Mergers and acquisitions in India are on the rise.

Volume of mergers and acquisitions in India in 2007 are

expected to grow two fold from 2006 and four times compared to 2005.

India has emerged as one of the top countries with respect to merger and acquisition deals. In 2007, the first two
months alone accounted for merger and acquisition deals worth $40 billion in India. The estimated figures for the
entire year projected a total of more than $ 100 billions worth of mergers and acquisitions in India. This is two fold
growth from 2006 and a growth of almost four times from 2005.

Mergers and Acquisitions in different sectors in India

Sector wise, large volumes of mergers and mergers and acquisitions in India have occurred in finance, telecom,
FMCG, construction materials, automotives and metals. In 2005 finance topped the list with 20% of total value of
mergers and acquisitions in India taking place in this sector. Telecom accounted for 16%, while FMCG and
construction materials accounted for 13% and 10% respectively.

In the banking sector, important mergers and acquisitions in India in recent years include the merger between
IDBI (Industrial Development bank of India) and its own subsidiary IDBI Bank. The deal was worth $ 174.6 million
(Rs. 7.6 billion in Indian currency). Another important merger was that between Centurion Bank and Bank of
Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian currency), this merger led to the creation of the Centurion
Bank of Punjab with 235 branches in different regions of India.

In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8 % in Bharti Telecom was worth
$252 million (Rs. 10.9 billion in Indian currency). In the Foods and FMCG sector a controlling stake of Shaw
Wallace and Company was acquired by United Breweries Group owned by Vijay Mallya. This deal was worth
$371.6 million (Rs. 16.2 billion in Indian currency). Another important one in this sector, worth $48.2 million (Rs
2.1 billion in Indian currency) was the acquisition of 90% stake in Williamson Tea Assam by McLeod Russell
India In construction materials 67 % stake in Ambuja Cement India Ltd was acquired by Holcim, a Swiss
company for $634.9 million (Rs 27.3 billion in Indian currency).

Mergers and Acquisitions in India in 2007

Some of the important mergers and takeovers in India in 2007 were -

• Mahindra and Mahindra acquired 90% stake in the German company Schoneweiss.

• Corus was taken over by Tata

• RSM Ambit based at Mumbai was acquired by PricewaterhouseCoopers.

• Vodafone took over Hutchison-Essar in India.

http://finance.mapsofworld.com/merger-acquisition/india.html

Mergers and Acquisitions History

Mergers and Acquisitions History can effectively help in gathering information about the significant
mergers and acquisitions of the world.

Mergers and Acquisitions History often surprises us as we come to know that the concepts of
Mergers and Acquisitions are not new, on the contrary they are continuing from the early years
of history.

Mergers and Acquisitions History helps us to understand the evolution of the concepts of Mergers
and Acquisitions in the world. If we involve in the detailed analysis of the History of Merger of
Acquisitions, we will find that Mergers and Acquisitions started to take place in the world from very early
years.

US Mergers and Acquisitions History

In USA, mergers and acquisitions started in twentieth century. After that Mergers and Acquisitions
continued to occur in cycle. These cycles of Mergers and Acquisitions, took place in USA in 1929, in the
last half of 1960s, in the first half of 1980s and again in the last half of 1990s. Here, it should be
mentioned that, by cycle we are referring to the period, in which the maximum number of mergers
took place.

Among the mergers and acquisitions cycles cited above, the most significant mergers of USA took place
in the last half of 1990s. The reason of this was that, the stock market was quite strong in US in that
period and this strong stock market supported the high incidence of mergers and acquisitions. The
mergers and acquisitions of this period involved big brands and huge amount of dollars.

Significant Mergers and Acquisitions of the History

• In 1987, an Australian Company named Stephen Jaques Stone James, which was a partnership
company with 79 partners, merged with the company named Mallesons. After the Merger, the
new joint company was known as Mallesons Stephen Jaques. This Merger contributed
significantly to the telecommunication sector development in Australia.

• In 1988, Tower Federal Savings Bank of Indiana acquired two financial institutions of Michigan.
Then in 1991, the Standard Federal Bank strengthened their position in Ohio by acquiring a
financial institution of Toledo. These two acquisitions had great impact on the banking Sector of
USA.

• In 2001, a merger between Association of European Universities and the Confederation of

European Union Rectors' Conference took place in Spain. This merger provided more power to
the University community of Europe.

• Mergers and Acquisitions Law

• Every country follows their own set of rules and regulations regarding Mergers and
Acquisitions. In some countries like USA and Nigeria there several strict laws regarding
Mergers and Acquisitions, while in country like Thailand there are no specific laws and
regulations to govern Mergers and Acquisitions.

