Master of Business Administration- MBA Semester 3 MF0011 –Mergers and Acquisitions- 4 Credits (Book ID: B1732) Assignment (60 Marks


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Q1.What are the steps for successful mergers? Answer: Steps to a Successful Merger: Merger is defined as a combination where two or more than two companies combine into one company. In this process one company survives and others lose their corporate existence. The survivor acquires assets as well as liabilities of the merged company or companies. Mergers need careful planning to achieve financial goals, reduce problems and for profit-making. Drop in productivity is expected to be around 50% as people from different workplaces have differences of opinion. Even a successful merger can take three months to three years for the completion of recovery process in an organization. For employees, possibility of changes and uncertainty at workplace can create stress. This affects judgments, perceptions, and interpersonal relationships. Often reduced communication and increased centralization as part of restructuring in companies creates space for rumors and insecurity in employees. During these times, employees do not have much access to senior level managers. Active intervention is necessary to maintain the level of productivity and to assure employees.
Some suggestions for a smoother restructuring and transition are:   Circulate a consistent message in the combining entities from top down. Maintain consistent accountability and compensation throughout the company for similar positions.   Find out new ways of structuring the company to bridge corporate culture differences. Establish gauge able objectives, especially in areas, which will be working together for a common goal.  Revamp the compensation plan to recognize the additional work required by transition.

The result requires reconsideration. Explain the key approaches to identify acquisition opportunities. Some financial experts suggest selection criteria based on two approaches: 1. i. Answer: Identifying takeover opportunities: The basic purpose of valuation of target companies is to locate possibilities of takeover. exceeds the required rate of return.. NPV is 4 per share. .a. Capital assets pricing. Present value analysis 2. Target Company’s market price per share ` 50 Target Company's merger @ 100% basis g = Target company's earnings and dividend expected to grow at 8% p. The basic logic behind the model is that if expected rate of return. Valuation serves the purpose of identification of target companies for takeover as well as serves the basic purpose of fixing exchange ratio in case the target company is finally selected for acquisition. Q2. The capital assets pricing model considers this aspect as discussed below. Given data: i = k = Acquirer company's cost of capital 10% do = po = target company's payout ratio ` 1 per share. i.e. the portfolio effect. the target company is a good buy. 54 – 50 = 4. Here. considering the risk element. Using above data and the formula for the constant annual growth rate of dividend as discussed earlier in dividend approach target company's theoretical price is as under: The theoretical price exceeds the market price. The earnings or the target firm are projected and discounted at the acquirer’s cost of capital to obtain a theoretical market price of the shares of the target company. Plan different ways for people to get to know each other. The following example gives you an idea of how to calculate theoretical price. Capital assets pricing This approach provides a superior theoretical framework as it also factors the risk. This approach does not consider the risk posture of acquisition. This is then compared with the actual market price to determine the net present value of investment in the target company..e. Present value analysis The present value analysis is mostly similar to valuation on the basis of steady-state earnings and/or dividends for listed companies.

The process is considered as a multi-stage one and a holistic view of the process is required to appreciate the links between different stages and develop effective value-creating M & A strategies. a five-stage model of mergers and acquisitions was developed by the author Sudi Sudarsanam. etc. acquisitions are made by companies due to one or more of the following strategic intents: • to gain market power • • • to achieve economies of scale to internalise vertically linked operations to save cost on dealing with markets to acquire complementary resources. Answer: The Five-Stage Model To examine the issues that may contribute to the failure of acquisition and value destruction. M & A generally seeks to create value through: . strategic alliances. Business strategy aims to enhance the firm’s competitive positioning on a sustainable basis in its chosen markets. This model advocates a view of M & A as a process rather than a transaction.Write a note on the five stage model. The five stages comprise: • corporate strategy evolution • • • • organising for acquisition deal structuring and negotiations post-acquisition integration post-acquisition audit and organizational learning Stage 1: Corporate strategy evolution The goal of M & A is to achieve corporate and business strategic objectives. E(Rj) = Required return E(Rj) = Expected return E(Rm) = Expected return for market index Rf = Risk-free return Bj = Beta (normally based on past performance) j = Potential merger partner. Both the objectives can be met by M & A but is only one of several alternatives including. The acquirer looks for capabilities that can be leveraged to enhance the competitive advantage of both the firms post-merger. for instance. Generally. outsourcing. Q3.The required rate of return is calculated by solving the following equation: E(Rj) = Rf + [E(Rm) – Rf] (Bj) Where. Achievement of the objectives depends both on the conceptual and empirical validity of the strategy. Corporate strategy aims to achieve ways to optimise the portfolio of businesses that a firm has and how that portfolio can be modified in the interest of the shareholders. organic growth.

