Mergers and Acquisition

Instructor : Anirban Ghatak

Asst. Prof., Institute of Management
Christ University, Kengeri Campus
E Mail : anirban.ghatak@christuniversity.in
Ph No: 080 – 40129827 / 9886555253
Mergers & Acquisition
CONCEPTS……

Anirban Ghatak, Lecturer, Christ University Institute of Management, 68 / 2

 Mergers & Acquisition CONCEPTS……

Mergers
• A transaction where two firms agree to
integrate their operations on a
relatively coequal basis because they
have resources and capabilities that
together may create a stronger
competitive advantage.
• One or more company can merge with an
existing company to form a new company.
• Laws of India use the term AMALGAMATION
for mergers.
 Examples

• JP Morgan/Chase Manhattan becomes JP Morgan

Chase
• Exxon and Mobil becomes Exxon-Mobil
Sometimes target firms name disappears and
combined firms are known by acquired name or
sometimes, by a completely new name.
• Burroughs/Sperry Rand became Unisys
 Mergers—jargon
Firm seeking to buy or merge is the ―bidder‖
Firm that is sought is the ―target‖
Payment (cash or securities) is the ―consideration
 Mergers & Acquisition CONCEPTS……

Amalgamation
• According to Sec 2 (1C) of INCOME TAX ACT , 1961,
amalgamation is the mergers of two or more
companies with one existing company or the merger
of two or more companies called amalgamating
company to form a new company called amalgamated
company in such a way that,
• All the assets and liabilities of the
amalgamating companies becomes the assets and
liabilities of the amalgamated company.
• Share holders holding not less than 90% i.e.
9/10th in the value of the shares in amalgamating
company becomes the shareholders of the
amalgamated company.
 Mergers & Acquisition CONCEPTS……

Thus, mergers or amalgamations may

take two forms:-
• Absorbtion
• Consolidation
 Mergers & Acquisition CONCEPTS……

Absorbtion
• A transaction where two firms agree to
integrate their operations on a relatively
coequal basis because they have resources and
capabilities that together may create a
stronger competitive advantage.
• Absorption is a type of merger used to happen
between the sister concerns and subsidiaries.
Tata Fertilizers limited
• For example
by Tata Chemicals Limited.
 Mergers & Acquisition CONCEPTS……
Consolidation

• A consolidation is a combination of two or

more companies into a 'new company'. In this
form of merger, all companies are legally
dissolved and a new entity is created . Here,
the acquired company transfers its assets,
liabilities and shares to the acquiring
company for cash or exchange of shares.
• For example, merger of Hindustan Computers
Ltd, Hindustan Instruments Ltd, Indian
Software Company Ltd and Indian Reprographics
Ltd into an entirely new company called HCL
Ltd.
• HCL + HIL + ISCL + IRL = HCL
 OTHER
CONCEPTS
 Mergers & Acquisition CONCEPTS……
Acquisition

• An act of acquiring an affective control by

management of one company over the management
or assets of other company with out any
combinations of companies.
• In this case 2 or molre companies may remain
independent , separate legal entity but there
may be change in control of companies.
• Examples:
• 1. P&G and Gillette
2. Dabur acquired Balsara for 143 crores
3. Godrej Consumer Care bought Keyline Brands
4. Marico acquired HLL Nihar brand.
5. HLL's acquisitions: Kissan, Kwality Ice-creams
and Modern Foods.
 Mergers & Acquisition CONCEPTS……
Takeover

• A takeover in commerce refers to one company

(the acquirer) purchasing another (the
target). Such events resemble mergers, but
without the formation of a new company.
• As per the MRTP act take over means
acquisition of not less than 25% of the voting
power of a company.
• U/S (372) of Companies act, take over means if
a company invests more than 15% of the
subscribed capital of another company can
result take over.
 Mergers & Acquisition CONCEPTS……
Examples

Company Take Over company

• Chabrias Shaw wallace
• Goenkas Calcutta Electric Supply
• Hindujas Asok Layland
• Satyam India World
• Hindal Co Indal
• HMV RPG
• Tata VSNL
 Mergers & Acquisition CONCEPTS……

Takeover Types

A friendly takeover consists of a straight buyout

of a company, and happens all the time. The
shareholders receive cash or (more commonly)
an agreed-upon number of shares of the
acquiring company's stock.
 Takeover Types