Mergers and Acquisitions Law exist in every country of the world. But, the laws and
regulations regarding Mergers and Acquisitions differ from country to country. In US the
Mergers and Acquisitions Law are different from that of Nigeria or Thailand. So, to get a real
picture of the Mergers and Acquisitions Law, we have to discuss the Mergers and
Acquisitions Law of different countries.
• Mergers and Acquisitions Law in United States of America

• In Unites States of America(USA), Mergers and Acquisitions Law have been generated
keeping in mind the interests of the shareholders. To protect the shareholders, US govt.
constituted the law that, a merger deal can be finalized only through the process of voting by
the Board of directors and voting by the shareholders of the two separate companies.

In USA, there are both state laws and federal laws to administer Mergers and Acquisitions.
• State Laws of USA regarding Mergers and Acquisitions
• The State Laws determine the process through which any merger or acquisition can be approved
in the country. These laws also ensure that, the shareholders of the target firm receive fair
value for their shares. In USA, State laws has also been generated keeping in mind the issue of
Hostile Takeover. These laws protect any target company from Hostile Takeover by providing
financial and legal support.
• Federal Laws of USA regarding Mergers and Acquisitions
• The Federal Laws keeps a check on the size of the joint firm after a Merger or Acquisition, so
that the merged firm cannot develop monopolistic power. The Federal Laws of USA ensures
that, no big merged firm involves in any business activity which is unlawful.

Just like USA, all the other countries have their own laws and regulations regrading Mergers and
Acquisitions. In Nigeria, for approval of any Merger or Acquisition deal, a majority agreement is
required to be produced before court. The court sanctions the deal by issuing order. On the
contrary, in Thailand, there are no fixed laws and regulations regarding Mergers and
Acquisitions. The companies are free to set their own terms and conditions in case of any
merger or acquisition.
http://finance.mapsofworld.com/merger-acquisition/law.html

Impact Of Mergers And Acquisitions

Abstract:
Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and
acquisitions on various sects of the company may differ. In the article below, details of how the
shareholders, employees and the management people are affected has been briefed.

Mergers and acquisitions are aimed at improving profits and productivity of a company. Simultaneously,
the objective is also to reduce expenses of the firm. However, mergers and acquisitions are not always
successful. At times, the main goal for which the process has taken place loses focus. The success of
mergers, acquisitions or takeovers is determined by a number of factors. Those mergers and
acquisitions, which are resisted not only affects the entire work force in that organization but also harm
the credibility of the company. In the process, in addition to deviating from the actual aim, psychological
impacts are also many. Studies have suggested that mergers and acquisitions affect the senior
executives, labor force and the shareholders.

Employees:
• Impact Of Mergers And Acquisitions on workers or employees:
Aftermath of mergers and acquisitions impact the employees or the workers the most. It is a
well known fact that whenever there is a merger or an acquisition, there are bound to be lay
offs. In the event when a new resulting company is efficient business wise, it would require less
number of people to perform the same task. Under such circumstances, the company would
attempt to downsize the labor force. If the employees who have been laid off possess sufficient
skills, they may in fact benefit from the lay off and move on for greener pastures. But it is
usually seen that the employees those who are laid off would not have played a significant role
under the new organizational set up. This accounts for their removal from the new organization
set up. These workers in turn would look for re employment and may have to be satisfied with a
much lesser pay package than the previous one. Even though this may not lead to drastic
unemployment levels, nevertheless, the workers will have to compromise for the same. If not
drastically, the mild undulations created in the local economy cannot be ignored fully.

Management at the top:

• Impact of mergers and acquisitions on top level management:
Impact of mergers and acquisitions on top level management may actually involve a "clash of
the egos". There might be variations in the cultures of the two organizations. Under the new set
up the manager may be asked to implement such policies or strategies, which may not be quite
approved by him. When such a situation arises, the main focus of the organization gets diverted
and executives become busy either settling matters among themselves or moving on. If
however, the manager is well equipped with a degree or has sufficient qualification, the
migration to another company may not be troublesome at all.

Shareholders:
• Impact of mergers and acquisitions on shareholders:
We can further categorize the shareholders into two parts:
• The Shareholders of the acquiring firm
• The shareholders of the target firm.

Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of
the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives
in a house he has recently bought, he will not be able to know its drawbacks. So that the shareholders
forgo their shares, the company has to offer an amount more then the actual price, which is prevailing in
the market. Buying a company at a higher price can actually prove to be beneficial for the local
economy.

