MADRAS SCHOOL OF SOCIAL WORK (Autonomous)

(Affiliated to the University of Madras)

32, Casa Major Road,
Egmore, Chennai- 08

STRATEGIC HUMAN RESOURCE MANAGEMENT

AN ASSIGNMENT ON

MERGERS AND ACQUISITIONS

-Global and Indian perspective

Done by: R. Dhilip Kumar

Professor in-charge: Dr. V.A.Vijayaraghavan

Class: II MSE (Aided)

Regn No: 09 /MSWH/ 26

Date of submission: 09/ 04/ 2011

Signature:
 MERGERS & ACQUISITIONS

-GLOBAL AND INDIAN PERSPECTIVES

Introduction:

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.
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.

Synopsis:

1. Definition

2. Main idea

3. Synergy

4. Types

5. Acquisitions

6. Cost involved in M & a

7. Impact of M & A

8. M & A in India

9. Preventing failures in M & A

10. Conclusion & references

Definition:

The phrase mergers and acquisitions (abbreviated M&A) is defined as 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.

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.

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.

Types 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.
Process of Mergers and Acquisitions:

The process of merger and acquisition has the following steps:

Market Valuation

Before you go for any merger and acquisition, it is of utmost important that you must know the
present market value of the organization as well as its estimated future financial performance.
The information about organization, its history, products/services, facilities and ownerships are
reviewed. Sales organization and marketing approaches are also taken into consideration.

Exit Planning

The decision to sell business largely depends upon the future plan of the organization – what
does it target to achieve and how is it going to handle the wealth etc. Various issues like estate
planning, continuing business involvement, debt resolution etc. as well as tax issues and business
issues are considered before making exit planning. The structure of the deal largely depends
upon the available options. The form of compensation (such as cash, secured notes, stock,
convertible bonds, royalties, future earnings share, consulting agreements, or buy back
opportunities etc.) also plays a major role here in determining the exit planning.

Structured Marketing Process

This is merger and acquisition process involves marketing of the business entity. While doing the
marketing, selling price is never divulged to the potential buyers. Serious buyers are also
identified and then encouraged during the process. Following are the features of this phase.

 Seller agrees on the disseminated materials in advance. Buyer also needs to sign a
Non-Disclosure agreement.

 Seller also presents Memorandum and Profiles, which factually showcases the
business.

 Database of prospective buyers are searched.

 Assessment and screening of buyers are done.

 Special focuses are given on he personal needs of the seller during structuring of deals.

 Final letter of intent is developed after a phase of negotiation.

Letter of Intent

Both, buyer and seller take the letter of intent to their respective attorneys to find out whether
there is any scope of further negotiation left or not. Issues like price and terms, deciding on due
diligence period, deal structure, purchase price adjustments, earn out provisions liability
obligations, ISRA and ERISA issues, Non-solicitation agreement, Breakup fees and no shop
provisions, pre closing tax liabilities, product liability issues, post closing insurance policies,
representations and warranties, and indemnification issues etc. are negotiated in the Letter of
Intent. After reviewing, a Definitive Purchase Agreement is prepared.

Buyer Due Diligence

This is the phase in the merger and acquisition process where seller makes its business process
open for the buyer, so that it can make an in-depth investigation on the business as well as its
attorneys, bankers, accountants, tad advisors etc.

Definitive Purchase Agreement

Finally Definitive Purchase Agreement are made, which states the transaction details including
regulatory approvals, financing sources and other conditions of sale

Strategic Process of Mergers and Acquisition:

The merger and acquisition strategies may differ from company to company and also depend a
lot on the policy of the respective organization. However, merger and acquisition strategies have
got some distinct process, based on which, the strategies are devised.

Determine Business Plan Drivers

Merger and acquisition strategies are deduced from the strategic business plan of the
organization. So, in merger and acquisition strategies, you firstly need to find out the way to
accelerate your strategic business plan through the M&A.
While chalking out strategies, you need to consider the points like the markets of your intended
business, the market share that you are eyeing for in each market, the products and technologies
that you would require, the geographic locations where you would operate your business in, the
skills and resources that you would require, the financial targets, and the risk amount etc.

