merger and acquistation

7/30/2019 merger and acquistation

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MERGERS AND

ACQUISITIONS

Module I


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Topics to be Covered Meaning & Definitions of Merger

Types of Mergers

Motives & Reasons behind the mergers

Theories of Mergers

Synergy

Types of Synergy

Value creation in Horizontal, Vertical & Conglomerate

Mergers.

Change forces contributing to M&A activities


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MEANING OF MERGERS

It denotes combination of two or more companies insuch a way that only one survives and the other is dissolved

Generally mergers represent a process of allocation andre-allocation of resources by firms in response to change ineconomic conditions and technological innovations.

Generally we can see basically two types of mergers A Statutory merger is a merger where the acquiring company

assumes the assets and the liabilities of the merged companies A subsidiary merger is a merger of two companies where the

target company becomes a subsidiary or part of a subsidiary ofthe parent company

Consolidation is a merger of two companies where the targetcompany and bidding company become one under different orone of the existing name.


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MEANING OF AQUISITIONS

It refers to a situation where one firm acquires

other and the latter ceases to exist occurs when onecompany takes controlling interest in another

company

Assets of the dissolved company (targetcompany) are owned by the acquiring company

The shareholders of the target firm are paid

either cash or given shares in acquiring company.


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AMALGAMATION

Mergers may either in the form of amalgamation or

acquisitionnature of purchase

Amalgamation: when two or more companies

carrying on similar business go into liquidation and a

new company is formed to takeover the businesses


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Mergers & Acquisitions in India The top deal so far last year is the US$2.3 billion acquisition

of Ford Motor Co's. Jaguar and Land Rover brands by TataMotors Ltd.

Mergers & Acquisitions activity: In 2008, 1,270 deals withIndian participation and a known value of 50 billion. USDhave been announced.

May 9, 2008 - India's top mobile operator Bharti Airtel Ltd isin exploratory talks to acquire 51 percent in South Africa'sMTN Group at a value of around US$19 billion, creating theworlds sixth-largest mobile company with 130 millionsubscribers across 21 countries.

The countrys biggest deals in the first half of 2009 wereONGC Videsh Ltds purchase of the UKs Imperial EnergyCorp. Plc. for $1.9 billion, Tech Mahindra Ltds $576 millionacquisition of fraud-hit Satyam Computer Services Ltd in a

global bid, and Sesa Goa Ltds $350 million takeover ofDempo Mining Corp. Pvt. Ltd.


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Types of Mergers

Horizontal Mergers

Vertical Mergers

Conglomerate Mergers


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TYPES OF MERGER

Horizontal MergerCombination of two or more firms in similar type of

production or area of business.

Ex: EXXON & MOBIL (Larger share in Oil & Gas

Market)

Vertical Merger

Combination of two or more firms involved in different

stages of production or Merging of firms along the valuechain.

Ex: MERCK (Manufacturer of Pharmaceuticals) &MEDCO ( Distributor)to gain advantage in distributing its

products


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Conglomerate Merger

Combination of firms engaged in unrelated lines

of business activities. Typically, industries with poorprospects for growth will seek to diversify their

business.

Ex: GE got into new areas like financial services

and TV Broadcasting.

Circular Merger:

Involves bringing together of products orservices that are unrelated but marketed through the

same channels, allowing shared dealerships. Ex:

McLeod Russell (a tea company) with Eveready

Industries (batteries)


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Sl/No CATEGORY Value Created

1

Revenue

Enhancement

Increased market power

Network externalities

Leveraging marketing resources

and capabilities

2 Cost Savings Reduction of excess capacity

Scale of economiesProduction /Mkt/ Sales &

Dist. / logistics / branding / R&D,

Learning Economies

3 New growthopportunities

Creating new capabilities andresources

Creating new products, markets

and processes

VALUE CREATION IN HORIZONTAL MERGERS


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Sl/ No CATEGORY TYPE OF VALUE CATEGORY SOURCES

1 Efficiency Revenue enhancement

New growth opportunities through

leveraging existing resources and also

capabilities of the merging firms

2 Increase in income Revenue enhancement may arise from

the ability to offer a package of services

and products rather then just product

alone.

3 Improve profitability Higher profitability may be realized

through increased market power that

vertical merger confers.

It Provides opportunities for indirect

price discrimination.

Remove firms barriers b/w suppliers or

distributors.

VALUE CREATION IN VERTICAL MERGERS


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Sl/No CATEGORY TYPE OF VALUE CATEGORY SOURCES

1 Market Power It can be entry strategy into new

product market

2 Efficient internal

capital market

As two products are different the

sourcing of capital becomes easy

3 Resource &

capabilities transfer

Diversifying acquirer resources

redeploys excess & capabilities to

target and Resources cannot be

sold but transfer cost effectively.

4 Efficient

diversification & risk

reduction

Corporate diversification more

efficient and Cheaper

Diversification of income and

cash flow reduces volatility and

default risk

VALUE CREATION IN CONGLOMERATE

MERGERS


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Sl/No CATEGORY TYPE OF VALUE CATEGORY

SOURCES

5 Agency cost Conglomerate diversification

manifests agency problem will be

reduces.

6 Personal risk reduction Most of managers human andfinancial capitalinvested in their firm, so need todiversify risk

7 Management efficiencyin complementing eachother

Managers exploit surplus firm-specific skills andmake themselves indispensable


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SYNERGY

A state in which two or more things work together in a particularlyfruitful way that produces an effect greater the sum of their individual

effects. Expressed also as "the whole is greater than the sum of its parts."

In general, also sunergos , meaning "working together" is the

combined working together of two or more parts of a system so that thecombined effect is greater than the sum of the efforts of the parts. In

business and technology, the term describes a hoped-for or real effect

resulting from different individuals, departments, or companies working

together and stimulating new ideas that result in greater productivity.


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THEORIES OF MERGER

1. INEFFICIENT MANAGEMENT2. DIFFERENTIAL EFFICIENCY

3. SYNERGY (Operating synergy, Financial synergy &Managerial synergy)

4. DIVERSIFICATION

5. MARKET SHARE

6. STRATEGIC REALIGNMENT

7. HUBRIS AND THE WINNERS CURSE

8. AGENCY PROBLEMS

9. INFORMATION AND SIGNALLING10. MANAGERIALISM


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DRIVING FORCES FO M&A

1. INTERNAL FACTORS Motive to Grow

Synergy

Diversification

2. EXTERNAL FACTORS

Managerial Efficiency

Market Entry

Tax Shield

Strategy Competition


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TYPES OF MOTIVES FOR MERGER

STRATEGIC MOTIVES

FINANCIAL MOTIVES

ORGANIZATIONAL MOTIVES

CROSS BORDER MOTIVES


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STRATEGIC MOTIVES

Expansion and growth

Dealing with the entry of MNCs

Economics of scale

Synergy

Market penetration

Market leadership

Backward /Forward integration

New product entry


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Cont. New market entry

Surplus resource

Minimum size

Risk reduction

Balancing product cycle

Arresting downward trends

Growth and diversification strategy

Re- fashioning


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FINANCIAL MOTIVES

Deployment of surplus funds

Fund raising capacity

Market capitalization

Tax planning

Creation of share holder value

Tax benefits

Revival of sick units

Asset stripping Under valuation of target company

Increasing EPS


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ORGANIZATIONAL MOTIVES

Superior management

Ego satisfaction

Retention of managerial talents

Removal of inefficient management


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CROSS BORDER MOTIVES

Growth orientation

Access to input

Unique advantage

Clients needs

Opportunism


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merger and acquistation

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