Mergers - Motives
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Transcript of Mergers - Motives
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Mergers & Acquisitions
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M & A
There is a great deal of confusion anddisagreement regarding the precise meaningof terms relating to the business combinationviz. Merger, acquisition, takeover,
amalgamation and consolidation. Sometimes,these terms are used in broad senseencompassing most dimensions of businesscombination, while sometimes they are defined
in a restricted legal sense. We shall definethese terms keeping in mind the relevant legalframework in India.
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Merger or Amalgamation
A merger is said to occur when two or more companies
combine into one company. One or more companies maymerger with an existing company or they may merger toform a new company. Laws in India use the termsamalgamation for merger. For example,Section 2(1A) of the Income Tax Act, 1961 defines
amalgamation as the merger of two or more companieswith another company or the merger of two or morecompanies (called amalgamating company or companies)to form a new company (called amalgamated company) insuch a way that all assets and liabilities of theamalgamating company or companies become assets andliabilities of the amalgamated company and shareholdersholding not less than nine-tenths in value of the shares inthe amalgamating company or companies become
shareholders of the amalgamated company.
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Merger or Amalgamation
Merger or amalgamation may take two forms:
a) Merger through absorption
b) Merger through consolidation
Absorption: An absorption is a combination of two ormore companies into an existing company. All companiesexcept one lose their identity in a merger throughabsorption. An example of this type of merger is theabsorption of Tata Fertilisers Ltd. (TFL) by Tata ChemicalsLtd. (TCL). TCL, an acquiring company (a buyer), survived
after merger while TFL, an acquired company (a seller),ceased to exist. TFL transferred its assets, liabilities andshares to TCL. Under the scheme of merger, TFLshareholders were offered 17 shares of TCL (market valueper share being Rs.114) for every 100 shares of TFL held
by them.
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Merger or Amalgamation
Consolidation: A consolidation is a combination of
two or more companies into a new company. In thisform of merger, all companies are legally dissolvedand a new entity is created. In a consolidation, theacquired company transfers its assets, liabilities and
shares to the acquiring company for cash for exchangeof shares. In a narrow sense, the terms amalgamationand consolidation are sometimes usedinterchangeably.
An example of consolidation is the merger oramalgamation of Hindustan Computers Ltd., HindustanInstruments Ltd., Indian Software Company Ltd., andIndian Reprographics Ltd. in 1986 to an entirely newcompany called HCL Ltd.
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Merger or Amalgamation
Acquisition
A fundamental characteristic of merger (either throughabsorption or consolidation) is that the acquiringcompany (existing or new) takes over the ownership ofother companies and combine their operations with its
own operations. An acquisition may be defined as anact of acquiring effective control by one company overassets or management of another company withoutany combination of companies. Thus, in an
acquisitions two or more companies may remainindependent, separate legal entity, but there may bechange in control of companies.
Ex: IVRCL acquires controlling stake in Hind-Dorr Ltd
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Merger or Amalgamation
Acquisition
A fundamental characteristic of merger (either throughabsorption or consolidation) is that the acquiringcompany (existing or new) takes over the ownership ofother companies and combine their operations with its
own operations. An acquisition may be defined as anact of acquiring effective control by one company overassets or management of another company withoutany combination of companies. Thus, in an
acquisitions two or more companies may remainindependent, separate legal entity, but there may bechange in control of companies.
Ex: IVRCL acquires controlling stake in Hind-Dorr Ltd
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Takeover Vs Acquisition Takeover vs. acquisition: Sometimes, a distinction between
takeover and acquisition is make. The term takeover is understood toconnote hostility. When an acquisition is a forced or unwillingacquisition, it is called a takeover. In an unwilling acquisition, themanagement of target company would oppose a move of beingtaken over. When management of target companies mutually andwillingly agree for the takeover, it is called acquisition or friendly
takeover. An example of acquisition is the acquisition of controllinginterest of Universal Luggage Manufacturing Company Ltd. by BlowPlast Ltd. Similarly, Mahindra and Mahindra Ltd. a leadingmanufacturer of jeeps and tractors acquired a 26 per cent equitystake in Allwyn Nissan Ltd. Yet another example is the acquisition of
28 per cent equity of International Data Management (IDM) by HCLLtd. In recent years, due to the liberalization of financial sector aswell as opening up of the economy for foreign investors, a number ofhostile take-overs could be witnessed in India. Examples includetakeover of Shaw Wallace, Dunlop, Mather and Platt and HindustanDorr Oliver by Chhabrias, Ashok Leyland by Hindujas and ICIM,
Harrison Malayalam and Spencers by Goenkas.
