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Mergers and Acquisition Project
Mergers and Acquisition Project
DEFINATION
Mergers and acquisitions (M&A) and corporate restructuring are a big part of the
corporate finance world. Every day, Wall Street investment bankers arrange M&A
transactions, which bring separate companies together to form larger ones. When they're
not creating big companies from smaller ones, corporate finance deals do the reverse
and break up companies through spinoffs, carve-outs or tracking stocks.
India in the recent years has showed tremendous growth in the M&A deal. It has
been actively playing in all industrial sectors. It is widely spreading far across the
stretches of all industrial verticals and on all business platforms. The increasing
volume is witnessed in various sectors like that of finance, pharmaceuticals,
telecom, FMCG, industrial development, automotives and metals.
The volume of M&A transactions in India has apparently increased to about 67.2
billion USD in 2010 from 21.3 billion USD in 2009. At present the industry is
witnessing a whopping 270% increase in M&A deal in the first quarter of the financial
year. This increasing percentage is mainly attributed to the increasing cross-border
M&A transactions. Over that increasing interest of foreign companies in Indian
companies has given a tremendous push to such transactions.
Large Indian companies are going through a phase of growth as all are exploring
growth potential in foreign markets and on the other end even international
companies is targeting Indian companies for growth and expansion. Some of the
major factors resulting in this sudden growth of merger and acquisition deal in India
are favorable government policies, excess of capital flow, economic stability,
corporate investments, and dynamic attitude of Indian companies.
The recent merger and acquisition 2011 made by Indian companies worldwide are
those of Tata Steel acquiring Corus Group plc, UK based company with a deal of US
$12,000 million and Hindalco acquiring Novelis from Canada for US $6,000 million.
With these major mergers and many more on the annual chart, M&A services India
is taking a revolutionary form. Creating a niche on all platforms of corporate
businesses, merger and acquisition in India is constantly rising with edge over
competition.
Why Merge?
Companies would choose to merge together for different reasons:
1. The combined entity would be larger, and have corresponding
larger resources for marketing, product expansion, and obtaining
financing. This could help them better compete in the
marketplace.
2. The combined entity could merge similar operations to reduce
costs. Corporate and administrative functions, such as human
resources and marketing, are often targets for combinations.
They might also combine the production areas if the companies
produce similar products and reduce costs by having fewer
plants or facilities in operation.
3. The combined entity might have less competition in the
marketplace. If the products of the two companies competed for
customers, they could combine their offerings and use resources
for improving the product, rather than marketing against each
other.
4. The combined entity might have synergy in operations. Synergy
is when combined operations show lower costs or higher profits
than would be expected by just adding their financial information
together on paper. This could be due to economies of scale,
where costs are lower due to higher volume of production, or
due to vertical integration, where greater control over the
production process is achieved due to owning more steps in the
production process.
Why Acquire?
It's a well known fact that a good number of mergers fail because of various factors
including cultural differences and flawed intentions. Most companies when sign an
agreement often get a create a bigger picture of their expectations as they believe in
pure concept of higher capital gains when two are combining together. This belief is
not always true as conditions in the market and economy often rules the operation
and functioning of any company.
The history of merger and acquisitions have revealed that almost two thirds of the
mergers taking place experience failure and feel disappointed on their own terms
and pre defined parameters. At times even the motivation driving the mergers can
prove to be intangible.
There are many factors contributing to the failure and elements that are problems of
mergers and acquisition. There are many aspects that should be understood and
analyzed before signing an agreement because even one small mistake in taking a
decision can completely dump both the companies with an irreversible impact.
Some of the prominent issues with regards to failure of M&A are as follows:
A flawed intention in terms of unethical motivation or high expectations can
eventually lead to failure of the merger. If any company desires high capital gain
along with glory and fame irrespective of the corporate strategy defined to fulfill the
requirements of the company, the merger fails.
