendered and new company stock is issued in its place" )or example= both DaimlerE9enL and -hrysler ceased to exist when the two firms merged= and a new company= Daimler-hrysler= was created"

0C n practice= howe6er= actual mergers of e2uals don@t happen 6ery often" &sually= one company will buy another and= as part of the deal@s terms= simply allow the ac2uired firm to proclaim that the action is a merger of e2uals= e6en if it is technically an ac2uisition" 9eing bought out often carries negati6e connotations= therefore= by describing the deal euphemistically as a merger= deal makers and top managers try to make the takeo6er more palatable"

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1C % purchase deal will also be called a merger when both -E(s agree that joining together is in the best interest of both of their companies" 9ut when the deal is unfriendly E that is= when the target company does not want to be purchased E it is always regarded as an ac2uisition"

5C Whether a purchase is considered a merger or an ac2uisition really depends on whether the purchase is friendly or hostile and how it is announced" n other words= the real difference lies in how the purchase is communicated to and recei6ed by the target company

T>0 S051,> 6'1 />0 T5120/ W>0( />0 &040,/%'( 81',0&& %& &/1.,/.10#?
To make a selection process we need to follow a specific process* Definition of the main parameters for research Bindustry= siLe= performance= geographical marketC &se of databases to identify all the potential targets #earch of additional business Bbetter description of the business and of the main productsC and economic BratiosC information" ,ongElist for a first screening process and ranking of the possible targets

T>0 T5120/ S040,/%'(

N The identification of the ac2uisition target is a complex task= affected by the kind of ac2uirer and the objecti6e to be pursued

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N !any different kind of buyers I #trategic buyer I )inancial buyer EE<edge fund EE#o6ereign Wealth )unds

S/15/02%, B.901&: D%66010(/ M@A S/15/02%0& A,-.%&%/%'( ',,.1& 6'1 &0;0154 105&'(&: N Deal with o6ercapacity through consolidation in mature industries N %c2uire+rollEup competitors in geographically fragmented industries N Expand into new products or markets N %c2uire knowEhow N !o6e beyond industry boundaries

W>0( ,'$85(%0& 510 $012%(2 @ 5,-.%&%/%'( />09 ;54.5/0 />0 <.&%(0&&) B.&%(0&& ;54.5/%'(
T>0 6%;0 $'&/ ,'$$'( =59& /' ;54.5/0 5 <.&%(0&& 510 1" %sset 6aluation= ." <istorical earnings 6aluation= 0" )uture maintainable earnings 6aluation= 1" 'elati6e 6aluation Bcomparable company 7 comparable transactionsC= 5" Discounted cash flow BD-)C 6aluation"

14

Professionals who 6aluate businesses generally do not use just one of these methods but a combination of some of them= as well as possibly others that are not mentioned abo6e= in order to obtain a more accurate 6alue" These 6alues are determined for the most part by looking at a company@s balance sheet and+or income statement and withdrawing the appropriate information"

The information in the balance sheet or income statement is obtained by one of three accounting measures* 5 N'/%,0 /' R05#01 5 R0;%0= E(2520$0(/ '1 A( A.#%/"

%ccurate business 6aluation is one of the most important aspects of

!erger and

%c2uisitions as 6aluations like these will ha6e a major impact on the price that a business will be sold for" !ost often this information is expressed in a ,etter of (pinion of :alue B,(:C when the business is being 6aluated for interest@s sake" There are other= more detailed ways of expressing the 6alue of a business" These reports generally get more detailed and

expensi6e as the siLe of a company increasesK howe6er= this is not always the case as there are many complicated industries which re2uire more attention to detail=

regardless of siLe"

C1%/%,54 A&80,/& %( E&/%$5/%(2 />0 T5120/ V54.0

N 9usiness plan reliability N Proper choice of the 6aluation method to be used Bcash flows= market+precedent multiplesC 1;

N dentification of the proper terminal 6alue N -hoice of the discount rate N -onsider potential conse2uences for the potential buyer= such as* I #ynergies I -annibalisation I Easier access to capital I )iscal ad6antages I %ccounting implications

FINANCING M@A
!ergers are generally differentiated from ac2uisitions partly by the way in which they are financed and partly by the relati6e siLe of the companies" :arious methods of financing an !7% deal exist"

C5&> Payment by cash" #uch transactions are usually termed ac2uisitions rather than mergers because the shareholders of the target company are remo6ed from the picture and the target comes under the BindirectC control of the bidder@s shareholders alone" % cash deal would make more sense during a downward trend in the interest rates"

%nother ad6antage of using cash for an ac2uisition is that there tends to lesser chances of EP# dilution for the ac2uiring company" 9ut a ca6eat in using cash is that it places constraints on the cash flow of the company" ./

F%(5(,%(2 )inancing capital may be borrowed from a bank= or raised by an issue of bonds" %lternati6ely= the ac2uirer@s stock may be offered as consideration" %c2uisitions financed through debt are known as le6eraged buyouts if they take the target pri6ate= and the debt will often be mo6ed down onto the balance sheet of the ac2uired company"

H9<1%#& %n ac2uisition can in6ol6e a combination of cash and debt= or a combination of cash and stock of the purchasing entity"

F5,/'1%(2 )actoring can pro6ide the necessary extra to make a merger or sale work" <ybrid can work as ad eEdenit

S80,%54%&/ M@A A#;%&'19 6%1$&

%lthough at present the majority of !7% ad6ice is pro6ided by fullEser6ice in6estment banks= recent years ha6e seen a rise in the prominence of specialist !7% ad6isers= who only pro6ide !7% ad6ice Band not financingC" To perform these ser6ices in the &#= an ad6isor must be a licensed broker dealer= and subject to #E- B) $'%C regulation" !ore information on !7% ad6isory firms is pro6ided at corporate ad6isory"

WHAT IS VALUEA :alue originated from a )rench word H6aloirD which means Hbe worthD"

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WHAT IS VALUE CREATIONA :alue creation means performing acti6ities that increases the 6alue to customers and also to the shareholders"

VALUE CREATION THROUGH M@A WHAT IT MEANSA #ynergies 7 Economics of scale Gain access to new markets= customers= products" Di6ersification of 'isks" %ccess to $ew Technology and Gnowledge %bility to limit competition+ gain market share"

SOURCES OF VALUE CREATION IN M@A

There are four sources or models which create 6alue*E %$#())?# P'(D&-T !%'GET !%T' O !(DE, 9-G !%T' O !(DE, G'%$D !%T' O !(DE, $D&#T'F +P'(D&-T , )E -F-,E

W>5/ I& />0 M@A& I$85,/ '( V54.0A

N n finance= the best benchmark for e6aluating in6estment performance is the return 10-.%10# <9 %(;0&/'1& The return that in6estors could earn on another in6estment with similar risk ..

