MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209

Name Registration / Roll No. Course Subject Semester Subject Number Book ID

Kamlesh Sardar Kapoor 531010767 Master of Business Administration (MBA) Mergers & Acquisitions Semester 3 MF0011, Assignment 1 B1209

Kamlesh Sardar Kapoor

Roll No. 531010767

Center Code: 2519 Page 1 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209

Q1) What is the basic steps in strategic planning for a merger? Answer:
Basics Steps in Strategic Planning Management Mergers & Acquisitions are strategic decisions which are taken by the management of any company after through examination of many important facts and considerations. Since decisions regarding Mergers & Acquisitions, like capital budgeting decisions are irreversible in nature it is very important that due attention must be paid to some basic issues before planning about it.

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Hence the strategic planning can be broken down into five steps: Step 1: Pre Acquisition Review The first step is related with the assessment of company's own situation to determine if a Merger & Acquisition strategy should be implemented or is there any other alternative? If a company expects difficulty in the future when it comes to maintaining growth, core competencies, market share, return on capital, or other key performance variable, then a Merger & Acquisition (M & A) program may be necessary. If a company is undervalued or fails to protect its valuation, it may find itself the target of a merger. Therefore, the pre-acquisition review will include issues like the projected growth rate, inability of the company to sustain its market share in the future because of the potential threat from its competitor firms, under valuation of the company etc. The company must address to a fundamental question. Would the Merger help improve the situation regarding the above or not? Will it affect the valuation in a positive manner? Step 2: Searching and Screening of the targets The second step in the Merger & Acquisition process is to search for those companies which can be the potential takeover candidates. It is important for the merging company to see whether the company to be acquired has strategic compatibility with the acquiring company or not. Compatibility and fit should be assessed across a range of criteria size, kind of business, capital structure, core competencies, etc.

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Searching and screening process should and must be performed by the management of the Acquiring Company without taking the help of any outside agency. Dependence on external firms should be kept minimum however if it is important to take the help of any outside agency. Step 3: Valuation of the target company The third step in the Merger & Acquisition process is to perform a thorough and detailed analysis of the target company. Acquiring company must confirm that the Target Company is truly a good fit with the acquiring company. This requires a thorough review of operational, strategic, financial, and other aspects of the Target Company. This detail review is called "due diligence." Due diligence is the process of identifying and confirming or disconfirming the business reasons for the proposed capital transaction. Various factors like, customer needs, strategic fit, shareholder value etc is at the core of the analysis. Several functions are involved in due diligence related to potential acquisitions, including strategy, finance, legal, marketing, operations, human resources, and internal audit services. The direction of due diligence efforts depends on what the company expects to gain from the transaction: employees, customers, processes, products, or services. Due Diligence is initiated once a target company has been selected. The main objective is to identify various synergy values that can be realized through an M & A of the Target Company. A key aspect of due diligence is the valuation of the target company. In the preliminary phases of M & A. Total value of the company is calculated keeping in mind the value of the synergy expected from the combination and costs involved in the transaction. An example should give an idea of the calculation involved. Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 4 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Value of Acquiring Company = Rs. 500 lakh Value of Target Company = Rs. 250 lakh Value of Synergies as per Phase I Due Diligence = Rs. 150 lakh M & A Costs = Rs. 60 lakh Total Value of Combined Company = Value of the acquiring company + Value of the target company + Value of the Synergy M & A cost Hence Total value of the combined company = 500 + 250 + 150 60 = Rs 840 lakh. Step 4: Negotiation After selecting the target company it's time to start the process of negotiating. A negotiation plan is developed based on several key questions: How much resistance Acquiring Company is expected to encounter from the Target Company? What are the benefits of the Merger for the Target Company? What will be the acquiring company's bidding strategy? How much acquiring company should offer in the first round of bidding? The most common approach to acquire a company is for both companies to reach an agreement concerning the Merger & Acquisition. The idea is to go for a negotiated merger. The negotiated merger should be the preferred approach to a M & A since when both the company's agree to the deal then there are chances that the process will be a smooth one and will go a long way in making the merger a successful one.

Kamlesh Sardar Kapoor

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Step 5: Post Merger Integration If everything goes as per planning, the two companies announce an agreement to merge the two companies. This leads to the fifth and final phase within the M & A Process, the integration of the two companies. Every company is different in terms of operations, in terms of structure, in terms of culture, in terms of strategies etc. The Post Merger Integration Phase is the most difficult phase within the M & A Process. It is the responsibility of the management of the two companies to bring the two companies together and make the whole thing work. This requires extensive planning and design throughout the combined organization. If post merger integration is successful, then it should result in the generation of synergy and that is the final objective of any Merger & Acquisition program.

Q2) What are the sources of operating synergy? Answer:

Operating synergies are those synergies that allow firms to increase their operating income from existing assets, increase growth or both. Operating synergies can be categorized into four types. 1. Economies of scale: Economies of scale may arise from the merger, allowing the combined firm to become more cost efficient and profitable. Economies of scales can be seen in mergers of firms in the same business (horizontal mergers). For example, two banks combining together to create a larger bank. Merger of HDFC bank with Centurian bank of Punjab can be taken as an example of cost reducing operating synergy. Both the banks after combination can expect to cut costs considerably on account of sharing of their resources and thus avoiding duplication of facilities available.

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 2. Greater pricing power: Greater pricing power from reduced competition and higher market share, should result in higher profit margins and operating income. This synergy is also more likely to show up in mergers of firms which are in the same line of business and should be more likely to yield benefits when there are relatively few firms in the business. When there are more firms in the industry ability of firms to exercise relatively higher price reduces and in such a situation the synergy does not seem to work as desired. An example of limiting competition to increase pricing power is the acquisition of Universal luggage by Blow Plast. The two companies were in the same line of business and were in direct competition with each other leading to a severe price war and increased marketing costs. After the acquisition Blow past acquired a strong hold on the market and operated under near monopoly situation. Another example is the acquisition of Tomco by Hindustan Lever. 3. Higher growth: Higher growth in new or existing markets arising from the combination of the two firms. This can be the case, for example, when a firm acquires an emerging market firm with an established distribution network and brand name recognition, and uses these strengths to increase sales of its products. 4. Combination of different functional strengths: Combination of different functional strengths may enhance the revenues of each merger partner thereby enabling each company to expand its revenues. The phenomenon can be understood in cases where one company with an established brand name lends its reputation to a company with upcoming product line or a company. A company with strong distribution network merges with a firm that has products of great potential but is unable to reach the market before its competitors can do so. In other words the two companies should get the advantage of the combination of their complimentary functional strengths. Synergy results from complementary activities. This can be understood with the following examples. Example Consider a situation where there are two firms A and B. Firm A is having substantial amount of financial resources (having enough surplus cash that can be invested somewhere) while firm B is having profitable investment opportunities ( but is lacking surplus cash). If A and B combine with each other both can utilise each other strengths, for example here A can invest its resource (cash) in the opportunities

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 available to B. Note that this can happen only when the two firms are combined with each other or in other words they must act in a way as if they are one. Operating synergies can affect margins and growth, and through these the value of the firms involved in the merger or acquisition.