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the shareholders of the acquired
company in degrees, the degree to which they were benefited, by the same degree, these shareholders
are harmed. This can be attributed to debt load, which accompanies an acquisition.
http://finance.mapsofworld.com/merger-acquisition/impact.html

Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate cost efficiency
through economies of scale, can enhance the revenue through gain in market share and can even generate tax
gains. Benefits of Mergers and Acquisitions are the main reasons for which the companies enter into these deals.
The main benefits of Mergers and Acquisitions are the following:
Greater Value Generation
Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more
value than the separate firms. When a company buys out another, it expects that the newly generated
shareholder value will be higher than the value of the sum of the shares of the two separate companies.
 Mergers and Acquisitions can prove to be really beneficial to the companies when they are weathering through
the tough times. If the company which is suffering from various problems in the market and is not able to
overcome the difficulties, it can go for an acquisition deal.

If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost
efficient company can be generated.

Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm,
the joint company accumulates larger market share. This is because of these benefits that the small and less
powerful firms agree to be acquired by the large firms.

Gaining Cost Efficiency

When two companies come together by merger or acquisition, the joint company benefits in terms of cost
efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As
the two firms form a new and bigger company, the production is done on a much larger scale and when the
output production increases, there are strong chances that the cost of production per unit of output gets reduced.

Mergers and Acquisitions are also beneficial

• when a firm wants to enter a new market

• when a firm wants to introduce new products through research and development

• when a forms wants achieve administrative benefits

Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital.

http://finance.mapsofworld.com/merger-acquisition/benefits.html

Merger and Acquisition Strategies

Merger and Acquisition Strategies are significant in order to bring success to a merger or acquisition
deal.

A sound strategic planning can protect any merger from failure. The important issues that should be
kept in mind at the time of developing Merger and Acquisition Strategy, are discussed in the
following page.

Merger and Acquisition Strategies are extremely important in order to derive the maximum benefit
out of a merger or acquisition deal. It is quite difficult to decide on the strategies of merger and
acquisition , specially for those companies who are going to make a merger or acquisition deal for the
first time. In this case, they take lessons from the past mergers and acquisitions that took place in the
market between other companies and proved to be successful.

Through market survey and market analysis of different mergers and acquisitions, it has been found out
that there are some golden rules which can be treated as the Strategies for Successful Merger or
Acquisition Deal.

These rules or strategies are discussed below:

• Before entering in to any merger or acquisition deal, the target company's market performance
and market position is required to be examined thoroughly so that the optimal target company
can be chosen and the deal can be finalized at a right price.
• Identification of future market opportunities, recent market trends and customer's reaction to
the company's products are also very important in order to assess the growth potential of the
company.
• After finalizing the merger or acquisition deal, the integration process of the companies should
be started in time. Before the closing of the deal, when the negotiation process is on, from that
time, the management of both the companies require to work on a proper integration strategy.
This is to ensure that no potential problem crop up after the closing of the deal.
• If the company which intends to acquire the target firm plans restructuring of the target
company, then this plan should be declared and implemented within the the period of
acquisition to avoid uncertainties.
• It is also very important to consider the working environment and culture of the workforce of
the target company, at the time of drawing up Merger and Acquisition Strategies, so that the
laborers of the target company do not feel left out and become demoralized.

This section does not cite any references or

sources. Please help improve this article by adding
citations to reliable sources. Unsourced material
may be challenged and removed. (June 2008)
Acquisition
Main article: Takeover

An acquisition, also known as a takeover or a buyout, is the buying of one

company (the ‘target’) by another. An acquisition may be friendly or hostile.
In the former case, the companies cooperate in negotiations; in the latter case,
the takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer. Acquisition usually refers to a purchase of a smaller
firm by a larger one. Sometimes, however, a smaller firm will acquire
management control of a larger or longer established company and keep its
name for the combined entity. This is known as a reverse takeover. Another
type of acquisition is reverse merger, a deal that enables a private company to
get publicly listed in a short time period. A reverse merger occurs when a
private company that has strong prospects and is eager to raise financing buys
a publicly listed shell company, usually one with no business and limited
assets. Achieving acquisition success has proven to be very difficult, while
various studies have showed that 50% of acquisitions were unsuccessful.[citation
needed]
The acquisition process is very complex, with many dimensions
influencing its outcome.[1]

• The buyer buys the shares, and therefore control, of the target company
being purchased. Ownership control of the company in turn conveys
effective control over the assets of the company, but since the company is
acquired intact as a going business, this form of transaction carries with it
all of the liabilities accrued by that business over its past and all of the
risks that company faces in its commercial environment.
• The buyer buys the assets of the target company. The cash the target
receives from the sell-off is paid back to its shareholders by dividend or
through liquidation. This type of transaction leaves the target company as
an empty shell, if the buyer buys out the entire assets. A buyer often
structures the transaction as an asset purchase to "cherry-pick" the assets
that it wants and leave out the assets and liabilities that it does not. This
can be particularly important where foreseeable liabilities may include
future, unquantified damage awards such as those that could arise from
litigation over defective products, employee benefits or terminations, or
environmental damage. A disadvantage of this structure is the tax that
many jurisdictions, particularly outside the United States, impose on
transfers of the individual assets, whereas stock transactions can
frequently be structured as like-kind exchanges or other arrangements
 that are tax-free or tax-neutral, both to the buyer and to the seller's
shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation
where one company splits into two, generating a second company separately listed on a stock
exchange.

