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“TRENDSMERGER & ACQUISITION”
Mrs. ANJANA SINGH
Submitted By: GAURI SHANKAR
It is a great pleasure to acknowledge the assistance and cooperation rendered and offered by a class of people, who in their skillful bought the Report to completion on style.
I am delight to thank everybody who has cooperated to bring this Report to reality. It is impossible to grade or classify the assistance provided by them but it is the feeling behind this cooperation that matters the most. I take the pleasure to express my profound gratitude to respect Dr. J. C. GANDHI sir for his kind and immeasurable guidance. My sincere thanks to Mrs. ANJANA SINGH for this constructive cooperation, spontaneous reviews, ideal criticism during the process of building and bring the ideas into reality that is completion of Report. Last and the most impartially my sincere thanks to my respected father and mother for this excellent upbringing and seeing a dream in me. GAURI SHANKAR (MBA 2ND SEM.)
A merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. There are 15 different types of actions that a company can take when deciding to move forward using M&A. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the United States, business laws vary from state to state whereby some companies have limited protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the "poison pill".
Historically, mergers have often failed to add significantly to the value of the acquiring firm's shares Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off employees, operating at a more technologically efficient scale, etc.), reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may or may not be consistent with public policy or public welfare. Thus they can be heavily regulated, for example, in the U.S. requiring approval by both the Federal Trade Commission and the Department of Justice. The U.S. began their regulation on mergers in 1890 with the implementation of the Sherman Act. It was meant to prevent any attempt to monopolize or to conspire to restrict trade. However, based on the loose interpretation of the standard "Rule of Reason", it was up to the judges in the U.S. Supreme Court whether to rule leniently (as with U.S. Steel in 1920) or strictly (as with Alcoa in 1945).
Index Merger …………….4
Introduction ………………….4 Meaning & Definition …………………..4 Economics/Reasons of Merger …………………...4 Objective ………………….6 Type of Mergers ………………….6 Legal & Procedural aspects of Merger……………….6 Costs & benefits of a Merger …………………..7
Concept …………………..8 Meaning & Definition …………………….8 Five sins of Acquisition ……………….9 Managing an acquisition Programmed ………………..10 HR issue in Merger & Acquisition …………………..12 Strategic drivers of M&A ……………………12 Phases of merger ………………..12 HR issue & their implication on various stages of M&A ………………….13 Managing HR issues in M&A ………………….14 Resent report for merger & Acquisition in 2007-2008 ………………….16 Examples ……………….16
A merger is a combination of two or more companies into one company. It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. The Income Tax Act, 1961 of India uses the term ‘amalgamation’ for merger.
MEANING AND DEFINITION
According to Section 2 (1A) of the Income Tax Act, 1961, the term amalgamation means the merger of one or more companies with another company or merger of two or more companies to form one company in such a manner that: i) ii) iii) All the property of the amalgamating company or companies immediately before the All the liabilities of the amalgamating company or companies immediately before the Shareholders holding not less than nine-tenths in value of the shares in the amalgamating company
amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. amalgamation become the liabilities or the amalgamated company by virtue of the amalgamation. or companies (other than shares already held therein immediately before the amalgamation by or by a nominee for, the amalgamated company by virtue of the amalgamation. According to the Companies Act, 1956, the term amalgamation includes ‘absorption’. In S.S Somayajula vs. Hop Prudhommee and Co. Ltd., the learned Judge refers to amalgamation as “a state of things under which either two companies are joined so as to form a third or one is absorbed into or blended with another.”
Thus merger or amalgamation may take any of the two forms:
i) ii) Merger or amalgamation through absorption. Merger or amalgamation through consolidation.
Absorption: A combination of two or more companies into an existing company is known as
‘absorption’. In a merger through absorption al companies except one go into liquidation an lose their separate identities. Suppose there are two companies, A Ltd. And B Ltd. Company B Ltd. are merged into
A Ltd. leaving its assets and liabilities to the acquiring company A Ltd; and company B Ltd. is liquidated. It is a case of absorption. 2) Consolidation: A consolidation is a combination of two or more companies into a new company. In this form of merger, all the existing companies which combine, go into liquidation and form a new company with a different entity. The entity of consolidating corporations is lost and their assets and liabilities are taken over by the new corporation or company. The assets of old concerns are sold to the new concern and their management and control also passes into the hands of the new concern.
