GLOBAL MERGERS AND ACQUISITIONS

MERGER

When two or more firms agree to go forward as a

single new company rather than remain separately

owned and operated. Merger happens in a friendly

manner

A transaction where two firms agree to integrate their

operations because they have resources and

capabilities that together may create stronger

competitive advantage. The term ‘merger’ refers to a

combination of two or more companies into a single

company and this combination may be either through

consolidation or absorption.

A consolidation is a combination of two or more

companies into a third entirely new company formed

for the purpose. The new company absorbs the assets,

and possibly liabilities, of both original companies

which ceases to exist. When two firms merge, stocks of

both are surrendered and new stocks in the name of

new company are issued. Generally, mergers take

place between two companies of more or less the

same size. In case of absorption one company absorbs

another company i.e. it purchases either the assets or

shares of that company. The merger by absorption is

always friendly in nature i.e. both the companies agree

to the terms of absorption.

DIFFERENT TYPES OF MERGER

• Horizontal Merger

• Vertical Merger

• Concentric Merger

• Conglomerate Merger

1) HORIZONTAL MERGER

Consolidation of firms that are direct rivals- that is, sell

substitutable products. The horizontal merger is

between two companies who compete in the same

industry. They combine their operations and gain

strength. It helps the companies to:-

Improve performance

Increase capital

Increase profit

Decrease competitors

Increases edge over competitors

Example of Horizontal Merger:-

LIPTON INDIA AND BROOKE BOND INDIA

Lipton India was merged with Brooke Bond India in

1993-94 to form Brooke Bond Lipton India Limited

(BBLIL).

The principal objective behind this type of merger is

to:-

• achieve economies of scale in the production

process through the carrying off of duplication of

installations, services and functions

• widening the line of products

• decreasing working capital and fixed assets

investment

• getting rid of competition

• minimizing advertising expenses

• enhancing the market capability

• getting more dominance in the market.

2) VERTICAL MERGER

When 2 firms working in different stages of production

or distribution of the same product join together.

Vertical merger happens when two or more company

in the same industry but in different fields combine

together in the business. In this form, Companies in

merger decide to combine all the operations and

production under one shelf.

The economic benefits of this type of merger stem

from the firm’s increased control over the acquisition

of raw material or the distribution of finished goods.

3) CONCENTRIC MERGER

Two or more companies in association are some way or

other related to production processes, business

markets or basic required technologies.

It includes the extension of product line or acquiring

components that are all the way required in daily

operations.

4) CONGLOMERATE MERGER

A merger between firms that are involved in totally

unrelated business activities.

Two types of conglomerate mergers:

• Pure conglomerate mergers involve firms with

nothing in common.

• Mixed conglomerate mergers involve firms that

are looking for product extensions or market

extensions.

EXAMPLES OF CONGLOMERATE MERGER

TIME WARNER- AOL

• Time Warner Inc. (formerly AOL Time Warner) is

an American multinational media corporation

headquartered in the Time Warner Center in New

York City.

AOL Inc. is an American global brand company

that develops, grows, and invests in brands and

web sites.

In 2000, AOL and Time Warner merged under

the name AOL Time Warner.

ACQUISITION

Acquisition refers to one company buying out another

to combine the bought entity within itself. Acquisition

increases the interest of the acquiring company in the

target or acquired company. A transaction where one

firm buys another firm with the intent of more

effectively using a core competence by making the

acquired firm its subsidiary within its portfolio of

business.

With acquisition, one firm takes over another and

establishes its power as the single owner. Generally,

the firm which takes over is the bigger and stronger

one. The relatively less powerful, smaller firm loses its

existence, and the firm taking over, runs the whole

business with its own identity. Unlike the merger,

stocks of the acquired firm are not surrendered, but

bought by the public prior to the acquisition, and

continue to be traded in the stock market.

When a deal is made between two companies in

friendly terms, it is typically proclaimed as a merger,

regardless of whether it is a buy out. In an unfriendly

deal, where the stronger firm swallows the target firm,

even when the target company is not willing to be

purchased, then the process is labeled as acquisition.

Often mergers and acquisitions become synonymous,

because, in many cases, a bigger firm may buy out a

relatively less powerful one and compel it to announce

the process as a merger. Although, in reality an

acquisition takes place, the firms declare it as a merger

to avoid any negative impression.

