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Introduction to Mergers and Acquisition

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. In this context, it would be essential for us to understand what corporate restructuring and mergers and acquisitions are all about. The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

The concept of merger and acquisition in India was not popular until the year 1988. During that period a very small percentage of businesses in the country used to come together, mostly into a friendly acquisition with a negotiated deal. The key factor contributing to fewer companies involved in the merger is the regulatory and prohibitory provisions of MRTP Act, 1969

MERGER & ACQUISITION IN INDIA 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 & Acquisitions may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisitions at some stage in the firms development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers &Acquisitions. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.

Meaning of Merger Before we understand, what is Merger? First, let's find out the simple meaning of an acquiring company and acquired companies. 1. Acquiring company is a single existing company that purchases the majority of equity shares of one or more companies. 1. Acquired companies are those companies that surrender the majority of their equity shares to an acquiring company. Merger is a technique of growth. It is not treated as a business combination. Merger is done on a permanent basis. Generally, it is done between two companies. However, it can also be done among more than two companies. During merger, an acquiring company and acquired companies come together to decide and execute a merger agreement between them. After merger, acquiring company survives whereas acquired companies do not survive anymore, and they cease (stop) to exist. Merger does not result in the formation of a new company. The management of acquiring company continues to lead (direct) the merger. Example of Merger Consider the example of merger shown in the following diagram. In the above example, Company 'A' and Company 'B' are operating (existing) in the market. Company 'A' is an acquiring company, and Company 'B' is getting acquired by Company 'A'. In other words, Company 'B' gets merged with Company 'A'. In this example of merger, Company 'A' will purchase the majority of equity shares (ownership shares) of Company 'B'. Company 'A' will take over the assets and liabilities of the Company 'B'. The of the Company 'B' will be given the shares of Company 'A'. The acquiring Company 'A' will continue to operate (function) by its erstwhile (former) name.

Some recent examples of well-known mergers are as follows: 1. British Salt operating in UK merged with TATA Chemicals based in India. 2. Zain Telecommunications operating in Africa merged with Bharti Airtel Limited based in India. 3. of Rajasthan operating in India merged with Bank (India). HISTORY OF MERGER AND ACQUISITION:Mergers and Acquisitions History helps us to understand the evolution of the concepts of Mergers and Acquisitions in the world. If we involve in the detailed analysis of the History of Merger of Acquisitions, we will find that Mergers and Acquisitions started to take place in the world from very early years. US Mergers and Acquisitions History
In USA, mergers and acquisitions started in twentieth century. After that Mergers and Acquisitions continued to occur in cycle. These cycles of Mergers and Acquisitions, took place in USA in 1929, in the last half of 1960s, in the first half of 1980s and again in the last half of 1990s. Here, it should be mentioned that, by cycle we are referring to the period, in which the maximum number of mergers took place. Among the mergers and acquisitions cycles cited above, the most significant mergers of USA took place in the last half of 1990s. The reason of this was that, the stock market was quite strong in US in that period and this strong stock market supported the high incidence of mergers and acquisitions. The mergers and acquisitions of this period involved big brands and huge amount of dollars.

Significant Mergers and Acquisitions of the History In 1987, an Australian Company named Stephen Jacques Stone James, which was a partnership company with 79 partners, merged with the company named Mallesons. After the Merger, the new joint company was known as Mallesons Stephen Jacques. This Merger contributed significantly to the telecommunication sector development in Australia. In 1988, Tower Federal Savings Bank of Indiana acquired two financial institutions of Michigan. Then in 1991, the

Standard Federal Bank strengthened their position in Ohio by acquiring a financial institution of Toledo. These two acquisitions had great impact on the banking Sector of USA. In 2001, a merger between Association of European Universities and the Confederation of European Union Rectors' Conference took place in Spain. This merger provided more power to the University community of Europe. TYPES OF MERGER:1) Horizontal mergers: The consolidation of firms that are direct rivals--i.e. firms that sell substitutable products or services within the same geographic market. 2) Vertical Mergers: The consolidation of firms that have potential or actual buyer-seller relationships. 3) Conglomerate Mergers: Consolidated firms may share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated. 4) Co generic mergers:- occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company. Following are some of the important steps in the M&A process Business Valuation Business valuation or assessment is the first process of merger and acquisition. This step includes examination and evaluation of both the present and future market value of the target company. A thorough research is done on the history of the company with regards to capital gains, organizational structure, market share, distribution channel, corporate culture, specific business strengths, and credibility in the market. There are many other aspects that should be considered to ensure if a proposed company is right or not for a successful merger. Proposal Phase Proposal phase is a phase in which the company sends a proposal for a merger or an acquisition with complete details of the deal including the

