TAKEOVER AND ACQUISITION CONTENTS

1. MERGERS, ACQUISITIONS, AND OTHER CORPORATE COMBINATIONS
A. Concerns about Mergers B. Types of Mergers and Acquisitions C. Merger Analysis D. Merger Remedies

2. MERGERS, MANAGEMENT BUYOUTS AND CORPORATE REORGANISATIONS
A. Objectives of Mergers and Acquisitions B. Mergers and Acquisitions And Business Strategy C. The Dynamics of the Takeover Process D. Economic Consequences of Takeovers

Chapter 3. CROSS-BORDER ACQUISITIONS
A. Corporate Divestments B. As strategic alliances alternatives to acquisitions

Chapter 4. ACQUISITION MOTIVES
A. Managerial Motives in Acquisitions B. Free Cash Flow and the Agency Problem C. Internal Agency Conflict Control Mechanisms D. External Agency Conflict Control Mechanisms

Chapter 5.TARGET MANAGEMENT BEHAVIOUR IN HOSTILE OFFERS
A. Acquisitions and Corporate Strategy B. Analytical framework for generic strategies C. The Product Life Cycle D. Porter’s Five Forces Model

Chapter 6.CORPORATE STRATEGIES FOR MARKET ENTRY
A. Case Study 1 • Sainsbury Prefers Greenfield Investment in Scotland: Acquisition

B. Case Study 2

Acquisition Reflecting Strategic Choice

Chapter 7.VALUE CREATION IN DIFFERENT ACQUISITION TYPES
A. Donor-Recipient Mode B. Participative Mode C. Collusive Mode

Chapter 8.TAKEOVER
A. Meaning and Concept of Takeover B. Emergence of Concept of Takeover C. Objects of Takeover

Chapter 9.KINDS OF TAKEOVER
A. Takeover Bids B. Type of Takeover Bids C. Consideration for Takeover

Chapter 10.MERGERS AND ACQUISITIONS
A. Acquisition

B. Types of acquisition C. Merger D. Classifications of Mergers Distinction between Mergers and Acquisitions

Chapter 11.BUSINESS VALUATION
Financing M&A Specialist M&A Advisory Firms

Chapter 12.MOTIVES BEHIND M&A
Effects on Management B. M&A Marketplace Difficulties C. M&A Failure

Chapter 13.THE GREAT MERGER MOVEMENT

Short-Run Factors Long-Run Factors Cross-Border M&A

Chapter 14.Working with console takeover and recovery
Forced Takeover Console Takeover and Recovery Function Requirements A. Console Takeover and Recovery Function Restrictions

Chapter 15. Mergers And Acquisitions – Types Of Mergers, Corporate Merger Procedures, Competitive Concerns, Federal Antitrust Regulation, Merger Guidelines

1. MERGERS, ACQUISITIONS, AND OTHER CORPORATE COMBINATIONS Concerns about Mergers
The review and approval of mergers, acquisitions and other corporate combinations (all referred to as "mergers" for convenience here) is normally entrusted to competition authorities or other branches of government rather than to telecommunications regulators. However, there has been a high level of merger and acquisition activity in the global telecommunications industry in recent years. Consequently, the analysis of mergers and acquisitions can be expected to become a more important part of competition policy in the telecommunications sector. Many mergers will have little or no negative impact on competition. Some mergers may be procompetitive, for example, by enhancing production efficiencies resulting from economies of scale or scope. Mergers may also create new synergies, lad to innovation by combining talents of different firms, and provide additional resources to develop new products and services. Concerns about mergers, acquisitions and other corporate combinations are generally based on the same concerns about anti-competitive behavior as discussed earlier in this Module. The main concern is that a larger merged firm may increase its market power. To the extent a merged firm becomes more dominant in a market, there is a greater potential to abuse the accumulation and exercise of market power to the detriment of competitors and consumers. The basic rationale for merger control is that it is better to prevent firms from gaining excessive market power than to attempt to regulate abuses of their market power once such power exists. In practice, merger reviews and the exercises of related powers by competition authorities are usually based on an evaluation of the impact of specific merger on competition in the relevant markets.

Types of Mergers and Acquisitions
Mergers can be characterized according to three categories: horizontal mergers, which take place between firms that are actual or potential competitors occupying similar positions in the chain of production; vertical mergers, which take place between firms at different levels in the chain of production (such as between manufacturers and retailers); and other mergers, such as those which take place between unrelated businesses or conglomerates with different types of businesses. Merger reviews typically focus on horizontal mergers since, by defining, they reduce the number of competitors n the relevant markets. Also of concerns are mergers between a firm which is active in a particular market and another which is a potential competitor. In the telecommunications industry, vertical mergers can also be of concern. The merger of a firm that provides essential inputs to other firms can be problematic if the supply of those inputs to other firms is threatened. For example, the merger of a dominant local provider with a major internet Service Provider can raise concerns about where there other ISPs will obtain local access services on fair and non-discriminatory terms. Such a merger might be reviewed in order to ensure that adequate safeguards are in place to protect competing ISPs.

Merger Analysis
Large mergers, acquisitions and some other corporate combinations require prior review and approval in some jurisdictions. As part of their review, competition authorities may prohibit mergers or approve them subject to conditions. Mergers are usually only prohibited or subjected to conditions if the authority occludes that the merger will substantially harm competition. Given the discretion

] . It may also prove difficult to determine how any efficiency or other welfare gains will be distributed between the producing firm and its customers. by reducing the number of firms participating in a market. and evaluation of any efficiencies arising from the merger. substantial efficiency gains or other public welfare gains could support approval of a merger even where anti-competitive risks are identified. The evaluation of market participants includes not only firms which actually participate in the relevant market. Finally. Analysis of barriers to market entry. If a market is defined broadly. A narrow definition could lead to a conclusion that the merged entity would have excessive market power in a smaller market. Amore narrow market definition may result in a determination that the firms operate in different markets. Sometimes the merger is not the best solution. These are intended to assist firms and their advisers to anticipate the procedures and criteria which will be applied in assessing a merger. attention will typically focus on the establishment or increase of the dominant position by the merged entity. The competition authority may be persuaded that the public interest is better served by a merger than by the failure of one of the merging entities. In assessing the potential adverse effects of a proposed merger. transactions of this sort should be carefully evaluated. market definition is often the key factor in determining whether a merger is anti-competitive. the five-stage analysis concludes with an assessment of any efficiencies to be realized as a result of the merger. Identification of firms participating in the relevant market and their market shares. a merger which would have anti-competitive effects may be permitted where one of the merging entities is in severe financial distress. the objective is to assess efficiency or other welfare gains which can be projected to result from the merger. but does not always have a long-term negative effect on the economy. The importance of market definition was discussed earlier in this Chapter. Similarly difficult is the development of any means to ensure redistribution of efficiency gains to broader public advantage. Bankruptcy is painful for shareholders. Market definition. In this stage. The second stage of the analysis is the identification of firm competing in the relevant market and their market shares. There may also be concerns that the merger. but also firms which could be expanded to enter it. Theoretically. On the other hand. In exceptional circumstances. An example of such guidelines is contained in the Horizontal Merger Guidelines published in 1997 by the US Department of Justice and the Federal Trade Commission. a broad market definition could lead to a conclusion that the merged entity will face sufficient competition from other firms in the market. A finding that there are low barriers to entry can help justify a merger. However. These will be balanced against any anti-competitive effects which have been identified in the earlier stages of the review. the merging firms may be considered to be competitors. it is difficult for a competition authority to qualify the positive and negative aspects of the transaction and arrive at any verifiable net effect. In the context of a merger review. The Guidelines set out a five stage analysis of the following subject areas. The evaluation of barriers to entry is an important aspect of merger review. various competition authorities have published merger guidelines. For instance. The determination of market share will have a direct bearing on an assessment of market power and the potential for abuse of market power by the merged entity. it may be that another firm could expand productive capacity using the assets of the failing firm and that public welfare would be better served by this alternative solution. will create conditions which make anti-competitive agreements among them more likely. Identification of potential adverse effects of the merger.inherent in the interpretation of this threshold. IN practice.

the merging firms must normally provide information to the reviewing authority. The information disclosed in the pre-merger notification will normally be used by a competition authority in the first stage of merger review. a competition authority will normally seek information about matters such as the following: • • • • • • • Products. It is standard practice in jurisdictions which impose merger review to require parties to be merger to submit advance notice of the proposed transaction. Merger Remedies The goal of merger control laws is to prevent or remove anti-competitive effects of mergers. (I. Additional information is usually gathered from third parities such as competitors and customers. to determine if any anti-competitive concerns are present and whether to proceed with a more detailed review of the proposed transaction). If the competition authority decides to proceed with a further investigation. financial performance Activity of competitors and competitors’ market shares Availability of substitute products Influence of potential competition (including foreign competition) Pace of technological or other change in the relevant markets. Required information typically includes: The identity of the firms involved in the proposed transaction.Information in Merger Reviews As part of the merger review process. and its impact on competition Nature and degree of regulation in the relevant markets The quality of a merger review will depend heavily on the quality and range of information available to the reviewing authority. A description of the relevant product and service markets in which the firms operate The initial information filing typically triggers a waiting period.e. . suppliers. during which the reviewing authority will be entitled to request further information. Commercially sensitive information is also generally protected from public disclosure. Three types of remedies are typically used to achieve this goal. A description of the nature and commercial terms of the transaction The timing of the transaction Financial information on the involved (including revenue. The content of pre-merger notifications are generally defined by the law or regulation. market shares. it will obtain more information from the merger participants. During a more detailed review. customers. assets and copies of annual or other financial reports) Identification of related ownership interests and the organization structure of the firms involved. This process concludes with a determination by the reviewing authority whether to proceed with a more detailed investigation.

or if the merger has been previously consummated. The first two remedies are structural. This can be achieved through a variety of one-time conditions and on-going requirements. . the proposed Telia/Telenor merger. Structural remedies are often more likely to be effective in the long run and require less ongoing government intervention. Partial Divestiture – A second remedy is partial divestiture.Prohibition or Dissolution – The first remedy involves preventing the merger in its entirety. requiring dissolution of the merged entity. Regulation/Conditional Approval – A third remedy is regulation or modification of the behaviour of the merged firm in order to prevent or reduce anti-competitive effects. Partial divesture can reduce or eliminate anti-competitive effects while preserving some of the commercial advantages of a merger. Although it has since been abandoned. Behavioural remedies require ongoing regulatory oversight and intervention. provides a good illustration of the use of this remedy. Partial divestiture is emerging as a preferred remedy in many jurisdictions. with permission to proceed with the merger in other respect. The merged firm might be required to divest assets or operations sufficient to eliminate identified anti-competitive effects. and the third remedy is behavioural. which is described in Box 1-17. Partial divestiture or behavioural constraints are less intrusive I the operation of market than preventing a merger from proceeding or requiring dissolution of a previously completed merger.

the corporations come together to combine and share 0their resources to achieve common objectives. whereas at other times they prefer internal growth? This is a phenomenon which as yet is not completely understood. Some divestments were sometimes motivated by the need to avoid corporate financial distress or outright liquidation. They are not the only means of corporate growth. In a merger a new entity may be formed subsuming the merging firms. MERGERS. Why do companies get high’ on takeover fever at certain times. 1972 and 1989. Objectives of Mergers and Acquisitions The immediate objective of an acquisition is self-evidently growth and expansion of the acquirer’s assets. in general. Thus in the UK we have observed peaks of takeover activity in 1968. In modern finance theory. . An acquisition resembles more of an arm’s-length deal. with one firm purchasing the assets or shares of another. mergers and acquisitions have tended to follow a historic pattern of ‘waves’. Where the acquired firm is larger than the acquirer. this merely represents an intermediate objective. One of the themes of the 1980s was deco glomeration and sticking to the core businesses. We will discuss these possible motivations and the impact of various forms of divestment on the performance of both divestors and acquirers of divested assets. Indeed. A similar wave pattern has been observed in other countries. A more fundamental objective may be the enhancement of shareholders’ wealth through acquisitions aimed at accessing or creating sustainable competitive advantage for the acquirer. the acquisition is referred to as a ‘reverse takeover’. A ‘takeover’ is similar to an acquisition and also implies that the acquirer is much larger than the acquired. ‘acquisition’ and ‘takeover’ are all part of the mergers and acquisitions parlance. such as when acquirers choose which accounting rules to apply in consolidating the accounts of the two firms involved. There is a variety of motivations for divestments. they have precise connotations in certain contexts. Although the terms ‘merger’ and’ acquisition’ are often used interchangeably. as well as by financial innovations like highleverage buyouts and mezzanine finance. In a merger. on this view. sales and market share. Management buyouts and management buying. and with the acquired firm’s shareholders ceasing to be owners of that firm. we shall.2. but are an alternative to growth by internal or organic capital investment. However. use the terms interchangeably. The terms ‘merger’. was getting rid of under. shareholder wealth maximisation is posited as a rational criterion for investment and financing decisions made by managers. whereas in an acquisition the acquired firm becomes the subsidiary of the acquirer. The divestor. The shareholders of the combining firms often remain as joint owners of the combined entity. with periods of frenetic takeover activity punctuating periods of relative sedateness. notably in the USA. From time to time. While the distinction is important for specific contexts.or non-performing businesses so as to concentrate its resources on high-value activities. MANAGEMENT BUYOUTS AND CORPORATE REORGANISATIONS Mergers and acquisitions are a means of corporate expansion and growth. companies have preferred the external means of growth through acquisitions to internal growth.

18 842 15 370 221 3093 20.23 433 5863 199 1832 31.45 447 2343 142 436 18. May 1993 By the managerial utility theory.Shareholder wealth maximization may.22 1337 27 250 441 5677 20.30 534 1656 117 186 11. Central Statistical Office Bulletin. . Source: 'Acquisitions and Mergers within the UK'. 1972-92 Total of acquisitions Divestments Divest Year total (%) Number Value (£m) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 988 1989 1990 1991 1992 1210 2532 272 185 7.64 315 291 115 70 24.61 568 5474 170 1121 20.57 Note: The last column is based on values of acquisitions and divestments.31 506 10434 214 2945 28. London.41 567 1140 126 163 14.23 469 1475 101 210 14. acquisitions may be driven by managerial ego or desire for power.31 1205 1304 254 247 18.12 1528 16486 340 4667 28.83 779 8329 342 2941 35. mergers and inter corporate divestments in the UK.94 504 508 137 49 9.32 481 824 109 94 11.31 1499 22 839 376 5532 24.24 452 1144 125 262 22.05 353 448 111 100 22. however. empire building or perquisites that go with the size of the firm.47 474 7090 134 793 11. be supplanted Acquisitions.90 463 2206 164 804 36. Empirical evidence which we shall discuss is inconclusive as to what fundamentally drives acquisitions.

66 433 5939 13.03 463 2206 4.63 1528 16539 10.76 34.24 34. often amounting to . Here the added value can be created even when the target remains a stand-alone entity. Central Statistical Office Bulletin.69 83. After 1969. London. and more recent evidence lends some support to the view that acquisitions can add value to the acquirer shareholders.47 474 7090 14.01 452 1144 2. however. and DataStream for GDP price deflator. Such an advantage may stem from economies of scale and scope. whether acquisitions can create value for the acquirer’s shareholders is a question which has been empirically addressed by a number of researchers. Earlier evidence suggests that acquisitions. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 469 1475 3. These tests are. the ability of this strategy to create value for shareholders is open to doubt. The GDP price deflator has been used to restate the value of bids in 1990 prices. sensitive to the methodology adopted.14 27.56 1499 22 839 15.70 Note: Data up to 1969 include only quoted companies.28 506 10434 20.64 76. An acquisition may also fulfill the acquirer’s corporate strategy of building a portfolio of unrelated businesses.24 265.53 19.29 447 2343 5.72 53. Indeed. are at best neutral and at worst value destroying to a small degree. Sources: ‘Acquisitions and Mergers within the UK’. or market power or access to unique strengths which the acquired company may possess.96 93. and does not depend upon any possible synergy between the acquirer and the acquired.92 842 15370 18. There is almost universal agreement that target shareholders earn substantial bid premia. Often the acquirer may aim to transfer its ‘superior’ management skills to the target of acquisition and thereby enhance the earning power of the target’s assets. figures include all industrial and commercial companies. from the acquirer shareholders’ perspective.38 293.48 568 5474 9. In an efficient capital market framework.77 779 8329 10.05 1337 27 250 20. such acquisitions must form part of the business and corporate strategies of the acquirer.82 203.62 98. The acquirer is pursuing a corporate strategy of value creation through efficiency improvements in the target. May 1993. The aim here may be risk reduction if the earnings streams of the different businesses in the portfolio are not highly positively correlated.25 198. Business strategy is aimed at creating a sustainable competitive advantage for the firm.Mergers and Acquisitions and Business Strategy Whatever the fundamental objective of the manager: in acquiring other companies.

there are intermediaries whose profitability depends upon the volume of takeovers they handle. may overpay for the targets. UK bidders are subject to the antitrust regime policed by the Office of Fair Trading (OFT). Such reduction in competition may also have long-term consequences for the competitiveness and growth of the economy as a whole. takeovers in the UK and many other countries are subject to antitrust screening. Rationalization may also lead to plant closures and consequent redundancies. acquirers. . the shareholders and manager groups may gain from the merger. but to the detriment of consumers. Takeovers often lead to rationalization of operations of the firms involved as well as renegotiation of the terms of employment. Indeed. this overpayment. investment decisions such as acquisitions are subject to a wide variety of intra-organizational conflicts. Takeovers have been referred to as the market for corporate control.30 per cent in a matter of days surrounding the bids. unable to resist such pressures. the evidence may be consistent with managerial motives dominating takeover decisions. It is. The incentives that some of the intermediaries. In this event. This paradox of target shareholders gaining and the bidder shareholders struggling to hold their own raises a number of interesting issues concerning both the. Economic Consequences of Takeovers So far we have focused on the shareholders and managers as gaining or losing from acquisitions. consumers and communities in which the operations of the acquired and acquirer firms are located. with ill-defined objectives and messy political compromises. either or both of the groups can gain at the expense of these other constituencies. The latter include employees. The Dynamics of the Takeover Process Another aspect of the acquisition process which may determine its success is the market dynamics external to the firm. which leads to poor acquisition decisions. We will explore the impact of the organizational dynamics of the acquisition decision process on acquisition success. Such incentives may lead to pressures for’ closing the deal’. While the UK antitrust rules empower the OFT to take into account wider criteria than just competition. have in M & A deals may create conflicts of interest between bidders and their advisers. We will describe the role of the inter me diaries in the bid process and the areas of potential conflicts of’ interest between bidders and targets on the one hand and intermediaries on the other. there are other aspects of the acquisition process which need to be explored before the actual Source of acquisition failure can be reasonably traced. therefore. Apart from managerial selfinterest. There have been. It appears that there is many a proverbial slip between acquisitions and value creation in the post-acquisition period. for instance. It may be the acquisition process. cases in the recent past when acquirers attempted to reduce the value of pension benefits which employees of the acquired company had enjoyed. In large corporations. Acquirer’s motive and its ability to translate expected gains from the proposed acquisition into wealth gains for its shareholders. let alone exceed. But mergers’ and acquisitions have wider constituencies than just these two groups. as in others. which may drive at least some of the acquisitions. arguably. such as merchant bankers. with often devastating impact on local communities. since 1984 there has been a major shift in emphasis towards competition as the primary ground on which mergers are investigated in the UK. and post acquisition added value may not match. Where the acquisition is driven by the desire to achieve market dominance or increased market power. necessary to understand the dynamics of the takeover process. They also have to observe the rules of the European Union (EU) Merger Regulation. In this market. with rival management teams competing for the right to manage the corporate assets of the target. The antitrust authorities have statutory powers to block a merger or allow it subject to certain acceptable conditions. Indeed. For these reasons.