Any kind of agreement based completely on the optimistic stock market condition
can also lead to failure as stock market is an uncertain entity. In such cases more
risks are involved with the prevailing merger.
Cultural difference is also a big problem in case of a merger. When two companies
from different corporate cultures come together it becomes a really challenging task
to integrate the cultures of both the companies. It is certainly difficult to maintain the
difference and move ahead for success without any kind of integration.
Strategies play an integral role when it comes to merger and acquisition. A sound
strategic decision and procedure is very important to ensure success and fulfilling of
expected desires. Every company has different cultures and follows different
strategies to define their merger. Some take experience from the past associations,
some take lessons from the associations of their known businesses, and some hear
their own voice and move ahead without wise evaluation and examination.
Following are some of the most essential strategies of merger and acquisition
that can work wonders in the process:
The first and foremost thing is to determine business plan drivers. It is very
important to convert business strategies to set of drivers or a source of motivation to
help the merger succeed in all possible ways.
There should be a strong understanding of the intended business market,
market share, and the technological requirements and geographic location of the
business. The company should also understand and evaluate all the risks involved
and the relative impact on the business.
Then there is an important need to assess the market by deciding the
growth factors through future market opportunities, recent trends, and customer's
feedback.
The integration process should be taken in line with consent of the
management from both the companies venturing into the merger.
Restructuring plans and future parameters should be decided with
exchange of information and knowledge from both ends. This involves considering
the work culture, employee selection, and the working environment as well.
At the end, ensure that all those involved in the merger including
management of the merger companies, stakeholders, board members, and investors
agree on the defined strategies. Once approved, the merger can be taken forward to
finalizing a deal.
The number as well as the average size of merger and acquisition deals is
increasing in India. During post liberalization, increase in domestic competition and
competition against cheaper imports have made organizations merge themselves to
reap the benefits of a large-sized company. The merger and acquisition valuation is
the building block of a proposed deal. It is a technical concept that needs to be
estimated carefully.
M&A valuation involves determining the maximum price that a buyer is willing to pay
to buy the target company. From the seller's point of view, it means estimating the
minimum price he wants to take against his business. If there are many buyers, then
each one bids a purchase price based on his valuation. Finally, the seller will give
the business to the highest bidder.
The use of different valuation techniques and principles has made valuation a
subjective process. A conflict in the choice of technique is the main reason for the
failure of many mergers. For instance, the asset value can be determined both at the
market price and the cost price. Therefore, it is important that the merging parties
should first discuss and agree upon the methods of valuation.
Calculating the swap ratio is at the core of the valuation process. It is the ratio at
which the shares of the acquiring company will be exchanged with the shares of the
acquired company. For instance, a swap ratio of 1:2 means that the acquiring
company will provide its one share for every two shares of the other company.
Merger and acquisition has become the most prominent process in the corporate
world. The key factor contributing to the explosion of this innovative form of
restructuring is the massive number of advantages it offers to the business world.
Following are some of the known advantages of merger and acquisition:
The very first advantage of M&A is synergy that offers a surplus power that
enables enhanced performance and cost efficiency. When two or more companies
get together and are supported by each other, the resulting business is sure to gain
tremendous profit in terms of financial gains and work performance.
Cost efficiency is another beneficial aspect of merger and acquisition. This
is because any kind of merger actually improves the purchasing power as there is
more negotiation with bulk orders. Apart from that staff reduction also helps a great
deal in cutting cost and increasing profit margins of the company. Apart from this
increase in volume of production results in reduced cost of production per unit that
eventually leads to raised economies of scale.
With a merger it is easy to maintain the competitive edge because there are
many issues and strategies that can e well understood and acquired by combining
the resources and talents of two or more companies.
A combination of two companies or two businesses certainly enhances and
strengthens the business network by improving market reach. This offers new sales
opportunities and new areas to explore the possibility of their business.