N V54.0 ,105/%'(= when the returns on the in6estment exceed the re2uired rate of return N V54.0 #0&/1.,/%'(? when the in6estment returns fall short of the return rate re2uired by in6estors N V54.0 ,'(&01;5/%'(= when in6estors earn exactly the re2uired rate of return

M@A 5(# V54.0 C105/%'(: S>510>'4#01&

W>5/ I& />0 I$85,/ '( S>510>'4#01&B V54.0A Target shareholders benefit from #ubstantial premium paid by the bidder ncreasing sophistication of takeo6er defenses -ompetiti6e situations

N B%##01 &>510>'4#01&* statistically= studies ha6e pro6ed that returns are either negati6e or slightly negati6e= due to the increase in purchase premiums= unless significant synergies are generated in the deal

M'/%;0& <0>%(# M@A "M01201& 5(# A,-.%&%/%'(&*

The dominant rationale used to explain !7% acti6ity is that ac2uiring firms seek impro6ed financial performance" The following moti6es are considered to impro6e financial performance*

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This refers to the fact that the combined company can often reduce its fixed costs by remo6ing duplicate departments or operations= lowering the costs of the company relati6e to the re6enue stream= thus increasing profit margins" ncreased re6enue+ ncreased !arket #hare* This assumes that the buyer will be absorbing a major competitor and thus increase its market power Bby capturing increased market shareC to set prices" same

C1'&& &044%(2 )or example= a bank buying a stock broker could then sell its banking products to the stock

broker@s customers= while the broker can sign up the bank@s customers for brokerage accounts" (r= a manufacturer can ac2uire and sell complementary products" Economies of #cale* )or example= managerial economies such as the increased opportunity of managerial specialiLation" %nother example is purchasing economies due to increased order buying discounts" siLe and associated bulkE

T5:0& % profitable company can buy a loss maker to use the target@s loss as their ad6antage by reducing their tax liability" n the &nited #tates and many other countries= rules are in place to limit the ability of profitable companies to AshopA for loss making companies= limiting the moti6e of an ac2uiring company"

G0'2158>%,54 '1 '/>01 #%;01&%6%,5/%'(

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This is designed to smooth the earnings results of a

company= which o6er the long term in6estors more confidence in

smoothens the stock price of a company= gi6ing conser6ati6e

in6esting in the company" <owe6er= this does not always deli6er 6alue to shareholders"

D%;01&%6%,5/%'( $%2>/ 859 %6: N There is high closeness+ complimentarily in terms of industrial focus between the target and the buyer N )a6our knowledge transfer across di6isions N -reates critical mass to face the competition N Exploits better transparency and monitoring through internal capital markets N !anagers are properly moti6ated and reward

R0&'.1,0 /15(&601 'esources are une6enly distributed across firms B9arney= 1;;1C and the interaction of target and ac2uiring firm resources can create 6alue through either o6ercoming information asymmetry or by combining scarce resources"

V01/%,54 %(/0215/%'( :ertical ntegration occurs when an upstream and downstream firm merges Bor one ac2uires

the otherC" There are se6eral reasons for this to occur" (ne reason is to internaliLe an externality problem" % common example is of such an externality is double marginaliLation" Double

marginaliLation occurs when both the upstream and downstream firms ha6e monopoly powerK each firm reduces output from the competiti6e le6el to the monopoly le6el= creating two

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deadweight losses" 9y merging the 6ertically integrated firm can collect one deadweight loss by setting the upstream firm@s output to the competiti6e le6el" This increases profits and consumer surplus" % merger that creates a 6ertically integrated firm can be profitable"

<owe6er= on a6erage and across the most commonly studied 6ariables= ac2uiring firms? financial performance does not positi6ely change as a function of their ac2uisition acti6ity" Therefore= additional moti6es for merger and ac2uisition that may not add shareholder 6alue include*

D%;01&%6%,5/%'( While this may hedge a company against a downturn in an indi6idual industry it fails to deli6er 6alue= since it is possible for indi6idual shareholders to achie6e the same hedge by di6ersifying their portfolios at a much lower cost than those associated with a merger"

!anager@s hubris* manager@s o6erconfidence about expected synergies from !7% which results in o6erpayment for the target company"

E$8%10 <.%4#%(2 !anagers ha6e larger companies to manage and hence more power"

M5(5201C& ,'$80(&5/%'( n the past= certain executi6e management teams had their payout based on the total amount of profit of the company= instead of the profit per share= which would gi6e the team a per6erse incenti6e to buy companies to increase the total profit while decreasing the profit per share

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Bwhich hurts the owners of the company= the shareholdersCK although some empirical studies show that compensation is linked to profitability rather than mere profits of the company"

EFFECTS ON MANAGEMENT
% study published in the Puly+%ugust .//4 issue of the Pournal of 9usiness #trategy suggests that mergers and ac2uisitions destroy leadership continuity in target companies? top management teams for at least a decade following a deal" The study found that target companies lose .1 percent of their executi6es each year for at least 1/ years following an ac2uisition I more than double the turno6er experienced in nonEmerged firms"