[edit] Merger
In business or economics a merger is a combination of two companies into one larger
company. Such actions are commonly voluntary and involve 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 involved in the deal. A merger can resemble a takeover but result in a new
company name (often combining the names of the original companies) and in new branding;
in some cases, terming the combination a "merger" rather than an acquisition is done purely
for political or marketing reasons.
[edit] Classifications of mergers
Horizontal merger - Two companies that are in direct competition and share similar product
lines and markets (eg: Sirius/XM)
Vertical merger - A customer and company or a supplier and company. (eg: an ice cream
maker merges with the dairy farm whom they previously purchased milk from; now, the milk
is 'free')
Market-extension merger - Two companies that sell the same products in different markets
(eg: an ice cream maker in the United States merges with an ice cream maker in Canada)
Product-extension merger - Two companies selling different but related products in the
same market (eg: a cone supplier merging with an ice cream maker).
Conglomeration - Two companies that have no common business areas.
• Congeneric merger/concentric mergers occur where two merging firms are
in the same general industry, but they have no mutual buyer/customer or
supplier relationship, such as a merger between a bank and a leasing
company. Example: Prudential's acquisition of Bache & Company.
There are two types of mergers that are distinguished by how the merger is financed. Each
has certain implications for the companies involved and for investors:
Purchase mergers - As the name suggests, this kind of merger occurs when one company
purchases another. The purchase is made with cash or through the issue of some kind of debt
instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them with a tax
benefit. Acquired assets can be written-up to the actual purchase price, and the difference
between the book value and the purchase price of the assets can depreciate annually, reducing
taxes payable by the acquiring company.
Consolidation mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.
A unique type of merger called a reverse merger is used as a way of going public without the
expense and time required by an IPO.
The contract vehicle for achieving a merger is a "merger sub".
The occurrence of a merger often raises concerns in antitrust circles. Devices such as the
Herfindahl index can analyze the impact of a merger on a market and what, if any, action
could prevent it. Regulatory bodies such as the European Commission, the United States
Department of Justice and the U.S. Federal Trade Commission may investigate anti-trust
cases for monopolies dangers, and have the power to block mergers.
Accretive mergers are those in which an acquiring company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a high price to earnings
ratio (P/E) acquires one with a low P/E.
Dilutive mergers are the opposite of above, whereby a company's EPS decreases. The
company will be one with a low P/E acquiring one with a high P/E.
The completion of a merger does not ensure the success of the resulting organization; indeed,
many mergers (in some industries, the majority) result in a net loss of value due to problems.
Correcting problems caused by incompatibility—whether of technology, equipment, or
corporate culture— diverts resources away from new investment, and these problems may be
exacerbated by inadequate research or by concealment of losses or liabilities by one of the
partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating
inefficiency, and conversely the new management may cut too many operations or personnel,
losing expertise and disrupting employee culture. These problems are similar to those
encountered in takeovers. For the merger not to be considered a failure, it must increase
shareholder value faster than if the companies were separate, or prevent the deterioration of
shareholder value more than if the companies were separate. A Merger company is always
limited.
[edit] Distinction between mergers and acquisitions
Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things. [2]
When one company takes over another and clearly established itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to
exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size,
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 "merger of equals". Both
companies' stocks are surrendered and new company stock is issued in its place. For example,
in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist
when they merged, and a new company, GlaxoSmithKline, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company
will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim
that the action is a merger of equals, even if it is technically an acquisition. Being bought out
often carries negative connotations, therefore, by describing the deal euphemistically as a
merger, deal makers and top managers try to make the takeover more palatable. An example
of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely
referred to in the time, and is still now, as a merger of the two corporations.
A purchase deal will also be called a merger when both CEOs agree that joining together is in
the best interest of both of their companies. But when the deal is unfriendly - that is, when the
target company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the
purchase is friendly or hostile and how it is announced. In other words, the real difference lies
in how the purchase is communicated to and received by the target company's board of
directors, employees and shareholders. It is quite normal though for M&A deal
communications to take place in a so called 'confidentiality bubble' whereby information
flows are restricted due to confidentiality agreements (Harwood, 2005).
[edit] Business valuation
The five most common ways to valuate a business are
• asset valuation,
• historical earnings valuation,
• future maintainable earnings valuation,
• relative valuation (comparable company & comparable transactions),
• discounted cash flow (DCF) valuation
Professionals who valuate 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 above, in
order to obtain a more accurate value. These values 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: a Notice to Reader, a Review Engagement or
an Audit.
Accurate business valuation is one of the most important aspects of M&A as valuations like
these will have a major impact on the price that a business will be sold for. Most often this
information is expressed in a Letter of Opinion of Value (LOV) when the business is being
valuated for interest's sake. There are other, more detailed ways of expressing the value of a
business. These reports generally get more detailed and expensive as the size of a company
increases, however, this is not always the case as there are many complicated industries
which require more attention to detail, regardless of size.