With all these benefits, a merger and acquisition deal increases the market
power of the company which in turn limits the severity of the tough market
competition. This enables the merged firm to take advantage of hi-tech technological
advancement against obsolescence and price wars.
It's a well known fact that a good number of mergers fail because of various factors
including cultural differences and flawed intentions. Most companies when sign an
agreement often get a create a bigger picture of their expectations as they believe in
pure concept of higher capital gains when two are combining together. This belief is
not always true as conditions in the market and economy often rules the operation
and functioning of any company.
The history of merger and acquisitions have revealed that almost two thirds of the
mergers taking place experience failure and feel disappointed on their own terms
and pre defined parameters. At times even the motivation driving the mergers can
prove to be intangible.
There are many factors contributing to the failure and elements that are problems of
mergers and acquisition. There are many aspects that should be understood and
analyzed before signing an agreement because even one small mistake in taking a
decision can completely dump both the companies with an irreversible impact.
Some of the prominent issues with regards to failure of M&A are as follows:
Here is a list of some of the most happening mergers and acquisitions in India in the year
2014, listed in random order.
1. Flipkart- Myntra
The huge and most talked about takeover or acquisition of the year. The seven year old
Bangalore based domestic e-retailer acquired the online fashion portal for an undisclosed
amount in May 2014. Industry analysts and insiders believe it was a $300 million or Rs
2,000 crore deal.
Flipkart co-founder Sachin Bansal insisted that this was a completely different acquisition
story as it was not driven by distress, alluding to a plethora of small e-commerce players
either having wound up or been bought over in the past two years. Together, both company
heads claimed, they were scripting one of the largest e-commerce stories.
Reliance Industries Limited (RIL) took over 78% shares in Network 18 in May 2104for Rs
4,000 crores. Network 18 was founded by Raghav Behl and includes moneycontrol.com,
In.com, IBNLive.com, Firstpost.com, Cricketnext.in, Homeshop18.com, Bookmyshow.com
while TV18 group includes CNBC-TV18, CNN-IBN, Colors, IBN7 and CNBC Awaaz.
6. TCS- CMC
Tata Consultancy Services (TCS), the $13 billion flagship software unit of the Tata Group,
has announced a merger with the listed CMC with itself as part of the groups renewed efforts
to consolidate its IT businesses under a single entity.
At present, CMC employs over 6,000 people and has annual revenues worth Rs 2,000 crores.
The deal was inked a few days back. TCS already held a 51% stake in CMC.
The search engine giant, Yahoo, acquired the one year old Bangalore based startup
Bookpad for a little under $15 million, though the exact amount has not been disclosed by
either of the two parties concerned. While the deal value is relatively small, this was the first
acquisition made by Yahoo, and was much talked about and hence finds a mention in our list.
Bookpad was founded by three IIT Guwahati pass outs and allows users to view, edit and
annotate documents within a website or an app.
Indian antagonism law permits the utmost time period of 210 days for the
companies for going ahead with the process of merger or acquisition. The allotted
time period is clearly different from the minimum obligatory stay period for
claimants. According to the law, the obligatory time frame for claimants can either
be 210 days commencing from the filing of the notice or acknowledgment of the
Commission's order.
The entry limits for companies merging under the Indian law are
considerably high. The entry limits are allocated in context of asset worth or in
context of the company's annual incomes. The entry limits in India are higher than
the European Union and are twofold as compared to the United Kingdom.
The Indian M&A laws also permit the combination of any Indian firm with its
international counterparts, providing the cross-border firm has its set up in India.
There have been recent modifications in the Competition Act, 2002. It has replaced
the voluntary announcement system with a mandatory one. Out of 106 nations
which have formulated competition laws, only 9 are acclaimed with a voluntary
announcement system. Voluntary announcement systems are often correlated with
business ambiguities and if the companies are identified for practicing monopoly
after merging, the law strictly order them opt for de-merging of the business
identity.
