MERGERSMERGERSIn merger two firms,In merger two firms, agree to move ahead and exist as a single

new company. Merger can be merger of equals : both companies are of equal sizes. merger of unequal's : large company merge with smaller one

Voluntary process : consent of both companies.Name of new merged entity is usually a combination of both

parent companies Mergers are mostly financed by a stock swap. Both companies Both companies

surrender their stocks and stock of the new company is issued surrender their stocks and stock of the new company is issued as a replacement. as a replacement.

Types of mergerTypes of mergerHorizontal mergerHorizontal merger : When two merging companies are of the same : When two merging companies are of the same

industry and produce similar products.industry and produce similar products. Example : Footwear Company Merging with Footwear companyExample : Footwear Company Merging with Footwear company

Vertical mergerVertical merger : When two companies are producing the same : When two companies are producing the same goods, but are at different stages, it is a vertical merger.goods, but are at different stages, it is a vertical merger.

Example : Footwear Company Merging with Leather TanneryExample : Footwear Company Merging with Leather Tannery

Concentric merger Concentric merger : when two companies are related to each other in : when two companies are related to each other in terms of customer functions or customer groups. terms of customer functions or customer groups.

Example : Footwear Company Merging with another specialty Example : Footwear Company Merging with another specialty Footwear CompanyFootwear Company

Conglomerate mergerConglomerate merger : When two companies operate in different : When two companies operate in different industries.industries.

Example : Footwear Company Merging with Pharmaceutical FirmsExample : Footwear Company Merging with Pharmaceutical Firms

EXAMPLE:-

Example X + Y

= Z

X + Y = X

EXAMPLES OF HORIZONTAL MERGER:-

Lipton India and Brooke Bond. Bank of Mathura with ICICI Bank.  BSES Ltd with Orissa Power Supply

Company. Associated Cement Companies Ltd Damodar

Cement.

EXAMPLES OF VERTICAL MERGER:-

Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming. 

Pixar-Disney( Merger ).

EXAMPLE OF CONGLOMORATE MERGER:-

Walt Disney Company and the American Broadcasting Company.

Major Mergers in the telecom:-

AUQUIRER VODAFONE MCL WorldCom BELL Atlantic AT AND T SBC

TARGET Manes and man Spirit GTE MeCaw celluar Pacific telesis

EXAMPLE OF CONCENTRIC MERGER:-

Nextlink is a competitive local exchange carrier offering services in 57 cities and building a nationwide IP network. 

Concentric, a national ISP, offers dedicated and dial-up Internet access, high-speed DSL and VPN services across the U.S. and overseas.

Citigroup (principally a bank) buying Salomon Smith Barney (stock brokerage investment operation.).

Major Mergers and Acquisitions in India

Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million.

Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million.

Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million.Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million.

Suzlon Energy acquired Hansen Group through a deal of $565 million.

The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million.

HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500 million.

VSNL acquired Teleglobe through a deal of $239 million.

Are all mergers successful?Are all mergers successful?Hindalco-Novelis (failure)Hindalco-Novelis (failure)

Hindalco (Hindalco (metal maker of Birla group) acquired Novelis for a metal maker of Birla group) acquired Novelis for a staggering $ 5.76 billion.staggering $ 5.76 billion.Novelis , on a net worth of $ 322 million, had a debt of $ 2.33 billion Novelis , on a net worth of $ 322 million, had a debt of $ 2.33 billion

HindalcoHindalco took $ 3.13 bn loan to aquire Novelis. Right after the took $ 3.13 bn loan to aquire Novelis. Right after the acquisition hindalco came on a rough road. acquisition hindalco came on a rough road.

With the debt market tightening , the metal maker is left with no With the debt market tightening , the metal maker is left with no choice but to dilute its equity through a 1:3 rights issue. choice but to dilute its equity through a 1:3 rights issue.

Further, high interest costs, which rose by over 490 % loan increased Further, high interest costs, which rose by over 490 % loan increased from Rs 3.13 billion in FY 07 to Rs 18.49 billion in FY 08.from Rs 3.13 billion in FY 07 to Rs 18.49 billion in FY 08.

Finally Hindalco’s earning per share in FY08 dropped to Finally Hindalco’s earning per share in FY08 dropped to Rs.15.76, Rs.15.76, from Rs. 26.73 in FY07from Rs. 26.73 in FY07, a fall of 41% !, a fall of 41% !

