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“Peter Drucker has written that the chief strategic resource of the ten years will
be neither capital nor knowledge, but the ability to form powerful partnerships.”
Objectives:
Background:
• Both America and Europe have experienced the spectacular waves of M&A.
• Between 1890-1904
Methods:
• Internal
• External
Internal:
External:
MERGER
Combination of two or more companies into a single company where one survives and the
others lose their corporate existence.
Generally, the co. which survives is the buyer, retains its identity and seller co. is
extinguished.
CONSOLIDATION
Consolidation of two existing firms into a new company in which both the existing co’s
extinguish.
ACQUISITION
Refers to a situation where one acquires another and the latter ceases to exist. It is an act
of acquiring company effective control, by one co. over assets or mgt. of another co without
any combination of companies.
AMALGAMATION:
• blending of two or more companies into one, the shareholders of each blending co.
become substantially the shareholders of the other co. which holds blended co’s.
Amalgamations are governed by sections 390 to 394 and 396 of the co’s Act requiring
consent of the shareholders and creditors.
TAKEOVER:
Sale of shares is the simplest process of takeover. Under MRTP Act, takeover means
acquisition of not less than 25%of the voting power in a co.
HOLDING COMPANY :
Holds more than half of the nominal value of equity capital of another company, called
subsidiary co.
RESTRUCURING:
Division takes place when part of its undertaking is transferred to newly formed co or to an
existing co.
Buyers motive:
to diversify the product line when existing products have reached their peak in the
life cycle
to reduce competition
for tax reasons – prior tax losses which will offset current or future earnings.
Sellers Motives
increase growth rate by receiving more resources from the acquiring co.
limit competition
overcome the problem of slow growth and profitability in one’s own industry
gain economies of scale & increase income proportionately with low investment
Theories of Mergers
(1) Operating
This theory is based on operating synergy assumes that economies of scale do exist in the
industry & prior to the merger, the firms are operating at levels of activities that fall short
of achieving the potentials of economies of scale.
(2) Financial
Improve liquidity
Improve EPS
If a firm is merged with or takeover by another with better managerial efficiency, the
overall managerial effeciency will be improved.
Types of Merger
VERTICAL COMBINATION:
Merger of coal mining and railway co. – existing product service added. Eg. Oil industry
Objectives:
(1)Backward integration:occurs when the firms acquire or create a co. that supplies the
raw material or components.
(2) Forward vertical integration:occurs when the firms acquire or create a co. that
purchases its products/services
HORIZONTAL COMBINATION
Involves two firms operating and competing in the same kind of business activity. Eg. ACC
Ltd,& the acquisition in 1987 of American Motors by Chrysler represented a horizontal
combination; Orissa Power supply co merged with BSES Ltd.
Economies of scale
Elimination of duplication
CONGLOMERATE MERGER
Involve firms engaged in unrelated types of business activity or whose businesses are not
related either vertically or horizontally.
Eg. Borjan Tea Estate was merged with TATA Tea Ltd.; Videocon Narmada Electronics Ltd.
Merged with Videocon International Ltd.
Objectives
Diversification of activities
Financial stabilities
Eg: combination of firms producing Television, washing machines and kitchen appliances.
Introduction stage
Exploitation stage
Maturity stage
Decline stage
Marketing synergy
Operating synergy
Investment synergy
Management synergy
Corporate Restructuring
Objectives:
Background:
Intense competition
Globalisation
Technological change
Foreign investment
Background
Meaning:
Corporate restructuring is an episodic exercise, not related to investments in new plant and
machinery which involve a significant change in one or more of the following
Composition of liability
It is a comprehensive process by which a co. can consolidate its business operations and
strengthen its position for achieving the desired objectives:
Characteristics
Selling of portions of the co. such as a division that is no longer profitable or which has
distracted management from its core business, can greatly improve the co’s balance sheet.
