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Assignment MF0002 - Mergers & Acquisitions - Sikkim Manipal University

Assignment MF0002 - Mergers & Acquisitions - Sikkim Manipal University

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Published by: priyanga_j on Feb 20, 2010
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1)What are the basic steps in Strategic Planning in Mergers?
Decisions involving mergers and reorganizations fall under the general category of strategic planning. It is a behavior and a way of thinking that requires diverse inputs from allsegments of the organization. Strategic planning involves answering questions such as:
What is the purpose of our organization?
Who do we serve?
What are our strengths, weaknesses, opportunities and threats?
Where do we need to take this company?
How do we plan to get there?Viewing mergers and acquisitions within the context of strategic planning facilitates a proactive rather than a reactive approach. It may also help the cooperative avoid tying uptoo much time, energy, and effort in pursuing mergers at the expense of operations andother types of opportunities. Some of the essential elements in strategic planning processesof mergers and acquisitions are as listed 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 andinternational economies5.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 processesThe scope of mergers and acquisition set the tone for the nature of mergers andacquisition activities and in turn affects the factors which have significant influenceover these activities. Proper identification of different phases and related activitiessmoothen the process involved in merger.
2)Write Short Notes:a.Spin Of
The creation of an independent company through the sale or distribution of new shares of anexisting business/division of a parent company is called Spin-off. It is a kind of de-merger when an existing parent company transforms into two or more separately re-organizeddifferent entities. The parent company distributes all the shares it owns in a controlledsubsidiary to its own shareholders on a pro-rata basis. In this process, the parent companygains effect to making two of the one company. It may be in the form of subsidiary or aseparate company. There is no money transaction in spin-off. The transaction is treated asstock dividend and tax free exchange. Both companies exist and carry on business. It doesnot alter ownership proportion in any company. The newly created entity becomes anindependent company taking its own decision and developing its own policies andstrategies, which need not necessarily, be the same as those of the parent company. Spin-off is necessary for a company having brand equity or for a multi-product company whichenters into collaboration with a foreign company. Businesses wishing to 'streamline' their operations, often sell less productive or unrelated subsidiary businesses as spin-offs. Thespun-off companies are expected to be worth more as independent entities than as parts of alarger business.
2)Write Short Notes:b.Divestitures
Divestiture is a transaction through which a firm sells a portion of its assets or a division toanother company. It involves selling some of the assets or division for cash or securities to athird party which is an outsider. These assets may be in the form of plant, division, productline or a subsidiary. The divestiture process is a form of contraction for the sellingcompany and means of expansion for the purchasing company. For a business, divestiture isthe removal of assets from the books. Businesses divest by the selling of ownership stakes,the closure of subsidiaries or by the bankruptcy of divisions. The buyers benefit due to lowacquisition cost of a completely established product line which is easy to combine in hisexisting business and increase his profit and market share. The seller can concentrate after divestiture more on profitable segments and consolidate its business activities. The motivefor divestiture is to generate cash for the expansion of other product lines, to get rid of  poorly performing operation, to streamline the corporate firm or to restructure thecompany’s business consistent with its strategic goals. Divestiture enables the selling firmto have more lean and focused operation. This in turn, helps the selling company to increaseits efficiency and profitability and also help to create more value for its shareholders.The general opinion is that divestiture is the outcome of incapability of the parent companyto manage dissimilar assets or assets creating negative synergy. Some of the reasons for divestitures are mentioned here below:
Corporate attempt to adjust changing economic and political environment of thecountry.
Strategy to enable others to exploit opportunity effectively to optimize return.
To correct the previous investment decision where the company moved into theoperational field having no expertise or experience to run on profitable basis.
To help finance the acquisition.
To realize the capital gain from the assets acquired at the time when they wereunder performing.
To make financial and managerial resources available for developing other more profitable opportunities.
Selling not required or unconnected parts in the business due to:
Poor fit of Division
Reverse Synergy
Poor Performance
Capital Market Factor 
Cash flow factors
Abandoning the core businessThe divestiture decision can be considered similar to reverse capital budgeting decision. Inthis case, the selling firm receives cash by divesting an asset or a division of the firm, andthese cash flows received are then compared with the present value of the cash flows after tax sacrificed on account of parting of a division or asset. Following are the steps involvedin assessing whether the divestiture is profitable for the selling firm or not.i.Computation of decrease in cash flow after tax (for year 1, 2 …n) due to sale odivision.ii.Multiply by appropriate cost of capital factor relevant to division.iii.Computation of decrease in present value of the selling firm ( i x ii)iv.Computation of present value of obligations related to the liabilities of the division(assuming liabilities are also transferred with the sale of a division)v.Present value lost due to sale of division (iii – iv)The decision criteria regarding acceptance and rejection of divestiture decision is asfollows:
Present value lost due to sale of division is less than the sale proceedsobtained from it: Accept, that is, sell the division.
Present value lost due to sale of division is more than the sale proceedsobtained from it: Reject, that is, keep the division.

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