Mergers & Acquisitions

A merger is a combination of two corporations in which only one corporation survives and the
merged corporation goes out of existence. Merger is a broad term and it denotes the combination
of two or more companies in such a way that only one survives while the other is dissolved. A
merger is an investment in a future growth opportunity. In merger proposals plant is ready and
market acceptance clear and well established. In a merger, the acquiring company assumes the
assets and liabilities of the merged company.
When two companies differ significantly in size, they usually merge. From the company’s point
of view, merger is the least complex and cheapest method of acquisition since it gives the target
company’s shareholders the best view of the transaction, gives more time to conduct due
diligence and the expense of drafting an offer to purchase and tendering for shares is reduced.
Merger however takes significantly longer than tender offer. The acquirer may lose the target
company to others meanwhile.

An investment bank frequently provides advice on, and assistance in, mergers & acquisitions.
For example, they assist in finding merger partners, underwrite any new securities to be issued
by the merged firms, assess the value of target firms, recommend the terms of the merger
agreement, and even assist target firms in preventing a merger.

Type of Mergers:-

1. Horizontal Merger: It is a merger between two companies that are in direct competition
& share the same product lines & market.
2. Vertical merger: It is a merger in which a firm or a company combines with a supplier
or distributor. It is combination of companies that have a buyer-seller relationship.
3. Conglomeration is the merger of two companies have no related products or markets or
having no common business ties. It occurs when the companies are not competitors and
do not have a buyer- seller relationship.

By: GORTON, GARY; KAHL, MATTHIAS; ROSEN, RICHARD J.. Journal of Finance, Jun2009

Is firm size important for merger and acquisition?

Mergers combine managerial merger motives with an industry-level regime shift that may lead to value-
increasing merger opportunities. Anticipation of these merger opportunities can lead to
defensive acquisitions, where managers acquire other firms to avoid losing private benefits if their firms
are acquired, or “positioning” acquisitions, where firms position themselves as more attractive takeover
targets to earn takeover premier. The identity of acquirers and targets and the profitability
of acquisitions depend on the distribution of firm sizes within an industry.

Firm size is an important determinant of merger Activity in industries with economies of scale. Firms
may engage in a race for size for two reasons.
 1. Managers may want to make acquisitions to increase their firm’s size and hence reduce the
likelihood that it is taken over.
2. Firms may want to engage in acquisitions to become larger and hence position themselves as
more attractive takeover targets. These positioning acquisitions are profitable.

The industry structure—the size distribution of the firms in the industry—is a very important
determinant of which mergers occur. Industries where many firms are similar in size to the largest
firm are prone to defensive merger waves if managers care a lot about the private benefits of
control. However, industries in which there is a dominant firm are less prone to waves of
unprofitable acquisitions. In contrast, they may display waves of profitable acquisitions (which are
more likely when managers care little about private benefits of control). In industries in which some
but not all firms are of similar size, merger waves are most likely, because they occur both when
private benefits are low and when they are high. The profitability of acquisitions tends to decrease
in the acquirer’s size. Large acquirers overpay while small acquirers tend to engage in profitable
acquisitions. Firms of intermediate size sometimes engage in profitable and sometimes in
unprofitable acquisitions. Overall, the race for firm size often leads to profitable acquisitions, but if
private benefits are high, it may induce large firms to make unprofitable acquisitions. Acquisitions
are more profitable in industries in which the largest firm is larger relative to the other firms, and
whether firms in industries with more medium-size firms are more likely to make acquisitions.

By: Swaminathan, Vanitha; Murshed, Feisal; Hulland, John . Journal of Marketing Research

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what is better merger consolidation or diversification?

