OBJECTIVE OF THE STUDY

Every research is done for achieving some specific or we can say certain
objectives, without any objective there can no research takes place.
Purpose of this study is to understand the Merger and Acquisition.
o understand couple of good mergers and their specific
requirements.
o major mergers occurred in last three years.
AN ITRODUCTION
The phrase mergers and acquisitions (abbreviated M&A) refers to the
aspect of corporate strategy, corporate finance and management dealing with the
buying, selling and combining of different companies that can aid, finance, or help
a growing company in a given industry grow rapidly without having to create
another business entity.
Mergers and acquisitions (M&A) and corporate restructuring are a big
part of te corporate finance !or"d# $%er& da&' (a"" )treet in%estment
ban*ers arrange M&A transactions' !ic bring separate companies
togeter to form "arger ones# (en te&+re not creating big companies from
sma""er ones' corporate finance dea"s do te re%erse and brea* up companies
troug spinoffs' car%e,outs or trac*ing stoc*s.
Not surprisingly, these !tions o"ten #$e the ne%s. Dels !n &e %orth hun're's o" #illions, or
e(en &illions, o" 'ollrs. They !n 'i!tte the "ortunes o" the !o#pnies in(ol(e' "or yers to !o#e. For
C$O, le'ing n )*+ !n represent the highlight o" %hole !reer. +n' it is no %on'er %e her &out so
#ny o" these trns!tions, they hppen ll the ti#e. Ne-t ti#e you "lip open the ne%spper.s &usiness
se!tion, o''s re goo' tht t lest one he'line %ill nnoun!e so#e $in' o" )*+ trns!tion.
)ure' M&A dea"s grab ead"ines' but !at does tis a"" mean to
in%estors- To ans!er tis question' tis tutoria" discusses te forces tat dri%e
companies to bu& or merge !it oters' or to sp"it,off or se"" parts of teir
o!n businesses# Once &ou *no! te different !a&s in !ic tese dea"s are
e.ecuted' &ou+"" a%e a better idea of !eter &ou sou"d ceer or !eep !en
a compan& &ou o!n bu&s anoter compan& , or is bougt b& one# /ou !i""
a"so be a!are of te ta. consequences for companies and for in%estors#
Te Main Idea One plus one #$es three/ this e0ution is the spe!il l!he#y o" merger
or n acquisition. The $ey prin!iple &ehin' &uying !o#pny is to !rete shrehol'er (lue o(er n'
&o(e tht o" the su# o" the t%o !o#pnies. T%o !o#pnies together re #ore (lu&le thn t%o seprte
!o#pnies 1 t lest, tht2s the resoning &ehin' )*+.
Tis rationa"e is particu"ar"& a""uring to companies !en times are
toug# )trong companies !i"" act to bu& oter companies to create a more
competiti%e' cost,efficient compan&# Te companies !i"" come togeter oping
to gain a greater mar*et sare or to acie%e greater efficienc&# 0ecause of
tese potentia" benefits' target companies !i"" often agree to be purcased
!en te& *no! te& cannot sur%i%e a"one#
Distinction bet!een Mergers and Acquisitions
+lthough they re o"ten uttere' in the s#e &reth n' use' s though they %ere synony#ous, the ter#s
#erger n' !0uisition #en slightly 'i""erent things.
(en one compan& ta*es o%er anoter and c"ear"& estab"ised itse"f
as te ne! o!ner' te purcase is ca""ed an acquisition# 1rom a "ega" point of
%ie!' te target compan& !eses to e-ist, the &uyer 3s%llo%s3 the &usiness n' the &uyer2s sto!$
!ontinues to &e tr'e'.
In te pure sense of te term' a merger appens !en t!o firms' often
of about te same si2e' agree to go for!ard as a sing"e ne! compan& rater
tan remain separate"& o!ned and operated# Tis *ind of action is more
precise"& referred to as a 3merger of equa"s#3 0ot companies+ stoc*s are
surrendered and ne! compan& stoc* is issued in its p"ace# 1or e.amp"e' bot
Daim"er,0en2 and Cr&s"er ceased to e.ist !en te t!o firms merged' and a
ne! compan&' Daim"erCr&s"er' !as created#
In pr!ti!e, ho%e(er, !tul #ergers o" e0uls 'on2t hppen (ery o"ten. Usully, one !o#pny %ill &uy
nother n', s prt o" the 'el2s ter#s, si#ply llo% the !0uire' "ir# to pro!li# tht the !tion is #erger
o" e0uls, e(en i" it2s te!hni!lly n !0uisition. Being &ought out o"ten !rries negti(e !onnottions,
there"ore, &y 'es!ri&ing the 'el s #erger, 'el #$ers n' top #ngers try to #$e the t$eo(er #ore
plt&le.
A purcase dea" !i"" a"so be ca""ed a merger !en bot C$Os gree tht
4oining together is in the &est interest o" &oth o" their !o#pnies. But %hen the 'el is un"rien'ly 1 tht is,
%hen the trget !o#pny 'oes not %nt to &e pur!hse' 1 it is l%ys regr'e' s n !0uisition.
(eter a purcase is considered a merger or an acquisition rea""&
depends on !eter te purcase is friend"& or osti"e and o! it is
announced# In oter !ords' te rea" difference "ies in o! te purcase is
communicated to and recei%ed b& te target compan&+s board of directors,
e#ployees n' sareo"ders.
)/N$R4/
)&nerg& is the #gi! "or!e tht llo%s "or enhn!e' !ost e""i!ien!ies o" the ne% &usiness.
Synergy t$es the "or# o" re(enue enhn!e#ent n' !ost s(ings. By #erging, the !o#pnies hope to
&ene"it "ro# the "ollo%ing/
Staff reductions - As every employee knows, mergers tend to mean ob
losses. !onsider all the money saved from reducing the number of staff
members from accounting, marketing and other departments. "ob cuts will
also include the former !#$, who typically leaves with a compensation
package.
#conomies of scale - %es, si&e matters. 'hether it(s purchasing stationery or
a new corporate )T system, a bigger company placing the orders can save
more on costs. *ergers also translate into improved purchasing power to
buy e+uipment or office supplies - when placing larger orders, companies
have a greater ability to negotiate prices with their suppliers.
Ac+uiring new technology - To stay competitive, companies need to stay on
top of technological developments and their business applications. ,y
buying a smaller company with uni+ue technologies, a large company
can maintain or develop a competitive edge.
)mproved market reach and industry visibility - !ompanies buy companies
to reach new markets and grow revenues and earnings. A merge may e-pand
two companies( marketing and distribution, giving them new sales
opportunities. A merger can also improve a company(s standing in the
investment community. bigger firms often have an easier time raising capital
than smaller ones.
That said, achieving synergy is easier said than done - it is not automatically
reali&ed once two companies merge. Sure, there ought to be economies of scale
when two businesses are combined, but sometimes a merger does ust the opposite.
)n many cases, one and one add up to less than two.
Sadly, synergy opportunities may e-ist only in the minds of the corporate
leaders and the deal makers. 'here there is no value to be created, the !#$ and
investment bankers - who have much to gain from a successful */A deal - will
try to create an image of enhanced value. The market, however, eventually sees
through this and penali&es the company by assigning it a discounted share price. !e"ll
talk more about why M#A may fail in a later section of this tutorial.
5ARI$TI$) O1 M$R4$R)
0rom the perspective of business structures, there is a whole host of different
mergers. 1ere are a few types, distinguished by the relationship between the two
companies that are merging.
1ori&ontal merger - Two companies that are in direct competition and
share the same product lines and markets.
2ertical merger - A customer and company or a supplier and company.
Think of a cone supplier merging with an ice cream maker.
*arket-e-tension merger , Two companies that sell the same products in
different markets.
3roduct-e-tension merger , Two companies selling different but related
products in the same market.
!onglomeration - Two companies that have no common business areas.
There are two types of mergers that are distinguished by how the merger is
financed. #ach has certain implications for the companies involved and for
investors.
o 3urchase *ergers - 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 instrument4 the sale is
ta-able.
Ac+uiring companies often prefer this type of merger because it can
provide them with a ta- benefit. Ac+uired 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
ta-es payable by the ac+uiring company. 'e will discuss this further
in part four of this tutorial.
o !onsolidation *ergers - 'ith this merger, a brand new company is
formed and both companies are bought and combined under the new
entity. The ta- terms are the same as those of a purchase merger.