Corporate Divestments As noted earlier. As the EU Merger Regulation has been in existence only since September 1990.80 billion. The UK has been the most important foreign investor in the USA in recent years. Thus a predatory acquisition followed by asset stripping is not the only mechanism available for transferring assets to those who can exploit their potential to the full. British companies have made acquisitions both on Continental Europe and in the USA. As strategic alliances alternatives to acquisitions In recent years. 3. and dulled their aware ness of the idiosyncratic nature of the US corporate environment and cultural norms. Firms can reconfigure their businesses less traumatically than in the past. With the advent of the Single Market. therefore. the scope for overpayment and post acquisition integration. the European Union now represents the largest single market in the world. amount. many of the same problems as domestic ones.The dual antitrust regime to which EU companies are subject sometimes creates a jurisdictional conflict between member states and t1. Crossborder acquisitions pose. they could use the divestment mechanism to improve the value of their businesses. Cross-Border Acquisitions There has been a substantial increase in the amount of funds flowing across nations in search of takeover candidates. Provided firms are perceptive enough to see when a particular business in their portfolio has outlived its strategic raison d’etre. sought to increase their market presence by acquisitions in this huge market. But strategic alliances also have certain inherent advantages. The motivation behind the promulgation of the EU Merger Regulation was to create ‘a one-stop shopping’ for antitrust clearance. and thereby avoid falling into the hands of asset strippers. European acquisitions made by UK companies in 1993 was 196. with British companies making large acquisitions. Since . European as well as Japanese and American companies have. This preference has resulted partly from the ‘failure’ of many acquisitions. when they find that a particular business fits ill with their changed strategic vision. these problems may be of a higher order of magnitude in cross-border mergers because of the acquirer’s lack of familiarity with the acquired firm’s environment and organizational culture. The commonality of language may have induced in these acquirers a false sense of familiarity. We will examine to what extent this aim has been achieved and look forward to the future evolution of the EU regime. The ease with which divestments could be carried out has endowed firms with a great deal of flexibility and capacity to adapt their business and corporate strategies to the changing environment. it is still evolving. The number of. However. as regards identifying appropriate targets with high value creation potential. le European Commission. They have also increasingly been the targets of acquirers overseas. with a corpus of case law on individual mergers being built up. There are many instances of UK companies making a hash of their US acquisitions. many companies have sought to advance their strategic goals through strategic alliances in preference to straight acquisitions. and with greater speed. the 1980s witnessed a high level of corporate divestments. Together. The corresponding figures for acquisitions in the USA were 107 and £13. acquisitions and divestments constitute corporate restructuring. Acquirers need to sensitize themselves to the cultural and other nuances of targets in foreign countries before they venture abroad. The existence of an inter corporate market in corporate assets does not require that the ownership of the legal entity owning those assets has to change before the portfolio of its businesses can be reshuffled.

with these ventures and alliances. as noted in Chapter I. and Defenses Strategic Alliances Divestiture Ownership Restructuring Leveraged Buyouts The objective of this lesson is to give you insight in to :  cquisition motives A Acquisition and corporate strategies Acquisition motives may be defined in terms of the acquirer’s corporate and business strategy objectives. This paradoxical co-operative-competitive game is not easy to manage. Why Engage in Corporate Restructuring?? Sales enhancement and operating economies*  Improved management  Information effect  Wealth transfers  Tax reasons  Leverage gains  Hubris hypothesis  Management’s personal agenda  Sources of Value Strategic Acquisitions Involving Common Stock Acquisitions and Capital Budgeting Closing the Deal Takeovers. these strategies themselves are . while strategic objectives are the proximate motives for acquisitions. Other acquisitions may be motivated by the desire for increased market power. Often joint ventures fall apart for organizational reasons because of cultural conflicts or divergent managerial philosophies between the venture partners. We shall set out the relative attractions and shortcomings of strategic alliances. the problem of post-acquisition integration does not arise. Further. consolidation of excess production capacity and so on. less well-known target in order to achieve marketing and distribution synergies. control of a supplier. Tender Offers. however.they are created to achieve specific and fairly narrowly defined strategic objectives. There are. However. For example. pitfalls in strategic alliances which are cooperative arrangements among actual or potential rivals. a large food company with well-established brand names or distribution network may acquire a small. there is a greater clarity of purpose than in ‘fuzzy’ acquisitions.

Where managers seek to enhance shareholder wealth. . i. Managers may be taking these decisions to further the interest of the owners of the firm. managerial incompetence untainted by malice towards the shareholders is at least a plausible villain in the acquisition drama. Where managerial interests differ from those of the shareholders.Cost of acquisition share value Cost of acquisition = Acquisition transaction cost + Acquisition premium Acquisition transaction cost is the cost incurred when an acquisition is made. in the form of various advisers’ fees regulator’s fees. the shareholders. This is the neoclassical view of the firm. should yield zero or positive net present value. the shareholder wealth maximization criterion is satisfied when the added value created by the acquisition exceeds the cost of acquisition: Added value from acquisition = Value of acquirer and the acquired’ after acquisition . It must be remembered that the conflict between the two perspectives may permeate all decisions made by managers and not just acquisitions. the discount rate is the risk adjusted rate with a marketdetermined risk premium for risk (see Chapter 9 on determination of the discount rate). Strategies are formulated and acquisition decisions are made by the managers of the acquiring firm. With acquisitions. Even if managers do act in the shareholder interest. Value creation may occur in the target alone. but also ensure that the cost of the acquisition does not exceed that value. acquisitions may fail for a variety of other reasons. It is also called the control premium. when discounted at the appropriate discount rate. This gives managers much scope to pursue their own self-interest at the expense of the shareholders. pre-bid price. This means that the incremental cash flows from the decision. we describe the alternative shareholder and managerial perspectives. managers wield considerable power and discretion. they must not only add value. increase to £30 million. its value will. post acquisition. bid dynamics and problems of post-acquisition integration. as a result of the operational and strategic improvements made to Sittin’3 Duck. However. Shareholder Wealth Maximization Perspective In this neoclassical perspective. Their equity market values ahead of the bid are respectively £100 million and £20 million. The causes of failure of acquisitions cannot be unambiguously attributed to managerial selfishness. Predator expects that. In the literature there is a wide perception that acquisition ‘don’t pay’ for the shareholders of the acquirer (see on assessment of acquisition performance). all firm decisions including acquisitions are made with the objective of maximizing the wealth of the shareholders of the firm. Acquisitions driven by managerial self-interest may fail and cause wealth losses for shareholders. In large. Predator plc makes a cash bid for Sitting Duck plc. The acquisition premium is the excess of the offer price paid to the target over the targets. Under uncertainty. and draw out the implications for the success of the acquisition when either the shareholder or managerial considerations dominate the other. stock exchange fees. such as weak acquisition strategy.e. cost of underwriting and so on. in which the shareholder interest is paramount and managerial interests are subordinated. It may be argued that these are themselves an affirmation of managerial misconduct arising from pursuit of managerial self-interest. publicly owned modern corporations. or in both the acquirer and the acquired firm. The calculation of added value for the acquirer’s shareholders is illustrated in the following example. In this chapter.formulated to serve the interests of the stakeholders in the acquiring firm. acquisitions may be undertaken to serve the former. and are often subject to only feeble oversight by shareholders.Their aggregate value before Increase in acquirer = Added value . A possible reason for this is that they are motivated by managerial self-interest.

5m Increase in Predator’s share value = flam .5m = £4.5 million at the time of the takeover.5m Assuming that the stock market correctly anticipates the expected benefits from the acquisition and the transaction costs. Added value from acquisition = £ (100+ 30)m . . Managerial Perspective The modern corporate economy is characterized by large corporations with widespread diffusion of ownership which is divorced from management. the market value of Predator will increase by £4. which also entails transaction costs.It pays a premium of £5 million to Sitting Duck shareholders to win control in a hostile bid. of £0.5m = £5.5.. in the form of advisers’ fees etc.5 million.(100 + 20)m = £10m Cost of acquisition = £5m + 0.

but to some extent reinforcing. Managers may derive intangible benefits such as power and social status when they run large firms. 1986). 1.4. ‘Cost to the shareholders of such behaviour is called the agency Cost and represents loss of value to the shareholders. . If managers are unaware of such errors. Where the acquisition does have value creation potential. it may be overestimated. as an increase in firm size. managers as agents may not always act in the best interest of the principal. perquisites. Acquisitions lacking in value creation rationale may be undertaken to satisfy managerial objectives ‘such. In this agency model. Managers may pursue growth. they may unwittingly pay an excessive bid premium or enter into a hostile bid with attendant high transaction costs. since such estimation is often based on incomplete information about the target it the time of the bid. 2. 1. To diversify risk and minimize the costs of financial distress and bankruptcy (job security motive). Ex ante. Managerial Motives in Acquisitions Managers may undertake acquisitions for the following reasons: 1. To pursue growth in the size of their firm. Managerial compensation may be related to firm size because of the greater complexity of larger firms. Managers may overpay for the acquisition or incur high transaction costs by launching hostile bids. such self-interest pursuit may result in bad acquisitions and loss of shareholder value. if their compensation is a function of sales growth. In the acquisition context. even when there is no corresponding increase in shareholders’ wealth (Jensen. ‘since their remuneration. Executive compensation may increase as a result of an increase in firm size (e. status and power are a function of firm size (the empire-building syndrome). The. managerial intentions may be obscured by alternative explanations for acquisition failure. security motive).g. 3. To deploy their currently underused managerial talents and skills (the self-fulfillment motive). Managers may act in disregard of their principal’s interest in order to promote their own selfinterest. the relation between shareholders and managers may be viewed as one between a principal and his or her agent. Ex post. ACQUISITION MOTIVES With the separation of ownership from control. managers can be very persuasive about the merits of an acquisition and the potential for shareholder wealth increase. The above motives are not mutually exclusive. Disentangling managers’ true intentions from their decisions poses problems both before and after a takeover. in terms of assets or sales). To avoid being taken over (job. Managers may make genuine errors in estimating the value creation potential. They are now discussed in turn. Thus evidence of acquisition failure may point to either an agency problem or managerial failure unrelated to agency conflict.

may be the beneficiaries of risk reduction. They depend.avoiding being taken over – is perhaps the least plausible or respectable and. Thus. on their firms for their Income in the form pf salaries and bonuses. quite falsely. the firm may lose young managers and thereby accelerate its own decline. rather than shareholders. when the. where they receive compensation in the form of ‘stocks. Group and Distillers were taken over in bids worth nearly £2 billion. They may have developed firm-specific human capital which outside their present firm may not be valued as highly. Second. failure. they increase their investment in their own firms. Thus. the Hoylake consortium bid £13 billion for BAT Industries in 1989. the food and tobacco conglomerate was taken over in a hostile leveraged buyout for $25 billion. 1ft the UK. For example. or to move into growth industries and away from the declining ones in which the firm currently operates. the reduction. In the mid. Finally. investment and financing decisions. This over investment arises’ from three sources. large firms were not so protected. the more stable cash flows of the combined firm resulting from a diversifying merger may strengthen the security available to the debt holders of the firm. that increased firm size confers such immunity. way have. nevertheless. Acquisitions to increase firm size. However. Thus debt holders. diversification into that firm is only possible for investors via corporate diversification. Target managers often go to extraordinary lengths to defeat hostile takeover bids. Those were the days of megabids when hostile bidders were not deterred by target size. managers may undertake acquisitions. Consolidated Goldfields was taken over in a hostile bid by Hanson in 1989 for £3. the survival of the firm may depend on an orderly exit from that industry and entry into one with greater growth opportunities: The present industry operations may not exhaust the managerial energies and talents available to the firm. This suggests that total risk. Firm failure results in receivership or winding up of the firm. Risk diversification may be achieved when the acquiring and the acquired firms’ cash flows are not highly positively correlated. 3. Financial distress and firm. marketmovement-related risk appropriate to well diversified shareholders.” Managers are generally over invested in their own firms. In the USA. assuming. shareholders may construct their portfolio to include the shares of both companies and achieve the required diversification. To achieve immunity from the threat of a takeover. in the overall variability of the firm’s cash flows reduces the probability of financial distress and bankruptcy. At least in the 1980s. is often clothed in euphemistic and lofty managerial rhetoric about the value of the company’s continued independence. perhaps at a lower cost than the firm. and stock options. unlike shareholders” managers hold highly un-diversified portfolios which are overwhelmingly invested in their own firms. acquired firm’s shares are not traded. be of value under certain circumstances. In a well functioning capital’ market. for that reason. which includes firm specific risk such as the risk of failure. The last of the motives . at times. thereby reducing the overall variability of the combined entity’s cash’ flows. Where a firm is in a mature or declining industry. RJR Nabisco. Such diversification is not necessarily value creating for the shareholders. a greater impact on managers than on shareholders. Without moving into a growth industry.1980s. are consistent with the defensive motive of avoiding becoming a takeover target. Financial distress is the condition where the firm finds it difficult to meet its obligations and is forced to make sub optimal operating. shareholders’ do-it-yourself diversification may be a superior alternative to firm diversification. 4. Risk diversification may. Free Cash Flow and the Agency Problem . several UK companies like Imperial. Shareholders may also benefit from a reduction in the risk of financial distress and bankruptcy through corporate diversification.2. is more important to managers than systematic risk: that is.1 billion.

and indirect. cash flow). oil and other mature industries diversified into unrelated businesses with poor subsequent financial performance and value decline for their shareholders. Making managers’ part owners of the firm by offering share options may. to buy back equity. ‘free cash flow is cash flow in excess of that required to fund all projects that have positive net present values when discounted at the relevant cost of capital’ (see on calculation of free. a rigorous policing of managerial conduct and managerial compensation contracts. The effectiveness of policing by non-executive directors and determination of performance-linked managerial remuneration by remuneration committees is yet . It is not clear at what level of managerial shareholding alignment gives way to entrenchment. In the 1960s. bonuses and perquisites. power or status. Either course would reduce the size of the free cash flow. their interests are at least partly aligned to those of shareholders. In the 1980s. Similarly. direct pecuniary remuneration in the form of salaries. few growth prospects. According to Jensen (1986). and the market for ‘corporate control in which management teams compete for the right to manage corporate assets. Mechanisms For. Such “free cash flow is generally available to profitable firms in mature ‘industries with.returns to their shareholding. Internal Agency Conflict Control Mechanisms Since the source of agency conflict is the divorce of ownership from control. The recent Cadbury Report (1992) has sought to improve corporate governance in UK companies’ by proposing” the inclusion of a sufficient number of non”-executive directors’ and the establishment of remuneration committees. however. and have more debt and less equity in their firms’ capital structure. 1986). such firms themselves became targets of hostile takeovers. Policing of management requires an institutional arrangement such as the presence of outside. many firms in tobacco. External mechanisms rely on the discipline imposed on managers by the product market in which the firm sells its output. Managers receive their reward in many forms . Alternatively. which might turn out to be negative net present value investments. Executive share option schemes operated by many companies are intended to accomplish such an alignment. performance-linked remuneration to managers requires a mechanism for clearly metering managerial performance and establishing a formula for rewarding that performance. not influence their behaviour towards alignment if they derive more toward from the other two sources. food. the managerial labour market where managers with a reputation may command premium wages. Internal controls include shareholder-manager alignment devices. psychological rewards of control. and after it has financed the currently available investment opportunities. Managers of those firms have the option to increase the dividend payout or recapitalize their firms. Controlling the Agency Conflict A number of control mechanisms exist to minimize the incidence and cost of the agency conflict to shareholders. This suggests that free cash flow is not in itself a manifestation of the agency conflict between shareholders and managers. How can managers be induced to make use of the free cash flow in an optimal way from the shareholders’ perspective? ‘For shareholders the problem is how to motivate managers to disgorge the excess cash rather than investing it at below the cost of capital or wasting it on organizational inefficiencies’ (Jensen. such a conflict may _mitigated by aligning the interests of the managers and shareholders.Free cash flow is normally measured as the operating cash flow after the firm has met its tax commitments. that is. when put to ‘improper use by managers. but that. When managers own shares in their own companies. share ownership by managers may potentially facilitate their entrenchment and protect them from the discipline of other internal controls as we as external controls. nonexecutive directors. Further. it can accentuate that conflict. managers could use the free cash flow to finance diversifying acquisitions. They are both internal and external to the firm.