(d) Outsourcing of operations such as payroll and technical support to a more efficient
third party
(j) Forfeiture of all or part of the ownership shares by pre structuring stock holders
to increase focus on core areas of work and to get closer to the customer
Objectives
• Growth
• Technology
• Government policy
• Economic stability
II Sell-offs
Methods of restructuring
(1) Joint Venture - A combination of subsets of assets contributed by two (or more)
business entities for a specific business purpose and a limited duration. Each of the venture
partners continues to exist as a separate firm, and the joint venture represents a new
business enterprise.
Eg. DCM group and Daewoo motors entered in to JV to form DCM DAEWOO Ltd. to
manufacture automobiles in India.
Venture can be for one specific project only, or a continuing business relationship such as
Sony Ericsson.
-to form strategic alliances: In a JV two or more co’s (parent co) agree to share their capital,
technology, human resources, risk and rewards in formation of a new entity under shared
control.
Internal reasons:
Competitive goals:
Strategic goals:
1. synergies
2. transfer of technology / skills
3. diversification
When do JV form:
To overcome hurdles such as- import quotas, tariff, national and political interest
etc.
Benefits of JV
Sell-offs:
Normally, sell-offs are done because the subsidiary doesn’t fit into the parent co’s core
strategy.
Spin off
The parent co. distributes all the shares it owns in a controlled subsidiary to its own
shareholder on a pro-rata basis. It may be in the form of subsidiary or a separate
company.
There is no money transaction in spin-off. The transaction is treated as stock dividend &
tax free exchange.
Divestitures:
is a transaction through which a firm sells a portion of its assets or a division to another
company. It involves selling some of the assets or division for cash or securities to a
third party which is an outsider.
Divestiture is a form of contraction for the selling co. means of expansion for the
purchasing company.
Steps:
(1) Computation of decrease in cash flow after tax ( yr1….n) due to sale
A transaction in which a parent firm offers some of a subsidiary’s common stock to the
general public, to bring in a cash infusion to the parent without loss of control.
ECO is also a means of reducing their exposure to a riskier line of business and to boost
shareholders value.
It is nothing but takeover of a co. using the acquired firm’s assets and cash flow to
obtain financing.
In LBO, the assets of the co. being acquired are used as collateral for the loans in
addition to the assets of the acquiring co.
LBO’s are generally found in capital intensive industries. Debt is obtained on the basis
of co’s future earning potential.
LBO’s are risky for the buyers if the purchase is highly leveraged.
Management Buyout:
is the form of corporate divestment by way of going private through managements
purchase of all outstanding shares.
It occurs when managers and executives of a co. purchase controlling interest in a co.
from existing shareholders.
• to save their jobs, either if the business has been scheduled for closure or if an
• to maximise the finanacial benefits they receive from the success they bring to
The goal of an MBO may be to strengthen the manager’s interest in the success of the
company. Key considerations in MBO are fairness to shareholders,price, the future
business plan, and legal and tax issues.
Benefits of MBO:
• Source of tax savings: since interest payments are tax deductible, pushing up
gearing rations to fund a management buyout can provide large tax covers.
MLPs are a type of limited partnership in which the shares are publicly traded. The limited
partnership interests are divided into units which are traded as shares of common stock.
Shares of ownership are referred to as units.
MLPs generally operate in the natural resource, financial services, and real estate
industries.
Types of partners
General partners
Limited partners
Types of MLP’s
Roll up MLP - formed by the combination two or more partnership into one publicly traded
partnership.
Acquisition MLPs - formed by an offering of MLP interest to the public with the proceeds
Roll out MLPs - formed by a corporations contribution of operating assets in exchange for
Start up MLP - formed by partnership that is initially privately held but later offers its
ESOPs are “qualified” in the sense that the ESOP’s sponsoring company, the selling
shareholder and participants receive various tax benefits.
It is a retirement plan in which the co. contributes its stock to the plan for the benefit of the
company’s employees. With an ESOP, you never buy or hold the stock directly.