A!56)S)T)$7S
As &ou can see' an acquisition ma& be on"& s"igt"& different from a
merger# In fact' it ma& be different in name on"&# 6i*e mergers' acquisitions
are actions troug !ic companies see* economies of sca"e' efficiencies and
enanced mar*et %isibi"it&# Un"i*e a"" mergers' a"" acquisitions in%o"%e one
firm purcasing anoter , tere is no e.cange of stoc* or conso"idation s
ne% !o#pny. +!0uisitions re o"ten !ongenil, n' ll prties "eel stis"ie' %ith the 'el. Other ti#es,
!0uisitions re #ore hostile.
In an acquisition' as in some of te merger dea"s !e discuss abo%e' a
compan& can bu& anoter compan& !it cas' stoc* or a combination of te
t!o# Anoter possibi"it&' !ic is common in sma""er dea"s' is for one
compan& to acquire a"" te assets of anoter compan&# Compan& 7 bu&s a"" of
Compan& /+s assets for cas' !ic means tat Compan& / !i"" a%e on"&
cas (and debt' if te& ad debt before)# Of course' Compan& / becomes
mere"& a se"" and !i"" e%entua""& "iquidate or enter nother re o" &usiness.
Anoter t&pe of acquisition is a re%erse merger, 'el tht en&les pri%ate
compan& to get pu&li!ly1liste' in relti(ely short ti#e perio'. + re(erse #erger o!!urs %hen pri(te
!o#pny tht hs strong prospe!ts n' is eger to rise "inn!ing &uys pu&li!ly1liste' shell !o#pny,
usully one %ith no &usiness n' li#ite' ssets. The pri(te !o#pny re(erse #erges into the pub"ic
compan&, n' together they &e!o#e n entirely ne% pu&li! !orportion %ith tr'&le shres.
Regard"ess of teir categor& or structure' a"" mergers and acquisitions
a%e one common goa"8 te& are a"" meant to create s&nerg& tat ma*es te
%a"ue of te combined companies greater tan te sum of te t!o parts# Te
success of a merger or acquisition depends on !eter tis s&nerg& is
acie%ed#
*ergers and Ac+uisitions. 2aluation *atters
In%estors in a compan& tat are aiming to ta*e o%er anoter one must
determine !eter te purcase !i"" be beneficia" to tem# In order to do so'
te& must as* temse"%es o! muc te compan& being acquired is rea""&
!ort#
Natura""&' bot sides of an M&A 'el %ill h(e 'i""erent i'es &out the %orth o"
trget !o#pny/ its seller %ill ten' to (lue the !o#pny t s high o" pri!e s possi&le, %hile the &uyer
%ill try to get the lo%est pri!e tht he !n.
Tere are' o!e%er' man& "egitimate !a&s to %a"ue companies# Te
most common metod is to "oo* at comparab"e companies in an industr&' but
dea" ma*ers emp"o& a %ariet& of oter metods and too"s !en assessing a
target compan&. Here re 4ust "e% o" the#/
8. !omparative 9atios - The following are two e-amples of the many
comparative metrics on which ac+uiring companies may base their offers.
o 3rice-#arnings 9atio (3:# 9atio) - 'ith the use of this ratio, an
ac+uiring company makes an offer that is a multiple of the earnings of
the target company. ;ooking at the 3:# for all the stocks within the
same industry group will give the ac+uiring company good guidance
for what the target(s 3:# multiple should be.
o #nterprise-2alue-to-Sales 9atio (#2:Sales) - 'ith this ratio, the
ac+uiring company makes an offer as a multiple of the revenues,
again, while being aware of the price-to-sales ratio of other companies
in the industry.
<. 9eplacement !ost - )n a few cases, ac+uisitions are based on the cost of
replacing the target company. 0or simplicity(s sake, suppose the value of a
company is simply the sum of all its e+uipment and staffing costs. The
ac+uiring company can literally order the target to sell at that price, or it will
create a competitor for the same cost. 7aturally, it takes a long time to
assemble good management, ac+uire property and get the right e+uipment.
This method of establishing a price certainly wouldn(t make much sense in a
service industry where the key assets - people and ideas - are hard to value
and develop.
=. >iscounted !ash 0low (>!0) , A key valuation tool in */A, discounted
cash flow analysis determines a company(s current value according to its
estimated future cash flows. 0orecasted free cash flows (net income ?
depreciation:amorti&ation - capital e-penditures - change in working capital)
are discounted to a present value using the company(s weighted average
costs of capital ('A!!). Admittedly, >!0 is tricky to get right, but few
tools can rival this valuation method.
)&nerg&8 Te 9remium for 9otentia" )uccess
0or the most part, ac+uiring companies nearly always pay a substantial
premium on the stock market value of the companies they buy. he justification for doing so nearly always boils
down to the notion of synergy$ a merger benefits shareholders when a company"s post%merger share price
increases by the value of potential synergy.
;et(s face it, it would be highly unlikely for rational owners to sell if they
would benefit more by not selling. That means buyers will need to pay a premium
if they hope to ac+uire the company, regardless of what pre-merger valuation tells
them. 0or sellers, that premium represents their company(s future prospects. 0or
buyers, the premium represents part of the post-merger synergy they e-pect can be
achieved. The following e+uation offers a good way to think about synergy and
how to determine whether a deal makes sense. The e+uation solves for the
minimum re+uired synergy.
)n other words, the success of a merger is measured by whether the value of
the buyer is enhanced by the action. 1owever, the practical constraints of mergers,
which we discuss in part five, often prevent the e-pected benefits from being fully
achieved. Alas, the synergy promised by deal makers might just fall short.
(at to 6oo* 1or
)t(s hard for investors to know when a deal is worthwhile. The burden of proof
should fall on the ac+uiring company. To find mergers that have a chance of
success, investors should start by looking for some of these simple criteria.
A reasonable purchase price - A premium of, say, 8@A above the market
price seems within the bounds of level-headedness. A premium of B@A, on
the other hand, re+uires synergy of stellar proportions for the deal to make
sense. Stay away from companies that participate in such contests.
!ash transactions - !ompanies that pay in cash tend to be more careful when
calculating bids and valuations come closer to target. 'hen stock is used as
the currency for ac+uisition, discipline can go by the wayside.
Sensible appetite C An ac+uiring company should be targeting a company
that is smaller and in businesses that the ac+uiring company knows
intimately. Synergy is hard to create from companies in disparate business
areas. Sadly, companies have a bad habit of biting off more than they can
chew in mergers.
Mergers are a!fu""& ard to get rigt' so in%estors sou"d "oo* for acquiring
companies !it a ea"t& grasp of rea"it&#
A general term used to refer to the consolidation of companies. A merger is
a combination of two companies to form a new company, while an ac+uisition is
the purchase of one company by another in which no new company is formed.
An e-ample of a maor merger is the merging of ">S 0itel )nc. and 6niphase !orp.
in 8DDD to form ">S 6niphase. An e-ample of a maor ac+uisition is
*anulife 0inancial !orporation(s <@@E ac+uisition of "ohn 1ancock 0inancial
Services )nc.
O5$R5I$(
A merger is a tool used by companies for the purpose of e-panding their
operations often aiming at an increase of their long term profitability. There are 8B
different types of actions that a company can take when deciding to move forward
using */A. 6sually mergers occur in a consensual (occurring by mutual consent)
setting where e-ecutives from the target company help those from the purchaser in
a due diligence process to ensure that the deal is beneficial to both parties.
Ac+uisitions can also happen through a hostile takeover by purchasing the maority
of outstanding shares of a company in the open market against the wishes of the
target(s board. )n the 6nited States, business laws vary from state to state whereby
some companies have limited protection against hostile takeovers. $ne form of
protection against a hostile takeover is the shareholder rights plan, otherwise
known as the Fpoison pillF.
1istorically, mergers have often failed (Straub, <@@G) to add significantly to
the value of the ac+uiring firm(s shares (Hing, et al., <@@E). !orporate mergers may
be aimed at reducing market competition, cutting costs (for e-ample, laying off
employees, operating at a more technologically efficient scale, etc.), reducing
ta-es, removing management, Fempire buildingF by the ac+uiring managers, or
other purposes which may or may not be consistent with public policy or public
welfare. Thus they can be heavily regulated, for e-ample, in the 6.S. re+uiring
approval by both the 0ederal Trade !ommission and the >epartment of "ustice.