Q3) Explain the process of a leveraged buyout? Answer:

Leveraged Buyouts (LBO) A buyout is a transaction in which a person, group of people, or organization buys a company or a controlling share in the stock of a company. Buyouts can also be negotiated with people or companies on the outside This can be a risky decision, as the assets of the company are usually used as collateral, and If the company fails to perform, it can go bankrupt because the people involved in the buyout will not be able to service their debt.

A leveraged buyout is essentially a strategy involving the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. In general an LBO is defined as the acquisition, financed largely by borrowing of all the stock or assets of a hitherto public company by a small group of investors. Debt financing represents usually 50 % o or more of the purchase price. The tangible assets of the firm to be acquired are used as collateral for the loans to be obtained for financing the acquisition. The cash requirements for debt servicing force management, to shed unneeded assets, improve operating efficiency and forego wasteful capital expenditure. A buyout is a transaction in which a person, group of people, or organization buys a company or a controlling share in the stock of a company. Buyouts great and small occur all over the world on a daily basis. Buyouts can also be negotiated with people or companies on the outside. For example, a large candy company might buy out smaller candy companies with the goal of cornering the market more effectively and purchasing new brands which it can use to increase its customer base. Likewise, a company which makes widgets might decide to buy a company which makes thingamabobs in order to expand its operations, using an establishing company as a base rather than trying to start from scratch. In a leveraged buyout, the company is Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 8 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 purchased primarily with borrowed funds. In fact, as much of 90% of the purchase price can be borrowed. This can be a risky decision, as the assets of the company are usually used as collateral, and if the company fails to perform, it can go bankrupt because the people involved in the buyout will not be able to service their debt. Leveraged buyouts wax and wane in popularity depending on economic trends. 5.2.1 Modes of purchase There are a number of types of financing which can be used in an LBO. These include, for example, the following (in order of their risk): 1. Senior debt: This is the debt which ranks ahead of all other debt and equity capital in the business. Bank loans are typically structured in up to three trenches: A, B and C. The debt is usually secured on specific assets of the company, which means the lender can automatically acquire these assets if the company breaches its obligations under the relevant loan agreement; therefore it has the lowest cost of debt. These obligations are usually quite stringent. The bank loans are usually held by a syndicate of banks and specialized funds. Typically, the terms of senior debt in an LBO will require repayment of the debt in equal annual installments over a period of approximately 7 years. 2. Subordinated debt: This debt ranks behind senior debt in order of priority on any liquidation. The terms of the subordinated debt are usually less stringent than senior debt. Repayment is usually required in one bullet payment at the end of the term. Since subordinated debt gives the lender less security than senior debt, lending costs are typically higher. An increasingly important form of subordinated debt is the high yield bond, often listed on Indian markets. High yield bonds can either be senior or subordinated securities that are publicly placed with institutional investors. They are fixed rate, publicly traded, long term securities with a looser covenant package than senior debt though they are subject to stringent reporting requirements. 3. Mezzanine finance: This is usually high risk subordinated debt and is regarded as a type of intermediate financing between debt and equity and an alternative to high yield bonds. An enhanced return is made available to lenders by the grant of an equity kicker (e.g. warrants, options and shares), which crystallizes upon an exit. A form of this is called a PIK, which reflects interest Paid In Kind, or rolled up into the principal, and generally includes an attached equity warrant (for larger financings)

