TAKEOVER AND ACQUISITION

CONTENTS

1. MERGERS, ACQUISITIONS, AND OTHER CORPORATE COMBINATIONS

A. Concerns about Mergers

B. Types of Mergers and Acquisitions

C. Merger Analysis

D. Merger Remedies

2. MERGERS, MANAGEMENT BUYOUTS AND CORPORATE REORGANISATIONS

A. Objectives of Mergers and Acquisitions

B. Mergers and Acquisitions And Business Strategy

C. The Dynamics of the Takeover Process

D. Economic Consequences of Takeovers

Chapter 3. CROSS-BORDER ACQUISITIONS

A. Corporate Divestments

B. As strategic alliances alternatives to acquisitions

Chapter 4. ACQUISITION MOTIVES

A. Managerial Motives in Acquisitions

B. Free Cash Flow and the Agency Problem

C. Internal Agency Conflict Control Mechanisms

D. External Agency Conflict Control Mechanisms

Chapter 5.TARGET MANAGEMENT BEHAVIOUR IN HOSTILE OFFERS

A. Acquisitions and Corporate Strategy

B. Analytical framework for generic strategies

C. The Product Life Cycle

D. Porter’s Five Forces Model

Chapter 6.CORPORATE STRATEGIES FOR MARKET ENTRY

A. Case Study 1

Sainsbury Prefers Greenfield Investment in Scotland: Acquisition

B. Case Study 2

Acquisition Reflecting Strategic Choice

Chapter 7.VALUE CREATION IN DIFFERENT ACQUISITION TYPES

A. Donor-Recipient Mode

B. Participative Mode

C. Collusive Mode

Chapter 8.TAKEOVER

A. Meaning and Concept of Takeover

B. Emergence of Concept of Takeover

C. Objects of Takeover

Chapter 9.KINDS OF TAKEOVER

A. Takeover Bids

B. Type of Takeover Bids

C. Consideration for Takeover

Chapter 10.MERGERS AND ACQUISITIONS

A. Acquisition

B. Types of acquisition

C. Merger

D. Classifications of Mergers

E. Distinction between Mergers and Acquisitions

Chapter 11.BUSINESS VALUATION

A. Financing M&A

B. Specialist M&A Advisory Firms

Chapter 12.MOTIVES BEHIND M&A

A. Effects on Management

B. M&A Marketplace Difficulties

C. M&A Failure

Chapter 13.THE GREAT MERGER MOVEMENT

A. Short-Run Factors

B. Long-Run Factors

C. Cross-Border M&A

Chapter 14.Working with console takeover and recovery

A. Forced Takeover

B. Console Takeover and Recovery Function Requirements

C. Console Takeover and Recovery Function Restrictions

Chapter 15. Mergers And Acquisitions – Types Of Mergers, Corporate Merger Procedures, Competitive Concerns, Federal Antitrust Regulation, Merger Guidelines

1. MERGERS, ACQUISITIONS, AND OTHER CORPORATE COMBINATIONS

Concerns about Mergers

The review and approval of mergers, acquisitions and other corporate combinations (all referred to as "mergers" for convenience here) is normally entrusted to competition authorities or other branches of government rather than to telecommunications regulators. However, there has been a high level of merger and acquisition activity in the global telecommunications industry in recent years. Consequently, the analysis of mergers and acquisitions can be expected to become a more important part of competition policy in the telecommunications sector.

Many mergers will have little or no negative impact on competition. Some mergers may be pro-competitive, for example, by enhancing production efficiencies resulting from economies of scale or scope. Mergers may also create new synergies, lad to innovation by combining talents of different firms, and provide additional resources to develop new products and services.

Concerns about mergers, acquisitions and other corporate combinations are generally based on the same concerns about anti-competitive behavior as discussed earlier in this Module. The main concern is that a larger merged firm may increase its market power. To the extent a merged firm becomes more dominant in a market, there is a greater potential to abuse the accumulation and exercise of market power to the detriment of competitors and consumers.

The basic rationale for merger control is that it is better to prevent firms from gaining excessive market power than to attempt to regulate abuses of their market power once such power exists. In practice, merger reviews and the exercises of related powers by competition authorities are usually based on an evaluation of the impact of specific merger on competition in the relevant markets.

Types of Mergers and Acquisitions

Mergers can be characterized according to three categories: horizontal mergers, which take place between firms that are actual or potential competitors occupying similar positions in the chain of production; vertical mergers, which take place between firms at different levels in the chain of production (such as between manufacturers and retailers); and other mergers, such as those which take place between unrelated businesses or conglomerates with different types of businesses.

Merger reviews typically focus on horizontal mergers since, by defining, they reduce the number of competitors n the relevant markets. Also of concerns are mergers between a firm which is active in a particular market and another which is a potential competitor.

In the telecommunications industry, vertical mergers can also be of concern. The merger of a firm that provides essential inputs to other firms can be problematic if the supply of those inputs to other firms is threatened. For example, the merger of a dominant local provider with a major internet Service Provider can raise concerns about where there other ISPs will obtain local access services on fair and non-discriminatory terms. Such a merger might be reviewed in order to ensure that adequate safeguards are in place to protect competing ISPs.

Merger Analysis

Large mergers, acquisitions and some other corporate combinations require prior review and approval in some jurisdictions. As part of their review, competition authorities may prohibit mergers or approve them subject to conditions. Mergers are usually only prohibited or subjected to conditions if the authority occludes that the merger will substantially harm competition. Given the discretion inherent in the interpretation of this threshold, various competition authorities have published merger

guidelines. These are intended to assist firms and their advisers to anticipate the procedures and criteria which will be applied in assessing a merger.

An example of such guidelines is contained in the Horizontal Merger Guidelines published in 1997 by the US Department of Justice and the Federal Trade Commission. The Guidelines set out a five stage analysis of the following subject areas.

Market definition; Identification of firms participating in the relevant market and their market shares; Identification of potential adverse effects of the merger; Analysis of barriers to market entry; and evaluation of any efficiencies arising from the merger. The importance of market definition was discussed earlier in this Chapter. In the context of a merger review, market definition is often the key factor in determining whether a merger is anti-competitive. If a market is defined broadly, the merging firms may be considered to be competitors. Amore narrow market definition may result in a determination that the firms operate in different markets. On the other hand, a broad market definition could lead to a conclusion that the merged entity will face sufficient competition from other firms in the market. A narrow definition could lead to a conclusion that the merged entity would have excessive market power in a smaller market.

The second stage of the analysis is the identification of firm competing in the relevant market and their market shares. The determination of market share will have a direct bearing on an assessment of market power and the potential for abuse of market power by the merged entity. The evaluation of market participants includes not only firms which actually participate in the relevant market, but also firms which could be expanded to enter it.

In assessing the potential adverse effects of a proposed merger, attention will typically focus on the establishment or increase of the dominant position by the merged entity. There may also be concerns that the merger, by reducing the number of firms participating in a market, will create conditions which make anti-competitive agreements among them more likely.

The evaluation of barriers to entry is an important aspect of merger review. A finding that there are low barriers to entry can help justify a merger.

Finally, the five-stage analysis concludes with an assessment of any efficiencies to be realized as a result of the merger. In this stage, the objective is to assess efficiency or other welfare gains which can be projected to result from the merger. These will be balanced against any anti-competitive effects which have been identified in the earlier stages of the review.

Theoretically, substantial efficiency gains or other public welfare gains could support approval of a merger even where anti-competitive risks are identified. IN practice, it is difficult for a competition authority to qualify the positive and negative aspects of the transaction and arrive at any verifiable net effect. It may also prove difficult to determine how any efficiency or other welfare gains will be distributed between the producing firm and its customers. Similarly difficult is the development of any means to ensure redistribution of efficiency gains to broader public advantage.

In exceptional circumstances, a merger which would have anti-competitive effects may be permitted where one of the merging entities is in severe financial distress. The competition authority may be persuaded that the public interest is better served by a merger than by the failure of one of the merging entities. However, transactions of this sort should be carefully evaluated. Sometimes the merger is not the best solution. For instance, it may be that another firm could expand productive capacity using the assets of the failing firm and that public welfare would be better served by this alternative solution. Bankruptcy is painful for shareholders, but does not always have a long-term negative effect on the economy.]

Information in Merger Reviews

As part of the merger review process, the merging firms must normally provide information to the reviewing authority. It is standard practice in jurisdictions which impose merger review to require parties to be merger to submit advance notice of the proposed transaction. The information disclosed in the pre-merger notification will normally be used by a competition authority in the first stage of merger review. (I.e. to determine if any anti-competitive concerns are present and whether to proceed with a more detailed review of the proposed transaction).

The content of pre-merger notifications are generally defined by the law or regulation. Required information typically includes: The identity of the firms involved in the proposed transaction.

A description of the nature and commercial terms of the transaction

The timing of the transaction

Financial information on the involved (including revenue, assets and copies of annual or other financial reports) Identification of related ownership interests and the organization structure of the firms involved.

A description of the relevant product and service markets in which the firms operate

The initial information filing typically triggers a waiting period, during which the reviewing authority will be entitled to request further information. This process concludes with a determination by the reviewing authority whether to proceed with a more detailed investigation.

If the competition authority decides to proceed with a further investigation, it will obtain more information from the merger participants. Additional information is usually gathered from third parities such as competitors and customers. Commercially sensitive information is also generally protected from public disclosure.

During a more detailed review, a competition authority will normally seek information about matters such as the following:

Products, customers, suppliers, market shares, financial performance Activity of competitors and competitors’ market shares Availability of substitute products Influence of potential competition (including foreign competition) Pace of technological or other change in the relevant markets, and its impact on competition Nature and degree of regulation in the relevant markets The quality of a merger review will depend heavily on the quality and range of information

available to the reviewing authority.

Merger Remedies

The goal of merger control laws is to prevent or remove anti-competitive effects of mergers. Three types of remedies are typically used to achieve this goal.

Prohibition or Dissolution – The first remedy involves preventing the merger in its entirety, or if the merger has been previously consummated, requiring dissolution of the merged entity.

Partial Divestiture – A second remedy is partial divestiture. The merged firm might be required to divest assets or operations sufficient to eliminate identified anti-competitive effects, with permission to proceed with the merger in other respect.

Regulation/Conditional Approval – A third remedy is regulation or modification of the behaviour of the merged firm in order to prevent or reduce anti-competitive effects. This can be achieved through a variety of one-time conditions and on-going requirements.

The first two remedies are structural, and the third remedy is behavioural. Behavioural remedies require ongoing regulatory oversight and intervention. Structural remedies are often more likely to be effective in the long run and require less ongoing government intervention.

Partial divestiture or behavioural constraints are less intrusive I the operation of market than preventing a merger from proceeding or requiring dissolution of a previously completed merger. Partial divesture can reduce or eliminate anti-competitive effects while preserving some of the commercial advantages of a merger. Partial divestiture is emerging as a preferred remedy in many jurisdictions. Although it has since been abandoned, the proposed Telia/Telenor merger, which is described in Box 1-17, provides a good illustration of the use of this remedy.

2. MERGERS, MANAGEMENT BUYOUTS AND CORPORATE REORGANISATIONS

Mergers and acquisitions are a means of corporate expansion and growth. They are not the only means of corporate growth, but are an alternative to growth by internal or organic capital investment. From time to time, companies have preferred the external means of growth through acquisitions to internal growth. Indeed, mergers and acquisitions have tended to follow a historic pattern of ‘waves’, with periods of frenetic takeover activity punctuating periods of relative sedateness. Thus in the UK we have observed peaks of takeover activity in 1968, 1972 and 1989. A similar wave pattern has been observed in other countries, notably in the USA. Why do companies get high’ on takeover fever at certain times, whereas at other times they prefer internal growth? This is a phenomenon which as yet is not completely understood. The terms ‘merger’, ‘acquisition’ and ‘takeover’ are all part of the mergers and acquisitions parlance. In a merger, the corporations come together to combine and share 0their resources to achieve common objectives. The shareholders of the combining firms often remain as joint owners of the combined entity. An acquisition resembles more of an arm’s-length deal, with one firm purchasing the assets or shares of another, and with the acquired firm’s shareholders ceasing to be owners of that firm.

In a merger a new entity may be formed subsuming the merging firms, whereas in an acquisition the acquired firm becomes the subsidiary of the acquirer. A ‘takeover’ is similar to an acquisition and also implies that the acquirer is much larger than the acquired. Where the acquired firm is larger than the acquirer, the acquisition is referred to as a ‘reverse takeover’. Although the terms ‘merger’ and’ acquisition’ are often used interchangeably, they have precise connotations in certain contexts, such as when acquirers choose which accounting rules to apply in consolidating the accounts of the two firms involved. While the distinction is important for specific contexts, we shall, in general, use the terms interchangeably.

Management buyouts and management buying, as well as by financial innovations like high-leverage buyouts and mezzanine finance. There is a variety of motivations for divestments. One of the themes of the 1980s was deco glomeration and sticking to the core businesses. The divestor, on this view, was getting rid of under- or non-performing businesses so as to concentrate its resources on high-value activities. Some divestments were sometimes motivated by the need to avoid corporate financial distress or outright liquidation. We will discuss these possible motivations and the impact of various forms of divestment on the performance of both divestors and acquirers of divested assets.

Objectives of Mergers and Acquisitions

The immediate objective of an acquisition is self-evidently growth and expansion of the acquirer’s assets, sales and market share. However, this merely represents an intermediate objective. A more fundamental objective may be the enhancement of shareholders’ wealth through acquisitions aimed at accessing or creating sustainable competitive advantage for the acquirer. In modern finance theory, shareholder wealth maximisation is posited as a rational criterion for investment and financing decisions made by managers.

Shareholder wealth maximization may, however, be supplanted

Acquisitions, mergers and inter corporate divestments in the UK, 1972-92

Total of acquisitions Divestments Divest Year total (%)

Number Value (£m)

1972 1210 2532 272 185 7.31

1973 1205 1304 254 247 18.94

1974 504 508 137 49 9.64

1975 315 291 115 70 24.05

1976 353 448 111 100 22.32

1977 481 824 109 94 11.41

1978 567 1140 126 163 14.30

1979 534 1656 117 186 11.23

1980 469 1475 101 210 14.24

1981 452 1144 125 262 22.90

1982 463 2206 164 804 36.45

1983 447 2343 142 436 18.61

1984 568 5474 170 1121 20.47

1985 474 7090 134 793 11.18

1986 842 15 370 221 3093 20.12

1987 1528 16486 340 4667 28.31

988 1499 22 839 376 5532 24.22

1989 1337 27 250 441 5677 20.83

1990 779 8329 342 2941 35.31

1991 506 10434 214 2945 28.23

1992 433 5863 199 1832 31.57

Note: The last column is based on values of acquisitions and divestments.

Source: 'Acquisitions and Mergers within the UK', Central Statistical Office Bulletin,

London, May 1993

By the managerial utility theory, acquisitions may be driven by managerial ego or desire for power, empire building or perquisites that go with the size of the firm. Empirical evidence which we shall discuss is inconclusive as to what fundamentally drives acquisitions.

Mergers and Acquisitions and Business Strategy

Whatever the fundamental objective of the manager: in acquiring other companies, such acquisitions must form part of the business and corporate strategies of the acquirer. Business strategy is aimed at creating a sustainable competitive advantage for the firm. Such an advantage may stem from economies of scale and scope, or market power or access to unique strengths which the acquired company may possess. Often the acquirer may aim to transfer its ‘superior’ management skills to the target of acquisition and thereby enhance the earning power of the target’s assets. Here the added value can be created even when the target remains a stand-alone entity, and

does not depend upon any possible synergy between the acquirer and the acquired. The acquirer is pursuing a corporate strategy of value creation through efficiency improvements in the target.

1980 469 1475 3.14 27.01

1981 452 1144 2.53 19.03

1982 463 2206 4.76 34.29

1983 447 2343 5.24 34.48

1984 568 5474 9.64 76.47

1985 474 7090 14.96 93.92

1986 842 15370 18.25 198.63

1987 1528 16539 10.82 203.56

1988 1499 22 839 15.24 265.05

1989 1337 27 250 20.38 293.77

1990 779 8329 10.69 83.28

1991 506 10434 20.62 98.66

1992 433 5939 13.72 53.70

Note: Data up to 1969 include only quoted companies.

After 1969, figures include all industrial and commercial companies. The GDP price deflator has been used to restate the value of bids in 1990 prices.

Sources: ‘Acquisitions and Mergers within the UK’, Central

Statistical Office Bulletin, London, May 1993, and DataStream for GDP price deflator.

An acquisition may also fulfill the acquirer’s corporate strategy of building a portfolio of unrelated businesses. The aim here may be risk reduction if the earnings streams of the different businesses in the portfolio are not highly positively correlated. In an efficient capital market framework, the ability of this strategy to create value for shareholders is open to doubt. Indeed, whether acquisitions can create value for the acquirer’s shareholders is a question which has been empirically addressed by a number of researchers. Earlier evidence suggests that acquisitions, from the acquirer shareholders’ perspective, are at best neutral and at worst value destroying to a small degree. These tests are, however, sensitive to the methodology adopted, and more recent evidence lends some support to the view that acquisitions can add value to the acquirer shareholders. There is almost universal agreement that target shareholders earn substantial bid premia, often amounting to 30 per cent in a matter of days surrounding the bids. This paradox of target shareholders gaining and the bidder shareholders struggling to hold their own raises a number of interesting issues concerning both the. Acquirer’s motive and its ability to translate expected gains from the proposed acquisition into wealth gains for its shareholders. Indeed, arguably, the evidence may be consistent with managerial motives dominating takeover decisions. It appears that there is many a proverbial slip between acquisitions and value creation in the post-acquisition period. Apart from managerial self-interest, which may drive at least some of the acquisitions, there are other aspects of the acquisition process which need to be explored before the actual Source of acquisition failure can be reasonably traced.