Determine Acquisition Financing Constraints

Now, you need to find out if there are any financial constraints for supporting the acquisition.
Funds for acquisitions may come through various ways like cash, debt, public and private
equities, PIPEs, minority investments, earn outs etc. You need to consider a few facts like the
availability of untapped credit facilities, surplus cash, or untapped equity, the amount of new
equity and new debt that your organization can raise etc. You also need to calculate the amount
of returns that you must achieve.

Develop Acquisition Candidate List

now you have to identify the specific companies (private and public) that you are eyeing for
acquisition. You can identify those by market research, public stock research, referrals from
board members, investment bankers, investors and attorneys, and even recommendations from
your employees. You also need to develop summary profile for every company.

Build Preliminary Valuation Models

this stage is to calculate the initial estimated acquisition cost, the estimated returns etc. Many
organizations have their own formats for presenting preliminary valuation.

Rate/Rank Acquisition Candidates

Rate or rank the acquisition candidates according to their impact on business and feasibility of
closing the deal. This process will help you in understanding the relative impacts of the
acquisitions.

Review and Approve the Strategy

this is the time to review and approve your merger and acquisition strategies. You need to find
out whether all the critical stakeholders like board members, investors etc. agree with it or not. If
everyone gives their nods on the strategies, you can go ahead with the merger or acquisition.
Costs involved in M & A:

Costs of mergers and acquisitions are an important and integral part of mergers and acquisitions
process. Before going for any merger or acquisition, both the companies calculate the costs of
mergers and acquisitions to find out the viability and profitability of the deal. Based on the
calculation, they decide whether they should go with the deal or not.

In mergers and acquisitions, both the companies may have different theories about the worth of
the target company. The seller tries to project the value of the company high, whereas buyer will
try to seal the deal at a lower price. There are a number of legitimate methods for valuation of
companies.

Valuation in M & A

There are a number of methods used in mergers and acquisition valuations. Some of those can be
listed as:

Replacement Cost Method

In Replacement Cost Method, cost of replacing the target company is calculated and acquisitions
are based on that. Here the value of all the equipments and staffing costs are taken into
consideration. The acquiring company offers to buy all these from the target company at the
given cost. Replacement cost method isn't applicable to service industry, where key assets
(people and ideas) are hard to value.

Discounted Cash Flow (DCF) Method

Discounted Cash Flow (DCF) method is one of the major valuation tools in mergers and
acquisitions. It calculates the current value of the organization according to the estimated future
cash flows.

Estimated Cash Flow = Net Income + Depreciation/Amortization - Capital Expenditures -

Change in Working Capital

These estimated cash flows are discounted to a present value. Here, organization's Weighted
Average Costs of Capital (WACC) is used for the calculation. DCF method is one of the
strongest methods of valuation.
 Economic Profit Model

In this model, the value of the organization is calculated by summing up the amount of
capital invested and a premium equal to the current value of the value created every year
moving forward.

Economic Profit = Invested Capital x (Return on Invested Capital - Weighted Average Cost
of Capital)

Economic Profit = Net Operating Profit Less Adjusted Taxes - (Invested Capital x Weighted
Average Cost of Capital)

Value = Invested Capital + Current Value of Estimated Economic Profit

Price-Earnings Ratios (P/E Ratio)

This is one of the comparative methods adopted by the acquiring companies, based on which
they put forward their offers. Here, acquiring company offers multiple of the target
company's earnings.

Enterprise-Value-to-Sales Ratio (EV/Sales)

Here, acquiring company offers multiple of the revenues. It also keeps a tab on the price-to-
sales ratio of other companies.

Impact of M & A:

Impacts on Employees

Mergers and acquisitions may have great economic impact on the employees of the organization.
In fact, mergers and acquisitions could be pretty difficult for the employees as there could always
be the possibility of layoffs after any merger or acquisition. If the merged company is pretty
sufficient in terms of business capabilities, it doesn't need the same amount of employees that it
previously had to do the same amount of business. As a result, layoffs are quite inevitable.
Besides, those who are working would also see some changes in the corporate culture. Due to the
changes in the operating environment and business procedures, employees may also suffer from
emotional and physical problems.
Impact on Management

The percentage of job loss may be higher in the management level than the general employees.
The reason behind this is the corporate culture clash. Due to change in corporate culture of the
organization, many managerial level professionals, on behalf of their superiors, need to
implement the corporate policies that they might not agree with. It involves high level of stress.