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 4. Loan stock: This can be a form of equity financing if it is convertible into equity capital. The question of whether loan stock is tax deductible should be investigated thoroughly with the companys advisers 5. Preference share: This forms part of a companys share capital and usually gives preference shareholders a fixed dividend and fixed share of the companys equity (subject to there being sufficient available profits) 6. Ordinary shares: This is the riskiest part of a LBOs capital structure. However, ordinary shareholders will enjoy majority of the upside if the company is successful. 5.2.2 Governance aspects of leveraged buyouts Every restructuring programme must generate some additional values for the business, owners, shareholders etc. So an LBO exercise also creates certain additional values for various groups involved in such an operation. The sources of value generated are as follows: (a) Reduction in agency cost is the most important sources of value in an LBO. An LBO refers to take a public corporation to private. In case of a public corporation, the management is different from owners. In practice, however, the management sometimes takes some suboptimal decisions without the prior approval of its owners, which are proved to be costly and detrimental to the growth of the firm and beneficial to the management. (b) The second source of value gain is associated with efficiency. It is argued that a private firm is much more efficient in taking decisions relating to a changing environment than that of a public corporation, where every decision is not required to be ratified by the general body before implementation. Thus, action can be taken more speedily since major new programmes do not have to be justified by detailed studies and reports to the board of directors. It is this efficiency in decision-making that creates value for an LBO. (c) Another source of value gain in case of an LBO is tax benefits as in such an operation; the interest obligation of the private firm is expected to certain tax benefits. The concept of stepping up of assets for depreciation as an ingredient of LBO calls for additional tax advantages. (d) Finally, it is understood that management or investors in an LBO deal have more information on the value of the firm, than the ordinary shareholders. Because of this information, a buy out proposal gives indication to the market that the post buy out Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 10 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 scenario would certainly provide more operating incomes than previously expected or that the firm is less risky than perceived by the public at present. It is this asymmetric information, which adds value to an LBO and because of this value; the buy out investors do not mind paying large premiums on such deals. The value so created through an LBO exercise are exclusively meant for shareholders of restructured firm and partly for the specialists engaged in such an operation. Basically, this is considered as a wealth transfer mechanism in a sense that because of the financial leverage, the gain achieved by the shareholders came at the expense of the firms debt holders. 5.2.3 Leveraged buyouts and corporate governance LBO firms today are seeking to build value in acquired companies by improving profitability, pursuing growth including roll-up strategies (in which an acquired company serves as a platform for additional acquisitions of related businesses to achieve critical mass and generate economies of scale), and improving corporate governance to better align management incentives with those of shareholders. As a general rule, funds raised by private equity firms have a number of fairly standard provisions: Minimum commitment: Prospective limited partners are required to commit a minimum amount of equity. Limited partners make a capital commitment, which is then drawn down (a takedown or capital call) by the general partner in order to make investments with the funds equity. Investment or commitment period: During the term of the commitment period, limited partners are obligated to meet capital calls upon notice by the general partner by transferring capital to the fund within an agreed-upon period of time (often 10 days). The term of the commitment period usually lasts for either five or six years after the closing of the fund or until 75 to 100% of the funds capital has been invested, whichever comes first. Term: The term of the partnership formed during the fund-raising process is usually ten to twelve years, the first half of which represents the commitment period (defined above), the second half of which is reserved for managing and exiting investments made during the commitment period. Diversification: Most funds partnership agreements stipulate that the partnership may not invest more than 25% of the funds equity in any single investment. Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 11 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 5.2.4 Stages of leveraged buyouts operation Four distinct but related stages are envisaged for the proper implementation of LBO programs, which are described below. 1st stage: Arrangement of finance: The first stage of the operation consists raising the cash required for the buy outs and working out a management incentive system. The equity base of the new firm consists of around 10 percent of cash put up by the company's top management or buy out specialists. Outside Investors like merchant bankers, venture capitalists and commercial banks then arrange to provide the remaining equity. Usually 50 per cent of the cash is raised by borrowings against company's assets in secured bank acquisition loans from commercial banks. Rest of the cash is obtained by issuing certain debts in a private placement, usually with pension funds, insurance companies, venture capital firms or public offerings through high-risk high-yield junk bonds. Private placements and and junk bonds are subordinated forms of debts (often referred to as mezzanine money') and they secure a place in between the secured debts from banks and risky residual claims of share holders. 2nd stage: Going private: In this stage, the organizing or sponsoring group purchases all the outstanding shares of the target company and takes it private through stock purchases format or purchase all assets through asset purchasing format. For the latter case, the purchasing group forms another new, privately held corporation. To reduce the debt by paying off a part of bank loans, the new owners sometimes sell off part of the corporation and may begin disposing of the inventory. 3rd stage: Restructuring: In this stage, the new management would try to enhance the generation of profit and cash flows by reducing certain operating costs and changing the marketing strategy. For this operation, it may adopt any or all of the below given policies: viz. (a) Consolidation and reorganization of existing production facilities; (b) Changing the product mix (thereby changing the quality of the product) and changing the policy relating to customer services and pricing. (c) Trimming employment through attrition; Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 12 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 (d) Phasing out employees in turn and reduction on spending on research and development, new plants and equipments, etc., so long as there is a need toredeem the fresh acquired debts; (e) Extraction and implementation of better terms from various suppliers. However, while undertaking the above stated restructuring activities due attention should be given for the approval of genuine capital expenditure programs for the growth of the firm, otherwise, the long term growth of the firm would hamper. 4th stage: Reverse leveraged buyouts: Under this stage, the investor group may take the company to public again, if the already restructured company emerges stronger and the goals set by the LBO groups have already been achieved. This is known as the process of 'Reverse LBO' or the process of 'Going Public', where the process it effected through public equity offerings. The sole purpose of this exercise is to create liquidity for existing shareholders. This type of reverse LBO is executed mostly by ex-post successful LBO companies.

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209

Q4) What are the cultural aspects involved in a merger. Give sufficient examples? Answer:
The value chains of the acquirer and the acquired, need to be integrated in order to achieve the value creation objectives of the acquirer. This integration process has three dimensions: the technical, political and cultural. The technical integration is similar to the capability transfer discussed above. The integration of social interaction and political relationships represents the informal processes and systems which influence peoples ability and motivation to perform. At the time of integration, the acquirer should have regard to these political relationships, if acquired employees are not to feel unfairly treated. An important aspect of integration is the cultural integration of the acquiring and acquired firms. The culture of an organization is embodied in its collective value systems, beliefs, norms, ideologies myths and rituals. They can motivate people and can become valuable sources of efficiency and effectiveness. The following are the illustrative organizational diverse cultures which may have to be integrated during post-merger period: Strong top leadership versus Team approach Management by formal paper work versus management by wandering around Individual decision versus group consensus decision Rapid evaluation based on performance versus Long term relationship based on loyalty Rapid feedback for changes versus formal bureaucratic rules and procedures Narrow career path versus movement through many areas Risk taking encouraged versus one mistake you are out Risky activities versus low risk activities Narrow responsibility arrangement versus. Everyone in this company is salesman (or cost controller, or product quality improver etc.)

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Learn from customer versus. We know what is best for the customer The above illustrative culture may provide basis for the classification of organizational culture. There are four different types of organizational culture as mentioned below: Power - The main characteristics are: essentially autocratic and suppressive of challenge; emphasis on individual rather than group decision making Role - The important features are: bureaucratic and hierarchical; emphasis on formalrules and procedures; values fast, efficient and standardized culture service Task/achievement - The main characteristics are: emphasis on team commitment; task determines organization of work; flexibility and worker autonomy; needs creative environment. Person/support - The important features are: emphasis on equality; seeks to nurture personal development of individual members Poor cultural fit or incompatibility is likely to result in considerable fragmentation, uncertainty and cultural ambiguity, which may be experienced as stressful by organizational members. Such stressful experience may lead to their loss of morale, loss of commitment, confusion and hopelessness and may have a dysfunctional impact on organizational performance. Mergers between certain types can be disastrous. Differences in culture may lead to polarization, negative evaluation of counterparts, anxiety and ethnocentrism between top management teams of the acquired and acquiring firms. In assessing the advisability of an acquisition, the acquirer must consider cultural risk in addition to strategic issues. The differences between the national and the organizational Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 15 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 culture influence the cross-border acquisition integration. Thus, merging firms must consciously and proactively seek to transform the cultures of their organizations. Cultural compatibility is one of the most significant determinants of a successful M&A transaction. Acknowledging whether cultural compatibility can exist should be a factor in determining whether to pursue a given deal. Integration can never be attaining and growth strategies never realized if two companies are worlds apart culturally. This alignment of cultures can be achieved through information sharing, emphasizing similarities and mitigating dissimilarities through effective