Whether the deal results in a merger or an acquisition

also depends on the way it is announced. In other

words, the difference lies in how the purchase is

communicated to and received by the target

company's board of directors, shareholders and

employees.

In India, accounting for amalgamations is governed by

Accounting Standard-14 (AS-14) by the institute of

Chartered Accountants of India. AS-14 stipulates that

amalgamation means amalgamation pursuant to the

provisions of the companies act, 1956 or any other

statue as may be applicable to companies. Accounting

Standard-14

It classifies amalgamations into two broad categories:

Amalgamation in the nature of merger

Amalgamation in the nature of

purchase/acquisition

AMALGAMATION IN THE NATURE OF MERGER

The first category covers those amalgamations where

there is a genuine pooling i.e. not merely assets and

liabilities of the amalgamating companies but also of

the shareholder’s interest and of the business of these

companies such amalgamations are in the nature of

‘merger’.

An amalgamation would come within this fold if all the

following conditions are satisfied:

1) All the assets and liabilities of the transferor

company become the assets and liabilities of the

transferee company after such amalgamation.

2) Shareholders holding not less than 90% of the equity

shares of the transferor company(other than the

equity share already held immediately before the

amalgamation by the transferee company or its

subsidiaries or their nominees) become equity

shareholders of the transferee company by virtue of

the amalgamation.

3) The consideration for the amalgamation receivable

by those equity shareholders of the transferor

company who agree to become equity shareholders of

the transferee company is discharged by the transferee

company wholly by the issue of the equity shares in the

transferee company, except that cash may be paid in

respect of any fractional shares.

4) The business of the transferor company, after

amalgamation, is intended to be carried on by the

transferee company.

5) No adjustment is intended to be made in the book

values of the assets and liabilities of the transferor

company when they are incorporated in the financial

statements of the transferee company except to

ensure uniformity of accounting policies.

AMALGAMATION IN THE NATURE OF

ACQUISITION/PURCHASE :

On the other hand, second category covers those

amalgamations which are in effect a mode by which

one company acquires another company and as a

consequence, the shareholder of a company which is

acquired normally do not continue to have a

proportionate share in the equity of the combined

entity; or the business of the company which is

acquired is not intended to be continued. Such

amalgamations are amalgamations in the nature of

‘purchase’.

If any of the above conditions of Amalgamation in the

nature of merger is not fulfilled , the amalgamation

would be in the nature of purchase and hence be

covered under category B viz. purchase or acquisition.

MOTIVES FOR MERGERS AND ACQUISITION

a)Economies of large scale business

org enjoys both internal and external

economies

lead to reduction in cost and increase in

profits

b)Elimination of competition

MOTIVES FOR MERGERS & ACQUISITIONS

Economies of large scale business

Elimination of competition

Adoption of technology

Lack of technical & managerial talent

Effects of trade cyclesDesire to enjoy monopoly power

Desire to unified control & self- sufficiency

Personal Ambition

Govt. Pressure

• eliminates severe, intense and Wasteful

expenditure by different competing organization

c) Adoption of technology

The adoption of modern technology by a

corporate org requires large resources which may

be out of reach of an individual firm. This may

induce M&A of different firms.

d)Lack of technical & managerial talent

• In the developing countries at the earlier stages of

industrialization, scarcity of entrepreneurial,

managerial and technical talent is also one of the

important factors that leads to M&A.

e)Effects of trade cycles

Trade cycles are the periods of ups and downs

in an economy.

Ups are the periods of boom when production

is on large scale, profits are more, employment is

max. and new firms crop up indiscriminately in all

directions. This situations creates unhealthy

competitor and acts as a motivating factors for

M&A.

On the other hand, downs are the period of

depression when economic activity reaches to its

lowest point. During depression, only efficient and

large firms mange to survive and inefficient firms,

to reduce the risk of failure, preferred to be

merged or acquired by the strong firms.

f) Desire to enjoy monopoly power

M&A leads to monopolistic control in the

market. In the situation of monopoly, affirm can

easily make adjustments in the supply and price of

products and can also increase the profit of the

firm.

g) Desire to unified control & self- sufficiency

• Firms which depend on other units for their raw

material s requirement or which are engaged in

diff process of product for ensuring uninterrupted

supply of raw materials are encouraged and

benefitted by M&A. By bringing such firms under

unified control, their dependence on other firms

can be avoided.