A hostile takeover occurs when a company attempts

to buy out another whether they like it or not. A
hostile takeover can usually occur only through
publicly traded shares, as it requires the
acquirer 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 liquidity). A hostile takeover may
presage a corporate raid.
For example IBM’s acquisition of Lotus in 1995;
Oracle’s bid for PeopleSoft in 2003
 Takeover Types

A reverse takeover can occur in different

forms:
a smaller corporate entity takes over a larger
one.
a private company purchases a public one.
a method of listing a private company while
bypassing most securities regulations, whereby
which a shell public company buys out a
functioning private company whose management
then controls the public company.
 Mergers & Acquisition CONCEPTS……
Holding Company

• A company can obtain the status of holding

company by acquiring shares of the other
company.
• A HOLDING COMPANY is a company which holds
more than half of the nominal value of
equity shares or capital of other company
called SUBSIDIARY COMPANY or co ntrol sthe
compositions of its BOD.
• Both the holding and the subsidiary company
retains their separate legal entities and
maintain their separate books of accounts.
 How to Make a Merger Work
 Are there any rules of thumb for merger success?
Consider the following.
 1. Don’t rush the wedding - do your homework
carefully to prevent morning-after surprises.
 2. Know what you’re buying - not just the financials,
but the corporate culture.
 3. Adopt each partner’s best practices - don’t assume
the bigger company or the acquirer has all the
answers.
 4. Be honest with employees about how a merger will
affect them - start early and communicate honestly
with them.
 5. Take the time to do internal recruiting - make
sure the managers you want to keep don’t go
wandering off to a competitor.
Adapted from ―How to Make a Merger Work‖, Fortune
magazine, January 24, 1994.
 A Firm‘s Internal and External Growth Strategies
External
Market
and Other
Forces
Market/Customer
Insights Commercial
Organizationa
l
Corporate
Value Chain: Increased
And Business
Core Capabilities Increased
Strategies
Competencies (Internal Performance
Identification Growth)
Outsourcing (Non-
Core Team/Individu
Competencies) als
Technologi
M&A/JV’s cal
(External Growth)
Types of Mergers
Horizontal Merger:
 A horizontal merger is the combinations of two
competing firms belongs to the same industry and
are at the same stage of business cycle.
 These mergers are aimed at achieving Economies
of Scale in production by eliminating
duplication of facilities and operations and
broadening the product line, reducing investment
in working capital, eliminating competition
through product concentration, reducing
advertising costs, increasing market segments
and exercising better control over the market.
 It is also an indirect route to achieving
technical economies of large scale.
Types of Mergers
Horizontal Merger:
 This is a combination of 2 or more
companies in similar types of activities
like production, distribution area etc…
 Tomco with HLL.
 Merger of Tata Industrial Finance Ltd.
With Tata Finance Ltd.
 GEC with EEC and TOMCO with HLL.
 Horizontal when two competitors combine
Ex) Exxon–Mobil, Daimler-Chrysler
 Other Examples

Other Examples:
Boeing-McDonnell Douglas;
Staples-Office Depot(unconsummated);
Chase Manhattan-Chemical Bank;
Southern Pacific RR-Sante Fe RR;
Pabst-Blatz;
LTV-Republic Steel;
Konishiroku Photo-Minolta.
Vertical Mergers
 A vertical merger is one where
companies at different product or
business life cycle combines.
 It can be Backward Integration where
company merges its suppliers or
Forward Integration where it merges
its customers.
 The basic motive of these sorts of
merges is to reduce cost and
dependence.
 Merge of Reliance Petrochemicals
Ltd. With Reliance Industries Ltd.
can be placed in this category.
Vertical Mergers
 Involve the acquisition of a firm
that can supply an input product (an
upstream acquisition) or purchase an
output product (a downstream
acquisition)
– Example
•Ford & Autolite – manufactures
spark plugs
•Helene-Curtis and Unilever
– The terms forward and backward
integration are also used.
 The Strategic Management Process
External
Analysis

Strategic Strategy Competitive

Mission Objectives
Choice Implementation Advantage

Which Businesses
Internal to Enter?
Analysis
Corporate Level • Vertical Integration
Strategy
Logic of Corporate Level Strategy
Corporate level strategy should create value:
1) such that the value of the corporate whole increases

2) such that businesses forming the corporate whole

are worth more than they would be under
independent ownership

3) that equity holders cannot create through

portfolio investing
• a corporate level strategy should create
synergies that are not available in equity
markets
• vertical integration = value chain economies
What is Vertical Integration?
Where your pizza comes from

Dairy Farmers
(milk)

Seed Companies Pizza Chains

(Alfalfa & Corn)

Leprino Foods
(Mozzarella Cheese)

Crop Farmers
(Alfalfa & Corn) End Consumer

Food Distributors
What is Vertical Integration?