THE GREAT MERGER MOVEMENT OF MERGER @ ACQUISITION

The Great !erger !o6ement was a predominantly &"#" business phenomenon that happened from 14;5 to 1;/5" During this time= small firms with little market share consolidated with similar firms to form large= powerful institutions that dominated their markets" t is estimated that more than 1=4// of these firms disappeared into consolidations= many of which ac2uired substantial shares of the markets in which they operated" The 6ehicles used were soE called trusts"

To truly understand how large this mo6ement wasMin 1;// the 6alue of firms ac2uired in mergers was ./J of GDP" n 1;;/ the 6alue was only 0J and from 1;;4I./// is was around 1/I11J of GDP" (rganiLations that commanded the greatest share of the market in 1;/5 saw

.8

that command disintegrate by 1;.; as smaller competitors joined forces with each other"

<owe6er= there were companies that merged during this time such as DuPont= $abisco= &# #teel= and General Electric that ha6e been able to keep their dominance in their respected sectors today due to growing technological ad6ances of their products= patents= and brand recognition by their customers" These companies that merged were consistently mass producers of homogeneous goods that could exploit the efficiencies of large 6olume production" -ompanies which had specific fine products= like fine writing paper= earned their profits on high margin rather than 6olume and took no part in Great !erger !o6ement"

P01%'#

N5$0

F5,0/

14;8I 1;/1

)irst Wa6e

<oriLontal mergers

1;13I 1;.;

#econd Wa6e :ertical mergers

1;35I 1;3;

Third Wa6e

Di6ersified conglomerate mergers

1;41I 1;4;

)ourth Wa6e -ongeneric mergersK <ostile takeo6ersK -orporate 'aiding

1;;.I .///

)ifth Wa6e

-rossEborder mergers

.4

.//0I .//4

#ixth Wa6e

#hareholder %cti6ism= Pri6ate E2uity= ,9(

M@A '<D0,/%;0& %( $'10 10,0(/ $01201 =5;0&

During the third merger wa6e B1;35I1;4;C= corporate marriages in6ol6ed more di6erse companies" %c2uirers more fre2uently bought into different industries" #ometimes this was done to smooth out cyclical bumps= to di6ersify= the hope being that it would hedge an in6estment portfolio" #tarting in the fifth merger wa6e B1;;.I1;;4C and continuing today= companies are more likely to ac2uire in the same business= or close to it= firms that complement and strengthen an ac2uirer?s capacity to ser6e customers" 9uyers aren?t necessarily hungry for the target companies? hard assets" #ome are more interested in ac2uiring thoughts= methodologies= people and relationships" Paul Graham recogniLed this in his .//5 essay A<iring is (bsoleteA= in which he theoriLes that the free market is better at identifying talent= and that traditional hiring practices do not follow the principles of free market because they depend a lot upon credentials and uni6ersity degrees" Graham was probably the first to identify the trend in which large companies such as Google= FahooQ or !icrosoft were choosing to ac2uire startups instead of hiring new recruits" !any companies are being bought for their patents= licenses= market share= name brand= research staff= methods= customer base= or culture" #oft capital= like this= is 6ery perishable= fragile= and fluid" ntegrating it usually takes more finesse and expertise than integrating machinery= real estate= in6entory and other tangibles" .;

SHORT3RUN FACTORS
(ne of the major short run factors that sparked in The Great !erger !o6ement was the desire to keep prices high" That is= with many firms in a market= supply of the product remains high" During the panic of 14;0= the demand declined" When demand for the good falls= as illustrated by the classic supply and demand model= prices are dri6en down" To a6oid this decline in prices= firms found it profitable to collude and manipulate supply to counter any changes in demand for the good" This type of cooperation led to widespread horiLontal integration amongst firms of the era"

)ocusing on mass production allowed firms to reduce unit costs to a much lower rate" These firms usually were capitalEintensi6e and had high fixed costs" 9ecause new machines were mostly financed through bonds= interest payments on bonds were high followed by the panic of 14;0= yet no firm was willing to accept 2uantity reduction during this period"

LONG3RUN FACTORS
n the long run= due to the desire to keep costs low= it was ad6antageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than 6arious sites of different companies as in the past" This resulted in shipment directly to market from this one location" n addition= technological changes prior to the

merger mo6ement within companies increased the efficient siLe of plants with capital intensi6e assembly lines allowing for economies of scale" Thus impro6ed technology and

transportation were forerunners to the Great !erger !o6ement" 0/

n part due to competitors as mentioned abo6e= and in

part

due

to

the

go6ernment=

howe6er= many of these initially successful mergers were e6entually dismantled" The &"#" go6ernment passed the #herman %ct in 14;/= setting rules against price fixing and monopolies"

#tarting in the 14;/s with such cases as &"#" 6ersus %ddyston Pipe and #teel -o"= the courts attacked large companies for strategiLing with others or within their own companies to maximiLe profits" Price fixing with competitors created a greater incenti6e for companies to unite and merge less than one name so that they were not competitors anymore and technically not price fixing"

CROSS3BORDER MERGERS AND ACQUISITIONS

n a study conducted in ./// by ,ehman 9rothers= it was found that= on a6erage= large !7% deals cause the domestic currency of the target corporation to appreciate by 1J relati6e to the ac2uirer@s" )or e6ery R1Ebillion deal= the currency of the target corporation increased in 6alue by /"5J" !ore specifically= the report found that in the period immediately after the deal is announced= there is generally a strong upward mo6ement in the target corporation@s domestic currency Brelati6e to the ac2uirer@s currencyC" )ifty days after the announcement= the target currency is then= on a6erage= 1J stronger"

The rise of globaliLation has exponentially increased the market for cross border !7%" n 1;;3 alone there were o6er ./// cross border transactions worth a total of approximately R.53 billion"

01

This rapid increase has taken many !7% firms by surprise because the majority of them ne6er had to consider ac2uiring the capabilities or skills re2uired to effecti6ely handle this kind of transaction" n the past= the market@s lack of significance and a more strictly national mindset pre6ented the 6ast majority of small and midEsiLed companies from considering cross border intermediation as an option which left !7% firms inexperienced in this field" This same reason also pre6ented the de6elopment of any extensi6e academic works on the subject"

