MF0002 (MF0011) Solved Assignment ( Set 1 & 2) | Leveraged Buyout | Mergers And Acquisitions

Q.1 Give some examples of synergies from Merger .

Ans:- Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge.Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial. Varieties of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

• • • • •

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.

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. We will discuss this further in part four of this tutorial.

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.

The following are examples of the types of synergies commonly anticipated. Although these benefits have been categorized as marketing, operating, financial and strategic, these classifications sometimes overlap. Marketing

Benefits associated with increased market share, such as savings in advertising costs or increased corporate awareness;

The elimination of a competitor, thereby reducing price competition and the threat of new products being introduced by that competitor;

• •

Improved market coverage resulting from the integration of product lines; Access to new customers to whom the acquirers' existing products can be sold; and

Improved distribution of products from better utilization of the marketing organization and distribution channels of the combined entities.

Operating

The ability to immediately transfer technology of the purchaser's business to the vendor's business (or vice versa), thereby increasing profitability and eliminating the time that the vendor would otherwise require to develop the same capabilities internally;

Higher capacity utilization leading to incremental throughput, utilization of engineering and design services, and overall operating efficiencies;

Increased purchasing power; and headcount reductions.

Financial

Accelerated growth potential for the vendor's business through access to lower cost and/or more varied financial resources enjoyed by the purchaser;

Benefits associated with a more efficient capital structure for the combined firm arising from its greater consolidated asset base, and improved cash flow generation capability following the transaction; and

Where the acquirer is a publicly held company, greater size may lead to increased investor interest and stock analyst coverage, thereby reducing the acquirers' cost of raising equity capital.

Strategic

Acquisition of additional capacity and/or existing know-how and market presence on a 'buy' rather than 'build' basis;

• •

Potential risk reduction resulting from upstream/downstream integration opportunities; Entry into a new strategically important market, from either a product or geographic standpoint;

A reduction in risk through greater diversification of products and/or markets; and

So-called 'scarcity value' related to the unusual or unique attributes of the target company as viewed by acquirers.

Costs of realizing synergies While corporate acquirers frequently emphasize the anticipated benefits from an acquisition, they often do not give adequate pre-acquisition consideration to the costs of integration, the timing of the anticipated proceeds, and the probability factors related to the actual realization of the perceived benefits. This may occur because synergy assessments are overly optimistic as a result of inadequate analysis, overly optimistic to rationalize the price that is perceived necessary to secure the acquisition, or do not adequately consider post-acquisition competitor strategies and activities. Examples of incremental expenditures that may be required to obtain anticipated synergies include the following:
• •

Severance costs associated with headcount reductions; Lease termination payments and facilities disposition costs, including relocation expenses;

General integration and monitoring costs related to the implementation of policies and procedures, quality standards, computer system integration, and so on;

Turnover of key personnel in the acquired business due to uncertainty, differing management philosophies, or those who seek other career opportunities;

Deferred costs, where the vendor has deferred certain expenses (such as equipment maintenance, research and development, and advertising) in the months (or years) prior to sale in order to improve its financial results;

Contingent or inadequately accrued liabilities, including pending litigation, postretirement benefits, warranty reserves, environmental and cleanup costs, for example; and

Capital expenditures and working capital requirements needed to finance anticipated revenue growth.

An example of synergy valuation

Buyerco is considering the acquisition of Targetco and has estimated the intrinsic value of the shares of Targetco to be $23 million, based on Targetco's annual prospective discretionary cash flows of $2.5 million and an 11% rate of return (i.e. capitalization rate), which Buyerco considers appropriate in this case. In addition, Buyerco anticipates that the following postacquisition synergies will arise through the purchase of Targetco:

Staff reductions resulting in savings of $400,000 per annum. Severance costs are expected to be $200,000, and Buyerco's income tax rate is 40%;

Incremental revenues of $1 million in the first year following acquisition, $2 million in the second year and $3 million in the third year and thereafter. Targetco's contribution margin on incremental sales is estimated at 30%. Due to excess operating capacity at Targetco, it will not incur any incremental fixed costs or additional capital expenditures. Working capital requirements are estimated at 10% of revenues;

Due to Buyerco's ability to utilize a more efficient capital structure in its consolidated operations, the required rate of return for Targetco will decline from 11% to 10%; and

Buyerco views the acquisition of Targetco as strategically important because it will allow Buyerco access to an important new market that would have been difficult to enter without this acquisition. Buyerco estimates the value of this benefit to be $5 million.

Assuming that Buyerco applies a 50% probability factor to anticipated post-acquisition synergies and that a 10% rate of return is considered appropriate, the price Buyerco may be prepared to offer for the shares of Targetco is estimated as follows: The quantification of perceived post-acquisition synergies is a subjective and fact-specific exercise. However, in any open market transaction it is important for both the buyer and seller to consider what anticipated synergies might arise and to attempt to quantify their value. From the seller's standpoint, this will assist in determining which potential purchasers to solicit and the estimated price that each might pay. For the purchaser, an assessment of synergies is important from the perspective of determining all the potential value components of the acquisition candidate, and in estimating the price that competitors might pay. In most cases, both the prospective buyer and seller in an open market transaction improve their respective negotiating position through a detailed and objective assessment of anticipated post-acquisition synergies,

the expected timing of those benefits, the related costs, and the likelihood of their ultimate realization. Q.2 Why strategy important for M&A Planning? Ans:- A sound strategic planning can protect any merger from failure. The important issues that should be kept in mind at the time of developing Merger and Acquisition Strategy. Merger and Acquisition Strategies are extremely important in order to derive the maximum benefit out of a merger or acquisition deal. It is quite difficult to decide on the strategies of merger and acquisition , specially for those companies who are going to make a merger or acquisition deal for the first time. In this case, they take lessons from the past mergers and acquisitions that took place in the market between other companies and proved to be successful. Through market survey and market analysis of different mergers and acquisitions, it has been found out that there are some golden rules which can be treated as the Strategies for Successful Merger or Acquisition Deal. Some of the essential elements in strategic planning process of merger and acquisition are as listed here below. 1. Before entering in to any merger or acquisition deal, the target company's market performance and market position is required to be examined thoroughly so that the optimal target company can be chosen and the deal can be finalized at a right price. 2. Assessment of changes in the organization environment 3. Evaluation of company capacities and limitations 4. Assessment of expectations of stakeholders 5. Analysis of company, competitors, industry, domestic economy and international economies 6. Formulation of the missions, goals and policies 7. Development of sensitivity to critical external environmental changes 8. Formulation of internal organizational performance measurements 9. Formulation of long range strategy programs 10. Formulation of mid-range programmes and short-run plans 11. Organization, funding and other methods to implement all of the proceeding elements 12. Information flow and feedback system for continued repetition of all essential elements and for adjustment and changes at each stage

13. Review and evaluation of all the processes 14. Target holding unique market position 15. A potential turnaround situation 16. Complimentary skill sets 17. Geographic expansion move 18. Ability to cut duplicate costs and improve profit 19. Elimination of competition 20. Increase in breadth and depth of product line 21. Improvement of IPO possibility 22. Access to new customer base 23. Stopping opportunities for key competitor In each of these activities, staff and line personnel have important responsibilities in the strategic decision making processes. The scope of mergers and acquisition sets the tone for the nature of mergers and acquisition activities and in turn affects which have significant influence over these activities,. This can be seen by observing the factors considered during the different stages of mergers and acquisition activities. Proper identification of different phases and related activities smoothens the process involved in merger.
Q.3 Fill in the blanks below, and discuss your results. Comparable Companies Ratio (Company W is compared with Companies TA, TB, TC) Ratio Enterprise market value / revenues Enterprise market value / EBITDA Enterprise market value / Free Cash Flow Company TA 2 20 Company TB 2.5 10 Compan y TC 1 5 Averag e