In large corporations, investment decisions such as acquisitions are subject to a wide variety of intra-organizational conflicts. It may be the acquisition process, with ill-defined objectives and messy political compromises, which leads to poor acquisition decisions. We will explore the impact of the organizational dynamics of the acquisition decision process on acquisition success.

The Dynamics of the Takeover Process

Another aspect of the acquisition process which may determine its success is the market dynamics external to the firm. Takeovers have been referred to as the market for corporate control, with rival management teams competing for the right to manage the corporate assets of the target. In this market, as in others, there are intermediaries whose profitability depends upon the volume of takeovers they handle. The incentives that some of the intermediaries, such as merchant bankers, have in M & A deals may create conflicts of interest between bidders and their advisers. Such incentives may lead to pressures for’ closing the deal’. In this event, acquirers, unable to resist such pressures, may overpay for the targets, and post acquisition added value may not match, let alone exceed, this overpayment. It is, therefore, necessary to understand the dynamics of the takeover process. We will describe the role of the inter me diaries in the bid process and the areas of potential conflicts of’ interest between bidders and targets on the one hand and intermediaries on the other.

Economic Consequences of Takeovers

So far we have focused on the shareholders and managers as gaining or losing from acquisitions. But mergers’ and acquisitions have wider constituencies than just these two groups. Indeed, either or both of the groups can gain at the expense of these other constituencies. The latter include employees, consumers and communities in which the operations of the acquired and acquirer firms are located. Takeovers often lead to rationalization of operations of the firms involved as well as renegotiation of the terms of employment. There have been, for instance, cases in the recent past when acquirers attempted to reduce the value of pension benefits which employees of the acquired company had enjoyed. Rationalization may also lead to plant closures and consequent redundancies, with often devastating impact on local communities.

Where the acquisition is driven by the desire to achieve market dominance or increased market power, the shareholders and manager groups may gain from the merger, but to the detriment of consumers. Such reduction in competition may also have long-term consequences for the competitiveness and growth of the economy as a whole. For these reasons, takeovers in the UK and many other countries are subject to antitrust screening. The antitrust authorities have statutory powers to block a merger or allow it subject to certain acceptable conditions.

UK bidders are subject to the antitrust regime policed by the Office of Fair Trading (OFT). They also have to observe the rules of the European Union (EU) Merger Regulation. While the UK antitrust rules empower the OFT to take into account wider criteria than just competition, since 1984 there has been a major shift in emphasis towards competition as the primary ground on which mergers are investigated in the UK.

The dual antitrust regime to which EU companies are subject sometimes creates a jurisdictional conflict between member states and t1; le European Commission. As the EU Merger Regulation has been in existence only since September 1990, it is still evolving, with a corpus of case law on individual mergers being built up. The motivation behind the promulgation of the EU Merger Regulation was to create ‘a one-stop shopping’ for antitrust clearance. We will examine to what extent this aim has been achieved and look forward to the future evolution of the EU regime.

3. Cross-Border Acquisitions

There has been a substantial increase in the amount of funds flowing across nations in search of takeover candidates. The UK has been the most important foreign investor in the USA in recent years, with British companies making large acquisitions. With the advent of the Single Market, the European Union now represents the largest single market in the world. European as well as Japanese and American companies have, therefore, sought to increase their market presence by acquisitions in this huge market. British companies have made acquisitions both on Continental

Europe and in the USA. They have also increasingly been the targets of acquirers overseas. The number of; European acquisitions made by UK companies in 1993 was 196, amount.

The corresponding figures for acquisitions in the USA were 107 and £13.80 billion. Cross-border acquisitions pose, many of the same problems as domestic ones, as regards identifying appropriate targets with high value creation potential, the scope for overpayment and post acquisition integration. However, these problems may be of a higher order of magnitude in cross-border mergers because of the acquirer’s lack of familiarity with the acquired firm’s environment and organizational culture.

There are many instances of UK companies making a hash of their US acquisitions. The commonality of language may have induced in these acquirers a false sense of familiarity, and dulled their aware ness of the idiosyncratic nature of the US corporate environment and cultural norms. Acquirers need to sensitize themselves to the cultural and other nuances of targets in foreign countries before they venture abroad.

Corporate Divestments

As noted earlier, the 1980s witnessed a high level of corporate divestments. Together, acquisitions and divestments constitute corporate restructuring. The ease with which divestments could be carried out has endowed firms with a great deal of flexibility and capacity to adapt their business and corporate strategies to the changing environment. Firms can reconfigure their businesses less traumatically than in the past, and with greater speed, when they find that a particular business fits ill with their changed strategic vision. The existence of an inter corporate market in corporate assets does not require that the ownership of the legal entity owning those assets has to change before the portfolio of its businesses can be reshuffled. Thus a predatory acquisition followed by asset stripping is not the only mechanism available for transferring assets to those who can exploit their potential to the full. Provided firms are perceptive enough to see when a particular business in their portfolio has outlived its strategic raison d’etre, they could use the divestment mechanism to improve the value of their businesses, and thereby avoid falling into the hands of asset strippers.

As strategic alliances alternatives to acquisitions

In recent years, many companies have sought to advance their strategic goals through strategic alliances in preference to straight acquisitions. This preference has resulted partly from the ‘failure’ of many acquisitions. But strategic alliances also have certain inherent advantages. Since they are created to achieve specific and fairly narrowly defined strategic objectives, there is a greater clarity of purpose than in ‘fuzzy’ acquisitions. Further, with these ventures and alliances, the problem of post-acquisition integration does not arise.

There are, however, pitfalls in strategic alliances which are cooperative arrangements among actual or potential rivals. This paradoxical co-operative-competitive game is not easy to manage. Often joint ventures fall apart for organizational reasons because of cultural conflicts or divergent

managerial philosophies between the venture partners. We shall set out the relative attractions and shortcomings of strategic alliances.

Why Engage in Corporate Restructuring??

Sales enhancement and operating economies*

Improved management

Information effect

Wealth transfers

Tax reasons

Leverage gains

Hubris hypothesis

Management’s personal agenda

Sources of Value

Strategic Acquisitions Involving Common Stock

Acquisitions and Capital Budgeting

Closing the Deal

Takeovers, Tender Offers, and Defenses

Strategic Alliances

Divestiture

Ownership Restructuring

Leveraged Buyouts

The objective of this lesson is to give you insight in to :

Acquisition motives

Acquisition and corporate strategies

Acquisition motives may be defined in terms of the acquirer’s corporate and business strategy objectives. For example, a large food company with well-established brand names or distribution network may acquire a small, less well-known target in order to achieve marketing and distribution synergies. Other acquisitions may be motivated by the desire for increased market power, control of a supplier, consolidation of excess production capacity and so on. However, as noted in Chapter I, while strategic objectives are the proximate motives for acquisitions, these strategies themselves are formulated to serve the interests of the stakeholders in the acquiring firm. Strategies are formulated and acquisition decisions are made by the managers of the acquiring firm. Managers may be taking these decisions to further the interest of the owners of the firm, i.e. the shareholders. This is the neoclassical view of the firm, in which the shareholder interest is paramount and managerial interests are subordinated. Where managerial interests differ from those of the shareholders, acquisitions may be undertaken to serve the former. In large, publicly owned modern corporations, managers wield considerable power and discretion, and are often subject to only feeble oversight by shareholders.

This gives managers much scope to pursue their own self-interest at the expense of the shareholders. Acquisitions driven by managerial self-interest may fail and cause wealth losses for shareholders.

In the literature there is a wide perception that acquisition ‘don’t pay’ for the shareholders of the acquirer (see on assessment of acquisition performance). A possible reason for this is that they are motivated by managerial self-interest. In this chapter, we describe the alternative shareholder and managerial perspectives, and draw out the implications for the success of the acquisition when either the shareholder or managerial considerations dominate the other. It must be remembered that the conflict between the two perspectives may permeate all decisions made by managers and not just acquisitions.

The causes of failure of acquisitions cannot be unambiguously attributed to managerial selfishness. Even if managers do act in the shareholder interest, acquisitions may fail for a variety of other reasons, such as weak acquisition strategy, bid dynamics and problems of post-acquisition integration. It may be argued that these are themselves an affirmation of managerial misconduct arising from pursuit of managerial self-interest. However, managerial incompetence untainted by malice towards the shareholders is at least a plausible villain in the acquisition drama.

Shareholder Wealth Maximization Perspective

In this neoclassical perspective, all firm decisions including acquisitions are made with the objective of maximizing the wealth of the shareholders of the firm. This means that the incremental cash flows from the decision, when discounted at the appropriate discount rate, should yield zero or positive net present value. Under uncertainty, the discount rate is the risk adjusted rate with a market-determined risk premium for risk (see Chapter 9 on determination of the discount rate). With acquisitions, the shareholder wealth maximization criterion is satisfied when the added value created by the acquisition exceeds the cost of acquisition:

Added value from acquisition = Value of acquirer and the acquired’ after acquisition - Their aggregate value before

Increase in acquirer = Added value - Cost of acquisition share value

Cost of acquisition = Acquisition transaction cost + Acquisition premium

Acquisition transaction cost is the cost incurred when an acquisition is made, in the form of various advisers’ fees regulator’s fees, stock exchange fees, cost of underwriting and so on. The acquisition premium is the excess of the offer price paid to the target over the targets, pre-bid price. It is also called the control premium. Where managers seek to enhance shareholder wealth, they must not only add value, but also ensure that the cost of the acquisition does not exceed that value. Value creation may occur in the target alone, or in both the acquirer and the acquired firm. The calculation of added value for the acquirer’s shareholders is illustrated in the following example.

Predator plc makes a cash bid for Sitting Duck plc. Their equity market values ahead of the bid are respectively £100 million and £20 million. Predator expects that, as a result of the operational and strategic improvements made to Sittin’3 Duck, its value will, post acquisition, increase to £30 million. It pays a premium of £5 million to Sitting Duck shareholders to win control in a hostile bid, which also entails transaction costs, in the form of advisers’ fees etc., of £0.5 million.

Added value from acquisition = £ (100+ 30)m - (100 + 20)m =

£10m Cost of acquisition = £5m + 0.5m = £5.5m

Increase in Predator’s share value = flam - 5.5m = £4.5m

Assuming that the stock market correctly anticipates the expected benefits from the acquisition and the transaction costs, the market value of Predator will increase by £4.5 million at the time of the takeover.

Managerial Perspective

The modern corporate economy is characterized by large corporations with widespread diffusion of ownership which is divorced from management.

4. ACQUISITION MOTIVES

With the separation of ownership from control, the relation between shareholders and managers may be viewed as one between a principal and his or her agent. In this agency model, managers as agents may not always act in the best interest of the principal. The, ‘Cost to the shareholders of such behaviour is called the agency Cost and represents loss of value to the shareholders.

Managers may act in disregard of their principal’s interest in order to promote their own self-interest. In the acquisition context, such self-interest pursuit may result in bad acquisitions and loss of shareholder value. Acquisitions lacking in value creation rationale may be undertaken to satisfy managerial objectives ‘such, as an increase in firm size. Where the acquisition does have value creation potential, it may be overestimated. Managers may overpay for the acquisition or incur high transaction costs by launching hostile bids. Managers may make genuine errors in estimating the value creation potential, since such estimation is often based on incomplete information about the target it the time of the bid. If managers are unaware of such errors, they may unwittingly pay an excessive bid premium or enter into a hostile bid with attendant high transaction costs. Disentangling managers’ true intentions from their decisions poses problems both before and after a takeover. Ex ante, managers can be very persuasive about the merits of an acquisition and the potential for shareholder wealth increase. Ex post, managerial intentions may be obscured by alternative explanations for acquisition failure. Thus evidence of acquisition failure may point to either an agency problem or managerial failure unrelated to agency conflict.

Managerial Motives in Acquisitions

Managers may undertake acquisitions for the following reasons:

1. To pursue growth in the size of their firm, ‘since their remuneration, perquisites, status and power are a function of firm size (the empire-building syndrome).

2. To deploy their currently underused managerial talents and skills (the self-fulfillment motive).

3. To diversify risk and minimize the costs of financial distress and bankruptcy (job security motive).

1. To avoid being taken over (job, security motive).

The above motives are not mutually exclusive, but to some extent reinforcing. They are now discussed in turn.

1. Managerial compensation may be related to firm size because of the greater complexity of larger firms. Managers may derive intangible benefits such as power and social status when they run large firms. Executive compensation may increase as a result of an increase in firm size (e.g. in terms of assets or sales), even when there is no corresponding increase in shareholders’ wealth (Jensen, 1986). Managers may pursue growth, if their compensation is a function of sales growth.

2. Where a firm is in a mature or declining industry, the survival of the firm may depend on an orderly exit from that industry and entry into one with greater growth opportunities: The present industry operations may not exhaust the managerial energies and talents available to the firm. Without moving into a growth industry, the firm may lose young managers and thereby accelerate its own decline.

3. Risk diversification may be achieved when the acquiring and the acquired firms’ cash flows are not highly positively correlated, thereby reducing the overall variability of the combined entity’s cash’ flows. Such diversification is not necessarily value creating for the shareholders. In a well functioning capital’ market, shareholders may construct their portfolio to include the shares of both companies

and achieve the required diversification, perhaps at a lower cost than the firm. Thus, shareholders’ do-it-yourself diversification may be a superior alternative to firm diversification.

Risk diversification may, nevertheless, be of value under certain circumstances. For example, when the, acquired firm’s shares are not traded, diversification into that firm is only possible for investors via corporate diversification. Second, the reduction, in the overall variability of the firm’s cash flows reduces the probability of financial distress and bankruptcy. Financial distress is the condition where the firm finds it difficult to meet its obligations and is forced to make sub optimal operating, investment and financing decisions. Firm failure results in receivership or winding up of the firm. Financial distress and firm; failure; way have, a greater impact on managers than on shareholders.”

Managers are generally over invested in their own firms. This over investment arises’ from three sources. They depend, on their firms for their Income in the form pf salaries and bonuses. They may have developed firm-specific human capital which outside their present firm may not be valued as highly. Finally, where they receive compensation in the form of ‘stocks, and stock options, they increase their investment in their own firms.

Thus, unlike shareholders” managers hold highly un-diversified portfolios which are overwhelmingly invested in their own firms. This suggests that total risk, which includes firm specific risk such as the risk of failure, is more important to managers than systematic risk: that is, market-movement-related risk appropriate to well diversified shareholders. Shareholders may also benefit from a reduction in the risk of financial distress and bankruptcy through corporate diversification. However, the more stable cash flows of the combined firm resulting from a diversifying merger may strengthen the security available to the debt holders of the firm. Thus debt holders, rather than shareholders, may be the beneficiaries of risk reduction.

4. The last of the motives - avoiding being taken over – is perhaps the least plausible or respectable and, for that reason, is often clothed in euphemistic and lofty managerial rhetoric about the value of the company’s continued independence. Target managers often go to extraordinary lengths to defeat hostile takeover bids. To achieve immunity from the threat of a takeover, managers may undertake acquisitions, assuming, quite falsely, at times, that increased firm size confers such immunity.

At least in the 1980s, large firms were not so protected. In the USA, RJR Nabisco, the food and tobacco conglomerate was taken over in a hostile leveraged buyout for $25 billion. 1ft the UK, the Hoylake consortium bid £13 billion for BAT Industries in 1989. Consolidated Goldfields was taken over in a hostile bid by Hanson in 1989 for £3.1 billion. In the mid- 1980s, several UK companies like Imperial, Group and Distillers were taken over in bids worth nearly £2 billion. Those were the days of megabids when hostile bidders were not deterred by target size.

Acquisitions to increase firm size, or to move into growth industries and away from the declining ones in which the firm currently operates, are consistent with the defensive motive of avoiding becoming a takeover target.

Free Cash Flow and the Agency Problem

Free cash flow is normally measured as the operating cash flow after the firm has met its tax commitments, and after it has financed the currently available investment opportunities. According to Jensen (1986), ‘free cash flow is cash flow in excess of that required to fund all projects that have positive net present values when discounted at the relevant cost of capital’ (see on calculation of free, cash flow).

Such “free cash flow is generally available to profitable firms in mature ‘industries with, few growth prospects. Managers of those firms have the option to increase the dividend payout or

recapitalize their firms, that is, to buy back equity, and have more debt and less equity in their firms’ capital structure. Either course would reduce the size of the free cash flow. Alternatively, managers could use the free cash flow to finance diversifying acquisitions, which might turn out to be negative net present value investments. In the 1960s, many firms in tobacco, food, oil and other mature industries diversified into unrelated businesses with poor subsequent financial performance and value decline for their shareholders. In the 1980s, such firms themselves became targets of hostile takeovers. How can managers be induced to make use of the free cash flow in an optimal way from the shareholders’ perspective? ‘For shareholders the problem is how to motivate managers to disgorge the excess cash rather than investing it at below the cost of capital or wasting it on organizational inefficiencies’ (Jensen, 1986). This suggests that free cash flow is not in itself a manifestation of the agency conflict between shareholders and managers, but that, when put to ‘improper use by managers, it can accentuate that conflict.