Due to the complicated nature of cross border !7%= the 6ast majority of cross border actions ha6e unsuccessful results" -ross border intermediation has many more le6els of complexity to it than regular intermediation seeing as corporate go6ernance= the power of the a6erage employee= company regulations= political factors customer expectations= and countries@ culture are all crucial factors that could spoil the transaction"

<owe6er= with the weak dollar in the &"#" and soft economies in a number of countries around the world= we are seeing more crossEborder bargain hunting as top companies seek to expand their global footprint and become more agile at cultures across national boundaries" creating highEperforming businesses and

E6en mergers of companies with head2uarters in the same country are 6ery much of this type BcrossEborder !ergersC" %fter all= when 9oeing ac2uires !cDonnell Douglas= the two %merican companies must integrate operations in doLens of countries around the world" This is just as true

0.

for other supposedly Asingle countryA mergers= such as the R.8 billion dollar merger of #wiss drug makers #andoL and -ibaEGeigy"

number

of

western

go6ernment for corporate

officials

are

expressing being

concern by

o6er

the

commercial information

ac2uisitions

sourced

so6ereign

go6ernments 7 state enterprises"

%n ad hoc group of #W) n6estment Directors and !anagers ha6e now established a database called #W) n6estments and this database pro6ides shared ac2uisition information to the #W)s"

The #W) website is restricted and it states* A#W) n6estments are a resource which has been established by a number of so6ereign wealth funds and state enterprises to produce ac2uisition and in6estment databases and forecasting tools for potential ac2uisition targets" #ubscription to #W) n6estments is by in6itation only= and is restricted to go6ernment organiLations or state enterprises"A

The database seems to be initially concentrating on ,ondon #tock Exchange listed companiesK howe6er it is belie6ed that the database will in a matter of weeks be extended to include all the companies listed on the stock exchanges of most of the de6eloped countries"Western go6ernment are now in a difficult position= as public opinion and the trades unions prefer the protection and domestic ownership of national companies= howe6er the reality of the present economic

situation suggests that an injection of capital into many of the target company may in fact sa6e those companies from bankruptcy"

00

M5D'1 M@A "MERGER AND ACQUISITION* %( />0 1EE &:

Top 1/ !7% deals worldwide by 6alue Bin mil" &#DC from 1;;/ to 1;;;*

'ank

Fear

Purchaser

Purchased

Transaction 6alue

B n mil" &#DC 1" 1;;; :odafone %ir Touch P,- !annesmann 140=///

."

1;;;

PfiLer

WarnerE,ambert

;/=///

0"

1;;4

E on

!obil

88=.//

1"

1;;; -iticorp

Tra6elers Group

80=///

5"

1;;; #9- -ommunications

%meritech -orporation

30=///

3"

1;;;:odafone Group

%ir Touch -ommunications

3/=///

8"

1;;4 9ell %tlantic

GTE 01

50=03/

4"

1;;4 9P

%moco

50=///

;"

1;;; Swest -ommunications

&# WE#T

14=///

1/"

1;;8World com

!- -ommunications

1.=///

M5D'1 M@A "MERGER AND ACQUISITION* 61'$ 2

Top ; !7% deals worldwide by 6alue Bin mil" &#DC since .///* 'ank Fear Purchaser Purchase

/' 810&0(/:

Transaction 6alue

Bin mil" &#DC 1" ./// )usion* %merica (nline nc" B%(,C Time Warner 131=818

."

.///

Glaxo Welcome Plc"

#mithGline 9eecham Plc"

85=;31

0"

.//1

'oyal Dutch Petroleum -o"

#hell Transport 7 Trading -o

81=55;

1"

.//3

%T7T nc"

9ell#outh -orporation

8.=381

5"

.//1

-omcast -orporation

%T7T 9roadband 7 nternet #6cs"

8.=/11

3"

.///

#anofi E #ynthelabo #%

%6entis #%

3/=.10

05

8"

.///

#pinEoff*

$ortel $etworks -orporation

5;=;81

4"

.//.

PfiLer nc"

Pharmacia -orporation

5;=515

;"

.///

PP !organ -hase 7 -o

9ank (ne -orp

54=831

MERGERS AND ACQUISITIONS LAWS

9usiness firms opt for mergers and ac2uisitions mostly for consolidating a fragmented market and also for increasing their operational efficiency= which gi6e them a competiti6e edge" $ations across the globe ha6e promulgated !ergers and %c2uisitions ,aws to monitor the functioning of the business units therein" %n estimate made in .//8 put the number of global competition laws at 1/3" They possess merger control pro6isions"

While most mergers and ac2uisitions increase the operational efficiency of business firms some can also lead to a building up of monopoly power" The antiEcompetiti6e effects are achie6ed either through coordinated effects or unilateral effects" #ometimes mergers and ac2uisitions tend to create a collusi6e market structure"

<owe6er= free and fair competition is seen to maximiLe the consumers@ interests both in terms of 2uantity and price"

03

MERGERS AND ACQUISITIONS IN BANKING SECTOR

!erger and ac2uisitions in banking sector ha6e become familiar in the majority of all the countries in the world"

% large number of international and domestic banks all o6er the world are engaged in merger and ac2uisitions acti6ities" (ne of the principal objecti6es behind the mergers and ac2uisitions in the banking sector is to reap the benefits of economics of scale" With the help of mergers and ac2uisitions in the banking sector= the banks can achie6e significant growth in their operations and minimiLe their expenses to a considerable extent"

%nother important ad6antage behind this kind of merger is that in this process= competition is reduced because merger eliminates competitors from the banking industry" !ergers and ac2uisition in banking sector are forms of horiLontal merger because the merging entites are in6ol6ed in the same kind of business or commercial acti6ities" #ometimes = non banking institution are also merged with other banks if they pro6ide similar type of ser6ices"

n the context of mergers and ac2uisition in the banking sector= it can be reckoned that siLe does matter and growth in siLe can be achie6ed through mergers and ac2uisition 2uite easily" 08