communication. Organizational culture has been identified by some analysts as a key determinant of the outcomes achieved as a result of Daimler-Benz's acquisition of Chrysler Corporation. In speaking to risks associated with this acquisition, one analyst suggested that "when it comes to downside risks, the greatest is certainly culture. Beyond the fact of both being carmakers, the two companies differ in just about everything: language, markets, work traditions and governance. And in the executive suite, how will Chrysler's sky-high American salaries and stock options fit with the German structure of employee representation and a supervisory board?" However, a position articulated by Jurgen Schrempp, the chairman of Daimler-Benz, in a discussion of his firm's acquisition of Chrysler indicated an awareness of culture as a key component of organizational fit and the acquisition's success. In Schrempp's words, "We are set to build a truly global culture." Robert Eaton, Chrysler's former chairman, supported this intention by observing that "this is precisely one of the reasons we immediately agreed to run the business initially together. We both believe that integrating and merging cultures is possibly the greatest art of management." Thus, there appears to be a commitment between the top executives

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 of the acquiring and acquired firm to take definitive actions to prevent organizational culture from having a negative effect on the acquisition. Acknowledging whether cultural compatibility can exist should be a factor in determining whether to pursue a given deal. Integration can never be attaining and growth strategies never realized if two companies are worlds apart culturally. Organizational culture has been identified by some analysts as a key determinant of the outcomes achieved. Integrating and merging cultures is possibly the greatest art of management. In some countries, the host government provides strong incentives to foreign firms to use joint ventures as a mode of entry into their markets. Learning is another objective behind many international joint ventures. By partnering with local companies instead of entering a market on their own, foreign firms can more quickly develop their ability to operate effectively in the host country.

Q5) Study the recent merger that you have read about and discuss the synergies that resulted from the merger? Answer:
Synergy is the additional value that is generated by the combination of two or more than two firms creating opportunities that would not be available to the firms independently. There are two main types of synergy: 1.Operating synergy 2.Financial synergy Operating Synergy Operating synergies are those synergies that allow firms to increase their operating income, increase growth or both. We would categorize operating synergies into four types: Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 17 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209

1.Economies of scale that may arise from the merger, allowing the combined firm to become more costefficient and profitable. Economics of scales can be seen in mergers of firms in the same business For example : two banks combining together to create alarger bank. Merger of HDFC bank with Centurian bank of Punjab can be taken as an example of cost reducing operating synergy. Both the banks after combination can expect to cut costs considerably on account of sharing of their resources and thus avoiding duplication of facilities available. 2.Greater pricing power from reduced competition and higher market share, which should result in higher margins and operating income. This synergy is also more likely to show up in mergers of firms which are in the same line of business and should be more likely to yield benefits when there are relatively few firms in the business. When there are more firms in the industry ability of firms to exercise relatively higher price reduces and in such a situation the synergy does not seem to work as desired. An example of limiting competition to increase pricing power is the acquisition of universal luggage by Blow Plast. The two companies were in the same line of business and were in direct competition with each other leading to a severe price war and increased marketing costs. After the acquisition blow past acquired a strong hold on the market and operated under near monopoly situation. Another example is the acquisition of Tomco by Hindustan Lever. 3.Combination of different functional strengths, combination of different functional strengths may enhance the revenues of each merger partner thereby enabling each company to expand its revenues. The phenomenon can be understood in cases where one company with an established brand name lends its reputation to a company with upcoming product line or a company. A company with strong distribution network merges with a firm that has products of great potential but is unable to reach the market before its competitors can do so. In other words the two companies should get the advantage of the combination of their complimentary functional strengths. 4.Higher growth in new or existing markets, arising from the combination of the two firms. This would be case when a US consumer products firm acquires an emerging market firm, with an established distribution network and brand name recognition, and uses these strengths to increase sales of its products. Operating synergies can Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 18 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 affect margins and growth, and through these the value of the firms involved in the merger or acquisition. Synergy results from complementary activities. This can be understood with the following example Example: Consider a situation where there are two firms A and B. Firm A is having substantial amount of financial resources (having enough surplus cash that can be invested somewhere) while firm B is having profitable investment opportunities ( but is lacking surplus cash). If A and B combine with each other both can utilize each other strengths, for example here A can invest its resource in the opportunities available to B. note that this can happen only when the two firms are combined with each other or in other words they must act in a way as if they are one. Financial Synergy With financial synergies, the payoff can take the form of either higher cash flows or a lower cost of capital (discount rate). Included are the following: A combination of a firm with excess cash, or cash slack, (and limited project opportunities) and a firm with high-return projects (and limited cash) can yield payoff in terms of higher value for the combined firm. The increase in value comes from the projects that were taken with the excess cash that otherwise would not have been taken. This synergy is likely to show up most often when large firms acquire smaller firms, or when publicly traded firms acquire private businesses. Debt capacity can increase, because when two firms combine, their earnings and cash flows may become more stable and predictable. This, in turn, allows them to borrow more than they could have as individual entities, which creates tax benefit for the combined firm. This tax benefit can either be shown as higher cash flows, or take the form of a lower cost of capital for the combined firm. Tax benefits can arise either from the acquisition taking advantage of tax laws or from the use of net operating losses to shelter income. Thus, a profitable firm that acquires a money-losing firm may be able to use the net operating losses of the latter to reduce its tax burden. Alternatively, a firm that is able to increase its depreciation charges after an acquisition will save in taxes, and increase its value. Clearly, there is potential for synergy in many mergers. The more important issues are whether that synergy can be valued and, if so, how to value it. This result Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 19 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 has to be interpreted with caution, however, since the increase in the value of the combined firm after a merger is also consistent with a number of other hypotheses explaining acquisitions, including under valuation and a change in corporate control. It is thus a weak test of the synergy hypothesis. The existence of synergy generally implies that the combined firm will become more profitable or grow at a faster rate after the merger than will the firms operating separately. A stronger test of synergy is to evaluate whether merged firms improve their performance (profitability and growth) relative to their competitors, after takeovers. On this test, as we show later in this chapter, many mergers fail.