30

20

25

Application of valuation Ratios to Company W Actual recent data for Company W Revenues =$200 EBITDA = $10 Free cash flows = $5 Average Ratios Indicated Enterprise Market Value

Average=

Ans : Ratio Enterprise market value / revenues Enterprise market value / EBITDA Enterprise market value / Free Cash Flow Company TA 2 Company TB 2.5 Compan y TC 1 Avera ge 4.83

20

10

5

31.67

30

20

25

58.33

Average of Company TA

=

2.0 + 20+ 30 3 52 3 17.33 2.5 + 10+ 20 3 32.5 3

= =

Average of Company TB

=

=

=

10.83 1.0 + 5+ 25 3 31 3 10.33

Average of Company TC

=

= = Valuation Ratios to Company W
Revenues = 200 EBITDA = 10 Free cash flows = 5

Enterprise value is calculated as follows: Market Capitalization + Total Debt - Cash = Enterprise Value

200 + 10 – 5 = 205
Enterprise Market Value = 205 Calculate Ratio

Enterprise market value / revenues 205/ 200

1.02
Enterprise market value / EBITDA 205/ 10 20.5 Enterprise market value / Free Cash Flow

205/5 41 1.02 + 20.5 + 41 3 62.52

Average =
=

3
=

20.84

Company W is compared with Companies TA, TB, TC and get the result Average of Company W better than Company TA, Company TB & Company TC. Q.4 Write Reasons for International Mergers and Acquisitions? Ans:- International mergers and acquisitions are growing day by day. These mergers and acquisitions refer to those mergers and acquisitions that are taking place beyond the boundaries of a particular country. International mergers and acquisitions are also termed as global mergers and acquisitions or cross-border mergers and acquisitions. Globalization and worldwide financial reforms have collectively contributed towards the development of international mergers and acquisitions to a substantial extent. International mergers and acquisitions are taking place in different forms, for example horizontal mergers, vertical mergers, conglomerate mergers, congeneric mergers, reverse mergers, dilutive mergers, accretive mergers and others. International mergers and acquisitions are performed for the purpose of obtaining some strategic benefits in the markets of a particular country. With the help of international mergers and acquisitions, multinational corporations can enjoy a number of advantages, which include economies of scale and market dominance. International mergers and acquisitions play an important role behind the growth of a company. These deals or transactions help a large number of companies penetrate into new markets fast and attain economies of scale. They also stimulate foreign direct investment or FDI. The reputed international mergers and acquisitions agencies also provide educational programs and training in order to grow the expertise of the merger and acquisition professionals working in the global merger and acquisitions sector.

The rules and regulations regarding international mergers and acquisitions keep on changing constantly and it is mandatory that the parties to international mergers and acquisitions get themselves updated with the various amendments. Numerous investment bank professionals, consultants and attorneys are there to offer valuable and knowledgeable recommendations to the merger and acquisition clients.

Motivations for M&A include:
• • • • • • •

access to economies of scale and scope; market power; access to new markets; access to inputs, including labour as well as raw materials and technologies; complementarity of products; diversification; pre-emption;

Q.5 Write the guide lines for successful mergers and acquisitions Activity? Ans:- Mergers and acquisitions that are well-conceived and properly executed can create greater value. Whether it be companies merging together to strengthen their market position or the acquisition of a failing business, the global recession has created ample opportunity for M&A across sectors. However, according to Bain & Company, many acquirers lose huge amounts of value in these deals, as they often stumble during the post–merger integration process. The business consulting firm explains that companies should tailor their integration process to identify value, keep their best employees and focus on critical decisions which will affect the deal. In a new report titled ‘10 Steps to successful M&A integration’, Bain & Company has provided guidelines that businesses should follow to aid smooth and successful business integration. Successful integration-the key to avoiding the risks of a merger or acquisition and to realizing its potential value-is always a challenge. And it is complicated by the simple fact that no two deals should be integrated in the same way, with the same priorities, or under exactly the same timetable. But 10 essential guidelines can make the task far more manageable and lead to the right outcome:
1.

Follow the money : Every merger or acquisition needs a well-thought-out deal thesis-an objective explanation of how the deal enhances the company's core strategy. "This deal will give us privileged access to attractive new customers and channels." "This deal will

take us to clear leadership positions in our 10 priority markets." A clear deal thesis shows where the money is to be made and where the risks are. It clarifies the five to 10 most important sources of value-and danger-and it points you in the direction of the actions you must take to be successful. It should be the focus of both the due diligence on the deal and the subsequent integration. It is the essential difference between a disciplined and an undisciplined acquirer. The integration taskforces are then structured around the key sources of value. It is also necessary to translate the deal thesis into tangible nonfinancial results that everyone in the organization can understand and rally around-for example, one salesforce or one order-to-cash process. The teams naturally need to understand the value for which they are accountable, and should be challenged to produce their own bottom-up estimates of value right from the start. That will allow you to update your deal thesis continuously as you work toward close and cutover-the handoff from the integration team to frontline managers.
2.

Tailor your actions to the nature of the deal : Anyone undertaking a merger or acquisition must be certain whether it is a scale deal-an expansion in the same or highly overlapping business-or a scope deal-an expansion into a new market, product or channel (some deals, of course, are a mix of the two types). The answer to the scale-or-scope question affects a host of subsequent decisions, including what you choose to integrate and what you will keep separate; what the organizational structure will be; which people you retain; and how you manage the cultural integration process. Scale deals are typically designed to achieve cost savings and will usually generate relatively rapid economic benefits. Scope deals are typically designed to produce additional revenue. They may take longer to realize their objectives, because cross-selling and other paths to revenue growth are often more challenging and time-consuming than cost reduction. There are valid reasons for doing both types of transactions-though success rates in scope deals tend to be lower-but it is critical to design the integration program to the deal, not vice versa. Consider the recent spate of announcements about computer hardware companies buying services businesses. In 2008, it was Hewlett-Packard buying EDS. More recently, Dell announced the acquisition of Perot Systems, and Xerox made a bold move for ACS that will more than double the size of its workforce. These are clearly scope deals, as these companies search for ways to move up the value chain into more profitable lines of business. And they require a new type of integration effort for these hardware companies. If HP, for example, applied the same principles and processes that it used in integrating Compaq, it would greatly complicate the EDS acquisition.

3.

Resolve the power and people issues quickly : The new organization should be designed around the deal thesis and the new vision for the combined company. You'll want to select people from both organizations who are enthusiastic about this vision and can contribute the most to it. Set yourself an ambitious deadline for filling the top levels

and stick to it-tough people decisions only get harder with time. Moreover, until you announce the appointments, your best customers and your best employees will be actively poached by your competitors when you are most vulnerable to attack. The sooner you select the new leaders, the quicker you can fill in the levels below them, and the faster you can fight the flight of talent and customers and the faster you can get on with the integration. Delay only leads to endless corridor debate about who is going to stay or go and spending time responding to headhunter calls. You want all this energy focused on getting the greatest possible value out of the deal. The fallout from delays in crucial personnel decisions is all too familiar. When GE Capital agreed to buy Heller Financial in 2001, paying a nearly 50 percent premium over Heller's share price at the time, GE Capital indicated that it would need to reduce Heller's workforce by roughly 35 percent to make the deal viable. But it didn't move quickly to say who would remain. Key players departed before waiting to find out, and several helped Merrill Lynch create a rival middle-market unit the following year.
4.