MERGERS AND ACQUISITIONS LAWS: THE GLOBAL PERSPECTIVE

%s per global experience around 45J of ac2uisitions and mergers are de6oid of any competiti6e concerns" They get appro6al within a period of 0/ to 3/ days"

The remaining percentages of firms usually ha6e a substantially long gestation period for getting the legal appro6al" These cases are relati6ely complex and need a close examination of the 6arious aspects by the regulatory bodies"

%s per the guidelines from HThe

nternational -ompetition $etworkD simple merger

and ac2uisitions cases should recei6e appro6al within a period of 3 weeks" The comparable time frame for complex cases is 3 months"

t may be noted that the @-ompetition $etwork@ mentioned abo6e is actually an association of international competition authorities"

MERGERS AND ACQUISITIONS LAWS: THE INDIAN PERSPECTIVE

ndian competition law grants a maximum time period of .1/ days for the determination of the 04

combination= which comprises ac2uisitions= mergers= amalgamations and the like" (ne needs to take note of the fact that this stated time frame is clearly distinct from the minimum compulsory wait period for applicants"

%s per the law= the compulsory period of waiting for applicants can either be .1/ days starting from the day of notice filing or receipt of the -ommission@s order= whiche6er occurs earlier"

The threshold limits for firms entering business combinations are substantially high under the ndian law" The threshold limits are set either in terms of the asset 6alue or or in terms the firm@s turno6er" ndian threshold limits are greater than those for the E&" They are twice as high when compared with &G"

The ndian law also pro6ides for the modern day phenomenon of merger and ac2uisitions= which are cross border in nature" %s per the law domestic nexus is a preEre2uisite for notification on this type of combinations"

t can be noted that -ompetition %ct= .//. has undergone a recent amendment" This has replaced the 6oluntary notification regime with a mandatory regime" (f the total number of 1/3 countries= which possess competition laws only ; are thought to be credited with a 6oluntary notification regime" :oluntary notification regimes are generally associated with business uncertainties"

PostEcombination= if firms are seen to be in6ol6ed in antiEcompetiti6e practices deEmerger shows the way out" 0;

MORE ON INDIAN MERGERS AND ACQUISITIONS LAWS

ndian ncome Tax %ct has pro6ision for tax concessions for mergers+demergers between two ndian companies" These mergers+demergers need to satisfy the conditions pertaining to section .B1;%%C and section .B19C of the ndian ncome Tax %ct as per the applicable situation"

n case of an ndian merger when transfer of shares occur for a company they are entitled to a specific exemption from the capital gains tax under the H ndian ET tax %ctD" These companies can either be of ndian origin or foreign ones"

% different set of rules is howe6er applicable for the @foreign company mergers@" t is a situation where an ndian company owns the new company formed out of the merger of two foreign companies"

t can be noted that for foreign company mergers the share allotment in the merged foreign company in place of shares surrendered by the amalgamating foreign company would be termed as a transfer= which would be taxable under the ndian tax law"

%lso as per conditions set under section 5B1C= the @ ndian ET %ct@ states that= global income accruing to an ndian company would also be included under the head of @scope of income@ for 1/

the ndian company"

CERTIFIED MERGERS AND ACQUISITIONS:

There are a number of certified mergers and ac2uisitions ad6isory programs a6ailable at the present time" With the help of these programs= a lot of commercial entities are getting in6ol6ed in merger and ac2uisition acti6ities" These programs are offered by numerous merger and ac2uisition consultants and agencies" #ome of them are also conducting educational

programs and seminars for the purpose of educating financial professionals about the nuances of certified mergers and ac2uisitions and growing the knowledge base of the merger and ac2uisition professionals"

(ne of the most important certified merger and ac2uisition ad6isory programs is the -ertified :aluation !anager Program offered by the %merican %cademy of )inancial

!anagement B%%)!C" The %merican %cademy of )inancial !anagement is also hosting a number of

C01/%6%0# V54.5/%'( M5(5201 T15%(%(2 C'(6010(,0& />1'.2>'./ />0 9051)

The certified mergers and ac2uisitions agencies help commercial enterprises or

business corporations in ac2uiring or taking o6er other companies and also in significant issues related to mergers and ac2uisitions" These agencies also help business entities regarding

11

management buyouts B!9(sC= finding ac2uisition lookup= sources of e2uity and debt financing= as well as 6aluation of businesses"

n this modernEday world= the power of globaliLation= market liberaliLation and technological ad6ancement has contributed towards the formation of a increasingly competiti6e and acti6e commercial world= where mergers and ac2uisitions are more and more utiliLed for achie6ing optimiLation of firm 6alue and competiti6e benefits"

n the &nited #tates= the %lliance of !erger 7 %c2uisition %d6isors B%!7%%C is a principal global institution= which offers specialiLed ser6ices related to the academic and resource re2uirements in the profession of merger and ac2uisition ad6isory ser6ices" t has more than 5// members and has attained the position of a market leader in the educational domain of mergers and ac2uisitions" The members are merger and ac2uisition professionals offering

transactional support and mediator ser6ices" The majority of the members ha6e 2ualifications like !9%= -P%= or PD" The merger and ac2uisition training program offered by the %lliance of !erger 7 %c2uisition %d6isors is known as -!7%% certification"

T>0 ,01/%6%0# $01201& 5(# 5,-.%&%/%'( 5#;%&'19 &01;%,0& ,5( <0 <1'5#49 ,5/02'1%70# %(/' />0 6'44'=%(2 /980&:
1" 9usiness :aluation #er6ices ." )unding #er6ices B%c2uisition financing= recapitaliLations= financial reconstructionC 1.