Acquisition is a deal when one company takes over another Acquisition is a deal when one company takes over another company and buyer becomes sole proprietor.company and buyer becomes sole proprietor.

At times takeover occurs when the target company does not At times takeover occurs when the target company does not

want to be purchased. However with better offering of prices want to be purchased. However with better offering of prices shareholder are attracted by acquirer. shareholder are attracted by acquirer.

In legal terms, the target company ceases to survive. The buyer In legal terms, the target company ceases to survive. The buyer swallows the company and the buyer's stock continues to be swallows the company and the buyer's stock continues to be traded. traded.

Unlike mergers which are friendly, acquisitions can be friendly Unlike mergers which are friendly, acquisitions can be friendly and unfriendly.and unfriendly.

AQUISITION

Some notable AcquisitionsAcquisitions

Google bought YouTube ($1.65B in 2006)

Google bought a rival. YouTube had four times as many hits as Google VideoYouTube streamed nine times as many clips as Google Video. Google’s choice to buy rather than build marked a big strategic change.(Economist, 10/14/06, p82).

CONTINUED…

AOL acquired Time Warner for $164B (2003) eBay acquired Skype for $2.6B (2005) Newscorp acquired MySpace.com for $580M

(2005)

Tata Steel and CorusTata Steel and Corus On January 31, 2007, Tata Steel Limited, one of the leading steel producers in India, On January 31, 2007, Tata Steel Limited, one of the leading steel producers in India,

acquired the Anglo Dutch steel producer Corus Group for US$ 12.11 billion.acquired the Anglo Dutch steel producer Corus Group for US$ 12.11 billion. Corus was 2.5 times biggerCorus was 2.5 times bigger company than TATA. company than TATA.

It took nine rounds for Tata to acquire Corus. In the first bid Tata had closed the deal at It took nine rounds for Tata to acquire Corus. In the first bid Tata had closed the deal at US US

$ 7.6 bn$ 7.6 bn and later it ended up by paying and later it ended up by paying US $ 12.11 bnUS $ 12.11 bn, making it an expensive turnover. , making it an expensive turnover.

This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel

emerged as the emerged as the fifth largest steelfifth largest steel producer in the world. producer in the world.

After acquisition Tata benefited itself from Corus:After acquisition Tata benefited itself from Corus: Distribution network of Europe.Distribution network of Europe. expertise in steel making for automobiles.expertise in steel making for automobiles. In return Corus benefit itself from Tata Steel's expertise in low cost manufacturing of steel. In return Corus benefit itself from Tata Steel's expertise in low cost manufacturing of steel.

Major Laws Involved:-Major Laws Involved:-

SSEBI (substantial Acquisition of shares &Takeovers) Regulations EBI (substantial Acquisition of shares &Takeovers) Regulations 1997.1997.

TThe Securities and Exchange Board of India Act,1992 .he Securities and Exchange Board of India Act,1992 . SSecurity Contract Regulation Act ,1956 .ecurity Contract Regulation Act ,1956 . TThe Depositories Act,1956.he Depositories Act,1956. SSEBI Disclosure and Investor Protection Guidelines 2000.EBI Disclosure and Investor Protection Guidelines 2000. SSecurities and Exchange Board of India (Prohibition of Insider ecurities and Exchange Board of India (Prohibition of Insider

Trading Regulation ),1992.Trading Regulation ),1992. SSecurities and Exchange Board of India (Merchant Bankers) ecurities and Exchange Board of India (Merchant Bankers)

Rules/Regulation 1992.Rules/Regulation 1992. SSEBI (Delisting of Securities )Guidelines,2003.EBI (Delisting of Securities )Guidelines,2003. FForeign Exchange Management Act,1999.oreign Exchange Management Act,1999. CCompanies Act,1956.ompanies Act,1956.

the legal procedures for mergers or acquisitions :-

Permission for merger Information to the stock exchange Approval of board of directors Application in the High Court Shareholders' and creators' meetings Sanction by the High Court Filing of the Court order Transfer of assets and liabilities Payment by cash or securities

Why M & A OCCUR ?Why M & A OCCUR ? To reduce competition.To reduce competition.

To increase growth rate & capture a greater market share To increase growth rate & capture a greater market share

To improve value of organization’s stock.To improve value of organization’s stock.

To acquire a needed resource quickly.To acquire a needed resource quickly.