Impact on Shareholders

Impact of mergers and acquisitions also include some economic impact on the shareholders. If
it is a purchase, the shareholders of the acquired company get highly benefited from the
acquisition as the acquiring company pays a hefty amount for the acquisition. On the other
hand, the shareholders of the acquiring company suffer some losses after the acquisition due to
the acquisition premium and augmented debt load.

Impact on Competition

Mergers and acquisitions have different impact as far as market competitions are concerned.
Different industry has different level of competitions after the mergers and acquisitions. For
example, the competition in the financial services industry is relatively constant. On the other
hand, change of powers can also be observed among the market players.

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.

Though the two words mergers and acquisitions are often spoken in the same breath and are also
used in such a way as if they are synonymous, however, there are certain differences between
mergers and acquisitions.

Merger Acquisition

The case when two companies (often of same size) The case when one company takes over
decide to move forward as a single new company another and establishes itself as the new
instead of operating business separately. owner of the business.

The buyer company “swallows” the

The stocks of both the companies are surrendered,
business of the target company, which
while new stocks are issued afresh.
ceases to exist.

For example, Glaxo Wellcome and SmithKline Dr. Reddy's Labs acquired Betapharm
Beehcam ceased to exist and merged to become a through an agreement amounting $597
new company, known as Glaxo SmithKline. million.

A buyout agreement can also be known as a merger when both owners mutually decide to
combine their business in the best interest of their firms. But when the agreement is hostile, or
when the target firm is unwilling to be bought, it is considered as an acquisition.
Mergers and Acquisitions in India:

The practice of mergers and acquisitions has attained considerable significance in the
contemporary corporate scenario which is broadly used for reorganizing the business entities.
Indian industries were exposed to plethora of challenges both nationally and internationally,
since the introduction of Indian economic reform in 1991. The cut-throat competition in
international market compelled the Indian firms to opt for mergers and acquisitions strategies,
making it a vital premeditated option.

Why Mergers and Acquisitions in India:

The factors responsible for making the merger and acquisition deals favorable in India are:

• Dynamic government policies

• Corporate investments in industry

• Economic stability

• “ready to experiment” attitude of Indian industrialists

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc, have proved
their worth in the international scenario and the rising participation of Indian firms in signing
M&A deals has further triggered the acquisition activities in India.

In spite of the massive downturn in 2009, the future of M&A deals in India looks promising.
Indian telecom major Bharti Airtel is all set to merge with its South African counterpart MTN,
with a deal worth USD 23 billion. According to the agreement Bharti Airtel would obtain 49% of

Ten Biggest M & A deals in India:

 Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash
deal which cumulatively amounted to $12.2 billion.

 Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total

worth of $11.1 billion on February 11, 2007.
 India Aluminium and copper giant Hindalco Industries purchased Canada-based firm
Novelis Inc in February 2007. The total worth of the deal was $6-billion.

 Indian pharma industry registered its first biggest in 2008 M&A deal through the
acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy
for $4.5 billion.

 The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The
deal amounted to $2.8 billion and was considered as one of the biggest takeovers after 96.8%
of London based companies' shareholders acknowledged the buyout proposal.

 In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake
in Tata Teleservices for USD 2.7 billion.

 India's financial industry saw the merging of two prominent banks - HDFC Bank and
Centurion Bank of Punjab. The deal took place in February 2008 for $2.4 billion.

 Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008.
The deal amounted to $2.3 billion.

 2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion
making it ninth biggest-ever M&A agreement involving an Indian company.

 In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer
Repower. The 10th largest in India, the M&A deal amounted to $1.7 billion.

Laws governing M & A in India:

 Mergers and Acquisitions in India are governed by the Indian Companies Act, 1956,
under Sections 391 to 394. Although mergers and acquisitions may be instigated through
mutual agreements between the two firms, the procedure remains chiefly court driven. The
approval of the High Court is highly desirable for the commencement of any such process and
the proposal for any merger or acquisition should be sanctioned by a 3/4th of the shareholders
or creditors present at the General Board Meetings of the concerned firm.