strategies, amount, and the commitments. Most of the time, this proposal is send through a non-binding offer document. Planning Exit when any company decides to sell its operations, it has to undergo the stage of exit planning. The company has to take firm decision as to when and how to make the exit in an organized and profitable manner. In the process the management has to evaluate all financial and other business issues like taking a decision of full sale or partial sale along with evaluating on various options of reinvestments. Structuring Business Deal After finalizing the merger and the exit plans, the new entity or the takeover company has to take initiatives for marketing and create innovative strategies to enhance business and its credibility. The entire phase emphasize on structuring of the business deal. Stage of Integration This stage includes both the company coming together with their own parameters. It includes the entire process of preparing the document, signing the agreement, and negotiating the deal. It also defines the parameters of the future relationship between the two. Operating the Venture After signing the agreement and entering into the venture, it is equally important to operate the venture. This operation is attributed to meet the said and pre-defined expectations of all the companies involved in the process. The M&A transaction after the deal include all the essential measures and activities that work to fulfil the requirements and desires of the companies involved.

Reasons behind Mergers and Acquisitions:The mergers and acquisitions are one of the most talks about events of the corporate sector. There are several purposes of mergers and acquisitions. Some of these are business purposes and some are political. But the general purposes of mergers and acquisitions are to generate more profit for the newly built companies and to diversify their operational domains. * Through merger of companies of the same sector, the manufacturing costs can be reduced and sale of the products can be boosted. At the same time, growth of the market share and absence or elimination of a major competitor from the market can change the whole scenario.
Each and every company has some regular clients and merger and acquisition of the companies can provide the new company with an enlarged customer base than what was there before the merger. All these will help the company to make more profits.

* The merger or acquisition of two major companies can also provide the new companies with resources of both the companies. These resources can help the new company to develop easily. * The mergers and acquisition activities are also very effective for tax saving because whenever a big company in good financial condition purchases a smaller company with several debts and losses, the big company gets some advantage regarding tax payment. This is one of the purposes of mergers and acquisitions. * At the same time, there are some mergers that have taken place to gain some special business ratings or certain standards. The purposes may be of acquiring any special permission that can only be availed by companies with a certain amount of experience, monetary resource and size.

Strategies of merger and acquisition 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. * 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.

Distinction between Mergers and Acquisitions * Process of combining two or more companies together. The fact remains that the so-called single terminologies are different terms used under different situations. Though there is a thin line difference between the two but the impact of the kind of completely different in both company * Merger is considered to be a process when two or more companies come together to expand their business operations. In such a case the deal gets finalized on friendly terms and both the companies share equal profits in the newly created entity * When one company takes over the other and rules all its business operations, it is known as acquisitions. In this process of restructuring, one company overpowers the other company and the decision is mainly taken during downturns in economy or during declining profit margins. Among the two, the one that is financially stronger and bigger in all ways establishes it power. The combined operations then run under the name of the powerful entity who also takes over the existing stocks of the other company. * Another difference is, in an acquisition usually two companies of different sizes come together to combat the challenges of downturn and in a merger two companies of same size combine to increase their strength and financial gains * A deal in case of an acquisition is often done in an unfriendly manner, it is more or less a forceful or a helpless association where the powerful company either swallows the operation or a company in loss is forced to sell its entity. In case of a merger there is a friendly association where both the partners hold the same percentage of ownership and the equal profit share


* 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.

VALUTION OF MERGER AND ACQUISITION:* 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 CORPORATE MERGER AND ACQUISITION:* Corporate merger and acquisition is defined as the process of buying, selling, and integrating different corporations with the desire of expansion and accelerated growth opportunities. This kind of association in any form plays an integral role when it comes to business and economy as it results in significant restructuring of the business

* The key objective of corporate mergers and acquisitions is to increase market competition. This can be done in various ways using different methods of merger like horizontal merger, conglomeration merger, market extension merger, and product extension merger. All the types work towards a common goal but behold different characteristics suited to get the best outcome in terms of growth, expansion, and financial performance. * In many significant ways, this kind of restructuring a business proves to be beneficial to the corporate world. It greatly helps to share all resources, skills, talents, and knowledge that eventually increase the wisdom bar within the company. This can further help to combat the competitive challenges existing in the market. * Further to that, elimination of duplicate departments, possibility of cross selling, reduction of tax liability, and exchange of resources are other big time benefits of corporate merger and acquisition. This not only helps to cut the extra cost involved in the operation and gain financial gains but also help to expand across boundaries and enhance credibility. MERGER AND ACQUISITION IN BANKING SECTOR:HDFC Bank and Times Bank tied the merger knot in year 1999. The coming together of two likeminded private banks for mutual benefit was a land mark event in the history of Indian banking. Many analysts viewed this action as opening of the floodgate of a spate of mergers and consolidations among the banks, but this was not to be, it took nearly a year for another merger. The process of consolidation is a slow and painful process. But the wait and watch game played by the banks seems to have come to an end. With competition setting in and tightening of the prudential norms by the apex bank the players in the industry seems to be taking turns to merge. It was the turn Bank of Madura to integrate with ICICI Bank. This merger is remarkable different from the earlier ones. It is a merger between banks