Start integration when you announce the deal : Ideally, the acquiring company should begin planning the integration process even before the deal is announced. Once it is announced, there are several priorities that must be immediately addressed. Identify everything that must be done prior to close. Make as many of the major decisions as you can, so that you can move quickly once close day arrives. Get the top-level organization and people in place fast, as we noted-but don't do it so fast that you lose objectivity or that you shortcut the necessary processes. One useful tool is a clean team-a group of individuals operating under confidentiality agreements and other legal protocols who can review competitive data that would otherwise be off limits to the acquirer's employees. Their work can help get things up to speed faster once the deal closes. In late 2006, for example, Travelport-owner of the Galileo global distribution system (GDS) for airline tickets-announced that it intended to acquire Worldspan, a rival GDS. The two companies used a clean team to work through many critical people and technology issues while they awaited final regulatory approval from the European Commission. When regulators gave the green light, the company was able to begin integration immediately rather than spending weeks waiting to gather the necessary data and making critical decisions in a rush.

5.

Manage the integration through a "Decision Drumbeat" : Companies can create endless templates and processes to manage an integration. But too much program office bureaucracy and paperwork distract from the critical issues, suck the energy out of the integration and demoralize all concerned. The most effective integrations instead employ a Decision Management Office (DMO); and integration leaders, by contrast, focus the steering group and taskforces on the critical decisions that drive value. They lay out a decision roadmap and manage the organization to a Decision Drumbeat to ensure that each decision is made by the right people at the right time with the best available information.

To get started, ask the integration taskforce leaders to play back the financial and nonfinancial results they are accountable for, and in what timeframe. That will help identify the key decisions they must make to achieve these results, by when and in what order. Using this method, one global consumer products company recently was able to exceed its synergy targets by 40 percent-faster than originally planned-while retaining 75 percent of the top talent identified. Handpick the leaders of the integration team : An acquisition or merger needs a strong leader for the Decision Management Office. He or she must have the authority to make triage decisions, coordinate taskforces and set the pace. The individual chosen should be strong on strategy and content, as well as process-in other words, one of your rising stars. Ideally, this individual and other taskforce leaders will spend about 90 percent of their time on the integration. Given the importance of maintaining the base business's performance while you're pursuing integration, one solution is to put the No. 2 person in a country or function in charge of the integration taskforce. The chief can take over the No. 2's responsibilities for the duration. 7. Commit to one culture : Every organization has its own culture-the set of norms, values and assumptions that govern how people act and interact every day. It's "the way we do things around here." One of the biggest challenges of nearly every acquisition or merger is determining what to do about culture. Usually the acquirer wants to maintain its own culture. Occasionally, it makes the acquisition in hopes of infusing the target company's culture into its own. Whatever the situation, commit to the culture you want to see emerge from the integration, talk about it and put it into practice. A diagnostic can help reveal the gaps between the two, provided acquirers are appropriately skeptical about people's descriptions of their organization's culture and provided they recognize their own potential biases. 8. Win hearts and minds : Mergers and acquisitions make people on both sides of the transaction nervous. They're uncertain what the deal will mean. They wonder whetherand how-they will fit into the new organization. All of this means that you have to "sell" the deal internally, not just to shareholders and customers.
6.

Consider the challenge faced by InBev, the global beverage company, in acquiring Anheuser-Busch, one of the most iconic American brands. Early in the integration process, the leadership team focused on the most effective way to introduce InBev's longterm global strategy to Anheuser-Busch managers and employees. One powerful tool was InBev's "Dream-People-Culture" mission statement, which was tailored to the US company and introduced into the Anheuser-Busch lexicon with strong messages emphasizing the value of its customers and products, to excite the imagination of the AB organization. It's vital that your messages be consistent. If you are acquiring a smaller company and the deal is mostly about taking out costs, for instance, don't focus on a "Best of Both Organizations" in your first town-hall speech. In general, it's wise to concentrate on what the deal will mean in the future for your people, not on the synergies it will produce for the

organization. "Synergies," after all, usually means reducing payroll, among other thingsand people know that.
9.

Maintain momentum in the base business of both companies-and monitor their performance closely : It's easy for people in an organization to get caught up in the glamour of integrating two organizations. For the moment, that's where the action is. The future shape of the company, including jobs and careers, appears to be in the hands of the integration taskforces. But if management allows itself and the organization to get distracted, the base business of both companies will suffer. If everybody's trying to manage both the ongoing business and the integration, nobody will do either job well. The CEO must set the tone here. He or she should allocate the majority of time to the base business and maintain a focus on existing customers. Below the CEO, at least 90 percent of the organization should be focused on the base business, and these people should have clear targets and incentives to keep those businesses humming. By having No. 2s running the integration, their bosses should be able to make sure the base business maintains momentum. Take particular care to make customer needs a priority and to bundle customer and stakeholder communications, especially when systems change and customers may be confused about who to deal with. Meanwhile, establish an aggressive integration timeline with a countdown to cutover-the day when the primary objectives of integration are completed and the two businesses begin operating as one. To make sure things stay on track, monitor the base business closely throughout the integration process. Emphasize leading indicators like sales pipeline, employee retention and call-center volume. Olam International, a global leader in the agri-commodity supply chain business with $6 billion in annual revenues, has managed to maintain its base business while incorporating a stream of acquisitions. In 2007, for instance, Olam purchased Queensland Cotton, with trading, warehousing and ginning operations in the US, Australia and Brazil. Olam ensured that a core part of the Queensland Cotton team remained focused on the base business, while putting together a separate team made up of Queensland Cotton and Olam employees to manage the integration. That helped the company navigate difficult conditions due to drought in Australia, while also growing their Brazil and US businesses well above the market. Olam's acquisitions contributed 16 percent to its total sales volumes in fiscal year 2009 and 23 percent to its earnings, which have grown at an overall rate of 45 percent CAGR since 1990.

10.

Invest to build a repeatable integration model : Once you have achieved integration, take the time to review the process. Evaluate how well it worked and what you would do differently next time. Get the playbook and the names of your integration experts down on paper, so that next time you will be able to do it better and faster-and you will be able to realize that much more value from a merger or acquisition.

