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TERMS RELATED TO MERGERS AND ACQUISITIONS:

Asset Stripping When a company acquires another and sells it in parts expecting that the funds generated would match the costs pf acquisition, it is known as asset stripping. Black Knight The company that makes a hostile takeover is known as the Black Knight. Dawn Raid This is a process of buying shares of the target company with the expectation that the market prices may fall till the acquisition is completed. Demerger or Spin off During the process of corporate restructuring, a part of the company may beak up and set up as a new company and this is known as demerger. Zeneca and Argos are good examples in this regard that split from ICI and American Tobacco respectively. Carve out This is a case of selling a small portion of the company as an Initial Public Offering. Greenmail Greenmail is a situation where the target company purchases back its own shares from the bidding company at a higher price. Grey Knight A grey knight is a company that takes over another company and its intentions are not clear. Hostile Takeover Hostile bids occur when acquisitions take place without the consent of the directors of the target company. This confrontation on the part of the directors of the target company may be short lived and the hostile takeover may end up being friendly. Most American\n and British companies like the

phenomenon of hostile takeovers while there is some more which do not like such unfriendly takeovers. Macaroni Defense Macaroni Defense is a strategy that is taken up to prevent any hostile takeovers. The issue of bonds that can be redeemed at a higher price if the company is taken over does this. Management Buy In When a company is purchased and the investors bring in their managers to control the company, it is known as management buyout. Management Buy Out In a management buy out, the managers of a company purchases it with support from venture capitalists. Poison Pill Or Suicide Pill Defense This is a strategy that is taken by the target company to make itself less appealing for a hostile takeover. The bondholders are given the right to redeem their bonds at a premium should a takeover occur.

MERGER AND ACQUISITON TRENDS:


Trend essentially refers to the observed long-term movement in a time series data. Trend estimates are seasonally adjusted through an averaging process. Merger and acquisition trends provide an idea about the market movements. Merger and acquisition trends are seen to affect an economy's product market, money market, and labor market. Global markets are also considerably influenced by the merger and acquisition trends. Global Merger and Acquisition Trends for 2006 and 2007 2007 and 2006 were marked by a spate of mergers and acquisitions all over the globe in both developing and developed countries. The general trend was that, there was a decline in the number of public sector undertakings along with a hike in the number of private sector enterprises. This was due to the fact that many public sector organizations worldwide were either acquired by large private sector enterprises or merged with them. The explanation to this merger and acquisition trend as observed in 2006 and 2007 lay in the robust growth recorded by the Private Equity Funds. The other factors propelling this trend were the emphasis on short term earnings growth and the strict regulatory structure of public sector enterprises. This merger and acquisition trend towards increased privatization of public sector holdings was observed in Europe, Brazil, North America, and China. Europe in that period hosted a strong investment market, which catered to the public to private sector transition of companies. As these types of funds usually possessed a time frame of 3 to 5 years for putting the new invested capital to work, they were expected by the analysts to power heightened merger and acquisition activities across major global markets for the coming decade.

ABOUT MERGERS AND ACQUISITIONS IN BANKING SECTOR:


Mergers and acquisitions in banking sector have become familiar in the majority of all the countries in the world. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent. Another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitors from the banking industry. Mergers and acquisitions in banking sector are forms of horizontal merger because the merging entities are involved in the same kind of business or commercial activities. Sometimes, non-banking financial institutions are also merged with other banks if they provide similar type of services. Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. They also try to enhance their customer base. In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be described as inorganic growth. Both government banks and private sector banks are adopting policies for mergers and acquisitions. In many countries, global or multinational banks are extending their operations through mergers and acquisitions with the regional banks in those countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions in the banking sector. By doing this, global banking corporations are able to place themselves into a dominant position in the banking sector, achieve economies of scale, as well as garner market share.

Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and synergy. They also help to form and grow shareholder value. In some cases, financially distressed banks are also subject to takeovers or mergers in the banking sector and this kind of merger may result in monopoly and job cuts. Deregulation in the financial market, market liberalization, economic reforms, and a number of other factors have played an important function behind the growth of mergers and acquisitions in the banking sector. Nevertheless, there are many challenges that are still to be overcome through appropriate measures. Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority of a particular country. For example, the mergers and acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI).

