MERGER

Introduction: An outstanding feature of the liberalised Indian economy has been the rise of mergers and acquisitions. M&As continue to be the preferred option for businesses seeking to grow rapidly and change the rules of the game in their sector. Over the last few years, mergers and acquisitions have become much more important part of Indian landscape as Indian corporations recognised the need to improve their business fundamentals and competitive position, while more and more multinational corporations are looking for ways to enter this growing, dynamic market.

MERGER Concept:
Merge or merger is the technique of risk management in which two or more companies combine for reducing the side-effect of destructive competition.
A decision by two companies to combine all operations, officers, structure, and other functions of business.

MERGER

Concept:
Merger is said to occur when two or more companies combine into one company.
Merger is defined as a transaction involving two or more companies in the exchange of securities & only one company survives.

MERGER
Concept:
In business or economics a merger is a combination of two company into one larger company.

Difference Between Merger & Amalgamation

Mergers and amalgamations are procedures that are undertaken in business circle by two or more companies with a view to increase profits & to gain access to wider markets. The final outcome of both mergers and amalgamations is same that is to have a larger company with more assets and customers, there are technical differences in the two terms.

Difference Between Merger & Amalgamation

MERGER AMALGAMATION

Fusion of two or more entities and it is a process in which the identity of one or more entities is lost (as is often seen when political parties merge). (Or) Two or more smaller companies lose their identities as they fuse into a larger company.

Amalgamation is blending together of two or more business entities in a fashion that both lose their identities & a new separate entity is born. (Or) All combining companies may lose their identities & a new, independent company may be born.

Difference Between Merger & Amalgamation

MERGER AMALGAMATION

The assets and liabilities of a company get vested into the assets and liabilities of another company. Shareholders of both (or more) companies get new The shareholders of the shares allotted that are of a company being merged new company altogether. become shareholders of the larger company (as when two or more smaller banks merge with a larger bank).

MERGER
Objectives/Reasons/Need (in General)

Economies of Large Scale Operation Desire for Diversification Need for Additional Financing Need for Change of Management Managerial Motives Tax Benefits Reduction of Competition Increase in EPS

Merger Economies of Scale

Types of Economies of Scale
Technical economies, when producing the good by using expensive machinery intensively. Managerial economies, specialist managers. Financial economies, at lower rates of interest. by by employing borrowing

Merger Economies of Scale

Types of Economies of Scale
Commercial Economies, by buying materials in bulk.

Marketing Economies, spreading the cost of advertising and promotion. Research & Development Economies, from developing better products.

Merger Reason
Combining Complementary Resources Merging may result in each firm filling in the missing pieces of their firm with pieces from the other firm.
Firm A

Firm B

Merger Reason
Combining Complementary Resources Merging may result in each firm filling in the missing pieces of their firm with pieces from the other firm.
Firm A

Firm B

MERGER

Merging Company
Buying Company

Merged Company
Selling Company

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company

Quick Entry in the Liquidation Strategy: Business:Good source of Merger can be treated as entry into an area which a liquidation strategy from is denied for an merged companys point of organisation under the view. provision for licensing. Quite beneficial specially when the business is Merger can be used as a continuously a losing back door entry in the proposition.

business.

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company Faster Growth Rate:Provide Liquidation Strategy: opportunities for faster growth Provide better realisation than can be ahieved by internal of value of the Co. as sources because it offers compared to other methods advantages in various areas i.e. production, marketing and of disposing assets. distribution, research & development etc. The better Through merger, business utilisation of resources, better can be saved & at the same planning of capital expenditure time & better value can be etc. result in much faster realised. growth rate than what the organisation can achieve itself.

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company Diversification Growth Opportunities: Advantages:Besides rapid Specially when future holds growth, merger provides good but the present might not opportunities for diversification be as promising. in short period. Advantages When the troubles which better use of resources, cannot be overcome by the increased organisational present management, or revival capabilities through increased cannot be taken within the competitive competence, framework of the existing balance portfolio of business, financial & other resources of safety against impacts of the organisation, the existence business cycles and son on. & subsequently growth may be ensured by merger.

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company

Reduction in Competition & Dependence:Merger can be used to reduce competition & dependence. Competition:Horizontal & Concentric MergersOrganisation is in a position to eliminate the competition because it merges the organisation using same marketing channels or technology.

Growth Opportunities: In fact, such type of merger is encouraged by the Govt. & financial institutions which may hold sizable shares in these Cos.
The fates of may sick units have turned through mergers.

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company Reduction in Competition & Imbalanced Growth: Dependence: Distinctive advantages in one Dependence:Vertical field but lack in other fields. Integration-Organisation can Tech people Organisation reduce dependence on others based on technical competence for the supply of raw materials manageable within the present & disposal of its products. capability. Beyond that start Eg.Yarn manufacturing co. will because the present be in a better position to management will analyse dispose off its products if it problems with the framework merges a weaving co. of technology whereas problems may lie somewhere else. Overcome so merger.

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company Tax Advantages:Mergereffective source of tax planning special if merging & merged companies have different tax liabilities. If one of them is tax paying com & other is having accumulated losses, the merger may result into considerable tax savings.