Economics/Reasons of Mergers
A number of mergers, take-overs and consolidation have taken place in our country in the recent times. One of the A
major reasons cited, for such mergers, is the liberalization of G the Indian economy. Liberalization is forcing companies to E. enter new businesses, exit from others, and consolidate in C some simultaneously. The following are the other important reasons for mergers or amalgamations.
SIZE OF OPTIMAL SCALE OF OPERATIONS
Economies of Scale: An amalgamated company will have more resources at its command than the individual companies. This will help in increasing the scale of operations and the economies of large scale will be availed. These economies will occure because of more intensive utilization of production facilities, etc. these economies will be available in horizontal mergers (companies dealing in same line of products) where scope of more intensive use of resources is greater. The economies will occur only upto a certain point of operations known as optimal point. It is a point where average costs are minimum. When production increases from this point, the cost per unit will go up. The optimal point or production is shown with the help of a diagram also (abow). 1) Operating Economies: A number of operating economies will be available with the merger of two or more companies. Duplicating facilities in accounting, purchasing. Marketing. Etc. will be management emerging from the amalgamation. The amalgamated companies will be in a better position to operate than the amalgamating companies individually. 2) Growth and Diversification: As stated earlier, merger/amalgamation of two or more firms has been used as a dominant business strategy to seek rapid growth and diversification. The merger improves the competi- tive position of the merged firm as it can command an increased market share. It also offers a special advantage because it enables the merged firm to leap several stages in the process of expansion. In a saturated market, simultaneous expansion and replacement through merger/takeover is more desirable than creating additional capacities through expansion. A merger proposal has a very high growth appeal, and its desirability should always be judged in the ultimate analysis in terms of its contribution to the market price of the shares of the merged firm. The merged firm can also seek reduction in the risk levels through diversification of the business operations. The extent to which risk is reduced, however, depends on the correlation between the earning of the merging (combining) firms. A negative correlation between the combining firms always brings greater reduction in the risk whereas a positive correlation leads to less reduction in risk.
Utilization of Tax Shields: When a company with accumulated losses merges with a profit
making company it is able to utilize tax shields. A company having losses will not be able to set off losses against future profits, because it is not a profit earning unit. On the other hand if it merges with a concern earning profit then the accumulated losses of one unit will be set of against the future profits of the other unit. In this way the merger will enable the concern to avail tax benefits. 4) Increases in Value: The value of the merged company is greater than the sum of the independent values of the merged companies. For example, if X Ltd. and Y Ltd. merge and form Z ltd., the value of Z Ltd. Is expected to be greater than the sum of the independent values of X Ltd. & Y Ltd. 5) Eliminations of Competition: The merger of two or more companies will eliminate competition among them. The companies will be able to save their advertising expenses thus enabling them to reduce their prices. The consumers will also benefit in the form of cheaper or goods being made available to them. 6) Economic Necessity: Economic necessity may force the merger of some units. It their are two sick units, government may force their merger to improve their financial position and overall working. A sick unit may be required to merge with a healthy unit to ensure better utilization of resources, improve returns and better management. Rehabilitation of sick units is a social necessity because their closure many result in unemployment etc. OBJECTIVE The company main objective is Successful merger creates a larger industrial organization than before, survives and provides a basis for growth. Earnings on capitalization and dividend records determine the success of merger.
TYPE OF MERGERS
1) Horizontal Merger: When tow or more concerns dealing in same product or service join together, it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the units. Besides avoiding competition, there are economies of scale, marketing economies, elimination of duplication of facilities, etc. 2) Vertical Merger: A vertical merger represents a merger of firms engaged at different stages of production or distribution of the same product or service. In this case two or more companies dealing in the same product but at different stages may join to carry out the whole process itself. A petroleum company may set up its own petrol pumps for its selling. A railway company may join with coal mining company for carrying coal to different industrial centers. 3) Conglomerate merger: When two concerns dealing in totally different activities join hands it will be a case of conglomerate merger. The merging concerns are higher horizontally nor vertically related to each other. E.g a manufacturing company may merge with an insurance company.
