Module 4

Merger process
 Steps in Merger

1. Screening and investigation of merger

proposal:

When there is an intention of acquisition or merger,

the primary step is that of screening. The motives
and the needs are to be adjusted against three
strategic criteria i.e., business fit, mgt and financial
strength.

2. Negotiation stage:
• It’s the stage in which the bargain is made in order
to secure the highest price by the seller and the
acquirer keep to limit the price of the bid.
3. Approval of proposal by Board of Directors-
Deciding upon the considerations of the deal and terms of payments,
the proposal will be put for the Board of Director’s approval.

4. Approval of share holders-

As per the provisions of the Companies Act 1956 the shareholders of
both seller and the acquirer companies hold meeting under the
directions of the National Company Law Tribunal and consider the
scheme of amalgamation. A separate meeting for both preference
and equity shareholder is convened for this purpose.

5. Approval of creditors/financial institutions/banks-

Approvals from all these are to be sought for as per the respective
agreement with each of them and their interest are considered in
drawing up the scheme of merger.
 6. Tribunal’s approval:-
• Is required for confirming the scheme of
amalgamation.
• The Tribunal shall issue orders for winding up
of the amalgamating company without
dissolution on receipt of the reports from the
official liquidator and Regional Director that
the affairs of the amalgamating company
have not been conducted in a manner
prejudicial to the interest of its members or to
public interest.
7. Approval of Central Government:-
is required on the recommendation made by
the specified authority under Sec 72A of the
Income Tax Act, if applicable
8 Integration stage:
the structural and cultural aspects of the two
organizations, if carefully integrated in the new
organization, will lead to successful merger
and ensure that expected benefits of the
merger are realized.
 MERGER PROCESS: FIVE STAGE MODEL

Post-Acquisition Corporate
Audit strategy

Post-Acquisition
Integration Organizing for
Acquisitions

Deal
Structuring

STAGE 3
 1. CORPORATE STRATEGY DEVELOPMENT

• Business strategy is concerned with ways of achieving,

maintaining, or enhancing competitive advantage in
product markets.

• Corporate strategy is concerned with ways of optimizing

the portfolios of business that a firm currently owns &
with how this portfolio can be changed to serve the
interests of the corporations stakeholders.

• M & A is one such activity which achieves the objectives

of both corporate and business strategies.
 2. ORGANISING FOR ACQUISITION

• One of the major reasons for the observed failure of

many acquisitions may be that firms lack the
organization of resources and capabilities for making
acquisitions.
• It is also likely that the acquisition decision-making
processes within firms are far from the models of
economic rationality that one may assume.
• Success for effective acquisition integration is
determined at least partly by the thoroughness, clarity
and forethought with which the value creation logic in
blueprinted at the acquisition decision stage.
 3. Deal Structuring and Negotiating
• This stage consists of

 Valuing target companies, taking into account how the acquirer plans
to leverage its own assets with those of the targets.

 Choice of advisors to the deal such as investment bankers, lawyers

etc.

 Performing due diligence

 Determining the range of negotiation parameters

 4.Post-Acquisition Integration

This is a very important stage, the objective of which is to

put in place a merged organization that can deliver the
strategic and value expectations that drove the merger
in the first place.
Integration has the characteristics of a change mgt
programme but here three types of change may be
involved:
Change of the target firms
Change of the acquiring firms
Change in the attitude and behavior of both to
accommodate co-existence or fusion of the two firms.
 5. Post Acquisition Audit and Organization Learning

• The importance of organizational learning to

the success of future acquisitions needs much
greater recognition, given the high failure rate
of acquisitions.
• Post merger audit by internal auditors can
be acquisition specific as well as being part of
an annual audit. Internal auditors have a
significant role in ensuring organizational
learning and its dissemination.
 Challenges in M&A
1. Challenges in competitive strategy planning
2. Challenges in organizing for acquisitions
3. Challenges in deal structuring and
negotiation.
4. Challenges in post merger acquisition
integration
5. Challenges in post-acquisition audit and
organizational learning
Due Diligence process
 DUE DILIGENCE PROCESS

SET THE OBJECTIVES

1. Acquire knowledge
2. Acquire market share and brand name
3. Acquire technology, products
4. Acquire a geographical presence
5. Diversification
6. Squeeze out competition
7. Growth
8. Synergy
 THE SELECTION CRITERIA AND
INFORMATION COLLECTION
• Size of revenue, profit and asset of the target
• Management team
• Clearly identifiable market and customer base
• Maturity of the products, services and technology
• Marketing channel
• Market share
• Quality of accounting records
• Expected rate of return
• Intended Investment size
• Expected rate of return and payback period
 EVALUATION AND
STRUCTURING THE OFFER

• Measure historical performance

• Set the valuation
• Preparation of term sheet
 DUE DILIGENCE AND DOCUMENTATION
which includes:

• Investment fit – financial resources to be required

• Strategic fit - management strengths brought with this

merger

• Marketing fit-promotion, brand names, customer mix

• Operating fit –labour force, technology etc

• Management fit- leadership style, strategic thinking

• Financial fit – sales, profitability, return on capital

 Information required to make due
diligence work
• Corporate records
• Financial records
• Tax records
• Regulatory records
• Debt records
• Employment records
• Property records
• Miscellaneous records
 Process of merger integration
Integration of
•Systems
•Processes
•Procedures
•Strategy
•Reporting systems, etc.

Integration of people
 Human resource management issues
during integration

• Changing the BODs

• Choosing the right people for right positions
• Management and workforce redundancy
• Aligning performance evaluation and reward
systems
• Key people retention
 The role of HR in Mergers and Acquisitions

Key conclusions
• HR performance in integration is a key driver
of M&A success
44% of senior executives report that
integration is the greatest source of error in
M&A and that overcoming human capital
challenges is more important to integration
success than any other aspect of integration
 Steps to Build Positive HR Climate

• Articulate a vision for the combined organization.

• Create and communicate transparency in actions.
• Actively build trust and confidence.
• Prepare employees for change.
.

• Focus on training and development for the personnel

to adjust to the new job situation.
 Phase One : Pre Merger
Need for a pre merger analysis – to find the extent of
difference in systems, culture & service conditions.

• To identify the problem areas and preparing a plan of action

for these areas. These could include excess staff,
compensation need for relocation, changes in jobs, difference
in hierarchical levels.

• To make an assessment as to when the differences can be

harmonized – whether some time should be allowed before
changes are introduced or changes should be done
immediately.
 PHASE TWO : After Merger
- STAGE One

• Give people some time for adjustment.

• During this period take up follow-up action to:
– Initiate many goodwill measures
– Communicate well to quell rumors
– Build Trust
– Create a vision / image for the combined firm
• Maintain and improve the level of morale &
motivation of the employees
 PHASE TWO : After Merger
Stage - Two
• Develop and Communicate the Image for the merged entity
• Manage differences in culture
• Manage differences in HR Systems
• Harmonize service conditions
• Harmonize wages & salaries
• Involve employees in decision making
• Train employees to cope up with the changes
• Take steps to retain the best employees
• Recruit and select key people for key positions
 PHASE TWO : After Merger
Stage - Three

• In this stage, attempts are made to create a

homogeneous company with no trace of
erstwhile companies. For this, the leadership
role needs to be redefined into one with a
clear vision for the future. Thus, this stage
seeks to create not a union of multiple
organizations but a single organization with
one culture and one unique way of doing
things.