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Name:-Shivendra Singh

Roll No-1208005653

MF0011 MERGERS AND ACQUISITIONS

Q.1 Give the meaning of advantages and disadvantages of mergers and acquisitions? Explain the types of Mergers and Acquisitions? Advantages of mergers and acquisitions Mergers and acquisitions are strategic decisions leading to the maximizing of company's growth by enhancing its production and sales. The benefits of M & A are: 1. From the standpoint of shareholders: Shareholders may gain from mergers through economies of scale, which helps in lowering of cost. This results in increased profits, better investment opportunities which is not available otherwise, and the increment in the value of share caused by the premium paid by the acquiring company to the acquirer company. 2. From the standpoint of Promoters: Promoters get the advantage of increasing the size of the company, restructuring the financial composition of the firm and altering its strength as per their requirement. Promoters can change a private company into a public company without much investment and without losing control. 3. From the standpoint of Managers: Managers often look forward to mergers as an opportunity to enhance their status financially and otherwise. They are also concerned about the overall growth of the company and are ready to support mergers where these benefits are seen to accrue. On the other hand managers work against combinations that generate fear about their future. 4. From the standpoint of Consumers: The benefits of mergers get passed to the consumers in the form of better products and services at lower prices supported by enhanced after sales and service. Disadvantages of mergers and acquisitions A merger has disadvantages too. One of the disadvantages is that a merger must be approved by the stockholders of the firm. Typically, two-thirds (or even more) of the votes are required for approval. Obtaining the necessary votes can be time-consuming and difficult. Furthermore, the cooperation of the management of the target firm is a necessity. This cooperation is not easy or cheap. There can also be diseconomies of scale if the business becomes too large. Clashes of culture between different types of businesses Could happen and reduce the effectiveness of the integration. Merger may create a conflict of objectives between the different businesses. In view of sharing of services, staff positions may come down and this will result in employee dissatisfaction. A merger can be extremely beneficial to all stakeholders of a business but if handled wrongly it can cause serious disruption all round. Q2-Write a note on the five-stage model of mergers and acquisitions? The Five-Stage Model A five-stage model of mergers and acquisitions was developed by the author Sudi Sudarsanam. This model advocates a view of M & A as a process rather than a transaction. The process is considered as a multi-stage one and a holistic view of the process is required to appreciate the links between different stages and develop effective value-creating M & A strategies.

Stage 1: Corporate strategy evolution The goal of M & A is to achieve corporate and business strategic objectives. Corporate strategy aims to achieve ways to optimize the portfolio of businesses that a firm has and how that portfolio can be modified in the interest of the shareholders. Business strategy aims to enhance the firms competitive positioning on a sustainable basis in its chosen markets. Both the objectives can be met by M & A but is only one of several alternatives including, for instance, strategic alliances, outsourcing, organic growth, etc. Generally, acquisitions are made by companies due to one or more of the following strategic intents: to gain market power to achieve economies of scale to internalize vertically linked operations to save cost on dealing with markets to acquire complementary resources.

Stage 2: Organizing for acquisition It is important to understand the decision process of acquisition because it has a bearing not only on the quality of the decision and its value creation logic but also on the ultimate success of the post-merger integration. There are two primary perspectives here: 1. The rational perspective: This view is based on hard economic, strategic and financial evaluation of the acquisition proposal and the potential value creation. The acquisition is basically a matter of measurement of expected costs and benefits. The acquisition decision is assumed to be a unified view which requires commitment from all managers within the firm. 2. The process perspective: This is based on soft human dimension. In this view the process of decision-making is more politically complex and has to be carefully managed so that the required clarity and commitment of managers is achieved, which is taken for granted in the rationalist approach. The authors contention is that the M & A five-stage process model ensures that the risk involved in value damage are potentially structural in their foundation, and managing this risk effectively should be crucial while the acquisition is being considered. Stage 3: Deal structuring and negotiation The result of the processes described in Stages 1 and 2 is the specific target selection. Once the selection has been made by the firm, the merger transaction has to be negotiated or a takeover bid to be made. The deal making takes place in this stage. The deal structuring and negotiation process is complex and involves many interconnected steps including: valuing the target company choosing experts like investment bankers, lawyers and accountants as advisors to the deal obtaining and evaluating maximum intelligence possible about the target company performing due diligence negotiating the senior management positions of the both firms in the post-merger context developing the appropriate bid and defense strategies and tactics within the regulatory and other parameters.