The 6.S. began their regulation on mergers in 8ID@ with the implementation of the
Sherman Act. )t was meant to prevent any attempt to monopoli&e or to conspire to
restrict trade. 1owever, based on the loose interpretation of the standard F9ule of
9easonF, it was up to the udges in the 6.S. Supreme !ourt whether to rule
leniently (as with 6.S. Steel in 8D<@) or strictly (as with Alcoa in 8DEB).
Acquisition
An ac+uisition, also known as a takeover, is the buying of one company (the
JtargetK) by another. An ac+uisition may be friendly or hostile. )n the former case,
the companies cooperate in negotiations4 in the latter case, the takeover target is
unwilling to be bought or the target(s board has no prior knowledge of the offer.
Ac+uisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will ac+uire management control of a larger or
longer established company and keep its name for the combined entity. This is
known as a reverse takeover.
T&pes of acquisition
The buyer buys the shares, and therefore control, of the target company
being purchased. $wnership control of the company in turn conveys
effective control over the assets of the company, but since the company is
ac+uired 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 li+uidation. 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 Fcherry-pickF 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,
un+uantified 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 ta- that many
urisdictions, particularly outside the 6nited States, impose on transfers of
the individual assets, whereas stock transactions can fre+uently be structured
as like-kind e-changes or other arrangements that are ta--free or ta--neutral,
both to the buyer and to the seller(s shareholders.
The terms FdemergerF, Fspin-offF and Fspin-outF are sometimes used to indicate a
situation where one company splits into two, generating a second company
separately listed on a stock e-change.
Merger
)n 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 branding4 in some cases, terming the
combination a FmergerF rather than an ac+uisition is done purely for political or
marketing reasons.
C"assifications of mergers
Horizontal mergers take place where the two merging companies produce
similar product in the same industry.
Vertical mergers occur when two firms, each working at different stages in
the production of the same good, combine.
Congeneric 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. #-ample.
3rudential(s ac+uisition of ,ache / !ompany.
Conglomerate mergers take place when the two firms operate in different
industries.
A uni+ue type of merger called a reverse merger is used as a way of going
public without the e-pense and time re+uired by an )3$.
The contract vehicle for achieving a merger is a Fmerger subF.
The occurrence of a merger often raises concerns in antitrust circles. >evices
such as the 1erfindahl inde- can analy&e the impact of a merger on a market and
what, if any, action could prevent it. 9egulatory bodies such as the #uropean
!ommission, the 6nited States >epartment of "ustice and the 6.S. 0ederal Trade
!ommission may investigate anti-trust cases for monopolies dangers, and have the
power to block mergers.
Accreti%e mergers are those in which an ac+uiring company(s earnings per share
(#3S) increase. An alternative way of calculating this is if a company with a high
price to earnings ratio (3:#) ac+uires one with a low 3:#.
Di"uti%e mergers are the opposite of above, whereby a company(s #3S decreases.
The company will be one with a low 3:# ac+uiring one with a high 3:#.
The completion of a merger does not ensure the success of the resulting
organi&ation4 indeed, many mergers (in some industries, the maority) result in a
net loss of value due to problems. !orrecting problems caused by incompatibility
Lwhether of technology, e+uipment, or corporate cultureL diverts resources
away from new investment, and these problems may be e-acerbated by inade+uate
research or by concealment of losses or liabilities by one of the partners.
$verlapping subsidiaries or redundant staff may be allowed to continue, creating
inefficiency, and conversely the new management may cut too many operations or
personnel, losing e-pertise and disrupting employee culture. These problems are
similar to those encountered in takeovers. 0or the merger not to be considered a
failure, it must increase shareholder value faster than if the companies were
separate, or prevent the deterioration of shareholder value more than if the
companies were separate.
DI)TINCTION 0$T($$N M$R4$R) AND AC:UI)ITION)
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.
'hen one company takes over another and clearly established itself as the
new owner, the purchase is called an ac+uisition. 0rom a legal point of view, the
target company ceases to e-ist, the buyer FswallowsF the business and the buyer(s
stock continues to be traded.
)n the pure sense of the term, a merger happens when two firms, often of
about the same si&e, 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 Fmerger of e+uals.F ,oth companies( stocks are surrendered and
new company stock is issued in its place. 0or e-ample, both >aimler-,en& and
!hrysler ceased to e-ist when the two firms merged, and a new company,
>aimler!hrysler, was created.
)n practice, however, actual mergers of e+uals don(t happen very often.
6sually, one company will buy another and, as part of the deal(s terms, simply
allow the ac+uired firm to proclaim that the action is a merger of e+uals, even if it(s
technically an ac+uisition. ,eing 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 !#$s agree that
oining together is in the best interest of both of their companies. ,ut when the deal
is unfriendly - that is, when the target company does not want to be purchased - it
is always regarded as an ac+uisition.
(eter a purcase is considered a merger or an acquisition rea""&
depends on !eter te purcase is friend"& or osti"e and o! it is
announced# In oter !ords' te rea" difference "ies in o! te purcase is
communicated to and recei%ed b& te target compan&+s board of directors'
emp"o&ees and sareo"ders# )t is +uite normal though for */A deal
communications to take place in a so called (confidentiality bubble( whereby
information flows are restricted due to confidentiality agreements (1arwood,
<@@M).
0usiness %a"uation
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 (>!0) valuation
3rofessionals who valuate businesses generally do not use ust 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 7otice to 9eader, a 9eview #ngagement or an Audit.
Accurate business valuation is one of the most important aspects of */A as
valuations like these will have a maor impact on the price that a business will be
sold for. *ost often this information is e-pressed in a ;etter of $pinion of 2alue
(;$2) when the business is being valuated for interest(s sake. There are other,
more detailed ways of e-pressing the value of a business. These reports generally
get more detailed and e-pensive as the si&e of a company increases, however, this
is not always the case as there are many complicated industries which re+uire more
attention to detail, regardless of si&e.
1INANCIN4 M$R4$R & AC:UI)ITION
*ergers are generally differentiated from ac+uisitions partly by the way in
which they are financed and partly by the relative si&e of the companies. 2arious
methods of financing an */A deal e-ist.
Cas
3ayment by cash. Such transactions are usually termed ac+uisitions 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 ac+uisition is that there tends to
lesser chances of #3S dilution for the ac+uiring company. ,ut a caveat in using
cash is that it places constraints on the cash flow of the company.
1inancing
0inancing capital may be borrowed from a bank, or raised by an issue of
bonds. Alternatively, the ac+uirer(s stock may be offered as consideration.
Ac+uisitions 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
ac+uired company.
;&brids
An ac+uisition can involve a combination of cash and debt, or a combination
of cash and stock of the purchasing entity.
1actoring
0actoring can provide the necessary e-tra to make a merger or sale work.
Moti%es beind M&A
These motives are considered to add shareholder value.
Synergy. This refers to the fact that the combined company can often reduce
duplicate departments or operations, lowering the costs of the company
relative to the same revenue stream, thus increasing profit.
)ncreased revenue:)ncreased *arket Share. This motive assumes that the
company will be absorbing a maor competitor and thus increase its power
(by capturing increased market share) to set prices.
!ross selling . 0or e-ample, 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
ac+uire and sell complementary products.
#conomies of Scale . 0or e-ample, managerial economies such as the
increased opportunity of managerial speciali&ation. Another e-ample are
purchasing economies due to increased order si&e and associated bulk-
buying discounts.
Ta-es . A profitable company can buy a loss maker to use the target(s loss as
their advantage by reducing their ta- liability. )n the 6nited States and many
other countries, rules are in place to limit the ability of profitable companies
to FshopF for loss making companies, limiting the ta- motive of an ac+uiring
company.
Neographical 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. 1owever, this does not always deliver value to
shareholders (see below).
9esource transfer. resources are unevenly distributed across firms (,arney,
8DD8) and the interaction of target and ac+uiring firm resources can create
value through either overcoming information asymmetry or by combining
scarce resources.
These motives are considered to not add shareholder value.
>iversification. 'hile 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.
*anager(s hubris. manager(s overconfidence about e-pected synergies from
*/A which results in overpayment for the target company.
#mpire building . *anagers have larger companies to manage and hence
more power.
*anager(s compensation. )n the past, certain e-ecutive 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)4 although
some empirical studies show that compensation is linked to profitability
rather than mere profits of the company.