of two different generations. It marks the beginning of the acceptance of merger with old generation banks, which seemed to be out of place with numerous embedded problems The markets seem to be in favor of bank consolidation. As in the case of HDFC Bank and Times Bank, this time also market welcomed the merger of ICICI Bank and Bank of Madura. Each time a merger is announced it seems to set out a signal in the industry of further consolidation. The shares of the bank reached new heights. This time it was not only the turn of the new private sector banks, but also the shares of old generation private banks and even public sector banks experienced an buying interest. Are these merger moves a culmination of the consolidation in the industry? Will any bank be untouched and which will be left out? To answer this question let us first glance through the industry and see where the different players are placed. The Indian banking industry is consists of four categories-public sector banks, new private sector banks and foreign banks. The public sector banks control a major share of the banking operations. These include some of the biggest names in the industry like Stare Bank of India and its associate banks, Bank of Baroda, Corporation bank etc. their strength lies in their reach and distribution network. Their problems rage from high NPAs to over employment. The government controls these banks. Most of these banks are trying to change the perception. The government controls these banks. Most of these banks are trying to change the perception. The recent thrust on reduction of government stake, VRS and

NPA settlement are steps in this direction. However, real consolidation can happen if government reduces its stake and changes its perception on the need of merger. The governments stand has always been that consolidation should happen to save a bank from collapsing. The old private sector banks are the banks, which were established prior the Banking Nationalization Act, but could not be nationalized because of their small size. This segment includes the Bank Of Madura, United Western Bank, Jammu and Kashmir bank; etc. who banks are facing competition from private banks and foreign banks. They are trying to improve their margins. Though some of the banks in this category are doing extremely well, the investors and the markets seem not to reward them adequately. These banks are unable to detach themselves effectively from the older tag. The new private banks came into existence with the amendment of Banking Regulation Act in 1993, which permitted the entry of new private sector bank The effective shield against takeovers for these banks could be to get into strategic alliances like the Vysya bank model, which has bank Brussels Lambert of the Dutch ING Group as a strategic investor. United Western Bank and Lord Krishna Bank are already on a lookout for strategic partners. But the problems go beyond the shareholding pattern and are far rooted the prudential norms like the increasing CAR and the minimum net worth

requirements are making the very existence of these banks difficult. They are finding it difficult. They are finding difficult to raise capital and keep up with the ever-tightening norms .one of the survival routes for these banks is to merge with another bank. Mergers: Making sense of it all In the process of merger banks will have to give due importance to synergies and complimentary adhesions. The merger must make sound business sense and reflect in increasing the shareholder value. It should help increase the banks net worth and its capital adequacy. A merger should expand business opportunity for both banks. The other critical and competitive edge for survival is the cost of funds, which means stable deposits and risk diversification. Network size is very important in this perspective because one cannot grow staying in one place because the asset market in every place is limited. Unless one prepares the building blocks for growth by looking outside ones area he either sells out or gets acquired. The features, which a bank looks in its target seems to be the distribution network (number of branches and geographical distribution), number of clients and financial parameters like cost of funds, capital adequacy ratio, NPA and provision cover. The merger of strong entities should be encouraged. The reason for the merger should not be to save a bank from extinction rather the motive must be to go join for the distant advantages of both combining banks towards a mutual benefit. PS Shenoy, chairman and managing director, Bank of Baroda said, today public sector bank can merge with another

bank only through moratorium route. That means you can takeover only a dead and you die yourself and allow to be merged with a strong bank. Unfortunately this is not the spirit behind the merger and acquisition. Time for strategic alliance It is not only important for banks to merge with banks but also entities in the other business activities . Strategic mergers between banks for using each others infrastructure enabling remittance of funds to various centers among the strategic partner banks can give the account holder the flexibility of purchasing a draft payable at centers where the strategic tie-up exists. In a macro perspective mergers and acquisition can prove effective on strengthening the Indian financial sector. Today, while Indian banks have made tremendous strides in extending the reach domestically, internationally the Indian system is conspicuous by its absence. They are very few catering mostly to India related business. As a result India does not have a presence in international financial markets. If India has to emerge as an international banking center the presence of large banks with foreign presence is essential. With globalization and strategic alliances Indian banks would grow originally. They would be large banks with international presence .Globally the banking industry is consolidating through cross-border mergers. India seems to be far behind. The law does not allow the foreign banks with branch network to acquire Indian banks. But who knows with

pressures of globalisation the law of the land could be amended paving way for a cross border deal. While the private sector banks are on the threshold of improvement, the public sector banks (s) are slowly contemplating automation to accelerate and cover the lost ground. To contend with new challenges posed by the private sector banks, s are pumping huge amounts to update their It. but still, it looks like, public sector banks need to shift the gears, accelerate their movements, in the right direction by automation their branches and providing, Internet banking services.PSBPSB