0" %sset Disposal #er6ices 1" %c2uisition ,ookup 5" !anagement 9uyouts B!9(sC 3" -ertified E2uipment and !achinery Estimation

The #arbanesE(xley %ct plays a major role in the mergers and ac2uisitions that take place in the &nited #tates" t was introduced in the year .//. and is also called as the Public -ompany %ccounting 'eform and n6estor Protection %ct of .//." (ne of the principal objecti6es behind the promulgation of this act is to maintain transparency in the mergers and

ac2uisitions transactions and protect the in6estors"

C'.1&0 C'(/0(/ '6 5 C01/%6%0# M01201 5(# A,-.%&%/%'( A#;%&'19 P1'215$: The course content of a -ertified !erger and %c2uisition %d6isory Program deals with 6arious regulatory and legal features of mergers and ac2uisitions and usually includes the following*

1" )orms of transactions+deals ." The procedure of merger and ac2uisition 0" Principal matters that should be taken into account 1" $egotiation of contract 5" Warranties and representations 3" -onsideration or compensations 8" 'egulatory mattersE ac2uisition performed by a public company

10

4" En2uiries and searches ;" Due diligence 1/"Due diligenceE post ac2uisition 11" Title to international properties 1." -rossEborder deals 10" -oordinating+organiLing crossEborder transactions 11" 15" 13" 18" 14" 1;" ./" .1" .." .0" .1" Taking o6er distressed firms %nalyLing the parties to merger or ac2uisition :aluation of the probable ac2uisition Designing the funding for ac2uisition 'egulatory and legal matters associated with ac2uisition of a public company -ode for mergers and ac2uisitions -omprehending the ideas of merger and ac2uisition code )ormation of a takeo6er deal 9lueprinting the documentation The areas of difficulty that should be on the lookout Workshops on mergers and ac2uisitions and case studies"

ADVANTAGES OF ACQUISITION
%c2uisition pro6ides the following ad6antages to the companies which are merged* 1C E,'('$%0& '6 &,'80 />0 ('/%'( '6 0,'('$%0& '6 &,'80 10&0$<40 />5/ '6 0,'('$%0& '6 &,540" Economies of scale principally denote effecti6eness related to alterations in the supply side= for example= growing or reducing production scale of an indi6idual form of

11

commodity" (n the other hand= economies of scope denote effecti6eness principally related to alterations in the demand side= for example growing or reducing the range of marketing and supply of 6arious forms of products" Economies of scope are one of the principal causes for marketing plans like product lining= product bundling= as well as family branding" .C E,'('$%0& '6 &,540 Economies of scale refer to the cost benefits recei6ed by a company as the result of a horiLontal merger" The merged company is able to ha6e bigger production 6olume in comparison to the companies operating separately" Therefore= the merged company can deri6e the benefits of economies of scale" The maximum use of plant facilities can be done by the merged company= which will lead to a decrease in the a6erage expenses of the production"

0C G1'=/> '1 0:85(&%'(* Expansion of business= firm= capital and increase in sale in ac2uisition" The business in increase and company gets more profit" 9y gaining more profit the business can research for new product and make the organiLation more profitable"

1* R%&F #%;01&%6%,5/%'(* 'isk is di6ided into on both the companies which are merged" The risk of loss is di6ided" f business face loss then the amount of loss is di6ided in all companies which are merged"

5C G105/01 $51F0/ ,585<%4%/9 5(# 40&&01 ,'$80/%/%'(* f one ac2uired the company who is direct competitor that company= then the business face less competition in the market" The

15

both companies are now one companies and that why the marker cannot get

3* F%(5(,%54 &9(0129 B mpro6ed creditworthiness= enhancement of borrowing power= and decrease in the cost of capital= growth of 6alue per share and price earnings ratio= capital raising= smaller flotation expensesC* )inancial condition of business is good or better= after ac2uisition the company find more sources" The get more finance from internal and external sources" 8C I(,105&0# 6%:0# ,'&/ 5(# &/5/%, $512%(54 ,'&/* )ixed cost is increased due to expansion of business= now the company?s production is increase to that extent where the fixed cost is increased" The fixed cost fixed at all the le6el of production but after ac2uisition the business"

4C % larger firm may be able to operate more efficiently than two smaller firms= thereby reducing costs" %c2uisition may generate economies of scale" This means that the a6erage production cost will fall as production 6olume increases" % ac2usition may allow a firm to decrease costs by more closely coordinating production and distribution"

)inally= economies may be achie6ed when firms ha6e complementary resourcesMfor example= when one firm has excess production capacity and another has insufficient capacity"

;C Tax gains in mergers may arise because of unused tax losses= unused debt capacity=

13

surplus funds= and the writeEup of depreciable assets" The tax losses of target corporations can be used to offset the ac2uiring corporation@s future income" These tax losses can be used to offset income for a maximum of 15 years or until the tax loss is exhausted" (nly tax losses for the pre6ious three years can be used to offset future income"

1/C

% company that has earned profits may find 6alue in the tax losses of a target corporation that can be used to offset the income it plans to earn" % merger may not= howe6er= be structured solely for tax purposes" n addition= the ac2uirer must continue to operate the preEac2uisition business of the company in a net loss position" The tax benefits may be less than their Aface 6alue=A not only because of the time 6alue of money= but also because the tax loss carryEforwards might expire without being fully utiliLed"

11C Tax ad6antages can also arise in an ac2uisition when a target firm carries assets on its books with basis= for tax purposes= below their market 6alue" These assets could be more 6aluable= for tax purposes= if they were owned by another corporation that could increase their tax basis following the ac2uisition" The ac2uirer would then depreciate the assets based on the higher market 6alues= in turn= gaining additional depreciation benefits"

1.C nterest payments on debt are a taxEdeductible expense= whereas di6idend payments from e2uity ownership are not" The existence of a tax ad6antage for debt is an incenti6e to ha6e greater use of debt= as opposed to e2uity= as the means of financing merger and ac2uisition transactions" %lso= a firm that borrows much less than it could may be an ac2uisition target because of its unused debt capacity" While the use of financial

18

le6erage produces tax benefits= debt also increases the likelihood of financial distress in the e6ent that the ac2uiring firm cannot meet its interest payments on the ac2uisition debt"