First. managerial labor and corporate control markets have been proposed as agency conflict control devices. Hostile bids which are resisted by the incumbent target managements are a necessary part of the disciplinary role of the market for corporate control indeed. with managers being subjected to much greater scrutiny and questioning by active shareholder groups. their large block holdings enable the institutions to monitor managements effectively. that sales growth is positively related to directors’ pay increases. even when shareholder wealth is not enhanced as a result. Institutions have pleaded lack of expert’: knowledge to assume an interventionist role. This. This suggests that executive compensation can increase with an increase in firm size. with their own henchmen. Second. One of the implications of managerial self-interest pursuit. they are its defining characteristic. for a UK sample. could explain some of the vast amount of inefficient expenditures of corporate resources on diversification programmes that have created large conglomerate organizations in the past. conceptually. since executive directors can ‘pack’ the board and the remuneration committee. But these controls may be weak. In the same survey. In this market. although such pay increases. 1994). Such relationships may create a conflict of interest and dilute monitoring by institutions in their role as shareholders. more than half of that non executive directors felt that they had not been given the full range of financial and non-financial (e. While. there has been a trend in the USA towards shareholder activism. The profitability effect in fact dominates in the short term. these markets may discipline failing managers whatever the cause of such failure. the winning management team may make the acquisition from motives inconsistent with shareholder wealth increase.3: that is. They find. therefore. Baker et al. corporate assets are traded between competing management teams.’ they ‘have been rather reluctant to play that role. the Cadbury Report also envisages a more active monitoring role for institutional investors. Acquisitions and Managerial Compensation Ravens craft and Scherer (1987). are also due to higher profitability. but nevertheless can playa correctional role when managerial failure has occurred. that managers will emphasize size or growth. Often institutional investors have taken on such activist roles in response to criticism of their earlier inertia in the face of perceived ‘managerial excesses’. The management teams which can create more value out of those corporate assets will then outbid other teams less capable of value creation. (1988) report. such as underwriting. It is the fear that these markets will punish managerial failure by allowing displacement of the failed managers that is supposed to act as a deterrent against the pursuit of managerial self interest. a ‘period. it may be thought that these institutions can play the policing role effectively. In the 1990s. The operation of the market for corporate control. A recent survey of 235 VIS companies found that more than half of all non-executive appointments of directors were personally made by the chairperson (KPMG Peat Marwick. strategic) information. it has been argued that hostile takeovers may be an inefficient and expensive method of correcting managerial failure (Kay. There are two ‘flies in the ointment’ concerning this view.to be’ assessed. Baker et al. Of course. little or even negative wealth changes for acquiring company shareholders Moreover. Empirical Evidence on Acquisition Motives Whether managers act in shareholders’ or in their own interest has beep tested in a few studies. acquirers in many cases overpay for the targets. in practice. argue. With the increasing concentration of shareholdings in the hands of financial institutions. rests on inefficient teams being weeded out by superior management teams. They are not specifically designed for that purpose. Institutions may also receive side payments for other business relationships with firms. 1989). In the UK. Of particular relevance to acquisitions is the disciplinary role of the market for corporate control. that the average elasticity of compensation with respect to firm size is 0. from their case studies . a 10 per cent increase in firm sales raises executive compensation by 3 per cent. Empirical evidence shows that acquisitions generate. has been tested by Meeks and Whittington (1975). 1994). External Agency Conflict Control Mechanisms The product. for the USA. Another survey found that non-executive directors were not perceived as very effective by institutional shareholders (BDO Binder Hamlyn. on average.g.

expansion through takeovers increases such pay. He finds that the acquisition process leads to an increase in managerial remuneration. find that empire building through conglomerate acquisitions may have been an important motive behind the original acquisitions. Firth (1991) tests whether executive reward increases with acquisitions for a sample of 254 UK takeover offers during 1974-80. Other studies have sought to establish a more explicit link between acquisitions and managerial compensator. and the relationship between frequency of takeovers and pay is positive. The above studies may be summarized as suggesting that managers stand to gain from acquisitions in terms of their compensation. . A more recent study of managers’ compensation by Conyon and Clegg (1994) finds. and that this is predicated on the increased size of the acquirer. Even in acquisitions where shareholders lose. for a sample of 170 UK firms between 1985 and 1990. that directors’ pay is positively related to sales growth. Making acquisitions in which shareholders gain leads to significant increases in managerial rewards. Further. executives gain. Firth (1991) concludes that the evidence is ‘consistent with takeovers being motivated by managers wanting to maximize their own welfare’.of US acquisitions and sell-offs. even though such acquisitions may not always benefit their shareholders.

Cotter et al. These results suggest that board oversight of management can be effective. They study US tender offers which are generally hostile and made directly to the target shareholders. as well as non-financial rewards such as status. In those offers where target boards are numerically dominated by outside directors. managers may be replaced and so lose future compensation. Like all other strategic decisions. in particular. target management resistance to a bid is significantly more probable and the offer less likely to succeed. acquisitions should satisfy the criterion of added value. presumably because such resistance reduces the probability of offer success. However. . Managers. the added value will be reflected in wreath gains for shareholders. Acquisitions and Corporate Strategy An acquisition is a means to an end. gaining competitive advantage in existing product markets. the end being the achievement of certain strategic objectives of the acquirer. target resistance may reduce the probability of a successful bid. in deciding whether or not to oppose an” offer. more reputable outside directors and those who have a large share ownership in the target company exercised a more restraining influence on target managers’ resistance. These strategic objectless may be varied. If the takeover is successful. they may resist in order to maximize the premium paid by the bidder..TARGET MANAGEMENT BEHAVIOUR IN HOSTILE OFFERS Target management may resist takeover bids in order to secure their jobs or safeguard their empire. Where a bid is abandoned. managerial resistance reduces wealth gains to target shareholders. Cotter and Zenner (1994) present evidence on the relation between changes in managerial wealth and the tender offer process for a US sample. Moreover. however. one may infer that the resistance was driven by managerial entrenchment motives rather than shareholder welfare considerations. Where managers make decisions in their own interests. The probability of a tender offer success is increased when managers’ wealth increases. the smaller the capital gains on the managers’ shareholding in the target. Alternatively. have to strike a trade-off between these potential gains and losses. the outcome of tender offers and the wealth gains to target shareholders. the smaller the managerial wealth changes and. Such value reducing target management behaviour may. once the offer premium is allowed for._ Chapter 5. Target management attitude to bids is also influenced by the incentive structure for managers. they can enjoy capital gains on their shareholding in their firms and also receive ‘golden parachute’ payments (see on golden parachutes). if the target shareholders lose their earlier gains. this added value may be appropriated by managers to the detriment of shareholders. by constrained by a watchful board with independent. outside directors. but that it depends on the characteristics of the board. They find that initial target management resistance is greater. Where they act in shareholders’ interests. It appears that share ownership may align managers’ interest with that of other shareholders. On the other hand. (1993) find. with a US sample. market or product extension. that board composition influences the target management decision to resist. While increasing the premium. or risk reduction. including growth of the firm.

into added value. 1993: 66). A management style appropriate to managing the business units is part of the architecture of the firm. we describe an analytical framework for strategic evaluation of acquisitions.market growth rate and the firm’s relative share of that market. When demand for the products sold in a market rises rapidly. shown in this matrix classifies . The positive impact of market share on profitability has been demonstrated in a number of studies. A ‘question mark’ is a young business with plenty of growth prospects. which the firm can translate into sustainable competitive advantage and. These acquisitions are differentiated by the source of value creation in each. Various conceptual models discussed in the corporate strategy literature are drawn upon and applied to the acquisition context.For certain types of strategy such as market or product extension. reputation. These objectives include orderly redirection of the firm’s activities. ch. Kay (1993. Preference for acquisition over the alternatives should be justified by their relative benefits ‘and costs. acquisition may be one of several alternatives for achieving the same objectives. joint ventures and co-operative alliances.a firm’s portfolio of businesses on two dimensions . advertising and market knowledge. exploiting interdependence among present or prospective businesses within the corporate portfolio. ‘Acquisitions need to be placed in the context of the firm’s broader corporate and business strategy framework. are available to be exploited together with the strategic assets to enhance the competitive advantage of the component businesses. such as reputation or innovatory flair. the framework for the evaluation of targets. Apart from this portfolio management role. with a view to maximizing the contribution that the individual business makes to the corporate objectives. The four types of business have different profiles in terms of . and risk reduction. Different types of acquisition are dictated by the firm’s strategic imperatives and choices. and exclusivity through licensing. Models for identifying and assessing value creation sources are suggested. deploying surplus cash from one business to finance profitable growth in another. the experience curve effect. Analytical framework for generic strategies A simple model of this analysis is the Boston Consulting Group (BCG) matrix. 8) defines strategic assets to include: natural monopolies. A ‘cash cow’ is a mature business with low growth opportunities. Market share represents the firm’s competitive strength in that market. It also aims to exploit the strategic assets that the business has accumulated. The other alternatives include organic growth. Architecture comprises the internal relations between the firm and its employees. Business strategy is concerned with improving the competitive position of an individual business. 1994. 220). reputation and innovation. The distinctive capabilities that the firm has built at the corporate level. the external relations between the firm and its suppliers or customers. Corporate and business strategies differ in the level within the firm at which strategy is formulated and implemented. the most substantial being the PIMS (Profit Impact of Market Share) study of thousands of firms by the Strategic Planning Institute in the USA. whereas business strategy focuses on a narrow range of markets. hence the attractiveness of the market. Market growth rate is used as a proxy for the attractiveness of the market. barrier_ to entry in the form of sunk costs. with a view to achieving certain predetermined objectives at the corporate level. A ‘star’ is a product sold in a market with high growth opportunities and where the firm commands a high market share. in turn. the acquisition target profile and the post-acquisition integration (In this chapter. and networks within a group of collaborating firms (Kay. but where the firm has a low market share and faces heavy competition. The acquisition type also dictates the acquisition logic. A ‘dog’ is a business is which the market growth is low and the firm’s market share is also low. Corporate strategy has an all-firm encompassing focus and may exploit the dependencies between component businesses. firms have more profitable opportunities. corporate strategy aims to develop a number of distinctive capabilities or core competencies (Hamel and Prahalad. Corporate and Business Strategies Corporate strategy is concerned with arranging the business activities of the corporation as a whole. Boston Consulting Group business portfolio matrix. These distinctive capabilities include the firm’s architecture. and in the breadth of focus. but where the firm has a high market share.

As the market expands. That is the end of story. consumer tastes may have changed or substitutes. whether it is in the growth or decline phase.1 derives its rationale from the nature of the product and its life cycle. this is implicit in the product life cycle model. the first mover enjoys high margins on increasing sales volume. and the development of marketing and distribution channels and advertising. Thus the two models are complementary. profit margins are low and investment needs are also low. market growth slows down. investment in market development. to further expansion of market demand. It represents a product market which is declining for a variety of reasons. each Competitor has significant but fairly stable market shares. The product life cycle concept helps us to identify the market opportunities for a single product ‘and the position of the firm in that market: for example. reduction of excess capacity is often achieved through defensive mergers. profit margins are squeezed and the shake-out starts. and non-price dimensions such as product quality Thereafter. high investment business with low free cash flow. may have been invented. In the case of some products which ‘are necessities. Competition gets keener. A cash cow is a profitable. a star is a business in the growth phase. In this phase. volumes are falling. The high investment is necessary to build up the market and the firm’s market share. Thus a cash cow throws off surplus cash. Indeed. as defined in Chapter 2. The expanding market with high profits now attracts competing producers. but the profit margin is high. The Product Life Cycle It can be seen that the classification in Figure 3. The product life cycle concept is depicted and traces the evolution of a product and its associated market over time. A star is a high-profit. and for which substitutes emerge slowly. The BCG matrix expands this analysis to the firm’s portfolio of businesses. which leads to excess production capacity. This increased supply leads to a lower profit margin and. The four stages of a product’s life are: launch. and so on. The high profits are retained to make additional investments in order to maintain the high market shares held by the firm in a fast-growing market. The firm which launches a new product has the advantage and burden of a first mover. The first mover must expend resources on building up the demand for the product and on additional production capacity. product differentiation. bringing about the decline of the product.profitability. maturity and decline. which may become a source of cash inflow. We have now reached the maturity stage of the product’s’ life. research and development (R & D) or additional production capacity is ‘no longer needed. is the cash flow from a firm’s operations after it has met its investment needs. The market has settled’ down to the slower and more certain rhythms of oligopolistic competition. Firms now begin to compete on a wide front – in terms of price. investment needs and free cash flows. low investment business with high free cash flow. For other products. Market development expenditure takes the form of further product development in response to customer preferences. Profit margins are low. if at all the maturity phase can be one of relative and prolonged serenity. a dog is in the decline phase. Ansoff’s Model of Strategic Choice . and investment requirements are low. consequently. A question mark is a high-investment business with potentially high profits and a low (or negative) Tee cash flow. Free cash flow. Since the business is mature and probably oligo polis tic. each of which may be at a different stage of its own life cycle: for instance. At this stage. While the BCG matrix explicitly considers the interaction between the market environment (growth) and the firm’s competitive strength (market share). Shake-out tends to lead to a better matching of production capacity to market demand and to a smaller number of competitors. The market for the product is small. this phase requires dis-investment. growth. A dog is a low-profit (possibly loss-making) business with low free cash flow and low investment (possibly dis-investment).

BCG nor the Ansoff model captures the rich complexity of factors which determine the competitive environment of markets. with the firm increasing market share in its existing markets. and the bargaining powers of suppliers and buyers. its own competitive strengths. Thus it 12 11.3 Ansoff product-market matrix. Porter’s Five Forces Model Porter portrays the competitive structure of a firm’s environment in five dimensions. Neither the Figure 3. depending on the relation between its existing products/markets and those which it wishes to enter. or the factors which constitute a firm’s competitive strength. whereas the current rivalry.g.The BCG matrix helps to identify the strengths and weaknesses of a corporate business portfolio. some of which are listed in Competitive Strengthened by • • • • • • • • New entrant Product substitution Supplier power Buyer power Current rivalry Low level of entry barriers (e. . retained or further strengthened through additional investment. These five dimensions are: existing competition in the firm’s industry. Diversification. Product extension.3. The core competencies or distinctive capabilities of the firm have a decisive influence on its strategic choice. and the potential for value creation when these strengths are matched to the demands of the market. It depicts four possible strategic choices for a firm. The particular choice that a firm makes depends on its evaluation of the attractiveness of the market that it wishes to enter or deepen its commitment to. The Ansoff model maps out the alternative directions in which it can choose to go. the relative bargaining power of the buyers of the firm’s output. the threat of new substitutes. forces such as the threat of new entrants or the threat of substitutes are essentially of a dynamic nature and are based on expectations. and the threat of 3ubstitutes. The strength of each of the five competitive forces is determined by a number of factors. in which the firm sells new products related to its existing ones in its present markets. Indeed. Their relative strength may also change over time. Market extension. These five relative bargaining power of suppliers of inputs. These are as follows: Market penetration. These five forces are not of equal strength within the same industry or across industries at any time.. in which the firm sells new products in new markets.370 indicates the direction of a firm’s strategic movement in terms of market attractiveness and competitive strength. The Ansoff matrix is shown in Figure 3. and provides guidance as to which of those businesses should be divested. with the firm selling its existing products in new geographic markets. are more static and reflect current realities.