LEGAL AND PROCEDURAL ASPECTS OF MERGER
The procedure of merger is long-drawn and involves some important legal dimensions. Following steps are taken in the procedure: 1) Analysis of Proposal by the Companies: Whenever a proposal for merger comes up then
managements of concerned companies look into the pros and cons of the scheme. The likely benefits such as economies of scale, operational economies, improvements in efficiency, reduction in cost , benefits o diversification, etc. are clearly evaluated. The likely reactions of shareholders, creditors and others are also assessed. The taxation implications are also studied. After going through the whole analysis work, it is seen whether the scheme will be beneficial or not. It is pursued father only if it will benefit the interested parties otherwise the scheme is shelved. 2) Determining Exchange Rations: The merger schemes involve exchange of shares. The shareholders of amalgamated companies are given shares of the amalgamated company. It is very important that a rational ratio of exchange of share should be decided. Normally a number of factors like book value per share, market value per share, potential earnings, and value of assets to be taken over are considered for determining exchange rations. 3) 4) Approval of Board of Directors: After discussing the amalgamation schme thoroughly and Approval of Shareholders: After the approval of this scheme by the respective Boards of negotiating the exchange ratios, it is put before the respective Board of Directors or approval. Directors, it must be put before the shareholders. According to section 391 of Indian companies act, the amalgamation scheme should be approved at a meeting of the members or class of the members, as the case may be, of the respective companies representing three-forth in value and majority in number, whether present in person or by proxies. In case the scheme involves exchange or shares, it is necessary that is approved by not less than 90 per cent of the shareholders (in Value) of the transferor company to deal effectively with the dissenting shareholders. 5) Consideration of Interests of the Creditors: The views of creditors should also be taken into consideration. According to section 391 amalgamation scheme should be approved by majority of creditors in numbers and three-forth in value. 6) Approval of the Court: After getting the scheme approved, an application is filed the court for its sanction. The court will consider the viewpoint of all parties appearing, if any, before it, before giving its consent. It will see that the interests of al concerned parties are protected in the amalgamation scheme. The court may accept, modify of reject and amalgamation scheme and pass orders accordingly. However, it is up to the shareholders whether to accept the modified scheme or not. 7) Clearance under MRPT Act: Ever scheme of amalgamation or merger requires the approval of Central Government under MRPT Act. The idea behind this approval is to se that it does not result in control, ownership and management of important undertakings into a few hands and which is not likely to be public interest. Any scheme of amalgamation or merger leading to concentration of economic power is not allowed by the government.
COSTS AND BENEFITS OF A MERGER
When firm A acquires firm B, it is making a capital investment decision and firm B is making a capital divestment decision. What is the net present value of this decision to firm A? What is the net present value of this decision to firm B?
To calculate the NAV to company A, We have to identify the benefit and the cost of the merger. The benefit to the merger is the difference between the present value (PV) of the combined entity PV AB and the present value of the two entities if they remain separate (PVA + PVB). Hence, Benefit = PVAB –(PVA + PVB) The cost of the merger, from the point of view of firm A, assuming that compensation to firm B is paid in cash, is equal to the payment made for acquiring firm B less the present value of from B as a separate entity. Thus, Cost = cash – PVB
The net present value (NPV) of the merger from the point of view of firm A is the difference between the benefit and the cost of befined above. So NPV to A = Benefit –cost = (PVAB –(PVA+PVB) – cash + PVB The net present value of the merger from the point of view of firm b is simply the cost of the merger from the point of view of firm A. Hence, NPV to B = Cash –PVB Example:- Firm A has a value of Rs. 20 million and firm B has a value of Rs. 5 million. If the two firms merge, cost savings with a present value of Rs. 5 million would occur. Firm A proposes to offer Rs. 6 million cash compensation to acquire firm B. Calculate the NPV of the merger to the two firms. In this example PVA =Rs. 20 million, PVB = Rs. 5 million, PVAB= 25 million, Cash = Rs. 6 million. Therefore Benefit = PVAB –(PVA + PVB)= Rs. 5 million Cost= cash – PVB =Rs. 1 million NPV to A= Benefit – cost = Rs. 4 million NPV to B= cash - PVB = Rs. 1 million
Concept: - As essential feature of merger through absorption as well as consolidation is the combination of the companies. The acquiring company takes over the ownership of one or more other companies and combines their operations. However, an acquisition does not involve combination of companies. It is simply an act of acquiring control over management of other companies. The control over management of another company can be acquired through either a ‘friendly take-over’ or through ‘forced’ or ‘unwilling acquisition’.
