This action might not be possible to undo. Are you sure you want to continue?
Introduction to Mergers & Acquisitions
Structure 1.1 Introduction Objectives 1.2 Background 1.3 Meaning Self Assessment Questions 1.4 Motives behind Mergers 1.5 Advantages of Mergers & Acquisitions 1.6 Theories of mergers Operating Financial Managerial synergy of mergers Self Assessment Questions 1.7 Types of Merger Self Assessment Questions 1.8 Value creation of Mergers 1.9 Role of industry Life Cycle Introduction Stage Exploitation Stage Maturity Stage Decline Stage 1.10 Summary 1.11 Terminal Questions 1.12 Answers to SAQ’s & TQ’s
This unit introduces the background of corporate mergers and acquisition and also explains the concept of mergers and acquisition. To start with, you need to know why the corporate go for mergers and the rationale behind such mergers and acquisition. You will also able to understand about the various forms of mergers and acquisition in this unit.
Sikkim Manipal University
Page No.: 1
the growth of the firm should be quick and sustainable.Mergers and Acquisitions Unit 1 Objectives After studying this unit. The current upswing in activity in the domestic market as well as in the global markets proves that strong conceptual and technical skills are required for anyone working in the field. Both of the above methods have their own strengths and weaknesses. The internal growth usually involves a longer implementation period and also entails greater uncertainties. today the business firms are operating in highly competitive environment.: 2 . the merger waves started: between 1890-1904 at the end of World War I during later part of II World War and continues to the present day. In today’s business world. you should be able to Define the concept of mergers and acquisition Discuss the motives behind mergers Describe theories of mergers Discuss about the forms of mergers and acquisition 1. In the US. amalgamations. absorption. profitable growth constitutes one of the prime objectives of the business organizations. The external growth expedites the pace of growth as the acquired firm already has the facilities or market Sikkim Manipal University Page No. consolidation etc. It can be achieved in two different methods: Internal o Through the process of introducing or developing new products o By expanding or enlarging capacity of the existing product(s). takeovers. In the competitive world. Mergers and acquisitions have happened in history in the last 100 years. Both America and Europe have experienced the spectacular wave of mergers and acquisitions in recent days.2 Background Merger and acquisition are the most popular means of corporate restructuring. External o By acquisitions of existing business firms in the form of mergers. As a result of globalization. acquisitions.
3. M & A have started taking place in India in the recent years. All assets. It contemplates a state of things under which two companies are so joined as to form a third entity.3.1 Merger Merger is defined as a combination of two or more companies into a single company where one survives and the others lose their corporate existence. In a narrow sense. Debt or Cash modes 1. a growing firm may be in constant search for identifying potential firms which may be merged.3 Meaning of Terms In this section. M & A have become universal practice in the corporate world for securing survival. One company is absorbed into and blended with another company. the term will be used interchangeably with ‘Merger’ whenever the circumstances would so require.2 Amalgamation One or more companies may merge to form a new company. The survivor company acquires the assets as well as liabilities of the merged company or companies.3.3 Consolidation Consolidation is Fusion (convergence) of two existing companies into a new company in which both the existing companies extinguish. 1. you will be able to understand various terminologies relating to mergers and acquisitions. expansion and globalization of the enterprises and achieving multitude of objectives. A number of mega mergers and hostile takeovers could be witnessed in India now. It is mixing up of the two companies to make them into a new one in which both the existing companies lose their identity and ease to exist. growth. 1. The firm will opt for merger if it maximizes the wealth of shareholders. These terminologies are frequently used in the later part of this book.Mergers and Acquisitions Unit 1 acceptable products. Hence. explains amalgamation which will be discussed separately under legal aspects of merger. The Company Act 1956 vides section 394 and 396A. However. Generally the company which survives is the buyer which retains its identity and Seller Company is extinguished. 1. liabilities and stock of one company stand transferred to Transferee Company in consideration of payment in the form of Equity. the term Sikkim Manipal University Page No.: 3 .