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Motives of Mergers
Mergers and Acquisitions are strategic decisions
leading to the maximization of a companys growth byenhancing its production and marketing operations.
They have become popular in the recent times
because of the enhanced competition, breaking oftrade barriers, free flow of capital across countries andglobalization of business as a number of economiesare being deregulated and integrated with other
economies.
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Motives of Mergers Limit competition
Utilize under-utilised market power
Overcome the problem of slow growth and profitability in ones
own industry
Achiever diversification
Gain economies of scale and increase income with
proportionately less investment Establish a transnational bridgehead without excessive start-up
costs to gain access to foreign market
Utilize under-utilised resources human, physical & managerial
Displace existing management
Circumvent government regulations
Reap speculative gains attendant upon new security issue orchange in P/E ratio
Create an image of aggressiveness and strategies opportunism,empire building and to amass vast economic powers of the
company.
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Motives of Mergers
Maintaining or accelerating a companys growth,particularly when the internal growth is constraineddue to paucity of resources;
Enhancing profitability, through cost reduction resultingfrom economies of scale, operating efficiency andsynergy;
Diversifying the risk of the company, particularly whenit acquires those businesses whose income streamsare not correlated.
Reducing tax liability because of the provision ofsetting-off accumulated losses and unabsorbeddepreciation of one company against the profits ofanother.
Limiting the severity of competition by increasing the
companys market power.
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Advantages of M & A
Accelerated Growth Growth is essential for sustaining the viability, dynamism and value-
enhancing capability of a company. a growth-oriented company is notonly able to attract the most talented executives but it would also beable to retain them. Growing operations provide challenges andexcitement to the executives as well as opportunities for their jobenrichment and rapid career development. This helps to increase
managerial efficiency. Other things being the same, growth leads tohigher profits and increase in the shareholders value. A companycan achieve its growth objective by:
Expanding its existing markets
Entering in new markets
A company may expand and/or diversify its markets internally orexternally. If the company cannot grow internally due to lack ofphysical and managerial resources, it can grow externally bycombining its operations with other companies through mergers andacquisitions. Mergers and acquisitions may help to accelerate thepace of a companys growth in a convenient and inexpensivemanner.
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Advantages of M & A
2) Enhanced Profitability:
The combination of two or more companies may resultin more than the average profitability due to costreduction and efficient utilization of resources. Thismay happen because of the following reasons:
Economies of scale
Operating economies
Synergy
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Advantages of M & A
Economies of scale: Economies of scale arise when increase in
the volume of productions leads to a reduction in the cost of
production per unit. Merger may help to expand volume ofproduction without a corresponding increase in fixed costs. Thus,fixed costs are distributed over a large volume of productioncausing the unit cost of production to decline. Economies of scalemay also rise from other indivisibilities such as production
facilities, management functions and management resources andsystems. For example, a given mix of plant and machinery canproduce scale economies when its capacity utilization isincreased. Economies will be maximized when it is optimallyutilized. Similarly, economies in the use of the marketing function
can be achieved by covering wider markets and customers usinga given sales force and promotion and advertising efforts.Economies of scale may also be obtained from the optimumutilization of management resource and systems of planning,budgeting, reporting and control. A combined firm with a largesize can make the optimum use of the management resource andsystems resulting in economies of scale.
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Advantages of M & A Operating economies: In addition to economies of scale, a
combination of two or more firms may result into cost reduction
due to operating economies. A combined firm may avoid orreduce over-lapping functions and facilities. It can consolidate itsmanagement functions such as manufacturing, marketing, R&Dand reduce operating costs. For example, a combined firm mayeliminate duplicate channels of distribution, or create a centralized
training centre, or introduce an integrated planning and controlsystem.
In a vertical merger, a firm may either combine with its suppliersof input (backward integration) and/or with its customers (forward
integration). Such merger facilities better coordination andadministration of the different stages of business operations purchasing, manufacturing, and marketing eliminate the needfor bargaining (with suppliers and/or customers), and minimizinguncertainty of supply of inputs and demand for product and saves
costs of communication.
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Why M&A?
Underlying Principle for
M&A Transactions
2 + 2 4
Additional Value of Synergy