MERGER TYPES:
A merger refers to the process whereby at least two companies combine to form one single company. Business firms make use of mergers and acquisitions for consolidation of markets as well as for gaining a competitive edge in the industry. Merger types can be broadly classified into the following five subheads as described below. They are Horizontal Merger, Conglomeration, Vertical Merger, ProductExtension Merger and Market-Extension Merger. Horizontal Merger refers to the merger of two companies who are direct competitors of one another. They serve the same market and sell the same product. Conglomeration refers to the merger of companies, which do not either sell any related products or cater to any related markets. Here, the two companies entering the merger process do not possess any common business ties. Vertical Merger is effected either between a company and a customer or between a company and a supplier. Product-Extension Merger is executed among companies, which sell different products of a related category. They also seek to serve a common market. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them.

Market-Extension Merger occurs between two companies that sell identical products in different markets. It basically expands the market base of the product.

VALUATION RELATED TO MERGERS AND ACQUISITIONS:


The methods of valuation related to mergers and acquisitions can be broadly categorized into three types, namely market based method, income based method, as well as asset based method. All these methods carry a significant degree of importance in the context of mergers and acquisitions. There are numerous elements, which ascertain whether a particular firm should be acquired or not. Methods of Valuation Related to Mergers and Acquisitions The methods of valuation associated with mergers and acquisitions can be broadly classified into the following types: 1) Market Based Method In valuation of mergers and acquisitions with the help of market based method, the different attributes of the firm which is going to be acquired are compared with the similar types of attributes of other firms in the market. These firms (not the firm in question) normally have a market value that has been set up earlier. Furthermore, some other factors are to be taken into consideration before the comparison of the different attributes is done. First of all, which elements need comparison are to be distinguished and secondly, which are the firms that are going to act as comparables. Public

sector corporations involved in the same type of industry (of the target firm) can be chosen as comparables. Nevertheless, if the target firm is not registered with a stock exchange or is relatively small in its size than the public sector corporations, comparing it with the public sector corporations may not be useful. In these circumstances, public and private databases are there and these are basically commercial databases. The other features that require to be compared are net earnings, gross revenue, and book value of assets. As soon as all the information have been gathered, a broad-based comparison is performed for obtaining the value of the target firm. The market based method can be further categorized into the following types:

Market multiple (or price-earnings ratio) of comparable firms for firms that are not listed Market capitalization of listed firms 2) Income Based Method The income based method of valuation associated with mergers and acquisitions takes into account the net present value. The net present value of earnings that is going to be received in the future is taken into consideration through the implementation of a mathematical formula. The income based method can be further classified into the following types:

Cost to create technique Free cash flow/discounted cash flow method Capitalized earnings technique 3) Asset Based Method This method of valuation related to mergers and acquisitions is applied while the target firm is running at a loss. In this kind of a situation, the valuation of the assets of the firm at loss is estimated. Besides this procedure, the income based method and market based method can also be applied. Valuation received with the help of these procedures may render small values. Nevertheless, there is a probability that these methods would produce the true condition of the assets of the target firm. The asset based method can be further categorized into the following forms:

Valuation of Intangible Assets Economic Book Value or Net Adjusted Asset Value Liquidation Value

BENEFITS OF MERGERS AND ACQUISITONS:


Merger refers to the process of combination of two companies, whereby a new company is formed. An acquisition refers to the process whereby a company simply purchases another company. In this case there is no new company being formed. Benefits of mergers and acquisitions are quite a handful. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. It may also lead to tax gains and can even lead to a revenue enhancement through market share gain.

Birds Eye View of the Benefits Accruing from Mergers and Acquisitions The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share. Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. An increase in cost efficiency is effected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down.

An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization. It can be noted that mergers and acquisitions prove to be useful in the following situations: Firstly, when a business firm wishes to make its presence felt in a new market. Secondly, when a business organization wants to avail some administrative benefits. Thirdly, when a business firm is in the process of introduction of new products. New products are developed by the R&D wing of a company.

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