Q6) What are the motives for a joint venture, explain with an example of a joint venture? Answer:
Joint ventures are new enterprises owned by two or more participants. They are typically formed for special purposes for a limited duration. It is a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration. Each of the venture partners continues to exist as a separate firm, and the joint venture represents a new business enterprise. It is a contract to work together for a period of time each participant expects to gain from the activity but also must make a contribution. For example: GM-Toyota JV: GM hoped to gain new experience in the management techniques of the Japanese in building high-quality, low-cost compact & subcompact cars. Whereas, Toyota was seeking to learn from the management traditions that had made GE the no. 1 auto producer in the world and In addition to learn how to operate an auto company in the environment under the conditions in the US, dealing with contractors, suppliers, and workers. DCM group and Daewoo motors entered in to JV to form DCM DAEWOO Ltd. to manufacture automobiles in India. Characteristics of Joint Venture Some of the key features of a JV are: y JVs are typically not a passive investment. Generally the parties need to contribute skills as well as money.

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 JVs are typically for a single business, development or project rather than a long term relationship between the co-ventures. JVs usually are not the major activity of the parties concerned. If they're individuals they'll have day jobs. In the business word they'll have a core business to which the JV is an adjunct typically. The JV is a collaborative extension of their commercial activities. The association between the participants is almost invariably regulated by a written agreement called a Joint Venture Agreement (JVA).

y y

These characteristics will be present in all joint venture relationships regardless of the structure the parties adopt. Rational for Joint Ventures Joint ventures may involve companies in one or more countries. International joint ventures in particular are becoming more popular, especially in capital-intensive industries such as oil and gas exploration, mineral extraction, and metals processing. The basic reason is simple: to save money. For example, just to start a mining operation in the United States in 1984, a company would have had to spend one to two billion dollars. Few companies then (or now) could finance such an expenditure on their own, so joint ventures became more attractive as a way to share risks and costs and create scale economies. Given below are the key rational behind the joint ventures: To augment insufficient financial or technical ability to enter a particular line or business. To share technology & generic management skills in organization, planning & control. To diversify risk To obtain distribution channels or raw materials supply To achieve economies of scale To extend activities with smaller investment than if done independently To take advantage of favorable tax treatment or political incentives (particularly in foreign ventures). Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 21 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 The planning stages essential to the formation of a joint venture are outlined below. 1. Identifying objectives At the outset of every proposed joint venture, it is necessary to have an understanding of the basic objectives of the proposed enterprise. This includes identification of the nature and scope of the proposed undertaking, as well as the company's expectations and goals. For example, if a company is seeking a shortterm arrangement to measure the potential market for a product in a foreign country, a licensing or straightforward contractual arrangement might be preferable to a joint venture, which generally contemplates a longer term and more substantial commitment. 2. Selecting a partner If a joint venture is deemed desirable, one of the first considerations is the selection of a compatible partner. A concern may initially seek a co-venturer of equal business stature and with comparable corporate policies, philosophies, and financial resources. Through the process of active negotiation, involving business people as well as lawyers, the JVPs should determine whether their objectives are compatible. This process may be difficult, but it is important, particularly in the context of multinational joint ventures, given the cultural, linguistic, political, and social differences between the parties. Similarly, there may be legal, accounting, and tax differences between the countries of the JVPs. Since all of these differences may give rise to misunderstandings, they must be reconciled. 3. Choosing the business form The next step is to choose the basic structure of the business venture. A variety of complex legal and practical considerations are involved at this stage. It is necessary to identify the respective contributions of the parties and the proposed financing arrangements in order to measure the compatibility of the potential JVPs and to determine the appropriate organizational form. Frequently, one JVP looks for a capital infusion and, in return, shares its technology expertise, and know-how. 4. Identifying legal problems At the beginning of the process, counsel must identify and resolve major legal issues and potential problem areas, including governmental regulatory matters. 5. Identifying conflicts between partners Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 22 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 It is also important to identify potential areas of conflict between the JVPs so that they can be reconciled prior to making an irrevocable commitment. For example, the parties may have to deal with differing tax objectives resulting from fundamentally different business goals or, more commonly, from different constraints of the tax laws and accounting practices of the home country. Early recognition of these issues may allow the parties sufficient flexibility to structure the joint venture to avoid these problems. 6. Drafting the joint venture agreement Finally, after the goals, structure, and legal issues have been identified, it is necessary to draft the joint venture agreement. As will be seen in later chapters of this book, international joint ventures often involve unique features, and careful draftsman ship is required. As there are good business and accounting reasons to create a joint venture with a company that has complementary capabilities and resources, such as distribution channels, technology, or finance, joint ventures are becoming an increasingly common way for companies to form strategic alliances. In a joint venture, two or more parent companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control. Broadly, the important reasons for forming a joint venture can be presented below: Internal Reasons to Form a JV Spreading Costs: You and a JV partner can share costs associated with marketing, product development, and other expenses, reducing your financial burden. Opening Access to Financial Resources: Together you and a JV partner might have better credit or more assets to access bigger resources for loans and grants than you could obtain on your own. Connection to Technological Resources: You might want access to technological resources you couldn't afford on your own, or vice versa. Sharing innovative and proprietary technology can improve products, as well as your own understanding of technological processes.

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MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Improving Access to New Markets: You and a JV partner can combine customer contacts and together even form a joint product that accesses new markets. Help Economies of Scale: Together you and a JV partner can develop products or services that reduce total overall production expenses. Bring your product to market cheaper where the customer can enjoy the cost savings. External Reasons to Form a JV Develop Stronger Innovative Product: Together you and a JV partner may be able to share ideas to develop a product that is more competitive in your industry. Improve Speed to Market: With shared access to financial, technological, and distribution resources, you and a JV partner can get your joint product to market faster and more efficiently. Strategic Move Against Competition: A JV may be able to better compete against another industry leader through the combination of markets, technology, and innovation. Strategic Reasons Synergistic Reasons: You may find a JV partner with whom you can create synergy, which produces a greater result together than doing it on your own. Share and Improve Technology and Skills: Two innovative companies can share technology to improve upon each other's ideas and skills. Diversification - There could be many diversification reasons access to diverse markets, development of diverse products, diversifies the innovative working force, etc. Don't let a JV opportunity pass you by because you don't think it will fit in with your own small business. Small and big companies alike can benefit from the reasons listed above. Analyze how your company can benefit internally, externally, and strategically, and then find a joint venture partner that will fit with your needs.

