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MF0011

MF0011

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Published by: Kusum Ahuja on Dec 16, 2012
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Master of Business Administration - MBA Semester 3Subject Code – MF0011Subject Name – Mergers and Acquisitions4 Credits(Book ID: B1209)Assignment Set- 1 (60 Marks)
Q.1 What are the basic steps in strategic planning for a merger.Answer: Basic steps in Strategic planning in Merger :
 Any merger and acquisitioninvolve the following critical activities in strategic planning processes. Some of theessential elements in strategic planning processes of mergers and acquisitions are aslisted here below:1. Assessment of changes in the organization environment2.Evaluation of company capacities and limitations3.Assessment of expectations of stakeholders4.Analysis of company, competitors, industry, domestic economy and internationaleconomies5.Formulation of the missions, goals and polices6.Development of sensitivity to critical external environmental changes7.Formulation of internal organizational performance measurements8.Formulation of long range strategy programs9.Formulation of mid-range programmes and short-run plans10.Organization, funding and other methods to implement all of the proceedingelements11.Information flow and feedback system for continued repetition of all essentialelements and for adjustment and changes at each stage12.Review and evaluation of all the processesIn each of these activities, staff and line personnel have important Responsibilities in thestrategic decision making processes. The scope of mergers and acquisition set the tonefor the nature of mergers and acquisition activities and in turn affects the factors whichhave significant influence over these activities. This can be seen by observing thefactors considered during the different stages of mergers and acquisition activities.Proper identification of different phases and related activities smoothen the process of involved in merger.
 
Q.2 What are the sources of operating synergy?Answer:
Sources of Operating Synergy:
Operating synergies are those synergiesthat allow firms to increase their operating income, increase growth or both. We wouldcategorize operating synergies into four types:1.
Economies of scale
that may arise from the merger, allowing the combined firm tobecome more cost-efficient and profitable. Economics of scales can be seen in mergersof firms in the same business.
For example:
two banks combining together to create alarger bank. Merger of HDFC bank with Centurian bank of Punjab can be taken as anexample of cost reducing operating synergy. Both the banks after combination canexpect to cut costs considerably on account of sharing of their resources and thusavoiding duplication of facilities available.2.
Greater pricing power 
from reduced competition and higher market share, whichshould result in higher margins and operating income. This synergy is also more likelyto show up in mergers of firms which are in the same line of business and should bemore likely to yield benefits when there are relatively few firms in the business. Whenthere are more firms in the industry ability of firms to exercise relatively higher pricereduces and in such a situation the synergy does not seem to work as desired.
Anexample
of limiting competition to increase pricing power is the acquisition of universalluggage by Blow Plast. The two companies were in the same line of business and werein direct competition with each other leading to a severe price war and increasedmarketing costs. After the acquisition blow past acquired a strong hold on the marketand operated under near monopoly situation. Another example is the acquisition of Tomco by Hindustan Lever.3.
Combination of different functional strengths
, combination of different functionalstrengths may enhance the revenues of each merger partner thereby enabling eachcompany to expand its revenues. The phenomenon can be understood in cases whereone company with an established brand name lends its reputation to a company withupcoming product line or a company. A company with strong distribution networkmerges with a firm that has products of great potential but is unable to reach the marketbefore its competitors can do so. In other words the two companies should get theadvantage of the combination of their complimentary functional strengths.4.
Higher growth
in new or existing markets, arising from the combination of the twofirms. This would be case when a US consumer products firm acquires an emergingmarket firm, with an established distribution network and brand name recognition, anduses these strengths to increase sales of its products.Operating synergies can affectmargins and growth, and through these the value of the firms involved in the merger or acquisition.Synergy results from complementary activities. This can be understood withthe following example
Example :
Consider a situation where there are two firms A andB. Firm A is having substantial amount of financial resources (having enough surpluscash that can be invested somewhere) while firm B is having profitable investmentopportunities ( but is lacking surplus cash). If A and B combine with each other both canutilize each other strengths, for example here A can invest its resource in theopportunities available to B. note that this can happen only when the two firms arecombined with each other or in other words they must act in a way as if they are one.
 
Q.3 Explain the process of a leveraged buyout.Answer:
In the realm of increased globalized economy, mergers and acquisitions haveassumed significant importance both with the country as well as across the boarders.Such acquisitions need huge amount of finance to be provided. In search of an idealmechanism to finance and acquisition, the concept of Leverage Buyout (LBO) hasmerged. LBO is a financing technique of purchasing a private company with the help of borrowed or debt capital. The leveraged buyout are cash transactions in nature wherecash is borrowed by the acquiring firm and the debt financing represents 50% or moreof the purchase price. Generally the tangible assets of the target company are used asthe collateral security for the loans borrowed by acquiring firm in order to finance theacquisition. Sometimes, a proportionate amount of the long term financing is securedwith the fixed assets of the firm and in order to raise the balance amount of the totalpurchase price, unrated or low rated debt known as junk bond financing is utilized.
Modes of purchase
There are a number of types of financing which can be used in anLBO. These include:
Senior debt :
this is the debt which ranks ahead of all other debt and equitycapital in the business. Bank loans are typically structured in up to threetrenches: A, B and C. The debt is usually secured on specific assets of thecompany, which means the lender can automatically acquire these assets if thecompany breaches its obligations under the relevant loan agreement; therefore ithas the lowest cost of debt. These obligations are usually quite stringent. Thebank loans are usually held by a syndicate of banks and specialized funds.Typically, the terms of senior debt in an LBO will require repayment of the debt inequal annual installments over a period of approximately 7 years.
Subordinated debt :
This debt ranks behind senior debt in order of priority onany liquidation. The terms of the subordinated debt are usually less stringentthan senior debt. Repayment is usually required in one ‘bullet’ payment at theend of the term. Since subordinated debt gives the lender less security thansenior debt, lending costs are typically higher. An increasingly important form of subordinated debt is the high yield bond, often listed on Indian markets. Highyield bonds can either be senior or subordinated securities that are publiclyplaced with institutional investors. They are fixed rate, publicly traded, long termsecurities with a looser covenant package than senior debt though they aresubject to stringent reporting requirements.
Mezzanine finance:
This is usually high risk subordinated debt and is regardedas a type of intermediate financing between debt and equity and an alternative of high yield bonds. An enhanced return is made available to lenders by the grant of an ‘equity kicker’ which crystallizes upon an exit. A form of this is called a PIK,which reflects interest ‘paid in kind’, or rolled up into the principal, and generallyincludes an attached equity warrant.
Loan stock:
This can be a form of equity financing if it is convertible into equitycapital. The question of whether loan stock is tax deductible should beinvestigated thoroughly with the company’s advisers.

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