MEANING AND DEFINITION
When a company takes-over the control of another company through mutual agreement, it is called acquisition or friendly take-over. On the other hand, if the control is acquired through unwilling acquisition, i.e., when the takeover is opposed by the ‘target’ company it is known as take-over or we can say acquisition. Takeovers have become commonplace in the Indian corporate world. Some of the prominent takeovers witnessed recently are:
Ashok Leyland Union Carbide (Renamed As Eveready India)
Regulation of Acquisition Takeover may be regarded as a legitimate device in the market for corporate control provided they as properly regulated by the following principles: 1) Transparency of the Process: A takeover affects the interests of many parties and constituents
such as shareholders, employees, customers, suppliers, contending acquirers, creditors, and others. Hence it should be conducted in an open maner. If the process is transparent, takeovers will be regarded by various parties and consitituents as a legitimate device in the market for corporate control. 2) Interest of small shareholders: in a takeover the ‘controlling block’ which often tends to be between 20 to 40 per cent is usually acquired from a single seller (occasionally it may be acquired from many sellers through market purchases). Typically the ‘controlling block’ it bought at a ‘negotiated’ price which is higher than the prevailing market price. What happens to the other shareholders? The takeover code should ensure that the other shareholders should not suffer any disadvantage. 3) Realization of Economic Gains: The primary economic rationale for takeovers should be to improve the efficiency of operations and promote better utilization of resources. In order to facilitate the realization of these economic gains, the acquirer must enjoy a reasonable degree of latitude for restructuring operations, widening of product range, redeployment of resources, etc. in addition, suitable fiscal incentives, particularly when takeovers contribute to rehabilitation of ailing units, must be provided. 4) NO Undue Concentration of Market Power: While the regulatory framework must be conducive to the realization of economic gains. It must prevent concentration of market power. The acquirer should not, as a result of the takeover, enjoy undue market power which can be used to the detriment of customers and others. 5) Financial Support: If takeovers are regarded as useful devices for improving the quality of management and efficiency of operation, they should not remain the preserve of those who are financially strong. Suitable financial mechanisms should be developed to enable competent persons, irrespective o their financial resources, to participate in takeover exercise. Successful entrepreneurs and managers with proven abilities and trace record should have access to funds provid3d by financial institutions or investors through the capital market to support their takeover proposals.
Regulation on Substantial Acquisition of Shares and Takeovers
The Securities and Exchange Board of India has issued detailed guidelines for regulating substantial acquisition of shares and takeovers. The essence of these guidelines is as follows: 1) 2) The acquirer should intimate to the target company and the concrn3d stock exchange as soon as its No sooner the holding of the acquire crosses 10% of voting capital of the target company it should
holding crosses 5% of the voting capital of the target company. intimate this to the concerned stock exchange. At the same time, it should offer to other shareholders of the company, through a public announcement, a minimum of 20% of this voting capital of the target company
through an offer document. The offer should not be priced lower than the average price of acquisition during past one year. 3) The public announcement of offer should contain particulars like the object and terms of the offer. The identity of the ultimate pers9on seeking to acquire shares, the intention of acquisition, and so on. The Purpose of these guidelines is to: i) ii) iii) Impart greater transparency to takeover deals, Ensure a greater amount of disclosure through public announcement and offer documents, and Protect the interest of small shareholders.
Five Sins of Acquisitions The American Management Association examined 54 big mergers in the late 1980s and found that roughly onehalf of them led to fall in productivity or profits or both. Warren Hellman says: “So many mergers fail to deliver what they promise that there should be a presumption of failure. His burden of proof should be on showing that anything really good is likely to come out of one”. It appears that acquisitions are plagued by five sins: 1) Straying Too Far Afield: Very few firms have the ability to successfully mange diverse business.