Stage 3: Deal structuring and negotiation The result of the processes described in Stages 1 and 2 is the specific target selection. The acquisition is basically a matter of measurement of expected costs and benefits. strategic and financial evaluation of the acquisition proposal and the potential value creation. There are two primary perspectives here: The rational perspective: This view is based on ‘hard’ economic. lawyers and accountants as advisors to the deal obtaining and evaluating maximum intelligence possible about the target company performing due diligence negotiating the senior management positions of the both firms in the postmerger context developing the appropriate bid and defence strategies and tactics within the regulatory and other parameters. The acquisition decision is assumed to be a unified view which requires commitment from all managers within the firm. The author’s contention is that the M & A five-stage process model ensures that the risk involved in value damage are potentially structural in their foundation. Integration of two organisations is not just about making changes in the organisational structure and instituting a new hierarchy of . and managing this risk effectively should be crucial while the acquisition is being considered. Stage 4: Post-acquisition integration The objective of this important stage is to make the merged organisation operational so that the strategic value expectations can be delivered which drove the merger in the first place. The deal-making takes place in this stage.• • • enhancement of revenue while maintaining the existing cost base reduction in cost while maintaining the existing revenue levels generation of new resources and capabilities. which is taken for granted in the rationalist approach. the merger transaction has to be negotiated or a takeover bid to be made. In this view the process of decision-making is more politically complex and has to be carefully managed so that the required clarity and commitment of managers is achieved. thus leading to revenue growth or cost reduction or both. Stage 2: Organising for acquisition It is important to understand the decision process of acquisition because it has a bearing not only on the quality of the decision and its value creation logic but also on the ultimate success of the post-merger integration. The process perspective: This is based on ‘soft’ human dimension. The deal structuring and negotiation process is complex and involves many interconnected steps including: • valuing the target company • • • • • choosing experts like investment bankers. Once the selection has been made by the firm.

necessary to address cultural issues during the integration process. Absorption: This means full consolidation of the operations.authority. systems. Above all. • Holding company: This refers to involving no interaction between portfolio companies. therefore. The value creation logic behind the acquisition dictates the extent to which the capabilities of the two firms need to be merged into a single organisation. Q4. In this stage. Symbiosis-based acquisitions need simultaneous protection and permeability of the boundary between the two firms. it also involves integrating people and changing organisational culture of the merging firms. Companies possessing the right growth strategy through acquisition and the necessary organisational capabilities to manage their acquisitions efficiently and effectively can sustain their competitive advantage far longer and create sustained value for their shareholders. It is. For acquisition-making to become a firm’s core competence. etc. Since it involves redistributing the power between the merging firms. The different stages of industry lifecycle are: Fragmentation Stage: The first stage of the new industry is referred to as fragmentation. possessing robust organisational learning capabilities is a must. The diagram below illustrates the dimensions of need for interdependence vis-à-vis need for autonomy. therefore. reporting systems. or should be. the new industry develops the business. possibly to develop a new hybrid culture. The taxonomy results in four types of post-acquisition integration Preservation: There is a great need for autonomy so that the capabilities of the acquired firm are nurtured by the acquirer with judicious and limited intervention such as financial control while allowing the acquired firm to develop and exploit its capabilities to the full. it is also a politically sensitive stage. Explain the role of industry life cycle. It involves integration of processes. with passive investment by parent more in the nature of a financial portfolio motivated by risk reduction and reduction in capital costs Symbiosis: This refers to two firms initially co-existing but gradually becoming independent. part of their competitive strategy. The extent of integration depends upon the degree of strategic interdependence required between the two firms as a precondition for value creation and capability transfer. . a major factor which determines the success of the acquisition. Integration of organisations may require change in the mindset and behaviour of the people. Answer: Role of Industry Lifecycle: Industry lifecycle has a crucial impact on mergers and acquisitions. organisation and culture of both the firms over time. Developing such learning capabilities is thus integral to the M & A core competence of building effort by multiple or serial acquirers. The entrepreneur plans on how to introduce new products or services into the market. strategies. Conflicts of interest and loyalty will certainly come into play. • • Stage 5: Post-acquisition audit and organisational learning Companies trying to grow through acquisitions need to develop acquisition-making as a core competence and excel in it. It is. This stage of the acquisition process is.