Mergers can be either consolidation based or diversification based. Firms use consolidation-based
mergers to strengthen their positions in existing product markets. When firms within the same
industry merge, gains in market power may result, enabling the merged firms to eliminate less
efficient management, achieve economies of scale, charge higher prices, achieve higher distribution
clout, offer greater product variety, and reduce competitive activities. Because of their greater market
power, merging firms may also be able to increase their bargaining power over suppliers and force
suppliers to compete on a price basis. Furthermore, production, marketing, and distribution
efficiencies can be achieved, leading to lower costs and greater operational synergies. Conversely,
firms can use diversification-based mergers to expand into either related businesses (i.e., related
diversification) or unrelated businesses (i.e., unrelated diversification). The key objective in a
diversification is to gain economies of scope between successive stages of production. In a related
diversification, firms acquire either related technologies or related products. By entering into a new
line of business, the firm increases market share through geographic extension and new products,
which leads to higher margins and customer loyalty across product categories. Some researchers have
found that the high costs of diversification outweigh its benefits; others have shown that
consolidation-based mergers result in poorer performance. The market values of diversified firms
have been found in some studies to be lower than stand-alone firms, a phenomenon known as the
“diversification discount”. Diversification stretches the acquiring company’s management skills and
can lead to bureaucratic complexity. Thus, whether consolidation (versus diversification) mergers are
value creating or value destroying depends on the strategic emphasis alignment between the firms
involved in a merger.

By: Alexandridis, G.; Petmezas, D.; Travlos, N.G. . Financial Management (Blackwell Publishing Limited),
Winter2010

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Gains from mergers & Acquisitions

The principle benefits from mergers and acquisitions can be as increased value generation, increase in
cost efficiency and increase in market share. Benefits of mergers and acquisitions are the main reasons
for which the companies enter into these deals.

 The fundamental aim of mergers and acquisitions (M&As) is the generation of synergies.
 corporate growth
 increase market power
 boost profitability
 Improve shareholders’ wealth.
 It generates cost efficiency through economies of scale
 When a firm wants to enter a new market
 To gain higher competitiveness
WHY DO MERGERS FAIL?

There are several reasons, but most common seem to be the following

1. Lack of accountability. A large number of people want to be involved

in and lay claim to the credit when acquisition are announced, far fewer
of these individuals want be held responsible for post-acquisition work
of delivering on the promises made at the time of the deal.

2. Lack of a post-merger plan to deliver on synergy and control: The

absence of planning can be attributed to the fact that firms are seldom
concrete about what form synergy will take and do not try to
quantitatively estimate the cash flows associated with the synergy.

3. Cultural shock: A firm acquires a culture over a time that helps it

attract and keep its employees. When firms merge and try to
consolidate, their cultures are likely to come into conflict. If not
managed well, one or both firms will face employee flight and loss of
morale. This problem becomes bigger as firms get larger and the
cultural difference run deeper.

4. Failure to consider external constraints: Most realistic firms have to

deals with external constraints that may not take kindly to these
actions.

5. The market price hurdle: The market price of securities settled

between the buyer and the seller is the most important factor for failure
of mergers.

6. Managerial Egos: In most mergers, the managers at the top of the

combining firms have to co-habit and share power. Although they might
share initially, power struggles often arise between the chief executives
of the combining firms. These disagreements ripple down through the
organizational ranks, leading to a loss of focus on the original motives
for the manager.

MOTIVES BEHIND M& A’S:

The motives behind mergers and acquisitions are classified under
the following heads.
I. Strategic Motives
II. Organizational Motives
III. Financial Motives

SRTATEGIC MOTIVES:

The strategic motives behind M&A activities are as follows

1. Expansion and growth. If allowed by the government,

expansion and growth through M&A is less time consuming
and more cost effective.

2. Dealing with the entry of MNCs; through the mergers and

acquisitions the company can deal with the entry of MNCs.

3. Economies of scales; the big is always thought to be better in

the industrial era.
4. Synergies; the concept of synergy can be explained symbolically
as follows, If company A merges with company B the value of
merged entity called AB is expected to be greater than sum of the
independent values of A and B i.e,V (AB) is greater than V (A) +
(B) Where V (AB) =Value of the merged entityV (A) =Independent
value of company AV (B) =Independent value of company B The
greater value is ultimately expected to result into higher earning
per share for the merged entity.

5. Market penetration; traditionally a company might be catering

to the middle class and upper middle class segment. Introducing a
product for other market segment will be easier by an acquiring
company which has a good market share in the specified segment.

6. Acquiring the competition; It is said “if you can’t fight them, join
them”.
7. Backward/Forward Integration: Where the supply of raw
material is critical, acquiring a company producing raw material
will be an added advantage.

8. New product entry; entering into new product through M&A

9. New market entry: Advertisement and market promotion

activities will be more cost effective if the organization has
presence in many places. Mergers and acquisition may provide
this advantage.

10. To obtain additional advantage from an existing surplus

resource, M&A might offer good potential.

11. To reduce the risk of the shareholders of the companies

involved. M&A could be attempted.

12. Balancing product cycle: If the main product is seasonal, it

will be beneficial to add another non seasonal product.

ORGANISATIONAL MOTIVES:

1. Ego satisfaction: The powers available with the top

management of big corporate houses do prompt the managers to
explore the possibilities of mergers and acquisition.
2. Retention of management talent: Human resources are
considered essential and important. To assure growth to the
management personnel in order to retain the management talent,
it may required to attempt M&A.

3. Removal of inefficient management: mergers and acquisition is

a quick remedy to replace inefficient management from an
organization which has high product strength.

FINANCIAL MOTIVES:

1. Revival of sick units: when a viable company has become sick,

a healthy company may like to merge with it so as to reap the
benefit of the hidden potentials of the sick unit.
 2. Tax planning: The provisions of the corporate income tax
might subsidies the M&A activities.

3. Asset stripping: If the market value of the shares is quoted

below the true net worth of a company, it will be a target for
mergers and acquisition.

OTHER MOTIVES:

1. Diversification: Diversification can be achieved either by

merger or internal growth. But earlier is preferable due to cost
advantage.

2. Acquisition of specific assets

3. To obtain improved production technology.

Value Creation Following Mergers and Acquisitions

Many firms use mergers to overcome resource deficiencies by acquiring

critical marketing resources, such as brands, distribution channels, and
sales expertise. The patterns of marketing and R&D resource allocations
across merging entities (e.g., strategic emphasis alignment) can provide
insights into the potential for value creation in a merger. We
demonstrate that both strategic emphasis alignment and misalignment
can enhance value creation, but under varying merger motives. This
research suggests that strategic misalignment (i.e., merging firms having
dissimilar resource configurations) can be more beneficial when
diversification is the primary motive. In contrast, strategic emphasis
alignment can create value when consolidation is the aim, particularly in
dynamic, growing industries.
Merger Activity Picks Up in Last Year
as Firms Seize Opportunity During Recession

Does it seem like the “merger mania” that swept the legal profession
several years ago isancient history, never to be seen again? Well,while
many firms are still reluctant to makebold growth moves in the form of
mergers, recently there has been some significant activity on the
consolidation front. In onecase, the headline-grabbing breakdown of
what would have been a major coast-to-coastmarriage created quite a
stir profession-wide.Despite some slowdown in merger movement
during the autumn, 20 combinations have taken place this year as of the
end ofSeptember, according to the Of Counsel 700 Survey as well as
those consultants who trackmergers. These combinations, and even the
buzz about potential mergers, suggest tosome that the economy is
coming aroundand that law firm leaders are beginning todiscard their
“hunkering-down”approach tomanagement.

Eat or Be Eaten: A Theory of Mergers and Firm Size

Firm size is an important determinant of merger activity in

industries with economies of scale. Firms may engage in a race for
size for two reasons. First,managersmay want tomake
acquisitions to increase their firm’s size and hence reduce the
likelihood that it is taken over. These acquisitions,while
unprofitable,may allowthemto preserve their private benefits of
control. Alternatively, firms may want to engage in acquisitions to
become larger and hence position themselves asmore attractive
takeover targets. These positioning acquisitions are profitable. We
show that industry structure—the size distribution of the firms in
the industry—is a very important determinant of which mergers
occur. Industries where many firms are similar in size to the
largest firm are prone to defensive merger waves if managers care
a lot about the private benefits of control.However, industries
inwhich there is a dominant firm are less prone to waves of
unprofitable acquisitions.

In contrast, they may display waves of profitable acquisitions

(which are more likely when managers care little about private
benefits of control). In industries in which some but not
all firms are of similar size, merger waves are most likely, because
they occur both when private benefits are low and when they are
high. The profitability of acquisitions tends to decrease in the
acquirer’s size. Large acquirers overpay while small acquirers
tend to engage in profitable acquisitions. Firms of intermediate
size sometimes engage in profitable and sometimes in
unprofitable acquisitions. Overall, the race for firmsize often leads
to profitable acquisitions, but if private benefits are high, it may
induce large firms to make unprofitable
acquisitions..