Under the Indian I-T tax Act, the firm, either Indian or foreign, qualifies for
certain tax exemptions from the capital profits during the transfers of shares.
In case of foreign company mergers, a situation where two foreign firms are
merged and the new formed identity is owned by an Indian firm, a different set of
guidelines are allotted. Hence the share allocation in the targeted foreign business
identity would be acknowledged as a transfer and would be chargeable under the
Indian tax law.
As per the clauses mentioned under section 5(1) of the Indian Income Tax Act,
the international earnings by an Indian firm would fall under the category of 'scope of
income' for the Indian firm.
IMPACT OF MERGERS AND ACQUISITIONS
Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and acquisitions on
various sects of the company may differ. In the article below, details of how the shareholders, employees
and the management people are affected has been briefed.
Mergers and acquisitions are aimed at improving profits and productivity of a company. Simultaneously,
the objective is also to reduce expenses of the firm. However, mergers and acquisitions are not always
successful. At times, the main goal for which the process has taken place loses focus. The success of
mergers, acquisitions or takeovers is determined by a number of factors. Those mergers and acquisitions,
which are resisted not only affects the entire work force in that organization but also harm the credibility of
the company. In the process, in addition to deviating from the actual aim, psychological impacts are also
many. Studies have suggested that mergers and acquisitions affect the senior executives, labor force and
the shareholders.
Employees:
Impact Of Mergers And Acquisitions on workers or employees:
Aftermath of mergers and acquisitions impact the employees or the workers the most. It is a well known
fact that whenever there is a merger or an acquisition, there are bound to be lay offs.In the event when a
new resulting company is efficient business wise, it would require less number of people to perform the
same task. Under such circumstances, the company would attempt to downsize the labor force. If the
employees who have been laid off possess sufficient skills, they may in fact benefit from the lay off and
move on for greener pastures. But it is usually seen that the employees those who are laid off would not
have played a significant role under the new organizational set up. This accounts for their removal from the
new organization set up. These workers in turn would look for re employment and may have to be satisfied
with a much lesser pay package than the previous one. Even though this may not lead to drastic
unemployment levels, nevertheless, the workers will have to compromise for the same. If not drastically,
the mild undulations created in the local economy cannot be ignored fully.
Management at the top:
Impact of mergers and acquisitions on top level management:
Impact of mergers and acquisitions on top level management may actually involve a clash of the egos.
There might be variations in the cultures of the two organizations. Under the new set up the manager may
be asked to implement such policies or strategies, which may not be quite approved by him. When such a
situation arises, the main focus of the organization gets diverted and executives become busy either settling
matters among themselves or moving on. If however, the manager is well equipped with a degree or has
sufficient qualification, the migration to another company may not be troublesome at all.
Shareholders:
Impact of mergers and acquisitions on shareholders:
We can further categorize the shareholders into two parts:
The Shareholders of the acquiring firm
The shareholders of the target firm.
Shareholders of the acquired firm:
The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the
cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a
house he has recently bought, he will not be able to know its drawbacks. So that the shareholders forgo
their shares, the company has to offer an amount more then the actual price, which is prevailing in the
market. Buying a company at a higher price can actually prove to be beneficial for the local economy.
Shareholders of the acquiring firm:
They are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in
degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed. This
can be attributed to debt load, which accompanies an acquisition.
IMPORTANT POINTS RELATING TO MERGERS AND ACQUISITIONS
Important terms relating to mergers and acquisitions are vital to the understanding of the entire process
of mergers and acquisitions.
Every word encountered in the process of mergers and acquisitions need to be carefully understood for a
sound understanding of the subject.
There are many important terms relating to mergers and acquisitions. These terms may appear to be
completely unrelated to mergers and acquisitions but nevertheless, these terms may indicate a very
important process in mergers and acquisitions. Some of the important terms relating to mergers and
acquisitions are as follows:
Mergers
When two or more companies combine. The shareholders of the target firm are adequately compensated
for, if the merger is effected. Acquisition
When one company acquires another company. The company, that is acquired is known as target firm. The
company, which acquires is called acquiring company. An acquisition may be either friendly acquisition,
when both the companies agree to the tender offer or may be unfriendly acquisition when the companies
do not agree with the tender offer.
