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MERGERS AND

ACQUISITIONS
Video fr om Janhvi S hah
History
• The concept of merger and acquisition in India was not popular
until the year 1988. During that period a very small percentage
of businesses in the country used to come together.

• The key factor contributing to fewer companies involved in the


merger is the regulatory and prohibitory provision of the MRTP
act 1969.

• According to this act the company or the firm has to follow a


pressurized and burdensome procedure to get approval for
Mergers and Acquisitions.
WHAT IS A MERGER?

It is a strategy of combining
different companies into a
Merger is the activity by
single company in order to
which two companies unite
enhance the financial and
into one new company
operational strengths of
both organizations.
We have 5 different types of mergers,
namely:

TYPES OF MERGER

Horizontal Concentric
Merger Market Merger/
Vertical Extension Product
Merger Merger Extension
Merger

Conglomerate
Merger
Horizontal Merger
When two firms working in the same industry or
producing similar kind of products combine, it is known
as a horizontal merger

The main objectives of such mergers Is to gain benefits


from the economies if sale, to reduce competition,
achieve the monopoly status and control the market.

Examples- merger of bank of Mathura with ICICI bank.


Examples of Horizontal Mergers
• Lipton India and Brooke Bond

• Bank of Madura with ICICI bank

• BSES Ltd. with Orissa Power Supply Company

• Associated Cement Company Ltd. with Damodar


Cement
Vertical
Mergers

When a firm acquires


When a firm acquires
another firm which
another firm which
Types produces raw
would help it get
closer to the
materials used by it.
customer.

When a FMCG
company acquires an
Examples A tyre manufacturer
advertising company
or a retailing outlet
Conglomerate Merger

•When two companies operating in


unrelated industries merge together,
it is known as a conglomerate merger.
Example- A watch manufacturer
merging with a cement company
•The main objective is to achieve big
size and hence increase sale.
Example- Tata Sky
It refers to combination of
two or more firms which are
related to each other in
terms of customer groups,
functions or technology.

These are usually This would enable


undertaken to Concentric / business to offer
facilitate one-stop
consumers, since it Product shopping, and
would be easier to Extension therefore,
sell these products Merger convenience for
together. consumers.

Example: Merger of a
company that produces DVD
players with a company that
produces DVD’s
Diagrammatic Representation
• Here is a diagram that clearly explains the first
four types of merger:
Market Extension Merger

•This involves the combination of two


companies that sell the same product
in different markets.
•A market extension merger allows for
the market that can be reached to
become larger .
•Example- Dell’s Alien ware Gaming
Laptops
When one company takes over another company
and establishes itself as the new owner of the
A company, it is known as an Acquisition.
C It is also known as Takeover or Buyout.
Q It means that one firm purchases the assets and
shares of another firm.
U
The company to be acquired is known as the target
I company.
S
I
T
I
O
N
Friendly
Acquisition
Types of
Acquisitions
Hostile/Unfriendly
Acquisition
FRIENDLY
ACQUISITIONS

Friendly acquisitions occur when


the target firm expresses its
agreement to be acquired.

Friendly acquisitions often work


towards a mutual benefit for both the
acquiring and the target companies.
Hostile Acquisitions
These refer to those types of acquisitions
where the board of directors and the key
employees of the firm are not in favor of
the acquisition.
• By purchasing the stock of
the target company at a fixed
Methods price above the market price
• By initiating a proxy fight.
Difference between Merger and
Acquisition
MERGER ACQUISITION
Merging of two organizations to one •Buying one organization by another

•It is a mutual decision •It can be friendly or hostile.

•It is expensive than acquisition. It •It is less expensive than a merger


Involves higher legal cost
•Through mergers, the shareholders can •Buyers cannot raise much capital.
increase their net worth
•It is time consuming •It is a faster and an easier transaction

•The main purpose of merger is to reduce •Acquisitions usually take place for having
competition and to increase efficiency instantaneous growth of the firm.
Activity time
CAUSES OF M&A
Causes of Mergers and
Acquisitions
Increasing Capabilities

Improvised
Better
services
technology

Expanded
research

More Robust
development manufacturing
opportunities
Larger Market Share

New dealers
overnight

Goodwill of other
company

Eliminate initial
struggles
Gaining a Competitive Advantage

• Monopoly

• Better to Best

• Edge over strong competitors


Diversifying Products
Diversifying ProductsororServices
Services
Unrelated industry