[edit] Financing M&A

Mergers are generally differentiated from acquisitions partly by the way in which they are
financed and partly by the relative size of the companies. Various methods of financing an
M&A deal exist:
[edit] Cash
Payment by cash. Such transactions are usually termed acquisitions rather than mergers
because the shareholders of the target company are removed from the picture and the target
comes under the (indirect) control of the bidder's shareholders alone.
A cash deal would make more sense during a downward trend in the interest rates. Another
advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution
for the acquiring company. But a caveat in using cash is that it places constraints on the cash
flow of the company.
[edit] Financing
Financing capital may be borrowed from a bank, or raised by an issue of bonds.
Alternatively, the acquirer's stock may be offered as consideration. Acquisitions financed
through debt are known as leveraged buyouts if they take the target private, and the debt will
often be moved down onto the balance sheet of the acquired company.
[edit] Hybrids
An acquisition can involve a combination of cash and debt or of cash and stock of the
purchasing entity.
[edit] Factoring
Factoring can provide the extra to make a merger or sale work. Hybrid can work as ad e-
denit.

[edit] Specialist M&A advisory firms

Although at present the majority of M&A advice is provided by full-service investment
banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only
provide M&A advice (and not financing). These companies are sometimes referred to as
Transition Companies, assisting businesses often referred to as "companies in transition." To
perform these services in the US, an advisor must be a licensed broker dealer, and subject to
SEC (FINRA) regulation. More information on M&A advisory firms is provided at corporate
advisory.

[edit] Motives behind M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek improved
financial performance. The following motives are considered to improve financial
performance:
• Economy of scale: This refers to the fact that the combined company can
often reduce its fixed costs by removing duplicate departments or
operations, lowering the costs of the company relative to the same
revenue stream, thus increasing profit margins.
• Increased revenue or market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by
capturing increased market share) to set prices.
• Cross-selling: For 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. Or, a manufacturer
can acquire and sell complementary products.
• Synergy: For example, managerial economies such as the increased
opportunity of managerial specialization. Another example are purchasing
economies due to increased order size and associated bulk-buying
discounts.
• Taxation: A profitable company can buy a loss maker to use the target's
loss as their advantage by reducing their tax liability. In the United States
and many other countries, rules are in place to limit the ability of
profitable companies to "shop" for loss making companies, limiting the tax
motive of an acquiring company.
• Geographical or other diversification: This is designed to smooth the
earnings results of a company, which over the long term smoothens the
stock price of a company, giving conservative investors more confidence
in investing in the company. However, this does not always deliver value
to shareholders (see below).
• Resource transfer: resources are unevenly distributed across firms
(Barney, 1991) and the interaction of target and acquiring firm resources
can create value through either overcoming information asymmetry or by
combining scarce resources.[3]
• Vertical integration: Vertical integration occurs when an upstream and
downstream firm merge (or one acquires the other). There are several
reasons for this to occur. One reason is to internalise an externality
 problem. A common example is of such an externality is double
marginalization. Double marginalization occurs when both the upstream
and downstream firms have monopoly power, each firm reduces output
from the competitive level to the monopoly level, creating two deadweight
losses. By merging the vertically integrated firm can collect one
deadweight loss by setting the upstream firm's output to the competitive
level. This increases profits and consumer surplus. A merger that creates a
vertically integrated firm can be profitable.[4]
Vertical integration may also be driven by reduction of transaction costs (particularly credit
related) and risk mitigation [5] [1]
However, on average and across the most commonly studied variables, acquiring firms'
financial performance does not positively change as a function of their acquisition activity.[6]
Therefore, additional motives for merger and acquisition that may not add shareholder value
include:
• Diversification: While this may hedge a company against a downturn in an
individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at
a much lower cost than those associated with a merger.
• Manager's hubris: manager's overconfidence about expected synergies
from M&A which results in overpayment for the target company.
• Empire-building: Managers have larger companies to manage and hence
more power.
• Manager's compensation: In the past, certain executive management
teams had their payout based on the total amount of profit of the
company, instead of the profit per share, which would give the team a
perverse incentive to buy companies to increase the total profit while
decreasing the profit per share (which hurts the owners of the company,
the shareholders); although some empirical studies show that
compensation is linked to profitability rather than mere profits of the
company.