A holding company is a company which holds more than half of the nominal value of the equity capital of another company.3. Hindustan Instruments. acquisitions and amalgamations are business combination. 1. Both holding and subsidiary companies retain their separate legal entities and maintain their separate books of accounts. insurance of loan capital.6 Acquisition Acquisition is an act of acquiring effective control by one company over assets or management of another company.3. but there may be change in control of company. All Assets. All mergers. 1. separate legal entity. That is.Mergers and Acquisitions Unit 1 amalgamation and consolidation are sometimes used interchangeably. An acquisition may be affected by: o Agreement with the persons holding majority interest in a company management (BOD/ Shareholder) o Purchase of shares in open market o To make take-over to the general body of share holders o Purchase of new shares by private treaty o Acquisition of share capital of one company by either all or any of the following forms: cash.3. and share capital. Takeover is nothing but obtaining of control over management of company Sikkim Manipal University Page No. a Company can obtain the status of a holding company by acquiring shares of other companies. Liabilities and Stocks of the Consolidating companies stand transferred to new company for consideration.: 4 .3.4 Combination It refers to mergers and consolidations as a common term used interchangeably. without any combination of companies. called subsidiary company.7 Takeover A take-over is acquisition and both the terms are used interchangeably. but carrying legally distinct interpretation. two or more companies may remain independent. 1. HCL LTD – Hindustan Computers. in an acquisition. Indian Software Company and Indian Reprographics Ltd merged in 1986 to form HCL Ltd. Thus. 1.5 Holding Company The main criteria of becoming holding company is the control in the composition of the Board of Directors in another company and such control should emerge from holding of equity shares and thereby more than 50% of the total voting power of such company.
9 De-merger or Corporate Split Or Division It is just opposite to combination. A Company can have effective control over another by holding minority ownership. Takeover means: _________________________________________________________ _________________________________________________________ Sikkim Manipal University Page No. use of super technology and displacement of labour altering capital base etc with a view to improve the performance. Self Assessment Questions 1. Quote the best Indian examples for consolidation.Mergers and Acquisitions Unit 1 by other. Section 372 of the Companies Act 1956 defines the limit of a company’s investment in the share of another company. Division of a company takes place when part of its undertaking is transferred to newly formed company or to an existing company. State how a business firm can achieve growth internally and externally. Time taken in completion of transaction is less in take-over than in mergers. _________________________________________________________ _________________________________________________________ 2. it has to be approved in the shareholders’ general meeting and also by the Central Government. Under MRTP Act. _________________________________________________________ _________________________________________________________ 4. The investment in shares of other companies in excess of 10% of subscribed capital can result into their takeovers.3. 1.3. If a company wants to invest in more than 10% of the subscribed capital of another company. The process of take over is unilateral and the offeror company decides about the maximum price. 1. I. Define Holding Company. Takeover means acquisition of not less than 25% of the voting power in a company. _________________________________________________________ _________________________________________________________ 3.: 5 .8 Restructuring It is re-organizing through changing location of capital investment.
One of them is the buyer and the other is the seller. 1. a merger makes it easier to deal with estate tax problems Sikkim Manipal University Page No. improving competitive position etc. This is done by acquiring firm’s whose earnings and sales complement the firm’s peak and valleys o To balance or fill out the product line o To diversify the product line when the current products have reached their peak in the life cycle o To reduce competition by purchasing a competitor o To acquire a needful resource quickly. market expansion. For eg. Both these firms have motives for combination. A different rationale can be assigned at both individual and collective levels which influence sellers and buyers to opt for Mergers and Acquisition.it may be desirable to purchase a firm with prior tax losses which will offset current or future earnings o To increase efficiency and profitability. two or more firms have to act for merger. mergers often lead to increase in stock price and/or Price Earning ratio o To increase the growth rate of the firm o To make a good investment – a firm may make better use of funds by purchasing instead of ploughing the same funds into internal expansion o To improve the stability of the firms’ earnings and sales. Generally.Mergers and Acquisitions Unit 1 1.4. High-quality technology or highly innovative management o For tax reasons.4.: 6 .1 The Buyers Motives The motivations for buyers are as follows: o To increase the value of the firm’s stock – that is. especially if there is synergy between the two companies 1.2 The Sellers’ Motives The motivations for sellers are as follows: o To increase the value of the owner’s stock and investment in the firm o To increase the firm’s growth rate by receiving more resources from the acquiring company o To acquire resources to stabilize operations and make them more efficient o For tax reasons – if the firm is owned by a family or an individual.4 Motives behind Mergers The primary objectives of Mergers & Acquisition are diversification.