Bain has done extensive research on what drives success in acquisitions, including two Learning Curve studies completed in 2004 and again in 2007. The data is compelling. Frequent acquirers consistently outperform infrequent acquirers as well as companies that do no deals at all. If you had invested $1 in each group, the returns from the frequentacquirer group would be 25 percent greater than the infrequent group over a 20-year period. Over the last 15 years, a number of companies, including Cisco Systems, Danaher, Cardinal Health, Olam International and ITW, have shown that you can substantially beat the odds if you get the integration process right and make it a core competency. Making it happen: The Decision Drumbeat in practice A Decision Drumbeat is the way to focus your senior management and integration taskforces quickly on the critical decisions necessary for a merger integration to succeed. Here's how one global consumer products company applied this approach to sucessfully integrate a major competitor in record time: Focus on the fundamentals. The first rule is to clearly articulate the financial and non-financial results you expect, and by when. Parcel out these results to each of the integration taskforces, and have them work out the decisions necessary to get there. Pare these decisions down to the bare essentials-just what's necessary to deliver one integrated company on schedule. It's important to distinguish between integration and optimization decisions. The latter should be put off until the integration is complete. For the consumer products company, it was imperative to quickly equip the salesforce with an integrated portfolio of brands for the busy trading period, despite the fact that some of the brands were aimed at the same consumers and were positioned in similar ways. The answer in this case was to quickly decide how to target the brands at different outlets, and to leave decisions about fundamental brand repositioning for later, after cutover to a single combined company. Coordinate decisions. Any integration involves a large number of decisions in a short time frame, and many of those decisions are highly interdependent. So the timing of decisions needs to be closely coordinated, and everyone needs to understand the impact their actions have on others. For instance, most marketing teams would prefer to wait until the end of the integration process to recommend the final product portfolio. Recognizing this tendency, the consumer products company quickly made a decision on the brand portfolio. That set up a series of cascading decisions: Within four weeks, the company had created new SKU lists, order forms and sales scripts, and had trained the salesforce so that they were able to sell each brand when they hit the streets representing the combined company. The Decision Management Office plays an important coordinating role: first, by helping the taskforces work out which decisions must be made to deliver their results;

second, by ensuring that the decisions are made and executed in the right order to support the decision deadlines of other taskforces. No one else has the integrated view of the timing and the value at stake. Assign decision rights and roles. The Decision Management Office should then map out who is responsible for each decision and communicate that to all involved. One of the most effective ways to clarify decision roles, in our experience, is a system we call RAPID-a loose acronym for Recommend (which usually involves 80 percent of the work); offer Input; Agree or sign off on (limited to rare circumstances, for example, when fiduciary responsibilities are involved); Decide, with one person assigned the "D"; and Perform, or execute the decision. The resulting decision roadmap shows who is accountable for each major decision and when that decision needs to be taken. At the consumer products company, the steering group focused on the 20 percent of decisions that were most critical to integration success, leaving the remainder of the decisions to the integration taskforces. That meant the integration was able to move at maximum speed and, by empowering the taskforce leaders, many gained priceless management experience that led to eventual promotions. Stick to the timetable. Actively ensure that everyone is on track to make their decisions. The Decision Management Office ensures that each taskforce has what it needs from other taskforces or from the steering group to make their decisions on time through the weekly drumbeat of meetings with each of the taskforces. When necessary, bring in experts to speed up team delivery; and bring teams together for major decision points and cutover plans, which require detailed and coordinated planning. Focus your working sessions on critical trade-offs and the additional work required to resolve them. Here, again, the consumer products company kept to the deadline by providing extra help to the taskforces when they risked missing decision deadlines-to ensure union negotiators had what they needed to secure agreement from manufacturing employees, for instance, or to work around obstacles in the distribution system when containers from the two companies did not fit on the same trucks. As one senior executive later said: "We focused on decisions, not on process for process's sake. From day one we had a focused plan that everyone understood and believed in, and that really energized the team." As we emerge from the global recession, companies should prepare to take advantage of attractive asset values and to capture the benefits garnered by frequent acquirers. But they must act with judgment and finesse. Winners in this game will bring a tailored approach to integration, adjusting their approach to the deal thesis with one eye constantly fixed on the critical sources of value and risk. The most experienced acquirers not only understand these 10 steps to a successful

integration, they also understand how to adjust their application to the deal and the circumstances.

Q.6 Write the reasons for joint ventures? Ans:- As there are good business and accounting reasons to create a joint venture with a company that has complementary capabilities and resources, such as distribution channels, technology, or finance, joint ventures are becoming an increasingly common way for companies to form strategic alliances. In a joint venture, two or more “parent” companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control. Broadly, the important reasons for forming a joint venture can be presented below: Internal Reasons to Form a JV • • Spreading Costs: You and a JV partner can share costs associated with marketing, product development, and other expenses, reducing your financial burden. Opening Access to Financial Resources: Together you and a JV partner might have better credit or more assets to access bigger resources for loans and grants than you could obtain on your own.

Connection to Technological Resources: You might want access to technological resources you couldn't afford on your own, or vice versa. Sharing innovative and proprietary technology can improve products, as well as your own understanding of technological processes. Improving Access to New Markets: You and a JV partner can combine customer contacts and together even form a joint product that accesses new markets. Help Economies of Scale: Together you and a JV partner can develop products or services that reduce total overall production expenses. Bring your product to market cheaper where the customer can enjoy the cost savings. External Reasons to Form a JV Develop Stronger Innovative Product: Together you and a JV partner may be able to share ideas to develop a product that is more competitive in your industry. Improve Speed to Market: With shared access to financial, technological, and distribution resources, you and a JV partner can get your joint product to market faster and more efficiently. Strategic Move Against Competition: A JV may be able to better compete against another industry leader through the combination of markets, technology, and innovation. Strategic Reasons Synergistic Reasons: You may find a JV partner with whom you can create synergy, which produces a greater result together than doing it on your own. Share and Improve Technology and Skills: Two innovative companies can share technology to improve upon each other's ideas and skills. Diversification - There could be many diversification reasons: access to diverse markets, development of diverse products, diversify the innovative working force, etc. Don't let a JV opportunity pass you by because you don't think it will fit in with your own small business. Small and big companies alike can benefit from the reasons listed above. Analyze how your company can benefit internally, externally, and strategically, and then find a joint venture partner that will fit with your needs.

Q.1 Explain the differences between a flip- in and flip over poison pill? Ans:- Poison pills take a wide variety of forms, but today most are based on the class of security known as a right. Hence, the pill's official name, the "shareholder rights plan." A traditional right, such as a warrant, grants the holder the option to purchase new shares of stock of the issuing corporation. The modern poison pill adds two additional elements not found in traditional rights: "flip in" and "flip over" provisions. Rights are corporate securities that give the holder of the right the option of purchasing shares. Because issuance of rights does not require shareholder approval, a rights based pill may be adopted by the board of directors without any shareholder action. When adopted, the rights initially attach to the corporation's outstanding common stock, cannot be traded separately from the common stock, and are priced so that exercise of the option would be economically irrational. The rights become exercisable, and separate from the common stock, upon a so called distribution event, which is typically defined as the acquisition of, or announcement of an intent to acquire, some specified percentage of the issuer's stock by a prospective acquirer. (Twenty percent is a commonly used trigger level.) Although the rights are now exercisable, and will