10C % firm with surplus funds may wish to ac2uire another firm" The reason is that distributing the money as a di6idend or using it to repurchase shares will increase income taxes for shareholders" With an ac2uisition= no income taxes are paid by shareholders"

11C

%c2uiring firms may be able to more efficiently utiliLe working capital and fixed assets in the target firm= thereby reducing capital re2uirements and enhancing profitability" This is particularly true if the target firm has redundant assets that may be di6ested"

15C

The cost of debt can often be reduced when two firms merge" The combined firm will generally ha6e reduced 6ariability in its cash flows" Therefore= there may be circumstances under which one or the other of the firms would ha6e defaulted on its debt= but the combined firm will not" This makes the debt safer= and the cost of borrowing may decline as a result" This is termed the coinsurance effect"

13C

Di6ersification is often cited as a benefit in mergers" Di6ersification by itself= howe6er= does not create any 6alue because stockholders can accomplish the same thing as the merger by buying stock in both firms"

14

18C

(btaining 2uality staff or additional skills= knowledge of your industry or sector and other business intelligence" )or instance= a business with good management and process systems will be useful to a buyer who wants to impro6e their own" deally= the business you choose should ha6e systems that complement your own and that will adapt to running a larger business"

14C %ccessing funds or 6aluable assets for new de6elopment" 9etter production or distribution facilities are often less expensi6e to buy than to build" ,ook for target businesses that are only marginally profitable and ha6e large unused capacity which can be bought at a small premium to net asset 6alue"

1;C

9usiness underperforming" )or example= if you are struggling with regional or national growth it may well be less expensi6e to buy an existing business than to expand internally"

./C

%ccessing a wider customer base and increasing your market share" Four target business may ha6e distribution channels and systems you can use for your own offers"

.1C

Di6ersification of the products= ser6ices and longEterm prospects of your business" % target business may be able to offer you products or ser6ices which you can sell through your own distribution channels"

..C

'educing costs and o6erheads through shared marketing budgets= increased

1;

purchasing power and lower costs"

.0C

'educing competition" 9uying up new intellectual property= products or ser6ices may be cheaper than de6eloping the business"

.1C

(rganic growth= i"e" the existing business plan for growth= needs to be accelerated" 9usinesses in the same sector or location can combine resources to reduce costs= eliminate duplicated facilities or departments and increase re6enue"

SWOT Bstrengths= weaknesses= opportunities and threatsC analysis to assess your business" %nalysing your results carefully will show you how to build on strengths= resol6e weaknesses= exploit opportunities and a6oid threats" % #W(T analysis on the %ssess external factors= especially the impact of the economic climate on the price of a deal"

WHAT CAN GO WRONG WITH A MERGER OR ACQUISITIONA

The extent and 2uality of the planning and research you do before a merger or ac2uisition deal will largely determine the outcome" #ometimes situations will arise outside your control and you may find it useful to consider and prepare for these risks"

%n ac2uisition could become expensi6e if you end up in a bidding war where other parties are e2ually determined to buy the target business"

% merger could become expensi6e if you cannot agree terms such as who will run the combined 5/

business or how long the other owner will remain in6ol6ed in the business"

9oth mergers and ac2uisitions can damage business performance because of time spent on the deal and a mood of uncertainty"

F5,0 8%/6544& 6'44'=%(2 5 #054 &.,> 5&: 1C The target business does not do as well as expected" .C The costs you expected to sa6e do not materialiLe" 0C Gey people lea6e" 1C The business cultures are not compatible"

!anagement accountants and solicitors= with experience in similar deals to help forecast potential pitfalls and to address any that arise" 'ead about making mergers work in our guide on joint 6entures and partnering"

Different legal issues can arise at different stages of the ac2uisition process and re2uire separate and se2uential treatment" Diligence is the process of unco6ering all liabilities associated with the purchase" correct" t is also the process of 6erifying that claims made by the 6endors are

Directors of companies are answerable to their shareholders for ensuring that this process is properly carried out"

51

F'1 40254 8.18'&0&? $5F0 &.10:

1" (btain proof that the target business owns key assets such as property= e2uipment= intellectual property= copyright and patents ." (btain details of past= current or pending legal cases 0" ,ook at the detail in the business@ current and possible future contractual obligations with its employees Bincluding pension obligationsC= customers and suppliers 1" -($# DE' the impact of a change in the business@ ownership on existing contracts

ALWAYS USE A LAWYER TO CONDUCT LEGAL DUE DILIGENCE

DEAL STAGE -onsidering general terms of a potential deal you will probably seek certain confirmations and commitments from the seller of the target business" These will pro6ide a le6el of insurance and comfort about the deal and are indications of the seller@s own confidence in their business"

% written statement from the seller that confirms a key fact about the business is known as a warranty" Fou may re2uire warranties on the business? assets= the order book= debtors and creditors= employees= legal claims and the business@ audited accounts" % commitment from the seller to reimburse you in full in certain situations is known as an indemnity" Fou might seek indemnities for unreported tax liabilities= for example"

5.