Cooperation. the competition in the industry is rather aggressive. To gain benefits of the growing opportunities. the dominant business model’s efficiency gives companies a competitive advantage over competition (Kotler. A number of reasons can be attributed to the rise in business combinations. some firms may shift some of their production overseas. Due to the presence of many competitors and product substitutes. the market demand may be fully met or suppliers may have a shortage. There is a rapid rise in the value of the industry as well. Many companies also try to merge with other companies in the decline stage Q5.What are the important forces contributing to mergers and acquisitions? Answer: Important Forces Contributing to Mergers and Acquisitions Mergers and acquisitions have become more popular in the era of increased competition. Shake-out: In the industry lifecycle. Achieving improved technical knowhow from the combined entity to cut cost. Decline: The final stage of the industry lifecycle is the decline. 2006). many firms enter this stage through mergers and acquisitions. In this stage many companies leave the market and many other try to take the advantage by acquiring companies which are performing low.The twin problems of innovation and invention are overcome by the entrepreneur at this stage. It is a stage at which there is possibility of a war of slow destruction between businesses resulting in the failure of those with heavy bureaucracies. the second stage is the shake-out stage. improvise on quality and produce better products to retain and improve market share. competition and price take a complex form (Gottschalk & Saether. To gain competitive advantage. Some of these are: • • Safeguarding the sources of raw material Achieving economies of scale by combining production facilities through efficient utilisation of resources • Standardising product specifications and improving product quality. competitors begin realising business opportunities in the emerging industry. At this stage. free flow of capital across geographical boundaries and globalization of business. 2003). A new industry emerges in this stage and it is at this stage. • • • • Reducing competition and protecting existing market Obtaining new markets Enhancing borrowing power of the combined entity on better and enhanced asset backing Gaining economies of scale and increase income with proportionately less investment . Maturity: The third stage of the lifecycle is maturity. In addition.

Although they have stringent reporting requirements. Leveraged buyouts are cash transactions where cash is borrowed by the acquiring firm and the debt financing represents 50% or more of the purchase price. Senior debt: The debt that is at the topmost rank amongst all the other debts and equity capital in the business is the senior debt. . Mezzanine finance: It is an alternative to high yield bonds and is considered as a type of intermediate financing between debt and equity. the concept of Leveraged Buyout (LBO) has emerged. Q6. It is usually high risk subordinated debt. Subordinated debt: In the order of priority in any liquidation.• • • • Reducing tax liability because of the provision of setting off accumulated losses and unabsorbed depreciation of one company against the profits of another Achieving diversification. The high yield bond. the terms of senior debt in an LBO requires debt repayment over a period of 7 years approximately through equal annual instalments 2. which is often listed in the Indian markets. the terms are less stringent compared to the senior debt. The lenders can opt for an enhanced return which is made available to them by the grant of an ‘equity kicker’ (e. Usually the obligations are quite stringent. High yield bonds that are publicly handed over to institutional investors can either be senior or subordinated securities. In this debt. Such acquisitions need huge amounts of finance. A syndicate of banks and specialised funds generally hold the bank loans. A typical structure of a bank loan is up to three trenches: ‘A’. mergers and acquisitions have assumed significance both within the country and across borders. Utilising under-utilised manpower. they are fixed rate. subordinated debt is ranked after senior debt. Most of the times. which implies that if there is a breach in the obligations under the loan agreement. Sometimes a part of the requirement is secured with the fixed assets of the firm and to raise the balance amount unrated or low-rated debt known as junk bond financing is utilized Modes of LBO Financing There are many types of financing used in an LBO. Offering enhanced satisfaction to consumers. Specific assets of the company generally secure the debt. These include the following (in order of their risk): 1. In search for an ideal mechanism to finance an acquisition. 3. Generally the tangible assets of the target company are used as security for borrowing by the acquiring firm. is an increasingly significant form of subordinated debt. repayment is required in the form of one ‘bullet’ payment. ‘B’ and ‘C’. At the end of the term. What is leveraged buyout? Explain the different modes of LBO Financing. Lending costs are typically higher in this debt as it offers less security to the lender than in senior debt. Answer: In the realm of ever-increasing globalisation.g. can be publicly traded and offer long term securities with a looser covenant package in comparison to senior debt. therefore the cost of debt is lower. LBO is a financing technique of purchasing a private company with the help of borrowed or debt capital. the lender automatically takes over the assets.

majority of the upside will be enjoyed by ordinary shareholders. Preference share: It is a part of the company’s share capital. shares and options) that can be crystallized upon an exit. 4. . 5. 6. It gives a fixed dividend and fixed share of the company’s equity which depends on the availability of adequate profits. if the company is successful. However. It usually includes an attached equity warrant for larger financings. Ordinary shares: It is the riskiest among the parts of a LBO’s capital structure. An investigation should be carried out with the company’s advisers whether or not loan stock is tax deductible.warrants. Loan stock: It can be regarded as a form of equity financing once it is convertible into equity capital. PIK is a form of this and reflects interest ‘Pain in Kind’. or rolled up into the principal.

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