Meaning

Process – M& A
• The process involving merger and acquisition is important as it can dictate the benefits derived from the
deal. The process involves the following steps:
• Preliminary Valuation
This step primarily focuses on the business assessment of the target company. Not only the latest
financials of the target company are scrutinized, its expected market value in future is also calculated. This
close analysis includes the company’s products, capital requirements, brand value, organizational
structure, etc.
• Proposal Phase
Once the target company’s business performance is analyzed and reviewed, the proposal for the business
transaction is given. It could be either a merger or an acquisition. Generally, the mode of giving a proposal
is an issuance of a non-binding offer document.
• Planning for Exit
After the proposal is given to the target company and it takes the offer, the target company then engages
in planning for the exit. This includes planning the right time to exit and considering all the options such as
a full sale or partial sale. This is also a time for tax planning and evaluating the reinvestment options.
• Marketing
Once the exit plan is finalized, the target company engages in a marketing plan and aims to achieve the
highest selling price.
• Agreement
In the case of an acquisition deal, the purchase agreement is finalized. In the case of a merger, the final
agreement is signed.
• Integration: This is the final step that involves the complete integration of the two companies. It is
important to ensure that the same rules are followed throughout in the new company.
 Horizontal Mergers
• It refers to the merger of two companies who are direct competitors of one another
and they serve the same market and sell the same product.
• Horizontal mergers are those mergers where the companies manufacturing similar
kinds of commodities or running similar type of businesses merge with each other.
• The principal objective behind this type of mergers is
• To achieve economies of scale in the production procedure through
carrying off duplication of installations, services and functions,
• Widening the line of products,
• Decrease in working capital and fixed assets investment,
• Getting rid of competition,
• Minimizing the advertising expenses,
• Enhancing the market capability and to get more dominance on the
market.
 Advantages of Horizontal Merger:
• Economies of scale – Cost Benefits
• Dominant existence in a particular market
• Synergy
• Growth or expansion
• Risk diversification
• Diminution in tax liability
• Greater market capability and lesser competition
• Financial synergy (Improved creditworthiness, enhancement of
borrowing power, decrease in the cost of capital, growth of value
per share and price earning ratio, capital raising, smaller flotation
expenses)
• Motivation for the managers
 Examples
• Some Important Mergers
– HP and Compaq
– HPCL and ONGC (Oil Companies)
– The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and
Brook Bond
– The merger of Bank of Mathura with ICICI (Industrial Credit and Investment
Corporation of India) Bank
– The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply
Company
– The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar
Cement
– Reliance Communications and Aircel – Biggest Merger in Telecom Industry

• Mergers in India – Detailed List

• http://www.moneycontrol.com/stocks/market
info/mergers/
 Vertical Mergers
• Merger of firms that have actual or potential buyer and seller
relationships
• Occurs when two companies that produce goods or services
for the same finished product merge operations.
• Suppose a car manufacturer buys a tire company. This vertical
merger reduces the cost the manufacturer pays for tires, and
allows it to expand business by selling tires to competing
carmakers.
• Example
– Honda and Good Year Tyres
– Disney and Pixar (the animated studio led by Apple head Steve
Jobs
 Conglomeration Mergers
• It refers to the merger of companies which do
not sell any related products to any related
market.
• Merger of companies involved in totally
unrelated business activities
• Examples
– L&T – Voltas
– PepsiCo and Pizza Hut
 Congeneric Mergers

– involve companies in the same industry, but with

different business lines.
– Both companies involved in the merger may have
common technology, markets, or production
processes.
– The acquired firm in a congeneric merger is either
an extension of a product line (PRODUCT
EXTENTION MERGER) or a market related to the
acquiring firm (MARKET EXTENTION MERGER).
 Acquisitions
• An acquisition is the purchase of one business
or company by another company or other
business entity. There maybe either hostile or
friendly takeover.