Stage 4: Post-acquisition integration The objective of this important stage is to make the merged organization operational so that the strategic value expectations can be delivered which drove the merger in the first place. Integration of two organizations is not just about making changes in the organizational structure and instituting a new hierarchy of authority. It involves integration of processes, systems, strategies, reporting systems, etc. Above all, it also involves integrating people and changing

organizational culture of the merging firms, possibly to develop a new hybrid culture. Integration of organizations may require change in the mindset and behavior of the people. It is, therefore, necessary to address cultural issues during the integration process. Since it involves redistributing the power between the merging firms, it is also a politically sensitive stage. Conflicts of interest and loyalty will certainly come into play. This stage of the acquisition process is, therefore, a major factor which determines the success of the acquisition. Stage 5: Post-acquisition audit and organizational learning Companies trying to grow through acquisitions need to develop acquisition making as a core competence and excel in it. Companies possessing the right growth strategy through acquisition and the necessary organizational capabilities to manage their acquisitions efficiently and effectively can sustain their competitive advantage far longer and create sustained value for their shareholders. For acquisition-making to become a firms core competence, possessing robust organizational learning capabilities is a must. Developing such learning capabilities is thus integral to the M & A core competence of building effort by multiple or serial acquirers. 3- What do you understand by creating synergy? Give the prerequisites for the creation of synergy. Describe the important forces contributing to mergers and acquisitions. Creating Synergy The creation of synergy is not automatic. Synergy requires a great deal of work on the part of managers at the corporate and business levels. Creation of synergy does not require only the material resources of the two companies. It demands effective integration of the combined units human resource, physical assets and operations. The activities that create synergy include combining similar processes, coordinating business units sharing common resources, and resolving conflicts among business units. Managers often underestimate the magnitude of problems that arise in integration efforts, resulting in a situation where creation of synergy becomes very difficult. Prerequisites for the creation of synergy There are certain requirements which must be met for synergy to be created. These requirements termed as the building blocks for the creation of synergy must be fulfilled and seen into well before and during the process of combination. These are strategic compatibility, organizational compatibility, managerial actions, and value creation. When all the four exist then the chances of the firm being able to create synergy are substantially higher. 1. Strategic compatibility: Strategic compatibility refers to the matching of organizations strategic capabilities. There are various ways in which capabilities can be matched through a merger. Thus, when combined firms or business organizations are both strong and/or weak in the same business activities, the newly created combined firm displays the same capabilities , although the magnitude of the strength or weakness is greater, and no synergy results. 2. Organizational compatibility: Organizational compatibility occurs when two organizations have similar management processes, cultures, systems and structures. Organizational compatibility from an operational point of view suggests that the integration processes that are developed and used to combine the operations can be expected to bring about desired results effectively and efficiently. 3. Managerial actions: The third building block for the creation of synergy is related to the actions and initiatives that managers take for their firms to actually realize the competitive benefits. Creation of synergy requires active involvement and participation of the management. Managers must recognize the importance and magnitude of integration issues and the need to involve human resources in implementing a combination.