6. which provide increasing returns if spread over large no. equipment and overhead.6 Theories of Mergers 1.5 Advantages of Mergers & Acquisitions The most common advantages of mergers and acquisitions are: Maintaining or accelerating profitable growth of a company Enhancing profitability through cost reduction resulting from: o Economies of scale o Operating Efficiency o Synergy Diversifying the risk of the company by the way of acquiring the business of different income streams Reducing tax liability by the way of setting off accumulated losses or unabsorbed depreciation of one company against the profits of another Enhancing the market power of the company 1. horizontal and conglomerate M&As. such as people.2 Financial This theory postulates that the purpose of mergers and acquisitions is to: Improve liquidity and have direct access to cash resources Dispose of surplus and outdated assets for cash out of combined enterprises Enhance gearing capacity. Economies of scale arise because of indivisibilities. The theory based on operating synergy assumes that economies of scale do exist in the industry and prior to the merger. Thus manufacturing operations. 1. This theory can be applied to vertical.Mergers and Acquisitions Unit 1 o o To help diversify the owning family’s holdings beyond the present firm To deal with top management problems such as Management Succession for an entrepreneur or dissension among top managers 1.6. heavy investments in plant and equipment typically produce such economies. of units of output. borrow on better strength and greater assets backing Sikkim Manipal University Page No.1 Operating This theory postulates that the reason for M&A is the resultant operating synergy or operating economies of scale. the firms are operating at levels of activities that fall short of achieving the potentials for economies of scale.: 7 .
This would be a social gain as well as private gain.: 8 . a merger between the two firms will be synergistic since it combines the non-managerial organization capital of the acquired firm with the excess managerial resources of the acquiring firm. II. the overall managerial efficiency will be improved to the level of the efficient firm. The level of efficiency in the economy would be raised by such mergers. State important buyer’s motivation behind mergers _________________________________________________________ _________________________________________________________ _________________________________________________________ 2. As per this theory. That is. Merger of Coal Mining and Railway Company is the best example Sikkim Manipal University Page No.7 Types of Merger 1. it would result in only one firm in the economy. This theory suggests that M & A occurs mostly in respect of firms in similar kinds of business. two or more companies which are engaged in the production of same goods or services but different stages of production or services join together. One difficulty in the differential efficiency theory is that. if carried to its extreme. indeed in the world – the firm with the greatest managerial efficiency. Self Assessment Questions 1. List the economic advantage of mergers and acquisitions _________________________________________________________ _________________________________________________________ _________________________________________________________ 1.6.1 Vertical Combination It is a process of joining of two or more companies involved in different stages of the production or distribution of the same product or service.Mergers and Acquisitions Unit 1 Avail of tax benefits Improve Earning Per Share 1.7.3 Managerial synergy of mergers This theory says that if a firm is merged with or taken-over by another firm with better managerial efficiency. State important Seller’s motivation behind mergers _________________________________________________________ _________________________________________________________ _________________________________________________________ 3.
Backward Integration Such combination occurs when the firms acquire or create a company that supplies the firm the raw materials or components and other inputs. Forward Vertical Integration Such combination occurs when the firms acquire or create a company that purchases its products/ services.: 9 . The essential objective of such merger is: To ensure a ready market for the goods & services produced To ensure a source of supply required for production of goods or services To gain a strong position because of imperfect market of intermediary products. scarcity of resources To control over product specification The various types of vertical combination are as explained below: 1. The above concept of integration of firms can be depicted as below: Petroleum Exploration Backward Linkage Petroleum Production Backward Linkage Refining Original Company Sales to Wholesaler/Dealers Forward Linkage Sales to Retailers Figure 1.1 Forward Linkage Sikkim Manipal University Page No.Mergers and Acquisitions Unit 1 in which new product/services which are complementary to existing product/ services is added. 2.
: 10 .3 Conglomerate Merger This is joining of two or more companies whose businesses are not related with each other either vertically or horizontally. Ltd.7. advertisement cost etc To have greater access to channels of distribution 1. Eg. They are: 1.2 Horizontal Combination This is the joining of two or more companies in same area of business. Financial Conglomerate: The important features of financial conglomerate is: Provide a flow of funds to each segment of their operations. In this type of combination.Mergers and Acquisitions Unit 1 1.7. two or more companies which are producing essentially the same product or providing the same services or which are in direct competition with each other join together. Gujarat Gas Ltd & Gujarat Finance Co. The combination of ACC Ltd is the best example to quote here. The companies involved in merger under this mode may be engaged in totally different lines of business. Such merger results in: Economies of scale Operational economies Elimination of duplication facilities Reduces competition and number of Companies Reduction in investment in working capital. It is like Manufacturing Company acquiring Insurance Company. The basic objectives of conglomerate mergers are: Diversification of Activities Reduction of Risk Economies of Large Scale Operations Financial Stabilities Increase in profits Attain managerial competence There are various types of conglomerate mergers in practice. exercise control Undertake strategic planning but do not participate in operating decisions Serve at least five distinct economic functions: Improve risk-return ratios through diversifications Sikkim Manipal University Page No.
