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Mergers

A merger is a transaction that results in the transfer of ownership and control of a corporation.

Merger MotivesImprove overall performance of the merged firms through cost savings, elimination of overlapping operations, improve purchasing power, increase market share, or reduce competition.

• Company growth

• Broaden product lines

• Acquire technology / skills

• Acquire new markets

Financial restructuring:• cutting costs• selling off units• laying off employees• refinancing company

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Types of Mergers

Economists distinguish between three types of mergers:

1. Horizontal

2. Vertical

3. Conglomerate

Horizontal Mergers

• Two firms producing the same product merge to achieve economies of scale.– Bank A has a huge back office function to clear

checks. It can just as easily handle another 500,000 customers.

Vertical Mergers

• A firm in industry A sells its output to industry B.

• Two firms merge to integrate their production.

Conglomerate mergers

Consolidated firms may sell related products, share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated.

Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance; Pepsico-Pizza Hut; Proctor & Gamble-Clorox.

Recent Mergers

Reliance Industries in March 2009 approved a scheme of amalgamation of its subsidiary Reliance Petroleum with the parent company. The all-share merger deal between the two Mukesh Ambani group firms was valued at about Rs 8,500 crore ($1.68 billion).

ACQUISITION

Acquisition One firm buys the assets or shares of

another.

#Takeover implies the acquiring firm is larger than the target.

#Reverse takeover if the target is larger than the acquirer.

TYPES OF ACQUISITION

• ASSET ACQUISITIONS

• STOCK ACQUISITIONS

Two types of data acquisition

• Two types of data acquisition– Static acquisition

• Copying a hard drive from a powered-off system

• Used to be the standard

– Live acquisition• Copying data from a running computer

AcquisitionsAcquisitions

Reasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

Mergers and AcquisitionsMotivations

• Economies of scale and scope

Scale – production in high volumes

Scope – combining marketing or distribution for different types of related products, maybe horizontal or concentric

Mergers and AcquisitionsMotivations

• Secure supplies or supply chain and other interdependencies- Vertical

• Expertise

• Monopoly gains

• Efficiency gains by elimination of duplication/operating synergies

• Operating losses

M & A RISKS

• Poor strategic fit

• Cultural and Social Differences

• Incomplete and Inadequate Due Diligence

• Poorly Managed Integration

• Overly Optimistic

Reasons for Mergers and Acquisitions

o Capacity o Economies of Scale o Accessing technology or skills o Tax reasons

HDFC Bank-Centurion Bank of Punjab: $2.4 billion

HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs 9,510 crore ($2.4 billion) in one of the largest mergers in the financial sector in India in February, 2008.

M & A PROCESS

Pre Acquisition Review

Search & Screen Targets

Investigate &

Value the Target

Acquire through

Negotiation

Post

Merger

Integration

Phase 1 - Pre Acquisition Review

The first step is to assess your own situation and determine if a merger and acquisition strategy should be implemented. If a company expects difficulty in the future when it comes to maintaining core competencies, market share, return on capital, or other key performance drivers, then a merger and acquisition (M & A) program may be necessary.

Phase 2 - Search & Screen Targets

The second phase within the M & A Process is to search for possible takeover candidates. Target companies must fulfill a set of criteria so that the Target Company is a good strategic fit with the acquiring company.

Compatibility and fit should be assessed across a range of criteria - relative size, type of business, capital structure, organizational strengths, core competencies, market channels, etc.

Phase 3 - Investigate & Value the Target

The third phase of M & A is to perform a more

detail analysis of the target company. You want to confirm that the Target Company is truly a good fit with the acquiring company. This will require a more thorough review of operations, strategies, financials, and other aspects of the Target Company.

This detail review is called "due diligence."

Phase 4 - Acquire through Negotiation

Now that we have selected our target company, it's time to start the process of negotiating a M & A.

We need to develop a negotiation plan based on several key questions:

• How much resistance will we encounter from the Target Company?

• What are the benefits of the M & A for the Target Company?

• What will be our bidding strategy?

Phase 5 - Post Merger Integration

The deal is finalized in a formal merger and acquisition agreement.

This leads us to the fifth and final phase within the M & A Process, the integration of the two companies.

The integration process can take place at three levels:

• 1. Full:

• 2. Moderate:

• 3. Minimal:

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