2ertical integration. !ompanies ac+uire part of a supply chain and benefit
from the resources. 1owever, this does not add any value since although one
end of the supply chain may receive a product at a cheaper cost, the other
end now has lower revenue. )n addition, the supplier may find more
difficulty in supplying to competitors of its ac+uirer because the competition
would not want to support the new conglomerate.
M$R4$R &AC:UI)ITION MAR<$T96AC$ DI11ICU6TI$)
7o marketplace currently e-ists for the mergers and ac+uisitions of privately
owned small to mid-si&ed companies. *arket 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.
At present, the process by which a company is bought or sold can prove
difficult, slow and e-pensive. A transaction typically re+uires si- to nine months
and involves many steps. ;ocating parties with whom to conduct a transaction
forms one step in the overall process and perhaps the most difficult one. 5ualified
and interested buyers of multimillion dollar corporations are hard to find. #ven
more difficulties attend bringing a number of potential buyers forward
simultaneously during negotiations. 3otential ac+uirers in an industry simply
cannot effectively FmonitorF the economy at large for ac+uisition opportunities
even though some may fit well within their company(s operations or plans.
An industry of professional FmiddlemenF (known variously as intermediaries,
business brokers, and investment bankers) e-ists to facilitate */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. )n servicing their clients they attempt to create a
one-time market for a one-time transaction. !ertain types of merger and
ac+uisitions transactions involve securities and may re+uire that these
FmiddlemenF be securities licensed in order to be compensated. *any, but not all,
transactions use intermediaries on one or both sides. >espite best intentions,
intermediaries can operate inefficiently because of the slow and limiting nature of
having to rely heavily on telephone communications. *any phone calls fail to
contact with the intended party. ,usy e-ecutives 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. >ue to these problems
and other problems like these, brokers who deal with small to mid-si&ed companies
often deal with much more strenuous conditions than other business brokers. *id-
si&ed business brokers have an average life-span of only 8<-8I months and usually
never grow beyond 8 or < employees. #-ceptions to this are few and far between.
Some of these e-ceptions include The Sundial Nroup, Neneva ,usiness Services
and 9obbine-.
The market inefficiencies can prove detrimental for this important sector of
the economy. ,eyond the intermediaries( high fees, the current process for mergers
and ac+uisitions 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 */A (and also in
raising e+uity or debt capital). 0urthermore, 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.
3revious attempts to streamline the */A process through computers have
failed to succeed on a large scale because they have provided mere Fbulletin
boardsF - static information that advertises one firm(s opportunities. 6sers must
still seek other sources for opportunities ust 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 !alifornia Association of ,usiness ,rokers
(!A,,) and the )nternational ,usiness ,rokers Association (),,A) These
organi&ations have effectivily created a type of virtual market without
compromising the confidentiality of parties involved and without the unauthori&ed
release of information.
$ne part of the */A process which can be improved significantly using
networked computers is the improved access to Fdata roomsF during the due
diligence process however only for larger transactions. 0or the purposes of small-
medium si&ed business, these datarooms serve no purpose and are generally not
used. 9easons for fre+uent failure of */A was analy&ed by Thomas Straub in
F9easons for fre+uent failure in mergers and ac+uisitions - a comprehensive
analysisF, >62 Nabler #dition, <@@G.
T;$ 4R$AT M$R4$R MO5$M$NT
The Nreat *erger *ovement was a predominantly 6.S. business
phenomenon that happened from 8IDB to 8D@B. >uring 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 8,I@@ of
these firms disappeared into consolidations, many of which ac+uired substantial
shares of the markets in which they operated. The vehicle used were so-called
trusts. To truly understand how large this movement wasLin 8D@@ the value of
firms ac+uired in mergers was <@A of N>3. )n 8DD@ the value was only =A and
from 8DDIC<@@@ is was around 8@C88A of N>3. $rgani&ations that commanded
the greatest share of the market in 8D@B saw that command disintegrate by 8D<D as
smaller competitors oined forces with each other. 1owever, there were companies
that merged during this time such as >u3ont, 7abisco, 6S Steel, and Neneral
#lectric 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. These companies that merged were consistently
mass producers of homogeneous goods that could e-ploit the efficiencies of large
volume production. !ompanies which had specific fine products, like fine writing
paper, earned their profits on high margin rather than volume and took no part in
Nreat *erger *ovement.
);ORT,RUN 1ACTOR)
$ne of the maor short run factors that sparked in The Nreat *erger
*ovement was the desire to keep prices high. That is, with many firms in a
market, supply of the product remains high. >uring the panic of 8ID=, the demand
declined. 'hen 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 hori&ontal integration
amongst firms of the era. 0ocusing on mass production allowed firms to reduce
unit costs to a much lower rate. These firms usually were capital-intensive and had
high fi-ed costs. >ue to the fact that new machines were mostly financed through
bonds, interest payments on bonds were high followed by the panic of 8ID=, yet no
firm was willing to accept +uantity reduction during this period.
6ON4,RUN 1ACTOR)
)n 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. )n
addition, technological changes prior to the merger movement within companies
increased the efficient si&e of plants with capital intensive assembly lines allowing
for economies of scale. Thus improved technology and transportation were
forerunners to the Nreat *erger *ovement. )n 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 6.S. government
passed the Sherman Act in 8ID@, setting rules against price fi-ing and monopolies.
Starting in the 8ID@s with such cases as U.S. versus Addyston Pipe and Steel Co.,
the courts attacked large companies for strategi&ing with others or within their own
companies to ma-imi&e profits. 3rice fi-ing 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 fi-ing.
CRO)),0ORD$R M$R4$R & AC:UI)ITION
)n a study conducted in <@@@ by ;ehman ,rothers, it was found that, on
average, large */A deals cause the domestic currency of the target corporation to
appreciate by 8A relative to the ac+uirer(s. 0or every O8-billion deal, the currency
of the target corporation increased in value by @.BA. *ore specifically, the report
found that in the period immediately after the deal is announced, there is generally
a strong upward movement in the target corporation(s domestic currency (relative
to the ac+uirer(s currency). 0ifty days after the announcement, the target currency
is then, on average, 8A stronger.
The rise of globali&ation has e-ponentially increased the market for cross
border */A. )n 8DDM alone there were over <@@@ cross border transactions worth
a total of appro-imately O<BM billion. This rapid increase has taken many */A
firms by surprise because the maority of them never had to consider ac+uiring the
capabilities or skills re+uired to effectively handle this kind of transaction. )n the
past, the market(s lack of significance and a more strictly national mindset
prevented the vast maority of small and mid-si&ed companies from considering
cross border intermediation as an option which left */A firms ine-perienced in
this field. This same reason also prevented the development of any e-tensive
academic works on the subect.
>ue to the complicated nature of cross border */A, the vast maority of
cross border actions have unsuccessful results. !ross border intermediation has
many more levels of comple-ity to it then regular intermediation seeing as
corporate governance, the power of the average employee, company regulations,
political factors customer e-pectations, and countries( culture are all crucial factors
that could spoil the transaction.
M$R4$R) AND AC:UI)ITION)8 DOIN4 T;$ D$A6
'hen the !#$ and top managers of a company decide that they want to do
a merger or ac+uisition, they start with a tender offer. The process typically begins
with the ac+uiring company carefully and discreetly buying up shares in the target
company, or building a position. $nce the ac+uiring company starts to purchase
shares in the open market, it is restricted to buying BA of the total outstanding
shares before it must file with the S#!. &n the filing, the company must formally declare how many
shares it owns and whether it intends to buy the company or keep the shares purely as an investment.
!orking with financial advisors and investment bankers, the acquiring company will arrive at an overall price
that it"s willing to pay for its target in cash, shares or both. he tender offer is then frequently advertised in the
business press, stating the offer price and the deadline by which the shareholders in the target company must accept
'or reject( it.
!orking with financial advisors and investment bankers, the acquiring company will arrive at an overall price
that it"s willing to pay for its target in cash, shares or both. he tender offer is then frequently advertised in the
business press, stating the offer price and the deadline by which the shareholders in the target company must accept
'or reject( it.
Te Target+s Response )nce the tender offer has been made, the target company can do one of several
things*
Accept te Terms of te Offer - )f the target firm(s top managers and
shareholders are happy with the terms of the transaction, they will go ahead
with the deal.