 Indian antagonism law permits the utmost time period of 210 days for the companies
for going ahead with the process of merger or acquisition. The allotted time period is clearly
different from the minimum obligatory stay period for claimants. According to the law, the
obligatory time frame for claimants can either be 210 days commencing from the filing of the
notice or acknowledgment of the Commission's order.
  The entry limits for companies merging under the Indian law are considerably high.
The entry limits are allocated in context of asset worth or in context of the company's
annual incomes. The entry limits in India are higher than the European Union and are twofold
as compared to the United Kingdom.

The Indian M&A laws also permit the combination of any Indian firm with its international
counterparts, providing the cross-border firm has its set up in India.

There have been recent modifications in the Competition Act, 2002. It has replaced the voluntary
announcement system with a mandatory one. Out of 106 nations which have formulated
competition laws, only 9 are acclaimed with a voluntary announcement system. Voluntary
announcement systems are often correlated with business ambiguities and if the companies are
identified for practicing monopoly after merging, the law strictly order them opt for de-merging
of the business identity.

Provisions under M & A laws in India:

 Provision for tax allowances for mergers or de-mergers between two business
identities is allocated under the Indian Income tax Act. To qualify the allocation, these
mergers or de-mergers are required to full the requirements related to section 2(19AA) and
section 2(1B) of the Indian Income Tax Act as per the pertinent state of affairs.

 Under the “Indian I-T tax Act”, the firm, either Indian or foreign, qualifies for certain
tax exemptions from the capital profits during the transfers of shares.

 In case of “foreign company mergers”, a situation where two foreign firms are merged
and the new formed identity is owned by an Indian firm, a different set of guidelines are
allotted. Hence the share allocation in the targeted foreign business identity would be
acknowledged as a transfer and would be chargeable under the Indian tax law.

 As per the clauses mentioned under section 5(1) of the Indian Income Tax Act, the
international earnings by an Indian firm would fall under the category of 'scope of income' for
the Indian firm.
Important terminology related to M & A:

 Asset Stripping – Asset Stripping is the process in which a firm takes over another
firm and sells its asset in fractions in order to come up with a cost that would match the total
takeover expenditure.

 Demerger or Spin off – Demerger refers to the practice of corporate reorganization.

During this process a fraction of the firm may break up and establish itself as a new business
identity.

 Black Knight – The term generally refers to the firm which takes over the target firm
in a hostile manner.

 Carve - out – The procedure of trading a small part of the firm as an Initial Public
Offering is known as carve-out.

 Poison Pill or Suicide Pill Defense – Poison Pill is an approach which is adopted by
the target firm to present itself as less likable for an unfriendly subjugation. The
shareholders have full privilege to exchange their bonds at a premium if the buyout takes
place.

 Greenmail – Greenmail refers to the state of affairs where the target firm buys back
its own assets or shares from the bidding firm at a greater cost.

 Dawn Raid – The process of purchasing shares of the target firm anticipating the
decline in market costs till the completion of the takeover is known as Dawn Raid.

 Grey Knight – A firm that acquires another under ambiguous conditions or without
any comprehensible intentions is known as a grey knight.

 Macaroni Defense – Macaroni Defense is an approach that is implemented by the

firms to protect them from any hostile subjugation. A company can prevent itself by issuing
bonds that can be exchanged at a higher price.

 Management Buy In – This term refers to the process where a firm buys and invests
in another and employs their managers and officials to administer the new established
business identity.

 Hostile Takeover – Unfriendly or Hostile acquisitions takes place when the

management of the target firm does not have any prior knowledge about it or does not
mutually agree for the proposal. The disagreements between the chief executives of the target
firm may not be long-lasting and the hostile subjugation may take up the form of friendly
takeover. This practice is prevalent among the British and American firms. However, some of
them are still against hostile subjugations.

 Management Buy Out – A management buy out refers to the process in which the
management buys a firm in collaboration with its undertaking entrepreneurs.

Failures in M & A:

Despite the highest degree of strategy and planning and investments of hundreds of crores, the
majority of the mergers and acquisitions cannot create a value and fail miserably. In 1987, the
professor of Harvard, Michael Porter found that around 50% to 60% of the mergers and
acquisitions ended in a failure. In 2004, McKinsey also found that only 23% acquisitions ended
in a positive note on investment. There are several explanations for failure of mergers and
acquisitions. Let's find out why majority of the mergers and acquisitions fail.