CROSS3BORDER MERGERS
-ompanies B-rossE9order !ergersC 'egulations .//8 came into force on 15 December .//8 and go6ern mergers between &G and o6erseas companies" The regulations introduced a framework which remo6ed legislati6e barriers and made it easier for &G companies to engage in mergers with other companies from within the European Economic %rea" 'ead information on the regulations go6erning crossEborder mergers on the Department for 9usiness= Enterprise and 'egulatory 'eform B9E''C websiteE (pens in a new window" f you are contemplating a crossE border merger= make sure you take appropriate professional ad6ice from the start"

THE DEAL ITSELF %fter you ha6e registered interest in doing a deal with another business you will probably follow a process that includes the following steps* 1" %ppointing professional ad6isers E legal and financial" ." -arrying out due diligence" 0" :aluing the business" 1" $egotiating financing of the ac2uisition+merger" 5" !aking an initial offer subject to contract" 3" %greeing the main terms of the deal including a payment schedule= warranties and indemnities from the other business"

8" &pdating due diligence based on access to the target business" 50

4" )inaliLing the terms of the deal E including restructuring of the shareholding= if appropriate"

;" %nnouncing the deal and communicating it to staff"

I( />0 ,5&0 '6 5( A,-.%&%/%'(? =%44 (00# /' %(/0215/0 F09 5&80,/& '6 />0 /=' <.&%(0&&0&? &80,%6%,5449:
1" !anagement ." #taff 0" Technology 1" -ommunications 5" Processes= policies and procedures 3" Payroll 8" Training 4" Personnel policies ;" n6oicing and purchasing systems

T>0 1'40 '6 81'60&&%'(54&:

t is important for you to seek professional ad6ice when considering a deal" Fou may use bankers= accountants= lawyers= sur6eyors and 6alue?s for different matters" %d6isers with experience in deals will help you make the right choice= pay a reasonable price and a6oid pitfalls during and after a deal"

%d6isers can pro6ide 6aluable guidance in areas such as 6aluing the business= financing the deal=

51

terms and contracts= re6iewing legal aspects and specialist 6aluation of specific areas of the business"

C5&0 &/.#9
Gi6ing a little about $okia= like it was once a market leader but due to decrease in sales it has to join hands with !icrosoft like thatT"

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$okia came into partnership with !icrosoft from )ebruary= ./11 with a motto of 'eplacing #ymbian as there (perating #ystem to someone bit more established and wellEknown like Windows (perating #ystem 8"

T'.2> C'$80/%/%;0 E(;%1'($0(/

%s increase in the sales and popularity of %ndroid de6ices like #amsung= #ony= <T- and %pple?s Phones= $okia was facing it difficult to race with them so to make itself competiti6e against such Giants $okia came into Partnership with !icrosoft"

D'=(6544 '6 />0 2%5(/&

55

E6en though being in partnership with !icrosoft= both $okia 7 !icrosoft were facing it difficult to compete with %ndroid and (# De6ices= because of lack of smooth user interface and unable to pro6ide best applications as others were doing"

O(0 >5& /' 2'G

%s per )orbes %rticle= there was a inside news that on 1 st Pan ./11= partnership deal between $okia 7 !icrosoft was to get o6er= and $okia was to join force with %ndroid for which it also made a special phone= howe6er when !icrosoft felt that such thing can happen they ac2uired the whole $okia -ell phone segment for R8". billion" <ere= >one has to go? means if $okia would ha6e gone to %ndroid= Windows phones would ha6e 6anished= instead $okia is gone now to Windows"

G0(0154 M'/%;0& I(,105&%(2 M51F0/ S>510

The first and foremost moti6e was to increase market share of Windows Phone= as after ac2uisition they will be ha6ing total market share which $okia has= which includes all there different phones $okia has under its brand which will increase the total market share of Windows Phone in World market"

I(,105&%(2 C'$80/%/%;0 M51F0/

53

Phones like phone are still doing its work in only highEend smart phones only = howe6er after this deal !icrosoft will be ha6ing all different range of phones in their pocket like %sha= which will increase their competiti6eness in the market

S.1;%;54
Windows phone alone was facing a lot of difficulties= to sur6i6e and compete in the market= so to be in the market and hold its position they ha6e to make this deal"

S/15/02%, M'/%;0& K008%(2 />0 M'$0(/.$ A4%;0

'ecent figures of ./10 has shown that the total market share of Windows phones in the world market is 4"0J which is highest till its launch= as compared to last year?s market share which was 0"8J in global market= so !icrosoft need to keep its momentum ali6e to be more competiti6e"

L'= E(# T>0'19

!icrosoft now will not only be focusing on its #martphone segment all o6er the world= but they will also target all those people who cannot afford <ighEEnd #mart phones= with its %sha series= 9asic &tility phones and low cost Windows phones like ,umia 5./ 7 5.5"

58

C'$840/%(2 M%,1'&'6/ E,'&9&/0$

!icrosoft was ha6ing e6erything in the technology world= be its gaming console like Obox= 9ing #earch Engine= !icrosoft -omputer (perating #ystem= the only thing they didn?t had was a mobile phones under their segment= which now they will be ha6ing after ac2uiring $okia"

F%(5(,%54 M'/%;0&
I(,105&%(2 R0;0(.0
%s now they all the $okia and Windows Phones in their hands to sale= all the re6enue that will occur from selling of any type of $okia Phones will go into the pockets of !icrosoft which will lead to increase in re6enues as compared to older ones"

T15(&5,/%'( ,'&/&
Transaction costs are why a manufacturer of car tyres would come to own and operate rubber plantations in some fetid tropical countryK not because its executi6es want to farm rubber= but because the transaction costs of not owning the supplier are higher than the costs of operating it themsel6es"

T5: S5;%(2
!icrosoft has billions in cash that@s off shore" !icrosoft is not bringing that cash back to the &"#" because it will get taxed" #o= the cash will ne6er be a di6idend" t will ne6er be used for stock

54

buybacks" t@s just going to sit there" !icrosoft might as well use it to buy an o6erseas company like $okia"

M5(5201%54 M'/%;0&
Direct -ontrol ,ogistics 7 #upply -hain !anagement Talent %c2uisition

C'(,4.&%'(
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t was one of the most news making ac2uisition because of $okia?s ac2uisition which was one time a leader of world market in -ell Phone segment= due to its downfall and ac2uisition by company like !icrosoft

S/5F0 '6 W%(#'=&

9efore ac2uiring $okia= the windows phone were not doing too well= but after ac2uiring $okia= it on Windows #take now= and e6en now they wont be able to pick up they will loose e6erything in !obile phone #egment

5;

W5%/ @ W5/,> G5$0

%fter ac2uisition= till now it has been just 1 months= and only couple of products ha6e been launched by Windows under the brand name $okia= so we ha6e to wait and watch what results they produce"

3/