remain so for the remainder of their specified life (typically ten years), they remain out of the money. Flip-over rights plans are triggered after a merger is complete while flip-in plans are triggered if the acquiring firm passes a predetermined ownership level in the target. If triggered, poison pills will burden either acquiring firms or target firms with additional financial liabilities or extreme dilution of earnings and ownership. Each type of pill has varying degrees of poison, and therefore, different probabilities of deterring an acquisition. One problem with flip-over rights plans is that acquiring firms can simply purchase less than 100% ownership in the target, take control of the board of directors and the assets of the firm, and ignore the pill because the triggering event has not occurred. The ownership flip-in provision was added to make the pills more poisonous and to substantially increase the cost of a takeover. Shareholders do not have to wait for an actual change in control to exercise their rights. With flip-in plans, shareholders can exercise their rights immediately after a bidder owns a predetermined percentage of shares. Flip-in pills give shareholders the right to purchase a security that has an exercise price well above current market price or any reasonable expectations of short-term future prices. Before the triggering event, shareholders have no incentive to exercise their rights. However, when a particular acquiring firm accumulates enough shares to pass the ownership threshold, the flip-in rights become valuable because they offer target shareholders the opportunity to purchase target shares at steep discounts. There is typically a ten day period from the trigger date to the date of the automatic new issue of stock and this period is crucial for target management to establish a stronghold for the merger or acquisition negotiations. If managers believe that the bidder intends to fully realize the long-term value of the target shares, they can redeem the pills and negotiate a change of control transaction. However, if managers believe the bidder is hostile and intends to drain the capital and human asset base of the target, they can authorize the new issue and allow all shareholders other than the acquiring firm to exercise their rights. The automatic new issue of target stock lowers the value of the shares that the bidder holds and forces the purchase of additional shares. Q.2 What does an LBO accomplish in Mergers and Acquisitions? Ans:- The term leveraged buyout (LBO) describes an acquisition or purchase of a company financed through substantial use of borrowed funds or debt. In fact, in a typical LBO, up to 90 percent of the purchase price may be funded with debt. During the 1980s, LBOs became very common and increased substantially in size, so that they normally occurred in large companies with more than $100 million in annual revenues. But many of these deals subsequently failed due to the low quality of debt used, and thus the movement in the 1990s was toward smaller deals (featuring small- to medium-sized companies, with about $20 million in annual revenues) using less leverage. Thanks to low stock prices, looser regulatory restrictions, and a rally in high-yield bonds, Barron's predicted that 2001 would be the biggest year since the 1980s for LBOs.

The most common leveraged buyout arrangement among small businesses is for management to buy up all the outstanding shares of the company's stock, using company assets as collateral for a loan to fund the purchase. The loan is later repaid through the company's future cash flow or the sale of company assets. A management-led LBO is sometimes referred to as "going private," because in contrast to "going public"—or selling shares of stock to the public—LBOs involve gathering all the outstanding shares into private hands. Subsequently, once the debt is paid down, the organizers of the buyout may attempt to take the firm public again. Many management-led, small business LBOs also include employees of the company in the purchase, which may help increase productivity and increase employee commitment to the company's goals. In other cases, LBOs are orchestrated by individual or institutional investors, or by another company. According to Jennifer Lindsey in her book The Entrepreneur's Guide to Capital, the best candidate for a successful LBO will be in growing industry, have hard assets to act as collateral for large loans, and feature top-quality, entrepreneurial management talent. It is also vital that the LBO candidate post a strong historical cash flow and have low capital requirements, because the debt resulting from the LBO must be retired as quickly as possible. Ideally, the company should have at least twice as much cash flow as will be required for payments on the proposed debt. The LBO debt should be reduced to 50 percent of overall capitalization within one year, and should be completely repaid within five to seven years. Other factors improving the chances for a successful LBO include a strong market position and an established, unconcentrated customer base. In order to improve the chances of success for an LBO, Lindsey noted that the deal should be undertaken when interest rates are low and the inflation rate is high (which will make assets more valuable). It is also vital that a management, employee, or outside investment group wants to own and control the company. Many LBOs involving small businesses take place because the owner wants to cash out or retire and does not want to sell to a larger company. LBOs can be very costly for the acquiring parties, with expenses including attorney fees, accounting evaluations, the printing of prospectus and proxy statements, and interest payments. In addition, if either the buyer or the seller is a public company, an LBO will involve strict disclosure and reporting requirements with both federal and state government agencies. Possible alternatives to an LBO include purchase of the company by employees through an Employee Stock Ownership Plan (ESOP), or a merger with a compatible company.

Advantages and Disadvantages A successful LBO can provide a small business with a number of advantages. For one thing, it can increase management commitment and effort because they have greater equity stake in the company. In a publicly traded company, managers typically own only a small percentage of the common shares, and therefore can participate in only a small fraction of the gains resulting from improved managerial performance. After an LBO, however, executives can realize substantial financial gains from enhanced performance. This improvement in financial incentives for the

firm's managers should result in greater effort on the part of management. Similarly, when employees are involved in an LBO, their increased stake in the company's success tends to improve their productivity and loyalty. Another potential advantage is that LBOs can often act to revitalize a mature company. In addition, by increasing the company's capitalization, an LBO may enable it to improve its market position. Successful LBOs also tend to create value for a variety of parties. For example, empirical studies indicate that the firms' shareholders can earn large positive abnormal returns from leveraged buyouts. Similarly, the post-buyout investors in these transactions often earn large excess returns over the period from the buyout completion date to the date of an initial public offering or resale. Some of the potential sources of value in leveraged buyout transactions include: 1) wealth transfers from old public shareholders to the buyout group; 2) wealth transfers from public bondholders to the investor group; 3) wealth creation from improved incentives for managerial decision making; and 4) wealth transfers from the government via tax advantages. The increased levels of debt that the new company supports after the LBO decrease taxable income, leading to lower tax payments. Therefore, the interest tax shield resulting from the higher levels of debt should enhance the value of firm. Moreover, these motivations for leveraged buyout transactions are not mutually exclusive; it is possible that a combination of these may occur in a given LBO. Not all LBOs are successful, however, so there are also some potential disadvantages to consider. If the company's cash flow and the sale of assets are insufficient to meet the interest payments arising from its high levels of debt, the LBO is likely to fail and the company may go bankrupt. Attempting an LBO can be particularly dangerous for companies that are vulnerable to industry competition or volatility in the overall economy. If the company does fail following an LBO, this can cause significant problems for employees and suppliers, as lenders are usually in a better position to collect their money. Another disadvantage is that paying high interest rates on LBO debt can damage a company's credit rating. Finally, it is possible that management may propose an LBO only for short-term personal profit. Criticism of Lbos Ever since the LBO craze of the 1980s—led by high-profile corporate raiders who financed takeovers with low-quality debt and then sold off pieces of the acquired companies for their own profit—LBOs have garnered negative publicity. Critics of leveraged buyouts argue that these transactions harm the long-term competitiveness of firms involved. First, these firms are unlikely to have replaced operating assets since their cash flow must be devoted to servicing the LBOrelated debt. Thus, the property, plant, and equipment of LBO firms are likely to have aged considerably during the time when the firm is privately held. In addition, expenditures for repair and maintenance may have been curtailed as well. Finally, it is possible that research and development expenditures have also been controlled. As a result, the future growth prospects of these firms may be significantly reduced. Others argue that LBO transactions have a negative impact on the stakeholders of the firm. In many cases, LBOs lead to downsizing of operations, and employees may lose their jobs. In