To take advantage of synergy.To take advantage of synergy.

To acquire resources to stabilize operations.To acquire resources to stabilize operations.

To achieve economies of scale.To achieve economies of scale.

Disadvantages of M&ADisadvantages of M&A

Reduced competition may even facilitate monopolistic or Reduced competition may even facilitate monopolistic or oligopolistic tendencies among firms.oligopolistic tendencies among firms.

Increase of prices.Increase of prices.

Job losses for employees.Job losses for employees.

Difficulties in cultural integration of the merging firms.Difficulties in cultural integration of the merging firms.

Interest of minority shareholders is not protected. Interest of minority shareholders is not protected.

JOINT VENTUREJOINT VENTURE An entity formed between two or more parties to undertake a specified activity An entity formed between two or more parties to undertake a specified activity

together. Parties agree to create a new entity by both contributing equity, and they together. Parties agree to create a new entity by both contributing equity, and they then share revenue, expenses, and control of the enterprise. The venture can be for then share revenue, expenses, and control of the enterprise. The venture can be for one specific project only or a continuing business relationship Eg: Sony Ericsson.one specific project only or a continuing business relationship Eg: Sony Ericsson.

Unlike mergers and acquisitions, in joint venture the parent companies does not Unlike mergers and acquisitions, in joint venture the parent companies does not cease to exist. cease to exist.

TypesTypes of Joint Ventures of Joint Ventures

(a) Between 2 Indian org. in one industry(a) Between 2 Indian org. in one industry

(b) Between 2 Indian org. across different industries.(b) Between 2 Indian org. across different industries.

(c) Between an Indian org. & a foreign org. in India.(c) Between an Indian org. & a foreign org. in India.

(d) Between an Indian org. & a foreign org. in that foreign country.(d) Between an Indian org. & a foreign org. in that foreign country.

(e) Between an Indian org. & a foreign org. in third country.(e) Between an Indian org. & a foreign org. in third country.

Joint VentureJoint VentureMaruti Udyog Ltd. & Suzuki Motor Corp.Maruti Udyog Ltd. & Suzuki Motor Corp.

Maruti Suzuki is one of India's leading automobile manufacturers and the market Maruti Suzuki is one of India's leading automobile manufacturers and the market leader in the car segment, both in terms of volume of vehicles sold and revenue leader in the car segment, both in terms of volume of vehicles sold and revenue earned.earned.

Until recently, 18.28% of the company was owned by the Indian government, and Until recently, 18.28% of the company was owned by the Indian government, and 54.2% by Suzuki of Japan. 54.2% by Suzuki of Japan.

The Indian government held an initial public offering of 25% of the company in The Indian government held an initial public offering of 25% of the company in June 2003.June 2003.

As of May 10, 2007, Govt. of India sold its complete share to Indian financial As of May 10, 2007, Govt. of India sold its complete share to Indian financial

institutions. With this, Govt. of India no longer has stake in Maruti Udyog.institutions. With this, Govt. of India no longer has stake in Maruti Udyog.

During 2007-08, Maruti Suzuki sold 764,842 cars, of which 53,024 were exported.During 2007-08, Maruti Suzuki sold 764,842 cars, of which 53,024 were exported.

In all, over six million Maruti cars are on Indian roads since the first car was rolled out on In all, over six million Maruti cars are on Indian roads since the first car was rolled out on December 14, 1983. December 14, 1983.

Strategic alliancesStrategic alliances A strategic alliance is a form of affiliation that involves a mutual sharing of resources A strategic alliance is a form of affiliation that involves a mutual sharing of resources

or “partnering” to improve efficiency.or “partnering” to improve efficiency.

In strategic alliances, the focus is on “sharing” of resources rather than seeking change In strategic alliances, the focus is on “sharing” of resources rather than seeking change in control. Equity investment in each others company is not any focus.in control. Equity investment in each others company is not any focus.

Types of strategic alliancesTypes of strategic alliances : :

Pre competitive alliancePre competitive alliance : vertical value chain alliances b/w manufacturers and : vertical value chain alliances b/w manufacturers and suppliers.suppliers.