Why M & A fail?

There could be several reasons behind the failure of mergers and acquisitions. Many company
look mergers and acquisitions as the solution to their problems. But before going for merger and
acquisition, they do not introspect themselves. Before an organization can go for mergers and
acquisitions, it needs to consider a lot. Both the parties, viz. buyer and seller need to do proper
research and analysis before going for mergers and acquisitions. Following could be the reasons
behind the failure of mergers and acquisitions.

Cultural Difference

One of the major reasons behind the failure of mergers and acquisitions is the cultural difference
between the organizations. It often becomes very tough to integrate the cultures of two different
companies, who often have been the competitors. The mismatch of culture leads to deterring
working environment, which in turn ensure the downturn of the organization.

Flawed Intention

Flawed intentions often become the main reason behind the failure of mergers and acquisitions.
Companies often go for mergers and acquisitions getting influenced by the booming stock
market. Sometimes, organizations also go for mergers just to imitate others. In all these cases,
the outcome can be too encouraging.

Often the ego of the executive can become the cause of unsuccessful merger. Top executives
often tend to go for mergers under the influence of bankers, lawyers and other advisers who earn
hefty fees from the clients.
Mergers can also happen due to generalized fear. The incidents like technological advancement
or change in economic scenario can make an organization to go for a change. The organization
may end up in going for a merger.

Due to mergers, managers often need to concentrate and invest time to the deal. As a result, they
often get diverted from their work and start neglecting their core business. The employees may
also get emotionally confused in the new environment after the merger. Hence, the work gets
hampered.

How to prevent failure?

Several initiatives can be undertaken in order to prevent the failure of mergers and acquisitions.
Following are those:

 Continuous communication is of utmost necessary across all levels – employees,

stakeholders, customers, suppliers and government leaders.

 Managers have to be transparent and should always tell the truth. By this way, they
can win the trust of the employees and others and maintain a healthy environment.

 During the merger process, higher management professionals must be ready to greet a
new or modified culture. They need to be very patient in hearing the concerns of other people
and employees.

 Management need to identify the talents in both the organizations who may play major
roles in the restructuring of the organization. Management must retain those talents.

Conclusion:

One size doesn't fit all. Many companies find that the best way to get ahead is to expand
ownership boundaries through mergers and acquisitions. For others, separating the public
ownership of a subsidiary or business segment offers more advantages. At least in theory,
mergers create synergies and economies of scale, expanding operations and cutting costs.
Investors can take comfort in the idea that a merger will deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance thanks to

redesigned management incentives. Additional capital can fund growth organically or through
acquisition. Meanwhile, investors benefit from the improved information flow from de-merged
companies.
M&A comes in all shapes and sizes, and investors need to consider the complex issues involved
in M&A. The most beneficial form of equity structure involves a complete analysis of the costs
and benefits associated with the deals.

Summary:

 A merger can happen when two companies decide to combine into one entity or when
one company buys another. An acquisition always involves the purchase of one company
by another.

 The functions of synergy allow for the enhanced cost efficiency of a new entity made
from two smaller ones - synergy is the logic behind mergers and acquisitions.

 Acquiring companies use various methods to value their targets. Some of these methods
are based on comparative ratios - such as the P/E and P/S ratios - replacement
cost or discounted cash flow analysis.

 An M&A deal can be executed by means of a cash transaction, stock-for-

stock transaction or a combination of both. A transaction struck with stock is not taxable.

 Break up or de-merger strategies can provide companies with opportunities to raise

additional equity funds unlock hidden shareholder value and sharpen management focus.
De-mergers can occur by means of divestitures, carve-outs spinoffs or tracking stocks.

 Mergers can fail for many reasons including a lack of management foresight, the inability
to overcome practical challenges and loss of revenue momentum from a neglect of day-
to-day operations.

References:

1. http://www.investopedia.com/university/mergers/default.asp

2. http://en.wikipedia.org/wiki/Mergers_and_acquisitions
3. http://business.mapsofindia.com/finance/mergers-acquisitions/mergers-and-
acquisitions.html