Mechanisms For, Controlling the Agency Conflict

A number of control mechanisms exist to minimize the incidence and cost of the agency conflict to shareholders. They are both internal and external to the firm. Internal controls include shareholder-manager alignment devices, a rigorous policing of managerial conduct and managerial compensation contracts. External mechanisms rely on the discipline imposed on managers by the product market in which the firm sells its output, the managerial labour market where managers with a reputation may command premium wages, and the market for ‘corporate control in which management teams compete for the right to manage corporate assets.

Internal Agency Conflict Control Mechanisms

Since the source of agency conflict is the divorce of ownership from control, such a conflict may _mitigated by aligning the interests of the managers and shareholders. When managers own shares in their own companies, their interests are at least partly aligned to those of shareholders. Executive share option schemes operated by many companies are intended to accomplish such an alignment. Managers receive their reward in many forms - returns to their shareholding; direct pecuniary remuneration in the form of salaries, bonuses and perquisites; and indirect, psychological rewards of control, power or status. Making managers’ part owners of the firm by offering share options may, however, not influence their behaviour towards alignment if they derive more toward from the other two sources. Further, share ownership by managers may potentially facilitate their entrenchment and protect them from the discipline of other internal controls as we as external controls. It is not clear at what level of managerial shareholding alignment gives way to entrenchment. Policing of management requires an institutional arrangement such as the presence of outside, non-executive directors. Similarly, performance-linked remuneration to managers requires a mechanism for clearly metering managerial performance and establishing a formula for rewarding that performance.

The recent Cadbury Report (1992) has sought to improve corporate governance in UK companies’ by proposing” the inclusion of a sufficient number of non”-executive directors’ and the establishment of remuneration committees. The effectiveness of policing by non-executive directors and determination of performance-linked managerial remuneration by remuneration committees is yet to be’ assessed. But these controls may be weak, since executive directors can ‘pack’ the board and the remuneration committee, with their own henchmen. A recent survey of 235 VIS companies found that more than half of all non-executive appointments of directors were personally made by the chairperson (KPMG Peat Marwick, 1994). In the same survey, more than half of that non executive directors felt that they had not been given the full range of financial and non-financial (e.g. strategic) information. Another survey found that non-executive directors were not perceived as very effective by institutional shareholders (BDO Binder Hamlyn, 1994). With the increasing concentration of shareholdings in the hands of financial institutions, it may be thought that these institutions can play

the policing role effectively. While; a ‘period, their large block holdings enable the institutions to monitor managements effectively, in practice,’ they ‘have been rather reluctant to play that role. Institutions have pleaded lack of expert’: knowledge to assume an interventionist role. Institutions may also receive side payments for other business relationships with firms, such as underwriting. Such relationships may create a conflict of interest and dilute monitoring by institutions in their role as shareholders. In the 1990s, there has been a trend in the USA towards shareholder activism, with managers being subjected to much greater scrutiny and questioning by active shareholder groups. Often institutional investors have taken on such activist roles in response to criticism of their earlier inertia in the face of perceived ‘managerial excesses’. In the UK, the Cadbury Report also envisages a more active monitoring role for institutional investors.

External Agency Conflict Control Mechanisms

The product, managerial labor and corporate control markets have been proposed as agency conflict control devices. They are not specifically designed for that purpose, but nevertheless can playa correctional role when managerial failure has occurred. It is the fear that these markets will punish managerial failure by allowing displacement of the failed managers that is supposed to act as a deterrent against the pursuit of managerial self interest. Of course, these markets may discipline failing managers whatever the cause of such failure. Of particular relevance to acquisitions is the disciplinary role of the market for corporate control. In this market, corporate assets are traded between competing management teams. The management teams which can create more value out of those corporate assets will then outbid other teams less capable of value creation. Hostile bids which are resisted by the incumbent target managements are a necessary part of the disciplinary role of the market for corporate control indeed, they are its defining characteristic. The operation of the market for corporate control, therefore, rests on inefficient teams being weeded out by superior management teams. There are two ‘flies in the ointment’ concerning this view. First, conceptually, the winning management team may make the acquisition from motives inconsistent with shareholder wealth increase. Empirical evidence shows that acquisitions generate, on average, little or even negative wealth changes for acquiring company shareholders Moreover, acquirers in many cases overpay for the targets. Second, it has been argued that hostile takeovers may be an inefficient and expensive method of correcting managerial failure (Kay, 1989).

Empirical Evidence on Acquisition Motives Whether managers act in shareholders’ or in their own interest has beep tested in a few studies. One of the implications of managerial self-interest pursuit, that managers will emphasize size or growth, has been tested by Meeks and Whittington (1975). They find, for a UK sample, that sales growth is positively related to directors’ pay increases, although such pay increases, are also due to higher profitability. The profitability effect in fact dominates in the short term. Baker et al. (1988) report, for the USA, that the average elasticity of compensation with respect to firm size is 0.3: that is, a 10 per cent increase in firm sales raises executive compensation by 3 per cent. This suggests that executive compensation can increase with an increase in firm size, even when shareholder wealth is not enhanced as a result. This, Baker et al. argue, could explain some of the vast amount of inefficient expenditures of corporate resources on diversification programmes that have created large conglomerate organizations in the past. Acquisitions and Managerial Compensation Ravens craft and Scherer (1987), from their case studies of US acquisitions and sell-offs, find that empire building through conglomerate acquisitions may have been an important motive behind the original acquisitions. Other studies have sought to establish a more explicit link between acquisitions and managerial compensator.

Firth (1991) tests whether executive reward increases with acquisitions for a sample of 254 UK takeover offers during 1974-80. He finds that the acquisition process leads to an increase in managerial remuneration, and that this is predicated on the increased size of the acquirer. Making acquisitions in which shareholders gain leads to significant increases in managerial rewards. Even in acquisitions where shareholders lose, executives gain. Firth (1991) concludes that the evidence is

‘consistent with takeovers being motivated by managers wanting to maximize their own welfare’. A more recent study of managers’ compensation by Conyon and Clegg (1994) finds, for a sample of 170 UK firms between 1985 and 1990, that directors’ pay is positively related to sales growth. Further, expansion through takeovers increases such pay, and the relationship between frequency of takeovers and pay is positive. The above studies may be summarized as suggesting that managers stand to gain from acquisitions in terms of their compensation, even though such acquisitions may not always benefit their shareholders.

_

Chapter 5.TARGET MANAGEMENT BEHAVIOUR IN HOSTILE OFFERS

Target management may resist takeover bids in order to secure their jobs or safeguard their empire. Alternatively, they may resist in order to maximize the premium paid by the bidder. While increasing the premium, target resistance may reduce the probability of a successful bid. Where a bid is abandoned, if the target shareholders lose their earlier gains, one may infer that the resistance was driven by managerial entrenchment motives rather than shareholder welfare considerations. Such value reducing target management behaviour may, however, by constrained by a watchful board with independent, outside directors.

Cotter et al. (1993) find, with a US sample, that board composition influences the target management decision to resist, the outcome of tender offers and the wealth gains to target shareholders. They study US tender offers which are generally hostile and made directly to the target shareholders. In those offers where target boards are numerically dominated by outside directors, target management resistance to a bid is significantly more probable and the offer less likely to succeed. However, more reputable outside directors and those who have a large share ownership in the target company exercised a more restraining influence on target managers’ resistance. These results suggest that board oversight of management can be effective, but that it depends on the characteristics of the board. Target management attitude to bids is also influenced by the incentive structure for managers. If the takeover is successful, managers may be replaced and so lose future compensation, as well as non-financial rewards such as status. On the other hand, they can enjoy capital gains on their shareholding in their firms and also receive ‘golden parachute’ payments (see on golden parachutes). Managers, in deciding whether or not to oppose an” offer, have to strike a trade-off between these potential gains and losses.

Cotter and Zenner (1994) present evidence on the relation between changes in managerial wealth and the tender offer process for a US sample. They find that initial target management resistance is greater, the smaller the managerial wealth changes and, in particular, the smaller the capital gains on the managers’ shareholding in the target. Moreover, once the offer premium is allowed for, managerial resistance reduces wealth gains to target shareholders, presumably because such resistance reduces the probability of offer success. The probability of a tender offer success is increased when managers’ wealth increases. It appears that share ownership may align managers’ interest with that of other shareholders.

Acquisitions and Corporate Strategy

An acquisition is a means to an end, the end being the achievement of certain strategic objectives of the acquirer. These strategic objectless may be varied, including growth of the firm, gaining competitive advantage in existing product markets, market or product extension, or risk reduction.. Like all other strategic decisions, acquisitions should satisfy the criterion of added value. Where managers make decisions in their own interests, this added value may be appropriated by managers to the detriment of shareholders. Where they act in shareholders’ interests, the added value will be reflected in wreath gains for shareholders.

For certain types of strategy such as market or product extension, acquisition may be one of several alternatives for achieving the same objectives. The other alternatives include organic growth, joint ventures and co-operative alliances. Preference for acquisition over the alternatives should be justified by their relative benefits ‘and costs. ‘Acquisitions need to be placed in the context of the firm’s broader corporate and business strategy framework. Different types of acquisition are dictated by the firm’s strategic imperatives and choices. These acquisitions are differentiated by the source of value creation in each. The acquisition type also dictates the acquisition logic, the framework for the evaluation of targets, the acquisition target profile and the post-acquisition integration (In this chapter, we describe an analytical framework for strategic evaluation of acquisitions. Various conceptual

models discussed in the corporate strategy literature are drawn upon and applied to the acquisition context. Models for identifying and assessing value creation sources are suggested.

Corporate and Business Strategies Corporate strategy is concerned with arranging the business activities of the corporation as a whole, with a view to achieving certain predetermined objectives at the corporate level. These objectives include orderly redirection of the firm’s activities, deploying surplus cash from one business to finance profitable growth in another, exploiting interdependence among present or prospective businesses within the corporate portfolio, and risk reduction. Apart from this portfolio management role, corporate strategy aims to develop a number of distinctive capabilities or core competencies (Hamel and Prahalad, 1994; 220), which the firm can translate into sustainable competitive advantage and, in turn, into added value. These distinctive capabilities include the firm’s architecture, reputation and innovation. Architecture comprises the internal relations between the firm and its employees, the external relations between the firm and its suppliers or customers, and networks within a group of collaborating firms (Kay, 1993: 66). A management style appropriate to managing the business units is part of the architecture of the firm. Business strategy is concerned with improving the competitive position of an individual business, with a view to maximizing the contribution that the individual business makes to the corporate objectives. It also aims to exploit the strategic assets that the business has accumulated. Kay (1993, ch. 8) defines strategic assets to include: natural monopolies, barrier_ to entry in the form of sunk costs, the experience curve effect, reputation, advertising and market knowledge, and exclusivity through licensing. Corporate and business strategies differ in the level within the firm at which strategy is formulated and implemented, and in the breadth of focus. Corporate strategy has an all-firm encompassing focus and may exploit the dependencies between component businesses, whereas business strategy focuses on a narrow range of markets. The distinctive capabilities that the firm has built at the corporate level, such as reputation or innovatory flair, are available to be exploited together with the strategic assets to enhance the competitive advantage of the component businesses. Boston Consulting Group business portfolio matrix.

Analytical framework for generic strategies

A simple model of this analysis is the Boston Consulting Group (BCG) matrix, shown in this matrix classifies .a firm’s portfolio of businesses on two dimensions - market growth rate and the firm’s relative share of that market. Market growth rate is used as a proxy for the attractiveness of the market. When demand for the products sold in a market rises rapidly, firms have more profitable opportunities, hence the attractiveness of the market. Market share represents the firm’s competitive strength in that market. The positive impact of market share on profitability has been demonstrated in a number of studies, the most substantial being the PIMS (Profit Impact of Market Share) study of thousands of firms by the Strategic Planning Institute in the USA. A ‘star’ is a product sold in a market with high growth opportunities and where the firm commands a high market share. A ‘cash cow’ is a mature business with low growth opportunities, but where the firm has a high market share. A ‘question mark’ is a young business with plenty of growth prospects, but where the firm has a low market share and faces heavy competition. A ‘dog’ is a business is which the market growth is low and the firm’s market share is also low. The four types of business have different profiles in terms of profitability, investment needs and free cash flows. Free cash flow, as defined in Chapter 2, is the cash flow from a firm’s operations after it has met its investment needs.

A dog is a low-profit (possibly loss-making) business with low free cash flow and low investment (possibly dis-investment). It represents a product market which is declining for a variety of reasons. A question mark is a high-investment business with potentially high profits and a low (or negative) Tee cash flow. The high investment is necessary to build up the market and the firm’s market share. A cash cow is a profitable, low investment business with high free cash flow. Since the business is mature and probably oligo polis tic, investment in market development, research and development (R & D) or additional production capacity is ‘no longer needed. Thus a cash cow throws

off surplus cash. A star is a high-profit, high investment business with low free cash flow. The high profits are retained to make additional investments in order to maintain the high market shares held by the firm in a fast-growing market.

The Product Life Cycle

It can be seen that the classification in Figure 3.1 derives its rationale from the nature of the product and its life cycle. The product life cycle concept is depicted and traces the evolution of a product and its associated market over time. The four stages of a product’s life are: launch, growth, maturity and decline.

The firm which launches a new product has the advantage and burden of a first mover. The market for the product is small, but the profit margin is high. The first mover must expend resources on building up the demand for the product and on additional production capacity. Market development expenditure takes the form of further product development in response to customer preferences, and the development of marketing and distribution channels and advertising. As the market expands, the first mover enjoys high margins on increasing sales volume. The expanding market with high profits now attracts competing producers. This increased supply leads to a lower profit margin and, consequently, to further expansion of market demand. Firms now begin to compete on a wide front – in terms of price, product differentiation, and non-price dimensions such as product quality

Thereafter, market growth slows down, which leads to excess production capacity. Competition gets keener, profit margins are squeezed and the shake-out starts. In this phase, reduction of excess capacity is often achieved through defensive mergers. Shake-out tends to lead to a better matching of production capacity to market demand and to a smaller number of competitors. We have now reached the maturity stage of the product’s’ life. The market has settled’ down to the slower and more certain rhythms of oligopolistic competition. Profit margins are low, each Competitor has significant but fairly stable market shares, and investment requirements are low. In the case of some products which ‘are necessities, and for which substitutes emerge slowly, if at all the maturity phase can be one of relative and prolonged serenity. For other products, consumer tastes may have changed or substitutes; may have been invented, bringing about the decline of the product. At this stage, volumes are falling, profit margins are low and investment needs are also low. Indeed, this phase requires dis-investment, which may become a source of cash inflow. That is the end of story.

The product life cycle concept helps us to identify the market opportunities for a single product ‘and the position of the firm in that market: for example, whether it is in the growth or decline phase. The BCG matrix expands this analysis to the firm’s portfolio of businesses, each of which may be at a different stage of its own life cycle: for instance, a star is a business in the growth phase; a dog is in the decline phase, and so on. Thus the two models are complementary. While the BCG matrix explicitly considers the interaction between the market environment (growth) and the firm’s competitive strength (market share), this is implicit in the product life cycle model.

Ansoff’s Model of Strategic Choice

The BCG matrix helps to identify the strengths and weaknesses of a corporate business portfolio, and provides guidance as to which of those businesses should be divested, retained or further strengthened through additional investment. Thus it 12 11.370 indicates the direction of a firm’s strategic movement in terms of market attractiveness and competitive strength. The Ansoff model maps out the alternative directions in which it can choose to go.

The Ansoff matrix is shown in Figure 3.3. It depicts four possible strategic choices for a firm, depending on the relation between its existing products/markets and those which it wishes to enter. These are as follows:

Market penetration, with the firm increasing market share in its existing markets,

Market extension, with the firm selling its existing products in new geographic markets.

Product extension, in which the firm sells new products related to its existing ones in its present markets.

Diversification, in which the firm sells new products in new markets.

The particular choice that a firm makes depends on its evaluation of the attractiveness of the market that it wishes to enter or deepen its commitment to, its own competitive strengths, and the potential for value creation when these strengths are matched to the demands of the market. The core competencies or distinctive capabilities of the firm have a decisive influence on its strategic choice. Neither the Figure 3.3 Ansoff product-market matrix. BCG nor the Ansoff model captures the rich complexity of factors which determine the competitive environment of markets, or the factors which constitute a firm’s competitive strength.

Porter’s Five Forces Model

Porter portrays the competitive structure of a firm’s environment in five dimensions. These five dimensions are: existing competition in the firm’s industry, the threat of new substitutes. These five relative bargaining power of suppliers of inputs, the relative bargaining power of the buyers of the firm’s output, and the threat of 3ubstitutes. These five forces are not of equal strength within the same industry or across industries at any time. Their relative strength may also change over time. Indeed, forces such as the threat of new entrants or the threat of substitutes are essentially of a dynamic nature and are based on expectations, whereas the current rivalry, and the bargaining powers of suppliers and buyers, are more static and reflect current realities. The strength of each of the five competitive forces is determined by a number of factors, some of which are listed in Competitive Strengthened by

New entrant Product substitution Supplier power Buyer power Current rivalry Low level of entry barriers (e.g., scale economies, capital requirements), Low relative price of substitute, buyer propensity to substitute, low, (product) switching costs to buyers, High (supplier) switching costs to buyers, non-availability of substitutes, supplier concentration Buyer concentration, low cost of Switching to other sellers. Low industry growth, high fixed Operating costs, low product differentiation of example.

An assessment of market attractiveness depends in turn upon an assessment of the strength of these, factors. Strategic Situation and Strategic Choice Analyses Strategy formulation is a loosely sequential process which consists of two broad steps: strategic situation and strategic choice

analyses. Strategic: situation analysis is self-examination of the corporation’s existing strategic posture, whereas strategic choice, al1alysis is a forward looking, scenario-building approach to the firm’s future strategic posture. The Porter model can be used for both strategic situation and strategic choice analyses. A firm can employ it to examine the strategic. Strength/market attractiveness configuration of its existing portfolio of businesses. Such an examination enables the firm to assess its competitive strengths (S) and weaknesses (W), and to match these against the opportunities (0) and threats (T) posed by the five forces. Such a SWOT analysis may reveal a in as much between the firm’s present capabilities and those that are needed to create, sustain or strengthen a competitive advantage in a market.

The Porter model is also useful in examining the future configuration of strategic strength and attractiveness of markets which the firm wishes to enter. It is this configuration which will determine the strategic choice that the firm makes.

Chapter 6.CORPORATE STRATEGIES FOR MARKET ENTRY

From its strategic situation and strategic choice analyses, a firm selects the particular markets to serve. The market entry mode is then a choice among several alternatives organic growth, acquisition or strategic alliance. The choice of entry mode depends on a number of factors:

If level of competition in the host market is already high and there is excess capacity/building new capacity is likely to invite retaliation from the existing players. In this case: acquisition of an existing firm will reduce the risk of retaliation. A start-up venture is often more risky than the acquisition of an ongoing petition,’ or is not, feasible for other reasons However, it may avoid the problems of integration with 1m acquisition The firm may not posses all the necessary resources and capabilities to compete effectively in the host market. Access to these resources and capabilities may be possible only through acquisition or strategic alliance. The ability of a firm to appropriate the added value from the new market entry depends on the organizational form of that entry. The ability to appropriate is maximized with entry via organic growth, and becomes more difficult with acquisition, strategic alliance and joint venture.

Case Study 1

Sainsbury Prefers Greenfield Investment in Scotland: Acquisition

When Tesco, the UK food retailer, made a £154m bid for Wm Low, the Scottish food retailer, Sainsbury joined the fray with a counter-bid of £21Om. Sainsbury had only four stores in Scotland and wished to increase its market share quickly and relatively cheaply. Its ambitions had been hampered by intense competition for sites and struggles with local authorities over planning permission, thus preventing a Greenfield expansion.

Acquisition is the quickest means of entry into a new market, and confers a strategic advantage when ‘time to market’ is important. However, acquisitions maybe more expensive due to the control premium that the existing owners of the target firm have to be paid. There is evidence, reviewed in that this premium is often high. Acquisition may also not be possible if suitable targets are not available. The choice of entry mode is, therefore, based on a careful evaluation of the above alternatives. Strategic alliances are discussed in this...chapter, we describe the framework for a strategic evaluation of acquisitions.

Acquisition as Strategic Choice

The strategic choice made by: a firm dictates the type of acquisition it undertakes and the target firm’s profile. Market penetration strategy suggests acquisition of a target selling the same product: that is a horizontal merger. With market extension, the target serves as a channel for distributing the firm’s existing products, as with a cross border acquisition. The target in a product extension acquisition is selling complementary products, thus increasing the product range that the combined entity can sell in their present markets. In a diversification strategy, the target is in an unrelated business, as with a conglomerate merger. Case study 3.2 exemplifies an acquisition including elements of horizontal expansion, and product and market extension.

Case Study 2

Acquisition Reflecting Strategic Choice

Greene King (GK) made a £104 million bid for fellow brewer Morland in 1992. GK’s strategy was to become the largest regional brewer in southern England. While GK operated in the south and west of London, Morland operated in the Thames Valley. Thus the two companies were operating in complementary areas. GK argued that this provided a natural geographical fit between the two

companies. The acquisition would provide economies in production, distribution and marketing, and in purchasing of supplies. Since GK and Morlan had complementary brands of beer, GK expected to sell its own brands alongside Morland’s, thus increasing the product range in Morland’s area. GK estimated that combining with Morland would produce £2.5 million of extra trading profit per year, to the benefit of the shareholders of the enlarged group.

CHAPTER 7.VALUE CREATION IN DIFFERENT ACQUISITION TYPES

When a firm makes an acquisition, it buys ‘off the shelf’ a bundle of tangible and intangible resources and capabilities, all wrapped up in a particular organizational form. An acquisition also brings together two such bundles - the acquirer and the acquired. In acquisitions and mergers, sustainable competitive advantage is created when there is a mismatch between the resources, capabilities and opportunities available to the two firms. Resources include marketing excellence, a distribution network, R & 0 and surplus operating capacity. Some of these resources are in the form of strategic assets such as market power and entry barriers such as the experience curve or size. As noted earlier, a firm’s distinctive capabilities can be a source of sustainable competitive advantage, and these include the firm’s architecture, capacity for innovation and reputation. The firm’s architecture encompasses its management style and reputation as distinct from the reputation of its products. Value created in acquisitions may be differentiated by the source of that value. There are three broad generic modes of value creation in acquisitions: the donor-recipient mode; the participative mode; and the collusive mode.

Donor-Recipient Mode

In this mode, there is a transfer of resources and/or capabilities from the acquirer to the acquired firm. Value is created when such a transfer improves the strategic and financial performance of the acquired. An example of this method of value creation is the takeover of a poorly performing firm by an acquirer with a superior and reputed management, such as Hanson or BTR: In this. Process the acquirer must guard against the transplant rejection syndrome: that is, the acquired firm being resistant to the transfer.

Participative Mode

In this mode, there is a pooling of the resources and capabilities of the two firms. Such pooling ‘is a two-way exchange process, and a great deal of interaction and mutual learning between the firms takes place. This pooling makes more effective use of the two firms’ resources and enhances their joint capabilities. Scope and scale economies may be achieved from this pooling.

Collusive Mode

This involves the pooling of strategic assets. Kay (1993: 114) defines ‘strategic assets as those characteristics of the market structure which give a firm its competitive advantage. In this mode, the coming together of the two firms in an acquisition creates or strengthens those strategic assets. Examples of the collusive mode include cartels, vertical integration and licensing. The enhancement of strategic assets is the source of sustainable competitive advantage and added value, Analysis of the Value Chain Value chain analysis is generally carried out at the business unit level and seeks to identify the cost structure of a firm’s activities. Porter (1985: 36) defines a firm as a ‘collection of activities that are performed to design, produce’, market, deliver, and support its product’. Each of these activities contributes to the cost structure of Figure 3.5-value chain for a manufacturing firm. the firm. Some of these activities, such as design and customer support, are intended to differentiate the firm’s offerings from those of its competitors.

A value chain represents the breakdown of the value of the total output (sales revenue) into its component profit margin and costs. The costs are broadly divided into those expended on primary activities and those expended on support activities. These costs are then broken down into various functional costs. Primary activities are those directed towards the creation of the product, its sale and transfer to the buyer, and service after the sale. Study of a firm’s value chain enables a manager to understand the behaviour of costs, and also to identify the possible sources of differentiation. According to Porter, a firm secures its competitive advantage by differentiating its value chain. Cost-

based competitive advantage (i.e. being the lowest-cost producer) is reflected in the value chain: for example, in scale economies in operations. Similarly, product differentiation as a competitive advantage is also reflected in the value chain - for instance, in technology development. A firm can create or improve its competitive advantage by reconfiguring the value chain. A firm’s distinctive capabilities as described by Kay can be traced to Porter’s value chain. For example, innovation is clearly related to technology development. Value Chain Analysis for Acquisitions In the acquisitions context, the acquirer is concerned with two value chains - its own and that of the acquired. Any anticipated synergy from the merger can be realized only when the two value chains are reconfigured so as to create or improve he competitive advantages for the combined firm. The reconfiguration process may involve changing one or both of the value chains. Changing value chains necessarily involves changing the organizational structures of two firms. The ease with which the latter can be accomplished depends on the political and cultural processes which define those organizations Different value creation logic drives different types of acquisition.

The way the value chain of either or both of the merging firms is reconfigured depends upon this logic. For example, where the logic is economy of scale and the production facilities of both firms are rationalized and integrated, the operating cost component of the value chain will fall. Where economy of scale in purchase of inputs is the logic behind the acquisition, the input logistics component will be altered. Where the acquirer aims to put a larger volume of the acquired company’s output through its’ own distribution network, the. Distribution cost to the acquired firm will fall A conglomerate merger may be motivated by an expected reduction in cost of capital. In this case, the firms’ infrastructure costs will decline. In other cases, some of the activities of the acquired firm may be considered redundant, such as R & D and design capability. If these activities are then terminated, the support activities component of the acquired firm’s value chain will, be slimmed. If the takeover is financial control oriented and efficiency driven, leading to the reduction in head office staff and to other central functions being transferred to the acquirer, the infrastructure component o. the acquired firm’s value chain will be reduced.

Chapter 8.TAKEOVER

Meaning and Concept of Takeover

Takeover is an acquisition of shares carrying voting rights in a company with a view to gaining control over the management of the company. It takes place when an individual or a group of individuals or a company acquires control over the assets of a company either by acquiring majority of its shares or by obtaining control of the management of the business and affairs of the company. Where the shares of the company are closely held by a small number of persons, a takeover may be effected by agreement with the holders of those shares. However, where the shares of a company are widely held by the general public, it involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

Takeovers are taking place all over the world. Those companies whose shares are under quoted on the stock market are under a constant threat of takeover. In fact every company is vulnerable to a takeover threat.

The takeover strategy has been conceived to improve corporate value, achieve better productivity and profitability by making optimum use of the available resources in the form of men, materials and machines. Takeover is a corporate device whereby one company acquires control over another company, usually by purchasing all or a majority of its shares. Ordinarily, a larger company takes over a smaller company. In a reverse takeover, a smaller company acquires control over a larger company. It must be noted takeover of management is quite distinct from takeover of possession for the purpose of sale of establishment.

In the former case the underlying view is to rehabilitate the establishment by providing better management which is not so in the latter case.

Emergence of Concept of Takeover

Earlier in India well performing companies were not allowed to utilize their surplus funds and managerial competence to takeover suitable and promising companies and “build on them” with their own funds and technical, administrative, financial and marketing expertise. They had to wait for companies to go sick, be referred to BIFR, and be taken over under a rehabilitation scheme prepared by a nominated operating agency and sanctioned by BIFR.

In India, the process of economic liberalization and globalization ushered in the early 1990’s created a highly competitive business environment, which motivated many companies to restructure their corporate strategies. The restructuring process led to an unprecedented rise in strategies like amalgamations, mergers including reverse mergers, demergers, takeovers, reverse takeovers and other strategic alliances. The concept of takeover picked up and in the meantime the Securities and Exchange Board of India (SEBI) also notified the Substantial Acquisition of Shares and Takeover Regulations, which laid down a procedure to be followed by an acquirer for acquiring majority shares or controlling interest in another company. The takeover code is not meant to ensure proper management of the business of companies or to provide remedies in the event of mismanagement. Its main objective is to ensure equality of treatment and opportunity to all shareholders and offer protection to them, in the event of substantial acquisition of shares and takeovers.

Objects of Takeover

i. The objects of a takeover may inter alia bei.To effect savings in overheads and other working expenses on the strength of combined resources;

ii. To achieve product development through acquiring firms with compatible products and technological/manufacturing competence, which can be sold to the acquirer’s existing marketing areas, dealers and end users;

iii. To diversify through acquiring companies with new product lines as well as new market areas, as one of the entry strategies to reduce some of the risks inherent in stepping out of the acquirer’s historical core competence;

iv. To improve productivity and profitability by joint efforts of technical and other personnel on the strength of improved efficiency in administration, management, production, finance and marketing of goods and services as a consequence of unified control;

v. To create shareholder value and wealth by optimum utilization of the resources of both companies;

vi. To eliminate competition;

vii. To keep hostile takeover at bay;

viii. To achieve economy of numbers by mass production at economical costs;

ix. To secure advantage of vertical combination by having under one command and under one roof, all the stages or processes in the manufacture of the end product, which had earlier been available in two companies at different locations, thereby saving loading, unloading, transportation costs and other expenses and also by affecting saving of time and energy unnecessarily spent on excise formalities at different places and stages;

x. To secure substantial facilities as available to a large company compared to smaller companies for raising additional capital, increasing market potential, expanding consumer base, buying raw materials at economical rates and for having own combined and improved research and development activities for continuous development of the products so as to ensure a permanent market share in the industry;

xi. To increase market share;

xii. To achieve market development by acquiring one or more companies in new geographical territories or segments,such as new user groups or price categories, in which the activities of acquirer are absent or do not have a strong presence.

CHAPTER 9.KINDS OF TAKEOVER

Takeovers may be broadly classified into three kinds:

i. Friendly Takeover:

a. Friendly takeover is with the consent of taken over company. In friendly takeover, there is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company. This kind of takeover is done through negotiations between two groups. Therefore, it is also called negotiated takeover.

ii. Hostile Takeover

a. : When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management, such acts of acquirer are known as ‘hostile takeover’. Such takeovers are hostile on the management and are thus called hostile takeover.

iii. Bail Out Takeover:

a. Takeover of a financially sick company by a profit earning company to bail out the former is known as bail out takeover. Such takeover normally takes place in pursuance to the scheme of rehabilitation approved by the financial institution or the scheduled bank, who have lent money to the sick company. The lead financial institutions, evaluates the bids received in respect of the purchase price track record of the acquirer and his financial position. This kind of takeover is done with the approval of the Financial Institutions and banks.

Takeover Bids

“Takeover bid” is an offer to the shareholders of a company, whose shares are not closely held, to buy their shares in the company at the offered price within the stipulated period of time. It is addressed to the shareholders with a view to acquiring sufficient number of shares to give the offer or company, voting control of the target company. It is usually expressed to be conditional upon a specified percentage of shares being the subject-matter of acceptance by or before a stipulated date.

A takeover bid is a technique, which is adopted by a company for taking over control of the management and affairs of another company by acquiring its controlling shares.

Type of Takeover Bids

A takeover bid may be made by consent of the majority or all the shareholders of the target company, which is referred to as a “friendly takeover bid”. It may be against the wishes of the management of the target company, which is referred to as a “hostile Takeover bid”. Bids may be mandatory, partial or competitive bids. Mandatory Bid SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 as amended by Second Amendment Regulations, contain provisions for making public announcement i.e. mandatory bid vide Regulations 10, 11 and 12 in the following cases:

a. For acquisition of 15% or more of the shares or voting rights;

b. For acquiring additional shares or voting rights to the extent of 5% of the voting rights in any financial year ending on 31st March if such person already hold not less than 15% but not more than 75% of the shares or voting rights in a company;

c. For acquiring shares or voting rights along with persons acting in concert to exercise more than 75% of voting rights in a company.

d. For acquiring control over a company.

Partial Bid

Partial bid covers a bid made for acquiring part of the shares of a class of capital where the offerer intends to obtain effective control of the offerer through voting power. Such a bid is made for equity shares carrying voting rights. In other words the offerer bids for the whole of issued shares of one class of capital in a company other than equity share capital carrying voting rights, partial bids come to the fore. Regulation 12 of SEBI (Substantial Acquisition of Shares) Regulations, 1997 qualifies partial bid in the form of acquiring control over the target company irrespective of whether or not there has been any acquisition of shares or voting rights in a company. For such acquisition, it is necessary to make public announcement in accordance with the Regulations.

Competitive Bid

Competitive bid can be made by any person within 21 days of public announcement of the offer made by the acquirer. Such bid shall be made through public announcement in pursuance of Regulation 25 of the SEBI Takeover Regulations 1997. Any competitive offer by an acquirer shall be for such number of shares which when taken together with shares held by him along with persons acting in concert with him shall be at least equal to the holding of the first bidder including the number of shares for which the present offer by the first bidder has been made. No person shall make a competitive bid for acquisition of shares of a financially weak company where once lead financial institution has evaluated the bid and accepted the bid of the acquirer who has made the public announcement in pursuance of Regulation 35 of SEBI Takeover Regulations, 1997.

Consideration for Takeover

Selection of the method for takeover should be made on the basis of information received about the target company and the means available with the acquirer.

1. Consideration in the form of cash: Takeover by an offered company of an offered company may be affected by a cash consideration, either for all or in part of the equity capital through a bid directly from the equity holders or through the stock market. The offered company can have the new shares in sufficient number allotted to it or its directors to gain controlling voting power in the offered company and also purchase for cash, block of shares from the persons in

Control of the offered company, carrying effective voting rights and thereby enabling its nominees on the Board to control the affairs of the company.

2. Consideration in the form of Shares: When consideration is offered in the form of shares by the offered in own company to shareholders of the target company various courses of action are available:

a. Share-for-share takeover bid in which the offered company in exchange for shares of offered provides fully paid up shares on a stated basis. Apart from this, share-plus-cash or share-plus-loan stock, convertible or non-convertible, shares or loan stock with a cash option could be a mode of consideration.

b. Reverse bid wherein the offered company makes share for-share bid for the whole of the equity capital of the offered company where the offered company has a large capital base. This alternative is more suitable when the offered company is listed, a growing concern and capable of acting as a better holding company by pursuing its policies etc. Also, this mode offers sufficient tax advantages.

c. Combinations of various modes may be resorted to, for discharging the consideration. For instance, acquisition by private deal of a block of shares from the existing Board of Directors or larger controlling interest shareholders of the offered company or acquisition of all or part of the assets of the offered company for shares of offered company or reverse acquisition with offering company etc.