Attempt to Negotiate - The tender offer price may not be high enough for
the target company(s shareholders to accept, or the specific terms of the deal
may not be attractive. )n a merger, there may be much at stake for the
management of the target - their obs, in particular. )f they(re not satisfied
with the terms laid out in the tender offer, the target(s management may try
to work out more agreeable terms that let them keep their obs or, even
better, send them off with a nice, big compensation package.
7ot surprisingly, highly sought-after target companies that are the obect of
several bidders will have greater latitude for negotiation.
0urthermore, managers have more negotiating power if they can show that
they are crucial to the merger(s future success.
$.ecute a 9oison 9i"" or )ome Oter ;osti"e Ta*eo%er Defense C
A poison pill scheme can be triggered by a target company when a hostile
suitor ac+uires a predetermined percentage of company stock. To e-ecute its
defense, the target company grants all shareholders - e-cept the ac+uiring
company - options to buy additional stock at a dramatic discount. This
dilutes the ac+uiring company(s share and intercepts its control of the
company.
1ind a (ite <nigt - As an alternative, the target company(s management
may seek out a friendlier potential ac+uiring company, or white knight. )f a
white knight is found, it will offer an e+ual or higher price for the shares
than the hostile bidder.
*ergers and ac+uisitions can face scrutiny from regulatory bodies. 0or
e-ample, if the two biggest long-distance companies in the 6.S., AT/T and Sprint,
wanted to merge, the deal would re+uire approval from the 0ederal
!ommunications !ommission (0!!). The 0!! would probably regard a merger of
the two giants as the creation of a monopoly or, at the very least, a threat to competition in the
industry.
C"osing te Dea" +inally, once the target company agrees to the tender offer and regulatory requirements
are met, the merger deal will be e,ecuted by means of some transaction. &n a merger in which one company buys
another, the acquiring company will pay for the target company"s shares with cash, stock or both.
A cash%for%stock transaction is fairly straightforward* target company shareholders receive a cash payment for
each share purchased. his transaction is treated as a ta,able sale of the shares of the target company.
&f the transaction is made with stock instead of cash, then it"s not ta,able. here is simply an e,change of share
certificates. he desire to steer clear of the ta, man e,plains why so many M#A deals are carried out as stock%for%
stock transactions.
!hen a company is purchased with stock, new shares from the acquiring company"s stock are issued directly to
the target company"s shareholders, or the new shares are sent to a broker who manages them for target company
shareholders. he shareholders of the target company are only ta,ed when they sell their new shares.
!hen the deal is closed, investors usually receive a new stock in their portfolios % the acquiring company"s
e,panded stock. -ometimes investors will get new stock identifying a new corporate entity that is created by the M #
A deal.
0R$A< U9)
As mergers capture the imagination of many investors and companies, the idea of
getting smaller might seem counterintuitive. ,ut corporate break-ups, or de-
mergers, can be very attractive options for companies and their shareholders
AD5ANTA4$)
The rationale behind a spinoff, tracking stock or carve-out is that .the parts are
greater than the whole.. hese corporate restructuring techniques, which involve the separation of a business unit or
subsidiary from the parent, can help a company raise additional equity funds. A break%up can also boost a company"s
valuation by providing powerful incentives to the people who work in the separating unit, and help the parent"s
management to focus on core operations.
Most importantly, shareholders get better information about the business unit because it issues separate
financial statements. his is particularly useful when a company"s traditional line of business differs from the
separated business unit. !ith separate financial disclosure, investors are better equipped to gauge the value of the
parent corporation. he parent company might attract more investors and, ultimately, more capital.
Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. +or
investors, that"s great news* it curbs the kind of negative internal wrangling that can compromise the unity and
productivity of a company.
+or employees of the new separate entity, there is a publicly traded stock to motivate and reward them.
Stock options in the parent often provide little incentive to subsidiary managers, especially because their efforts
are buried in the firm"s overall performance.
DI)AD5ANTA4$)
That said, de-merged firms are likely to be substantially smaller than their
parents, possibly making it harder to tap credit markets and costlier finance that
may be affordable only for larger companies. And the smaller si&e of the firm may
mean it has less representation on maor inde-es, making it more difficult to attract interest from
institutional investors.
*eanwhile, there are the e-tra costs that the parts of the business face if
separated. 'hen a firm divides itself into smaller units, it may be losing the
synergy that it had as a larger entity. +or instance, the division of e,penses such as marketing, administration and
research and development '/#0( into different business units may cause redundant costs without
increasing overall revenues.
Restructuring Metods here are several restructuring methods* doing an outright sell%off, doing an
equity carve%out, spinning off a unit to e,isting shareholders or issuing tracking stock. Each has advantages and
disadvantages for companies and investors. All of these deals are quite comple,.
)e"",Offs
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary.
1ormally, sell%offs are done because the subsidiary doesn"t fit into the parent company"s core strategy. he market
may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. As
a result, management and the board decide that the subsidiary is better off under different ownership.
,esides getting rid of an unwanted subsidiary, sell-offs also raise cash,
which can be used to pay off debt. )n the late 8DI@s and early 8DD@s, corporate
raiders would use debt to finance acquisitions. hen, after making a purchase they would sell%off its subsidiaries to
raise cash to service the debt. he raiders" method certainly makes sense if the sum of the parts is greater than the
whole. !hen it isn"t, deals are unsuccessful.
$quit& Car%e,Outs More and more companies are using equity carve%outs to boost shareholder value. A
parent firm makes a subsidiary public through an initial public offering '&P)( of shares, amounting to a
partial sell%off. A new publicly%listed company is created, but the parent keeps a controlling stake in the newly traded
subsidiary.
A carve-out is a strategic avenue a parent firm may take when one of its
subsidiaries is growing faster and carrying higher valuations than other businesses
owned by the parent. A carve-out generates cash because shares in the subsidiary
are sold to the public, but the issue also unlocks the value of the subsidiary unit and
enhances the parent(s shareholder value.
The new legal entity of a carve-out has a separate board, but in most carve-
outs, the parent retains some control. )n these cases, some portion of the parent
firm(s board of directors may be shared. Since the parent has a controlling stake,
meaning both firms have common shareholders, the connection between the two
will likely be strong.
That said, sometimes companies carve-out a subsidiary not because it(s
doing well, but because it is a burden. Such an intention won(t lead to a successful
result, especially if a carved-out subsidiary is too loaded with debt, or had trouble
even when it was a part of the parent and is lacking an established track record for
growing revenues and profits.
!arve-outs can also create une-pected friction between the parent and
subsidiary. 3roblems can arise as managers of the carved-out company must be
accountable to their public shareholders as well as the owners of the parent
company. This can create divided loyalties.
)pinoffs
A spinoff occurs when a subsidiary becomes an independent entity. The
parent firm distributes shares of the subsidiary to its shareholders through a stock
dividend. -ince this transaction is a dividend distribution, no cash is generated. hus, spinoffs are unlikely to be
used when a firm needs to finance growth or deals. 2ike the carve%out, the subsidiary becomes a separate legal entity
with a distinct management and board.
;ike carve-outs, spinoffs are usually about separating a healthy operation. )n
most cases, spinoffs unlock hidden shareholder value. 0or the parent company, it
sharpens management focus. 0or the spinoff company, management doesn(t have
to compete for the parent(s attention and capital. $nce they are set free, managers
can e-plore new opportunities.
)nvestors, however, should beware of throw-away subsidiaries the parent
created to separate legal liability or to off-load debt. $nce spinoff shares are issued
to parent company shareholders, some shareholders may be tempted to +uickly
dump these shares on the market, depressing the share valuation.
Trac*ing )toc* A tracking stock is a special type of stock issued by a publicly held company to track the
value of one segment of that company. he stock allows the different segments of the company to be valued
differently by investors.
;et(s say a slow-growth company trading at a low price-earnings ratio 'P3E
ratio( happens to have a fast growing business unit. he company might issue a tracking stock so the market can
value the new business separately from the old one and at a significantly higher P3E rating.
'hy would a firm issue a tracking stock rather than spinning-off or carving-
out its fast growth business for shareholdersP The company retains control over the
subsidiary4 the two businesses can continue to enoy synergies and share
marketing, administrative support functions, a head+uarters and so on. 0inally, and
most importantly, if the tracking stock climbs in value, the parent company can use
the tracking stock it owns to make ac+uisitions. -till, shareholders need to remember that tracking
stocks are class ,, meaning they don"t grant shareholders the same voting rights as those of the main stock. Each
share of tracking stock may have only a half or a quarter of a vote. &n rare cases, holders of tracking stock have no
vote at all.