Higher profits

Variety of products

Backup if one product fails

E.g.: PepsiCo
Replacing Leadership

Ineffective leaders

Mismanagement

Policies are not


efficient enough
Surviving

Only Financial
option crisis

Unable to
Pressure for
handle
betterment
competition
Cutting Costs

Better Technology and


Production Strategies

Integrated
Lower cost on
Contacts of
Transportation
Suppliers

Availability of
Advantages of
missing
Location Commodity
Foreign Exchange and Foreign Market
For
Merger &
Acquisition
• Strategies play an integral role when it comes
to merger and acquisition.
• Every company has different cultures and
follows different strategies to define their
merger.
• Through market survey & analysis of different
mergers and acquisitions, it has been found
out that there are some GOLDEN RULES which
can be treated as the

STRATEGIES FOR SUCCESFUL MERGER &


ACQUSITION DEAL
Plan Drivers
Understanding the Market
Intended
Geographic Business
Locations Market

Understanding

Market
Technological Share
Requirements
Accessing the Market
• Identification of:
1. Future Market Opportunities
2. Market Trends
3. Customers Reaction
Integration Process
Restructuring Plans
Take Steps
Board
Managers Members

Stakeholders
/Investors

MERGER
Requirements for a merger
1.Coordinate and compromise
They decide the new agreement policy
without any conflicts.
Check on Difference of Opinions
They are not able to decide among
themselves then they may appoint
third party of executor.
2. Excellent organizational skills
Team members Manager needs
may not know to motivate
whom to report people around
to. him
3. Manager must be comfortable with
ambiguity.

He should be able
to facilitate groups.

Mobilize people

Add quick
strategies
4. He needs to think like an
entrepreneur

Analytical

Zeal and persistence

Innovation
Legal Procedure for Mergers
and Acquisition
Permission for Sanction by Filing of the
a Merger the High Court Court Order

Information to Shareholders’ Transfer of


the Stock and Creators‘ Liabilities and
Exchange meetings Assets

Approval of Payment by
Application in
Board of Cash or
the High Court
Directors Securities
Permission for a Merger
Information to Stock Exchange
Approval of Board of Directors

Board of directors
Application in the High Court
Shareholders’ and Creators' Meetings
Sanction by the High Court
Filing of the Court Order
Transfer of Liabilities and Assets
Payment by Cash or Securities
WHO GETS BENEFIT ?
Merger

Contribution in
Share in profit
Merged firm

Comparing values Profit sharing ratio


of all companies
Two companies in
Acquisition

Acquiring Company(A) Target Company(T)


Cash
1. A T
What is the
value of T
company ?

Shares
2. A T
Deal in cash
The Target company being paid in the merger 125Cr.

The Target company was initially valued at 100Cr.

(Additional cost) 25Cr.

Target benefits Acquirer losses


Why a company participates in M & A,
if it is may going to lose some interest ?
Deal in shares
Valuation of companies

Asset based valuation

Earnings based
valuation

Multiple valuation
method
Valuation is not exact

Valuation is Essential

It is an estimation
Valuation of the company is done.
Now what to do ??

Exchange of shares
Methods of calculating
Shares Exchange Ratio

Intrinsic
value per Market
share / Earnings price per
Per Share Combination
Book value share
per share
Intrinsic value per share/
Book value per share

WhatsApp share’s book value 100$ 1


= = 1 : 10
Face Book's share’s book value 1000$ 10
Earnings Per Share
(EPS)

WhatsApp has EPS of 50$ 1


= = 1:4
Facebook has EPS of 200$ 4
Combination

WhatsApp intrinsic value 100$ 1


= = 1:15
Face Book's market price 1500$ 15
Market price per share

WhatsApp market price 150$ 1


= = 1: 10
Face Book's market value 1500$ 10
Methods of calculating
Shares Exchange Ratio
1. Intrinsic value per
share/ Book value per 25%
share

2. Earnings Per Share 25%

3. Market price per share 25%

4. Combination 25%
Really a tough job …
PRACTICAL EXAMPLES OF M&A IN
INDIA
The Indian Telecommunication Industry
The Indian Telecom Industry

AN INTRODUCTION
Emerging as one of the leading
potential markets, it has
witnessed high paced growth
in the past 15 years.

These are some of the


prominent Telco's in India.
But before the privatization of the sector, the only
government establishments serving the nation
were-

MTNL
(Mahan agar Telecom Nigam Limited)

BSNL
(Bharatiya Sanchar Nigam Limited)

VSNL
(Videsh Sanchar Nigam Limited)
Economic Reform of 1991
In the course of the reform, in the
Indian Economy, this was one of the
many sectors which was privatized.

In 1994, the privatization took place


under the guidance of TRAI (Telecom
Regulatory Authority of India).