For example. General management functions (planning. Managerial Conglomerate: The managerial conglomerate not only assumes financial responsibility and control. By providing managerial counsel and interactions on decision.Mergers and Acquisitions Unit 1 Avoid ‘gamblers ruin’ – an adverse run of losses which might cause bankruptcy Establish programme of financial planning & control Improve resource allocation to perform efficiently Divert internal cash flows from the unfavourable areas to more attractive areas 2. Washing Machines and Kitchen Appliances come under the concept of concentric merger. organizing etc) are in reality transferable to all types of business firms. managerial conglomerates increase the potential for improving performance. When any two firms of unequal competence are combined. combination of firms producing Television. These economic benefits are achieved through corporate head quarters. The important benefits of concentric mergers are: Reducing of Risks Economies of large scale operations Financial stability Increase in profit Attain managerial competence The important reasons for adopting conglomerate strategy are: Achieve higher growth rate than expansion Effective use of Financial Resources Avail potential opportunities of profitable investments Achieve competitive advantage and stability Improve P/E Ratio and bring out higher market price of shares Sikkim Manipal University Page No. but also plays a role in operating decisions and provides staff enterprise and staff services to the operating entities. the total performance of the combined firm will be greater than the sum of the individual part.: 11 . 1. This defines SYNERGY in its most general forms.4 Concentric Merger Concentric merger is combination of firms related to each other in terms of customer groups or customer functions or alternative technologies.7.
Self Assessment Questions 1.7.8 Value Creation in Mergers The value creation in mergers is due to synergic effect. o Marketing Synergy This occurs when products use common distribution channels. sales promotion and sales administration o Operating Synergy Operating synergy is realized by better utilization of facilities. Following are the important synergies that take place in merger and acquisition process if planned strategically. Give an example of Vertical Combination _________________________________________________________ 2. Combination of Cement Industry with Chemical Industry is the best example for concentric merger. Acquiring company obtains benefits in the form of economies of resource sharing and diversification. personnel. List the objectives of Conglomerate mergers _________________________________________________________ _________________________________________________________ 5. Give an example of Backward and Forward integration _________________________________________________________ 4.5 Circular Combination Under this combination.: 12 . Yes / No 1. companies producing distinct products seek amalgamation to share common distribution and research facilities so as to obtain economies by elimination of cost on duplication & promoting market enlargement. technology materials etc o Management Synergy Management synergy exists if the existing managerial expertise of the company will be an added advantage of the new business Sikkim Manipal University Page No. and economies in purchasing etc o Investment Synergy This can result from the use of same production facilities. Give an example of Horizontal Combination _________________________________________________________ 3.Mergers and Acquisitions Unit 1 1. III.
Some acquisition of smaller firms by larger firms takes place for the purposes of rounding out the management skills of the smaller firms and providing them with a broader financial base. The influence of various industry life cycles on mergers and acquisitions activities are explained here below: 1. 1.: 13 .Mergers and Acquisitions Unit 1 The effective implementation of above synergies in merger in turn creates value to the business firms 1.9.2 Exploitation Stage Mergers during the exploitation stage are similar to mergers during the introductory stage. newly created firms may sell to outside larger firms in a mature or declining industry thereby enabling larger firms to enter a new growth industry. 1. horizontal mergers are undertaken to ensure survival. The smaller firms may wish to sell because they want to convert personal income to capital gain and because they do not want to place large investments in the hands of managers that do not have a long record of success.9. enabling such firms to pool management and capital resources.9 Role of industry life cycle The stage of industry life cycle has an impact on mergers and acquisition process.9.4 Decline Stage In this stage. in order to match the low cost and price performance of other firms – domestic or foreign. The horizontal merger between smaller firms may also occur. production and marketing.1 Introduction Stage In this stage. 1. Conglomerate acquisitions of firms in growth industries are undertaken to utilize the accumulating cash position Sikkim Manipal University Page No. Concentric mergers involving firms in related industries provide opportunities for synergy and carry over. The impetus for such mergers is reinforced by the more visible indications of prospective growth and profit and by the large capital requirements of a higher growth rate.3 Maturity Stage Mergers in this stage are undertaken to achieve economies of scale in research. This results in related or conglomerate merger. Vertical mergers are also carried out to increase efficiency and profit margins.9.