Takeover
Takeover may be referred to as a corporate activity when a company places a bid for acquiring another
company. The company, which intends to take over the target firm makes an offer of the outstanding
shares in case the target firm is traded publicly.
Hostile takeover
Is defined as an unfriendly takeover. Such actions are usually revolted against by the managers and
executives of the target firm.
People pill
Under some circumstances of hostile takeover, the people pill is used to prevent the takeover. The entire
management team gives a threat to put in their papers if the takeover takes place. Using this strategy will
work out provided the management team is very efficient and can take the company to new heights. On the
other hand, if the management team is not efficient, it would not matter to the acquiring company if the
existing management team resigns. So, the success of this strategy is quite questionable.
Sandbag
Sandbag is referred to as the process by which the target firm tends to defer the takeover or the acquisition
with the hope that another company, with better offers may takeover instead. In other words, it is the
process by which the target company kills time while waiting for a more eligible company to initiate the
takeover.
Shark Repellent
There are instances when a target company, which is being aimed at for a takeover resists the same. The
target firm may do so by adopting different means. Some of the ways include manipulating shares as well
as stocks and their values. All these attempts of the target firm resisting its acquisition or takeover are
known as shark repellent.
Golden parachute
Is yet another method of preventing a takeover. This is usually done by extending benefits to the top level
executives lest they lose their portfolio/jobs if the takeover is effected. The benefits extended are quite
lucrative.
Raider
May be referred to an acquiring company, which is always on the look out for firms with undervalued
assets. If the company finds that a company (target) does exists whose assets are undervalued, it buys
majority of the shares from that target company so that it can exercise control over the assets of the target
firm.
Saturday Night Special
Saturday Night Special is referred to as an action of the corporate companies, whereby one company
makes an attempt to takeover another company all of a sudden by executing a public tender offer. The
name is derived from the fact that such attempts were made towards the weekends. However, such
practices have been stopped as per Williams Act. It has now been obligatory that if a company acquires
more than 5% of stocks from another company, this has to be reported to the SEC or the Securities
Exchange Commission.
Macaroni defense
This is referred to the policy wherein a large number of bonds are issued. At the same time the target
company also assures people that the return on investment for these bonds will be higher with the takeover
has taken place. This is another strategy embraced by the target firm for not succumbing to the pressures of
the acquiring company.
In the overall cost calculation of Acquisition, the Replacement Costs are something very crucial. In many
cases, the Replacement Costs determine whether the Acquisition will ultimately take place or not.
Replacement Costs actually refers to the cost of replacing the target firm. Generally, Target companys
value is calculated by adding the value of all the equipments, machinery and the costs of salary payments
to the employees. So, the company which wishes to acquire the target firm, offers price accounting to this
value. But, if the target firm does not agree on the price offered, then the other firm can create a competitor
firm with same costing. So, this idea of cost calculation is referred as the calculation of Replacement Cost.
But, it should be mentioned here that, in case of the firms, where the main assets are not equipments and
machinery, but people and their skills, this type of cost calculation is not possible.
Other than this Replacement Cost calculation method, the other methods that are followed in calculating
Costs of Mergers and Acquisitions, are the methods of Discounted Cash Flow Method and Comparative
Ratio calculation Method. In Discounted Cash Flow Method, weighted average costs of capital are
calculated, while in Comparative Ratio calculation method, Price- Earnings Ratio and Enterprise Value to
Sales Ratio are calculated.
According to experts this trend of going private through mergers and acquisitions will continue in the
future. As the Private Equity Funds are facing the target of deploying the raised capital, acquisition og
large public organizations are definitely in the pipeline.