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Effects Of: Mergers & Acquisition On Performance of Company
Effects Of: Mergers & Acquisition On Performance of Company
Effects Of: Mergers & Acquisition On Performance of Company
Effects of
Mergers &
acquisition
On
Performance of
company
1
Table of contents
Sr.
title Page no.
No.
1 Introduction 2
Mergers: meaning, definition and what mergers
2 4
actually mean
3 Mergers vs. acquisitions 6
4 Purpose of mergers 7
5 Reasons why companies merge 9
6 Motivation for mergers 13
7 Types of mergers 16
8 Concerns for mergers 18
9 Steps in bringing about mergers of companies 20
10 Legal procedure for mergers 22
11 Corporate merger procedure 24
12 Why mergers fail? 24
Cases of mergers 25
Introduction
2
We have been learning about the companies coming together to from
another company and companies taking over the existing companies to
expand their business.
With recession taking toll of many Indian businesses and the feeling of
insecurity surging over our businessmen, it is not surprising when we
hear about the immense numbers of corporate restructurings taking
place, especially in the last couple of years. Several companies have
been taken over and several have undergone internal restructuring,
whereas certain companies in the same field of business have found it
beneficial to merge together into one company.
All our daily newspapers are filled with cases of mergers, acquisitions,
spin-offs, tender offers, & other forms of corporate restructuring. Thus
important issues both for business decision and public policy formulation
have been raised. No firm is regarded safe from a takeover possibility.
On the more positive side Mergers may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and
geographical markets may require Mergers at some stage in the firm's
development. Successful competition in international markets may
depend on capabilities obtained in a timely and efficient fashion through
Mergers. Many have argued that mergers increase value and efficiency
and move resources to their highest and best uses, thereby increasing
shareholder value.
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Mergers
Meaning
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The less important company loses its identity and becomes part of the
more important corporation, which retains its identity. A merger
extinguishes the merged corporation, and the surviving corporation
assumes all the rights, privileges, and liabilities of the merged
corporation. A merger is not the same as a consolidation, in which two
corporations lose their separate identities and unite to form a
completely new corporation. In India mergers are called amalgamations
in legal parlance.
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Debentures in the transferee company,
Cash, or
A mix of the above mode
7
Purpose of Mergers:
Purposes for mergers are short listed below: -
(1)Procurement of supplies:
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To improve liquidity and have direct access to cash resource;
To dispose of surplus and outdated assets for cash out of combined
enterprise;
To enhance gearing capacity, borrow on better strength and the greater
assets backing;
To avail tax benefits;
To improve EPS (Earning Per Share)
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business combinations. The combining corporates aim at circular
combinations by pursuing this objective.
Plausible reasons:
» Strategic benefit:
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♦ In a ‘saturated market’, simultaneous expansion and
replacement (through merger) makes more sense than creation
of additional capacity through internal expansion
» Economies of scale:
When two or more firms combine, certain economies are realized due to
larger volume of operations of the combined entity. These economies
arise because of more intensive utilization of production capacity,
distribution networks, and research and development facilities, data
processing systems and so on. Economies of scale are prominent in
horizontal mergers where the scope of more intensive utilization of
resources is greater. Even in conglomerate mergers there is scope for
reduction of certain overhead expenses.
» Economies of scope:
» Complementary resources:
If two firms have complementary resources, it may make sense for them
to merge. A good example of a merger of companies which
complemented each other well is the merger of Brown Bovery and Asea
that resulted in AseaBrownBovery (ABB). Brown Bovery was
international, where as Asea was not. Asea excelled in management,
whereas Brown Bovery did not. The technology, markets, and cultures of
the two companies fitted well.
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» Tax shields:
A firm in a mature industry may generate a lot of cash but may not have
opportunities for profitable investment. Such a firm ought to distribute
generous dividends and even buy back its shares, if the same is
possible. However, most managements have a tendency to make further
investments, even though they may not be profitable. In such a
situation, a merger with another firm involving cash compensation often
represents a more efficient utilization of surplus funds.
» Managerial effectiveness:
Dubious Reasons:
» Diversification:
The consequence of larger size and greater earnings and stability, many
argue, is to reduce the cost of borrowing for the merged firm. The
reason for this is that the creditors of the merged firm enjoy better
protection than the creditors of the merging firms independently.