PROBLEMS IN MERGER & ACQUISITION

a)Integration Difficulties

When two companies merge with each other, the

companies do not mingle or integrate with each other

in a proper manner. Differing financial and control

system can make the integration of the firms difficult. If

integration of the merged or acquired firms are not

proper, then the profitability of these firms also will

declined which in turn can even lead to shut down of

the firm.

b)Inadequate evaluation of target

If the acquirer firm does not evaluate the targeted firm

through market research and analysis, then it may

even lead to excess payment/bid for the purchase of

the targeted firm as they are willing to buy that firm for

their success or to attain maximum profit. It may lead

to inadequate evaluation of the target.

c)Larger or extraordinary debt

Costly debt can create onerous burden on cash

outflows

Ex;- Agri Bio Tech’s Acquisition of Dozens of small seed

firms

d)Inability to achieve synergy

Two firms merge with each other to attain the synergic

effect. But when these two firms does not integrate

with each other in a proper manner due to differing

financial and control system, it may even lead to an

equation of (1+1)<1. The main concept behind every

merger and acquisition is to attain maximum

integration which in turn leads to synergic effect

through reduction in cost, maximization of profits etc.

e)Too much diversification

Acquirer doesn’t have expertise required to mange

unrelated business. If a company is having a

conglomerate merger, then that company must have

some knowledge with respect to that product/service.

Otherwise the merger or acquisition will fail due to

excess diversification.

f)Mangers overly focused on acquisitions

Managers may fail to objectively access due to over

focus in the targeted company. After the merger or

acquisition the manager must be given a training as to

how they are required to manage the new company in

an accurate manner. Manager must not overly focus

on the acquisition because it may lead to less focus to

their core business product which may reduce their

profitability position of the firm.

ADVANTAGES OF ACQUISTION

Generally, corporate restructuring activities like

mergers and acquisitions are carried out to realize

economic gains. For justification of such transactions,

the combined worth of the two firms must be more

than individual worth of each. A few potential benefits

of an acquisition include realization of economies of

scale, tax advantages, and elimination of inefficiencies

as well as combination of complementary resources.

Apart from these, there are several other benefits of

an acquisition. These include revenue enhancement,

cost reduction, lesser taxes as well as change in capital

requirements. An increase in revenue is generally

caused by strategic benefits, market power and

marketing gains. Strategic benefits correspond to the

opportunities of entering new business lines.

Marketing gains take place due to effective advertising,

an improved product mix and economies of

distribution. Moreover, an acquisition might reduce

competition, which leads to an increase in market

power.

A bigger firm might be capable of operating in a more

efficient manner as compared to two small firms, this

reduces costs. Moreover, economies are realized when

two firms possess complementary resources. For

instance, a particular firm has a surplus production

capacity while its counterpart has inadequate capacity.

Tax advantages are also realized in acquisitions when

the target firm carries the assets at prices lower than

their market values. Therefore, for tax purposes, the

assets can be more valuable if they owned any other

organization. This increases the tax basis after an

acquisition. Moreover, the acquiring company would

depreciate the assets on the basis of higher market

values leading to additional benefits.

The payment of interests on debt is a tax-deductible

expenditure while the payment of dividends from

equity ownership is not. Though the utilization of

financial leverage leads to tax benefits, debts also

increase the possibility of financial distress if the

acquiring firm is unable to meet the interest payments

on acquisition debts. Besides this, a firm having surplus

funds might intend to take over another firm. This is

because the distribution of money in the form of

dividends or the use of money or repurchase of shares

would increase the income tax for shareholders. During

an acquisition, income taxes are not paid by the

shareholders.

Additional benefits of an acquisition include improving

the market power through purchase of competitors,

acquiring proprietary rights to services or products,

compensating for the weaknesses in key areas of

business as well as penetration of new geographical

regions.

CASE STUDY

HINDALCO- NOVELIS ( A FAILURE)???????

Hindalco Industries Limited is structured into

two strategic businesses aluminium and copper

with an annual revenue of US $14 billion and a

market capitalization in excess of US $ 23 billion.

Novelis- the world leader in aluminium rolling

(producing 19% of the world's flat-rolled

aluminium products) and is also the world leader

in the recycling of used aluminium beverage cans.

DEAL

In 2007, Indian aluminium giant Hindalco acquired

Atlanta based company Novelis Inc, a world leader in

aluminium rolling and flat-rolled aluminium products.

MOTIVATION FOR THE ACQUISITION FOR HINDALCO

To become the biggest rolled aluminium

products maker and 5thlargest integrated

aluminium manufacturer in the world.