High (supplier) switching costs to buyers. It is this configuration which will determine the strategic choice that the firm makes. buyer propensity to substitute.• • • • • • scale economies. The Porter model can be used for both strategic situation and strategic choice analyses. . Strength/market attractiveness configuration of its existing portfolio of businesses. Low relative price of substitute. • • • • • • An assessment of market attractiveness depends in turn upon an assessment of the strength of these. Strategic: situation analysis is self-examination of the corporation’s existing strategic posture. and to match these against the opportunities (0) and threats (T) posed by the five forces. capital requirements). Low industry growth. A firm can employ it to examine the strategic. sustain or strengthen a competitive advantage in a market. low product differentiation of example. (product) switching costs to buyers. low cost of Switching to other sellers. factors. scenario-building approach to the firm’s future strategic posture. low. whereas strategic choice. high fixed Operating costs. supplier concentration Buyer concentration. Such a SWOT analysis may reveal a in as much between the firm’s present capabilities and those that are needed to create. non-availability of substitutes. The Porter model is also useful in examining the future configuration of strategic strength and attractiveness of markets which the firm wishes to enter. Strategic Situation and Strategic Choice Analyses Strategy formulation is a loosely sequential process which consists of two broad steps: strategic situation and strategic choice analyses. Such an examination enables the firm to assess its competitive strengths (S) and weaknesses (W). al1alysis is a forward looking.

feasible for other reasons However. Its ambitions had been hampered by intense competition for sites and struggles with local authorities over planning permission. acquisitions maybe more expensive due to . strategic alliance and joint venture. A start-up venture is often more risky than the acquisition of an ongoing petition. and confers a strategic advantage when ‘time to market’ is important. acquisition or strategic alliance. The market entry mode is then a choice among several alternatives organic growth. However. the UK food retailer. The ability to appropriate is maximized with entry via organic growth. a firm selects the particular markets to serve.CORPORATE STRATEGIES FOR MARKET ENTRY From its strategic situation and strategic choice analyses. and becomes more difficult with acquisition. Access to these resources and capabilities may be possible only through acquisition or strategic alliance. Sainsbury joined the fray with a counter-bid of £21Om. the Scottish food retailer. Case Study 1 Sainsbury Prefers Greenfield Investment in Scotland: Acquisition When Tesco.’ or is not. Acquisition is the quickest means of entry into a new market.Chapter 6. Sainsbury had only four stores in Scotland and wished to increase its market share quickly and relatively cheaply. The choice of entry mode depends on a number of factors: If level of competition in the host market is already high and there is excess capacity/building new capacity is likely to invite retaliation from the existing players. The ability of a firm to appropriate the added value from the new market entry depends on the organizational form of that entry. made a £154m bid for Wm Low. In this case: acquisition of an existing firm will reduce the risk of retaliation. it may avoid the problems of integration with 1m acquisition The firm may not posses all the necessary resources and capabilities to compete effectively in the host market. thus preventing a Greenfield expansion.

therefore. and in purchasing of supplies. GK argued that this provided a natural geographical fit between the two companies. Acquisition as Strategic Choice The strategic choice made by: a firm dictates the type of acquisition it undertakes and the target firm’s profile. we describe the framework for a strategic evaluation of acquisitions. Acquisition may also not be possible if suitable targets are not available. While GK operated in the south and west of London. as with a conglomerate merger. With market extension. Market penetration strategy suggests acquisition of a target selling the same product: that is a horizontal merger. Thus the two companies were operating in complementary areas.5 million of extra trading profit per year. thus increasing the product range in Morland’s area. to the benefit of the shareholders of the enlarged group.. Case study 3. In a diversification strategy. GK’s strategy was to become the largest regional brewer in southern England. . The target in a product extension acquisition is selling complementary products. There is evidence. The choice of entry mode is. GK expected to sell its own brands alongside Morland’s. reviewed in that this premium is often high. based on a careful evaluation of the above alternatives. Since GK and Morlan had complementary brands of beer.2 exemplifies an acquisition including elements of horizontal expansion.chapter. The acquisition would provide economies in production. thus increasing the product range that the combined entity can sell in their present markets..the control premium that the existing owners of the target firm have to be paid. Case Study 2 Acquisition Reflecting Strategic Choice Greene King (GK) made a £104 million bid for fellow brewer Morland in 1992. distribution and marketing. Morland operated in the Thames Valley. Strategic alliances are discussed in this. GK estimated that combining with Morland would produce £2. and product and market extension. the target is in an unrelated business. as with a cross border acquisition. the target serves as a channel for distributing the firm’s existing products.

the acquirer and the acquired. In acquisitions and mergers. Process the acquirer must guard against the transplant rejection syndrome: that is. Participative Mode In this mode. and a great deal of interaction and mutual learning between the . the participative mode. An acquisition also brings together two such bundles . all wrapped up in a particular organizational form. R & 0 and surplus operating capacity. a distribution network. there is a pooling of the resources and capabilities of the two firms. such as Hanson or BTR: In this.VALUE CREATION IN DIFFERENT ACQUISITION TYPES When a firm makes an acquisition. Resources include marketing excellence. and these include the firm’s architecture. The firm’s architecture encompasses its management style and reputation as distinct from the reputation of its products. capacity for innovation and reputation.CHAPTER 7. Value is created when such a transfer improves the strategic and financial performance of the acquired. sustainable competitive advantage is created when there is a mismatch between the resources. As noted earlier. There are three broad generic modes of value creation in acquisitions: the donor-recipient mode. and the collusive mode. An example of this method of value creation is the takeover of a poorly performing firm by an acquirer with a superior and reputed management. there is a transfer of resources and/or capabilities from the acquirer to the acquired firm. Value created in acquisitions may be differentiated by the source of that value. the acquired firm being resistant to the transfer. Some of these resources are in the form of strategic assets such as market power and entry barriers such as the experience curve or size. a firm’s distinctive capabilities can be a source of sustainable competitive advantage. Donor-Recipient Mode In this mode. capabilities and opportunities available to the two firms. Such pooling ‘is a two-way exchange process. it buys ‘off the shelf’ a bundle of tangible and intangible resources and capabilities.

In this case. the infrastructure component o. be slimmed. deliver. produce’. This pooling makes more effective use of the two firms’ resources and enhances their joint capabilities. the input logistics component will be altered. A value chain represents the breakdown of the value of the total output (sales revenue) into its component profit margin and costs. Value Chain Analysis for Acquisitions In the acquisitions context. . the acquired firm’s value chain will be reduced. product differentiation as a competitive advantage is also reflected in the value chain . These costs are then broken down into various functional costs. The costs are broadly divided into those expended on primary activities and those expended on support activities.its own and that of the acquired. According to Porter. In this mode. the. A firm can create or improve its competitive advantage by reconfiguring the value chain.firms takes place. where the logic is economy of scale and the production facilities of both firms are rationalized and integrated. Where the acquirer aims to put a larger volume of the acquired company’s output through its’ own distribution network.e. If these activities are then terminated. Kay (1993: 114) defines ‘strategic assets as those characteristics of the market structure which give a firm its competitive advantage. A firm’s distinctive capabilities as described by Kay can be traced to Porter’s value chain. The reconfiguration process may involve changing one or both of the value chains. In other cases. Where economy of scale in purchase of inputs is the logic behind the acquisition. Porter (1985: 36) defines a firm as a ‘collection of activities that are performed to design. Each of these activities contributes to the cost structure of Figure 3.5-value chain for a manufacturing firm. Study of a firm’s value chain enables a manager to understand the behaviour of costs. the coming together of the two firms in an acquisition creates or strengthens those strategic assets. Analysis of the Value Chain Value chain analysis is generally carried out at the business unit level and seeks to identify the cost structure of a firm’s activities. the firms’ infrastructure costs will decline. Some of these activities. Distribution cost to the acquired firm will fall A conglomerate merger may be motivated by an expected reduction in cost of capital. and service after the sale. vertical integration and licensing. a firm secures its competitive advantage by differentiating its value chain. Costbased competitive advantage (i. Changing value chains necessarily involves changing the organizational structures of two firms. For example. Collusive Mode This involves the pooling of strategic assets. For example. the operating cost component of the value chain will fall. Scope and scale economies may be achieved from this pooling. innovation is clearly related to technology development. The ease with which the latter can be accomplished depends on the political and cultural processes which define those organizations Different value creation logic drives different types of acquisition. in scale economies in operations. If the takeover is financial control oriented and efficiency driven. Examples of the collusive mode include cartels. Primary activities are those directed towards the creation of the product. leading to the reduction in head office staff and to other central functions being transferred to the acquirer. Similarly. the acquirer is concerned with two value chains . are intended to differentiate the firm’s offerings from those of its competitors. being the lowest-cost producer) is reflected in the value chain: for example. such as R & D and design capability. in technology development. The way the value chain of either or both of the merging firms is reconfigured depends upon this logic. and also to identify the possible sources of differentiation.for instance. the support activities component of the acquired firm’s value chain will. some of the activities of the acquired firm may be considered redundant. such as design and customer support. the firm. and support its product’. The enhancement of strategic assets is the source of sustainable competitive advantage and added value. Any anticipated synergy from the merger can be realized only when the two value chains are reconfigured so as to create or improve he competitive advantages for the combined firm. market. its sale and transfer to the buyer.

In a reverse takeover. Ordinarily. It must be noted takeover of management is quite distinct from takeover of possession for the purpose of sale of establishment. a larger company takes over a smaller company. In fact every company is vulnerable to a takeover threat.Chapter 8. materials and machines. achieve better productivity and profitability by making optimum use of the available resources in the form of men. it involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. The takeover strategy has been conceived to improve corporate value. It takes place when an individual or a group of individuals or a company acquires control over the assets of a company either by acquiring majority of its shares or by obtaining control of the management of the business and affairs of the company.TAKEOVER Meaning and Concept of Takeover Takeover is an acquisition of shares carrying voting rights in a company with a view to gaining control over the management of the company. In the former case the underlying view is to rehabilitate the establishment by providing better management which is not so in the latter case. 1997. a smaller company acquires control over a larger company. usually by purchasing all or a majority of its shares. Takeover is a corporate device whereby one company acquires control over another company. where the shares of a company are widely held by the general public. Takeovers are taking place all over the world. Where the shares of the company are closely held by a small number of persons. Emergence of Concept of Takeover . However. a takeover may be effected by agreement with the holders of those shares. Those companies whose shares are under quoted on the stock market are under a constant threat of takeover.

To achieve economy of numbers by mass production at economical costs. expanding consumer base. They had to wait for companies to go sick. demergers. takeovers. To improve productivity and profitability by joint efforts of technical and other personnel on the strength of improved efficiency in administration. as one of the entry strategies to reduce some of the risks inherent in stepping out of the acquirer’s historical core competence. and be taken over under a rehabilitation scheme prepared by a nominated operating agency and sanctioned by BIFR. x. Objects of Takeover i. To achieve product development through acquiring firms with compatible products and technological/manufacturing competence. production. The objects of a takeover may inter alia bei. The takeover code is not meant to ensure proper management of the business of companies or to provide remedies in the event of mismanagement. vii. increasing market potential. in the event of substantial acquisition of shares and takeovers. reverse takeovers and other strategic alliances. mergers including reverse mergers. financial and marketing expertise. In India. To keep hostile takeover at bay. all the stages or processes in the manufacture of the end product. administrative. iii. dealers and end users. finance and marketing of goods and services as a consequence of unified control. . To secure substantial facilities as available to a large company compared to smaller companies for raising additional capital.Earlier in India well performing companies were not allowed to utilize their surplus funds and managerial competence to takeover suitable and promising companies and “build on them” with their own funds and technical. v. ii. buying raw materials at economical rates and for having own combined and improved research and development activities for continuous development of the products so as to ensure a permanent market share in the industry. which can be sold to the acquirer’s existing marketing areas. which had earlier been available in two companies at different locations. be referred to BIFR. iv. transportation costs and other expenses and also by affecting saving of time and energy unnecessarily spent on excise formalities at different places and stages.To effect savings in overheads and other working expenses on the strength of combined resources. unloading. To create shareholder value and wealth by optimum utilization of the resources of both companies. thereby saving loading. To eliminate competition. Its main objective is to ensure equality of treatment and opportunity to all shareholders and offer protection to them. which laid down a procedure to be followed by an acquirer for acquiring majority shares or controlling interest in another company. management. the process of economic liberalization and globalization ushered in the early 1990’s created a highly competitive business environment. ix. viii. The restructuring process led to an unprecedented rise in strategies like amalgamations. which motivated many companies to restructure their corporate strategies. vi. The concept of takeover picked up and in the meantime the Securities and Exchange Board of India (SEBI) also notified the Substantial Acquisition of Shares and Takeover Regulations. To secure advantage of vertical combination by having under one command and under one roof. To diversify through acquiring companies with new product lines as well as new market areas.

in which the activities of acquirer are absent or do not have a strong presence. To increase market share. it is also called negotiated takeover. Friendly takeover is with the consent of taken over company. CHAPTER 9. Hostile Takeover . To achieve market development by acquiring one or more companies in new geographical territories or segments. ii. This kind of takeover is done through negotiations between two groups. Friendly Takeover: a.KINDS OF TAKEOVER Takeovers may be broadly classified into three kinds: i. there is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company. xii.xi.such as new user groups or price categories. In friendly takeover. Therefore.

b. For acquiring shares or voting rights along with persons acting in concert to exercise more than 75% of voting rights in a company. The lead financial institutions. 11 and 12 in the following cases: a. For acquisition of 15% or more of the shares or voting rights. partial or competitive bids. Mandatory Bid SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 as amended by Second Amendment Regulations. evaluates the bids received in respect of the purchase price track record of the acquirer and his financial position. It may be against the wishes of the management of the target company. Takeover of a financially sick company by a profit earning company to bail out the former is known as bail out takeover. contain provisions for making public announcement i. Bail Out Takeover: a. Takeover Bids “Takeover bid” is an offer to the shareholders of a company. such acts of acquirer are known as ‘hostile takeover’. which is referred to as a “hostile Takeover bid”. A takeover bid is a technique. For acquiring control over a company. Type of Takeover Bids A takeover bid may be made by consent of the majority or all the shareholders of the target company. who have lent money to the sick company. Such takeover normally takes place in pursuance to the scheme of rehabilitation approved by the financial institution or the scheduled bank. It is usually expressed to be conditional upon a specified percentage of shares being the subject-matter of acceptance by or before a stipulated date. to buy their shares in the company at the offered price within the stipulated period of time. Bids may be mandatory. iii.a. voting control of the target company. d. whose shares are not closely held. Partial Bid . Such takeovers are hostile on the management and are thus called hostile takeover. It is addressed to the shareholders with a view to acquiring sufficient number of shares to give the offer or company. This kind of takeover is done with the approval of the Financial Institutions and banks. which is referred to as a “friendly takeover bid”. c. mandatory bid vide Regulations 10. : When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management. which is adopted by a company for taking over control of the management and affairs of another company by acquiring its controlling shares. For acquiring additional shares or voting rights to the extent of 5% of the voting rights in any financial year ending on 31st March if such person already hold not less than 15% but not more than 75% of the shares or voting rights in a company.e.

Consideration in the form of Shares: When consideration is offered in the form of shares by the offered in own company to shareholders of the target company various courses of action are available: a. 2. Consideration for Takeover Selection of the method for takeover should be made on the basis of information received about the target company and the means available with the acquirer. share-plus-cash or share-plus-loan stock. No person shall make a competitive bid for acquisition of shares of a financially weak company where once lead financial institution has evaluated the bid and accepted the bid of the acquirer who has made the public announcement in pursuance of Regulation 35 of SEBI Takeover Regulations. carrying effective voting rights and thereby enabling its nominees on the Board to control the affairs of the company.Partial bid covers a bid made for acquiring part of the shares of a class of capital where the offerer intends to obtain effective control of the offerer through voting power. 1997. Regulation 12 of SEBI (Substantial Acquisition of Shares) Regulations. it is necessary to make public announcement in accordance with the Regulations. The offered company can have the new shares in sufficient number allotted to it or its directors to gain controlling voting power in the offered company and also purchase for cash. Apart from this. 1. 1997 qualifies partial bid in the form of acquiring control over the target company irrespective of whether or not there has been any acquisition of shares or voting rights in a company. Such bid shall be made through public announcement in pursuance of Regulation 25 of the SEBI Takeover Regulations 1997. For such acquisition. Consideration in the form of cash: Takeover by an offered company of an offered company may be affected by a cash consideration. In other words the offerer bids for the whole of issued shares of one class of capital in a company other than equity share capital carrying voting rights. Any competitive offer by an acquirer shall be for such number of shares which when taken together with shares held by him along with persons acting in concert with him shall be at least equal to the holding of the first bidder including the number of shares for which the present offer by the first bidder has been made. Competitive Bid Competitive bid can be made by any person within 21 days of public announcement of the offer made by the acquirer. . convertible or non-convertible. partial bids come to the fore. Share-for-share takeover bid in which the offered company in exchange for shares of offered provides fully paid up shares on a stated basis. shares or loan stock with a cash option could be a mode of consideration. Such a bid is made for equity shares carrying voting rights. either for all or in part of the equity capital through a bid directly from the equity holders or through the stock market. block of shares from the persons in Control of the offered company.

Acquisition through a new company: A new company may be formed by acquiring snares in two target companies and the shares of the new company may be issued to the shareholders of both the target companies. Reverse bid wherein the offered company makes share for-share bid for the whole of the equity capital of the offered company where the offered company has a large capital base. this mode offers sufficient tax advantages. For instance. Thus. having considered the relative quoted market prices of shares of offered and offerer. through structural and operational advantages secured by the merger. 3. A typical merger. American Automaker. which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. in consideration for acquisition of share capita! Or undertakings in whole or in part. However. the decision about the proper mix of alternatives should be taken through expert advice. c. if already holds more than 50% of issued capital in the offering company and plans to acquire the balance equity of the offering will have to resort to takeover tactics subject to the restrictions placed by the Law and also SEBI guidelines. their dividend yield. For example. A merger involves the mutual decision of two companies to combine and become one entity. a growing concern and capable of acting as a better holding company by pursuing its policies etc. The motivation to pursue a merger or acquisition can be considerable. The combined business. it can be seen as a decision made by two "equals". can cut costs and increase profits. Also. merged with German Automaker. security cover. the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. acquisition by private deal of a block of shares from the existing Board of Directors or larger controlling interest shareholders of the offered company or acquisition of all or part of the assets of the offered company for shares of offered company or reverse acquisition with offering company etc. in other words. greater sales revenue and market share in its market. This alternative is more suitable when the offered company is listed. In a merger of two corporations. in fact. Combinations of various modes may be resorted to. broadened diversification and increased tax efficiency. voting strength. etc. involves two relatively equal companies. gearing level. a company that combines itself with another can experience boosted economies if scale. back in 1998. the underlying business rationale and financing methodology for mergers and takeovers are substantially different. mergers and takeovers (or acquisitions) are very similar corporate actions they combine two previously separate firms into a single legal entity. the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term. boosting shareholder values for both groups of shareholders. Acquisition of Minority held shares of a subsidiary: The offering. What is the difference between a merger and a takeover? In a general sense. Significant operational advantages can be obtained when two firms are combined and. Chrysler Corp. . 4.b. for discharging the consideration. net assets value.

Another type of acquisition is reverse merger a deal that enables a private company to get publicly listed in a short time period. with many dimensions influencing its outcome. also known as a takeover or a buyout. as Pixar's shareholders all approved the decision to be acquired. Acquisition usually refers to a purchase of a smaller firm by a larger one. in an acquisition. Either way. The acquisition process is very complex. Types of acquisition . Achieving acquisition success has proven to be very difficult. a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. Unsourced material may be challenged and removed. which essentially amounts to buying the company in the face of resistance from the smaller company's management. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America. Sometimes. the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. while various studies have showed that 50% of acquisitions were unsuccessful. A larger company can initiate a hostile takeover of a smaller firm.Daimler Benz to form DaimlerChrysler. In this case. Chapter 10. on the other hand. A takeover. usually one with no business and limited assets. however. This is known as a reverse takeover.Mergers and acquisitions Acquisition Main article: Takeover This section does not cite any references or sources. An acquisition may be friendly or hostile. Target companies can employ a number of tactics to defend themselves against an unwanted hostile takeovers. in the latter case. this takeover was friendly. In the former case. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. or acquisition. but it does not necessarily have to be a mutual decision. the purchasing company essentially finances the purchase of the target company. (June 2008) An acquisition. using inline citations). is the buying of one company (the ‘target’) by another. This combination of "unequals" can produce the same benefits as a merger. is characterized by the purchase of a smaller company by a much larger one. the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over. Please help improve this article by adding citations to reliable sources (ideally. buying it outright for its shareholders. the companies cooperate in negotiations. Unlike in a merger. This model provides a good overview of all dimensions of the acquisition process.

This section does not cite any references or sources. Please help improve this article by adding citations to reliable sources (ideally, using inline citations). Unsourced material may be challenged and removed. (June 2008)

The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment. The buyer buys the assets of the target company. The cash the target receives from the selloff is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company separately listed on a stock exchange.

Merger
In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons.

Classifications of Mergers
Horizontal Merger - Two companies that are in direct competition and share the same product lines
and markets.

Vertical Merger - A customer and company or a supplier and company. Think of a cone supplier
merging with an ice cream maker.

Market-Extension Merger - Two companies that sell the same products in different markets. Product-Extension Merger - Two companies selling different but related products in the same
market. Conglomeration - Two companies that have no common business areas.

Congeneric merger/concentric 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.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

Purchase Mergers
As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers
With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. The contract vehicle for achieving a merger is a "merger sub". The occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market and what, if any, action could prevent it. Regulatory bodies such as the European Commission, the United States Department of Justice and the U.S. Federal Trade Commission may investigate anti-trust cases for monopolies dangers, and have the power to block mergers.

Accretive Mergers
Are 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.

Dilutive Mergers
Are the opposite of above, whereby a company's EPS decreases The company will be one with a low P/E acquiring one with a high P/E. The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.

Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. This is challengeable. An acquisition can be either friendly or hostile. An example of a resent friendly takeover was when Microsoft bought Fast Search and Transfer (OSE Stock Exchange, Ticker FAST). CEO of the acquired company (FAST) revealed that they had been working with Microsoft for more than 6 months to get the deal which was announced in January, 2008. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. It is quite normal though for M&A deal communications to take place in a so called 'confidentiality bubble' whereby information flows are restricted due to confidentiality agreements (Harwood, 2005). The distinction between "merger" and "acquisition" is described this way t F. Ducoulombier, Candesic Analysis which slightly differs from the above: Corporate Restructuring is all activities involving expansion or contraction of a firm's operations or changes in its assets or financial structure. Merger: A transaction in which at least one firm ceases to exist and the assets of that firm are transferred to a surviving firm so that only one separate legal entity remains. Acquisition: A transaction in which both firms in the transaction survive but the acquirer increases its percentage ownership in the target. Consolidation: The combination of two or more firms to form a completely new corporation

CHAPTER 11.BUSINESS VALUATION
The five most common ways to valuate a business are
• • • • •

asset valuation, historical earnings valuation, future maintainable earnings valuation, relative valuation (comparable company & comparable transactions), discounted cash flow (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. These values are determined for the most part by looking at a company's balance sheet and/or income statement and withdrawing the appropriate information. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit.

the acquirer's stock may be offered as consideration. These companies are sometimes referred to as Transition Companies. Financing M&A Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Hybrid can work as ad e-denit. this is not always the case as there are many complicated industries which require more attention to detail. more detailed ways of expressing the value of a business. Another advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution for the acquiring company. Various methods of financing an M&A deal exist: Cash Payment by cash. There are other. and the debt will often be moved down onto the balance sheet of the acquired company." To perform these services in the US. Acquisitions financed through debt are known as leveraged buyouts if they take the target private. But a caveat in using cash is that it places constraints on the cash flow of the company. and subject to SEC (FINRA) regulation. Hybrids An acquisition can involve a combination of cash and debt or of cash and stock of the purchasing entity. These reports generally get more detailed and expensive as the size of a company increases however. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone.Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. . an advisor must be a licensed broker dealer. recent years have seen a rise in the prominence of specialist M&A advisers. More information on M&A advisory firms is provided at corporate advisory. A cash deal would make more sense during a downward trend in the interest rates. or raised by an issue of bonds. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. assisting businesses often referred to as "companies in transition. Financing Financing capital may be borrowed from a bank. Alternatively. Factoring Factoring can provide the extra to make a merger or sale work. who only provide M&A advice (and not financing). Specialist M&A Advisory Firms Although at present the majority of M&A advice is provided by full-service investment banks. regardless of size.

MOTIVES BEHIND M&A The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: • Synergy: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations. thus increasing profit margins. Cross-selling: For example. a bank buying a stock broker could then sell its banking products to the stock broker's customers. Or. Another example is purchasing economies due to increased order size and associated bulk-buying discounts. Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. • • • . Economy of scale: For example.CHAPTER 12. a manufacturer can acquire and sell complementary products. managerial economies such as the increased opportunity of managerial specialization. lowering the costs of the company relative to the same revenue stream. while the broker can sign up the bank's customers for brokerage accounts.

instead of the profit per share. although some empirical studies show that compensation is linked to profitability rather than mere profits of the company. additional motives for merger and acquisiiton that may not add shareholder value include: • Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value. creating two deadweight losses.• Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. There are several reasons for this to occur. Vertical integration: Vertical integration occurs when an upstream and downstream firm merges (or one acquires the other). By merging the vertically integrated firm can collect one deadweight loss by setting the upstream firm's output to the competitive level. However. Resource transfer: resources are unevenly distributed across firms (Barney. which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company. . [4] Therefore. Manager's hubris: manager's overconfidence about expected synergies from M&A which results in overpayment for the target company. each firm reduces output from the competitive level to the monopoly level. • • • Vertical integration may also be driven by reduction of transaction costs (particularly credit related) and risk mitigation. A common example is of such an externality is double marginalization. certain executive management teams had their payout based on the total amount of profit of the company. 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. giving conservative investors more confidence in investing in the company. Manager's compensation: In the past. this does not always deliver value to shareholders (see below). which over the long term smoothens the stock price of a company. rules are in place to limit the ability of profitable companies to "shop" for loss making companies. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition – more than double the turnover experienced in non-merged firms. However. One reason is to internalise an externality problem. the shareholders). Geographical or other diversification: This is designed to smooth the earnings results of a company. A merger that creates a vertically integrated firm can be profitable. Empire-building: Managers have larger companies to manage and hence more power. since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger. This increases profits and consumer surplus. on average and across the most commonly studied variables. limiting the tax motive of an acquiring company. acquiring firms' financial performance does not positively change as a function of their acquisition activity. • • • Effects on Management A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies’ top management teams for at least a decade following a deal. Double marginalization occurs when both the upstream and downstream firms have monopoly power. In the United States and many other countries.

suppliers. Potential acquirers in an industry simply cannot effectively "monitor" the economy at large for acquisition opportunities even though some may fit well within their company's operations or plans. Many phone calls fail to contact with the intended party. Generally speaking. brokers who deal with small to mid-sized companies often deal with much more strenuous conditions than other business brokers. Mid-sized business brokers have an average life-span of only 12-18 months and usually never grow beyond 1 or 2 employees. Please help improve this article by adding citations to reliable sources (ideally. Stock purchase or merger transactions involve securities and require that these "middlemen" be licensed broker dealers under FINRA (SEC) in order to be compensated as a % of the deal. In some states. Many. Due to these problems and other problems like these. but not all. an unlicensed middleman may be compensated on an asset purchase without being licensed. . These marketing problems typify any private negotiated markets. Busy executives tend to be impatient when dealing with sales calls concerning opportunities in which they have no interest. This need for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business. Furthermore. the current process for mergers and acquisitions has the effect of causing private companies to initially sell their shares at a significant discount relative to what the same company might sell for were it already publicly traded. it is likely that since privately held companies are so difficult to sell they are not sold as often as they might or should be. The market inefficiencies can prove detrimental for this important sector of the economy. A transaction typically requires six to nine months and involves many steps. Their concern for secrecy usually arises from the possible negative reactions a company's employees. Qualified and interested buyers of multimillion dollar corporations are hard to find. direct-calling campaigns. In servicing their clients they attempt to create a one-time market for a one-time transaction. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Geneva Business Services and Robbinex. a Multiple Listing Service (MLS) of small businesses for sale is maintained by organizations such as Business Brokers of Florida (BBF). At present. An industry of professional "middlemen" (known variously as intermediaries. Another MLS is maintained by International Business Brokers Association (IBBA). Despite best intentions. no marketplace currently exists for the mergers and acquisitions of privately owned small to mid-sized companies. using inline citations). Even more difficulties attend bringing a number of potential buyers forward simultaneously during negotiations. customers and others might have if the effort or interest to seek a transaction were to become known. business brokers. An important and large sector of the entire economy is held back by the difficulty in conducting corporate M&A (and also in raising equity or debt capital). Exceptions to this are few and far between. bankers. Locating parties with whom to conduct a transaction forms one step in the overall process and perhaps the most difficult one. slow and expensive. transactions use intermediaries on one or both sides. These professionals do not provide their services cheaply and generally resort to previously-established personal contacts. and investment bankers) exists to facilitate M&A transactions.M&A Marketplace Difficulties This section does not cite any references or sources. intermediaries can operate inefficiently because of the slow and limiting nature of having to rely heavily on telephone communications. Unsourced material may be challenged and removed. Some of these exceptions include The Sundial Group. (December 2007) In many states. Beyond the intermediaries' high fees. the process by which a company is bought or sold can prove difficult. and placing advertisements in various media.

However more often than not mergers were "quick mergers". Studies are mostly focused on individual determinants. Post-M&A performance is measured by synergy realization.a comprehensive analysis". As a result. relative performance (compared to competition). market power. these datarooms serve no purpose and are generally not used. bidding process. DUV Gabler Edition. The vehicles used were so-called trusts. patents. operational similarities. The literature therefore lacks a more comprehensive framework that includes different perspectives. M&A Failure Reasons for frequent failure of M&A were analyzed by Thomas Straub in "Reasons for frequent failure in mergers and acquisitions . and brand recognition by their customers. market complementarities. Thus. However. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other. Numerous empirical studies show high failure rates of M&A deals. results from mergers and acquisitions (M&A) are often disappointing.S. Users must still seek other sources for opportunities just as if the bulletin board were not electronic. and purchasing power Organizational integration which is reflected by three determinants: acquisition experience. Despite the goal of performance improvement. the efficiency gains associated with mergers were not present. One part of the M&A process which can be improved significantly using networked computers is the improved access to "data rooms" during the due diligence process however only for larger transactions. the mergers were not done to see large efficiency gains. and General Electric that have been able to keep their dominance in their respected sectors today due to growing technological advances of their products.All 12 variables are presumed to affect performance either positively or negatively. operational complementarities. The most significant of these are run by the California Association of Business Brokers (CABB) and the International Business Brokers Association (IBBA) These organizations have effectivily created a type of virtual market without compromising the confidentiality of parties involved and without the unauthorized release of information. A multiple listings service concept was previously not used due to the need for confidentiality but there are currently several in operation. In 1990 the value was only 3% and from 1998–2000 is around 10–11% of GDP. CHAPTER 13. cultural compatibility Financial / price perspective which is reflected by three determinants: acquisition premium. To truly understand how large this movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. business phenomenon that happened from 1895 to 1905. powerful institutions that dominated their markets. relative size. small firms with little market share consolidated with similar firms to form large. they were in fact done . Thomas Straub shows that M&A performance is a multi-dimensional function. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences.static information that advertises one firm's opportunities. the following key success factors should be taken into account Strategic logic which is reflected by six determinants: market similarities. During this time. US Steel. 2007.800 of these firms disappeared into consolidations.Previous attempts to streamline the M&A process through computers have failed to succeed on a large scale because they have provided mere "bulletin boards" . and absolute performance. Nabisco. there were companies that merged during this time such as DuPont. For a successful deal. many of which acquired substantial shares of the markets in which they operated.THE GREAT MERGER MOVEMENT The Great Merger Movement was a predominantly U. It is estimated that more than 1. and due diligence.Using four statistical methods. For the purposes of small-medium sized business. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. These "quick mergers" involved mergers of companies with unrelated technology and different management.

S. however. For every $1-billion deal. interest payments on bonds were high followed by the panic of 1893. In 1996 alone there were over 2000 cross border transactions worth a total of approximately $256 billion. To avoid this decline in prices. prices are driven down. Fifty days after the announcement. many of these initially successful mergers were eventually dismantled. This resulted in shipment directly to market from this one location.[6] The rise of globalization has exponentially increased the market for cross border M&A. This rapid increase has taken many M&A firms by surprise because the majority of them never had to consider acquiring the capabilities or skills required to effectively handle this kind of transaction. like fine writing paper. the demand declined. on average. When demand for the good falls. Companies which had specific fine products. More specifically. the market's lack of significance and a more strictly national mindset prevented the vast majority of small and mid-sized companies from considering cross border intermediation as an option which left M&A firms inexperienced in this field. These firms usually were capitalintensive and had high fixed costs. yet no firm was willing to accept quantity reduction during this period. there is generally a strong upward movement in the target corporation's domestic currency (relative to the acquirer's currency). the currency of the target corporation increased in value by 0. and in part due to the government. it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. it was found that. firms found it profitable to collude and manipulate supply to counter any changes in demand for the good. government passed the Sherman Act in 1890.. During the panic of 1893. the target currency is then. This same reason also prevented the development of any extensive academic works on the subject. earned their profits on high margin rather than volume and took no part in Great Merger Movement. the courts attacked large companies for strategizing with others or within their own companies to maximize profits. This type of cooperation led to widespread horizontal integration amongst firms of the era. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing. Cross-Border M&A In a study conducted in 2000 by Lehman Brothers. Because new machines were mostly financed through bonds. In part due to competitors as mentioned above.because that was the trend at the time. supply of the product remains high. Short-Run Factors One of the major short run factors that sparked in The Great Merger Movement was the desire to keep prices high. Thus improved technology and transportation were forerunners to the Great Merger Movement. The U. Starting in the 1890s with such cases as U. That is. as illustrated by the classic supply and demand model. In the past.5%. versus Addyston Pipe and Steel Co. Long-Run Factors In the long run. setting rules against price fixing and monopolies. large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer's. on average. In addition. the report found that in the period immediately after the deal is announced.S. . 1% stronger. technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. with many firms in a market. Focusing on mass production allowed firms to reduce unit costs to a much lower rate. due to the desire to keep costs low.

Stagnation or slow growth is a sure recipe for disaster. This is just as true for other supposedly "single country" mergers. we are seeing more cross-border bargain hunting as top companies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries.Due to the complicated nature of cross border M&A. my sweet. and see all industries taking part in the game. global organizations such as International Monetary Fund. In other words the only optimal size is big. is who gets eaten and who gets to eat. and countries' culture are all crucial factors that could spoil the transaction. A direct result of these policies was that global financial services companies began to acquire and buy equity stakes in financial service players in each of these economies. the reduction of barriers to trade and the growth of overseas markets that could no longer be ignored. political factors customer expectations. Old strategies that professed “Small is Beautiful” or offered lessons on how companies could “survive in a niche” are no longer viable. What characterizes the current business environment is that we now see all industries are potentially global. The days of regional differentiation are over. One of the most important situations that they eventually face is the key to their survival: acquire or be acquired. Yes it is true that there are still micro-cosmos that that thrive at the small business level and there is a new generation of savvy entrepreneurs who will develop and continue to fuel healthy business in the shadows of corporate juggernauts well into the future.[7][8] However.” – . From 1998 to 2000. such as the $27 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis). grow larger and faster than the competitors. South Korea and Indonesia to restructure their financial institutions and open up their economies by reducing trade barriers. The World Bank and the WTO assisted and encouraged countries including Thailand. the two American companies must integrate operations in dozens of countries around the world. The fact to be noticed is that why are there are so many mergers and takeovers happening at such a rapid pace? “The history of the world. the power of the average employee. with the weak dollar in the U. advances in travel. the vast majority of cross border actions have unsuccessful results. Mergers & Takeovers Category: Home \ Company Law Article: Cross Border Mergers And Takeovers : A Recent Trend Businesses were competitive locally expanded to the national arena. company regulations. Competitiveness in the national arena is now forcing business to go global. Thailand experienced a wave of acquisition activity. During the Asian economic crisis in 1997 and 1998. Globalization is a strong force that enables industrial consolidation. Cross border intermediation has many more levels of complexity to it then regular intermediation seeing as corporate governance.S. Even mergers of companies with headquarters in the same country are very much of this type (cross-border Mergers). Globalization has had a number of drivers including advances in information and communication technology. when Boeing acquires McDonnell Douglas.grow bigger than last year. and soft economies in a number of countries around the world. After all.

ever present as an inspirational force in M&A is the old reliable financial. They have improved profitability through better cost management and through efficiency gains realized after domestic consolidation. what are the legal implications to a cross border merger and takeover? “The decisions of the courts on economic and social questions depend on their economic and social philosophy” THEODORE ROOSEVELT The answer to this question needs has been dealt in many dimensions of law . With the habit of creating an empire it becomes difficult for these entrepreneurs to stay within its limits. the target firm becomes a national of the country of the acquirer. And. Globalization is a key to help in the rapidity of the M&A as it is globalization that integrates world economies together and many nations have opened themselves. Apart from personal glory (or greed). The simple fact is that most key players in many markets have already extracted a significant proportion of the available value from the domestic resources. the change in nationality implies a change in investor protection. because the law that is applicable to the newly merged firm changes as well. Therefore: · Cross-border mergers provide a natural experiment to analyse the effects of changes– both improvements and deteriorations. There are also new forces in play that make cross-border expansion more feasible and capable of creating value.SWEENEY TODD There is a variety of drivers and motivating factors at play in the M&A world. International law prescribes that in a cross-border merger. It may be the market share or intellectual capital or other reasons but one thing that the acquirer looks is for is the untapped resources to be exploited which can lead the company a step higher in the ladder of success. in corporate governance on firm value. · Cross border M&A can be followed by newer and better technology (including organizational and managerial practices) especially when acquired firms are . generally tax related motivation. · FDI plays an important role with the cross border mergers and takeovers as they are followed by sequential investment by foreign acquirer sometimes large especially in special circumstances such as that of privatization. Institutional investors are taking a more global perspective. international deregulation is removing old barriers. At this point a question that arises. Expansion is one of the primary reasons to cross the borders as the national limits fail to provide growth opportunities. More generally. expansion or corporate diversification motives. Among other effects. of course. Another reason is to gain monopoly. the countries have made laws and regulations that attract new companies to come into the country and make it easy for the companies to easily perform their operation of M&A. the company which has been acquired by the acquirer is always a company which is trembling financially but had something to offer the acquiring company. For example. M&A deals are often driven by many justifiable marketconsolidation. the newly created firm will share features of the corporate governance systems of the two merging firms. One has to look outside its boundaries and play out in the global arena to seek new opportunities and scale new heights. Customer profiles across markets are becoming more homogeneous.

2000). de jure or de facto. taxation issues are mainly dealt within national rules. some institutions to be taken over or even merge (in the context of a friendly bid) with institutions of a different type. This legal uncertainty may constitute a significant execution risk and act as a barrier to cross-border consolidation. Mergers and acquisitions are complex processes. The European Court of Justice has indicated that such measures were not justified by general-interest reasons linked to strategic requirements and the need to ensure continuity in public services when applied to commercial entities operating in the traditional financial sector. Not only a foreign bidder might be disadvantaged or impeded by a potential lack of information. Tax problems also occur and it is one of the ways to get out of tax hassles as when a strong company acquires a financially poor company the amount of profit earned is less in the first year therefore the tax burden on the company will be less. but could provide part of the explanation of the low level of cross-border M&As. yet there have been few empirical studies that have investigated how differing accounting and tax policies across countries affect cross-border M&A decisions. the privatization of financial institutions has sometimes been accompanied by specific legal measures aimed at capping the total participation of nonresident shareholders in those companies or imposing prior agreement from the Administration (i.). · Cross border M&A leads to employment opportunity over time only when the sequential investments take place and if the linkages of the acquired firm are retained or strengthened. Cross-border takeover bids are complex transactions that may involve the handling of a significant number of legal entities. legal structures are not only complex but also prevent. Differences in tax and financial reporting policies across countries lead to a number of different opportunities. The value of cross-border mergers and acquisitions (M&A) grew over 700% during the 1990’s to a value of $720 billion in 1999 (United Nations. golden shares). In a pending case (Marks & Spencer). when it came to consolidation. etc. the European Court of Justice has been asked whether it is contradictory to the EC treaty to prevent a company to reduce its taxable profits by setting off losses incurred in other member states. self regulations. whereas in the case of a domestic deal the process is much more deterministic. Some of such measures were clearly discriminatory against foreign institutions. Such restrictions are not specific to cross-border mergers. Despite some harmonized rules. but also some legal incompatibilities might appear in the merger process resulting in a deadlock. listed or not. In some cases. and are not always fully clear or exhaustive to ascertain the tax impact of a cross-border merger or acquisition. In some countries.e. even though the bid would be ‘friendly’. This uncertainty on tax arrangements sometimes require seeking for special agreements or arrangements from the tax authorities on an ad hoc basis.reconstructed to increase the efficiency of their operations. since consolidation is possible within a group of similar institutions (at a domestic level) whereas it is not possible with other types of institutions (which makes any crossborder merger almost impossible). motivations and risks. market regulations. and which are often governed by local rules (company law. while it is allowed to do so .

where the papers are signed.with losses incurred in subsidiaries established in the state of the parent company. a merger between two entities located in that domestic market may yield synergies of scale. long term market dominance has characteristically bred complacency among industry leaders. management must step up to the challenge. In some cases. asset management functions) as in the case of overall domestic group. Therefore. a cross-border group will be at a disadvantage when trying to centralise the “industrial functions” (e. new products. while not being entitled to the tax break in their home state. may happen at speeds never encountered before. “83% of all the mergers and acquisitions failed to produce any benefit for the shareholders and over half actually destroyed value”. with the result that every institution has to provide this service or product if it wants to remain competitive. groups of shareholders could be opposed to such an operation if it implies higher non-refundable withholding tax. i. spin offs and even corporate breakdown. The old watchword about fighting the lethargy that comes with contentment will be revived in the future . Since the latter may keep all its value chain within the country and still benefit from synergies.throughout history. But the biggest challenge to a cross border merger and takeover are the cultural issues. Few can stay lean.e. mean hungry once the corporate coffers are brimming with success and profit. These all are the management challenges and whatever it takes. there may be discriminatory tax treatments for foreign products or services. complacency. Difficulties encountered in mergers and acquisitions are amplified in cross cultural situations. Along with this will come uncharted innovations in information technology and knowledge management and an explosion of new services. interoperability and the value chain rationalization will turbo charge corporate development to a speed that will make unwary executives dizzy. determining the price and due . According to KPMG study. market roll ups and mergers in addition to splits. the merger and acquisition business is predominantly financial valuing of the assets. whereas it will be more difficult to exploit comparable synergies for a foreign institution taking over a domestic one. when companies involved are from two or more different countries.g. Specific domestic tax breaks may favour specific. What are the challenges in cross-border mergers “Marriage of two lame ducks will not give birth to a race horse.” and acquisitions? The exponential rise in stock prices. non-harmonized products or services. Even though a seat transfer or a quotation in another stock market might be justified for economic reasons. Interviews of over 100 senior executives involved in these 700 deals over a two year period revealed that the overwhelming cause of failure is the people and the cultural differences. Executives will also confront perhaps the biggest bugaboo of all. and thus lower returns on their investments. The impact of taxation on dividends may influence the shareholders’ acceptance of a cross-border merger. new industries and new markets? The convergence of all this interconnectedness. products or services provided from a Member State different from the one where it is sold. due to mergers and acquisitions will have a ripple effect on the whole economy. In such a situation. This mends learning to manage the knowledge and information while staying in the driver’s seat. technology innovation. Up to the point in the transaction.

The merger and acquisition activity in the past few years have become quite predictable and this trend is going to grow parallel with the desire and competitiveness of the society. Therefore a company involved in an international merger or acquisition needs to consider these differences right from the design stage if it is to succeed. Indeed. they are likely to go on strikes. If unions cannot provide answers because they have been excluded from the negotiation process. People living and working in different countries react to the same situation or events in a very different manner.diligence. Employees’ reluctance within the target company of a cross-border deal might also pose a threat to the successful outcome of the transaction. meaning that all parameters being equal. Consumers may mistrust foreign entities. Now let time be the emperor and decide the fate of this growing trend. some of these challenges are not new-but the penalties for mis-steps will be greater and swifter than in the past. Before the ink is dry. the non linear. In the case of international mergers and acquisition. Shareholders’ acceptance of quotation changes may be limited. This in turn translates people looking in for work in other companies. Of course. each in its respective industry. In countries where people identify largely with groups. however this financially driven deal becomes a human transaction filled with emotions and trauma and survival behaviour. there might be an impact on shareholders’ and analysts’ apprehension of failure risk when it comes to cross-border mergers. Often a firm in midst of transition loses its own talent. the complexity of these processes is often compounded by the differences in national cultures. Given that cross-border mergers are complex and need to overcome a number of execution risks (as evidenced in this document). Cross-border mergers may imply a change in the place of quotation. the place of quotation may have an important symbolic value. There are no longer any safe havens. These strikes may do much more damage to organisation than any other factor.It is expected that by 2010 there won’t be 50-60 undisputed global industry leaders as they exist today. Individual preoccupation on “How is it all going to impact me?” weakens the commitment to the job at hand. This explains why foreign institutions often prefer to keep a local brand. employees may not accept to be managed from another country.perhaps 10 or more per year. a local incumbent may have an advantage over a competitor identified as foreign. Indeed. even all risks or tax impacts are eliminated. The companies will have to keep in mind that cross border mergers are not only business proposals but a corporate marriage of both the entities which require deeper and insightful solutions. Companies in such dominant positions will deal with high volumes of merger transactions. A public opposition to the project may influence analysts’ assessment. there will be hundreds. people tend to look for support within their group. or even in the currency of quotation. In France and Italy people caught in midst of mergers and acquisition often turn to unions. Kinds of Takeover . strengthening the competition. often the irrational world of human beings in the midst of changes.

3. friendly takeover takes place as per the provisions of Section 395 of the Companies Act. The main purpose behind this kind of takeover is achieving the economies of scale or increasing the market share. Thus it is also called Negotiated Takeover. takeover is of three types: 1. E. 1985 to bail out the former from losses.g. 2. Ii. Generally. Horizontal Takeover: Takeover of one company by another company in the same industry. Friendly takeover 2.I. Bail out takeover 3. Hostile takeover: Hostile takeover is a takeover where one company unilaterally pursues the acquisition of shares of another company without being into the knowledge of that other company. 1956. The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations. The most dominant purpose which has forced most of the companies to resort to this kind of takeover is increase in market share. Hostile takeover 1. This kind of takeover is resorted to further some common objectives of both the parties. takeover of Hutch by Vodafone. Business context In the context of business. Bail out Takeover of a financially sick company by a financially rich company as per the provisions of Sick Industrial Companies (Special Provisions) Act. 1997. Friendly or Negotiated Takeover: Friendly takeover means takeover of one company by change in its management & control through negotiations between the existing promoters and prospective invester in a friendly manner. . takeover is of three types: 1. Legal Context From legal perspective.

3. at the same time during a D-mode IPL. The former is known as backward integration and latter is known as Forward integration. Chapter 14. However. The main purpose of this kind of takeover is diversification.Working with console takeover and recovery The console takeover and recovery function supports Operations Console workstations and the 5250 emulator on the Hardware Management Console (HMC). The main purpose behind this kind of takeover is reduction in costs. takeover of Sona Steerings Ltd. This might require a reallocation of hardware to support the new console. . Conglomerate takeover: Takeover of one company by another company operating in totally different industries. is backward takeover. The twinaxial console uses a different form of 5250 emulation and does not qualify as a console type to switch to or from without loss of data. Tip: Takeover is also supported in a D-mode initial program load (IPL). with data. Vertical takeover: Takeover by one company of its suppliers or customers. console-capable device to take control from the current LAN-connected console device. E. Before enabling this function. but only one device can be the console at one time. consider the function's requirements and restrictions. the takeover function cannot be used with the local console that is directly attached. Because there can be only one local console that is directly attached and the HMC 5250 emulation console can be shared. any 5250 emulation-based device can be used to recover a loss of the console by changing the console type.2. Two devices can be connected.g. By Maruti Udyog Ltd. The takeover function is the process used for a LAN-connected.

The current console type is still the only console allowed when takeover is enabled. Regardless of what the former console was doing. which means that more than one device has data on the screen after the console is established. Recovery can be from the same device or another 5250-based device. a local console that is directly attached is presented the Console Information Status window without displaying the DST Sign-on window. for example. It then saves the data to be delivered when the next device becomes the console. this is what would pertain: • • This recovery action from any 5250-based connection other than twinax. Every console-capable device that can support 5250 emulation is presented with a window of data regardless of its specific connectivity and regardless of whether it is the console at the time it connects successfully to the server. the device displays an error message (HMC) or the Console Information Status window. Forced Takeover V5R4M5 V6R1 MF44882 MF44647 MF44894 MF44644 These PTFs add function the user can control so performing an F18 at the sign-on screen or the Console Information Status screen to bypass further sign-ons and go directly to IBM® i sign-on. at the same step. the HMC 5250 emulator posts a Connection refused . as the original console.partition not configured for HMC console message. it can be used for a recovery action. Instead. As long as they have the takeover signon screen they can perform the F18.The recovery function is accomplished by suspending the data stream to the console that either loses its connection or is in the process of being taken over. Assuming the PTFs are installed and the OPSCONSOLE TAKEON is enabled. This process takes place even if the newly established console is the same as the former console. Console recovery uses part of the takeover function. you can use the takeover function from the same PC (after correcting the reason for the failure) or from another PC. A console-capable device no longer displays a blank screen and a Disconnected state when another device is the active console. the new console is in the same job. However. However. The key feature of this function is that it allows the job running at the console to be "transferred" to another device without loss of data. The job continues even though the original console is not operational. each console-capable workstation is presented with either a DST Sign-on window or the Console Information Status window. For example. The current console type and connectivity is ignored. If the console is set to Operations Console (LAN). and the existing console fails. The Take over the console field displays NO to indicate it cannot take over the existing console. if you are using a local console on a network (LAN) and have multiple PCs set up to be the console. When the console type is not set to be the HMC (4). The console type does NOT get set to a new value. .

• • Console takeover cannot be used with local consoles that are directly attached to the server. For example. and LAN1 is the console. not the directly-attached device. The recovery of the console without data loss is directly tied to the takeover option. This console's configuration uses a different type of 5250 emulation in its connection to the server. if device LAN1 is running in 24 X 80 mode and LAN2 is running in 27 X 132 mode. If they did a restart while in IBM i the system will again try to bring up LAN console.and the F18 would take them to the IBM i signon. There are additional device attributes. LAN2 displays NO in the Take over the console field.wrong console type error message .org March. • Console Takeover and Recovery Function Requirements Consider the following requirements before enabling the console takeover and recovery function.privacilla. • Government Exchange and Merger of Citizens' Personal Information is Systematic and Routine A Special Report Issued by Privacilla. if the user had a problem with their LAN console and connected a directlyattached device and used F18. the current console tag is set to the resource for LAN but manually activating the supporting resource for the directly-attached device would allow that device to be taken directly to the Console Information Status screen . You must enable console takeover if you want to take over a console or if you want to be protected from the loss of the console using the recovery action. 2001 . that might also prevent a console takeover. Only devices with the same attributes can perform a takeover. such as language. If you do not want takeover capability. you must still enable the takeover option. This function allows the user the capability to debug a failing console or overcome a disabled user ID. For example.The system has to have supporting hardware to allow another device to get the signon screen. but you do want recovery from loss of the console. of course. No changes to those tags (Console and Operations Console) take place. The currently set tagged resource(s) for console is/are NOT changed. The console takeover and recovery function does not support twinaxial consoles. Console Takeover and Recovery Function Restrictions Consider the following restrictions before enabling the console takeover and recovery function. If the user IPLs or performs a console service function to reset or make console type changes the system will use whatever values are in effect at that time. • • • The DST user ID used to sign on at an eligible device must also have the privilege to take over the console. • • This device session is temporary.org http://www.

Despite its name. As the Federal Trade Commission. The Department of Justice and the Department of Veterans Affairs share personal information about American citizens. federal agencies announced 47 times that they would exchange and merge personal information from databases about American citizens. Federal agencies and the Congress should not look outward for opportunities to protect privacy. We shine on government the light that the Federal Trade Commission is currently turning on the . Governments are fundamentally not in the business of protecting privacy. Privacilla describes the Computer Matching and Privacy Protection Act. The Social Security Administration and the Health Care Financing Administration share personal information about American citizens. The Postal Service and the Department of Labor share personal information about American citizens. then briefly analyzes merger and exchange of citizens' personal information by the federal government. The Internal Revenue Service and state social services agencies share personal information about American citizens. And the list goes on.Introduction More than once every other week. In this report. Under the "Computer Matching and Privacy Protection Act. a federal government agency quietly announces a new plan to exchange and merge databases of personal information about American citizens.and legally. And these programs are only the tip of an information-trading iceberg. They should look inward at the privacy threats the government creates through the merger and exchange of personal information it has collected about American citizens. law enforcement. The Department of Health and Human Services and the Department of Education share personal information about American citizens. systematically . The federal government is in fact the largest collector. they conveniently ignore the government's own. that privacy is a cost of the federal government's numerous tax. user. instead. The Social Security Administration and the state courts share personal information about American citizens. For the 18-month period from September 1999 to February 2001. the Department of Health and Human Services. more significant role in threatening privacy. The Computer Matching and Privacy Protection Act. While these computer matching programs are invariably intended for beneficial purposes. and benefit programs. and other agencies review merger and exchange of personal information in the private sector." they do this routinely. which causes agencies to report these activities in the Federal Register. and sometime abuser of citizens' personal and private information. the Computer Matching and Privacy Protection Act does not protect privacy. They demonstrate. Currently: • • • • • • • The Internal Revenue Service and the Social Security Administration share personal information about American citizens. they do not serve Americans' privacy interests. applies only to a small subset of the federal agency programs that exchange and merge databases of personal information.

not to draw too broad a conclusion from privacy-threatening government data practices. However. Other programs under which federal agencies exchange and merge personal information about citizens . and Background investigation and foreign counter-intelligence matches. and matches using records from Federal personnel or payroll records. and statistical gathering functions. and there are some protections for citizens." it regularized and systematized the merger and exchange of Americans' personal information among federal agencies. litigation. and 3) tax refund offset matches. Invoking "privacy. As should be clear. The "Computer Matching and Privacy Protection Act" The Computer Matching and Privacy Protection Act of 1988 (Public Law 100-503) amended the Privacy Act of 1974. conduct. 2) matches for administration.private sector. • • • .governments should be the first to give up data merger practices that threaten privacy.and there are many .not any limited-jurisdiction agency . and supervision of the execution and application of the internal revenue laws. There are legitimate interests served by government data-sharing. Routine administrative matches using Federal personnel records.are not covered by the Act or by this study. Internal agency matches using only records from the agency's systems of records. "Tax administration matches. Law enforcement investigative matches whose purpose is to gather evidence against a named person or persons in an existing investigation. government poses a greater threat to privacy than the private sector. collection. "Pilot matches" whose purpose is to gather benefit/cost data about full-scale matching programs.a power no private-sector entity has . direction. publication. It is likely to find a breathtaking amount of personal data exchange and surveillance." including 1) disclosure of taxpayer information to state tax officials. The Act covers only two kinds of programs that match databases of personal information about American citizens: matches involving federal benefits programs.should take a sweeping look at the federal government's information practices. the list of programs not subject to the Computer Matching and Privacy Protection Act is longer than the list of programs that are. In fact. however. enforcement. management. as well as assessment. Statistical matches whose purpose is in support of any research or statistical project. The United States Congress . because governments have a unique power to write and rewrite the rules about what can be done with personal information . The extent of it assuredly offends Americans' powerful sense that they should have some way to protect their privacy by controlling how government uses information about them. It is important. An appendix lists the 47 instances in the last 18 months where a federal agency has announced a computer matching program. Exclusions from the Act include: • • • • • Statistical matches whose purpose is solely to produce aggregate data stripped of personal identifiers.

Other than through destruction of the information. and on what terms. the Act sanctions and contributes to the federal government's threat to privacy. The agency must verify the adverse information. Rules to protect the "privacy" of information held by governments are little more than tardy apologies for stepping between people and their ability to protect privacy in the first place. which would return control to citizens. that quixotic concept that has frustrated and confounded so many. It is a state of affairs in which knowledge of information about a person is tailored to that person's interests in revealing or holding that information close. Fundamentally. The reason for this is a set of misunderstandings about privacy that befuddled policy-makers in 1988 and that still do today. in fact. In the case of the Computer Matching and Privacy Protection Act. Government Data Exchange and Privacy The Computer Matching and Privacy Protection Act does not meaningfully contribute to the privacy that American citizens enjoy. . is best regarded as a condition. Rules about how government handles data. It can only foster or destroy people's ability to protect their own privacy." They also must provide that the Comptroller General may have access to all necessary records to monitor or verify compliance with the agreement. complex and onerous as they may be. Important though these protections are. the condition. Such rules are really only guesses by politicians and bureaucrats at what people might choose if they still could. and give the individual notice and an opportunity to contest any adverse action. In the private sector. To unravel them. to protect privacy as they see fit. Privacy is maintained by people having authority and responsibility for what information about them is shared. Government cannot protect privacy. privacy is at odds with much of what modern governments do. When government has collected information from people under the authority of law." Such agreements must include "procedures for the retention and timely destruction of identifiable records" and "prohibitions on duplication and redisclosure of records. the agency need only publish a Federal Register announcement that personal information will be disclosed. they do not go to protecting privacy. By regularizing transfer of citizen data among federal agencies. we turn to some basic principles." In such cases. The only way truly to protect privacy is through systems that give consumers and citizens the choice. Privacy. These interests express themselves through the actions of individuals under the infinite circumstances presented throughout daily life. Even the best-intended government programs have as part of their design the removal of citizens' power over information about themselves. The Computer Matching and Privacy Protection Act includes important due process protections when a matching program reveals that adverse action may need to be taken against a citizen. Federal agencies engaging in computer matching programs must enter into "matching agreements" that are approved by the agencies' "Data Integrity Boards. citizens' data is not made private by sharing it among agencies under strict rules requiring security and accuracy. The information is already wrested from the control of the data subjects. by contrast. privacy can be protected through a combination of educated consumer choice and the freedom to contract. This is why privacy is inconsistent with so much of what government does. coupled with the responsibility. Privacy. cannot "protect privacy" of information that is already out of individuals' control. no amount of rules can recreate privacy in that information. people's ability to protect privacy in that information is taken away. backed up by the privacy torts.The Privacy Act allows disclosures of records if the agency decides that disclosures are "routine. reflects deeply complex and personal values held by individuals.

It is a serious and legitimate concern of civil libertarians that government collects too much information about the innocent in order to reach the guilty. purchases. and so on. income. the Federal Trade Commission recently posed several questions about current business practices. But when dealing with government. it is often outright illegal for citizens to protect their privacy. . marital status. foreign assets. providers' names. Personal information allows governments to collect taxes. The list of information required by tax laws and held by the Internal Revenue Service is incredibly long because the government sector is addicted to using taxation as a tool of social policy. government entities like the Financial Crimes Enforcement Network collect information from a variety of sources and share it widely. These questions should be rewritten and addressed to current government practices. the law requires people to submit this information. parental status. The answers reveal how government programs threaten privacy and possibly even violate Fourth Amendment rights. and much more. one that must be acknowledged forthrightly by serious thinkers. charitable gifts. Turning the FTC Spotlight on Government Yet the commercial world is today regarded as the greater threat to privacy.ftc. Again. what they think. It is collected both directly from the taxpayer and from "information returns" that must be filed by businesses. no citizen can practically and legally prevent this information from being collected. Any program that doles money out based on condition or status must know what people's condition or status is. investment transactions. and enforce laws and regulations. Collection is also required by law. Importantly. Privacy is a cost of government. what they do. We rely on government to investigate wrongdoing by examining information that is often regarded as private in the hands of the innocent. the modern commercial world thrives on information. home ownership. protecting privacy can be very inconvenient. In announcing a "public workshop" on merger and exchange of consumer data in the private sector (available at http://www. Taxation requires massive collections of information without regard to whether it is personal or private. Health programs.Like modern government. what they own. Citizens do not have a practical option of withholding it. What kinds of citizen information do agencies exchange and what are the sources of that information? The government sector thrives on information about people. Even when they do. and much more.gov/os/2001/02/mergingfrn. ages. This information is collected both directly from the beneficiary and from health care providers. often in comparison to the condition or status of the population at large. medical histories.htm). income levels. The federal government uses copious amounts of information to deliver various entitlements and benefits as well. serve up entitlements and benefits. to whom they say it. address. Though it is unlikely that information collected in investigations is matched under the Computer Matching and Privacy Protection Act. The information collected by the IRS includes name. or as a condition of receiving benefits. and it is sometimes very difficult for consumers to know how to protect their privacy. At no point do citizens have an option to withhold information. Needless to say. addresses. for example. phone number. A third use the government sector makes of personal information is to investigate crime and enforce laws and regulations. medical conditions. occupation. medical expenses. Law enforcers' ability to do these things correlates directly to the amount of information they can collect about where people go. require beneficiaries' names. telephone numbers. what they say. many politicians and bureaucrats see opportunities for making hay with the issue. genders.

The Internal Revenue Service. Paper IRS filings are today protected to some extent by "practical obscurity. arrest them.technologies should be regarded at worst with indifference. More efficient government is sorely needed. On the other hand. Information technology can be used both to improve efficiency and to threaten or invade privacy. more and more information is collected for increasingly complex taxation and benefits programs. The upshot is that governments can effectively search citizens without cause by going back to them again and again for personal information under myriad tax and benefit programs. It is different uses of technology that should be addressed.and provided security controls are put in place . is aggressively pushing electronic filing. The Fourth Amendment to the Constitution is the primary. and more often as improvements over former practice. As noted above. the government does not have to face Fourth Amendment limitations. The IRS has had problems in the past with employees snooping into citizens' files.S. How does the merger and exchange of detailed citizen data between federal agencies affect citizens? Merger and exchange of citizen data by federal agencies inherently harm citizens by eroding their ability to protect their privacy. it benefits the public." Anyone wanting information has to go and dig them out of a physical file. and take their property. to the extent technology can be used to lower the cost of government while improving the delivery of services. The merger and exchange of detailed personal information among federal agencies violates citizens' expectations under the Fourth Amendment to be free of warrant less government snooping into their affairs.Are there new technologies or technical standards that may increase the sharing of detailed citizen information and do they include or facilitate privacy protections? It is important to focus away from technologies in privacy debates. . essential limit on the power of governments in the U. nearly all technologies should be treated with neutrality or indifference. for example. The rules that apply to use and control of information are what matter to privacy. They sought to curtail them by preventing governments from collecting information about citizens without substantial justifications. technology increases the power of agencies and individual bureaucrats to do harm. and it can collect information at will. to inquire into people's lives. The Framers of the Constitution recognized the unique powers of government . and.powers that no privatesector entities have. e-filing will also make Americans' tax information more accessible for both good and bad purposes. As a matter of privacy policy. On balance . Nearly all technologies can be used for good purposes and bad purposes alike. Increased digitization of records and record-keeping means that agencies can work with information more quickly and ably. The growth of the federal government during the 20th century vastly increased The amount of personal information about citizens that governments in the United States collect. Law-abiding Americans have a reasonable expectation that information collected by governments will not be amassed into dossiers or held in databases that are easily and quickly combined for whatever purposes capture the government's interest. While this will undoubtedly improve its operations as our nation's tax collector. These could recur on a wider scale thanks to technology. When information is collected for these "administrative" purposes.

This daily publication is perfectly obscure to the clear majority of Americans about whom federal agencies exchange personal information. widespread exchange and merger of personal information by federal agencies may violate the Fourth Amendment. one of the primary uses of personal information by federal agencies is for debt collection and assessment of credit risk. for example. The notice federal agencies give of their data merger and exchange plans are technical and legal. There are many delinquencies in the numerous federal loan and loan guarantee programs. Merger and exchange of personal information about Americans helps agencies locate debtors and collect money owed. These practices certainly prevent people from maintaining privacy at the levels they desire. legal notice. What types of notice have federal agencies provided consumers regarding various kinds of data merger and exchange activities? Though some federal agencies may provide notice that there will be merger and exchange of information at the time information is collected. Notices of new merger and exchange programs are usually given through announcements in the Federal Register. By comparing income and annuity information from one agency. What governmental purposes are served through the merger of an agency's internal information about citizens with information obtained from other agencies? There should be no mistake about it. for example. Agencies use health care utilization records. Citizens also have little power to stop merger and exchange of information being undertaken by federal agencies. Even highly objectionable government collection of citizens' personal financial information continues today under the Bank Secrecy Act. .Because the United States' special constitutional rules are supposed to limit governments' power to collect information about citizens. it does serve laudable goals. Judging by the stated purposes of the computer matches identified in this survey. personal information is collected by governments under the authority of law or as a condition of receiving benefits. Though it is assuredly quite concerning that health care records should be transferred throughout the federal government for this purpose. they must contact their political leaders and be lucky enough to do so in sufficient numbers to make a federal political issue out of it. Federal Register notice is technical. It is an unsatisfactory way to keep the public meaningfully informed about uses that are being made of personal information. another agency can check the accuracy of information that has been submitted by beneficiaries. Citizens have no effective power to withhold information at any point in the process. They serve only to emphasize the powerlessness of citizens in the face of their government. As mentioned above. This serves law enforcement goals. notice is worth even less if nothing can be done about information collection and sharing in the first place. Of course. Many computer matches also assess whether applicants for loans or benefits are in compliance with the law. to identify program beneficiaries who may be deceased so that their benefits can be terminated. Merger and exchange of personal information among federal agencies serves many useful purposes. A second major purpose of the computer matching programs identified in this survey is avoiding waste and overpayment in federal programs. and also helps ensure that the federal government makes or guarantees loans to law-abiding citizens. this notice is usually not sufficient because agencies routinely alter the uses they make of personal information. while private-sector firms like Double-Click and N2H2 have terminated information collection and merger proposals in the face of public concern. To attempt it.

and take their property. The Computer Matching and Privacy Protection Act is poorly named. The American people expect and deserve no less. APPENDIX Survey of Merger (Sept. The government can do its most fruitful work to restore privacy by correcting its own practices. which rely on eroding citizens' privacy.unlike any private-sector entities . . It includes date of Federal Register notice. 28. 1. The privacy of personal information in the hands of government cannot be protected. By comparing information collected by. It is more than ironic that federal government agencies should look askance at information practices in the commercial sector. Though privacy interests are assuredly sacrificed.have the power to inquire by force of law into people's lives. . and so on. On average.Feb. there can be no mistake that important governmental purposes are served by agencies' merger and exchange of personal information. Notice Date Agency Participating Agencies Purpose Matching Program of 2/20/2001 Social Security Railroad Administration Retirement Board " . a new program for comparing databases of personal information is announced every two weeks.to disclose RRB annuity payment data . list of other participating agencies. law enforcement can catch people who are defrauding the government. announcements of these programs were issued at least 47 times. .Finally. Governments alone can write and rewrite the rules about how information may be used. Conclusion Federal government agencies are exchanging and merging personal information about citizens constantly and increasingly. 1999 . . underpaying taxes. receiving benefits for which they are not eligible. to verify Supplemental Security Income . and submitted to different agencies. agency giving notice. Indeed. . 2001) and Exchange of Citizen Data The table below draws from Federal Register notices under the Computer Matching and Privacy Protection Act. Congress should examine anew the federal government's information practices and its massive use of citizens' personal information. Privacy can not be a product of government functions and programs. Governments . and excerpts from the stated purpose of the computer matching program." " . It should consider the costs to privacy of the many government programs and functions that rely on reducing citizens' control over personal information. privacy is a direct and substantial cost of government. arrest them. Over the 18-month period September 1999 to February 2001. . because privacy is a condition people maintain by the exercise of control over their information and themselves. a major beneficial use of merger and exchange of personal information is to catch criminals.

. . ." Defense Office of Manpower Personnel Data Center." 2/16/2001 Social Security Health Care Administration Financing Administration." " . to identify individuals who are improperly receiving credit 1/8/2001 . . . to assist the Education Administration Secretary of Education in his obligation to 'verify immigration status and social security numbers [SSN] provided by a student to an eligible institution' . Management Defense " . to disclose Medicare nonutilization data to SSA. Department of Health and Human Services 2/12/2001 Department of Social Security " . . Department of Health and Human Services " . to identify Supplemental Security Income (SSI) recipients and Special Veterans' Benefits beneficiaries who have been admitted to certain public institutions. . . .(SSI) program and Special Veterans Benefits (SVB) eligibility and benefit payment amounts. . ." 2/13/2001 Social Security Health Care Administration Financing Administration.

to determine whether the current Postal Service automated and manual procedures for monitoring FECA benefits payments made to employees returning to work are operating effectively. . Revenue " . to identify those Postal Service employees who may have received dual benefits in violation of section 8116(a) of the FECA. SSA records Personnel Administration are used in Management redetermining and recomputing certain annuitants' benefits . . . . ." 12/1/2000 11/29/2000 Office of the Social Security Chief Administration.Logistics Agency. Department of Labor " . . . Postal Service Office of Workers' Compensation Programs. Department of Defense for military service in their civil service annuities or annuities based on the 'guaranteed minimum' disability formula." Office of Inspector General. . . Information Internal Officer. ." 12/7/2000 Office of Social Security " . to increase the availability of rental assistance to individuals who ." " .

Revenue and local Service. . state. . . unemployment compensation. benefits . and deterring and correcting abuses in assisted housing programs. to disclose to SSA certain return information for use in verifying eligibility for.Department of Service. ." " . and Security therefore eligibility status. . or recipients of." 10/25/2000 Office of Social Security " . . and/or the correct amount of. agencies." 11/7/2000 Immigration and Naturalization Service. to verify Personnel Administration earnings data Management supplied by civil service annuitants. Determining the appropriate level of rental assistance. . Department of Justice Minnesota " . of alien applicants for. meet the Housing and Department of requirements of Urban Treasury the rental Development assistance programs. Department of including Treasury Department of " . ." 11/16/2000 Social Security Internal Administration Revenue Service " . to confirm Department of the immigration Economic status. ." Internal Federal. . . to prevent or reduce fraud or abuse in certain Federally assisted benefit programs 10/16/2000 . .

Housing and Urban Development Albany Financial Operations Center. continuing Affairs Department of eligibility for Justice Federal benefit programs of those who are confined for a period exceeding 60 days due to a conviction for a felony or misdemeanor." Department of Bureau of " . to verify Veterans Prisons. Department of Veterans Affairs. . Social Security Administration Master Beneficiary Record and Supplemental Security Income Record and Special Veterans Benefits. Accounts Receivable Records." . . Department of Education Student Financial Assistance Collection Files 10/13/2000 and facilitate the settlement of government claims while protecting the privacy interest of the subjects of the match. Debt Collection and Management System. Department of Justice.

" . state. . Alaska Department of Health and Social Services. California Department of Social Services. Arizona Department of Economic Security. Veterans Benefits Administration. . Arkansas Department of Human Services. Arizona Health Care Cost Containment System. to prevent or reduce fraud and abuse in certain federally assisted benefit programs while protecting the privacy interests of the subjects of the match. agencies. Revenue and local Service.10/12/2000 Internal Federal. Colorado " . Department of Housing and Urban Development. Social Security Administration. Office of Program Benefits Policy. Department of Veterans Affairs. Department of including Real the Treasury Estate Assessment Center. Alabama Medicaid Agency. Alabama Department of Human Resources.

Florida Department of Children and Families. Illinois Department of Human Services. Georgia Department of Human Resources. Kansas Department of Social and Rehabilitation Services.Department of Human Services. District of Columbia Department of Human Services. Idaho Department of Health and Welfare. Indiana Family and Social Services Administration. Connecticut Department of Social Services. Kentucky . Hawaii Department of Human Services. Iowa Department of Human Services. Guam Department of Public Health and Social Services.

Mississippi Department of Human Services. Maryland Department of Human Resources. Nebraska Department of Health and . Missouri Department of Social Services. Michigan Family Independence Agency. Maine Department of Human Services. Massachusetts Division of Medical Assistance. Montana Department of Public Health and Human Services. Mississippi Division of Medicaid. Massachusetts Department of Transitional Assistance. Minnesota Department of Human Services.Cabinet for Families and Children. Louisiana Department of Social Services.

Oklahoma Department of Human Services. North Carolina Department of Health and Human Services.Human Services. New Jersey Department of Human Services. Oregon Department of Human Services. North Dakota Department of Human Services. Ohio Department of Human Services. New Hampshire Department of Health and Human Services. Puerto Rico Department of the Family. New Mexico Human Services Department. Nevada Department of Human Resources. New York Office of Temporary and Disability Assistance. Pennsylvania Department of Public Welfare. .

Rhode Island Department of Human Services. Vermont Department of Prevention. Virgin Islands Department of Human Services. Texas Department of Human Services. Utah Department of Health. and Health Access. Assistance. Tennessee Department of Human Services. South Dakota Department of Social Services.Puerto Rico Department of Health. Washington Department of . Virgin Islands Bureau of Health Insurance and Medical Assistance. Virginia Department of Social Services. Utah Department of Workforce Services. South Carolina Department of Social Services. Transition.

. Wyoming Department of Family Services 10/12/2000 Social Security Department of " . . to determine the correct amount of Social Security disability benefits for recipients of Part C Black Lung benefits .Social and Health Services. . . . to enable the Personnel RRM [sic] to (1) Management Identify affected RRB annuitants who are in receipt of a Federal public pension benefit but who have not reported receipt of this benefit to the RRB and (2) receive needed Federal public pension benefit information for affected RRB annuitants more . . to disclose Administration Labor Black Lung benefit data to SSA. . West Virginia Department of Human Services. . Wisconsin Department of Workforce Development." " ." 10/6/2000 Railroad Retirement Board Office of " . .

. . ." 9/7/2000 Department of Office of Child Education Support Enforcement. for certain persons who receive both a civil service benefit and a Social Security . Administration for Children and Families." " .timely accurately. . . . . . . . to identify disability insurance beneficiaries whose benefits should be reduced . to obtain address information on individuals who owe funds to the Federal Government under defaulted student loans or grant overpayments. to [calculate] a modified benefit computation formula . . to verify the Administration Personnel accuracy of Management information furnished by applicants and recipients concerning eligibility factors for the Supplemental Security Income (SSI) and Special Veterans' Benefits (SVB) programs. Department of Health and Human Services and " ." " ." 9/6/2000 Social Security Office of " . .

for the purpose of locating the taxpayer to collect the loan. . or State or nonprofit guarantee agency . . . . Permits ED Education Revenue to have access to Service. . . .retirement or disability benefit. . . . ." " . by the SSA beneficiary at the time of initially applying for Social Security benefits and on a continuing basis ." 8/22/2000 Social Security Texas Workers " ." 9/1/2000 Railroad Retirement Board Health Care Financing Administration. . . . . to any lender. any taxpayer's Department of mailing address Treasury who has defaulted on certain loans . Department of Health and Human Services "To identify RRB annuitants who are 66 or over and who have not had any Medicare utilization during the past calendar year. . to verify information provided . to identify Administration Compensation Title II and/or Title Commission XVI recipients who are receiving . . Provides for redisclosure ." " . . ." 8/23/2000 Department of Internal " .

obtain from SSA a record of the wages reported to SSA for persons who have applied for benefits . . . . [T]he RRB will receive from SSA once a year a copy of SSA's Master Benefit Record for earmarked annuitants.workers compensation benefits. . . ." "SSA will also receive from RRB on a daily basis RRB earnings information on selected individuals." "SSA will receive from RRB weekly RRB earnings information for all railroad employees. . on Administration a daily basis. . [T]he RRB will receive from SSA the amount of certain social security benefits which the RRB pays on behalf of SSA." 8/21/2000 Railroad Retirement Board Social Security "The RRB will." 8/16/2000 Department of Department of " . will allow the Housing and Education Department of Urban Education access ." " ." " . .

and reservists who have applied for or who are receiving education benefit payments under the Montgomery GI Bill. servicemembers. ." 8/15/2000 Department of Department of " . to identify Veterans Defense the eligibility Affairs status of veterans. . . ." " . . to identify 8/14/2000 7/28/2000 Department of Postal Service . .Development to a system which permits prescreening of applicants for debts owed or loans guaranteed by the Federal Government to ascertain if the applicant is delinquent in paying a debt owed to or insured by the Government. Will compare USPS payroll and ED delinquent debtor files for the purpose of identifying postal employees who may owe delinquent debts to the federal government under programs administered by the ED." Department of Postal Service Education " .

. ." Social Security State Courts Administration "To identify individuals who are subject to the title II benefit nonpayment on section 202(x)(1) on the Social Security Act . . to locate Veterans Revenue taxpayers who Affairs Service." 7/28/2000 Department of Internal " . will allow VA Housing and Veterans access to a Urban Affairs system which Development permits prescreening of applicants for loans or loans guaranteed by the Federal Government to ascertain if the . .Veterans Affairs and locate USPS employees who owe delinquent debts to the Federal Government as a result of their participation in benefit programs administered by VA. . owe delinquent Department of debts to the Treasury Federal Government as a result of their participation in benefit programs (including health care) administered by VA." 7/27/2000 6/9/2000 Department of Department of " . . .

Florida Division of Public Assistance. . the Health Care Financing Administration. ." " . Illinois Department of Public Aid. Kansas Department of Social and Rehabilitation Services.applicant is delinquent in paying a debt owed to or insured by the Government. Connecticut Department of Social Services." 4/11/2000 Administration for Children and Families. Department of Health and Human Services (on behalf of itself. Department of Defense " . ." 6/5/2000 Defense Small Business Manpower Administration Data Center. . to provide [state public assistance agencies] with data from the VA benefit and compensation file for the states to determine eligibility and insure fair and equitable treatment . Louisiana Department of Social . who owe delinquent debts to the federal government under certain programs administered by SBA. District of Columbia Department of Social Services. . Defense Logistics Agency. and the Food and Nutrition Service) Department of Veterans Affairs. . to identify and locate any matched Federal personnel. or retired. employed. serving. .

Virginia Department of . New York Department of Social Services. Pennsylvania Department of Public Welfare. Oklahoma Department of Human Services. Texas Department of Human Services. Utah Department of Workforce Services and Department of Health. Tennessee Department of Human Services. Ohio Department of Human Services. Nebraska Department of Social Services. Maryland Department of Human Resources.Services. Massachusetts Department of Transitional Assistance. South Dakota Department of Social Services. North Carolina Department of Human Resources.

. who owe delinquent debts to the Federal Government under certain programs administered by NSF. ." 3/28/2000 3/14/2000 3/8/2000 Department of Department of " ." Defense National Manpower Science Data Center. employed. L." Social Security State Health / "To identify Administration Income eligible Maintenance Supplemental Agencies Security Income (SSI) Medicaid enrollees whose records have been inactive . Department of Defense " ." . or retired. to assist ED Education Justice in enforcing the sanctions imposed under section 5301 of the Anti-Drug Abuse Act of 1988 (Pub. . . Foundation Defense Logistics Agency. . . . to identify and locate any matched Federal personnel. . . 100-690).Social Services 4/10/2000 Office of Social Security " . serving. to offset Personnel Administration specific benefits Management by a percentage of benefits payable under Title II of the Social Security Act.

Department of Justice District of Columbia Department of Employment Services. Agency. to confirm the immigration status of alien applicants for. California Department of Health Services." 1/27/2000 . " . . . California Department of Social Services. New Jersey Department of Labor. . Department of who owe Defense delinquent debts to the Federal Government under certain programs administered by VA. . Department of Justice " . . . Logistics employed. . New York State Department of Labor. Texas Workforce Commission." Immigration and Naturalization Service." 2/8/2000 Defense Department of " . . serving. will permit ED to confirm the immigration status of alien applicants for. . or recipients of. . assistance . or recipients or. Federal benefits assistance . Massachusetts Department of Employment and Training. . to identify Manpower Veterans and locate any Data Center.3/1/2000 Department of Immigration Education and Naturalization Service. or retired. Affairs Federal Defense personnel. .

to ensure Education that the requirements of section 12(f) of the Military Selective Service Act (50 U." Social Security States Administration " .C. Department of Housing and Urban Development . . . . will allow SBA access to a system which permits prescreening of applicants for debts owed or loans guaranteed by the Federal Government to 10/26/1999 Office of the Small Business Chief Administration Information Officer.Colorado Department of Human Services 12/29/1999 Department of Social Security " . .S. . . . will provide Education Administration an efficient and comprehensive method of identifying incarcerated applicants who are ineligible to received [sic] student financial assistance . . . . . App. . to facilitate administration of [the required income and eligibility verification system] . ." 11/29/1999 11/15/1999 Selective Service System Department of " . . 462(f) are met." " .

. HUD will be provided access to SBA's debtor data for prescreening purposes. . permits Department of prescreening of Housing and applicants for Urban loans owed or Development guaranteed by the Federal Government to . will allow Chief Agriculture USDA access to Information a system which Officer. . ." 10/13/1999 Social Security Internal " .ascertain if the applicant is delinquent in paying a debt owed to or insured by the Government. In addition. ." Social Security Compensation Administration and Pension Service. in the Treasury order to aid in the collection or compromise of Federal claims against these individuals . . of Social Security Department of benefits . Department of Veterans Affairs "To identify Supplemental Security Income (SSI) recipients who receive benefits and to update their SSI records to reflect the presence of such income. . to locate Administration Revenue certain recipients Service. ." 9/29/1999 9/29/1999 Office of the Department of " . .

Internal Revenue Service. Department of Housing and Urban Development Social Security Administration. . i. income that tenants did not report as required when applying for initial or continued rental assistance. ." " .ascertain if the applicant is delinquent in paying a debt owed to or insured by the Government. ." 9/16/1999 Office of Office of Personnel Workers' Management Compensation Programs.. to identify and/or prevent erroneous payments under the Civil Service Retirement Act (CSRA) or the Federal Employees' Retirement System Act and the Federal Employees' Compensation Act (FECA). .e." 9/14/1999 The Real Estate Assessment Center. identifying potential income discrepancies. Department of Treasury . Department of Labor " .

Finally. law has left firms relatively free to buy or sell entire companies or specific parts of a company. U. This concern is most acute where the participants are direct rivals.MERGERS AND ACQUISITIONS – TYPES OF MERGERS.CHAPTER 15. and liabilities of the merged corporation. A merger is not the same as a consolidation. privileges. Levin. Mergers can bring better management or technical skill to bear on underused assets. Charging Back up the Hill: Workplace Recovery after Mergers. Antitrust merger law seeks to prohibit transactions whose probable anticompetitive consequences outweigh their likely benefits. which retains its identity. The prospect of a lucrative sale induces entrepreneurs to form new firms. The critical time for review usually is when the merger is first proposed. FEDERAL ANTITRUST REGULATION. The possibility of a takeover can discourage company managers from behaving in ways that fail to maximize profits. Mergers. Merger cases examine past events or periods to understand each merging party's position in its market and to predict the merger's competitive impact. and Jack S. 1989. since the 1980s. Martin D. Federal and state laws regulate mergers and acquisitions. Acquisitions and Leveraged Buyouts. A merger or acquisition is a combination of two companies where one corporation is completely absorbed by another corporation. 2003. On the other hand. MERGER GUIDELINES Methods by which corporations legally unify ownership of assets formerly subject to separate controls. many mergers pose few risks to competition. Mitchell Lee. Despite concerns about a lessening of competition. and increase output. Regulation is based on the concern that mergers inevitably eliminate competition between the merging firms. Acquisitions. . CORPORATE MERGER PROCEDURES. and the surviving corporation assumes all the rights. COMPETITIVE CONCERNS.S. A merger can enable a business owner to sell the firm to someone who is already familiar with the industry and who would be in a better position to pay the highest price. the federal government has become less aggressive in seeking the prevention of mergers. Chicago: Commerce Clearing House. in which two corporations lose their separate identities and unite to form a completely new corporation. The less important company loses its identity and becomes part of the more important corporation. improve quality. Ginsburg. A merger extinguishes the merged corporation. Mergers and acquisitions often result in a number of social benefits. The fear that mergers and acquisitions reduce competition has meant that the government carefully scrutinizes proposed mergers. They also can produce economies of scale and scope that reduce costs. This requires enforcement agencies and courts to forecast market trends and future effects. and Down-sizings. because courts often presume that such arrangements are more prone to restrict output and to increase prices. San Francisco: Jossey-Bass. Marks.

The merger created a company valued at $182. payment collection and advertising and may also reduce the cost of communicating and coordinating production. either as forward or backward integration. Conglomerate Mergers Conglomerate mergers are affected among firms that are in different or unrelated business activity. The merger is based on the assumption that it will provide economies of scale from the larger combined unit. The merged company expected $1. Unlike horizontal mergers. The merger will also enable both the companies to pool resources and streamline business and finance with operational efficiencies and cost reduction and also help in development of new products that require synergies. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research.6 billion in pretax cost savings after three years. production. The basic reason is to eliminate costs of searching for prices. where one company survives and the other loses its corporate existence. Vertical Mergers 3. megamerger The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham PLC early this year announced plans to merge resulting in the largest drug manufacturing company globally. which have no specific timing. applied engineering. Example: Glaxo Wellcome Plc. Horizontal Mergers 2.3 per cent share of the global pharmaceutical market. Types of Mergers 1. Example: Merger of Usha Martin and Usha Beltron Usha Martin and Usha Beltron merged their businesses to enhance shareholder value. marketing and so on. Firms that plan to increase their product lines carry out these types of mergers. . The surviving company acquires all the assets and liabilities of the merged company. vertical mergers take place when both firms plan to integrate the production process and capitalize on the demand for the product. and a merger would let them pool their research and development funds and would give the merged company a bigger sales and marketing force. and SmithKline Beecham Plc.Contents Mergers & Acquisitions • Differential Efficiency & Financial Synergy: Theory of Mergers • Operating Synergy & Pure Diversification: Theory of mergers • Costs and Benefits of Merger • Evaluation of Merger as a Capital Budgeting Decision • Calculation of Exchange Ratio Mergers & Acquisitions When two or more companies agree to combine their operations. Both production and inventory can be improved on account of efficient information flow within the organization. through business synergies. contracting.4 billion and with a 7. Forward integration take place when a raw material supplier finds a regular procurer of its products while backward integration takes place when a manufacturer finds a cheap source of raw material supplier. Conglomerate Mergers Horizontal Mergers This type of merger involves two firms that operate and compete in a similar kind of business. The two companies have complementary drug portfolios. Vertical Mergers Vertical mergers take place between firms in different stages of production/operation. a merger is affected. The company that survives is generally the buyer and it either retains its identity or the merged company is provided with a new name.

These include: Friendly Takeover The acquiring firm makes a financial proposal to the target firm’s management and board. Concentric Companies The primary difference between managerial conglomerate and concentric company is its distinction between respective general and specific management functions. Hostile Takeover A hostile takeover may not follow a preliminary attempt at a friendly takeover. The effort to control may be a prelude • To a subsequent merger or • To establish a parent-subsidiary relationship or • To break-up the target firm. When two firms of unequal managerial competence combine. The merger is termed as concentric when there is a carry-over of specific management functions or any complementarities in relative strengths between management functions. For example. They not only assume financial responsibility and control but also play a chief role in operating decisions. the performance of the combined firm will be greater than the sum of equal parts that provide large economic benefits. Differential Efficiency & Financial Synergy: Theory of Mergers Differential Efficiency According to the differential efficiency theory of mergers. then this increase in efficiency is attributed to the merger. Conglomerate mergers have been sub-divided into: • Financial Conglomerates • Managerial Conglomerates • Concentric Companies Financial Conglomerates These conglomerates provide a flow of funds to every segment of their operations. some firms operate below their potential and consequently have low efficiency. ACQUISITIONS The term acquisition means an attempt by one firm. it is not uncommon for an acquiring firm to embrace the target firm’s management in what is colloquially called a bear hug. called target firm. called the acquiring firm. to gain a majority interest in another firm. Such firms are likely to be acquired by other. more efficient firms in the same industry. exercise control and are the ultimate financial risk takers. and dispose off its assets or • To take the target firm private by a small group of investors. They also: • Improve risk-return ratio • Reduce risk • Improve the quality of general and functional managerial performance • Provide effective competitive process • Provide distinction between performance based on underlying potentials in the product market area and results related to managerial performance. This . According to this theory. There are broadly two kinds of strategies that can be employed in corporate acquisitions. if the management of firm A is more efficient than the management of firm B and if after firm A acquires firm B. These types of mergers are also called concentric mergers. This proposal might involve the merger of the two firms. or the creation of parent/subsidiary relationship.This type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. Firms operating in different geographic locations also proceed with these types of mergers. the consolidation of two firms. the efficiency of firm B is brought up to the level of firm A. Managerial Conglomerates Managerial conglomerates provide managerial counsel and interaction on decisions thereby. increasing potential for improving performance.

The financial synergy theory also states that when the cash flow rate of the acquirer is greater than that of the acquired firm.is because. . However. which is less efficient due to lack of adequate managerial resources. managerial synergy is applicable only in cases where the firm acquires other firms in the same industry. a difficulty would arise when the acquiring firm overestimates its impact on improving the performance of the acquired firm. whose management team has greater competency than is required by the current tasks in the firm. This may result in the acquirer paying too much for the acquired firm. their combined debt capacity may be greater than the sum of their individual capacities before the merger. it can diversify and enter into new areas. often successive acquisitions in diversified areas. the managerial capacity of the firm will not develop rapidly enough to be able to transfer its efficiency to several newly acquired firms in a short time. When these surplus resources are indivisible and cannot be released. which has organizational capital alongwith inadequate managerial capabilities. Thus. However. Tax saving is another considerations. the acquirer may not be able to improve the acquired firm’s performance up to the level of the acquisition value given to it. It states that a firm. In such a case. since the surplus managerial resources of the acquirer combine with the non-managerial organizational capital of the firm. Financial Synergy The managerial synergy hypothesis is not relevant to the conglomerate type of mergers. Financial synergy occurs as a result of the lower costs of internal financing versus external financing. Further. This is because. A combination of firms with different cash flow positions and investment opportunities may produce a financial synergy effect and achieve lower cost of capital. the merger will create a synergy. firms with greater efficiency would be able to identify firms with good potential operating at lower efficiency. may seek to employ the surplus resources by acquiring and improving the efficiency of a firm. The managerial synergy hypothesis is an extension of the differential efficiency theory. capital is relocated to the acquired firm and its investment opportunities improve. it will attempt to gain a ‘toehold entry’ by acquiring a firm in that industry. Even if the firm has no opportunity to expand within its industry. a merger enables them to be optimally utilized. They would also have the managerial ability to improve the latter’s performance. since it does not possess the relevant skills related to that business. a conglomerate merger implies several. Alternatively. When the two firms merge.