WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Objectives :

◘ Objectives of M&A.

◘ Synergy of Merger.

◘ Three Types of Mergers.

◘ How to select a Target Company.

◘ How to strategize for M&A.

 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

M&A – Instrument of Inorganic Growth

Merger strategy has to be in strict

alignment with parameters for inorganic
growth through M&A. These are

™ To increase shareholder value.

™ To improve profitability.
™ To increase rate of rate of stock
returns.

If economic conditions are favorable,

shareholder value can be maximized by
wealth creation through M&A route.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

M&A – Instrument of Inorganic Growth

Mergers can be grouped into three

categories

™ horizontal integration when two similar

firms tie the knot;

™ vertical integration in which two firms

at different points in the supply / value
chain get together;

™ diversification where two companies with

nothing in common come together.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Financial Synergy

Mergers can result in financial synergy

and tax benefits. Combined assets of
merged companies provide greater leverage
to the acquirer to access funds
aggressively.

Synergies resulting from merger provide

net share holder value and financial
synergy is one of the driving force.
Financial synergy is a means to achieve
strategy for merger, and cannot be the
sole reason for the merger.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Local vs. Cross Border Merger

The companies intending to tap local

markets or desiring to acquire facilities
within the country naturally seek mergers
locally.
On the other hand, companies enjoying
domestic market leadership, would nurture
global ambitions. Buoyant economic
conditions coupled with government’s
liberalized policies have triggered
their global aspirations.
These companies prefer cross border M&As
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Local vs. Cross Border Merger

Studies reveal that countries with high

ratio of

i] [stock] market
capitalization
& to total GDP
ii] credit provided to
private sector

provide sizable incentive to domestic firms

to invest abroad.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Local vs. Cross Border Merger

Another parameter for deciding on

overseas M&A, is to compare cost of
internally developing new operations with
the cost & time implications of allying /
acquiring with a company overseas & seek
the economic option.
The decision can follow only after due
consideration of –
• resources & synergies the firm desires
• uncertainty in market place it competes
• competencies within the firm to cope with
acquisition.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Can I digest it?

M&A is like a huge meal. The benefits of

the deal are not available until it is
digested.
To derive value from an acquisition, the
acquiring company must have the ability
to absorb

• People
• Processes
• Values from the acquired
• Knowledge company.
• Ideas
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Can I digest it?

The size of the target company :
Acquisition of a smaller company may meet
the strategic need but may not provide
desired critical mass under any M&A.
Target company of equal or larger size
provides benefit of critical mass to the
acquirer.
In case of a larger company fall out in
terms of resources required to effect
merger, the issues in cultural
integration must be carefully studied.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Can I digest it?

To sum up :

M&A is a decision that plans for

something positive over a long time to
come and is taken , as per JM Keynes , by
a spontaneous urge for action rather than
after weighted average of quantitative
benefits multiplied by quantitative
probabilities.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Tailoring the Growth

To craft an M&A strategy, it is necessary
to set out and define growth objectives.

These could be –
◘ Expanded product portfolio

a] first to market with products.

b] developing products better & in more
timely manner than competitors.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Tailoring the Growth

◘ More cost efficient than competitors

a] Develop own designs

b] Focus on effective sourcing
c] Strategic location of production

◘ Expand into new market areas to increase

sales & profitability and reduce risk.

◘ Availing advanced technological

capabilities
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Tailoring the Growth

In Indian context –

Tata Group – consolidation in both old

[steel] and new economy [VSNL]; more
alliances than acquisitions, especially
in info tech sector.

Wipro – Focus on R&D business. M&A, an

integral part of the strategy.

Infosys – scaling new geography, new

products & process engine,
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Big picture vs. Nut & Bolts

Though M&A is a huge meal, but its most

effective strategy is firmly rooted in
details.
The big question to be asked is
• Which transaction would create value?
• When is it likely to create value?
• And where?
• Under what circumstances?
• Might it destroy value?
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Big picture vs. Nut & Bolts

Acquisitions, mergers, divestures, start-

ups should not be considered in vacuum.
Instead following queries be seriously
reviewed, researched & analyzed.
♥ will the deal bring long-term value to
shareholders?
♥ is the integration process likely to be
successful?
♥ are the two entities culturally
compatible?
♥ will management resources be leveraged
or strained?
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Big picture vs. Nut & Bolts

The best deals – those based on M&A

strategy which in turn is aligned to the
corporate strategies and supported by
rigorous investigation & analysis – can
bring huge benefits to companies,
enabling them to achieve far stronger
positions in the market place &
significantly better returns for their
shareholders.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

Usually that target company is selected which is

next in market share, so that proposed merger
allows the acquirer to become a market leader.

Other factors considered are :

• The resources & operational synergies the
company desires.
• The uncertainty of the market place such
as pricing, financing conditions etc.
• The competencies & skills available
within the organization to cope with
alliance.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

• The resources & operational synergies the

company desires.

♣ To gain access to global markets

[pharma].

♣ To consolidate manufacturing facilities

[steel].

♣ To grow geographically, add manpower, new

products, process engines [IT].
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

• The resources & operational synergies the

company desires. Contd.

♣ To gain larger customer reach, control

domestically and world class products /
services, improved performance standards,
best practices in governance [banking].

♣ To combine companies at different stages

in supply chain management.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

• The uncertainty of the market place such
as pricing, financing conditions etc.

Identifying wrong synergies

Could be major uncertainty. There is

always a risk of identifying wrong
synergies. It takes many years after the
acquisition, for the management to
realize whether synergies that were
intended have been achieved or not.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

• The uncertainty of the market place such
as pricing, financing conditions etc.

Establishing the price

another risk factor is the premium paid

to the target company. The risk can be
minimized by due diligence & project
assurance.
Both risks & rewards need to be
considered on a long term basis of
projections.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

Establishing the price

premiums and discounts are inherent in
valuations of M&A. They are driven by
factors like-
♣ market share premium
♣ brand value premium
♣ controlling stake premium
♣ cost of not acquiring
♣ small player discount
♣ Payment terms- cash / stock.
♣ discount for potential loss of
employees.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

Erosion of synergy

is reflected in non-occurrence of
expected revenue enhancement. This
happens as a result of retaliation to
merger by the competitors or be desertion
of important customers to competition
post merger.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

• The competencies & skills available

within the organization to cope with
alliance.

Financial & management bandwidth

commensurate with the merger must be
determined beforehand to pull off the
merger.

Realistic appraisal of its core abilities

is a must.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Evaluating Acquisition Candidates – with whom to merge.

• The competencies & skills available

within the organization to cope with
alliance. contd

It is required to identify who among the

core group will effect the merger &
contribute to create synergy.

This assures economies in management or

corporate functions & ensures no
duplication of efforts, especially when
two equal companies merge.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Strategic Fit in the Value Chain of the Company

Among various criteria considered in

selecting from the competing target
companies, the factor whether the target
fits into the value chain of the acquirer
or not is important.
this needs
♠ self scrutiny by acquirer of its
own competitive & market status.
♠ management’s aspirations & goals.
♠ industry analysis & competitor
analysis
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Future Potential & Synergies

The strategy for M&A shall also factor

in, the future potentials & synergies to
be created by the proposed merger.
These need to based on the principle
‘value of whole is greater than the
parts’.
These synergies emerge from revenue
increases & cost savings.
Value created would be more if the new
synergies are well above the premium paid
for the merger.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

Investment Opportunities

The strategy shall have to revolve around

the proposals that are most likely to
provide targeted earnings before
interest, tax, depreciation &
amortization [EBIDTA].
Egocentric Mergers

More often nom-economic issues like

management’s power, prestige or
reputation play a major role in some
M&As. This pitfall must be avoided.
 WHY M&A - STRATEGY FOR MERGERS AND ACQUISITIONS

synergies

Merger & acquisition for revenue increases

cost savings

increase in prestige

vanity

Next, Chapter Three, ’Legal & Tax Issues’