As a result, many foreign Telco's tried


to capture the Indian Markets.
Recent Developments

• The Sector has been developing steadily, with


better services being made available to us,
year after year.
• However, the steady progress has been
hindered recently due to the sudden
introduction of Reliance Jio in the markets.
• This has caused a drastic disruption in the
market.
Telco's in India before Jio
A V ESTABLISHED ON- I ESTABLISHED ON-
ESTABLISHED ON-
I O September 16th, D 1995
July 7th, 1995
R D 1991 E
T ORIGIN- A A ORIGIN-
E India F ORIGIN- INDIA
United Kingdom
L O
N
E
Bharti Airtel

Most successful
Telco in India

Held 31.7% of the


total Market Share

Managed by Bharti
Enterprises Ltd.
Vodafone

British Telco launched


in India in 2007

Held 22.7% of the


total Market Share

One of the biggest


competitor
Idea Cellular
Established by Aditya
Birla Group

Held 20.2% of the total


Market Share

Was 3rd largest mobile


operator in India
Reliance Jio

It provided it’s 4G
Launched by Mukesh
VoLTE network services
Ambani, it is a Telecom
free of cost for a
Revolution.
period of 6 months.

ESTABLISHED ON-
July 21st, 2016 It disrupted the market
This had a significant
for eliminating all of
effect on the entire
ORIGIN- it’s potential compete
market.
India tents.
Relative Market Share
Market Share after Jio
Resultant Mergers and Acquisitions

• Vodafone’s merger with Idea

• Reliance Communication’s acquisition of Aircel

• Bharti Airtel’s acquisition of Telenor


Voda-Idea Reason- Survival in the
Merger market competition and
formation of the biggest
Telco in India leaving behind
it’s competetents.
Effects of the Merger
(Company Rankings)
Before the Merger After the Merger

1. Jio
1. Voda-Idea
2. Airtel
2. Jio
3. Vodafone
3. Airtel
4. Idea

5. Others 4. Others
Facebook and WhatsApp
Acquisition Case Study
In 2014, Facebook CEO Mark Zuckerberg
managed to agree on the deal with
WhatsApp founders Jan Koum and Brian
Acton for astonishing $19 billion.

This acquisition was the sixth biggest in


technologies and biggest ever in history
of acquisitions of software companies.
Facebook Acquisitions
WhatsApp Inc. Details

Vision: Let’s make WhatsApp


available to everyone in the world.
Jan Koum Brian Acton
College Dropout Ex-Yahoo Engineer
Services: Text messaging, sending
images, video, audio media messages as
well as locations and contacts.
Reasons for
Acquisition
Reason • 450 million active users
One • 70% daily users
Reason Two

•32 employees later when acquisition


took place 56.
•Though the number was small but it
was 99.99% reliable.

They had incurred zero


advertisement cost.
Reason Three
Service cost was 1 $ per
year.
Annual Revenue: $20
million. Twitter had 241 million
But, it already has 450 users operating 3 years
million monthly active longer than WhatsApp.
users and hence,
Facebook was purchasing
this potential too.
R4- Engagement

It had become popular among teens.


It was looking for new ways of communication like
voice calls, video calls, etc..
R5- Volumes

Huge amount of Data Provided

2014

19 billion

34 million
600 Million photos
uploaded.
200 Million of voice
messages sent.
100 Million of video
messages.
DAILY, and all the numbers
were doubling year over
year.

Hence, it is a global communication change.


Imagine the losses suffered by other companies erasing 33
billion in SMS revenues.
R6- Unlike other sites, WhatsApp did
not have security vulnerabilitities
R7- Income from entire World
R8- Facebook can keep the app out of the
hand of other rivals like Google and
Microsoft.
R9- Deal Value (Revenue Angle)
Value of the Deal
Causes For Failure Of
Merger And Acquisitions
1. Finance
Misunderstandings
2. Technological
3. Cultural differences
Hewlett Packard Compaq

It rose to become the largest supplier


of PC systems during the 1990s before
being overtaken by HP in 2001
 Biggest merger in IT history
25B$ all stock purchase
Hewlett Packard and Compaq merger
in 2001 that resulted in US $13 billion
loss in market value.
 It was due to cultural clash and poor
strategies of cost cutting while
monitoring revenues.
4. Region
Language barrier
5. Core values
Ego Clash among Managers

Diversion from main core work.

Overly optimistic goals.

Executives may be influenced by bankers


lawyers or other people.
6. Size
7. Others
2.6 billion $
eBay's (EBAY) purchase of Skype for USD
2.6 billion in 2005, later to be sold at just
USD 1.9 billion after four years, was a failure
due to challenges in technical integration and
over- expectations from customers.
 eBay expected synergy coming from Skype
being established as the communication
medium between buyers & sellers on its
marketplace platform, which unfortunately
did not become popular among its market
participants.
8. Process
Communication

Clear Honest Consistent

During M &A stress levels are high , hence


there are chances of misinterpretation and
rumors being spread
Conclusion
K P B and Associates
Thank you for

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