• In the course of a bidder may purchase the

share or the assets of the target company.
 Hostile Takeovers and Friendly
Takeovers
• The process of taking control of the assets and
liabilities by a company of another firm is termed
as takeover.
In the event when the offer is approved
by the Board of Directors, the process of takeover
commence. There maybe two instances when a
takeover takes place-
• Hostile Takeover
• Friendly Takeover
 Hostile Takeover
• When the tender offer is placed before the
Board, the Board of Directors evaluates the same
to see if it will be advantageous for the
shareholders or will go against them. Decision is
not only taken keeping in mind the interests of
the shareholders but other areas are also
scanned through, if the Board feels the tender is
not agreeable it turns down the offer. If this is not
agreed by the management team of the acquiring
company and they wish to continue with the
same , this takeover takes the nature of hostility
and hence a Hostile Takeover.
 Hostile Takeover - Process
• A hostile takeover occurs when one corporation, the
acquiring corporation, attempts to take over another
corporation, the target corporation, without the
agreement of the target corporation’s board of
directors.
• AOL and Time Warner, $164bn, 2000
• A hostile takeover is usually accomplished by a
– Tender offer –purchase of shares from outstanding shareholders of the
target corporation at a premium to the current market price.
– Proxy fight - shareholders gather enough proxy votes to replace the
current management, making it easier to acquire the target company.
 Leveraged Buyout
• A Leveraged Buyout refers to the acquisition or takeover of a
company where a significant amount of money is borrowed to meet
the acquisition cost.
• LBOs are carried out by private equity firms.
• Since the company making the purchase can finance almost 90% of
the deal value, it makes large acquisitions possible even if
the acquirer firm has little capital to commit initially.
• The target company’s assets usually act as collateral for raising the
loan.
• Once the deal is through, the future cash flow from the newly
acquired company helps to repay the debt.
– The Blackstone Group bought Hilton in a $26 billion leveraged buyout.
 Friendly Takeover
• In case of friendly takeover the Board
approves of the offer put forward by the
acquiring firm. Both the companies oversee
each other interest and agree to merge. This
sort of merger is expected to increase the
productivity of this newly formed company
and have several added features by the
amalgamation of the specialities of both the
merging companies.
 Mergers and Acquisitions

Merger : The combining of two or more companies,

generally by offering the stockholders of one company
securities in the acquiring company in exchange for
the surrender of their stock.
 Jet & Sahara Merger - JetLite
Acquisition : When one company takes over another and clearly
established itself as the new owner, the purchase is called an
acquisition.
▫ LinkedIn acquired by Microsoft
▫ Whatsapp acquired by Facebook
▫ HDFC Bank acquisition of Centurion Bank of Punjab for
$2.4 billion
• For example,Oracle Corporation is very
famous for its acquisitions.
• Oracle acquires companies and not merge
with them.
• Oracle acquired Siebel,BEA,Peoplesoft and
more recently SUN through friendly or hostile
take overs.
 Top 5 International
Mergers And Acquisitions
Apple Acquires Shazam
 Apple has acquired the popular music identification app Shazam on 11th dec 2017. The deal
is estimated to be worth around $400 million.

Shazam can help Apple in a number of ways:

• Shazam knows what people are listening to, where and when, and how those trends are shifting
over time.
• Shazam is one of the highest rated apps in the world and loved by hundreds of millions of users
and we can’t imagine a better home for Shazam to enable us to continue innovating and delivering
magic for our users
• Only Shazam gives Apple 1 million clicks per day; deeper integration with ios
• The most obvious would be with Apple Music, where Shazam’s team could help improve the
experience of the service.
• Apple would obtain access to commercially sensitive data about customers of its competitors,”
the agency said in a statement. It added the data “could allow Apple to directly target its competitors’
customers and encourage them to switch to Apple Music.
• Apple Music, Apple TV and other iOS apps could take advantage of Shazam's technology by
allowing sound or image identification as a feature within them. (Shazam’s music and sound
recognition, which is already integrated with Siri)

The EU has launched an investigation into Apple’s acquisition of music identification service
Shazam. It’s concerned that the deal could shrink consumer options for mobile music streaming
services within the EEA (European Economic Area).
Vodafone and Idea Merger
Vodafone India and Idea Cellular NSE
announced their merger in March 2017, they had
projected about Rs 8,400 crore in annual cost
savings by the fourth full year of operations.