Siemens handled integration with great care.Mergers and Acquisitions Unit 1 of mature firms in declining industries whose internal flow of funds exceeds the investment requirements of their traditional lines of business. in a bitter hostile bid in 1988. but there has also been increased productivity. and a political storm.1994).(Financial Times. ATM was made into a world centre. in a joint bid with GEC of the UK for the British company Plessey in 1989. Plessey also used to operate with a short payback period of only two years. Although Nestle assured Rowntree at the time of bid that its global confectionery strategy would be run from York. they had been starved of capital investment funds. and testing and design facilities by Plessey before the acquisition. Siemens used a German consultant on a British cost-reduction project. (13. There have been job losses. However. with Rowntree it took four years. Siemens’ acquisition of Plessey Siemens of Germany. According to the senior executives of these two Plessey companies. however. There have been heavy capital investments in Rowntree since the takeover. Siemens allowed the UK companies to choose their own consultants. Successful Acquisition process A. the York-based confectioner. needed Rowntree ‘s Sikkim Manipal University Page No. UK managers were sent to Germany for intercultural training. York has become a global research centre for confectionery. This bid aroused a great deal of resistance from the Rowntree workforce. Nestle’s takeover of Rowntree: Nestle. took over the much respected Rowntree. equipment. Whereas it would normally take two to three years to integrate an acquisition fully. The British senior executives feel that without Siemens their company would not have survived. the Swiss food and confectionery giant.: 14 . the assurance was not kept. Subsequently. B. The Plessey companies were given a great deal of autonomy. acquired Plessey’s electronic system (PES) and air control traffic systems and management (ATM). Initially. with calls for a reference to the Monopolies and Mergers Commission. Nestle approached the integration task with considerable care and sensitivity. Nestle having neglected the confectionery business of its own. causing some resentment among the UK managers.4. and appreciate the greater autonomy and long-term financial support they have received from Siemens.
Explain the important theories of merger. Merger could be horizontal. with some of the old Rowntree managers holding global position in Zurich. growth.: 15 . the heavy investment the higher profile of Rowntree in Nestle’s global strategy and the degree of autonomy given to Rowntree have all combined to lessen the suspicion and hostility which accompanied the takeover in 1988(Financial Times. 1. 3. Mergers and acquisitions have become universal corporate practice for securing survival.4. What are the economic advantages from merger? 7.10 Summary The growth of a firm can be achieved either internally (new product development or expansion etc) or externally (mergers and acquisition). tax shields or share resources. expansion and globalization of the enterprise. Explain the concept of Mergers. It has therefore left Rowntree under the charge of UK managers. Explain the various types of mergers at different stages of industry life cycle. Differentiate between horizontal and vertical merger. What are the motives behind mergers and acquisitions? 6. What are the different types of mergers? 4. Further there has been a flow of managers between Rowntree and the rest of Nestle group. 5. 1. This two-way flow of managers .1994).11 Terminal Questions 1. 20. Sikkim Manipal University Page No. Acquisition and Amalgamation. 8. Merger is the combination of two or more firms into one of the firms whereas an amalgamation involves the combination of two or more firms to form a new firm. increased efficiency.Mergers and Acquisitions Unit 1 expertise and brands. How can a business firm achieve growth internally and externally? 2. Merger benefits may result from economies of scale. economies of vertical integration. vertical or conglomerate.
1 2. Refer to Section 1.Mergers and Acquisitions Unit 1 1.1 and 1.6 5.4 Coal Mining and Railway Company ACC Ltd Refer to Section 1. Refer to Section 1. Refer to Section 1. TQs 1. Refer to Section 1.7.7 4. Refer to Section 1. Refer to Section 1.9 Sikkim Manipal University Page No.4 6. 3.3.3 3. Refer to Section 1. Refer to Section 1.5 7. 3.7.2 2.1A and 1.2 8. 5.3 No III 1.6.3. Refer to Section 1.6. Refer to Section 1. Refer to Section 1.7 II 1.: 16 . 4.2 3. Refer to Section 1. 2.2. Refer to Section 1.6. Refer to Section 1. HCL Ltd.1B Refer to Section 1.12 Answers to SAQs and TQs SAQs I 1.1 2.5 4.2.
This action might not be possible to undo. Are you sure you want to continue?