Backward
Vertical
Dairy Farmers Integration
(milk)

Seed Companies Pizza Chains

(Alfalfa & Corn)

Leprino Foods
(Mozzarella Cheese)

Crop Farmers
(Alfalfa & Corn) End Consumer

Food Distributors Forward

Vertical
Integration
Value Chain Economies
The Logic of Value Chain Economies
Backward
Vertical
• the focal firm is able to Dairy Farmers Integration
(milk)
create synergy with the
other firm(s)
• cost reduction
Leprino Foods
• revenue enhancement (Mozzarella Cheese)

• the focal firm is able to

capture above normal
economic returns Forward
Food Distributors
(avoid perfect competition) Vertical
Integration
Competitive Advantage

If a vertical integration strategy meets the

VRIO criteria…
Is it Valuable?

Is it Rare?
Is it costly to Imitate?

Is the firm Organized to exploit it?

…it may create competitive advantage.

Value of Vertical Integration
Market vs. Integrated Economic Exchange
• markets and integrated hierarchies are ‗forms‘ in which
economic exchange can take place

• economic exchange should be conducted in the form

that maximizes value for the focal firm

• thus, firms assess which form is likely to generate

more value

Integration makes sense when the focal firm can

capture more value than a market exchange provides
Value of Vertical Integration
Three Value Considerations

Leverage Manage Exploit

Capabilities Opportunism Flexibility

• firm capabilities • opportunism • internalizing is

may be sources may be checked usually less
of competitive by internalizing flexible
advantage in (TSI)
other businesses • flexibility is
• internalizing must prized when
• if not, then don‘t be less costly than uncertainty is
integrate exchange opportunism high
Rarity of Vertical Integration
Integration vs. Non-Integration
• a firm‘s integration strategy may be rare because
the firm integrates or because the firm does not
integrate
• thus, the question of rareness does not
depend on the number of forms observed

• a firm‘s integration strategy is rare or common with

respect to the value created by the strategy

Example: Toyota’s Choice Not to Integrate Suppliers

Imitability of Vertical Integration
Form vs. Function
• the form, per se, is usually not costly to imitate
• the value-producing function of integration may
be costly to imitate, if:
• the integrated firm possesses resource
combinations that are the result of:
• historical uniqueness
• causal ambiguity
• social complexity
• small numbers prevent further integration
• capital requirements are prohibitive
Imitability of Vertical Integration
Modes of Entry

• acquisition and internal development are alternative

modes of entry into vertical integration
• thus, one firm may acquire a supplier while a
competitor could imitate that strategy through
internal development
• in both cases, the boundaries of the firm would
encompass the new business

• strategic alliances can be viewed as a substitute for

vertical integration—without the costs of ownership
 Organizing Vertical Integration
Functional Structure (U-Form)
CEO‘s Role
Cooperation
Accounting Finance Marketing HR Engineering

Cooperation
Conflict

Original Original Original Original Original

Business Business Business Business Business

New New New New New

Business Business Business Business Business

Conflict
Organizing Vertical Integration
Management Controls
What needs to be ‗controlled‘ in a vertically integrated
firm?