Kamlesh Sardar Kapoor

Roll No. 531010767

Center Code: 2519 Page 24 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 In February 1983, General Motors Corporation and Toyota Motor Company of Japan announced a joint venture plan to co-produce a small, front wheel drive auto in a plant vacated last year by GM in Fremont, California. According to the agreement, the two companies will produce a car comprised of a Japanese engine and trans mission and a U.S. body. The name of the new car, which.wil1 be marketed by Chevrolet, has not been decided. It will not replace any existing GM or Toyota car. The two companies together plan to invest $ 300 million in the project, including the $130 million plant that GM still owns. According to GM and Toyota projections, the project will create 12,000 new jobs in the U.S.--3,000 in the production process and 9,000 in supplier and related industries spre a d throughout the U.S Fremont, California, is enthusiastic about 'the venture. Pub lic opinion in California and the rest of U.S. is also highly favorable. The United Auto Workers support the project, even though Toyota is resisting hiring on the basis of seniority UAW workers laid off after the GM plant closed and the joint venture company will utilize Toyota production techniques that include I1versatile1l workers (who perform two or more jobs a practice not allowed in UAW plants in the U.S. Apparently only Chrysler and Ford oppose the project, charging that it violates antitrust legislation. They also contend that it will cost*more jobs than it creates, since the car built by the new plant will compete with other U.S. made cars. Federal Trade Commission is expected to rule on the anti-trust issue in September The 2 The project appears to offer important benefits It will give the U.S. auto industry, as well as the United Auto Workers some direct lessons in Japanese management techniques, labor management relations, and technology. It also promises to defuse the domestic content movement and efforts to continue % voluntary lf quotas 0.n Japanese cars=-both of which would be detrimental to free trade and the competitiveness of the U.S. auto industry. Hence, t he criticisms seem unjust. Not only do Chrysler and Ford seem to be afraid of competition, but the charges of anti trust violations seem to have little basis in fact. Indeed, the joint venture will excite competition It also promises to help the American consumer by putting another quality, economical, and clean car in the marketplace. SITUATION IN THE U.S. AUTO INDUSTRY The Toyota/GM joint venture must be seen in the context of a still seriously troub1ed.U.S. auto industry. During 1980-1982 several hundred thousand, nearly one quarter of U.S. auto workers were laid off-50,000 by Chrysler in 1981 alone U.S. auto manufacturing plants operated at under 60 percent capacity. At this same time, foreign auto companies captured 30 per cent Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 25 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 of the U.S. market During the slump Recovery has changed this situation only slightly. Lower interest rates and a stronger economy have helped. But the U.S auto industry is not back on its feet. Few workers laid off are back working. Closed plants remain closed. And the auto recovery would not be what it is were it not for the fact that there is still an import quota on Japanese cars In fact, the main problem for U.S. auto companies is competition from Japan. Japanese cars account for around 27 percentage points buyers originally took to Japanese cars because of their lower price. Then it was fuel economy. Now it is quality or value purchased. Independent testing services such as Consumer Reports give virtually all Japanese cars sold in the U.S. excellent ratings in terms of quality: frequency of repair, resale value, and integrity of body. No American car gets an excellent rating. Studies indicate that Japanese manufacturers can make the same car as U.S. companies for $1,000 to $1,500 less. Other estimates range as high as $ 2,500 Of the 30 percent penetration of the U.S. market American Sources of the Trouble There are three reasons for the higher cost and lower quality of American cars: labor, government and management. Of the $1,000 to $1,$00 savings in production that Japanese manufacturers have over American companies, one half is the cost of labor. This is not because labor is cheaper in Japan. In the auto industry however, American labor is more expensive-more than half again 3 Japanese labor, In short, labor in the U. S. auto industry is over paid. In 1981, auto workers were paid 70 percent above the average of nonagricultural industries. Moreover, Japanese auto manufacturing companies use less labor. Japanese plants are located more rationally, closer to raw material supplies and markets U.S. companies are located inland, requir ing more expensive land transport. New companies are located for reasons of reducing unemployment or hiring minorities. The U.S Japanese unions do not oppose automation or robotization. Japan has two to three times more robots in manufacturing than the U.S Japanese companies stress quality control, which they maintain in Japan in large part through excellent labor-management relations. This is much more difficult in the U.S And unlike Also crucial is the quality of labor. Government red tape is also a serious problem. Chrysler argued that its financial crisis could be explained totally in terms of the cost incurred by the company to comply with government regulations, pay taxes, and Social Security. All American Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 26 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 auto companies note that exporting is cumbersome and that it is more difficult for them to export than for American distributors of Japanese au t o companies to import. While the Japanese govern ment does not subsidize the exports of Japanese cars, as some con tend, it helps business rather than impeding or harassing it and generally gives greater assistance to large, dynamic exporting companies than to small, non exporting firms U.S. auto companies have been forced to diversify to survive. They have also been impelled to invest in foreign auto companies and import cars from Japan or build manufacturing plants abroad to remain competitive. Hence American companies are unable to compete--in the U.S or abroad. In 1979, fewer than 200,000 American made cars were sold overseas (ironically, nearly ten percent of them in Japan). Only Saudi Arabia and Kuwait purchase more U.S. made cars than cars manufacture red elsewhere U.S. auto companies based abroad are doing well, but are hurt by the bad image of U.S. cars at home and the financial condition of the parent company. Since 1979 America's share of the world market has dwindled. U.S. companies appear to have no hope of getting a meaningful slice of the 1980s world market, estimated at.41 million units of passenger cars alone. Meanwhile, Japanese companies are daily expanding in the inter- national market. Current Solutions One of the solutions frequently cited to deal with the U.S market side of the problem is a local or domestic content bill 4 requiring that all automobiles sold in the U.S. contain a certain percentage of American-made parts. Such a bill was sponsored by Representative John Dingell (D-MI) a nd recently passed the House It is doubtful, however, whether the bill can muster sufficient support to pass the Senate or to override an almost certain presidential veto. Such a bill would protect the U.S. auto industry in a way The bill would This kind of protection that would ultimately make it non-competitive hurt the consumer, and it would, no doubt, have an adverse effect upon both the energy and the environment ism would destroy any hope of American-made cars competing in the international marketpl ace. Another alternative is a quota--voluntary or otherwise In fact, a voluntary quota is now in effect.