addition, some of the transactions have negative effects on the communities in which the firms are located. Much of the controversy regarding LBOs has resulted from the concern that senior executives negotiating the sale of the company to themselves are engaged in self-dealing. On one hand, the managers have a fiduciary duty to their shareholders to sell the company at the highest possible price. On the other hand, they have an incentive to minimize what they pay for the shares. Accordingly, it has been suggested that management takes advantage of superior information about a firm's intrinsic value. The evidence, however, indicates that the premiums paid in leveraged buyouts compare favorably with those in inter-firm mergers that are characterized by arm's-length negotiations between the buyer and seller. Q.3 From the standard point of shareholders, why are tracking stocks less valuable than stocks in a spin-off . Ans:- A tracking stock and a spin-off are both forms of common equity allowing investors to share in the prospects of a specific business line of a company. During a spin-off, new common equity is formed for the business line or division that is being separated from the company. For the type of spin-off we consider in this paper, the equity is given to current shareholders, as a tax-free, pro-rata distribution. We have restricted our sample only to tax-free, pro-rata distributions for two reasons. First, the majority of equity distributions are taxable because the parent company wishes to retain a controlling portion of the equity of the child; in fact, for a spin-off to be considered tax-free, the distribution must include at least 80% of the outstanding shares of the division. Furthermore, the parent can not retain “practical control” under the guidelines set forth by the Internal Revenue Service (IRS) in Section 355 of the tax code. Essentially, the parent company removes its ownership and management interests from the spun-off division. This is in sharp contrast to the control exerted by the parent on a tracked division. Secondly, neither the parent nor the division receive any cash from a tax-free spin-off. Removing any decision incentives based on the complex tax and cash-flow implications surrounding taxed distributions allows us to clearly identify the control factors affecting the manager’s decisionmaking process. Unlike tracked divisions, there are no direct legal ties between the parent firm’s assets and a spun-off division. In contrast, although the new common stock equity representing the tracked division is traded freely from its original company, the assets of the child or parent can be used to satisfy liabilities incurred by the other. In that sense, any specific division does not have limited liability. This problem is inherent in any conglomerate. Besides having two distinct equity listings, the tracking parent and child are still tied together in many ways. There is still one board of directors that controls the two entities. Although a tracked division, like a spun-off division, releases quarterly information per Securities and Exchange

Commission (SEC) requirements3, resource allocation and transfer pricing are all done within the corporate entity. Academic research and the popular press have identified the unity of this corporate structure as a potential problem for shareholders in either portion of the company. Hass (1996) states: “The advent of [tracking stocks] present unique and formidable challenges to directors that are not faced by directors of corporations with conventional equity structures. These challenges primarily stem from the extensive intergroup conflicts and directorial loyalty concerns inherent in tracking stock equity structures. These conflicts and concerns arise when a parent corporation implementing a tracking stock equity structure artificially divides itself into two or more distinct business groups. Although that corporation strives to present its business groups to the financial community as separate and distinct standalone corporations, it remains intact and governed by a single board of directors and executive management team . . . stockholders of tracking stock corporations need legal assurance that these directors, when making business decisions and formulating corporate policies, are considering fully and fairly the needs of the business group to which their shares are linked economically.” Some of the potential problems Hass (1996) sees surrounding the tracking stock structure have to do with voting rights, dividends and liquidation rights. Ordinarily, explicit rights pertaining to the above are given to the equity holders through the certificate or articles of incorporation. For instance, shareholders will usually receive one vote per share. Therefore, voting power is easily determined by comparing the number of shares owned to the number of shares outstanding. But with a tracking stock structure, there can be two or more classes of equity with voting rights. When the tracking structure is first implemented, the voting rights are divided between the parent and child with a fixed ratio such as relative market capitalization or relative share price. However, as each class is traded, these ratios can change, and, through time, the relative voting power of each class could shift dramatically. For example, since Sprint Corporation (Ticker=FON) began tracking its Sprint PCS Wireless division (Ticker=PCS), the common equities have risen by approximately 70% and 550%, respectively. If the voting rights of the two stocks were based on their relative market capitalizations, then FON shareholders would find their class’ relative voting power diminish from 80% to 50% of the total voting rights since the inception of the PCS tracking stock. The two classes of equity would now share equal say in corporate matters although there exists a large differential in the profitability of the two divisions (the FON and PCS divisions earned $1.82 and -$2.71 per share, respectively, in the last period). The dividends paid in a tracking corporation are decided by the board of directors. When the tracking stock is first proposed, the tracking company sets up a system of expected future dividends for the new as well as original equity holders. For example, US West, in its proxy statement following the introduction of its media tracking stock, announced its intentions of paying a regular dividend of $0.535 per share to holders of its US West common stock while not foreseeing paying any regular dividends to holders of its tracking stock. However, it is still

possible for the board of directors to change or reinterpret this system at any point. Unlike corporations with two classes of equity in the form of common and preferred, there is no priority for one class to receive distributions over the other. This allows the board to possibly push wealth from one class to the other. Currently, there is no “legal assurance” or precedence in tracking stock structures (see Hass (1996)). Lastly, neither the holders of the equity of the tracked division nor the tracking parent technically have any strict rights to the respective assets that their equity follows. Instead, upon liquidation of the entire firm, holders of each type of stock share in the remaining value of the corporation only after paying all debt holders. Therefore, although the shares of a tracked division are tied exclusively to the performance of that division, stockholders may have to share value with other divisions upon liquidation. For instance, if a corporation with stock A and tracking stock B decided to liquidate their assets, the debt holders of both A and B would have to be paid off before any value is released to holders of either equity claim. If the liquidated value of parent A is not enough to repay its debts, the liquidation value of B may be used to satisfy the debts of A. Only after all debts have been satisfied may holders of either A or B receive any value. The crucial problem is that equity holders of either division or parent may be responsible not only for the debt it has issued for its division but for the liabilities of other divisions as well. Many view this as an impediment to takeovers and potential value release to shareholders relative to a spinoff. On the other hand, tracked divisions still retain some of the advantages of membership in a conglomerate. Asymmetric information between managers and external markets has motivated research postulating that internal capital markets allocate resources more efficiently than outside markets. For instance, a small firm may find it costly to borrow funds in the market even if it has good future prospects. As a division of a corporation, the conglomerate may be able monitor the prospects and success of the subsidiary and thereby provide resources and funding at a lower cost than external markets. This point is made by Weston (1970) and Stein (1997). However, Jensen (1986) and Stulz (1990) argue that one of the inherent problems in large conglomerates is overinvestment in lines of business with poor business prospects. Berger and Ofek (1995) confirm this notion by finding the existence of a diversification discount in conglomerate firms that is positively related to proxies for overinvestment and cross-subsidization. Q.4 Why have alliances increased importance? Ans:- The alliances are generating increasing interest among management theorists and practising managers. Whether raised by a chief executive giving a public speech extolling the virtues of cooperation, or by a popular press article highlighting new ways of developing partnership, the subject of alliances is very much in the news and on the minds of business leaders. The significance of alliances overlaps with the importance of intercorporate trust. In practise, the tightening of links between organizations means cooperation without extensive and costly legal agreements.