Ma=or M&A from >??? to present
Top D */A deals worldwide by value (in mil. 6S>) since <@@@.
Q8@R
Ran* /ear 9urcaser 9urcased
Transaction %a"ue (in
mi"# U)D)
8 <@@@
Fusion. America $nline )nc.
(A$;)
Time 'arner 8ME,GEG
< <@@@ Nla-o 'ellcome 3lc. SmithHline ,eecham 3lc. GB,DM8
= <@@E 9oyal >utch 3etroleum !o.
Shell Transport / Trading
!o
GE,BBD
E <@@M AT/T )nc. ,ellSouth !orporation G<,MG8
B <@@8 !omcast !orporation
AT/T ,roadband /
G<,@E8
)nternet Svcs
M <@@E Sanofi-Synthelabo SA Aventis SA M@,<E=
G <@@@
Spin-off. 7ortel 7etworks
!orporation
BD,DGE
I. <@@M Arecellor ittal ;u-emberg =<.< ,illion
D. <@@M !ata Corus I ,illion
)E56E5S * +C7UISITIONS 8 INDI+ INC. ON THE 95O:;
Indian companies have realized the benefits of expanding through
investments abroad. Happily, the gains spill over to the home economy and local
industries too.
)ndia is emerging a vibrant player in the world of mergers and ac+uisitions
(*/A). 7ot long ago, *r ;akshmi *ittal ac+uired Arcelor, and had Tata Steel(s
bid for the !orus group of the 6H gone through, it would have made the company
the world(s fifth largest producer. Tata Nroup companies and many in the
information technology, pharmaceutical and banking sectors have made a host of
other ac+uisitions. !ould anybody have imagined such a showing by )ndian
entrepreneurs even a few years agoP
)n many areas, )ndia is emerging at the top. A leader in )nformation
Technology, )ndia was designated the third most attractive research and
development centre in the world by 6nctad (6nited 7ations !onference on Trade
and >evelopment) in its 'orld )nvestment 9eport (')9), <@@B. )ndia is also the
biggest foreign investor in the 6H, outpacing even the 6S.
There has been a spurt in overseas investments by )ndia. 0rom O@.G billion
in <@@@-@8, the overseas investments increased to O<.G billion in <@@B-@M and
would have soared to O88 billion in <@@M-@G had the Tata(s !orus buy gone
through4 that is, it would be almost double the inbound foreign direct investments,
estimated at around OB.B billion for <@@M-@G. The industries that attracted )ndian
investments included metal, energy, pharmaceutical, )T and banking. ,ut why *
/ AsP Si- reasons, according to the former 9anba-y !#$, *r >. S. ,rar, drive
*/As. Accessing new markets, maintaining growth momentum, ac+uiring
visibility and international brands, buying cutting-edge technology rather than
importing it, developing new product mi-es, improving operating margins and
efficiencies, and taking on the global competition. 6nctad(s ')9 <@@M pointed out
four factors that drive developing nations to go global. 0irst, it helps market
penetration. )ndian multinational corporations looking for niche markets L such as
)T services and pharmaceutical products L gained substantially through outbound
investments.
Second, rising labour costs at home push *7!s abroad. Third, competitive
pressures in the domestic economy force *7!s to invest abroad. 0ourth, home
government policy liberalisations stimulate outbound investments4 indeed, since
<@@=, 7ew >elhi has taken steps to liberalise overseas investments.
According to 6nctad(s ')9 <@@M, developing and transition economies have
emerged significant outward investors, as this has become an important tool for
development of the domestic economy.
@$M$R4IN4+ IN5$)TOR)
)n 8DD@, only si- developing and transition countries had made any outward
investment. )n <@@B, the number had increased to <B. ,etween 8DIG and <@@B, the
share of global */As by *7!s from developing and transition countries rose
from E per cent to 8= per cent in value terms, and their share in greenfield and
e-pansion proects e-ceeded 8B per cent in <@@B.
This buoyancy of overseas investment by the developing and transition
countries is mainly because of )ndia and !hina that are emerging the significant
players. 1appily they are not in competition as in the case of inbound foreign
direct investments. Their obectives of and destinations for overseas investment are
different.
ARC$6OR TA<$O5$R 0ID
;a-mi *ittal has raised +uite a stir by making a bid for a hostile takeover of
;u-emburg based steel manufacturer, Arcelor. The steel baron, who has made his
fortune on the basis of these opportunistic takeovers, is now facing opposition from
the political fraternity in both ;u-emburg and 0rance.
(at is a osti"e ta*eo%er-
A hostile takeover occurs when a company attempts to buy out another,
whether the management of the target company likes it or not. A hostile takeover
can usually occur only through publicly traded shares, as it re+uires the ac+uirer to
bypass the board of directors and purchase the shares from other sources. This is
difficult unless the shares of the target company are widely available and easily
purchased ( i.e. they have high li+uidity). A good recent e-ample is $raclePs ,id
for 3eoplesoft.
Rise of te Mitta"
*r. ;a-mi 7iwas *ittal was born in Sadulpur in 9aasthan. 1e completed
his ,!om from St. SavierPs !ollege in !alcutta. Then he went on to take part in
his family steelmaking business. )n 8DGM, he established )spat )ndo in )ndonesia.
0rom there, there was no looking back. )n 8DID, he leased )scott, a steel maker in
Trinidad and Tobago. )n the ne-t G years, *ittal Steel ac+uired companies in
*e-ico, !anada, Nermany and Ha&akhstan. )n 8DDG, *ittal $wned )spat
)nternationalPs )3$ was floated.
The turning point for *ittal came when in >ecember <@@E, ;7* 1oldings
and )spat )nternational were merged together. Simultaneously, there was the
ac+uisition of )nternational Steel group in the 6S, the worldPs largest Steel
producer.
Te )&nerg&
0rom an operational point of view, there are clear advantages to both
companies in a merger of this sort. The regions of the world where they would
have significant market share include the established markets of 7orth America
and #urope, together with the growing emerging markets in South America and
Africa.
*ittals on their own ust do not have the facilities in #urope to challenge the high-
end auto market, despite making flat products in 9omania, 3oland and the !&ech
9epublic.
Arcelor, on the other hand have only a small foothold in the 7orth American
flat products market and have little in-house supplies of iron ore. (This was about
to change however P see below).
So, apart from in Asia, the two combined would be dominant in high-value
production and this would be complimented by *ittalPs low-cost commercial steel
production in central #urope and elsewhere. They would be getting closer to the P
one-stop-shop.
)n general, Arcelor have the richer product mi- with average revenues per
tonne much higher than those of *ittal Steel. This is because around G@A of their
output is flat products (much of it cold rolled) and stainless steels, whilst *ittalPs
mi- includes about <@A of low-value semi-finished products.
Another aspect of synergy is related to the availability of Pin-houseP raw
materials. Along with their steel company ac+uisitions in Ha&akhstan, 6kraine,
7orth America and ,osnia *ittal obtained significant reserves of iron ore. They
are actively planning new mines in Africa and South America. ,y contrast, and if
the >ofasco bid does not go ahead, Arcelor have very little. This is an area where
cost savings will occur P both through the redirection of raw materials as well as
stronger purchasing power with respect to e-ternal suppliers.
(at does it mean for Arce"or-
After a disappointing year when they failed to ac+uire Hryvori&hstal and
(initially) #rdemir, things were ust starting to go well for Arcelor. They came to a
deal with $yak, the buyers of #rdemir, for a minority stake and have ust won
control of >ofasco. These two investments give them an e-tension into other parts
of #urope, complementing their e-isting facilities in Turkey, a foothold in the
7orth American high-end market, and a source or iron ore in the shape of
>ofascoPs !anadian mines.
)n many ways, this gave them most of what they were looking for P certainly
for now. A successful integration of these companies into their e-isting network
would have reinforced their position as the worldPs 7o < steel maker, and probably
the worldPs 7o 8 in the +uality market.
(at does it mean for Mitta"-
Although there are significant gains for *ittal Steel, one cannot help
wondering whether their bid is partly for defensive reasons. The last thing they
wanted was Arcelor to win >ofasco P and the timing of the bid must have been
affected by ArcelorPs success in beating THS to this ac+uisition.