To have access to higher-end products and

superior technology

To have low-cost alumina and aluminium

production facilities combined with high-end

aluminium rolled product capabilities due to

vertical integration

Motivation for the Acquisition for Hindalco

To double Hindalco's turnover , it catapults

the Group right to the threshold of the Fortune

500 group of companies.

To benefit from the increasing Global and

Domestic Demand for aluminums

Post-acquisition, over 50 % of the group's

business could come from operations outside

India, which is currently at 30 %, marks its

increased internationalization

To increase foothold in the very concentrated

industry

FUNDING STRUCTURE

The Enterprise Value of Novelis was $6 billion

- $3.6 billion and $2.4 billion debt

To buy the $3.6 billion worth of Novelis

equity, Hindalco borrowed almost $2.85 billion

and the remaining was funded by the group

companies and its cash reserves

Novelis shareholders received US$44.93 in

cash for each outstanding common share, roughly

15 per cent premium to the market price.

Hindalco would refinance the $2.4-billion debt

on Novelis's balance sheet, though they will be

repaid with Novelis's cash flows.

Two special purpose vehicles were set up for

the purpose. The first, AV Metals, based in Canada,

raised the recourse finance and actually acquired

Novelis. The other handled the non-recourse

finance.

Hindalco's treasury contributed $450 million,

while SL Iron Ore Mining, another group company,

contributed $300 million as debt.

WHAT WENT WRONG

In 2008, with the debt market tightening,

Hindalco had to dilute its equity through a 1:3

rights issue to raise a little over $ 1 billion.

The balance of about $ 2 billion of the bridge

loan would have to be repaid by sourcing domestic

or international debt financing and liquidation of

treasury.

Further, high interest costs, which rose by

over 490% loan increased from Rs 3.13 billion in

FY07to Rs 18.49 billion in FY08.

Finally Hindalco’s earning per share in FY08

dropped to Rs.15.76, from Rs. 26.73 in FY07, a fall

of 41%

ESSENTIAL REQUIREMENTS TO BE KEPT IN MIND

WHILE CONSIDERING A TARGET CO. FOR ACQUISITION

OR MERGER

Economical Environment

Political Environment

Impact of Global Terrorism

Work Culture

Merger and Acquisition Strategy

ECONOMICAL ENVIRONMENT

The company must give due consideration to:-

• What is the type of economy?

It is much easier to do business in a country where

resources are owned and controlled by the private

sector (Market Economy) as compared to a country

where it is controlled by the Government (Command

Economy).

• Reforms initiated by various governments to

liberalize their economy.

POLITICAL ENVIRONMENT

Stable legal system

&

Stable political system

Leads to Long-Term stability of the business

IMPACT OF GLOBAL TERRORISM

Terrorism has added a new dimension, which

directly or indirectly affects the conduct of

business.

It even affects the control of Govt. on national

economy and resources.

Eg:- 1)Countries like Iraq where no business

leader would like to sink his investment.

2) Similar risk was felt by General Electric in

the summer of 2002, when India and Pakistan

nearly went to war due to terrorist activities

sponsored by Pakistan . GE has invested more

than $ 80 million in Banglore (India) for

creating largest research center outside U.S.A.

War between India and Pakistan would have

greatly hampered their business.

WORK CULTURE

The work culture of an organization is greatly

influenced by the national work culture

This also includes level of corruption, which an

organization is likely to face during the process of

takeover and later on for smooth conduct of the

business.

Eg:- German employees at an IBM facility in

Munich will be influenced more by German culture

than by IBM culture .

MERGER AND ACQUISITION STRATEGY

A company needs have a clear-cut policy

regarding merger and acquisition.

The M&A cell should be assisted by business

analyst, representative of financial

institution/investment bankers, technical experts,

valuators and lawyers specializing in this field.

Cell must have direct axis to the business

leader/decision making authority.

Sophisticated software that can handle

financial analysis, projections, valuation, and so on

is available in the market and help of these can be

taken.

Once the targeted company has been

identified, option of finalizing deal through

negotiation must be considered.

PROCESS OF MERGER AND ACQUISITION

STEP 1:-Finalization of target co. for acquisition or

merger

Information about targeted companies must

be collected from all possible sources & if required

business intelligence agencies could also be hired

to collect additional information which may not be

easily available.

Finalization of target co. for acquisition or merger

Formulating the approach for acquisition

Working out the agreement

Integrating the merged/acquired co.