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company
Synergistic Advantages:2+2=5. Marketing Synergy: Both cos. Can use same sales force, sales point, distribution channels, warehousing & advertising. Investment Synergy:Use of same plant, machinery, R&D facilities, better access to capital markets, & better position to negotiate terms for raising funds.

Merger
REASONS FROM THE POINT OF VIEW OF Merging Company Merged Company
Synergistic Advantages:2+2=5. Operating Synergy: Resulting from higher utilisation of common facilities, personnel & Overheads by various products. Management Synergy: Managerial Competence in one business can be utilised in other business.

Merger
Types of Mergers
Horizontal Base Mergers

When two companies are selling same product in same geographical market, they have to face competition. For abolishing competition, they merge with each other. That merger is called horizontal base mergers.

Horizontal Merger
Merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services or products or services which compete directly with each other (for example sugar and artificial sweetness).

Horizontal Merger
Merit Demerit
Result in reduction in Promote monopolistic number of competing trend in the industrial companies in an industry.

sector.

Increase scope economies of scale.

Easier for industry members to collude for Elimination of duplicate monopoly profits.
facilities.

for

Types of Mergers
Vertical Base Mergers When two companies have deep relationship as good buyer and seller, they can create new company for reducing the prices of products and to control over the system of manufacturing because raw material is not supplied by any other company but it is supplied by any one of merged company, so it will be easy to gear up the speed of production without any delay of raw material at minimum cost.

Types of Mergers
Vertical Mergers Vertical Mergers occur between firms in different stages of production operation. Here one of the companies engaged in the manufacture of a particular product & the other is established & expert in marketing or is engaged in production of raw material or ancillary items used by the other company in manufacturing or assembling the final & finished product.

Types of Mergers
Vertical Mergers It may be in the form of Backward or Forward Merger. Backward Merger: Company combines with supplier of raw material. Forward Merger: Company combines with customer.

Vertical Mergers
Merit:
Result in to a smooth & efficient flow of production & distribution of a particular product. Reduction in handling inventory costs.

Demerit:
It may post a risk of monopolistic trend in the industry.

Types of Mergers
Conglomerate Merger: This involves coming together of 2 or more companies engaged in different industries and/or services.

Types of Mergers
Conglomerate Merger
The joining of companies, unrelated products. in completely

A simple example would be, a clothing company, like Aeropostale joining a company that sells jewelry, like Kay Jewelers.

Types of Mergers
Market Base Mergers It is that type of mergers in which two companies join for increasing the sale of product under same brand. Suppose, A company is famous in India and B Co. is famous in US. If both are merged, it will easy to sell product in US and in India. It will also helpful for both companies to succeed in different part of world.

Types of Mergers
Product Base Mergers If two companies deal different products in same geographical area, after that, if they merge, they can make the hub market where customers can buy everything without going any other place.

Methods of Merger/Amalgamation
Scheme of compromise or arrangement. Purchase of Shares. In Public Interest under orders of the Central Govt. Through holding company. Scheme of Winding up. Exchange of shares followed by winding up.

Preliminary Steps in Mergers

Systematic manner from general to more specific. a)Identifying Industries:Set of industries to be selected which meet the strategic conditions outlined by the company for a merger.(Scale of Investment).
b)Selecting Sectors: Acceptable sectors identification (Based on turnover, growth, ROI). More desirable to be selected.

Preliminary Steps in Mergers

c)Choosing Companies:Potential Companies to be looked.(Competitive environment, Strength). 5 to 10% in size of the bidding company is a common rule. d)Comparative Cost & Returns: (i)Consider financial obligations associated with merger based on which potential companies are reduced further on the basis of their likely returns.

Preliminary Steps in Mergers

d)Comparative Cost & Returns: (ii)Companies are listed & compared based on their ROI (Return on Investment). (iii)Future expected returns are also developed on the basis of different market scenarios. (iv)Risk & uncertainities which have impact on variations on returns. (v)Companies to be ranked.

Preliminary Steps in Mergers

e)Short-listing Good Companies: Merger Idea if it increases the overall economic value of Co. To achieve this, it is necessary to identify the companies by its: (i)High Market share (ii)Large Sales Volume, (iii)Good Management System, (iv)Diversified portfolio or its potential, (v)A return on investment above a benchmark.

Preliminary Steps in Mergers

f)Assessing the Suitability: Suitability is to be judged by strategic criteria: (i)Business fit, (ii)Management, (iii)Financial Strength. Once above criteria satisfied Other factors such as dividend track record, earnings, share price movements etc. to be collected. SWOT analysis of both cos. To be carried out. Both benefits & risks to be considered.

Preliminary Steps in Mergers

g)Appropriateness of Timing:(Right Time) (i)Affordability to spare time. (ii)In terms of business cycles etc. h)Negotiation Stage: (i)Proper valuation, (ii)Payment terms, (iii)Exchange ratio of shares,

Preliminary Steps in Mergers

i)Approval of Proposal by Board of Directors (j)Approval of Shareholders (k)Approval of Creditors / Financial Institutions / Banks (l)Approvals of Respective High Court(s). (m)Integration Stage.

Legal Aspects of Merger/Amalgamation