• managers‘ efforts to achieve the desired value

chain economies
• cooperation and competition among and between
functions
• the integration of new businesses into the
existing business
• time horizon of managers
Organizing Vertical Integration
Management Controls
Board
Budgets
Committees
• separating strategic and • provide oversight and
operational budgets direction to managers
• strategic: inputs • help ensure that strategic
& outputs direction is maintained
• operational: outputs

These mechanisms focus management attention

on achieving value chain economies
Organizing Vertical Integration
Compensation
Salary
Integration
Opportunism Cash Bonus: Individual

Stock Grants: Individual

Leveraging Cash Bonus: Group Cooperation

Capabilities
Stock Grants: Group

Stock Options: Individual

Exploiting Time Horizon
Flexibility Stock Options: Group
International Expansion
The Cost – Control Tradeoff
Cost
(Capital at Risk)
High Greenfield Investment Vertically
Acquisition Integrated
Strategic Alliance
Somewhat
Franchising Vertically
Licensing
Integrated

Exporting Not Vertically Integrated

Low Control
High
Summary
Vertical Integration…

• makes sense when value chain economies

can be created and captured

• may allow a firm to leverage capabilities

• may be a response to the threat of opportunism

and uncertainty

• as a form of exchange per se, is not rare nor

costly to imitate
Summary
Vertical Integration…

• is an important consideration in the decision

to expand internationally (range of possibilities)

• makes sense when done for the right reasons,

under the right circumstances

• can be a costly mistake if done wrong

Ownership is costly—integrate only when the

benefits outweigh the costs of integration!
 Other Examples

Time Warner-TBS;
Disney-ABC Capitol Cities;
Cleveland Cliffs Iron-Detroit Steel;
Brown Shoe-Kinney,
Ford-Bendix.
 Circular Merger
• In circular combination, companies
producing distinct products in the same
industry seek amalgamation to share
common distribution and research
facilities in order to obtain economies
by eliminating costs of duplication and
promoting market enlargement.
• The acquiring company obtains benefits
in the form of economies of resource
sharing and diversification. Here we can
cite the merger of BBLIL with HUL.
 Conglomerate mergers
• Conglomerate merger are the one where
companies belongs to different or unrelated
lines of business.
• The basic motive of these mergers are to
reduce risk through diversification and
also enhances the overall stability of the
acquirer and improves the balances in the
company’s total portfolio of diverse
products and production processes.
• It also encourages firms to grow by
diversifying into other markets.
Conglomerate mergers
 Example of Conglomerate
merger:
 Torrent group, which
identified power as one of
the growing field, acquired
Ahmedabad Electric Company
and Surat Electric Company in
order to diversify the risk
of its existing line of
Pharmaceuticals business.
 Conglomerate mergers
Consolidated firms may sell related
products, share marketing and distribution
channels and perhaps production processes;
or they may be wholly unrelated.
For example:
Citicorp and Travelers,
Ciba-Geigy (contact lens, Ritalin,
Maalox)
Sandoz (Gerber Baby Food, Ovaltine) –
Novartis etc…
 Conglomerate mergers
Product extension conglomerate mergers
involve firms that sell non-competing
products use related marketing channels of
production processes.
Examples:
Cardinal Healthcare-Allegiance;AOL-Time
Warner;
Phillip Morris-Kraft; Pepsico-Pizza Hut;
Citicorp-Travelers Insurance; Proctor &
Gamble-Clorox.
 Conglomerate mergers
• Market extension conglomerate mergers join
together firms that sell competing products in
separate geographic markets.
• Examples: Scripps Howard Publishing—Knoxville
News Sentinel; Time Warner-TCI; Morrison
Supermarkets-Safeway;SBC Communications-Pacific
Telesis
• A pure conglomerate merger unites firms that
have no obvious relationship of any kind.
• Examples:BankCorp of America-Hughes Electronics
;R.J. Reynolds-Burmah Oil & Gas; AT&T-Hartford
Insurance
Japanese Keiretsu
 Not unlikely for Japanese firms to
grow via mergers and acquisitions
Sony acquired CBS Records (1987)
Sony acquired Columbia Pictures
(1989) for $3.45 billion
 Keiretsu involves a group of firms
affiliated with a large bank,
industrial firm, or trading firm.
Japanese Keiretsu (continued)
 Participation involves significant
reciprocal stock ownership (know
not to sell these cross-held
shares)
 Provides protection
 Reasons for Problems in
Acquisitions Achieving Success
Increased Integration
market power difficulties
Overcome Inadequate
entry barriers evaluation of target
Cost of new Large or
product development extraordinary debt
Increased speed Acquisitions Inability to
to market achieve synergy
Lower risk Too much
compared to diversification
developing new
products
Increased Managers overly
diversification focused on acquisitions
Avoid excessive Too large
competition
 Reasons for Acquisitions
Increased Market Power
Acquisition intended to reduce the competitive balance of
the industry
Example: British Petroleum’s acquisition of U.S. Amoco