» Eliminate Competition:
Many M&A deals allow the acquirer to eliminate future competition and
gain a larger market share in its product's market. The downside of
this is that a large premium is usually required to convince the target
company's shareholders to accept the offer. It is not uncommon for the
acquiring company's shareholders to sell their shares and push the price
lower in response to the company paying too much for the target
company.
» Synergy:
The most used word in M&A is synergy, which is the idea that by
combining business activities, performance will increase and costs will
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decrease. Essentially, a business will attempt to merge with another
business that has complementary strengths and weaknesses.
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Diversification of product line;
Acquisition of human assets and other resources not available
otherwise;
Better investment opportunity in combinations.
One or more features would generally be available in
each merger where shareholders may have attraction and favor
merger.
(a) Consumers
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Types of mergers:
Merger depends upon the purpose of the offeror company it wants to
achieve. Based on the offerors’ objectives profile, combinations could be
vertical, horizontal, circular and conglomeratic as precisely described
below with reference to the purpose in view of the offeror company.
The following main benefits accrue from the vertical combination to the
acquirer company i.e.
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2. Has control over products specifications.
Market-extension Merger
This involves the combination of two companies that sell the same
products in different markets. A market-extension merger allows for the
market that can be reached to become larger and is the basis for the
name of the merger.
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Product-extension Merger
This merger is between two companies that sell different, but somewhat
related products, in a common market. This allows the new, larger
company to pool their products and sell them with greater success to
the already common market that the two separate companies shared.
Accretive mergers
Those in which an acquiring company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a
high price to earnings ratio (P/E) acquires one with a low P/E.
Concerns of mergers
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supplier or dealer, thus converting a potentially adversarial relationship
into something more like a partnership. Second, internalization can give
management more effective ways to monitor and improve performance.
Vertical integration by merger does not reduce the total number of
economic entities operating at one level of the market, but it might
change patterns of industry behavior. Whether a forward or backward
integration, the newly acquired firm may decide to deal only with the
acquiring firm, thereby altering competition among the acquiring firm's
suppliers, customers, or competitors. Suppliers may lose a market for
their goods; retail outlets may be deprived of supplies; or competitors
may find that both supplies and outlets are blocked. These possibilities
raise the concern that vertical integration will foreclose competitors by
limiting their access to sources of supply or to customers. Vertical
mergers also may be anticompetitive because their entrenched market
power may impede new businesses from entering the market.
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Steps in bringing about mergers of
companies
Due diligence:
The term "Due Diligence" first came into common use as a result of the
US Securities Act of 1933.
The US Securities Act included a defense referred to in the Act as the
"Due Diligence" defense which could be used by broker-dealers when
accused of inadequate disclosure to investors of material information
with respect to the purchase of securities.
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So long as broker-dealers conducted a "Due Diligence" investigation into
the company whose equity they were selling, and disclosed to the
investor what they found, they would not be held liable for nondisclosure
of information that failed to be uncovered in the process of that
investigation.
The entire broker-dealer community quickly institutionalized as a
standard practice, the conducting of due diligence investigations of any
stock offerings in which they involved themselves.
Due diligence in capstone refers to performing the needful amount of
effort, as in 'doing diligence'.
Originally the term was limited to public offerings of equity investments,
but over time it has come to be associated with investigations of private
mergers and acquisitions as well. The term has slowly been adapted for
use in other situations.
Approval by shareholders:
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Legal Procedure for bringing about merger
of companies
The MOA of both the companies should be examined to check the power
to amalgamate is available. Further, the object clause of the merging
company should permit it to carry on the business of the merged
company. If such clauses do not exist, necessary approvals of the share
holders, board of directors, and company law board are required.
The stock exchanges where merging and merged companies are listed
should be informed about the merger proposal. From time to time,
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copies of all notices, resolutions, and orders should be mailed to the
concerned stock exchanges.
Once the mergers scheme is passed by the share holders and creditors,
the companies involved in the merger should present a petition to the
HC for confirming the scheme of merger. A notice about the same has to
be published in 2 newspapers.