Post acquisition/merger plan

Final evaluation of targeted company will broadly depend on the following:

1. Purpose of Merger or Acquisition

2. Financial information (Strength & Weakness

of Company)

3. Management and organization Information

4. Environment of the country where targeted

company is located

STEP 2:- Formulating the approach for acquisition

Final recommendation must be put up to the

Board of Directors for their approval.

Convince the management/business leader of

targeted company to explore the idea of affiliating

with the acquirer and that it is going to gain from

the proposal.

If the management of targeted company is

willing to be acquired or get merged, the process

of discussion must continue. The first few

discussions will normally be confined to

generalities such as why two companies should

combine, gains for both, financial position,

organizational structure and out look.

During the preliminary talks, targeted

company may like to know approx price & other

broad terms of condition before it is willing to

continue to discuss the deal seriously. Acquirer

must do his homework well & be prepared to

submit the proposed terms & conditions.

STEP 3:- Working out the agreement

The agreement for merger or acquisition should be

done in two stages.

a preliminary agreement between two

companies

final agreement

Once the agreement is approved by Board of Directors,

announcement of acquisition/merger should be made.

This announcement must highlight the advantages/

gains to both the organization, their employees,

shareholders and customers.

STEP 4:- Integrating the merged/acquired co.

To get full benefit from any acquisition or

merger plan, it is essential that the two companies

must get integrated rapidly and effectively.

To achieve this, it is essential to formulate an

integration plan.

It must cover management function,

accounting controls, budgeting control and

functional control.

In case of merger, it is essential to give due

importance and share to both companies in

running the new organization.

To achieve effective & smooth integration, it is

essential to have integration cell comprising of key

personnel of both the companies.

STEP 5:- Post-Merger Integration

There is generally tendency to become casual

once deal has been finalized.

Both the parties feel so relieved and at times

they fail to realize that the real problems come

when dealing with the nuts & bolts of the

merger/takeover.

Hence it is important to prepare for rapid

responses to unanticipated situations.

Human relation aspects need special

attention.

In the year 2000, the Americas accounted for

approximately 60% of worldwide deal value and

40% of the number of transactions. Today, those

figures have declined to 45% of worldwide value

and 30% of total number.

One country responsible for this trend is

CHINA

Chinese government is behind much of this

planned activity as it has emphasized consolidation

in basic industries such as mining, chemicals, steel

and power.

TOP INDIAN MERGERS & ACQUISITION IN INDIA

1)THE RELIANCE – BRITISH PETROLEUM DEAL

Reliance – BP deal finally came through in July

2011 after a 5 month wait.

Reliance Industries signed a 7.2 billion dollar deal

with UK energy giant BP, with 30 percent stake in

21 oil and gas blocks operated in India

2)GVK POWER ACQUIRES HANCOCK COAL

It is one of the biggest overseas acquisitions

initiated by India in September 2011

Hyderabad-based GVK Power bought out

Australia’s Hancock Coal for about 1.26 billion

dollars.

The acquisition includes a majority of

• the coal resources,

• railway line and

• port infrastructure of Hancock Coal,

• along with the option for long term coal supply

contracts.

3) THE VEDANTA – CAIRN ACQUISITION

• December 2011 finally saw the completion of

the much talked about Vedanta – Cairn deal that

was in the pipeline for more than 16 months.

• Touted to be the biggest deal for Indian energy

sector

• Vedanta acquired Cairn India for a nearly 8.6

billion dollars.

• Although the Home Ministry cleared the deal, it

has highlighted areas of concern with 64 legal

proceedings against Vedanta.

4)TATA STEEL AND CORUS

On January 31, 2007, Tata Steel Ltd., one of the

leading Steel producers in India, acquired the

Anglo-Dutch Steel producer Corus Group for

US$12.11 billion.

Corus was 2.5 times bigger than TATA

It took 9 rounds for Tata to acquire Corus. In the

1st bid Tata had closed the deal at US $7.6 billion

and later it ended up by paying US $12.11 billion,

making it an expensive turnover.

This acquisition was the biggest overseas

acquisition by an Indian company.

Tata steel emerged as the 5th largest steel

producer in the world.

After acquisition Tata benefitted itself from Corus:

Distribution network of Europe

Expertise in steel making for automobiles

In return Corus benefitted from Tata Steel’s

expertise in low cost manufacturing of steel.