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make
―start-ups‖ economically unattractive
Example: Belgian-Dutch Fortis’ acquisition of American
Banker’s Insurance Group
Lower Cost and Risk of New Product Development
Buying established businesses reduces risk of start-up
ventures
Example: Watson Pharmaceuticals’ acquisition of TheraTech
 Reasons for Acquisitions
Increased Speed to Market
Closely related to Barriers to Entry, allows market entry
in a more timely fashion
Example: Kraft Food’s acquisition of Boca Burger
Diversification
Quick way to move into businesses when firm currently lacks
experience and depth in industry
Example: CNET’s acquisition of mySimon

Reshaping Competitive Scope

Firms may use acquisitions to restrict its dependence on a
single or a few products or markets
Example: General Electric’s acquisition of NBC
 Reasons for Acquisitions
Economics of Scale
•Economies of scale from horizontal mergers
Example: (e.g. BP and Amoco expected to save $2 bn annually
from operations)
Economics of Scope
Economies of scope from vertical mergers
Example: integrate suppliers, such as in the case of GM and
Delphi, but recent trend is towards outsourcing

Complementarities
A small firm may have a unique product, but may need the
experience in marketing and sales of a mature firm that may
also be in need of new products
 Reasons for Acquisitions
•Unused tax shields: a firm may acquire another (loss-
making) firm to take advantage of tax-loss carry-forwards
(IRS will object if this is only reason for merger)

•Excess cash/inefficiencies
A firm with excess cash can use it better by acquiring
another firm with good projects; a firm with excess
cash can also become a target of an acquisition if it is
not investing the cash in positive NPV projects

•Acquisitions can also eliminate inefficiencies frequently

related to bad management
 Reasons for Acquisitions

•The target firm tries to avoid bankruptcy and chooses to

be acquired (evidence shows these acquisitions not to be
successful)

•The Hubris Hypothesis: the acquiring firm’s management

overvalue their ability to create value once they take
control of the target firm’s assets

•Managers motivations to build an empire may lead to

several acquisitions that end up destroy value (e.g.
WorldCom)
 Reasons for Acquisitions

•Synergy affect
The whole versus the sum of the parts
•Incremental Cash Flows
rev – costs – taxes – capital requirements
A. Increased revenues
1. Gains from better marketing
efforts
- Ineffective media programming
/advertising - Distribution network
enhancements
- Product mix
2. Strategic benefits
- Beachhead‖ into new markets
- Market power
 Problems with Acquisitions
Integration Difficulties
Differing financial and control systems can make integration
of firms difficult
Example: Intel’s acquisition of DEC’s semiconductor division

Inadequate Evaluation of Target

―Winners Curse‖ bid causes acquirer to overpay for firm
Example: Marks and Spencer’s acquisition of Brooks Brothers

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows
Example: AgriBioTech’s acquisition of dozens of small seed
firms
 Problems with Acquisitions
Inability to Achieve Synergy
Justifying acquisitions can increase estimate of
expected benefits
Example: Quaker Oats and Snapple
Overly Diversified
Acquirer doesn‘t have expertise required to manage
unrelated businesses
Example: GE--prior to selling businesses and refocusing
Managers Overly Focused on Acquisitions
Managers may fail to objectively assess the value of
outcomes achieved through the firm‘s acquisition strategy
Example: Ford and Jaguar
Too Large
Large bureaucracy reduces innovation and flexibility
 Attributes of Effective Acquisitions

+ Complementary Assets or Resources

Buying firms with assets that meet current
needs to build competitiveness

+ Friendly Acquisitions
Friendly deals make integration go more smoothly

+ Careful Selection Process

Deliberate evaluation and negotiations is more likely
to lead to easy integration and building synergies

+ Maintain Financial Slack

Provide enough additional financial resources so
that profitable projects would not be foregone
 Attributes of Effective Acquisitions

+ Low-to-Moderate Debt
Merged firm maintains financial flexibility

+ Flexibility
Has experience at managing change and is
flexible and adaptable

+ Emphasize Innovation
Continue to invest in R&D as part of the firm‘s
overall strategy