Although a great deal of interest in alliances and trust has been expressed by scholars, the study of their relationship has remained problematic and superficial for several reasons: problems with the definition of trust; lack of clarity in the relationship between alliances and trust; confusion between trust and its antecedents and its outcomes. Therefore, this study will first detail the nature of alliances and trust. The critical success factors in alliances established by small and medium-sized Swiss enterprises (SMEs) will be presented in the second part of the study, highlighting the role played by trust. The nature of alliances The past decade has witnessed the inception of a major directional change in both management theory and practice. The turn toward alliances is considered by some to be a genuine paradigm shift (Kotler, 1991; Parvatiyar, Sheth and Whittington, 1992). With the increased interest of both researchers and manager in this field, the following terms have emerged over the years which are related to alliances: working partnerships (Lewis, 1990; Anderson and Narus, 1990), collaborative agreements (Morris and Hergert,1988), strategic alliances (Harrigan, 1987; Urban and Vendemini, 1992), and joint ventures (Harrigan, 1986; Kogut, 1988). Alliances are part of the developing “network paradigm” which recognises that global competition increasingly occurs between networks of firms (Thorelli, 1986). From the multiplication of alliances emerge virtual corporations (Business Week, 1993), which can be seen as a temporary network of independent companies – suppliers, customers, even erstwhile rivals – linked by information technology to share resources, costs, and access to one another’s markets. According to Powell (1990), these network linked organizations – typified by reciprocal patterns of communication and exchange – represent a viable pattern of economic organisation. For the purpose of this study, alliances are defined as privileged agreements that an enterprise maintains with another organization while remaining legally independent. This implies repeated contacts between the partners over a certain period of time in order to coordinate their activities in one or several fields. Hence, understanding the nature of alliances requires distinguishing between the discrete transaction, which has a “distinct beginning, short duration, and sharp ending by performance” and relational exchange, which “traces to previous agreements [and] . . . is longer in duration, reflecting an ongoing process”. Categorised with reference to a focal firm, the alliances can take four orientations: (1) vertical upstream toward suppliers, (2) vertical downstream toward customers, (3) horizontal toward competitors, and (4) diagonal toward other organisations. Vertical alliances with suppliers encompass the partnering between manufacturers and theirgoods’ suppliers, as in “just in time” procurement, and relational exchanges involving servicesproviders, as between advertising and marketing agencies and their clients. Vertical alliances with customers involve long-term exchanges with ultimate customers, and relational exchanges of working partnerships, as in channels of distribution. At the horizontal level, we find partnerships with competitors, as in technology alliances, comarketing alliances, and global

strategic alliances. Diagonal alliances can be established with nonprofit organisations, as in public partnerships; they can also take the form of partnerships for joint research and development with local, state, or national governments. The need for trust in alliances Alliances involve interdependence and firms (and their managers) must, therefore, depend on others in various way to accomplish their organizational goals. Several theories have emerged that describe mechanisms for minimising the risk inherent in alliances. These theories are designed to regulate, to enforce, and/or to encourage compliance to avoid the consequences of broken trust. Most of these theories, such as the agency theory, usually rely on the construct of contract to mediate the relationship between the partners ( Jensen and Meckling, 1976). However, as Hart and Hölmström (1987) remarked, it is usually impossible to lay down each party’s obligations completely and unambiguously in advance, and so most contracts are seriously incomplete. Legalistic remedies therefore have often been described as weak, impersonal substitutes for trust (Sitkin and Roth, 1993). It is not surprising, therefore, if a widespread agreement on the importance of trust in human and organisational conduct have appeared among academics and business practitioners. Unfortunately, there is a widespread lack of agreement on a suitable definition of the concept. There are two main reasons that explain this lack of conceptual clarity. Firstly, several terms have been used synonymously with trust and this has obfuscated the nature of trust. Among these are cooperation, confidence, and predictability (Mayer and Schoorman, 1995). Secondly there has been a variety of approaches to the concept. In this respect, Hosmer (1995) distinguished four main approaches or contexts:

Individual expectations – Trust in context is seen as the nonrational expectation of the outcome of an uncertain event, given conditions of personal vulnerability (Deutstch, 1958). Interpersonal relationships – As suggested by Zand (1972), trust was the willingness of one person to increase his/her vulnerability to the actions of another person whose behaviour s/he could not control. Economic transactions – Trust is essential to reduce transaction costs and, according to Bromily and Cummings (1992, p. 4), “Trust is the expectation that another individual or group will (1) make a good faith effort to behave in accordance with any commitments, both explicit and implicit; (2) be honest in whatever negotiations preceded those commitments; and (3) not take excessive advantage of others when the opportunity [to renegotiate] is available”. Social structures – Most of the authors in this field have approached trust as “collective attribute” based upon the relationships between people that existed in a social system. Zucker (1986) for example defined trust as a set of logical expectations shared by everyone involved in an economic exchange.

The various approaches and definitions of trust are summarised in Table I. Drawing upon the definition of alliances presented in the previous section, it appears evident that we are primarily concerned with the economic transaction approach of trust. This must not lead, however, to the neglect of other perspectives. Individual expectations and interpersonal relationships are essential in creating and managing alliances if we remember that ultimately human beings (i.e. managers) negotiate, manage, and make alliances work. In this respect, Powell (1990, p. 330) noted that many of the alliances he studied in the publishing, fashion, computer software, construction, and entertainment businesses are among individuals, independent production teams, or very small business units. Similarly, it is important to take into account the social structures in which the firm evolves. This is especially true in SMEs where the identity of the enterprise is often assimilated to its owner manager. The arguments in favour of trust seem overwhelming remarked The Economist (1995) in an article on management focus. Trust reduces the costs and delays associated with traditional monitoring systems and formal legal contracts. But how does trust emerge in an alliance? The factors that lead to trust have been considered repeatedly in the literature. Mayer ad Schoorman (1995) remarked in this respect that ability, benevolence, and integrity are the three most recurrent factors. The problem, however, is that these factors tend to focus on the personal expectation and the interpersonal relationship approaches of trust. Thus, they fail to provide a global picture of the emergence of trust in alliances from a managerial perspective. Q.5 Summarize briefly what determines merger transaction is taxable? Ans:-Mergers and acquisitions can be either tax-free or taxable events. The tax status of a transaction may affect its value from both the buyer's and the seller's viewpoints. In a taxable acquisition, the assets of the selling firm are revalued or "written up." Therefore, the depreciation deduction will rise (assets are not revalued in a tax-free acquisition). But the selling shareholders will have to pay capital gains taxes and thus will want more for their shares to compensate. This is known as the capital gains effect. The capital gains and write-up effects tend to cancel each other out. Acquisitions can be good for business. They provide buyers with immediate revenue growth, new markets and intellectual capital while sellers have the opportunity to be financially rewarded for their efforts. But the deal’s attractiveness can quickly wane when the transaction results in a double layer of taxes for the seller or a lack of step-up in basis for the buyer. Advance planning along with knowledge of the tax implications and possible alternatives are the best ways to make acquisitions advantageous for both parties. “In some cases, there will be no immediate taxes generated by a tax-free stock exchange or only a capital gains rate may apply, and in other cases, you could be looking at double taxation under

an asset sale,” says Gary Curtis, corporate tax partner for Haskell & White LLP. “Since the transaction often puts buyers and sellers at odds, it’s important to have enough time to look at all the alternatives and structure the deal in a way that’s best for everyone.” Smart Business spoke with Curtis about how to avoid excessive taxation from acquisition transactions. What determines the tax liabilities in an acquisition? Usually buyers and sellers benefit from different acquisition transaction structures. In a taxable acquisition transaction, two of the influencing factors include:
• •

Whether the buyer is purchasing assets versus stock The entity structure of the seller

Sellers usually want a stock sale because the gain will be taxed only once at the relatively low capital gains tax rate. Buyers usually prefer an asset sale because they can purchase known assets and liabilities, as opposed to a stock transaction where they take on liabilities for all previous actions of the company, and the ‘step-up’ in basis to fair market value can be depreciated or amortized, which improves cash flow. Generally, the seller offers more warranties and guarantees to offset the unknown liabilities resulting from a stock sale, but they may get a lower sale price, as well.