Reason:
Amazon Acquires Whole Foods
Amazon.com Inc. acquires Whole Foods Market
Inc. for $13.7 billion on 28th August 2017, on a
bombshell of a deal that catapults the e-commerce
giant into hundreds of physical stores and fulfills a
long-held goal of selling more groceries.

Reasons:
• A bigger physical retail footprint for Amazon.
• More fulfillment centers means quicker delivery.
• A saving grace for Whole Foods.
• A competitive edge for Amazon.
• A stronger presence in the home for Amazon.
Walmart Acquires Flipkart
The World’s largest retailer, Walmart has acquired Indian e-commerce giant,
Flipkart for $16 billion and a 77% stake, reports confirmed on Wednesday,
Walmart and Flipkart will remain separate brands with the goal of transitioning
Flipkart to a publicly-listed, majority-qwned subsidiary in the future. Analysts
believe Walmart overpaid for a majority stake in Flipkart

Why did Walmart spend so much on Flipkart?

•"India is one of the most attractive retail markets in the world, given its size and
growth rate," Walmart's president and CEO Doug McMillon said in a statement.

•Walmart is betting on the fact that India's e-commerce market, pegged at a modest
$38bn in 2017, is expected to grow up to $200bn by 2027.

•E-commerce currently makes up less than 4% of the retail market in India, but
that's predicted to change as the number of Indians using smartphones (and the
internet) increases rapidly in the next decade.

•This deal is also a new front in Walmart's battle with Amazon, the global leader in
online retail, which accounts for 44% of the US e-commerce market.
 Reasons
• This investment shows Walmart’s commitment to India’s growth story
and its continued progress on the World Bank’s ease of doing business
ranking
• Walmart said Flipkart will leverage Walmart’s omni-channel expertise,
grocery and supply chain knowledge and financial strength, raising the
prospect of a fight with Amazon in the grocery category.
• India is one of the most attractive retail markets in the world, given its
size and growth rate.
• This investment will help Walmart to deepen its connection with
buyers and sellers and to create the next wave of retail in India
• This deal will provide quality, affordable goods for customers while
creating new skilled jobs and fresh opportunities for small suppliers,
farmers and women entrepreneurs in India
 Is this a good deal for Flipkart?

• Yes, according to most experts. After Walmart bought the controlling

stake, Flipkart is valued at more than $20bn.
• The deal also saves Flipkart, which was running out of cash in its battle
with Amazon. Both competitors have been "burning cash" in massive
sales and discounts pegged to Indian festivals in a bid to acquire more
customers.
• Amazon runs a profitable business worldwide, thanks to its
cloud computing service, and it has the cash to take on newer
markets.
• Flipkart, however, needs the financial strength Walmart offers.
• This is the highest price any foreign company has paid for a
stake in an Indian company.
 What does Walmart bring to the
table?
• Apart from capital, Walmart brings expertise in online
groceries and a strong food supply chain.
• "We aim to become the best food retailer in the world,
and that needs investment in supply chains to build
those capabilities," Rajneesh Kumar, corporate affairs
chief at Walmart India told the BBC.
• Walmart, he added, will also focus on sourcing from
India for its global operations. "We are already
sourcing handicrafts, apparel, food products like rice,
from India…we will ramp that up."
 PROS & CONS – M&A
ADVANTAGES DISADVANTAGES
• Synergy
The synergy created by the merger of two companies is
• Bad for Consumers
powerful enough to enhance business performance,
financial gains, and overall shareholders value in long-
With the merger, competition
term. can reduce the industry and
• Cost Efficiency the new company may have
The merger results in improving the purchasing power of
the company which helps in negotiating the bulk orders higher pricing power.
and leads to cost efficiency. The reduction in staff
reduces the salary costs and increases the margins of • Decrease in Jobs
the company. The increase in production volume causes
the per unit production cost resulting in benefits from A merger can result in job
economies of scale.
• Competitive Edge
losses. An acquiring company
The combined talent and resources of the new company may shut down the under-
help it gain and maintain a competitive edge. performing segments of the
• New Markets
The market reach is improved by the merger due to the company.
diversification or the combination of two businesses.
This results in better sales opportunities.
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