As one study revealed. 42% of the acquisitions that turned sour were conglomerate acquisitions in which the acquirer and the acquired lacked familiarity with each other’s business. The temptation to stray into unrelated areas that appear exotic and very promising is often strong. However, the reality is that such forays are often very risky. 2) Striving for Bigness: Size is perhaps a very important yardstick by which most organizations business or otherwise, judge them. Hence, there is a strong tendency on the part of mangers, whose compensation is significantly influenced by size, to build big empires. The concern with size may lead to unwise acquisitions. Hence, when evaluating an acquisition proposal keep the attention focused on how it will create value for shareholders and not on how it will increase the size of the company. 3) Leaping before Looking: Failure to investigate fully the business of the seller is rather common a. b. c. The seller may exaggerate the worth of intangible assets (brand image, technical knowhow, patents and copyrights, and so on). The accounting report may be deftly window-dressed, and The buyer/may not is able to assess the hidden problems and contingent liabilities nor may the problems here are
simple brush them aside because of its infatuation with the target company. Veterans in this game strongly argue that the negotiating parties must searchingly examine the other side’s motivations. 4) Overpaying: in a competitive bidding situation, the naïve ones tend to bid more. Often the highest bidder is one who overestimates value out of ignorance. Though he emerges as the winner he happens to be in a way the unfortunate winner. This is referred to as “winner’s curse” hypothesis. As Copeland, et al says: “In the heat of a deal, the acquirer may find it all too easy to bid up the price beyond the limits of a reasonable valuation. Remember the winner’s curse. If you are the winner in a bidding war, way did your competitors drop out?” 5) Failing to integrate well: Even the best strategy can be ruined by poor implementation. A precondition for the success of an acquisition is the proper post=acquisition integration of two different organizations. This is a ci\complex task which may not be handled well. As Copeland et al. say: “Relationships with customers, employers, and suppliers can easily be disrupted during the process; and
this disruption may cause damage to the value of the business. Aggressive acquirers often believe they can improve the target’s performance by injecting better talent, but end up chasing much of the talent out.”
MANAGING AN ACQUISITION PROGRAMME As the changes of failure in an acquisition can be high, it should be planned carefully. It pays to develop a disciplined acquisition program me consisting of the following steps: Step 1: Mange the Pre-Acquisition Phase: A good starting point of a merger and acquisition programme for an acquiring company is to institute a through valuation of the company itself. This will enable the acquiring company to understand well its strengths and weaknesses and deepen the acquirer’s insights into the structure of its industry. It will also help in identifying ways and means of enhancing the value of the acquiring firm so that the firm can minimize the changes of becoming a potential acquisition candidate itself. Armed with this knowledge, mangers of the acquiring firm can do brainstorming that will throw up worthwhile acquisition ideas. An opportunity that strengthens or leverage the core business or provide functional economies of scale, or result in transfer of skill or technology need to be identified. Step 2: Screen Candidates: The ideas generated in the brainstorming sessions and the suggestions received from various quarters (merchant bankers, consultants, corporate planners, and so on) will have to be filtered. Screening criteria that make sense for the acquiring company’s perspective need to be used. For example. And acquirer may eliminate companies that are: 1. 2. 3. 4. 5. 6. Too large (market capitalization of equity in excess of Rs. 100 Crore ), or Too small (revenues less than Rs. 10 Crore), or Engaged in a totally unrelated activity, or Commanding a high price=earnings multiple (in excess of 25), or Not export-oriented (exports account for less than 20 per cent of the turnover), or Not amendable to acquisition (existing management is not inclined to relinquish control).
Step 3: Evaluate the Remaining Candidates: The screening criteria applied in step 2 will narrow down the list of candidates to a fairly small number. Each of them should be examined thoroughly. A comprehensive evaluation must cover in great detail the following aspects: operations, plant facilities, distribution network, sales, personnel, and finances (including hidden and contingent liabilities). Special attention should be paid to the quality of management. Experience, competent, and dedicated management is a scarce resource. When a company is acquired, the quality of its management is as, if not more, important as the rest of its assets. Each candidate ought to be valued as realistically as possible. Valuations should not be clouded by wishful thinking; it should not be vitiated by an obsession to acquire the target company Step 4: Determine the Mode of Acquisition: As discussed earlier, the three major modes of acquisition are merger, purchase of assets, and takeover. In addition, one may look at leasing a facility or entering into a management contract. Though these do not tantamount to acquisition, they give the right to use and manage a complex of assets at a much lesser cost and commitment. They may eventually lead to acquisition. The choice of the mode of acquisition is guided by the regulations governing them. The time frame the acquirer has in mind, the resources and acquirer wishes to deploy, the ddegree of control the acquirer wants to exercise, and the extent to which the acquirer is willing to assume contingent and hidden liabilities.
Step 5: Negotiate and consummate the Deal: For successful negotiation, the acquiring firm should know how valuable the acquisition candidate is to the firm, to the present woner, and to other potential acquirers. While negotiating the deal an acquirer would do well to remember the following advice of Copeland et al. “your objective should be to pay one dollar more than the value to the next highest bidder, and an amount that is less than the value to your.” This implies that the acquiring firm should identify not only the synergies that it would derive bu also what other acquirers may obtain. Futher, the acquiring firm should assess the financial condition of the existing owner and other potential acquirers. Step 6: Manage the Post-Acquisition Integration: Generally after the acquisition, the new controlling group tends to the much more ambitious and is inclined to assume a higher degree of risk. It seeks to: 1. Quicken the pace of action in an otherwise staid organization, 2. Encourage a proactive, rather than a reactive, stance towards external developments, and 3. Emphasize achievement over adherence to organizational procedures. M&A: What motivates Indian companies?
The size factor Many companies have undertaken M&A to grow in size by adding manpower and to facilitate overall expansion and make a large company in world. To gain new customers One likely reason behind M&A has been to gain new customers because they have increase our facilities and service. The need for skill set enhancement The need for skill set enhancement seems to be a major reason for companies to merge and make new acquisitions. They were merger help in combining skill sets of both companies, which in turn led to growth and expansion of the merged entity. he wants looking forward to efficient marketing and service support for its products.
HR Issues in Mergers & Acquisitions
The post liberalization period was of mergers and acquisitions and still it is continuing as a strategic driver for market Dominance, Geographical expansion, leverage in resource and capability acquisition, competence, adjusting to Competition. M&A’s are strategic alliances. People Management plays a critical role in M&A. People issues like staffing decision, organizational design, etc., are most sensitive issues in case of M&A negotiations, but it has been found that These issues are often being overlooked. Geographical Expansion Companies use acquisitions to extend geographical reach and global market share through new market entry Leveraging Competence Companies merge to leverage their competence in NPD, credit risk and debt management, etc. Resource & Capability Acquisition Companies also merge to gain resource and capability acquisition, which they may lack, and would otherwise be difficult for them to build on their own. Adjusting to Competition Companies are sometimes forced into acquisitions by the acquisition strategy of their principal competitors. Phases of Merger There are three phases of merger: Run-up or Pre-Merger
Used to develop an awareness of the likely challenges and pressure points. Generally, the companies concentrate only on the strategic aspects and legal issues during the pre-M&A planning period. Human issues like staffing decisions, organizational design, etc., take a back seat. It is essential to plan and manage these issues at pre-takeover planning period. Immediate Transition (first 100 days or 6 months) Different team is used to manage this. Appointment of new board of directors and key appointments and redundancies. Effective hand-over is essential between teams. The Integration (Long-term coming together of the two parties) When the deal has been closed, the job of realizing the strategic and value creation objective of the deal starts. Companies involved in the merger have to be integrated in varying degrees.