That said, they gain improved 9/> and product development abilities as
well as +uality steel making in #urope. They also get a different image. 6ntil now
(and with some e-ceptions in 7orth America) they have thrived on turning around
bankrupt or poorly managed companies. They have done this very successfully, but
the problem is that the flow of such companies has slowed in recent years as the
transition process and related privatisations have dried up.
This has meant them turning to more established companies. )f they had
wanted to enhance their position in #urope, and had chosen !orus or 9iva as their
target, one would have been less surprised. #ither would have led to an easier ride
with competition authorities and would have been easier to absorb. Arcelor, on the
other hand, is big and rather corporate in the way it operates. 1ow the cultures
blend together will be a key element of whether the bid (if successful) leads to
e-tracting the promised synergy.
ArcelorKs board will be miffed that there was less communication prior to
the announcement and this will make it more difficult to secure a smooth transition
in the event of their offer being accepted by shareholders.
(at does it mean for te 4"oba" )tee" Industr&-
0or years analysts have been complaining of the lack of consolidation within
the industry. ;ack of production discipline during times of weak demand is
certainly one of the reasons for volatile prices. Any increase in consolidation may
therefore benefit the whole industry.
The world has four main regions when it comes to steel production. !hina is
obviously the largest and will not be greatly affected by the merger. (,oth
companies have interests there but even when combined they will still be small
players in the !hinese market.) )f anything, it may encourage the companies and
the Novernment to move faster in consolidating what is a very fragmented sector.
The big "apanese and Horean companies dominate the rest of Asia, albeit
alongside many smaller producers. 7ippon Steel, "0# and 3$S!$ are all in the
current top-8@. They will be nervous that they are falling behind the global giants
and, if the merger goes ahead, might be encouraged to forge links with a #uropean
or American producer.
9ussia is still the big net-e-porter of steel. )t has cheap ore, coal and other
energy and its companies are looking to e-pand beyond the region. They need
good finishing end facilities - close to the market but where steel making costs are
high. They will either look to pick up smaller stand-alone mills, or integrated
companies where it might be advantageous to close their heavy end.
0inally there is the rest of the world. The big companies are !orus, THS,
and 9iva in #urope4 7ucor and 6S Steel in 7orth America4 and Nerdau in both
7orth and South America. These companies will certainly be looking for partners
in the coming months and years in order to be able to compete with the potential
new giant.
9rob"ems
'e can clearly see that there are a few problems that will be faced by
*ittals in their bid, for Arcelor. 0irstly, Arcelor is not e-actly a loss making
company, like the ones they have taken over earlier. Thus their bid might re+uire
further sweetening. 0urther things on the political front are not very favorable.
0rance and ;u-emburg are very hostile to this hostile bidT This bid has allowed
many politicians to raise concerns over the possible loss of obs. This has
complicated the situation. Some 9acial comments have also been made. 1ow can a
company run by an )ndian family manage a corporate entityP
Unfair 4"oba"i2ation
Nlobali&ation was meant to make the Nlobal market a free place to trade in.
,ut with a stance like this, developed countries like 0rance and ;u-emburg have
shown their kind of Nlobali&ation. Some weaknesses in Nlobali&ation have also
come to the fore. 1ow and when should the 7ational Novernments step in to save
their )ndustriesP
TATA, CORU)
The board of directors of Anglo->utch steelmaker !orus has accepted a OG.M
billion takeover bid from Tata Steel, the two sides confirmed on 0riday.
The deal is the largest )ndian takeover of a foreign company and will create
the world(s fifth-largest steel group.
)n <@@B, Tata Steel was only the world(s BMth biggest steel producer and its
takeover of !orus represents its first e-pansion outside Asia.
FThe board has recommended Tata Steel(s offer. 'e are hopeful that the
shareholders will accept it,F >avid "ackson, director (communications) of !orus,
told !7,!-T28I news channel on 0riday.
Tata Nroup chairman 9atan Tata also confirmed that it has agreed to ac+uire
the #uropean steel company at EBB pence per share, putting the enterprise value of
!orus at about O8@ billion.
FThis proposed ac+uisition represents a defining moment for Tata Steel and is
entirely consistent with our strategy of growth through international e-pansion,F
Tata said.
"ackson said the deal comes at the Fright time and at the right priceF and
e-pressed hope that shareholders as well as trade unions would respond positively
to the offer.
9atan Tata, who is also chairman of Tata Steel, was +uoted in an A0S report
as saying that the two companies have compatible cultures of commitment to
stakeholders and complimentary strengths in technology, efficiency, product mi-
and geographical spread.
As per the agreement, GB per cent of !orus shareholders would have to
tender their shares for the ac+uisition to be complete.
'hen complete, this would be the largest takeover by an )ndian company overseas.
The deal would also catapult the combined entity to among the world(s largest steel
companies with a total capacity of about <E million tonnes per year.
, *uthuraman, managing director of Tata Steel, said in a press meet in
;ondon that the new, combined entity of Tata Steel-!orus would have a capacity
of E@ million tonne by <@88-8<.
FThe combined entity will have a turnover of O=< billion by <@88-8< with an
#,)>TA margin of <BA,F *uthuraman said.
1e also discussed the si--pronged strategy outlined by Tata Steel in <@@=
where the target was to increase capacity from E million tonne then to =@ million
tonne by <@8B.
*uthuraman was addressing the media in a meet attended by Tata Nroup
chief 9atan Tata along with the top management team of !orus !#$ 3hillipe
2arin and chairman "im ;eng. 9atan Tata said theFofferF was the right offer, and
was it was not FappropriateF to say anything more on the issue.
Haushik !hatteree, 23 (0inance) of Tata Steel, said the transaction has been
based on an enterprise value of O8@.<M billion. $ut of this Tata Steel will fund O=.B
billion, and the remaining would be raised through the S32 floated for the purpose.
*uthuraman said that there will be no change in !orus management. F'e are not
going to stop with here. !orus will complete its own plans, and there will be no
change in !orus managment,F *uthuraman said.
1e added that an integration committee will be put in place, and the buy will
open new markets for the company.
Tata,Corus among top A dea"s
The OI billion Tata Steel-!orus deal would be at 7o B among the top deals
witnessed by the steel industry over the last couple of years.
The table is topped by the Arcelor-*ittal Steel deal of O=< billion followed by the
7HH !orp-Hawasaki Steel deal of O8E.8 billion.

0I4 D$A6)###
Target 0u&er
5a"ue
(Bbn)
/ear
Arcelor *ittal Steel=<.< <@@M
7HH !orp
Hawasaki
Steel
8E.8 <@@8
;7*
1oldings
)spat )ntl 8=.= <@@E
Hrupp AN Thyssen I.= 8DDG
Corus Tata )tee" C#? >??D
>ofasco Arcelor B.< <@@B
)ntl Steel *ittal SteelE.I <@@B
A"" about Corus
The ;ondon-based !orus Nroup is one of the world(s largest producers of
steel and aluminium. !orus was formed in 8DDD following the merger of >utch
group Honinklike 1oogovens 7.2. with the 6H(s ,ritish Steel 3lc on $ctober M,
8DDD. )t employs EG,=@@ people worldwide and <E,@@@ people in the 6nited
Hingdom.
)t is listed on the ;ondon Stock #-change, #urone-t Amsterdam and the 7ew
%ork Stock #-change.
!orus has four divisions. strip products division, long products division,
distribution and building systems division, and aluminium division. !orus has an
annual turnover of O8I billion.
After the Arcelor-*ittal Steel merger, the bu&& was that !orus too would soon be a
part of the ne-t round of consolidation in the global steel industry, and likely
partners could include, among others, Tata Steel.
$n $ctober B <@@M, Tata Steel announced that it was looking at various
ac+uisition opportunities, including !orus Nroup. The announcement was followed
by another on $ctober 8G, <@@M stating that Tata was is in discussions with the
,oard and *anagement of !orus Nroup and that it has made an indicative non-
binding offer to ac+uire 8@@ per cent e+uity in !orus Nroup at EBB pence per share.
The !orus shares have risen in recent months on speculation the Anglo-
>utch group could face a takeover following the recent creation of Arcelor *ittal.
Tata Steel produced more than five million tonnes in the year ending *arch
<@@M and aims to reach G.B million tones by <@@I. )t has O=.I billion in annual
turnover.