[edit] Effects on management

A study published in the July/August 2008 issue of the Journal of Business Strategy suggests
that mergers and acquisitions destroy leadership continuity in target companies’ top
management teams for at least a decade following a deal. The study found that target
companies lose 21 percent of their executives each year for at least 10 years following an
acquisition – more than double the turnover experienced in non-merged firms.[7]

[edit] M&A marketplace difficulties

This section does not cite any references or sources. Please help
improve this article by adding citations to reliable sources. Unsourced
material may be challenged and removed. (December 2007)

In many states, no marketplace currently exists for the mergers and acquisitions of privately
owned small to mid-sized companies. Market participants often wish to maintain a level of
secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually
arises from the possible negative reactions a company's employees, bankers, suppliers,
customers and others might have if the effort or interest to seek a transaction were to become
known. This need for secrecy has thus far thwarted the emergence of a public forum or
marketplace to serve as a clearinghouse for this large volume of business. In some states, a
Multiple Listing Service (MLS) of small businesses for sale is maintained by organizations
such as Business Brokers of Florida (BBF). Another MLS is maintained by International
Business Brokers Association (IBBA).
At present, the process by which a company is bought or sold can prove difficult, slow and
expensive. A transaction typically requires six to nine months and involves many steps.
Locating parties with whom to conduct a transaction forms one step in the overall process
and perhaps the most difficult one. Qualified and interested buyers of multimillion dollar
corporations are hard to find. Even more difficulties attend bringing a number of potential
buyers forward simultaneously during negotiations. Potential acquirers in an industry simply
cannot effectively "monitor" the economy at large for acquisition opportunities even though
some may fit well within their company's operations or plans.
An industry of professional "middlemen" (known variously as intermediaries, business
brokers, and investment bankers) exists to facilitate M&A transactions. These professionals
do not provide their services cheaply and generally resort to previously-established personal
contacts, direct-calling campaigns, and placing advertisements in various media. In servicing
their clients they attempt to create a one-time market for a one-time transaction. Stock
purchase or merger transactions involve securities and require that these "middlemen" be
licensed broker dealers under FINRA (SEC) in order to be compensated as a % of the deal.
Generally speaking, an unlicensed middleman may be compensated on an asset purchase
without being licensed. Many, but not all, transactions use intermediaries on one or both
sides. Despite best intentions, intermediaries can operate inefficiently because of the slow and
limiting nature of having to rely heavily on telephone communications. Many phone calls fail
to contact with the intended party. Busy executives tend to be impatient when dealing with
sales calls concerning opportunities in which they have no interest. These marketing
problems typify any private negotiated markets. Due to these problems and other problems
like these, brokers who deal with small to mid-sized companies often deal with much more
strenuous conditions than other business brokers. Mid-sized business brokers have an average
life-span of only 12–18 months and usually never grow beyond 1 or 2 employees. Exceptions
to this are few and far between. Some of these exceptions include The Sundial Group,
Geneva Business Services, Corporate Finance Associates and Robbinex.
The market inefficiencies can prove detrimental for this important sector of the economy.
Beyond the intermediaries' high fees, the current process for mergers and acquisitions has the
effect of causing private companies to initially sell their shares at a significant discount
relative to what the same company might sell for were it already publicly traded. An
important and large sector of the entire economy is held back by the difficulty in conducting
corporate M&A (and also in raising equity or debt capital). Furthermore, it is likely that since
privately held companies are so difficult to sell they are not sold as often as they might or
should be.
Previous attempts to streamline the M&A process through computers have failed to succeed
on a large scale because they have provided mere "bulletin boards" - static information that
advertises one firm's opportunities. Users must still seek other sources for opportunities just
as if the bulletin board were not electronic. A multiple listings service concept was previously
not used due to the need for confidentiality but there are currently several in operation. The
most significant of these are run by the California Association of Business Brokers (CABB)
and the International Business Brokers Association (IBBA) These organizations have
effectivily created a type of virtual market without compromising the confidentiality of
parties involved and without the unauthorized release of information.
One part of the M&A process which can be improved significantly using networked
computers is the improved access to "data rooms" during the due diligence process however
only for larger transactions. For the purposes of small-medium sized business, these
datarooms serve no purpose and are generally not used.

[edit] M&A failure

Reasons for frequent failure of M&A were analyzed by Thomas Straub in "Reasons for
frequent failure in mergers and acquisitions - a comprehensive analysis", DUV Gabler
Edition, 2007. Despite the goal of performance improvement, results from mergers and
acquisitions (M&A) are often disappointing. Numerous empirical studies show high failure
rates of M&A deals. Studies are mostly focused on individual determinants. The literature
therefore lacks a more comprehensive framework that includes different perspectives.Using
four statistical methods, Thomas Straub shows that M&A performance is a multi-dimensional
function. For a successful deal, the following key success factors should be taken into
account:
• Strategic logic which is reflected by six determinants: market similarities,
market complementarities, operational similarities, operational
complementarities, market power, and purchasing power..
• Organizational integration which is reflected by three determinants:
acquisition experience, relative size, cultural compatibility.
• Financial / price perspective which is reflected by three determinants:
acquisition premium, bidding process, and due diligence.
All 12 variables are presumed to affect performance either positively or negatively. Post-
M&A performance is measured by synergy realization, relative performance (compared to
competition), and absolute performance.

