MERGERS AND ACQUISITIONS

Module I

Topics to be Covered
Meaning & Definitions of Merger Types of Mergers Motives & Reasons behind the mergers Theories of Mergers Synergy Types of Synergy Value creation in Horizontal, Vertical & Conglomerate Mergers. Change forces contributing to M&A activities

MEANING OF MERGERS
It denotes combination of two or more companies in such a way that only one survives and the other is dissolved Generally mergers represent a process of allocation and re-allocation of resources by firms in response to change in economic conditions and technological innovations. Generally we can see basically two types of mergers A Statutory merger is a merger where the acquiring company assumes the assets and the liabilities of the merged companies A subsidiary merger is a merger of two companies where the target company becomes a subsidiary or part of a subsidiary of the parent company Consolidation is a merger of two companies where the target company and bidding company become one under different or one of the existing name.

MEANING OF AQUISITIONS It refers to a situation where one firm acquires other and the latter ceases to exist occurs when one company takes controlling interest in another company Assets of the dissolved company (target company) are owned by the acquiring company The shareholders of the target firm are paid either cash or given shares in acquiring company.

AMALGAMATION Mergers may either in the form of amalgamation or acquisition nature of purchase Amalgamation: when two or more companies carrying on similar business go into liquidation and a new company is formed to takeover the businesses

Mergers & Acquisitions in India

The top deal so far last year is the US$2.3 billion acquisition of Ford Motor Co's. Jaguar and Land Rover brands by Tata Motors Ltd. Mergers & Acquisitions activity: In 2008, 1,270 deals with Indian participation and a known value of 50 billion. USD have been announced. May 9, 2008 - India's top mobile operator Bharti Airtel Ltd is in exploratory talks to acquire 51 percent in South Africa's MTN Group at a value of around US$19 billion, creating the worlds sixth-largest mobile company with 130 million subscribers across 21 countries. The countrys biggest deals in the first half of 2009 were ONGC Videsh Ltds purchase of the UKs Imperial Energy Corp. Plc. for $1.9 billion, Tech Mahindra Ltds $576 million acquisition of fraud-hit Satyam Computer Services Ltd in a global bid, and Sesa Goa Ltds $350 million takeover of Dempo Mining Corp. Pvt. Ltd.

Types of Mergers
Horizontal Mergers Vertical Mergers Conglomerate Mergers

TYPES OF MERGER

Horizontal Merger Combination of two or more firms in similar type of production or area of business. Ex: EXXON & MOBIL (Larger share in Oil & Gas Market)

Vertical Merger Combination of two or more firms involved in different stages of production or Merging of firms along the value chain. Ex: MERCK (Manufacturer of Pharmaceuticals) & MEDCO ( Distributor) to gain advantage in distributing its products

Conglomerate Merger Combination of firms engaged in unrelated lines of business activities. Typically, industries with poor prospects for growth will seek to diversify their business. Ex: GE got into new areas like financial services and TV Broadcasting.
Circular Merger: Involves bringing together of products or services that are unrelated but marketed through the same channels, allowing shared dealerships. Ex: McLeod Russell (a tea company) with Eveready Industries (batteries)

VALUE CREATION IN HORIZONTAL MERGERS

Sl/No

CATEGORY

Value Created

Revenue Enhancement

Cost Savings

New growth opportunities

Increased market power Network externalities Leveraging marketing resources and capabilities Reduction of excess capacity Scale of economies Production / Mkt/ Sales & Dist. / logistics / branding / R&D, Learning Economies Creating new capabilities and resources Creating new products, markets and processes

VALUE CREATION IN VERTICAL MERGERS

Sl/ No

CATEGORY

TYPE OF VALUE CATEGORY SOURCES

Efficiency

Revenue enhancement New growth opportunities through leveraging existing resources and also capabilities of the merging firms

Increase in income

Revenue enhancement may arise from the ability to offer a package of services and products rather then just product alone.
Higher profitability may be realized through increased market power that vertical merger confers. It Provides opportunities for indirect price discrimination. Remove firms barriers b/w suppliers or distributors.

Improve profitability

VALUE CREATION IN CONGLOMERATE Sl/No CATEGORY TYPE OF VALUE CATEGORY SOURCES MERGERS
1 2 3

Market Power Efficient internal capital market Resource & capabilities transfer

It can be entry strategy into new product market As two products are different the sourcing of capital becomes easy Diversifying acquirer resources redeploys excess & capabilities to target and Resources cannot be sold but transfer cost effectively.

Efficient Corporate diversification more diversification & risk efficient and Cheaper reduction Diversification of income and cash flow reduces volatility and default risk

Sl/No

CATEGORY

TYPE OF VALUE CATEGORY SOURCES

Agency cost

Conglomerate diversification manifests agency problem will be reduces.

Most of managers human and financial capital invested in their firm, so need to diversify risk Managers exploit surplus firmspecific skills and make themselves indispensable

Personal risk reduction

Management efficiency in complementing each other

SYNERGY
A state in which two or more things work together in a particularly fruitful way that produces an effect greater the sum of their individual effects. Expressed also as "the whole is greater than the sum of its parts." In general, also sunergos , meaning "working together" is the combined working together of two or more parts of a system so that the combined effect is greater than the sum of the efforts of the parts. In business and technology, the term describes a hoped-for or real effect resulting from different individuals, departments, or companies working together and stimulating new ideas that result in greater productivity.

THEORIES OF MERGER
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

INEFFICIENT MANAGEMENT DIFFERENTIAL EFFICIENCY SYNERGY (Operating synergy, Financial synergy & Managerial synergy) DIVERSIFICATION MARKET SHARE STRATEGIC REALIGNMENT HUBRIS AND THE WINNERS CURSE AGENCY PROBLEMS INFORMATION AND SIGNALLING MANAGERIALISM

DRIVING FORCES FO M&A

1. INTERNAL FACTORS Motive to Grow Synergy Diversification 2. EXTERNAL FACTORS Managerial Efficiency Market Entry Tax Shield Strategy Competition

TYPES OF MOTIVES FOR MERGER

STRATEGIC MOTIVES FINANCIAL MOTIVES ORGANIZATIONAL MOTIVES CROSS BORDER MOTIVES

STRATEGIC MOTIVES
Expansion and growth Dealing with the entry of MNCs Economics of scale Synergy Market penetration Market leadership Backward /Forward integration New product entry

Cont.
New market entry Surplus resource Minimum size Risk reduction Balancing product cycle Arresting downward trends Growth and diversification strategy Re- fashioning

FINANCIAL MOTIVES
Deployment of surplus funds Fund raising capacity Market capitalization Tax planning Creation of share holder value Tax benefits Revival of sick units Asset stripping Under valuation of target company Increasing EPS

ORGANIZATIONAL MOTIVES

Superior management Ego satisfaction Retention of managerial talents Removal of inefficient management

CROSS BORDER MOTIVES

Growth orientation Access to input Unique advantage Clients needs Opportunism