4. Value creation: Value creation is the fourth synergy creation building block. The focus here is on deriving benefits from synergy in excess of the costs to be incurred. The costs associated with the following have to be controlled: (a) Financing of the transaction (b) Premium paid for purchase. Important Forces Contributing to Mergers and Acquisitions Some of these are: Safeguarding the sources of raw material Achieving economies of scale by combining production facilities through efficient utilization of resources Standardizing product specifications and improving product quality Achieving improved technical knowhow from the combined entity to cut cost, improvise on quality and produce better products to retain and improve market share. Reducing competition and protecting existing market Obtaining new markets Enhancing borrowing power of the combined entity on better and enhanced asset backing Gaining economies of scale and increase income with proportionately less investment 4- Demerger results in the transfer by a company of one or more of its undertakings to another company. Give the meaning of demerger. What are the characteristics of demerger? Explain the structure of demerger with an example. A demerger results in the transfer by a company of one or more of its undertakings to another company. The company whose undertaking is transferred is called the demerged company and the company to which the undertaking is transferred is referred to as the resulting company. The term Demerger has not been defined in the Companies Act, 1956. However, according to Sub-section (19AA) of Section 2 of the Income Tax Act, demerger in relation to companies means transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to any resulting company in such a manner that all the property and liabilities of the undertaking being transferred by the demerged company, immediately before the demerger, become the property and liabilities of the resulting company by virtue of the demerger. Characteristics of Demerger Given below are the key characteristics of demerger: 1. Demerger is basically a scheme of arrangement under Sections 391 to 394 of the Companies Act which requires: approval by majority of shareholders holding shares that represent three-fourths value in a meeting convened for the purpose Sanction of the High Court. 2. Demerger results in transfer of one or more undertakings. 3. The transfer of undertakings is done by the demerged company, otherwise known as Transferor Company. The company to which the undertaking is being transferred is known as resulting company, otherwise known as Transferee Company. Structure of Demerger A demerger is distribution of the shares of a firms subsidiary to the shareholders of the firm on a pro rata basis. Neither the dilution of equity nor the transfer of ownership from the current

shareholders is involved. After the distribution, the operations and management of the subsidiary are separated from those of the parent. Since no cash transaction is involved in a demerger, it is a unique mode of divesting assets. Thus, it cannot be motivated by a desire to generate cash to pay off debt, as is often the case with other modes of divestitures. Example The structure of demerger can be understood from the following example of Bajaj Auto
Structure Prior to Demerger

Post Demerger Structure

5- Explain Employee Stock Ownership Plans (ESOP). Write down the rules of ESOP and types of ESOP. Employee-owned corporations are corporations owned wholly or in part by the employees. Employees are usually given a share of the corporation after a certain length of employment or they can buy shares at any time. A corporation owned entirely by its employees (a worker cooperative) will not, therefore, have its shares sold on public stock markets. Employee-owned corporations often adopt profit-sharing where the profits of the corporation are shared with the employees. These types of corporations also often have boards of directors elected directly by the employees. .

Rules of employee stock ownership plans (ESOP) 1. Vesting: Before an employee acquires entitlement to ESOP, he must work for a certain period, which is referred to as the vesting period. If an employee leaves before vesting, he loses the right. An ESOP must comply with minimum schedules for vesting, called as cliff vesting or graded vesting. In cliff vesting, the first three years do not require vesting. There is 100% vesting after three years of service. In graded vesting, there is 20% vesting in the second year of service and 20% is added for each year of service. After the sixth year, employees are 100% vested. 2. Distributions after termination: Distribution of vested benefits with retirement, disability or death, takes places during the following plan year. The following are the exceptions to this rule: (a) If the termination occurs for reasons other than the ones stated above, the distribution must commence no later than the sixth plan year following termination. (b) Repayment of the loans that have been taken against the ESOP benefits must be done. Distribution occurs in the plan year after repayment. (c) ESOP distributions comprise of a lump sum or equal payments over a five-year period. Large amounts due could lead to an extended payment plan. 3. Distribution during employment: Cash or stock can be received directly by employees by diversifying their accounts. Dividends may be paid by the employer to a participant who is at least a 5% owner beyond the age of 70, although still working in the company. In some situations, a plan may offer in-service distributions after a fixed number of years of service, once a specific age is reached or with a hardship necessity. 4. Put Option: A put option is offered by some companies, for company stock bought via the ESOP benefits plan. In this option, the employee can sell their company stock back to the employer within 60 days after distribution and within 60 days during the follo wing plan year. 5. Taxation: No tax is required to be paid by the employees on stock until they receive distributions. Payments are subject to applicable taxes, and an additional 10% excise tax will be levied. Dividends that have to be paid directly to participants on stock are taxable. Types of ESOPs There are two types of ESOPs leveraged and non-leveraged. Additionally, ESOPs may be combined with or converted from other employee benefit plans. 1. Non-leveraged ESOPs Identified as an ESOP in the plan document that invests primarily in company stock and meets certain legal requirements. The sponsoring employer contributes newly issued or treasury stock and/or cash to buy stock from existing owners. Contributions generally may equal 15% of the covered payroll (which usually is the combined payroll of all employees eligible for participation) or, if the ESOP includes a money purchase pension plan in which the employer commits to contribute a set percentage of covered payroll per year in cash or stock, 15% plus the money purchase pension plan contribution percentage (from 1% to 10%) up to a maximum of 25% of covered payroll. 2. Leveraged ESOPs: A leveraged ESOP borrows money on the credit of the employer or other related parties to buy company stock. It is only a qualified employee benefit plan that can do this. The loan can be towards the ESOP itself or to the employer who then lends the money to the ESOP (lenders generally prefer the latter). The loan from the company to the ESOP does not have to be on the same terms, provided its terms are the equivalent of an arm's length