TATAE) FA4UAR AC:UI)ITION
Tata group which is responsible for )ndiaKs biggest foreign takeover, by
ac+uiring the ,ritish steel company !orus through his Tata Steel business for
UM.Gbn earlier this year, is now reckoning for another big ac+uisition, this time for
its automotive division. Tata *otors is in the early stages of evaluating a bid for
the "aguar and ;and 9over reported ,ritish daily The Telegraph.. 9atan Tata is
understood to have instructed advisers in the past fortnight to begin evaluating the
merits of a oint offer for "aguar and ;and 9over, which have been earmarked for
disposal by struggling American car giant 0ord. 3eople close to the situation last
night said that Tata *otorsK evaluation of a bid was at an Ve-ploratoryW stage and
may not lead to a formal bid for the two brands. $ne person familiar with the
position said that Tata *otors had signed a confidentiality agreement with 0ord in
recent days. .,esides Tata, other car makers from middle east and eastern car
manufacturers may be interested in bidding, while a formal auction would also be
likely to attract private e+uity firms such as Apollo, ,lackstone and !erberus
( the6S buyout firm which ac+uired !hrysler earlier this year for OG.Bbn).
Price of the luxury brands:
Analyst believe anything between O<.Bbn to O=bn for aguar and ;and
9over. 1ere is their words
A *eryll ;ynch analysts suggest that "aguar and ;and 9over may fetch
about O8.Bbn (UG=Bm). #arlier a private e+uity firm called Alchemy 3artners was
said to be lining up a U=bn offer for the two lu-ury brands. V)f you look at the
financial position, Q"aguar and ;and 9overR are worth some O8bn to O8.Bbn,W *r
>orris an analyst said. VAdd a control premium, and the final sales price could
come in at about O<.Bbn.W
0ord bought "aguar for U8.Mbn in 8DID and it is believed that 0ord have
invested about O8@bn in "aguar since it bought, 0ord bought the ;and 9over from
,*' for U8.Gbn in <@@@.
What may hamper Tatas!
6nion leaders of both "aguar and ;and 9over have already raised concerns
about their ob security because of the sale.
"aguarKs sales were down nearly =< percent for <@@M in the 6nited States,
the companyKs largest market.
"aguar lost more than OG8B million last year and is e-pected to lose OBB@
million in <@@G. According to the analysis, "aguar is proected to lose more
than O=@@ million in <@@I and is not e-pecting a profit for several years.
These losses are mainly because of e-tremely high manufacturing costs in
,ritain and 0ord has not earn a profit from aguar since it bought.
;and 9over sold a record 8D<,B@@ vehicles in <@@M and is said to be
profitable. 6nlike the aguar, ;and 9over is a much stronger and more
profitable business but TataKs has to buy both the units since the products
and manufacturing of vehicles for ;and 9over and "aguar is so intertwined..
The worried aguar Ks workers, they told Vif the two companies are sold
together, then there was no guarantee Vthat a new owner would not shut
down most of "agKs manufacturing capacityW.
"fficial Words from Tata and #ord$
A spokesman for Tata *otors said the group did Vnot comment on
speculation about mergers and ac+uisitionsW. Though 0ord denied it, 0ord had told
that it was still some way from doing a deal, it also added hat it had been looking at
its options for a year, and that it was neither setting a timeframe for any decision,
nor ruling out any options.
is %ahindra in the race!
*ahindra / *ahindra (*/*) might also show interest in these brand. */*
which wants to be global S62 maker should have an interest, at least, in ;and
9over, says the brand is attractive. #ven so, it will not help *ahindra become an
independent global sports utility vehicle, or S62, brand. *oreover, ;and 9over,
which is about si- times as big as */*, might simply be unaffordable.
V) do not know what is on offer, whether it is the whole brand, or some
products or what plants are being offered. ) cannot say if it is a strategic fit or not.
*ahindra is a S62 brand and ;and 9over is an S62 brand. So, the two brands
have something where synergy is possible. ,ut having said that, its a big
company,W said 3awan Noenka, 3resident-Automotive Sector, *ahindra /
*ahindra.
#uropean car manufacturers 9enault and 0iat have recently ruled out of the
possibility of bidding for "aguar and ;and 9over.
#ord & the struggling auto giant:
0ord which has become struggling automaker in recent years posted a full-
year <@@M net loss of O8<.G billion, the largest single-year loss in the companyKs
history. Also 0ord lost its 7o. < ranking worldwide to "apanKs Toyota. 0ord !hief
#-ecutive $fficer Alan *ulally, who took over the top post in September <@@M
from ,ill 0ord has been restructuring 0ord to counter losses. As a part of
restructuring 0ord has been selling assets in a bid to offset falling sales and profits.
3remier Nroup, which includes Aston *artin, 2olvo,;and 9over and "aguar is the
main cause for 0ord continuing losses. #arlier this year 0ord sold its 6H based
sports car division Aston *artin(popularly known as ames bond car) for OIEI
million to investors led by 6.H. auto-racing champion >avid 9ichards. *any
believed that 0ord was in talks with NermanyKs ,*' to divest the 2olvo brand
but 0ord denied any such sale of 2olvo. 0ord reported a loss of O<I<m for the first
three months of <@@G.
Tatas #errari ride:
Soon we can see the 0erraris cruising in )ndia roads, as an e-tension of the
e-isting Tata-0iat(parent company of 0errari) partnership, 0iat is planning to drive
0errari into )ndia and its navigator will be the Tata *otors. The worldKs favourite
sports car - 0errari will &oom into )ndiaKs e-clusive sports car market currently
dominated by porsche. The two new 0erraris to be launched in )ndia would be a
M8< Nrand Tourer, a big four seater and 0E=@, an absolute sports car which is
performance oriented. Tata *otors will market and set up engineering centers as a
post sale services for these cars.
After some bad e-periences in !hina and 9ussia, 0errari did not want to take
chances by going it alone. 'ith Tatas in fold, the )talian maor is e-pecting a solid
infrastructure back up in )ndia. 0errari and Tata are natural partners because 0errari
already gets lot of its software done from T!S.
TATAE) TO )$TU9 9RODUCTION 0A)$ IN T;AI6AND
Tata *otors, )ndiaKs top commercial vehicle maker, will invest 8.= billion
baht (=I million dollars) to launch its first production base in Thailand, the Thai
,oard of )nvestment said on "uly 8Ith. Tata *otors plans to roll out one-tonne
pick-up trucks by the end of this year with initial output capacity of G,@@@ units per
year, the state-run investment promotion agency said. Tata *otors aims to boost
annual production capacity to =@,@@@-=B,@@@ units over the ne-t five years, with I@
percent of light pick-up trucks to be sold in Thailand and the rest for e-port, the
agency said.
CONC6U)ION
There are many Neographic and product coverage advantages from a merger
of this sort. ,ut the group formed from this merger will be really big and merging
their cultures for a successful unification might be a problem. Some Administrative
problems may also occur. 'e are surely in for some interesting days ahead.
)n real terms, the rationale behind mergers and ac+uisitions is that the two
companies are more valuable, profitable than individual companies and that the
shareholder value is also over and above that of the sum of the two companies.
>espite negative studies and resistance from the economists, */AKs continue to
be an important tool behind growth of a company. 9eason being, the e-pansion is
not limited by internal resources, no drain on working capital - can use e-change of
stocks, is attractive as ta- benefit and above all can consolidate industry - increase
firm(s market power.
'ith the 0>) policies becoming more liberali&ed, *ergers, Ac+uisitions and
alliance talks are heating up in )ndia and are growing with an ever increasing
cadence. They are no more limited to one particular type of business. The list of
past and anticipated mergers covers every si&e and variety of business -- mergers
are on the increase over the whole marketplace, providing platforms for the small
companies being ac+uired by bigger ones.
The basic reason behind mergers and ac+uisitions is that organi&ations
merge and form a single entity to achieve economies of scale, widen their reach,
ac+uire strategic skills, and gain competitive advantage. )n simple terminology,
mergers are considered as an important tool by companies for purpose of
e-panding their operation and increasing their profits, which in faXade depends on
the kind of companies being merged. )ndian markets have witnessed burgeoning
trend in mergers which may be due to business consolidation by large industrial
houses, consolidation of business by multinationals operating in )ndia, increasing
competition against imports and ac+uisition activities. Therefore, it is ripe time for
business houses and corporate to watch the )ndian market, and grab the
opportunity.
0I06IO4RA9;/
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