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» Filing the order with the registrar:
Certified true copies of the high court order must be filed with the
registrar of companies within the time limit specified by the court.
After the final orders have been passed by both the HC’s, all the assets
and liabilities of the merged company will have to be transferred to the
merging company.
The merging company, after fulfilling the provisions of the law, should
issue shares and debentures of the merging company. The new shares
and debentures so issued will then be listed on the stock exchange.
2006 was a very exciting and challenging year for Arcelor Mittal. The
new company was at the forefront of the consolidation process, leading
the industry through mergers and acquisitions.
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January 2006 Historic moment for the Global Steel Industry
The year started with the historic launch of the Mittal Steel offer to the
shareholders of Arcelor to create the world's first 100 million tonne plus
steel producer. The aim of increasing globalization and consolidation,
necessary in the steel industry, defines the deal and sets the pace for
the industry.
Mittal Steel USA places a new line into operation in Cleveland to provide
top-quality galvanized sheet steel to automakers and other demanding
customers. The new line is designed to produce in excess of 630,000
tones of corrosion-resistant sheet annually, using the hot-dip galvanizing
process.
Mittal Steel announces US antitrust clearance for Arcelor bid and the
approval of the offer documents by European regulators. The
acceptance period starts in Luxembourg, Belgium and France on 18 May
2006 (some days later for Spain and the United States) and lasts until 29
June 2006.
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Arcelor contributes to the first anti-seismic school building in Izmit
(Turkey), where a school building had been destroyed by an earthquake
in 1999.
Creating the world's largest steel company, Mittal Steel and Arcelor
reach an agreement to combine the two companies in a merger of
equals. The terms of the transaction were reviewed by the Boards of
Arcelor and Mittal Steel which each recommended the transaction to
their shareholders. The combined group, domiciled and headquartered
in Luxembourg, is named Arcelor Mittal.
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respectively was considered as Germany’s response to increasingly
tough competition markets.
The merger was to create the most powerful banking group in the world
with the balance sheet total of nearly 2.5 trillion marks and a stock
market value around 150 billion marks. This would put the merged bank
for ahead of the second largest banking group, U.S. based Citigroup,
with a balance sheet total amounting to 1.2 trillion marks and also in
front of the planned Japanese book mergers of Sumitomo and Sukura
Bank with 1.7 trillion marks as the balance sheet total.
The new banking group intended to spin off its retail banking which was
not making much profit in both the banks and costly, extensive network
of bank branches associated with it.
The merged bank was to retain the name Deutsche Bank but adopted
the Dresdner Bank’s green corporate color in its logo. The future core
business lines of the new merged Bank included investment Banking,
asset management, where the new banking group was hoped to outside
the traditionally dominant Swiss Bank, Security and loan banking and
finally financially corporate clients ranging from major industrial
corporation to the mid-scale companies.
With this kind of merger, the new bank would have reached the no.1
position of the US and create new dimensions of aggressiveness in the
international mergers.
But barely 2 months after announcing their agreement to form the
largest bank in the world, had negotiations for a merger between
Deutsche and Dresdner Bank failed on April 5, 2000.
The main issue of the failure was Dresdner Bank’s investment arm,
Kleinwort Benson, which the executive committee of the bank did not
want to relinquish under any circumstances.
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completely. However Walter, the chairman of the Dresdner Bank was not
prepared for this. This led to the withdrawal of the Dresdner Bank from
the merger negotiations.
References:
Bibliography:
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Webliography:
i. http://www.arcelormittal.com/index.php?lang=en&page=539
ii. http://law.jrank.org/pages/8550/Mergers-Acquisitions.html
iii. http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types-
Mergers.html
iv. http://law.jrank.org/pages/8545/Mergers-Acquisitions-Competitive-
Concerns.html
v. http://law.jrank.org/pages/8544/Mergers-Acquisitions-Corporate-Merger-
Procedures.html
vi. http://www.learnmergers.com/mergers-types.shtml
vii. http://www.learnmergers.com/mergers-mergers.shtml
viii. http://en.wikipedia.org/wiki/Mergers_and_acquisitions
ix. http://en.wikipedia.org/wiki/Due_diligence
x. http://www.investopedia.com/ask/answers/06/m&areasons.asp
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