Thus, the decision about the proper mix of alternatives should be taken through expert advice, having considered the relative quoted market prices of shares of offered and offerer, their dividend yield, gearing level, security cover, voting strength, net assets value, etc.

3. Acquisition through a new company: A new company may be formed by acquiring snares in two target companies and the shares of the new company may be issued to the shareholders of both the target companies, in consideration for acquisition of share capita! Or undertakings in whole or in part.

4. Acquisition of Minority held shares of a subsidiary: The offering, if already holds more than 50% of issued capital in the offering company and plans to acquire the balance equity of the offering will have to resort to takeover tactics subject to the restrictions placed by the Law and also SEBI guidelines.

What is the difference between a merger and a takeover?

In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously separate firms into a single legal entity. Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term.

The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies if scale, greater sales revenue and market share in its market, broadened diversification and increased tax efficiency. However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different. 

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America.

A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.

Target companies can employ a number of tactics to defend themselves against an unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.

Chapter 10.Mergers and acquisitions

Acquisition

Main article: Takeover

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An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. Another type of acquisition is reverse merger a deal that enables a private company to get publicly listed in a short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets. Achieving acquisition success has proven to be very difficult, while various studies have showed that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome. This model provides a good overview of all dimensions of the acquisition process.

Types of acquisition

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The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company separately listed on a stock exchange.

Merger

In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons.

Classifications of Mergers

Horizontal Merger - Two companies that are in direct competition and share the same product lines and markets.

Vertical Merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

Market-Extension Merger - Two companies that sell the same products in different markets.

Product-Extension Merger - Two companies selling different but related products in the same market.

Conglomeration - Two companies that have no common business areas.

Congeneric merger/concentric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

Purchase Mergers

As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers

With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO.

The contract vehicle for achieving a merger is a "merger sub".

The occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market and what, if any, action could prevent it. Regulatory bodies such as the European Commission, the United States Department of

Justice and the U.S. Federal Trade Commission may investigate anti-trust cases for monopolies dangers, and have the power to block mergers.

Accretive Mergers

Are those in which an acquiring company's earnings per share (EPS) increase An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E.

Dilutive Mergers

Are the opposite of above, whereby a company's EPS decreases The company will be one with a low P/E acquiring one with a high P/E.

The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. This is challengeable. An acquisition can be either friendly or hostile. An example of a resent friendly takeover was when Microsoft bought Fast Search and Transfer (OSE Stock Exchange, Ticker FAST).

CEO of the acquired company (FAST) revealed that they had been working with Microsoft for more than 6 months to get the deal which was announced in January, 2008.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. It is quite normal though for M&A deal communications to take place in a so called 'confidentiality bubble' whereby information flows are restricted due to confidentiality agreements (Harwood, 2005).

The distinction between "merger" and "acquisition" is described this way t F. Ducoulombier, Candesic Analysis which slightly differs from the above: Corporate Restructuring is all activities involving expansion or contraction of a firm's operations or changes in its assets or financial structure. Merger: A transaction in which at least one firm ceases to exist and the assets of that firm are transferred to a surviving firm so that only one separate legal entity remains. Acquisition: A transaction in which both firms in the transaction survive but the acquirer increases its percentage ownership in the target. Consolidation: The combination of two or more firms to form a completely new corporation

CHAPTER 11.BUSINESS VALUATION

The five most common ways to valuate a business are

asset valuation ,

historical earnings valuation,

future maintainable earnings valuation,

relative valuation (comparable company & comparable transactions),

discounted cash flow (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. These values are determined for the most part by looking at a company's balance sheet and/or income statement and withdrawing the appropriate information. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit.

Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. These reports generally get more detailed and expensive as the size of a company increases however; this is not always the case as there are many complicated industries which require more attention to detail, regardless of size.

Financing M&A

Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

Cash

Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone.

A cash deal would make more sense during a downward trend in the interest rates. Another advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution for the acquiring company. But a caveat in using cash is that it places constraints on the cash flow of the company.

Financing

Financing capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively, the acquirer's stock may be offered as consideration. Acquisitions financed through debt are known as leveraged buyouts if they take the target private, and the debt will often be moved down onto the balance sheet of the acquired company.

Hybrids

An acquisition can involve a combination of cash and debt or of cash and stock of the purchasing entity.

Factoring

Factoring can provide the extra to make a merger or sale work. Hybrid can work as ad e-denit.

Specialist M&A Advisory Firms

Although at present the majority of M&A advice is provided by full-service investment banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice (and not financing). These companies are sometimes referred to as Transition Companies, assisting businesses often referred to as "companies in transition." To perform these services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA) regulation. More information on M&A advisory firms is provided at corporate advisory.

CHAPTER 12.MOTIVES BEHIND M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:

Synergy: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

Economy of scale: For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts.

Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).

Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Vertical integration: Vertical integration occurs when an upstream and downstream firm merges (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality problem. A common example is of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power; each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. By merging the vertically integrated firm can collect one deadweight loss by setting the upstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.

Vertical integration may also be driven by reduction of transaction costs (particularly credit related) and risk mitigation.

However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. [4] Therefore, additional motives for merger and acquisiiton that may not add shareholder value include:

Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.

Manager's hubris: manager's overconfidence about expected synergies from M&A which results in overpayment for the target company.

Empire-building: Managers have larger companies to manage and hence more power.

Manager's compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders); although some empirical studies show that compensation is linked to profitability rather than mere profits of the company.

Effects on Management

A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies’ top management teams for at least a decade following a deal. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition – more than double the turnover experienced in non-merged firms.

M&A Marketplace Difficulties

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In many states, no marketplace currently exists for the mergers and acquisitions of privately owned small to mid-sized companies. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises from the possible negative reactions a company's employees, bankers, suppliers, customers and others might have if the effort or interest to seek a transaction were to become known. This need for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business. In some states, a Multiple Listing Service (MLS) of small businesses for sale is maintained by organizations such as Business Brokers of Florida (BBF). Another MLS is maintained by International Business Brokers Association (IBBA).

At present, the process by which a company is bought or sold can prove difficult, slow and expensive. A transaction typically requires six to nine months and involves many steps. Locating parties with whom to conduct a transaction forms one step in the overall process and perhaps the most difficult one. Qualified and interested buyers of multimillion dollar corporations are hard to find. Even more difficulties attend bringing a number of potential buyers forward simultaneously during negotiations. Potential acquirers in an industry simply cannot effectively "monitor" the economy at large for acquisition opportunities even though some may fit well within their company's operations or plans.

An industry of professional "middlemen" (known variously as intermediaries, business brokers, and investment bankers) exists to facilitate M&A transactions. These professionals do not provide their services cheaply and generally resort to previously-established personal contacts, direct-calling campaigns, and placing advertisements in various media. In servicing their clients they attempt to

create a one-time market for a one-time transaction. Stock purchase or merger transactions involve securities and require that these "middlemen" be licensed broker dealers under FINRA (SEC) in order to be compensated as a % of the deal. Generally speaking, an unlicensed middleman may be compensated on an asset purchase without being licensed. Many, but not all, transactions use intermediaries on one or both sides. Despite best intentions, intermediaries can operate inefficiently because of the slow and limiting nature of having to rely heavily on telephone communications. Many phone calls fail to contact with the intended party. Busy executives tend to be impatient when dealing with sales calls concerning opportunities in which they have no interest. These marketing problems typify any private negotiated markets. Due to these problems and other problems like these, brokers who deal with small to mid-sized companies often deal with much more strenuous conditions than other business brokers. Mid-sized business brokers have an average life-span of only 12-18 months and usually never grow beyond 1 or 2 employees. Exceptions to this are few and far between. Some of these exceptions include The Sundial Group, Geneva Business Services and Robbinex.

The market inefficiencies can prove detrimental for this important sector of the economy. Beyond the intermediaries' high fees, the current process for mergers and acquisitions has the effect of causing private companies to initially sell their shares at a significant discount relative to what the same company might sell for were it already publicly traded. An important and large sector of the entire economy is held back by the difficulty in conducting corporate M&A (and also in raising equity or debt capital). Furthermore, it is likely that since privately held companies are so difficult to sell they are not sold as often as they might or should be.

Previous attempts to streamline the M&A process through computers have failed to succeed on a large scale because they have provided mere "bulletin boards" - static information that advertises one firm's opportunities. Users must still seek other sources for opportunities just as if the bulletin board were not electronic. A multiple listings service concept was previously not used due to the need for confidentiality but there are currently several in operation. The most significant of these are run by the California Association of Business Brokers (CABB) and the International Business Brokers Association (IBBA) These organizations have effectivily created a type of virtual market without compromising the confidentiality of parties involved and without the unauthorized release of information.

One part of the M&A process which can be improved significantly using networked computers is the improved access to "data rooms" during the due diligence process however only for larger transactions. For the purposes of small-medium sized business, these datarooms serve no purpose and are generally not used.

M&A Failure

Reasons for frequent failure of M&A were analyzed by Thomas Straub in "Reasons for frequent failure in mergers and acquisitions - a comprehensive analysis", DUV Gabler Edition, 2007. Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are often disappointing. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. The literature therefore lacks a more comprehensive framework that includes different perspectives.Using four statistical methods, Thomas Straub shows that M&A performance is a multi-dimensional function. For a successful deal, the following key success factors should be taken into account Strategic logic which is reflected by six determinants: market similarities, market complementarities, operational similarities, operational complementarities, market power, and purchasing power Organizational integration which is reflected by three determinants: acquisition experience, relative size, cultural compatibility Financial / price perspective which is reflected by three determinants: acquisition premium, bidding process, and due diligence.All 12 variables are presumed to affect performance either positively or negatively. Post-M&A performance is measured by synergy realization, relative performance (compared to competition), and absolute performance.

CHAPTER 13.THE GREAT MERGER MOVEMENT

The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicles used were so-called trusts. To truly understand how large this movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 is around 10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other. However, there were companies that merged during this time such as DuPont, Nabisco, US Steel, and General Electric that have been able to keep their dominance in their respected sectors today due to growing technological advances of their products, patents, and brand recognition by their customers. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains, they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in Great Merger Movement.

Short-Run Factors

One of the major short run factors that sparked in The Great Merger Movement was the desire to keep prices high. That is, with many firms in a market, supply of the product remains high. During the panic of 1893, the demand declined. When demand for the good falls, as illustrated by the classic supply and demand model, prices are driven down. To avoid this decline in prices, firms found it profitable to collude and manipulate supply to counter any changes in demand for the good. This type of cooperation led to widespread horizontal integration amongst firms of the era. Focusing on mass production allowed firms to reduce unit costs to a much lower rate. These firms usually were capital-intensive and had high fixed costs. Because new machines were mostly financed through bonds, interest payments on bonds were high followed by the panic of 1893, yet no firm was willing to accept quantity reduction during this period.

Long-Run Factors

In the long run, due to the desire to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. This resulted in shipment directly to market from this one location. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel Co., the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing.

Cross-Border M&A

In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer's. For every $1-billion deal, the currency of the target corporation increased in value by 0.5%. More specifically, the report found that in the period immediately after the deal is announced, there is generally a strong upward movement in the target corporation's domestic currency (relative to the acquirer's currency). Fifty days after the announcement, the target currency is then, on average, 1% stronger.[6]

The rise of globalization has exponentially increased the market for cross border M&A. In 1996 alone there were over 2000 cross border transactions worth a total of approximately $256 billion. This rapid increase has taken many M&A firms by surprise because the majority of them never had to consider acquiring the capabilities or skills required to effectively handle this kind of transaction. In the past, the market's lack of significance and a more strictly national mindset prevented the vast majority of small and mid-sized companies from considering cross border intermediation as an option which left M&A firms inexperienced in this field. This same reason also prevented the development of any extensive academic works on the subject.

Due to the complicated nature of cross border M&A, the vast majority of cross border actions have unsuccessful results. Cross border intermediation has many more levels of complexity to it then regular intermediation seeing as corporate governance, the power of the average employee, company regulations, political factors customer expectations, and countries' culture are all crucial factors that could spoil the transaction.[7][8] However, with the weak dollar in the U.S. and soft economies in a number of countries around the world, we are seeing more cross-border bargain hunting as top companies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries.

Even mergers of companies with headquarters in the same country are very much of this type (cross-border Mergers). After all, when Boeing acquires McDonnell Douglas, the two American companies must integrate operations in dozens of countries around the world. This is just as true for other supposedly "single country" mergers, such as the $27 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).

Mergers & Takeovers

 Category: Home \ Company Law

 Article: Cross Border Mergers And Takeovers : A Recent Trend

Businesses were competitive locally expanded to the national arena. Competitiveness in the national arena is now forcing business to go global. The days of regional differentiation are over. Old strategies that professed “Small is Beautiful” or offered lessons on how companies could “survive in a niche” are no longer viable. Yes it is true that there are still micro-cosmos that that thrive at the small business level and there is a new generation of savvy entrepreneurs who will develop and continue to fuel healthy business in the shadows of corporate juggernauts well into the future. One of the most important situations that they eventually face is the key to their survival: acquire or be acquired. In other words the only optimal size is big- grow bigger than last year, grow larger and faster than the competitors. Stagnation or slow growth is a sure recipe for

disaster.

Globalization is a strong force that enables industrial consolidation. During the Asian economic crisis in 1997 and 1998, global organizations such as International Monetary Fund, The World Bank and the WTO assisted and encouraged countries including Thailand, South Korea and Indonesia to restructure their financial institutions and open up their economies by reducing trade barriers. A direct result of these policies was that global financial services companies began to acquire and buy equity stakes in financial service players in each of these economies. From 1998 to 2000, Thailand experienced a wave of acquisition activity. Globalization has had a number of drivers including advances in information and communication technology, advances in travel, the reduction of barriers to trade and the growth of overseas markets that could no longer be ignored. What characterizes the current business environment is that we now see all industries are potentially global, and see all industries taking part in the game.

The fact to be noticed is that why are there are so many mergers and takeovers happening at such a rapid pace?“The history of the world, my sweet, is who gets eaten and who gets to eat.” – SWEENEY TODD

There is a variety of drivers and motivating factors at play in the M&A world. Apart from personal glory (or greed), M&A deals are often driven by many justifiable market-consolidation, expansion or corporate diversification motives. And, of course, ever present as an inspirational force in M&A is the old reliable financial, generally tax related motivation.

Expansion is one of the primary reasons to cross the borders as the national limits fail to provide growth opportunities. One has to look outside its boundaries and play out in the global arena to seek new opportunities and scale new heights. With the habit of creating an empire it becomes difficult for these entrepreneurs to stay within its limits. The simple fact is that most key players in many markets have already extracted a significant proportion of the available value from the domestic resources. They have improved profitability through better cost management and through efficiency gains realized after domestic consolidation.

Another reason is to gain monopoly, the company which has been acquired by the acquirer is always a company which is trembling financially but had something to offer the acquiring company. It may be the market share or intellectual capital or other reasons but one thing that the acquirer looks is for is the untapped resources to be exploited which can lead the company a step higher in the ladder of success.

Globalization is a key to help in the rapidity of the M&A as it is globalization that integrates world economies together and many nations have opened themselves, the countries have made laws and regulations that attract new companies to come into the country and make it easy for the companies to easily perform their operation of M&A.

There are also new forces in play that make cross-border expansion more feasible and capable of creating value. For example, international deregulation is removing old barriers. Institutional investors are taking a more global perspective. Customer profiles across markets are becoming more homogeneous.

At this point a question that arises, what are the legal implications to a cross border

merger and takeover?“The decisions of the courts on economic and social questions depend on their economic and social philosophy” - THEODORE ROOSEVELTThe answer to this question needs has been dealt in many dimensions of law .

International law prescribes that in a cross-border merger, the target firm becomes a national of the country of the acquirer. Among other effects, the change in nationality implies a change in investor protection, because the law that is applicable to the newly merged firm changes as well. More generally, the newly created firm will share features of the corporate governance systems of the two merging firms. Therefore:· Cross-border mergers provide a natural experiment to analyse the effects of changes–both improvements and deteriorations, in corporate governance on firm value.

· FDI plays an important role with the cross border mergers and takeovers as they are followed by sequential investment by foreign acquirer sometimes large especially in special circumstances such as that of privatization.

· Cross border M&A can be followed by newer and better technology (including organizational and managerial practices) especially when acquired firms are reconstructed to increase the efficiency of their operations.

· Cross border M&A leads to employment opportunity over time only when the sequential investments take place and if the linkages of the acquired firm are retained or strengthened.

The value of cross-border mergers and acquisitions (M&A) grew over 700% during the 1990’s to a value of $720 billion in 1999 (United Nations, 2000). Differences in tax and financial reporting policies across countries lead to a number of different opportunities, motivations and risks, yet there have been few empirical studies that have investigated how differing accounting and tax policies across countries affect cross-border M&A decisions.

Cross-border takeover bids are complex transactions that may involve the handling of a significant number of legal entities, listed or not, and which are often governed by local rules (company law, market regulations, self regulations, etc.). Not only a foreign bidder might be disadvantaged or impeded by a potential lack of information, but also some legal incompatibilities might appear in the merger process resulting in a deadlock, even though the bid would be ‘friendly’. This legal uncertainty may constitute a significant execution risk and act as a barrier to cross-border consolidation.

In some cases, legal structures are not only complex but also prevent, de jure or de facto, some institutions to be taken over or even merge (in the context of a friendly bid) with institutions of a different type. Such restrictions are not specific to cross-border mergers, but could provide part of the explanation of the low level of cross-border M&As, since consolidation is possible within a group of similar institutions (at a domestic level) whereas it is not possible with other types of institutions (which makes any cross-border merger almost impossible).

In some countries, the privatization of financial institutions has sometimes been accompanied by specific legal measures aimed at capping the total participation of non-resident shareholders in those companies or imposing prior agreement from the Administration (i.e. golden shares). Some of such measures were clearly discriminatory

against foreign institutions, when it came to consolidation.

The European Court of Justice has indicated that such measures were not justified by general-interest reasons linked to strategic requirements and the need to ensure continuity in public services when applied to commercial entities operating in the traditional financial sector. Tax problems also occur and it is one of the ways to get out of tax hassles as when a strong company acquires a financially poor company the amount of profit earned is less in the first year therefore the tax burden on the company will be less.

Mergers and acquisitions are complex processes. Despite some harmonized rules, taxation issues are mainly dealt within national rules, and are not always fully clear or exhaustive to ascertain the tax impact of a cross-border merger or acquisition. This uncertainty on tax arrangements sometimes require seeking for special agreements or arrangements from the tax authorities on an ad hoc basis, whereas in the case of a domestic deal the process is much more deterministic.

In a pending case (Marks & Spencer), the European Court of Justice has been asked whether it is contradictory to the EC treaty to prevent a company to reduce its taxable profits by setting off losses incurred in other member states, while it is allowed to do so with losses incurred in subsidiaries established in the state of the parent company.

Specific domestic tax breaks may favour specific, non-harmonized products or services, with the result that every institution has to provide this service or product if it wants to remain competitive. In such a situation, a merger between two entities located in that domestic market may yield synergies of scale, whereas it will be more difficult to exploit comparable synergies for a foreign institution taking over a domestic one, while not being entitled to the tax break in their home state.

In some cases, there may be discriminatory tax treatments for foreign products or services, i.e. products or services provided from a Member State different from the one where it is sold. Therefore, a cross-border group will be at a disadvantage when trying to centralise the “industrial functions” (e.g. asset management functions) as in the case of overall domestic group. Since the latter may keep all its value chain within the country and still benefit from synergies.

The impact of taxation on dividends may influence the shareholders’ acceptance of a cross-border merger. Even though a seat transfer or a quotation in another stock market might be justified for economic reasons, groups of shareholders could be opposed to such an operation if it implies higher non-refundable withholding tax, and thus lower returns on their investments.

What are the challenges in cross-border mergers and acquisitions?“Marriage of two lame ducks will not give birth to a race horse.”

The exponential rise in stock prices, due to mergers and acquisitions will have a ripple effect on the whole economy, technology innovation, market roll ups and mergers in addition to splits, spin offs and even corporate breakdown, may happen at speeds never encountered before. Along with this will come uncharted innovations in information technology and knowledge management and an explosion of new services, new products, new industries and new markets? The convergence of all this interconnectedness, interoperability and the value chain rationalization will turbo charge

corporate development to a speed that will make unwary executives dizzy.

These all are the management challenges and whatever it takes, management must step up to the challenge. This mends learning to manage the knowledge and information while staying in the driver’s seat.

Executives will also confront perhaps the biggest bugaboo of all, complacency. The old watchword about fighting the lethargy that comes with contentment will be revived in the future .throughout history, long term market dominance has characteristically bred complacency among industry leaders. Few can stay lean, mean hungry once the corporate coffers are brimming with success and profit.

But the biggest challenge to a cross border merger and takeover are the cultural issues. According to KPMG study, “83% of all the mergers and acquisitions failed to produce any benefit for the shareholders and over half actually destroyed value”. Interviews of over 100 senior executives involved in these 700 deals over a two year period revealed that the overwhelming cause of failure is the people and the cultural differences. Difficulties encountered in mergers and acquisitions are amplified in cross cultural situations, when companies involved are from two or more different countries. Up to the point in the transaction, where the papers are signed, the merger and acquisition business is predominantly financial valuing of the assets, determining the price and due diligence. Before the ink is dry, however this financially driven deal becomes a human transaction filled with emotions and trauma and survival behaviour, the non linear, often the irrational world of human beings in the midst of changes. In the case of international mergers and acquisition, the complexity of these processes is often compounded by the differences in national cultures. People living and working in different countries react to the same situation or events in a very different manner. Therefore a company involved in an international merger or acquisition needs to consider these differences right from the design stage if it is to succeed.

Individual preoccupation on “How is it all going to impact me?” weakens the commitment to the job at hand. This in turn translates people looking in for work in other companies. Often a firm in midst of transition loses its own talent, strengthening the competition. In countries where people identify largely with groups; people tend to look for support within their group. In France and Italy people caught in midst of mergers and acquisition often turn to unions. If unions cannot provide answers because they have been excluded from the negotiation process, they are likely to go on strikes. These strikes may do much more damage to organisation than any other factor.

Employees’ reluctance within the target company of a cross-border deal might also pose a threat to the successful outcome of the transaction. Indeed, employees may not accept to be managed from another country. A public opposition to the project may influence analysts’ assessment.

Cross-border mergers may imply a change in the place of quotation, or even in the currency of quotation. Shareholders’ acceptance of quotation changes may be limited, even all risks or tax impacts are eliminated. Indeed, the place of quotation may have an important symbolic value.

Given that cross-border mergers are complex and need to overcome a number of execution risks (as evidenced in this document), there might be an impact on shareholders’ and analysts’ apprehension of failure risk when it comes to cross-border

mergers.

Consumers may mistrust foreign entities, meaning that all parameters being equal, a local incumbent may have an advantage over a competitor identified as foreign. This explains why foreign institutions often prefer to keep a local brand.

Of course, some of these challenges are not new-but the penalties for mis-steps will be greater and swifter than in the past. There are no longer any safe havens.It is expected that by 2010 there won’t be 50-60 undisputed global industry leaders as they exist today; there will be hundreds, each in its respective industry. Companies in such dominant positions will deal with high volumes of merger transactions- perhaps 10 or more per year. The companies will have to keep in mind that cross border mergers are not only business proposals but a corporate marriage of both the entities which require deeper and insightful solutions. The merger and acquisition activity in the past few years have become quite predictable and this trend is going to grow parallel with the desire and competitiveness of the society. Now let time be the emperor and decide the fate of this growing trend.

Kinds of Takeover

I. Legal Context

From legal perspective, takeover is of three types:

1. Friendly takeover

2. Bail out takeover

3. Hostile takeover

1. Friendly or Negotiated Takeover: Friendly takeover means takeover of one company by change in its management & control

through negotiations between the existing promoters and prospective invester in a friendly manner. Thus it is also called Negotiated Takeover. This kind of takeover is resorted to further some common objectives of both the parties. Generally, friendly takeover takes place as per the provisions of Section 395 of the Companies Act, 1956.

2. Bail out Takeover of a financially sick company by a financially rich company as per the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 to bail out the former from losses.

3. Hostile takeover: Hostile takeover is a takeover where one company unilaterally pursues the acquisition of shares of another company without being into the knowledge of that other company. The most dominant purpose which has forced most of the companies to resort to this kind of takeover is increase in market share. The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

Ii. Business context

In the context of business, takeover is of three types:

1. Horizontal Takeover: Takeover of one company by another company in the same industry. The main purpose behind this kind of takeover is achieving the economies of scale or increasing the market share. E.g. takeover of Hutch by Vodafone.

2. Vertical takeover: Takeover by one company of its suppliers or customers. The former is known as backward integration and latter is known as Forward integration. E.g. takeover of Sona Steerings Ltd. By Maruti Udyog Ltd. is backward takeover. The main purpose behind this kind of takeover is reduction in costs.

3. Conglomerate takeover: Takeover of one company by another company operating in totally different industries. The main purpose of this kind of takeover is diversification.

Chapter 14.Working with console takeover and recovery

The console takeover and recovery function supports Operations Console workstations and the 5250 emulator on the Hardware Management Console (HMC). Before enabling this function, consider the function's requirements and restrictions.

The takeover function is the process used for a LAN-connected, console-capable device to take control from the current LAN-connected console device. Because there can be only one local console that is directly attached and the HMC 5250 emulation console can be shared, the takeover function cannot be used with the local console that is directly attached. However, any 5250 emulation-based device can be used to recover a loss of the console by changing the console type. The twinaxial console uses a different form of 5250 emulation and does not qualify as a console type to switch to or from without loss of data. This might require a reallocation of hardware to support the new console.

Tip: Takeover is also supported in a D-mode initial program load (IPL). Two devices can be connected, with data, at the same time during a D-mode IPL, but only one device can be the console at one time.

The recovery function is accomplished by suspending the data stream to the console that either loses its connection or is in the process of being taken over. It then saves the data to be delivered when the next device becomes the console. This process takes place even if the newly established console is the same as the former console.

Console recovery uses part of the takeover function. Recovery can be from the same device or another 5250-based device. For example, if you are using a local console on a network (LAN) and have multiple PCs set up to be the console, and the existing console fails, you can use the takeover function from the same PC (after correcting the reason for the failure) or from another PC. Regardless

of what the former console was doing, the new console is in the same job, at the same step, as the original console. The job continues even though the original console is not operational.

The current console type is still the only console allowed when takeover is enabled. However, each console-capable workstation is presented with either a DST Sign-on window or the Console Information Status window. If the console is set to Operations Console (LAN), for example, a local console that is directly attached is presented the Console Information Status window without displaying the DST Sign-on window. The Take over the console field displays NO to indicate it cannot take over the existing console. However, it can be used for a recovery action. When the console type is not set to be the HMC (4), the HMC 5250 emulator posts a Connection refused - partition not configured for HMC console message.

Every console-capable device that can support 5250 emulation is presented with a window of data regardless of its specific connectivity and regardless of whether it is the console at the time it connects successfully to the server, which means that more than one device has data on the screen after the console is established. A console-capable device no longer displays a blank screen and a Disconnected state when another device is the active console. Instead, the device displays an error message (HMC) or the Console Information Status window. The key feature of this function is that it allows the job running at the console to be "transferred" to another device without loss of data.

Forced Takeover

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These PTFs add function the user can control so performing an F18 at the sign-on screen or the Console Information Status screen to bypass further sign-ons and go directly to IBM® i sign-on. Assuming the PTFs are installed and the OPSCONSOLE TAKEON is enabled, this is what would pertain:

This recovery action from any 5250-based connection other than twinax.

The current console type and connectivity is ignored. As long as they have the takeover signon screen they can perform the F18. The console type does NOT get set to a new value.

The system has to have supporting hardware to allow another device to get the signon screen, of course. The currently set tagged resource(s) for console is/are NOT changed.

This device session is temporary. If the user IPLs or performs a console service function to reset or make console type changes the system will use whatever values are in effect at that time. For example, if the user had a problem with their LAN console and connected a directly-attached device and used F18, the current console tag is set to the resource for LAN but manually activating the supporting resource for the directly-attached device would allow that

device to be taken directly to the Console Information Status screen - wrong console type error message - and the F18 would take them to the IBM i signon. No changes to those tags (Console and Operations Console) take place. If they did a restart while in IBM i the system will again try to bring up LAN console, not the directly-attached device.

This function allows the user the capability to debug a failing console or overcome a disabled user ID.

Console Takeover and Recovery Function Requirements

Consider the following requirements before enabling the console takeover and recovery function.

You must enable console takeover if you want to take over a console or if you want to be protected from the loss of the console using the recovery action.

The DST user ID used to sign on at an eligible device must also have the privilege to take over the console.

If you do not want takeover capability, but you do want recovery from loss of the console, you must still enable the takeover option. The recovery of the console without data loss is directly tied to the takeover option.

Console Takeover and Recovery Function Restrictions

Consider the following restrictions before enabling the console takeover and recovery function.

Console takeover cannot be used with local consoles that are directly attached to the server.

Only devices with the same attributes can perform a takeover. For example, if device LAN1 is running in 24 X 80 mode and LAN2 is running in 27 X 132 mode, and LAN1 is the console, LAN2 displays NO in the Take over the console field. There are additional device attributes, such as language, that might also prevent a console takeover.

The console takeover and recovery function does not support twinaxial consoles. This console's configuration uses a different type of 5250 emulation in its connection to the server.

Government Exchange and Merger of Citizens' Personal Information is Systematic and Routine

A Special Report Issued by Privacilla.org

http://www.privacilla.org

 

March, 2001

Introduction

More than once every other week, a federal government agency quietly announces a new plan to exchange and merge databases of personal information about American citizens. Under the "Computer Matching and Privacy Protection Act," they do this routinely, systematically - and legally. Currently:

The Internal Revenue Service and the Social Security Administration share personal information about American citizens.

The Social Security Administration and the Health Care Financing Administration share personal information about American citizens.

The Postal Service and the Department of Labor share personal information about American citizens.

The Department of Justice and the Department of Veterans Affairs share personal information about American citizens.

The Internal Revenue Service and state social services agencies share personal information about American citizens.

The Department of Health and Human Services and the Department of Education share personal information about American citizens.

The Social Security Administration and the state courts share personal information about American citizens.

And the list goes on.

For the 18-month period from September 1999 to February 2001, federal agencies announced 47 times that they would exchange and merge personal information from databases about American citizens. And these programs are only the tip of an information-trading iceberg. The Computer Matching and Privacy Protection Act, which causes agencies to report these activities in the Federal Register, applies only to a small subset of the federal agency programs that exchange and merge databases of personal information.

While these computer matching programs are invariably intended for beneficial purposes, they do not serve Americans' privacy interests. They demonstrate, instead, that privacy is a cost of the federal government's numerous tax, law enforcement, and benefit programs. Despite its name, the Computer Matching and Privacy Protection Act does not protect privacy.

As the Federal Trade Commission, the Department of Health and Human Services, and other agencies review merger and exchange of personal information in the private sector, they conveniently ignore the government's own, more significant role in threatening privacy. The federal government is in fact the largest collector, user, and sometime abuser of citizens' personal and private information. Governments are fundamentally not in the business of protecting privacy.

Federal agencies and the Congress should not look outward for opportunities to protect privacy. They should look inward at the privacy threats the government creates through the merger and exchange of personal information it has collected about American citizens.

In this report, Privacilla describes the Computer Matching and Privacy Protection Act, then briefly analyzes merger and exchange of citizens' personal information by the federal government. We shine on government the light that the Federal Trade Commission is currently turning on the private sector. An appendix lists the 47 instances in the last 18 months where a federal agency has announced a computer matching program. As should be clear, government poses a greater threat to privacy than the private sector.

It is important, however, not to draw too broad a conclusion from privacy-threatening government data practices. There are legitimate interests served by government data-sharing, and there are some protections for citizens. However, because governments have a unique power to write

and rewrite the rules about what can be done with personal information - a power no private-sector entity has - governments should be the first to give up data merger practices that threaten privacy.

The United States Congress - not any limited-jurisdiction agency - should take a sweeping look at the federal government's information practices. It is likely to find a breathtaking amount of personal data exchange and surveillance. The extent of it assuredly offends Americans' powerful sense that they should have some way to protect their privacy by controlling how government uses information about them.

The "Computer Matching and Privacy Protection Act"

The Computer Matching and Privacy Protection Act of 1988 (Public Law 100-503) amended the Privacy Act of 1974. Invoking "privacy," it regularized and systematized the merger and exchange of Americans' personal information among federal agencies.

The Act covers only two kinds of programs that match databases of personal information about American citizens: matches involving federal benefits programs, and matches using records from Federal personnel or payroll records. Other programs under which federal agencies exchange and merge personal information about citizens - and there are many - are not covered by the Act or by this study.

In fact, the list of programs not subject to the Computer Matching and Privacy Protection Act is longer than the list of programs that are. Exclusions from the Act include:

Statistical matches whose purpose is solely to produce aggregate data stripped of personal identifiers;

Statistical matches whose purpose is in support of any research or statistical project;

"Pilot matches" whose purpose is to gather benefit/cost data about full-scale matching programs;

Law enforcement investigative matches whose purpose is to gather evidence against a named person or persons in an existing investigation;

"Tax administration matches," including 1) disclosure of taxpayer information to state tax officials; 2) matches for administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws, as well as assessment, collection, enforcement, litigation, publication, and statistical gathering functions; and 3) tax refund offset matches;

Routine administrative matches using Federal personnel records;

Internal agency matches using only records from the agency's systems of records; and

Background investigation and foreign counter-intelligence matches.

The Privacy Act allows disclosures of records if the agency decides that disclosures are "routine." In such cases, the agency need only publish a Federal Register announcement that personal information will be disclosed.

Federal agencies engaging in computer matching programs must enter into "matching agreements" that are approved by the agencies' "Data Integrity Boards." Such agreements must include "procedures for the retention and timely destruction of identifiable records" and "prohibitions on duplication and redisclosure of records." They also must provide that the Comptroller General may have access to all necessary records to monitor or verify compliance with the agreement.