Non competitive alliancesNon competitive alliances : Intra industry partnerships b/w noncompetitive firms : Intra industry partnerships b/w noncompetitive firms

like two firms in same industry but different geographical locations.like two firms in same industry but different geographical locations. Competitive allianceCompetitive alliance : partnerships which brings two rival firms in a cooperative : partnerships which brings two rival firms in a cooperative

arrangement where intense interaction is necessary.arrangement where intense interaction is necessary. Pre competitive alliance Pre competitive alliance : partnerships which brings two firms of different industry: partnerships which brings two firms of different industry

together to work on well defined industries such as new technology development. together to work on well defined industries such as new technology development.

Reasons for strategic alliancesReasons for strategic alliances Market entryMarket entry -A strategic alliance can ease entry into a foreign market . Eg: -A strategic alliance can ease entry into a foreign market . Eg:

strategic alliance between British Airways and American Airlines. strategic alliance between British Airways and American Airlines.

Share risk & expensesShare risk & expenses -firms involved can share risks. Eg: In early 1990’s -firms involved can share risks. Eg: In early 1990’s film manufacturers Kodak and Fuji joined with camera manufacturers Nikon, film manufacturers Kodak and Fuji joined with camera manufacturers Nikon, Canon, and Minolta to create cameras and film for an "Advanced Photo Canon, and Minolta to create cameras and film for an "Advanced Photo System.System.

Synergistic Effects of Shared Knowledge and Expertise-Synergistic Effects of Shared Knowledge and Expertise- help a firm gain help a firm gain

knowledge and expertiseknowledge and expertise Skills+ brand + market knowledge+ assets= synergizing effectSkills+ brand + market knowledge+ assets= synergizing effect Eg: For example, in the early 1990s, Motorola initiated an alliance among Eg: For example, in the early 1990s, Motorola initiated an alliance among

various partners, including Raytheon, Lockheed Martin, China Great Wall, and various partners, including Raytheon, Lockheed Martin, China Great Wall, and Nippon Iridium, to develop and build a global satellite-based communications Nippon Iridium, to develop and build a global satellite-based communications network.network.

Gaining Competitive Advantage- Gaining Competitive Advantage-

PitfallsPitfalls

Lack of trust & commitment.Lack of trust & commitment. Perceived misunderstanding among partners.Perceived misunderstanding among partners. Conflicting goals & interests.Conflicting goals & interests. Inadequate preparation for entering into partnership.Inadequate preparation for entering into partnership. Hasty implementation of plans.Hasty implementation of plans.

Jet airways-Kingfisher AllianceJet airways-Kingfisher Alliancemarket leaders with share of market leaders with share of

Jet – 30%Jet – 30%kingfisher – 29%kingfisher – 29%

Economic slowdown and high ATF prices resulted in decline of air travel both in Economic slowdown and high ATF prices resulted in decline of air travel both in international and domestic segments of the air travel market.international and domestic segments of the air travel market.

Airline sector is set to incur a loss of $ 2bn (Rs.10,000 Crore) this yearAirline sector is set to incur a loss of $ 2bn (Rs.10,000 Crore) this year

Thus Jet and Kingfisher have decided to form an alliance in fields including fuel Thus Jet and Kingfisher have decided to form an alliance in fields including fuel management, ground handling, sharing of technical resources and crew for training management, ground handling, sharing of technical resources and crew for training and cross-utilization on similar aircraft types.and cross-utilization on similar aircraft types.

This will help both carriers to significantly rationalize and reduce costs and provide This will help both carriers to significantly rationalize and reduce costs and provide improved standards of service and a wider choice of air travel options to improved standards of service and a wider choice of air travel options to consumers with immediate effect. consumers with immediate effect.

They could not merge as of rule that two airline companies withThey could not merge as of rule that two airline companies with

combined market share greater than 40 % can not merge in India. So they formed combined market share greater than 40 % can not merge in India. So they formed an alliance. an alliance.

MERGER AQUISITION

JOINT VENTURE STRATEGIC ALLIANCE

Usually two companies of equal size merge Together.

Voluntary and friendly process

Stock swap : both companies surrender their stocks and stocks of new companies are given as replacement.

Parent companies cease to exist.

Large company takes over the smaller Company.

Often forceful or unfriendly where larger company attracts the shareholders of targetcompany by offering them better price for their shares.

Parent companies cease to exist.

Two or more companies agree to form an Entity for a specific task or period.

Always friendly.

One company receives financial assistance,Managerial inputs and technological inputs from superior company.

Parent companies keep functioning in theirRespective areas.

To improve efficiency of companies.

Includes no equity investments.

Parent companies keep functioning as normal by supporting each other.