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Merger and Acquisition

Merger and Acquisition

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Published by saurabh698
Merger and acquisition, ICFAI, Book for M&A, Take over, Take over defense, LBO, Funding , M&A in India.
Merger and Acquisition in India, Merger and Acquisition
Merger and acquisition, ICFAI, Book for M&A, Take over, Take over defense, LBO, Funding , M&A in India.
Merger and Acquisition in India, Merger and Acquisition

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Published by: saurabh698 on Jan 26, 2010
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 Mergers definition:
A merger is a combination in which two corporations combine and the mergedcorporation goes out of existence. The acquiring company assumes the assets andliabilities of the acquired company. The buyer is defined as company with larger marketcapitalization or the company that is issuing shares for other company’s share in stock-for-stock deal.A consolidation is different from merger for in consolidation a new corporation is bornout of the merger. Laconically, merger is a+b = a and consolidation is a+b = c.Despite of these difference these terms(merger, consolidation &takeover) ,as is true for many other terms in M&A are used interchangeably.
There are three types of mergers:1. Horizontal merger: These are mergers in which two competitors combine. Ex: Exxonand Mobil two petroleum companies combined in 1998.2. Vertical merger: Mergers of companies having a buyer seller relationship.3. Conglomerate merger: This occurs when two non competing companies which doesn’thave a buyer-seller relationship combine.
Before any merger companies generally seek advice of professionals which play key rolein M&A. These include Investment banks which offer expertise in structuring the dealand handling the strategy. They also provide financing for transaction.Given the complex legal nature of M&A law firms also play an important role.Valuation experts also provide important services in M&A.Another group of professionals who can play an important role are arbitragers. Arbitragerefers to buying of an asset in one market and selling in another. With respect to M&Aarbitragers purchase stocks of companies that may be taken over in the hope of getting atakeover premium when the deal closes.
Most mergers are friendly. Process begins when management of one firm contacts TargetCompany’s management often through investment bankers of each firm. Most merger agreements include a material adverse change clause which allows either party towithdraw from the deal if a major change in circumstance arises. When two companiesengage in M&A they often exchange confidential information which helps them to knowthe deal better. This shows another risk of M&A leaking of confidential information.A denial of negotiation when the opposite is the case is improper as companies may notdeceive the market.
Merger activities have seen five majors ‘waves of merger’. The first four occurred in1897-1904, 1916-1929, 1965-1969, and 1984-1989. The fifth wave began in 1994.thecause of these waves is attributed to economic, regulatory and technological shocks.Economic shocks come in form of economic expansion to grow to meet the rapidlygrowing demand in economy. Regulatory shocks may come from removal of regulatory barriers that might have prevented corporate mergers. Technological shocks come fromtechnological advancements in industry or even giving rise to new industries.
First wave (1897-1904):
This included many horizontal combinations andconsolidations. Many industrial giants originated in first merger wave such as U.S steel,Dupont, GE, Eastman Kodak, American tobacco. Many monopolies were built. Shermanact which was enforced to prevent monopolies wasn’t effective enough.
Second wave (1916-1929):
American economy evolved during this time due to postWorld War I economic boom. This period was dominated by horizontal mergers but alsosaw many vertical mergers. The period resulted in formation of many oligopolies. Theantimonopoly provisions of ineffective Sherman act were reinforced by Clayton act.Many prominent corporations formed during this wave were General motors, IBM andunion carbide.
Third wave (1965 – 1969):
Firms during this period faced tough antitrust environmentdue to the celler-kefauver act of 1950 which strengthened the anti merger provision of Clayton act. Clayton act made the acquisition of other firms’ stocks illegal when itresulted in a merger which reduced the competition in an industry. However the law hada loophole: it did not prevent the anticompetitive acquisition of assets. The celler-kefauver closed this loophole. Thus firms with financial resources were left with only oneway of merging, forming conglomerates. Many of the acquisitions resulted in poorly performing firms which had to be sold or divested.
Fourth wave (1984-1989):
This wave featured many interesting and uniquecharacteristics. Arbitragers became a very important part of takeovers. The ability of these corporate raiders to receive greenmails (or targets assets) in exchange of their stock made it highly profitable. Investment banks played an aggressive role as well devisingmany innovative techniques to facilitate or prevent takeovers. Many of the mega deals of 80’s were financed with huge debt. These leveraged buyouts were used to take a publiccompany private.
Fifth wave (1992- ):
Fifth merger wave is truly a global merger wave with increasednumber of deals in Europe, Asia, and South America. Fifth merger wave is marked bymany mega mergers. There were fewer hostile bids and more strategic mergers. Thesedeals were not highly leveraged, financed through the increased use of equity. In mid90’s market was enthralled by consolidation deals called roll ups. Here fragmentedindustries were consolidated through larger scale acquisition of companies calledconsolidators. Certain investment banks specialized in roll-ups and were able to getfinancing and were issuing stock in these companies.
Two of the most cited reasons for M&A are faster growth and synergy.
This can be internal or external growth (through M&A). Through M&A firmcan expand in same or different industry (called diversification). Expanding in differentindustry is very controversial in finance. If a company expands internally it grows slowly,competitors can take advantage of this and acquire market shares. M&A is also valuablewhen a firm wants to expand to different geographic market. Unfortunately it is mucheasier to generate sales growth by simply adding up revenues of both firms than it is toimprove the profitability of overall firm. Management needs to make sure that the greater size in terms of revenue has brought with it must commensurate profits and returns for shareholders else it was better off to continue with slow growth. The key question withevery M&A is whether the return from the deal is greater than what can be achieved withthe next best use of invested capital (opportunity cost).
: Simply stating synergy is 2+2 = 5, which is ability of combination to be more profitable than combining firms. The two main types of synergies are operating synergyand financial synergy. Operating synergy comes in two forms revenue enhancements andcost reductions. Revenue enhancement synergy comes from the new opportunities thatare present as a result of M&A. It may come from a company with good brand imagelending its reputation to other company. It may arise from a company with largedistribution merging with company with large product potential but losing its ability toget to market before rivals seize the period of opportunity. Revenue enhancementsynergies are difficult to achieve and difficult to be quantified and built into a valuationmethod.Another source of operating synergy is economics of scale which is decrease in averagecost with increase in output. As according to demand, companies with low level of outputwill have higher per unit cost, because the fix cost required to maintain manufacturingfacility is spread over the low output. Other reasons for gain include increasedspecialization of labor and efficient use of capital equipment, which might not be possibleat low output levels. But after certain level of output per unit cost rises again as companyexperiences diseconmics of scale which arises from higher costs and other problemsrelated with coordinating a large production.

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