The Computer Matching and Privacy Protection Act includes important due process protections when a matching program reveals that adverse action may need to be taken against a citizen. The agency must verify the adverse information, and give the individual notice and an opportunity to contest any adverse action. Important though these protections are, they do not go to protecting privacy. Fundamentally, privacy is at odds with much of what modern governments do.

Government Data Exchange and Privacy

The Computer Matching and Privacy Protection Act does not meaningfully contribute to the privacy that American citizens enjoy. By regularizing transfer of citizen data among federal agencies, in fact, the Act sanctions and contributes to the federal government's threat to privacy. The reason for this is a set of misunderstandings about privacy that befuddled policy-makers in 1988 and that still do today. To unravel them, we turn to some basic principles.

Privacy, that quixotic concept that has frustrated and confounded so many, is best regarded as a condition. It is a state of affairs in which knowledge of information about a person is tailored to that person's interests in revealing or holding that information close. These interests express themselves through the actions of individuals under the infinite circumstances presented throughout daily life. Privacy, the condition, reflects deeply complex and personal values held by individuals.

Government cannot protect privacy. It can only foster or destroy people's ability to protect their own privacy. Privacy is maintained by people having authority and responsibility for what information about them is shared, and on what terms.

When government has collected information from people under the authority of law, people's ability to protect privacy in that information is taken away. Rules about how government handles data, complex and onerous as they may be, cannot "protect privacy" of information that is already out of individuals' control. Such rules are really only guesses by politicians and bureaucrats at what people might choose if they still could. Rules to protect the "privacy" of information held by governments are little more than tardy apologies for stepping between people and their ability to protect privacy in the first place.

In the case of the Computer Matching and Privacy Protection Act, citizens' data is not made private by sharing it among agencies under strict rules requiring security and accuracy. The information is already wrested from the control of the data subjects. Other than through destruction of the information, which would return control to citizens, no amount of rules can recreate privacy in that information.

The only way truly to protect privacy is through systems that give consumers and citizens the choice, coupled with the responsibility, to protect privacy as they see fit. This is why privacy is inconsistent with so much of what government does. Even the best-intended government programs have as part of their design the removal of citizens' power over information about themselves. In the private sector, by contrast, privacy can be protected through a combination of educated consumer choice and the freedom to contract, backed up by the privacy torts.

Like modern government, the modern commercial world thrives on information, and it is sometimes very difficult for consumers to know how to protect their privacy. Even when they do, protecting privacy can be very inconvenient. But when dealing with government, it is often outright illegal for citizens to protect their privacy. Privacy is a cost of government, one that must be acknowledged forthrightly by serious thinkers.

Turning the FTC Spotlight on Government

Yet the commercial world is today regarded as the greater threat to privacy. Needless to say, many politicians and bureaucrats see opportunities for making hay with the issue. In announcing a "public workshop" on merger and exchange of consumer data in the private sector (available at http://www.ftc.gov/os/2001/02/mergingfrn.htm), the Federal Trade Commission recently posed several questions about current business practices. These questions should be rewritten and addressed to current government practices. The answers reveal how government programs threaten privacy and possibly even violate Fourth Amendment rights.

What kinds of citizen information do agencies exchange and what are the sources of that information?

The government sector thrives on information about people. Personal information allows governments to collect taxes, serve up entitlements and benefits, and enforce laws and regulations.

Taxation requires massive collections of information without regard to whether it is personal or private. The list of information required by tax laws and held by the Internal Revenue Service is incredibly long because the government sector is addicted to using taxation as a tool of social policy. The information collected by the IRS includes name, address, phone number, income, occupation, marital status, parental status, investment transactions, home ownership, medical expenses, purchases, foreign assets, charitable gifts, and much more. It is collected both directly from the taxpayer and from "information returns" that must be filed by businesses. Importantly, the law requires people to submit this information. At no point do citizens have an option to withhold information.

The federal government uses copious amounts of information to deliver various entitlements and benefits as well. Any program that doles money out based on condition or status must know what people's condition or status is, often in comparison to the condition or status of the population at large. Health programs, for example, require beneficiaries' names, addresses, telephone numbers, genders, ages, income levels, medical conditions, medical histories, providers' names, and much more. This information is collected both directly from the beneficiary and from health care providers. Collection is also required by law, or as a condition of receiving benefits. Citizens do not have a practical option of withholding it.

A third use the government sector makes of personal information is to investigate crime and enforce laws and regulations. Law enforcers' ability to do these things correlates directly to the amount of information they can collect about where people go, what they do, what they say, to whom they say it, what they own, what they think, and so on. We rely on government to investigate wrongdoing by examining information that is often regarded as private in the hands of the innocent. It is a serious and legitimate concern of civil libertarians that government collects too much information about the innocent in order to reach the guilty. Though it is unlikely that information collected in investigations is matched under the Computer Matching and Privacy Protection Act, government entities like the Financial Crimes Enforcement Network collect information from a variety of sources and share it widely. Again, no citizen can practically and legally prevent this information from being collected.

Are there new technologies or technical standards that may increase the sharing of detailed citizen information and do they include or facilitate privacy protections?

It is important to focus away from technologies in privacy debates. Nearly all technologies can be used for good purposes and bad purposes alike. Information technology can be used both to improve efficiency and to threaten or invade privacy. As a matter of privacy policy, nearly all technologies should be treated with neutrality or indifference. It is different uses of technology that should be addressed.

Increased digitization of records and record-keeping means that agencies can work with information more quickly and ably. More efficient government is sorely needed, and, to the extent technology can be used to lower the cost of government while improving the delivery of services, it benefits the public.

On the other hand, technology increases the power of agencies and individual bureaucrats to do harm. The Internal Revenue Service, for example, is aggressively pushing electronic filing. While this will undoubtedly improve its operations as our nation's tax collector, e-filing will also make Americans' tax information more accessible for both good and bad purposes. Paper IRS filings are today protected to some extent by "practical obscurity." Anyone wanting information has to go and dig them out of a physical file. The IRS has had problems in the past with employees snooping into citizens' files. These could recur on a wider scale thanks to technology.

On balance - and provided security controls are put in place - technologies should be regarded at worst with indifference, and more often as improvements over former practice. The rules that apply to use and control of information are what matter to privacy.

How does the merger and exchange of detailed citizen data between federal agencies affect citizens?

Merger and exchange of citizen data by federal agencies inherently harm citizens by eroding their ability to protect their privacy.

The Fourth Amendment to the Constitution is the primary, essential limit on the power of governments in the U.S. to inquire into people's lives, arrest them, and take their property. The Framers of the Constitution recognized the unique powers of government - powers that no private-sector entities have. They sought to curtail them by preventing governments from collecting information about citizens without substantial justifications.

The growth of the federal government during the 20th century vastly increased

The amount of personal information about citizens that governments in the United States collect. As noted above, more and more information is collected for increasingly complex taxation and benefits programs.

When information is collected for these "administrative" purposes, the government does not have to face Fourth Amendment limitations, and it can collect information at will. The upshot is that governments can effectively search citizens without cause by going back to them again and again for personal information under myriad tax and benefit programs.

Law-abiding Americans have a reasonable expectation that information collected by governments will not be amassed into dossiers or held in databases that are easily and quickly combined for whatever purposes capture the government's interest. The merger and exchange of detailed personal information among federal agencies violates citizens' expectations under the Fourth Amendment to be free of warrant less government snooping into their affairs.

Because the United States' special constitutional rules are supposed to limit governments' power to collect information about citizens, widespread exchange and merger of personal information by federal agencies may violate the Fourth Amendment. These practices certainly prevent people from maintaining privacy at the levels they desire.

What types of notice have federal agencies provided consumers regarding various kinds of data merger and exchange activities?

Though some federal agencies may provide notice that there will be merger and exchange of information at the time information is collected, this notice is usually not sufficient because agencies routinely alter the uses they make of personal information.

Notices of new merger and exchange programs are usually given through announcements in the Federal Register. This daily publication is perfectly obscure to the clear majority of Americans about whom federal agencies exchange personal information. Federal Register notice is technical, legal notice. It is an unsatisfactory way to keep the public meaningfully informed about uses that are being made of personal information.

Of course, notice is worth even less if nothing can be done about information collection and sharing in the first place. As mentioned above, personal information is collected by governments under the authority of law or as a condition of receiving benefits. Citizens have no effective power to withhold information at any point in the process.

Citizens also have little power to stop merger and exchange of information being undertaken by federal agencies. To attempt it, they must contact their political leaders and be lucky enough to do so in sufficient numbers to make a federal political issue out of it. Even highly objectionable government collection of citizens' personal financial information continues today under the Bank Secrecy Act, while private-sector firms like Double-Click and N2H2 have terminated information collection and merger proposals in the face of public concern.

The notice federal agencies give of their data merger and exchange plans are technical and legal. They serve only to emphasize the powerlessness of citizens in the face of their government.

What governmental purposes are served through the merger of an agency's internal information about citizens with information obtained from other agencies?

There should be no mistake about it. Merger and exchange of personal information among federal agencies serves many useful purposes.

Judging by the stated purposes of the computer matches identified in this survey, one of the primary uses of personal information by federal agencies is for debt collection and assessment of credit risk. There are many delinquencies in the numerous federal loan and loan guarantee programs. Merger and exchange of personal information about Americans helps agencies locate debtors and collect money owed. Many computer matches also assess whether applicants for loans or benefits are in compliance with the law. This serves law enforcement goals, and also helps ensure that the federal government makes or guarantees loans to law-abiding citizens.

A second major purpose of the computer matching programs identified in this survey is avoiding waste and overpayment in federal programs. By comparing income and annuity information from one agency, for example, another agency can check the accuracy of information that has been submitted by beneficiaries. Agencies use health care utilization records, for example, to identify program beneficiaries who may be deceased so that their benefits can be terminated. Though it is assuredly quite concerning that health care records should be transferred throughout the federal government for this purpose, it does serve laudable goals.

Finally, a major beneficial use of merger and exchange of personal information is to catch criminals. By comparing information collected by, and submitted to different agencies, law enforcement can catch people who are defrauding the government, underpaying taxes, receiving benefits for which they are not eligible, and so on.

Though privacy interests are assuredly sacrificed, there can be no mistake that important governmental purposes are served by agencies' merger and exchange of personal information.

Conclusion

Federal government agencies are exchanging and merging personal information about citizens constantly and increasingly. On average, a new program for comparing databases of personal information is announced every two weeks. Over the 18-month period September 1999 to February 2001, announcements of these programs were issued at least 47 times.

It is more than ironic that federal government agencies should look askance at information practices in the commercial sector. Governments - unlike any private-sector entities - have the power to inquire by force of law into people's lives, arrest them, and take their property. Governments alone can write and rewrite the rules about how information may be used.

The Computer Matching and Privacy Protection Act is poorly named. The privacy of personal information in the hands of government cannot be protected, because privacy is a condition people maintain by the exercise of control over their information and themselves. Privacy can not be a product of government functions and programs, which rely on eroding citizens' privacy. Indeed, privacy is a direct and substantial cost of government.

Congress should examine anew the federal government's information practices and its massive use of citizens' personal information. It should consider the costs to privacy of the many government programs and functions that rely on reducing citizens' control over personal information. The government can do its most fruitful work to restore privacy by correcting its own practices. The American people expect and deserve no less.

APPENDIX

Survey of Merger and Exchange of Citizen Data(Sept. 1, 1999 - Feb. 28, 2001)

The table below draws from Federal Register notices under the Computer Matching and Privacy Protection Act. It includes date of Federal Register notice, agency giving notice, list of other participating agencies, and excerpts from the stated purpose of the computer matching program.

Notice Date

Agency Participating Agencies

Purpose of Matching Program

2/20/2001 Social Security Administration

Railroad Retirement Board

" . . .to disclose RRB annuity payment data . . ."

" . . . to verify Supplemental Security Income (SSI) program and Special Veterans Benefits (SVB) eligibility and benefit payment

amounts."

2/16/2001 Social Security Administration

Health Care Financing Administration, Department of Health and Human Services

" . . . to identify Supplemental Security Income (SSI) recipients and Special Veterans' Benefits beneficiaries who have been admitted to certain public institutions."

2/13/2001 Social Security Administration

Health Care Financing Administration, Department of Health and Human Services

" . . . to disclose Medicare non-utilization data to SSA."

2/12/2001 Department of Education

Social Security Administration

" . . . to assist the Secretary of Education in his obligation to 'verify immigration status and social security numbers [SSN] provided by a student to an eligible institution' . . . ."

1/8/2001 Defense Manpower Data Center, Defense Logistics Agency, Department of Defense

Office of Personnel Management

" . . . to identify individuals who are improperly receiving credit for military service in their civil service annuities or annuities based

on the 'guaranteed minimum' disability formula."

12/7/2000 Office of Personnel Management

Social Security Administration

" . . . SSA records are used in redetermining and recomputing certain annuitants' benefits . . ."

12/1/2000 Office of Inspector General, Postal Service

Office of Workers' Compensation Programs, Department of Labor

" . . . to determine whether the current Postal Service automated and manual procedures for monitoring FECA benefits payments made to employees returning to work are operating effectively."

" . . . to identify those Postal Service employees who may have received dual benefits in violation of section 8116(a) of the FECA."

11/29/2000 Office of the Chief Information Officer, Department of Housing and

Social Security Administration; Internal Revenue Service, Department of

" . . . to increase the availability of rental assistance to individuals who meet the requirements of

Urban Development

Treasury the rental assistance programs."

" . . . Determining the appropriate level of rental assistance, and deterring and correcting abuses in assisted housing programs."

11/16/2000 Social Security Administration

Internal Revenue Service

" . . . to disclose to SSA certain return information for use in verifying eligibility for, and/or the correct amount of, benefits . . ."

11/7/2000 Immigration and Naturalization Service, Department of Justice

Minnesota Department of Economic Security

" . . . to confirm the immigration status, and therefore eligibility status, of alien applicants for, or recipients of, unemployment compensation."

10/25/2000 Office of Personnel Management

Social Security Administration

" . . . to verify earnings data supplied by civil service annuitants."

10/16/2000 Internal Revenue Service, Department of

Federal, state, and local agencies, including

" . . . to prevent or reduce fraud or abuse in certain Federally

Treasury Department of Housing and Urban Development Albany Financial Operations Center; Debt Collection and Management System, Department of Justice; Accounts Receivable Records, Department of Veterans Affairs; Social Security Administration Master Beneficiary Record and Supplemental Security Income Record and Special Veterans Benefits; Department of Education Student Financial Assistance Collection Files

assisted benefit programs and facilitate the settlement of government claims while protecting the privacy interest of the subjects of the match."

10/13/2000 Department of Veterans Affairs

Bureau of Prisons, Department of Justice

" . . . to verify continuing eligibility for Federal benefit programs of those who are confined for a period exceeding 60 days due to a conviction for a felony or

misdemeanor."

10/12/2000 Internal Revenue Service, Department of the Treasury

Federal, state, and local agencies, including Real Estate Assessment Center, Department of Housing and Urban Development; Veterans Benefits Administration, Department of Veterans Affairs; Office of Program Benefits Policy, Social Security Administration; Alabama Department of Human Resources; Alabama Medicaid Agency; Alaska Department of Health and Social Services; Arizona Department of Economic Security; Arizona Health Care Cost Containment System; Arkansas Department of Human Services; California Department of

" . . . to prevent or reduce fraud and abuse in certain federally assisted benefit programs while protecting the privacy interests of the subjects of the match."

Social Services; Colorado Department of Human Services; Connecticut Department of Social Services; District of Columbia Department of Human Services; Florida Department of Children and Families; Georgia Department of Human Resources; Guam Department of Public Health and Social Services; Hawaii Department of Human Services; Idaho Department of Health and Welfare; Illinois Department of Human Services; Indiana Family and Social Services Administration; Iowa Department of Human Services; Kansas Department of Social and

Rehabilitation Services; Kentucky Cabinet for Families and Children; Louisiana Department of Social Services; Maine Department of Human Services; Maryland Department of Human Resources; Massachusetts Department of Transitional Assistance; Massachusetts Division of Medical Assistance; Michigan Family Independence Agency; Minnesota Department of Human Services; Mississippi Division of Medicaid; Mississippi Department of Human Services; Missouri Department of Social Services; Montana Department of Public Health and Human Services;

Nebraska Department of Health and Human Services; Nevada Department of Human Resources; New Hampshire Department of Health and Human Services; New Jersey Department of Human Services; New Mexico Human Services Department; New York Office of Temporary and Disability Assistance; North Carolina Department of Health and Human Services; North Dakota Department of Human Services; Ohio Department of Human Services; Oklahoma Department of Human Services; Oregon Department of Human Services; Pennsylvania Department of Public Welfare;

Puerto Rico Department of the Family; Puerto Rico Department of Health; Rhode Island Department of Human Services; South Carolina Department of Social Services; South Dakota Department of Social Services; Tennessee Department of Human Services; Texas Department of Human Services; Utah Department of Health; Utah Department of Workforce Services; Vermont Department of Prevention, Assistance, Transition, and Health Access; Virgin Islands Bureau of Health Insurance and Medical Assistance; Virgin Islands Department of Human Services; Virginia Department of Social

Services; Washington Department of Social and Health Services; West Virginia Department of Human Services; Wisconsin Department of Workforce Development; Wyoming Department of Family Services

10/12/2000 Social Security Administration

Department of Labor

" . . . to disclose Black Lung benefit data to SSA."

" . . . to determine the correct amount of Social Security disability benefits for recipients of Part C Black Lung benefits . . . ."

10/6/2000 Railroad Retirement Board

Office of Personnel Management

" . . . to enable the RRM [sic] to (1) Identify affected RRB annuitants who are in receipt of a Federal public pension benefit but who have not reported receipt of this benefit to the RRB and (2) receive needed Federal public

pension benefit information for affected RRB annuitants more timely and accurately."

9/7/2000 Department of Education

Office of Child Support Enforcement, Administration for Children and Families, Department of Health and Human Services

" . . . to obtain address information on individuals who owe funds to the Federal Government under defaulted student loans or grant overpayments."

9/6/2000 Social Security Administration

Office of Personnel Management

" . . . to verify the accuracy of information furnished by applicants and recipients concerning eligibility factors for the Supplemental Security Income (SSI) and Special Veterans' Benefits (SVB) programs."

" . . . to identify disability insurance beneficiaries whose benefits should be reduced . . ."

" . . . to [calculate] a modified benefit computation formula . . . for

certain persons who receive both a civil service benefit and a Social Security retirement or disability benefit."

" . . . to verify information provided . . . by the SSA beneficiary at the time of initially applying for Social Security benefits and on a continuing basis . . ."

9/1/2000 Railroad Retirement Board

Health Care Financing Administration, Department of Health and Human Services

"To identify RRB annuitants who are 66 or over and who have not had any Medicare utilization during the past calendar year."

8/23/2000 Department of Education

Internal Revenue Service, Department of Treasury

" . . . Permits ED to have access to any taxpayer's mailing address who has defaulted on certain loans . . . for the purpose of locating the taxpayer to collect the loan."

" . . . Provides for redisclosure . . . to any lender, or State or nonprofit guarantee agency . . . ."

8/22/2000 Social Security Administration

Texas Workers Compensation Commission

" . . . to identify Title II and/or Title XVI recipients who are receiving workers compensation benefits."

8/21/2000 Railroad Retirement Board

Social Security Administration

"The RRB will, on a daily basis, obtain from SSA a record of the wages reported to SSA for persons who have applied for benefits . . . ."

" . . . [T]he RRB will receive from SSA the amount of certain social security benefits which the RRB pays on behalf of SSA."

" . . . [T]he RRB will receive from SSA once a year a copy of SSA's Master Benefit Record for earmarked annuitants."

"SSA will receive from RRB weekly RRB earnings information for all railroad employees."

"SSA will also receive from RRB on a daily basis RRB earnings information on

selected individuals."

8/16/2000 Department of Housing and Urban Development

Department of Education

" . . . will allow the Department of Education access to a system which permits prescreening of applicants for debts owed or loans guaranteed by the Federal Government to ascertain if the applicant is delinquent in paying a debt owed to or insured by the Government."

8/15/2000 Department of Veterans Affairs

Department of Defense

" . . . to identify the eligibility status of veterans, servicemembers, and reservists who have applied for or who are receiving education benefit payments under the Montgomery GI Bill."

8/14/2000 Department of Education

Postal Service " . . . Will compare USPS payroll and ED delinquent debtor files for the purpose of identifying postal employees who may owe

delinquent debts to the federal government under programs administered by the ED."

7/28/2000 Department of Veterans Affairs

Postal Service " . . . to identify and locate USPS employees who owe delinquent debts to the Federal Government as a result of their participation in benefit programs administered by VA."

7/28/2000 Department of Veterans Affairs

Internal Revenue Service, Department of Treasury

" . . . to locate taxpayers who owe delinquent debts to the Federal Government as a result of their participation in benefit programs (including health care) administered by VA."

7/27/2000 Social Security Administration

State Courts "To identify individuals who are subject to the title II benefit nonpayment on section 202(x)(1) on the Social Security Act . . . ."

6/9/2000 Department of Department of " . . . will allow

Housing and Urban Development

Veterans Affairs

VA access to a system which permits prescreening of applicants for loans or loans guaranteed by the Federal Government to ascertain if the applicant is delinquent in paying a debt owed to or insured by the Government."

6/5/2000 Defense Manpower Data Center, Defense Logistics Agency, Department of Defense

Small Business Administration

" . . . to identify and locate any matched Federal personnel, employed, serving, or retired, who owe delinquent debts to the federal government under certain programs administered by SBA."

4/11/2000 Administration for Children and Families, Department of Health and Human Services (on behalf of itself, the Health Care Financing Administration, and the Food and Nutrition Service)

Department of Veterans Affairs; Connecticut Department of Social Services; District of Columbia Department of Social Services; Florida Division of Public Assistance;

" . . . to provide [state public assistance agencies] with data from the VA benefit and compensation file for the states to determine eligibility and insure fair and equitable treatment . . . ."

Illinois Department of Public Aid; Kansas Department of Social and Rehabilitation Services; Louisiana Department of Social Services; Maryland Department of Human Resources; Massachusetts Department of Transitional Assistance; Nebraska Department of Social Services; New York Department of Social Services; North Carolina Department of Human Resources; Ohio Department of Human Services; Oklahoma Department of Human Services; Pennsylvania Department of Public Welfare; South Dakota Department of Social Services; Tennessee Department of Human

Services; Texas Department of Human Services; Utah Department of Workforce Services and Department of Health; Virginia Department of Social Services

4/10/2000 Office of Personnel Management

Social Security Administration

" . . . to offset specific benefits by a percentage of benefits payable under Title II of the Social Security Act."

3/28/2000 Social Security Administration

State Health / Income Maintenance Agencies

"To identify eligible Supplemental Security Income (SSI) Medicaid enrollees whose records have been inactive . . . ."

3/14/2000 Defense Manpower Data Center, Defense Logistics Agency, Department of Defense

National Science Foundation

" . . . to identify and locate any matched Federal personnel, employed, serving, or retired, who owe delinquent debts to the Federal Government under certain programs administered by NSF."

3/8/2000 Department of Education

Department of Justice

" . . . to assist ED in enforcing the sanctions imposed under section 5301 of the Anti-Drug Abuse Act of 1988 (Pub. L. 100-690)."

3/1/2000 Department of Education

Immigration and Naturalization Service, Department of Justice

" . . . will permit ED to confirm the immigration status of alien applicants for, or recipients of, assistance . . . ."

2/8/2000 Defense Manpower Data Center, Defense Logistics Agency, Department of Defense

Department of Veterans Affairs

" . . . to identify and locate any Federal personnel, employed, serving, or retired, who owe delinquent debts to the Federal Government under certain programs administered by VA."

1/27/2000 Immigration and Naturalization Service, Department of Justice

District of Columbia Department of Employment Services; New York State Department of Labor; New Jersey Department of Labor; Texas Workforce Commission;

" . . . to confirm the immigration status of alien applicants for, or recipients or, Federal benefits assistance . . . ."

Massachusetts Department of Employment and Training; California Department of Social Services; California Department of Health Services; Colorado Department of Human Services

12/29/1999 Department of Education

Social Security Administration

" . . . will provide an efficient and comprehensive method of identifying incarcerated applicants who are ineligible to received [sic] student financial assistance . . . ."

11/29/1999 Social Security Administration

States " . . . to facilitate administration of [the required income and eligibility verification system] . . . ."

11/15/1999 Selective Service System

Department of Education

" . . . to ensure that the requirements of section 12(f) of the Military Selective Service Act (50 U.S.C. App. 462(f) are met."

10/26/1999 Office of the Chief Information Officer, Department of Housing and Urban Development

Small Business Administration

" . . . will allow SBA access to a system which permits prescreening of applicants for debts owed or loans guaranteed by the Federal Government to ascertain if the applicant is delinquent in paying a debt owed to or insured by the Government. In addition, HUD will be provided access to SBA's debtor data for prescreening purposes."

10/13/1999 Social Security Administration

Internal Revenue Service, Department of the Treasury

" . . . to locate certain recipients of Social Security benefits . . . in order to aid in the collection or compromise of Federal claims against these individuals . . . ."

9/29/1999 Social Security Administration

Compensation and Pension Service, Department of Veterans Affairs

"To identify Supplemental Security Income (SSI) recipients who receive benefits and to update their SSI records to reflect the presence of such income."

9/29/1999 Office of the Chief Information Officer, Department of Housing and Urban Development

Department of Agriculture

" . . . will allow USDA access to a system which permits prescreening of applicants for loans owed or guaranteed by the Federal Government to ascertain if the applicant is delinquent in paying a debt owed to or insured by the Government."

9/16/1999 Office of Personnel Management

Office of Workers' Compensation Programs, Department of Labor

" . . . to identify and/or prevent erroneous payments under the Civil Service Retirement Act (CSRA) or the Federal Employees' Retirement System Act and the Federal Employees' Compensation Act (FECA)."

9/14/1999 The Real Estate Assessment Center, Department of Housing and Urban Development

Social Security Administration; Internal Revenue Service, Department of Treasury

" . . . identifying potential income discrepancies, i.e., income that tenants did not report as required when applying for initial or continued rental assistance."

CHAPTER 15.MERGERS AND ACQUISITIONS – TYPES OF MERGERS, CORPORATE MERGER PROCEDURES, COMPETITIVE CONCERNS, FEDERAL ANTITRUST

REGULATION, MERGER GUIDELINES

Methods by which corporations legally unify ownership of assets formerly subject to separate controls.

A merger or acquisition is a combination of two companies where one corporation is completely absorbed by another corporation. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. A merger extinguishes the merged corporation, and the surviving corporation assumes all the rights, privileges, and liabilities of the merged corporation. A merger is not the same as a consolidation, in which two corporations lose their separate identities and unite to form a completely new corporation.

Federal and state laws regulate mergers and acquisitions. Regulation is based on the concern that mergers inevitably eliminate competition between the merging firms. This concern is most acute where the participants are direct rivals, because courts often presume that such arrangements are more prone to restrict output and to increase prices. The fear that mergers and acquisitions reduce competition has meant that the government carefully scrutinizes proposed mergers. On the other hand, since the 1980s, the federal government has become less aggressive in seeking the prevention of mergers.

Despite concerns about a lessening of competition, U.S. law has left firms relatively free to buy or sell entire companies or specific parts of a company. Mergers and acquisitions often result in a number of social benefits. Mergers can bring better management or technical skill to bear on underused assets. They also can produce economies of scale and scope that reduce costs, improve quality, and increase output. The possibility of a takeover can discourage company managers from behaving in ways that fail to maximize profits. A merger can enable a business owner to sell the firm to someone who is already familiar with the industry and who would be in a better position to pay the highest price. The prospect of a lucrative sale induces entrepreneurs to form new firms. Finally, many mergers pose few risks to competition.

Antitrust merger law seeks to prohibit transactions whose probable anticompetitive consequences outweigh their likely benefits. The critical time for review usually is when the merger is first proposed. This requires enforcement agencies and courts to forecast market trends and future effects. Merger cases examine past events or periods to understand each merging party's position in its market and to predict the merger's competitive impact.

Ginsburg, Martin D. and Jack S. Levin. 1989. Mergers, Acquisitions and Leveraged Buyouts. Chicago: Commerce Clearing House.

Marks, Mitchell Lee. 2003. Charging Back up the Hill: Workplace Recovery after Mergers, Acquisitions, and Down-sizings. San Francisco: Jossey-Bass.

Contents

Mergers & Acquisitions• Differential Efficiency & Financial Synergy: Theory of Mergers• Operating Synergy & Pure Diversification: Theory of mergers• Costs and Benefits of Merger• Evaluation of Merger as a Capital Budgeting Decision • Calculation of Exchange Ratio

Mergers & AcquisitionsWhen two or more companies agree to combine their operations, where one company survives and the other loses its corporate existence, a merger is affected. The surviving company acquires all the assets and liabilities of the merged company. The company that survives is generally the buyer and it either retains its identity or the merged company is provided with a new name.Types of Mergers1. Horizontal Mergers2. Vertical Mergers3. Conglomerate Mergers

Horizontal MergersThis type of merger involves two firms that operate and compete in a similar kind of business. The merger is based on the assumption that it will provide economies of scale from the larger combined unit. Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. megamerger The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham PLC early this year announced plans to merge resulting in the largest drug manufacturing company globally. The merger created a company valued at $182.4 billion and with a 7.3 per cent share of the global pharmaceutical market. The merged company expected $1.6 billion in pretax cost savings after three years. The two companies have complementary drug portfolios, and a merger would let them pool their research and development funds and would give the merged company a bigger sales and marketing force. Vertical MergersVertical mergers take place between firms in different stages of production/operation, either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communicating and coordinating production. Both production and inventory can be improved on account of efficient information flow within the organization. Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms

plan to integrate the production process and capitalize on the demand for the product. Forward integration take place when a raw material supplier finds a regular procurer of its products while backward integration takes place when a manufacturer finds a cheap source of raw material supplier.Example: Merger of Usha Martin and Usha BeltronUsha Martin and Usha Beltron merged their businesses to enhance shareholder value, through business synergies. The merger will also enable both the companies to pool resources and streamline business and finance with operational efficiencies and cost reduction and also help in development of new products that require synergies.Conglomerate MergersConglomerate mergers are affected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production, marketing and so on. This type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. These types of mergers are also called concentric mergers. Firms operating in different geographic locations also proceed with these types of mergers. Conglomerate mergers have been sub-divided into:• Financial Conglomerates• Managerial Conglomerates• Concentric CompaniesFinancial ConglomeratesThese conglomerates provide a flow of funds to every segment of their operations, exercise control and are the ultimate financial risk takers. They not only assume financial responsibility and control but also play a chief role in operating decisions. They also:• Improve risk-return ratio• Reduce risk• Improve the quality of general and functional managerial performance• Provide effective competitive process• Provide distinction between performance based on underlying potentials in the product market area and results related to managerial performance.Managerial ConglomeratesManagerial conglomerates provide managerial counsel and interaction on decisions thereby, increasing potential for improving performance. When two firms of unequal managerial competence combine, the performance of the combined firm will be greater than the sum of equal parts that provide large economic benefits.Concentric CompaniesThe primary difference between managerial conglomerate and concentric company is its distinction between respective general and specific management functions. The merger is termed as concentric when there is a carry-over of specific management functions or any complementarities in relative strengths between management functions. ACQUISITIONSThe term acquisition means an attempt by one firm, called the acquiring firm, to gain a majority interest in another firm, called target firm. The effort to control may be a prelude • To a subsequent merger or • To establish a parent-subsidiary relationship or • To break-up the target firm, and dispose off its assets or • To take the target firm private by a small group of investors. There are broadly two kinds of strategies that can be employed in corporate acquisitions. These include:

Friendly TakeoverThe acquiring firm makes a financial proposal to the target firm’s management and board. This

proposal might involve the merger of the two firms, the consolidation of two firms, or the creation of parent/subsidiary relationship.Hostile TakeoverA hostile takeover may not follow a preliminary attempt at a friendly takeover. For example, it is not uncommon for an acquiring firm to embrace the target firm’s management in what is colloquially called a bear hug. Differential Efficiency & Financial Synergy: Theory of Mergers Differential EfficiencyAccording to the differential efficiency theory of mergers, if the management of firm A is more efficient than the management of firm B and if after firm A acquires firm B, the efficiency of firm B is brought up to the level of firm A, then this increase in efficiency is attributed to the merger. According to this theory, some firms operate below their potential and consequently have low efficiency. Such firms are likely to be acquired by other, more efficient firms in the same industry. This is because, firms with greater efficiency would be able to identify firms with good potential operating at lower efficiency. They would also have the managerial ability to improve the latter’s performance. However, a difficulty would arise when the acquiring firm overestimates its impact on improving the performance of the acquired firm. This may result in the acquirer paying too much for the acquired firm. Alternatively, the acquirer may not be able to improve the acquired firm’s performance up to the level of the acquisition value given to it. The managerial synergy hypothesis is an extension of the differential efficiency theory. It states that a firm, whose management team has greater competency than is required by the current tasks in the firm, may seek to employ the surplus resources by acquiring and improving the efficiency of a firm, which is less efficient due to lack of adequate managerial resources. Thus, the merger will create a synergy, since the surplus managerial resources of the acquirer combine with the non-managerial organizational capital of the firm. When these surplus resources are indivisible and cannot be released, a merger enables them to be optimally utilized. Even if the firm has no opportunity to expand within its industry, it can diversify and enter into new areas. However, since it does not possess the relevant skills related to that business, it will attempt to gain a ‘toehold entry’ by acquiring a firm in that industry, which has organizational capital alongwith inadequate managerial capabilities.

Financial Synergy The managerial synergy hypothesis is not relevant to the conglomerate type of mergers. This is because, a conglomerate merger implies several, often successive acquisitions in diversified areas. In such a case, the managerial capacity of the firm will not develop rapidly enough to be able to transfer its efficiency to several newly acquired firms in a short time. Further, managerial synergy is applicable only in cases where the firm acquires other firms in the same industry. Financial synergy occurs as a result of the lower costs of internal financing versus external financing. A combination of firms with different cash flow positions and investment opportunities may produce a financial synergy effect and achieve lower cost of capital. Tax saving is another considerations. When the two firms merge, their combined debt capacity may be greater than the sum of their individual capacities before the merger. The financial synergy theory also states that when the cash flow rate of the acquirer is greater than that of the acquired firm, capital is relocated to the acquired firm and its investment opportunities

improve.