If the selling company is set up as a C corporation, the principals may be hit by two rounds of taxation during an asset sale: income tax at the corporate level and again at the shareholder level when the proceeds of the sale are distributed. You can avoid double taxation resulting from an asset sale if the selling firm is structured as an S corporation. An S corporation or a business set up as a pass-through entity, such as a limited liability company (LLC), will generally only pay one level of tax, which will be at the capital gains rate. There may be some taxes at ordinary income rates, but these amounts are often insignificant in relation to the overall taxes. What are the tax alternatives? S corporations and LLC legal structures produce the least amount of tax liability during acquisition events. So if your company is currently structured as a C corporation, and you plan to keep the company for 10 years or longer before selling it, consider converting to an S corporation status. A tax-free merger is another alternative. It occurs when one company acquires a controlling interest in the other company in exchange for its stock. The sellers don’t report taxable gain until the new stock is sold. This method is advantageous if the shareholders of the acquired company don’t want to cash out in the near future, but even if the seller wants to receive some cash from

the transaction, the merger will still work as long as the seller doesn’t require more than 50 percent of the sale price in cash. Q.6 What is the nature of strategy as an adaptive learning process. Ans:- The strategies of detecting learning state and generating relative adaptation link affect the success of adaptive navigation. Proficiency is a classic indicator in testing the learning state of programming. Similar to data mining, proficiency mining is added in the learning process to explore each learner's proficiency from observable behaviour. This paper presents a web-based learning system (NMPTE) embedded with a proficiency-mining strategy that is used for supporting adaptive navigation. The strategy involves using selected parameters to characterise the process of coding rehearsal. The criteria of selecting parameters are based on the psychology researches and the basic properties of learning to program. Web technologies with the standard of XML are adopted to describe adaptive curricula and proficiency parameters. Our experience demonstrates that proficiency mining shows sufficient evidence to represent programming performance and becomes a tool to detect users' features in adaptation system. There are two reasons why research on knowledge sharing through knowledge acquisition would benefit from an organizational learning perspective. First, as noted earlier, the acquisition of a company for the purpose of grafting technologies should be studied as a process of organizational learning. Secondly, as many companies are becoming frequent buyers, learning not only takes place during the process of knowledge sharing but also as a process of knowledge re-use. In other words, companies learn from others in order to incorporate external knowledge and learn from themselves by incorporating past experience into their future strategy and management of acquisitions. The occurrence of the latter type of learning seems to differ among organizations. As Haspeslagh & Jemison (1991) mention, some companies seem to learn from their acquisitions experiences faster than others. Below we will discuss the two aspects of learning in more detail with the help of a learning model of knowledge acquisitions as shown in figure 2 which is an extended model of the research model mentioned above. Learning from others : Research on acquisitions can be divided into various schools. Combining these various schools provides more useful insight into the concept of knowledge acquisitions. More specifically, combining an organizational behaviour perspective with a process perspective yields greater insight into the strategic aspects of acquisitions. This paper takes a step in that direction. The assumption is that individuals and groups, through the process of knowledge sharing, have a strategic impact. By perceiving knowledge sharing in the post acquisition phase as a process of learning through grafting, the assumptions is made that through knowledge sharing, individuals have an impact on the process of acquisition and as a result, affect the outcome. This organizational learning approach and the influence of human aspects are even further supported by the introduction of the concept of social capital as an important precondition for knowledge sharing and its influence on value creation.

Thus, the process of learning through grafting seems to be not only “a potentially important determinant of acquisition outcomes” (Jemison & Sitkin, 1986), but of strategic importance. Therefore, learning from experiences of grafting actions of organizations could enable better knowledge acquisition strategies and management. Increasingly, research is being conducted on how the process of knowledge sharing affects final outcomes. These researchers believe that, as a result of impediments to learning, many acquisitions fail. Although, much more research is needed to support this argument literature in strategic alliances other than acquisitions have already pointed to the strategic impact of knowledge transfer by knowledge sharing individuals (Inkpen, 1998; Kogut & Zander, 1996; Larssen et al 1998). Learning from the past : For many companies, acquiring a company is not a single unique event. In fact large companies particularly in the high tech area have a track record of buying more than one firm a year. To them, these interventions could be a product of organizational learning from the past through feedback information. There are various authors who have proposed such a systems dynamics approach to organizational learning (Argyris & Schon, 1978; March & Olsen, 1976: Senge, 1991: Bateson, 1973). Argyris & Schon (1978), following Bateson (1973) have introduced two ways in which organizations learn from feedback information: single loop learning and double loop learning. Single loop learning happens when an organization reacts to information regarding the results of organizational actions, by adjusting its future actions. In general, organizations tend to do reasonably well as single loop learners (Argyris & Schon, 1978). Double loop learning occurs when organizations react to feedback signals by reflecting first on the governing variables such as the hidden norms and values that trigger the actions. Organizations in general are not very good in double loop learning (Argyris & Schon, 1978). As discussed below, it is believed that this also applies to learning from past acquisitions, although more research is needed to support this impression. While single loop learning happens through adapting actions to experiences with previous acquisitions, double loop learning happens when previous experiences are taken into account in the decision making prior to the deal. Learning from past acquisitions by adjusting knowledge management tools to foster knowledge sharing can be seen as an act of single loop learning. The organization learns by adjusting action strategies but leaves governing variables untouched (Argyris & Schon, 1978). Single loop learning happens through ex-post interventions: knowledge management tools to improve knowledge sharing. This concerns interventions to improve knowledge sharing after the deal is made. Learning from past experiences can also be supported by codifying the lessons learned and storing them in manuals, knowledge databases etc. This strategy represents one of the most traditional knowledge management tools. Experience with knowledge management in organizations indicates however that codifying past experience in order to support knowledge reuse has its problems. For example, people have difficulty contributing to a re-use policy, for several reasons: their knowledge cannot easily be expressed in words, they do not benefit from it, they do not spend time reflecting on past experiences, an unwillingness to use knowledge of others, or just because these past experiences do not fit the present situation (Huysman & De Wit, 2002). These experiences might imply that codifying past experience is not a viable option

or that other media should be used, such as for example videos. Double loop learning sets in when companies already think about and create favourable conditions for knowledge shariing before the deal is closed. Double loop learning happens through ex-ante interventions, by including knowledge audits in due diligence. This concerns interventions to improve knowledge sharing before the deal is made. Rivera et al. (2001) proposes the introduction of an interface or organizational structure in charge of dealing with gathering experiences from previous collaborations in order to support subsequent collaborations. Such an interface can be centralized: just one structure or team supervising the operation, or decentralized: no central structure, each collaboration supervised and managed independently. Centralization can both facilitate and hinder learning. Facilitate as it can build on past experience, hinder as there is a danger for path-dependency in the identification process. It would therefore be more efficient when the centralized interface captures the diversity of the group of employees as to recognize and understand the target-knowledge. During the due diligence stage the feasibility of the deal is assessed and analyzed. . One would suggest that during this stage attention is given to questions like what and whose knowledge needs to be shared and how should this knowledge be shared. Most often, these “knowledge audits” do not occur or occur sporadically or superficially. With knowledge audits reference is made to strategies or mechanisms that can be used to improve the selection of potentially successful targets. Knowledge audits are meant to reflect on the question “how can we more accurately identify the most critical knowledge to be shared before the deal is closed?” The pre-conditions for effective knowledge sharing along with successful knowledge management tools to support them, as discussed in chapter 2 of this paper, could be the focus of these knowledge audits in the form of a knowledge due diligence. For example, the acquirer should analyze the various degrees of similarities with the target, such as the degree of similar knowledge base, similar size, similar culture, information systems etc. (Mowery et al, 1996) in order to see if and how knowledge can be shared.

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