[edit] The Great Merger Movement

The Great Merger Movement was a predominantly U.S. business phenomenon that happened
from 1895 to 1905. During this time, small firms with little market share consolidated with
similar firms to form large, powerful institutions that dominated their markets. It is estimated
that more than 1,800 of these firms disappeared into consolidations, many of which acquired
substantial shares of the markets in which they operated. The vehicle used were so-called
trusts. To truly understand how large this movement was—in 1900 the value of firms
acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 it
was around 10–11% of GDP. Organizations that commanded the greatest share of the market
in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with
each other. However, there were companies that merged during this time such as DuPont,
Nabisco, US Steel, and General Electric that have been able to keep their dominance in their
respected sectors today due to growing technological advances of their products, patents, and
brand recognition by their customers. The companies that merged were mass producers of
homogeneous goods that could exploit the efficiencies of large volume production. However
more often than not mergers were "quick mergers". These "quick mergers" involved mergers
of companies with unrelated technology and different management. As a result, the efficiency
gains associated with mergers were not present. The new and bigger company would actually
face higher costs than competitors because of these technological and managerial differences.
Thus, the mergers were not done to see large efficiency gains, they were in fact done because
that was the trend at the time. Companies which had specific fine products, like fine writing
paper, earned their profits on high margin rather than volume and took no part in Great
Merger Movement.[citation needed]
[edit] Short-run factors
One of the major short run factors that sparked in The Great Merger Movement 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 1893, the demand declined. When demand for the good
falls, as illustrated by the classic supply and demand model, prices are driven down. To avoid
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 horizontal
integration amongst firms of the era. Focusing on mass production allowed firms to reduce
unit costs to a much lower rate. These firms usually were capital-intensive and had high fixed
costs. Because new machines were mostly financed through bonds, interest payments on
bonds were high followed by the panic of 1893, yet no firm was willing to accept quantity
reduction during this period.[citation needed]
[edit] Long-run factors
In the long run, due to the desire to keep costs low, it was advantageous for firms to merge
and reduce their transportation costs thus producing and transporting from one location rather
than various sites of different companies as in the past. This resulted in shipment directly to
market from this one location. In addition, technological changes prior to the merger
movement within companies increased the efficient size of plants with capital intensive
assembly lines allowing for economies of scale. Thus improved technology and
transportation were forerunners to the Great Merger Movement. In part due to competitors as
mentioned above, and in part due to the government, however, many of these initially
successful mergers were eventually dismantled. The U.S. government passed the Sherman
Act in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such
cases as U.S. versus Addyston Pipe and Steel Co., the courts attacked large companies for
strategizing with others or within their own companies to maximize profits. Price fixing with
competitors created a greater incentive for companies to unite and merge under one name so
that they were not competitors anymore and technically not price fixing.

[edit] Cross-border M&A

In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A
deals cause the domestic currency of the target corporation to appreciate by 1% relative to the
acquirer's. For every $1-billion deal, the currency of the target corporation increased s -
Another Tool For Traders | publisher = Investopedia |date=2005-10-12 | url =
http://www.investopedia.com/articles/forex/05/MA.asp | accessdate = 2007-06-17 }}</ref>
The rise of globalization has exponentially increased the market for cross border M&A. In
1996 alone there were over 2000 cross border transactions worth a total of approximately
$256 billion. This rapid increase has taken many M&A firms by surprise because the
majority of them never had to consider acquiring Due to the complicated nature of cross
border M&A, the vast majority of cross border actions have unsuccessful anies seek to
expand their global footprint and become more agile at creating high-performing businesses
and cultures across national boundaries.[8]
Even mergers of companies with headquarters in the same country are very much of this type
(cross-border Mergers). After all,when Boeing acquires McDonnell Douglas, the two
American companies must integrate operations in dozens of countries around the world. This
is just as true for other supposedly "single country" mergers, such as the $27 billion dollar
merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).

The Main Idea

One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle
behind buying a company is to create shareholder
value over and above that of the sum of the two
companies. Two companies together are more
valuable than two separate companies - at least,
that's the reasoning behind M&A.