Extent of integration is defined by the need to maintain the separateness of the acquired business. It involves integration of the following: * Systems * Processes and procedures * Strategy * Reporting systems * People Involves re-distribution of power between the merging firms. Conflict of interests may hinder an effective integration process. HR Issues & their Implications on Various Stages of M&A Stage 1: Pre Combination - The HR issues in the pre merger phase are: Identifying reasons for the M&A Forming M&A team leader searching for potential partners Selecting a partner Planning for managing the process of M&A Planning to learn from the process The HR implications in this phase are: Knowledge and understanding need to be disseminated Leadership needs to be in place Composition of team's impact success Systematic and extensive pre-selection and selection Conducting thorough due diligence of all areas Cultural assessment Planning for combination which minimizes problems at a later stage Creating practices for learning and knowledge transfer Stage 2: Combination - The HR issues in this phase are: Selecting the integration manager designing / implementing teams Creating the new structure strategies and leadership Retaining key employees managing the change process
The HR implications in this phase are: Selecting the appropriate candidate Creating team design and selection which are critical for transition and combination success Communicating the benefits of merger
Deciding on who stays and who goes Establishing a new culture, structure, and HR policies & practices Stage 3: Solidification & Assessment - The HR issues in the integration phase are: Solidifying the leadership and staffing Assessing the new strategies and structure Assessing the new culture Assessing the new HR policies & practices Assessing the concerns of stakeholders Revising as needed Learning from the process The HR implications in the integration phase are: Elective leadership and staffing of the new entity Creating and evaluating a new structure Assessment revision required for melding two cultures The concerns of all stakeholders need to be addressed and satisfied The new entity must learn When a merger is announced, company employees become concerned about job security and rumors start flying creating an atmosphere of confusion, and uncertainty about change. Roles, behaviors and attitudes of managers affect employees' adjustment to M&A. Multiple waves of anxiety and culture clashes are most common causes of merger failure. HR plays an important role in anticipating and reducing the impact of these cultural clashes. Lack of communication leads to suspicion, demoralization, loss of key personnel and business even before the contract has been signed. Gaining emotional and intellectual buy-in from the staff is not easy, and so the employees need to know why merger is happening so that they can work out options for themselves. Major stress on the accompany merger activity are: * Power status and prestige changes * Loss of identity * Uncertainty Unequal compensation may become issue of contention among new co-workers. There should be a clear and unambiguous communication between the new management and employees. To manage organizational stress, establish performance criteria, identify who will stay and who will go, create a new organizational structure and assume the leadership of the emerging organization. Managing HR Issues in M&A As the transition begins, the two cultures should combine to create a unique culture. Why M&A? • • • Opportunity for growth Need for faster growth Access to capital and brand
• • • • •
Gaining complementary strengths Acquire new customers Need to enhance skill sets Expand into new areas Widen the portfolio of addressable market and Meet end-to-end solution needs Recent Mergers & Acquisitions
Company Merged with/Acquired Reason/Benefits
Merged with OrbiTech
Acquired IPR of OrbiTech range of Orbi Banking product suite.
Aimed at expanding in the BPO space, the acquisition gave Wipro Acquired Spectra mind Wipro an opportunity to run a profitable BPO business. Acquired global energy practice of American Management Systems It acquired skilled professionals and a strong customer base in The area of energy consultancy. It acquired specialized expertise and people in telecom R&D. It acquired IP from the medical systems company, which in Wipro GE Medical Systems (India) Turn gave it a platform to expand its offerings in the Indian and Asia Pacific healthcare IT market. Primarily aimed at expanding its customer base. The company vMoksha Challenger Systems & X media also leveraged on the expertise of the companies in the BFSI space.
Acquired the R&D divisions of Ericsson
Acquired China-based Navion software
Expanded its presence in the Japanese and the Chinese markets. It also plans to use it as a redundancy centre for its Indian operations.
Acquired US-based eJiva and Hyderabad-based Aqua Regia
Expanded in size and leveraged on technical expertise of the acquired companies. Acquisitions have helped the company in offering multiple services and expanding its customer base considerably.
Resent report for merger and Acquisitions in 2007 and 2008
Indian Mergers and Acquisitions: The changing face of Indian Business
Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in India’s corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments. April 9th, 2008 Reliance Communications acquire Capgemini to become India’s largest IT services provider. Reliance Communication’s interest confirms Mr. Ambani’s hopes to build a significant IT business. A move on Capgemini would give it access to a client base in continental Europe and catapult it among the world’s top ten IT groups by market share.
Europe M&A Deals 2002-2006
Value £m 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 60 40 20 £m Value of Deals Total of all deals Deals Done 140 120 100 80
Deals by Target Country (Sellers) 2002-2008
EUROPE INDIA 35% 40.2%
Deals Done by Value 2002-2007
Deals Done Deals Done 45 40 35 30 25 20 15 10 5 0 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Value of Deal £m Cum. Deals Cum. Deals Done 300 250 200 150 100 50 0
Books Pandey, I.M., financial management, New Delhi, vikas publishing house pvt. Ltd., 1978. Khan&Jain, financial management, Tata McGraw hills Internet sites: http:// en. Wikipedia. Org/ wiki/ mergers and acquisition http:// www. Business standard. Com Google search
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