transaction. The loan can be used for any business purpose, such as buying stock from an existing shareholder, acquiring new capital, buying a company, or refinancing debt. 6- Explain the factors in Post-merger Integration. Write down the five rules of Integration Process. Factors in Post-merger Integration Some important factors that can decide the success or failure of a merger or acquisition are: Due diligence: Thorough due diligence involves comprehensive analysis of the financial position, management capabilities, physical assets and intangible assets of the target company. However, it can result in failure of the project if done badly. Financing: Manageable debt levels should be ensured. Complementary resources: Ideal conditions for a merger are when the primary resources of the acquiring and target firms are somewhat different, yet simultaneously supportive of one another. Therefore, companies should seek for such a situation. Friendly vs. hostile acquisitions: Friendly acquisitions tend to create greater economic value. A hostile acquisition can reduce the transfer of information during due diligence and merger integration, and increase turnover of key executives in the firm being acquired. Synergy creation: Four foundations for creation of synergy are strategic fit, organizational fit, managerial actions and value creation. Organizational learning: All stakeholders should participate in the acquisition process to ensure that relevant knowledge is spread throughout the firm, and is not lost if anyone involved leaves. Information gained should also be recorded and its impact on the process studied and utilised. Focus on core business: The lesser the common factors in the combining firms, the more magnified are cultural and management differences. This in turn restrains the sharing of resources and capabilities. The advantages of financial collaboration will not be sufficient to negate the disadvantages of diversification between misaligned partners. Five Rules of Integration Process 1. Starting the post merger integration (PMI) process early: The integration effort should start much before the deal is closed and the contracts signed; in fact to this extent, the expression post merger is itself a misnomer. It is essential to consider PMI issues at the very initial stage and plan meticulously while choosing the target company. The main advantage is the preparedness for potential risks and challenges. It also helps in evaluating the target companys culture. This is also confirmed by the findings of Parenteau and Weston (2003). 2. The integration manager: A due diligence team (from areas like HR, finance, tax, technology etc.) and one or more top managers are responsible for the acquisition. This team, which is involved in the acquisition, achieves the best insight into the target company. However, the team is either dissolved or moved to the next acquisition. The manager of the acquiring business unit has the charge of running his own units. His main focus will be on operating results and customers and not on integrating cultures, processes and people. GE Capital was one of the first companies to realize this problem. To counter this they introduced the concept of an integration manager, a dedicated position filled by an executive relieved of his regular duties for up to a year. 3. Speed: If the integration takes place faster, the company will start making profits from the predicted collaboration earlier. The valuable resources that are engaged in the internal reorganization should be released as soon as possible. But as A.T. Kearney discovered there is no absolute merger integration speed. The integration speed should be prioritized based on what steers competitive advantage most and therefore results in selective integration speed ). Apart from customers, nearly all the companys stakeholders will respond positively to speed. This is because a fast process reduces the impact of uncertainty of what is to come after the merger. This stands true for both a companys suppliers and for its employees.

4. The people problem: A successful merger is the one which retains the key people of both the companies. Efforts should be made to recognize and identify key managers, understand their motivations and accordingly act upon them. Measures like long-term stay bonuses that are tied to some performance measure will generate a positive atmosphere which in turn will improve the chances of retention. 5. Keeping culture high on the agenda: All companies are different in what they do and the way they get things done. This is founded in what is called the corporate culture. It has observable and unobservable behavioral rules, norms of work organization and philosophies which help in forming the internal hierarchies.