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Center Code: 2519 Page 27 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 International Trade and Industry (MITI) reluctantly agreed in April 1980 to a quota of 1,680,000 units a year. Quotas generally do not work and this one is no exception. Limiting the number of autos that Japanese manufacturers can export to the U.S. prompted Japanese companies to send a greater percentage of larger, more expensive cars to the U.S. Thus, Japan proved that not even large American cars are competitive. Also, Japanese companies now are making a larger share of the profits in the U.S with the same volume--profits U.S. companies need for investment in research and new machines. In addition, Japanese cars are put ting still more U.S. workers out of a job because more labor goes into bigger, more luxurious cars. Finally, since Japanese com panies are exporting fewer smaller cars to the U.S energy and environmental problems are made more acute Japan's Ministry of Continuing quotas will interfer e with the market forces and protect U.S. auto companies at a time when they should not be and cannot be, realistically protected. Moreover when President Carter announced the oluntary" quota on autos, he indicated that it was not binding. The new MITI hea d recently said that he sees no reason to continue it for a fourth year. If sales of Japanese cars are restricted and U.S. automakers do not produce a better product--which, history teaches, they will not do if protected South Korea, Taiwan, and other countries will simply enter the market. In the meantime, U.S. agricultural and other industries exporting to Japan would suffer-punished even though they are efficient THE TOYOTA-GM VENTURE AS A LEARNING EXPERIENCE Two Japanese companies--Honda and Nissan (Datsun)--have al ready set up manufacturing operation's in the U.S. a plant operating in Ohio; the latter is completing assembly works for smal1,trucks in Tennessee. Both are basically new operations. Both are nonunion managers and could become models for U.S . companies to follow The former has Honda and Nissan will be run by Japanese 5 Many of the workers in these plants are being sent to Japan for training in Japanese management techniques So far, both operations see considerable hope of success. On the other hand, they have created some problems. Japanese management techniques cannot easily be adopted in the U.S. The plants are seen as anti-union, taking advantage of cheap, labor and beneficial work laws in certain sections of the U.S. Finally the plants are located where they are because of special advantages offered by the state governments involved. Toyota long has resisted setting up operations in the U.S Volkswagen of America for fear of sullying its reputation for quality products--general ly the best among cars sold in the U.S has experienced this problem, though not so noticeably because of a parallel deterioration in quality at their German plants. Honda now seems to be facing the same situation. Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 28 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Toyota rejected a deal with Ford some months ago and why, in the case of the proposed joint venture agreement with GM, Toyota is not putting its name on the final product motivation. is coping with the threat of domestic content legislation and extended quotas I This explains why In short, Toyota's The de a l offers some important advantages to the U.S. auto industry in terms of learning how to build a good car--advantages that the Honda and Nissan plants do not offer will be unionized from the outset make it a union shopped the fact that they must make some concessions--mostly in terms of maintaining labor discipline to hold up quality control they have basically agreed to the new plant rehiring laid-off workers on the basis of work commitment and quality rather than seniority They have also promised stiffer work rules and will allow management to discipline workers who consistently are late slothful or impede productivity and quality management-or the union will take care of these problems itself First, the plant There will be no fighting to The United Auto Workers have already accept Thus The plant will import from Japan parts which Toyota produces more cheaply and where quality is the highest-engines and trans missions. Robots will take up some of the slack in keeping quality in body integrity and evenness in fitting parts together. The plant will be located rationally near the market, rather than close to the steel industry, or in Detroit, where the U.S. auto industry has been by tradition. Some parts of the car will come from either Japan or the U.S. dep ending on price and quality thereby fostering keen competition in parts manufacturing. Only one type of car will be produced in the plant: a front wheel drive, subcompact car of engines for its front wheel subcompacts, including. ceramic engines which will be much lighter, cheaper to build, and capable of increased fuel efficiency and less pollution, future improvements can probably be made in the auto quickly and cheaply Since Toyota is working on new types 6 Toyota will pick the chief operating officer, since he will be responsible for the machines used in the assembly process and the engineering of the car GM will occupy half of the Board of Directors seats, since it will provide half the investment, and will market the car through existing Chevrolet dealerships tion in the auto industry, the agreement is limited to the production of one type of vehicle, at one facility. Also, the agreement has a termination date--19 95. The number of cars produced annually will not exceed the 200,000 now planned. Future expansion will be up to General Motors To ensure that the joint venture does not .endanger competition CRITICISMS OF THE PROJECT Nevertheless, both Chrysler and Ford have assailed the agreement as, in the words .of Chrysler's Lee Iacocca, ti fundamentally tition in the U.S. car market since it will involve a "mergerii of the world's number one and number three auto makers In other words, Chrysler and Ford are accusing Toyota and GM of anti-trust violations, in spite of the Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 29 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 precaution o ns taken and the severe limits in the agreement. Iacocca also contends that the venture will cost the U.S. two jobs for each one it will provide I bad." Both companies feel that the agreement will threaten compe- I These criticisms seem shallow. First, since 1970, Chrysler, has owned 15 percent of Mitsubishi Motors of Japan and has exclusive rights to market specific Mitsubishi autos in the U.S. Mitsubishi Motors is connected'to a parent company which is one of Japan's largest combines and, in terms of both assets and sales is much larger than Toyota. The ties go further: Mitsubishi supplies Chrysler engines for its K cars,. has purchased outright Chrysler Australia, and is financing the exports of its cars to Chrysler in the U.S. to help Chrysler through its financial crisis. Second, Ford, in the 1970s, purchased one-fourth of the stock of Mazda-now Japanis third largest auto maker. Ford still owns stock and is the beneficiary of huge increases in the stock prices of the company--helping, of course, to keep Ford afloat during hard times. Third, the argument that the project will cost as many jobs as it will create is probably not credible. The car will compete with foreign cars more than U.S. cars. This is particularly true since it will find its best mark et in California where the percen tage of foreign cars, especially Japanese cars, is considerably higher than the national average. The proportion of foreign cars that are subcompacts there is also greater. This is further evidence that it will compete w i th imported cars, including the Japanese imports sold by Chrysler and with the Chrysler K Car, which is essentially a mixed breed--a U.S. car with Mitsubishi or Volkswagen engine (like the yet to be named Toyota-GM car is unlikely, moreover, that United. Auto Workers leaders would have approved the deal if it were to cost American jobs It 7 The effect on unemployment in the U.S. is, in fact difficult' to predict at this time. The new facility will hire workers from the GM Fremont plant and some from a Ford plant also closed in California this year. Parts companies nearby and elsewhere in the U.S:will benefit. Even more employment will be created if the experience is a good one for Toyota and it decides to build parts plants in the U.S as it heretofore has be e n unwilling to do It now is considering such a move The venture also offers GM two advantages Chrysler and Ford have not mentioned: saving perhaps 2 billion in research and development costs (in replacing the Chevette) and an advantage in meeting stiffer federal mileage and pollution regulations that go into, effect at about the time the new GM-Toyota car will begin sales. It'will, if successful, help GM compete in selling small cars. Chrysler and Ford have conveniently not noted that they proportionally have a larger share of the small car market and that they are taking advantage of foreign connections to do so.