This rationale is particularly alluring to companies

when times are tough. Strong companies will act to
buy other companies to create a more competitive,
cost-efficient company. The companies will come
together hoping to gain a greater market share or to
achieve greater efficiency. Because of these potential
benefits, target companies will often agree to be
purchased when they know they cannot survive
alone.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger
and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is called an
acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business
and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, 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 "merger of equals." Both companies' stocks are surrendered and new company stock is
issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged,
and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another
and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals,
even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by
describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of
both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be
purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly
or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated
to and received by the target company's board of directors, employees and shareholders.

Synergy
Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the
form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

• Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money
saved from reducing the number of staff members from accounting, marketing and other departments.
Job cuts will also include the former CEO, who typically leaves with a compensation package.

• Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT
system, a bigger company placing the orders can save more on costs. Mergers also translate into
improved purchasing power to buy equipment or office supplies - when placing larger orders, companies
have a greater ability to negotiate prices with their suppliers.
 • Acquiring new technology - To stay competitive, companies need to stay on top of technological
developments and their business applications. By buying a smaller company with unique technologies,
a large company can maintain or develop a competitive edge.

• Improved market reach and industry visibility - Companies buy companies to reach new markets and
grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving
them new sales opportunities. A merger can also improve a company's standing in the investment
community: bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two companies
merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a
merger does just the opposite. In many cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where
there is no value to be created, the CEO and investment bankers - who have much to gain from a successful
M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and
penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a
later section of this tutorial.

Varieties of Mergers
From the perspective of business structures, there is a whole host of different mergers. Here are a few types,
distinguished by the relationship between the two companies that are merging:

• Horizontal merger - Two companies that are in direct competition and share the same product lines and
markets.

• Vertical merger - A customer and company or a supplier and company. Think of a cone supplier
merging with an ice cream maker.

• Market-extension merger - Two companies that sell the same products in different markets.

• Product-extension merger - Two companies selling different but related products in the same market.

• Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain
implications for the companies involved and for investors:

• Purchase Mergers - As the name suggests, this kind of merger occurs when one company
purchases another. The purchase is made with cash or through the issue of some kind of debt
instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax
benefit. Acquired assets can be written-up to the actual purchase price, and the difference
between the book value and the purchase price of the assets can depreciate annually,
reducing taxes payable by the acquiring company. We will discuss this further in part four of
this tutorial.

• Consolidation Mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.

Acquisitions
As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name
only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and
enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no
exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel
satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with
cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one
company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash,
which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y
becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a
relatively short time period. A reverse merger occurs when a private company that has strong prospects and is
eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets.
The private company reverse merges into the public company, and together they become an entirely new
public corporation with tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant
to create synergy that makes the value of the combined companies greater than the sum of the two parts. The
success of a merger or acquisition depends on whether this synergy is achieved.

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every
day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to
form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the
reverse and break up companies through spinoffs, carve-outs or tracking stocks.

Not surprisingly, these actions often make the news. Deals can be worth hundreds of millions, or even billions, of
dollars. They can dictate the fortunes of the companies involved for years to come. For a CEO, leading an M&A
can represent the highlight of a whole career. And it is no wonder we hear about so many of these transactions;
they happen all the time. Next time you flip open the newspaper’s business section, odds are good that at least
one headline will announce some kind of M&A transaction.

Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this question, this tutorial
discusses the forces that drive companies to buy or merge with others, or to split-off or sell parts of their own
businesses. Once you know the different ways in which these deals are executed, you'll have a better idea of
whether you should cheer or weep when a company you own buys another company - or is bought by one. You
will also be aware of the tax consequences for companies and for investors.

Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate cost efficiency
through economies of scale, can enhance the revenue through gain in market share and can even generate tax
gains.

Benefits of Mergers and Acquisitions are the main reasons for which the companies enter into these deals. The
main benefits of Mergers and Acquisitions are the following:

Greater Value Generation

Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more
value than the separate firms. When a company buys out another, it expects that the newly generated
shareholder value will be higher than the value of the sum of the shares of the two separate companies.

Mergers and Acquisitions can prove to be really beneficial to the companies when they are weathering through
the tough times. If the company which is suffering from various problems in the market and is not able to
overcome the difficulties, it can go for an acquisition deal.

If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost
efficient company can be generated.
 Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm,
the joint company accumulates larger market share. This is because of these benefits that the small and less
powerful firms agree to be acquired by the large firms.

Gaining Cost Efficiency

When two companies come together by merger or acquisition, the joint company benefits in terms of cost
efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As
the two firms form a new and bigger company, the production is done on a much larger scale and when the
output production increases, there are strong chances that the cost of production per unit of output gets reduced.

Mergers and Acquisitions are also beneficial

• when a firm wants to enter a new market

• when a firm wants to introduce new products through research and development

• when a forms wants achieve administrative benefits

Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital.