ASSIGNMENT

MERGER & ACQUISITION WITH CASE STUDY

NAME: DISHA A. SALOT

ROLL NO:

SEM – 3

MBA

CORPORATE RESTRUCTURING

2019-20

GUIDED BY:

Prof. HARDIK BAXI

DEPARTMENT OF BUSINESS ADMINISTRATION

MAHARAJA KRUSHNAKUMARSHINHJI BHAVNAGAR UNIVERSITY

BHAVNAGAR
What is Mergers & Acquisitions?

Mergers and acquisitions (M&A) are defined as consolidation of companies.

Differentiating the two terms, Mergers is the combination of two companies to form one,
while Acquisitions is one company taken over by the other. M&A is one of the major
aspects of corporate finance world. The reasoning behind M&A generally given is that
two separate companies together create more value compared to being on an individual
stand. With the objective of wealth maximization, companies keep evaluating different
opportunities through the route of merger or acquisition.

Mergers & Acquisitions can take place:

• by purchasing assets

• by purchasing common shares

• by exchange of shares for assets

• by exchanging shares for shares

Types of Mergers and Acquisitions:

Merger or amalgamation may take two forms: merger through absorption or merger
through consolidation. Mergers can also be classified into three types from an economic
perspective depending on the business combinations, whether in the same industry or
not, into horizontal ( two firms are in the same industry), vertical (at different production
stages or value chain) and conglomerate (unrelated industries). From a legal
perspective, there are different types of mergers like short form merger, statutory
merger, subsidiary merger and merger of equals.

Need Guidance? Ask from Experts!

Reasons for Mergers and Acquisitions:

• Financial synergy for lower cost of capital

• Improving company’s performance and accelerate growth

• Economies of scale

• Diversification for higher growth products or markets

• To increase market share and positioning giving broader market access

• Strategic realignment and technological change

• Tax considerations

• Under valued target

• Diversification of risk

Principle behind any M&A is 2+2=5

There is always synergy value created by the joining or merger of two companies. The
synergy value can be seen either through the Revenues (higher revenues), Expenses
(lowering of expenses) or the cost of capital (lowering of overall cost of capital).

Three important considerations should be taken into account:

• The company must be willing to take the risk and vigilantly make investments to
benefit fully from the merger as the competitors and the industry take heed quickly

• To reduce and diversify risk, multiple bets must be made, in order to narrow down to
the one that will prove fruitful

• The management of the acquiring firm must learn to be resilient, patient and be able to
adopt to the change owing to ever-changing business dynamics in the industry

Stages involved in any M&A:

Phase 1: Pre-acquisition review: this would include self assessment of the acquiring
company with regards to the need for M&A, ascertain the valuation (undervalued is the
key) and chalk out the growth plan through the target.

Phase 2: Search and screen targets: This would include searching for the possible
apt takeover candidates. This process is mainly to scan for a good strategic fit for the
acquiring company.
Phase 3: Investigate and valuation of the target: Once the appropriate company is
shortlisted through primary screening, detailed analysis of the target company has to be
done. This is also referred to as due diligence.

Phase 4: Acquire the target through negotiations: Once the target company is
selected, the next step is to start negotiations to come to consensus for a negotiated
merger or a bear hug. This brings both the companies to agree mutually to the deal for
the long term working of the M&A.

Phase 5:Post merger integration: If all the above steps fall in place, there is a formal
announcement of the agreement of merger by both the participating companies.

Reasons for the failure of M&A – Analyzed during the stages of M&A:

Poor strategic fit: Wide difference in objectives and strategies of the company

Poorly managed Integration: Integration is often poorly managed without

planning and design. This leads to failure of implementation

Incomplete due diligence: Inadequate due diligence can lead to failure of M&A as it is
the crux of the entire strategy

Overly optimistic: Too optimistic projections about the target company leads to bad
decisions and failure of the M&A

Example: Breakdown in merger discussions between IBM and Sun Microsystems

happened due to disagreement over price and other terms.
Recent Mergers and Acquisitions
Mergers and Acquisitions Case Study:

Case Study 1: Sun Pharmaceuticals acquires Ranbaxy:

The deal has been completed: The companies have got the approval of merger
from different authorities.

This is a classic example of a share swap deal. As per the deal, Ranbaxy shareholders
will get four shares of Sun Pharma for every five shares held by them, leading to 16.4%
dilution in the equity capital of Sun Pharma (total equity value is USD3.2bn and the deal
size is USD4bn (valuing Ranbaxy at 2.2 times last 12 months sales).

Reason for the acquisition: This is a good acquisition for Sun Pharma as it will help
the company to fill in its therapeutic gaps in the US, get better access to emerging
markets and also strengthen its presence in the domestic market. Sun Pharma will also
become the number one generic company in the dermatology space. (currently in the
third position in US) through this merger.

Objectives of the M&A:

• Sun Pharma enters into newer markets by filling in the gaps in the offerings of the
company, through the acquired company

• Boosting of products offering of Sun Pharma creating more visibility and market share
in the industry

• Turnaround of a distressed business from the perspective of Ranbaxy

This acquisition although will take time to consolidate, it should in due course start
showing results through overall growth depicted in Sun Pharma’s top-line and bottom-
line reporting.

Case Study 2: CMC merges with TCS:

This is an example where there is a merger in the same industry (horizontal). It was
done to consolidate the IT businesses. The objective of this merger, as indicated by the
management of CMC, was that the amalgamation will enable TCS to consolidate CMC’s
operations into a single company with rationalised structure, enhanced reach, greater
financial strength and flexibility. Further it also indicated that, it will aid in achieving
economies of scale, more focused operational efforts, standardisation and simplification
of business processes and productivity improvements.
Merger and acquisition are the two most commonly applied corporate restructuring
strategies, which are often uttered in the same breath, but they are not one and the
same. These are the form of external expansion, whereby through corporate
combinations, business entities purchases a running business and grows overnight. It
helps the business in maximizing the profit and growth by increasing the level of
production and marketing operation. While merger means “to combine”, Acquisition
means “to acquire.”

Merger alludes to the combination of two or more firms, to form a new company, either
by way of amalgamation or absorption. Acquisition or otherwise known as takeover is a
business strategy in which one company takes the control of another company. By
reading this article, you will be able to understand the difference between merger and
acquisition.

Comparison Chart

Basis for
Merger Acquisition
Comparison
The merger means the fusion of
When one entity purchases the
two or more than two companies
Meaning business of another entity, it is
voluntarily to form a new
known as Acquisition.
company.
Formation of a new
Yes No
company
The mutual decision of the Friendly or hostile decision of
Nature of Decision companies going through acquiring and acquired
mergers. companies.
Minimum number of
3 2
companies involved
To decrease competition and
Purpose For Instantaneous growth
increase operational efficiency.
The size of the acquiring
Generally, the size of merging
Size of Business company will be more than the
companies is more or less same.
size of acquired company.
Legal Formalities More Less
Definition of Merger

Merger refers to the mutual consolidation of two or more entities to form a new
enterprise with a new name. In a merger, multiple companies of similar size agree to
integrate their operations into a single entity, in which there is shared ownership,
control, and profit. It is a type of amalgamation. For example M Ltd. and N Ltd. jJoined
together to form a new company P Ltd.

The reasons for adopting the merger by many companies is that to unite the resources,
strength & weakness of the merging companies along with removing trade barriers,
lessening competition and to gain synergy. The shareholders of the old companies
become shareholders of the new company. The types of Merger are as under:

Types of mergers
The following are the types of mergers

1. Horizontal mergers: It refers to two firms operating in same industry or producing

ideal products combining together. For e.g., in the banking industry in India, acquisition
of Times Bank by HDFC Bank, Bank of Madura by ICICI Bank, Nedungadi Bank by
Punjab National Bank etc. in consumer electronics, acquisition of Electrolux’s Indian
operations by Videocon International Ltd., in BPO sector, acquisition of Daksh by IBM,
Spectramind by Wipro etc. The main objectives of horizontal mergers are to benefit from
economies of scale, reduce competition, achieve monopoly status and control the
market.

2. Vertical merger: A vertical merger can happen in two ways. One is when a firm
acquires another firm which produces raw materials used by it. For e.g., a tyre
manufacturer acquires a rubber manufacturer, a car manufacturer acquires a steel
company, a textile company acquires a cotton yarn manufacturer etc.

Another form of vertical merger happens when a firm acquires another firm which would
help it get closer to the customer. For e.g., a consumer durable manufacturer acquiring
a consumer durable dealer, an FMCG company acquiring m advertising company or a
retailing outlet etc.

3. Conglomerate merger: It refers to the combination of two firms operating in

industries unrelated to each other. In this case, the business of the target company is
entirely different from those of the acquiring company. For e.g., a watch manufacturer
acquiring a cement manufacturer, a steel manufacturer acquiring a software company
etc. The main objective of a conglomerate merger is to achieve i big size.

4. Concentric merger: It refers to combination of two or more firms which are related to
each other in terms of customer groups, functions or technology. For eg., combination
of a computer system manufacturer with a UPS manufacturer.
5. Forward merger: In a forward merger, the target merges into the buyer. For e.g.,
when ICICI Bank acquired Bank of Madura, Bank of Madura which was the target,
merged with the acquirer, ICICI Bank.

6. Reverse merger: In this case, the buyer merges into the target and the shareholders
of the buyer get stock in the target. This is treated as a stock acquisition by the buyer.

7. Subsidiary merger: A subsidiary merger is said to occur when the buyer sets up an
acquisition subsidiary which merges into the target.

Definition of Acquisition

The purchase of the business of an enterprise by another enterprise is known as

Acquisition. This can be done either by the purchase of the assets of the company or by
the acquiring ownership over 51% of its paid-up share capital.

In acquisition, the firm which acquires another firm is known as Acquiring company
while the company which is being acquired is known as Target company. The acquiring
company is more powerful in terms of size, structure, and operations, which overpower
or takes over the weaker company i.e. the target company.

Most of the firm uses the acquisition strategy for gaining instant growth, competitiveness
in a short notice and expanding their area of operation, market share, profitability, etc.
The types of Acquisition are as under:

• Hostile
• Friendly
• Buyout

Key Differences Between Merger and Acquisition

The points presented below explain the substantial differences between merger and
acquisition in a detailed manner:

1. A type of corporate strategy in which two companies amalgamate to form a new

company is known as Merger. A corporate strategy, in which one company
purchases another company and gain control over it, is known as Acquisition.
2. In the merger, the two companies dissolve to form a new enterprise whereas, in
the acquisition, the two companies do not lose their existence.
3. Two companies of the same nature and size go for the merger. Unlike
acquisition, in which the larger company overpowers the smaller company.
4. In a merger, the minimum number of companies involved are three, but in the
acquisition, the minimum number of companies involved is 2.
 5. The merger is done voluntarily by the companies while the acquisition is done
either voluntarily or involuntarily.
6. In a merger, there are more legal formalities as compared to the acquisition.

Examples of Mergers and Acquisitions in India

• Acquisition of Corus Group by Tata Steel in the year 2006.

• Acquisition of Myntra by Flipkart in the year 2014.
• The merger of Fortis Healthcare India and Fortis Healthcare International.
• Acquisition of Ranbaxy Laboratories by Sun Pharmaceuticals.
• Acquisition of Negma Laboratories by Wockhardt

Case study: Tata Motor’s Acquisition of Jaguar and Land Rover

Tata Motors is the largest multi-holding automobile company in India and it is the fourth
largest truck producer in the world. In addition, Tata Motors is also the second largest
bus producer in the world, with the revenues of US$ 8.8 billion in the financial year
2008. Since its establishment in 1945, Tata Motors has grown significantly in the past
60years with the strategies of joint venture, acquisition and launched new products in
different market segments (i.e. passenger cars, commercial vehicles and utility
vehicles). A significant breakthrough for Tata was the development and
commercialization of the truly Indian cars and they are Tata Indica (1998) and Tata
Indigo (2002). Tata Motors has experienced many joint ventures with Daimler Benz,
Cummis Engine Co. Inc., and Fiat. In the year 2008, there were two most significant
events which have had a momentous impact on the scale of the Company’s operations
and its global image. The launching of Tata Nano, the world cheapest car and the
acquisition of Jaguar and Land Rover, the two iconic British brand have made Tata
Motors well known to the people in the world. Tata Motors has proven excellence over
the years through continuous strong financial results, market expansion, acquisition,
joint ventures and improvement and introduction of new products, it seems to have a
promising future. But it failed the expectation as the company was in trouble right after
the acquisition of Jaguar and Land Rover (JLR) in June 2008 due to the arrival of global
financial crisis. The bridge loan of US$ 3 billion which used to fund the acquisition of
JLR was due on June 2009 and yet at the end of the year 2008, Tata was only able to
repay the US$ 1 billion. The declining revenues and a tight credit conditions was hurting
the company’s cash flow. The questions arise is that whether Tata Motors able to repay
the bridge loan? Will it be able to build up investors’ confidence and increase sales in
the future? Could Tata Motors survive or going under bankruptcy?
Tata Motor’s Acquisition of Jaguar and Land Rover

On June 02, 2008, India-based Tata Motors completed the acquisition of the Jaguar and
Land Rover (JLR) units from the US-based auto manufacturer Ford Motor Company
(Ford) for US$ 2.3 billion, on a cash free-debt free basis. JLR was a part of Ford’s
Premier Automotive Group (PAG) and were considered to be British icons. Jaguar was
involved in the manufacture of high-end luxury cars, while Land Rover manufactured
high-end SUVs.

Forming a part of the purchase consideration were JLR’s manufacturing plants, two
advanced design centers in the UK, national sales companies spanning across the
world, and also licenses of all necessary intellectual property rights. Tata Motors had
several major international acquisitions to its credit. It had acquired Tetley, South Korea-
based Daewoo’s commercial vehicle unit, and Anglo-Dutch Steel maker Corus. Tata
Motors long-term strategy included consolidating its position in the domestic Indian
market and expanding its international footprint by leveraging on in-house capabilities
and products and also through acquisitions and strategic collaborations

Analysts were of the view that the acquisition of Jaguar and Land Rover, which had a
global presence and a repertoire of well established brands, would help Tata Motors
become one of the major players in the global automobile industry.

On acquiring JLR, Rattan Tata, Chairman, Tata Group, said, “We are very pleased at
the prospect of Jaguar and Land Rover being a significant part of our automotive
business. We have enormous respect for the two brands and will endeavor to preserve
and build on their heritage and competitiveness, keeping their identities intact. We aim
to support their growth, while holding true to our principles of allowing the management
and employees to bring their experience and expertise to bear on the growth of the
business.” Ford had bought Jaguar for US$ 2.5 billion in 1989 and Land Rover for US$
2.7 billion in 2000. However, over the years, the company found that it was failing to
derive the desired benefits from these acquisitions.

Ford Motors Company (Ford) is a leading automaker and the third largest multinational
corporation in the automobile industry. The company acquired Jaguar from British
Leyland Limited in 1989 for US$ 2.5 billion. After Ford acquired Jaguar, adverse
economic conditions worldwide in the 1990s led to tough market conditions and a
decrease in the demand for luxury cars. The sales of Jaguar in many markets declined,
but in some markets like Japan, Germany, and Italy, it still recorded high sales. In
March 1999, Ford established the PAG with Aston Martin, Jaguar, and Lincoln. During
the year, Volvo was acquired for US$ 6.45 billion, and it also became a part of the PAG.

History of Jaguar and Land Rover

Jaguar and Land Rover are two iconic British brands that were acquired by Ford Motor
Corporation in 1989. Land Rover is a British car manufacturer that specializes in four
wheel drive vehicles. The name started from a single vehicle that was named by the
Rover Company as Land Rover in the year 1948. After developments, this became a
porch of a variety of four-wheel drive models such as Discovery, Defender, Range
Rover and Freelander. In its history this company has had a number of ownership. In
1967 Leyland Motor Corporation absorbed the Rover Company. Leyland then formed a
merger with the British Motor Holdings and formed British Leyland. The new company
broke up in the 1980s but in 1988 the Land Rover (Rover Group) was purchased by
British Aerospace. The Rover Group was acquired by BMW in the year 1994 but the
merger broke down in 2000 where The Rover Group was taken up by Ford Motor
Company. It was in the year 2008 that Land Rover was sold to Tata Motors together
with Jaguar cars.

Jaguar Cars Ltd or Jaguar is a British luxury car manufacturer whose headquarters are
located in Coventry UK. In 1922 the company was founded as Swallow Sidecar
Company that used to make motorcycle sidecars and later passenger cars. After the
Second World War, the SS connotations were unfavourable and then the name
changed to Jaguar. The name changed to Leyland and eventually British Leyland in
1984 when it was listed in the London Stock Exchange.

Ford Sells Jaguar and Land Rover

In the year 2007, the Ford Motor Company, a widely respected company which also
happened to be the world’s third largest automaker based on vehicle sales worldwide,
reported the largest annual loss in the history of establishment of the company since
1903. The Company reported a loss of $12.8 billion. It also stated that it would not
return to profitability until 2009. In September 2006, after Allan Mulally (Mulally)
assumed charge as the President and CEO of Ford, he decided to dismantle the PAG.
In March 2007, Ford sold the Aston Martin sports car unit for US$ 931 million. In June
2007, Ford announced that it was considering selling JLR. Ford stated that weak
economy is the primary reason to sell Jaguar and Land Rover. The two brands were
however suffering losses often resulting in closure of few manufacturing plants and
heavy cut in workforce

The Deal

On March 26, 2008, Tata Motors entered into an agreement with Ford for the purchase
of Jaguar and Land Rover. Tata Motors agreed to pay US$ 2.3 billion in cash for a
100% acquisition of the businesses of JLR. As part of the acquisition, Tata Motors did
not inherit any of the debt liabilities of JLR – the acquisition was totally debt free.

The Benefits

Tata Motors’ long-term strategy included consolidating its position in the domestic
Indian market and expanding its international footprint by leveraging on in-house
capabilities and products and also through acquisitions and strategic collaborations. On
acquiring JLR, Ratan Tata, Chairman, Tata Group, said, “We are very pleased at the
prospect of Jaguar and Land Rover being a significant part of our automotive business.
We have enormous respect for the two brands and will endeavor to preserve and build
on their heritage and competitiveness, keeping their identities intact. We aim to support
their growth, while holding true to our principles of allowing the management and
employees to bring their experience and expertise to bear on the growth of the
business.”

Tata Motors stood to gain on several fronts from the deal. One, the acquisition would
help the company acquire a global footprint and enter the high-end premier segment of
the global automobile market. After the acquisition, Tata Motors would own the world’s
cheapest car – the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land
Rover. Two, Tata also got two advance design studios and technology as part of the
deal. This would provide Tata Motors access to latest technology which would also
allow Tata to improve their core products in India, for eg, Indica and Safari suffered from
internal noise and vibration problems. Three, this deal provided Tata an instant
recognition and credibility across globe which would otherwise would have taken years.
Four, the cost competitive advantage as Corus was the main supplier of automotive
high grade steel to JLR and other automobile industry in US and Europe. This would
have provided a synergy for TATA Group on a whole. The whole cost synergy that can
be created can be seen in the following diagram. Five, in the long run TATA Motors will
surely diversify its present dependence on Indian markets (which contributed to 90% of
TATA’s revenue). Along with it due to TATA’s footprints in South East Asia will help JLR
do diversify its geographic dependence from US (30% of volumes) and Western Europe
(55% of volumes).

Analysts were of the view that the acquisition of JLR, which had a global presence and
a repertoire of well established brands, would help Tata Motors become one of the
major players in the global automobile industry.
The Road Ahead

Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it
had increased the earnings volatility, given the difficult economic conditions in the key
markets of JLR including the US and Europe. Moreover, Tata Motors had to incur a
huge capital expenditure as it planned to invest another US$ 1 billion in JLR. This was
in addition to the US$ 2.3 billion it had spent on the acquisition. Tata Motors had also
incurred huge capital expenditure on the development and launch of the small car Nano
and on a joint venture with Fiat to manufacture some of the company’s vehicles in India
and Thailand. This, coupled with the downturn in the global automobile industry, was
expected to impact the profitability of the company in the near future.

Worldwide car sales are down 5% as compared to the previous year. The automobile
industry the world over is rationalizing production facilities, reducing costs wherever
possible, consolidating brands and dropping model lines and deferring R&D projects to
conserve funds. The Chinese and Indian domestic markets for cars have been
exceptions.

While China has witnessed a significant reduction in its automotive-related exports and
supplies to automobile companies, the Chinese domestic car market has grown by 7%.
In India the passenger car market has remained more or less flat compared to the
previous year.

Since then, its fortunes have been unsure, as the slump in demand for automobiles has
depressed its revenues at the same time Tata has invested nearly $400 million in the
Nano launch and struggled to pay off the expensive $3 billion loans it racked up for the
Jaguar/Land Rover shopping bill. Within the space of a year, Tata Motors has gone
from being a developing-world success story to a cautionary tale of bad timing and
overly ambitious expansion plans.

Tata Motors’ standalone Indian operations’ profits declined by 51% in 2008-09 over the
previous year.All through the fiscal year ended March 2009 the company bled money,
losing a record $517 million on $14.7 billion in revenues, just on its India operations.
Jaguar and Land Rover lost an additional $510 million in the 10 months Tata owned it
until March 2009. In January 2009, Tata Motors announced that due to lack of funds it
may be forced to roll over a part of the US$ 3 billion bridge loan after having repaid
around US$ 1 billion. The financial burden on Tata Motors was expected to increase
further with the pension liability of JLR coming up for evaluation in April 2009.
Benefits of Combining Forces

Some of the benefits of M&A deals have to do with efficiencies and others have to do
with capabilities, such as:

• Improved economies of scale. By being able to purchase raw materials in greater

quantities, for example, costs can be reduced.
• Increased market share. Assuming the two companies are in the same industry,
bringing their resources together may result in larger market share.
• Increased distribution capabilities. By expanding geographically, companies may
be able to add to their distribution network or expand its geographic service area.
• Reduced labor costs. Eliminating staffing redundancies can help reduce costs.
• Improved labor talent. Expanding the labor pool from which the new, larger
company can draw can aid in growth and development.
• Enhanced financial resources. The financial wherewithal of two companies is
generally greater than one alone, making new investments possible.

Potential Drawbacks

Although mergers and acquisitions are expensive undertakings, there are potential
rewards. And there are disadvantages, or reasons not to purchase an acquisition,
including:

• Large expenses associated with buying a company, especially if it does not want
to be acquired. (If an investor has a controlling interest in another company,
however, it may not have a choice regarding whether it is acquired.)
• Higher legal costs, which can be exorbitant if a company does not want to be
acquired.
• The opportunity cost of having to forego other deals in order to focus on bringing
two companies together.
• The possibility of a negative reaction to a merger or acquisition, which drives the
company’s stock price lower.

M&A is a growth strategy corporations often use to quickly increase its size, service
area, talent pool, customer base, and resources in one fell swoop. The process is
costly, however, so the businesses need to be sure the advantage to be gained is
substantial.

Conclusion

Nowadays, only a few numbers of mergers can be seen; however, acquisition is getting
popularity due to extreme competition. The merger is a mutual collaboration between
the two enterprises in becoming one while the acquisition is the takeover of the weaker
enterprise by the stronger one. But both of them gain the advantage of Taxation,
Synergy, Financial Benefit, Increase in Competitiveness and much more which can be
beneficial, however sometimes adverse effect can also be seen like an increase in
employee turnover, clashing in the culture of organizations and others but these are
rare to happen.