Kamlesh Sardar Kapoor

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Center Code: 2519 Page 30 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 Ford also has more significant operations abroad than is generally realized--making it the number two auto company in the world (considering only domestic operations it is smaller than both Toyota or Nissan). CONCLUSION The Toyota-GM 'venture represents free enterprise--not mono poly. There is no evidence to indicate that the U.S. government or the American public should be concerned that the two companies would or could corner the market. The scope of the joint venture is limited to one factory, to one car, and a fixed time of operation. Toyota decided on the undertaking for public relations reasons. The milieu was one of bad press in the U.S. toward Japan and specifically toward Toyota--the only large Japanese auto company without a U.S. operation. Senator Donald Riegle (D-MI recently charged publicly that Japan has Ilarrogantly cost millions of Americans their jobsfr and "has broken up millions of American families.Il Other congressmen in recent months have made reference to aIl yellow people and IrJapsIt in the context of discussing unemployment in the auto industry A Chinese student recently was murdered in Detroit by unemployed auto workers who thought he was Japanese. Domestic content legislation in the U.S. threatens Toyota. So do quotas the venture to GM at a later date up with GM and co-producing cars could sully their reputation for quality in the U.S. and throughout the world ing of cornering the global car market in cooperation with GM. Toyota can do better on its own Toyota officials have said they hope to sell their part of They still fear that linking Nor is Toyota think GM was motivated by a need for Japanese technology--not in ass embling cars, but in management techniques (especially organi8 zation) and in management-labor relations. The deal may also pro vide GM cheap access to future Toyota developments in building small, fuel efficient, and clean engines. Japan is ahead of the U .S. industry in this area And it will provide GM with investment capital to reopen a factory it closed a number of months ago. In auto sales in the U.S. and elsewhere GM will remain competitive with Toyota--as best it can. The United Auto Workers was motiv ated by an opportunity to put American worker's back to work and to save the auto industry in the U.S. If the,Toyota-GM joint venture were to cost more jobs in the U.S. than it would create overall, UAW would hardly support the project. Union leaders also realize that the U.S. auto indus try is in dire straits, despite the current recovery. UAW is wil ling to make concessions; in fact, it realizes it must. And it would prefer to do this in a project where the union is welcome rather than force itself into a wholly Japanese operation (such as Honda or Nissan).

Kamlesh Sardar Kapoor

Roll No. 531010767

Center Code: 2519 Page 31 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 The transfer of organizational technology from Japan to .the U.S. may establish a useful precedent. After World War I1 Japan obtained valuable technology from the U.S.--making possible its reindustrial ization and post-war economic success leaders favor providing U.S. companies with new Japanese techno logy from a number of Japanese companies and business leaders. If the transfer works in this joint venture, it will pave the way for much more Japanese B u tthey are unsure how they can do this and face opposition The Toyota-GM joint venture should not be regarded as violat Since the auto ing anti-trust guidelines in the U.S. simply.because two large companies are cooperating It should be judged by whether i t fosters or stifles competition in the auto market industry has become so international, the Toyota-GM deal must be seen in its global context ing in a market where it is not doing well and where, in spite of its size, it is behind many other competitors. The charges of anti-trust violations seem to stem much more from the fear of competition by Ford and Chrysler than from con cerns that monopoly will result. Free cornpetition is threatened by domestic content legislation and by quotas--which seem more lik ely if this project fails help avoid both GM seems to be getting help in compet The Toyota-GM venture will no doubt History tells us that government legislation which blocks the movement of goods and services .and technology has. fostered economic depress ion, the decline of innovation cultural stagna tion, and war. Civilization's advances have taken place in an en vironment of openness and interchange. This has sometimes been painful. It was for Japan after World War 11; but look at the results. It is now painful for the U.S but consider the alter- natives. 9 The Toyota-GM venture also carries serious implications for U.S.-Japanese relations to create more unemployment in the U.S its convictions regarding free trade and competition the U.S. government want s to avoid a wave of anti-Japanese .feelings in the U.S.--being fueled now by unions and politicians who are looking for votes and seek a scapegoat for the unemployment pro blem in the U.S. It must be remembered that Japan is America's number one ally, not just in Asia but anywhere number one overseas trading partner. It is the leading purchaser of American farm products and a number of other categories of U.S. goods. The trade balance in the 1950s and early 1960s favored the U.S. Now, only because of a dec l ine in U.S. productivity, it favors Japan The Japanese government does 'not want Yet it cannot abandon Similarly Japan is America's Ford and Chrysler have called for congressional hearings to criticize the venture public opinion against the project by por t raying the joint venture as a merger. All of this is designed to influence the Federal Trade Commission's vote. The FTC can delay the project (having already done so for several months issue a complaint, or sue Toyota and GM. Or it can approve the project sion is in the American interest and in the interest of free trade American competitiveness, and U.S.-Japanese relations They Kamlesh Sardar Kapoor Roll No. 531010767 Center Code: 2519 Page 32 of 33

MF0011- Mergers and Acquisitions Assignment -1, MBA Semester III Book ID: B1209 have sought to use the press to turn The latter deci John F. Copper Director Asian Studies Center

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Center Code: 2519 Page 33 of 33