ETHIRAJ COLLEGE FOR WOMEN

(Autonomous), Chennai – 600 008

MBA DEPARTMENT

NAME OF THE STUDENT: RAJESWARI K

REGISTER NO: 2013323036034
SEMESTER: III
SUBJECT: ADVANCED CORPORATE FINANCE
I. MERGER AND ACQUISITION:

Merger and Acquisition is an agreement between two existing companies to

convert into the new company, or purchasing of the one company by another. This
is generally done in order to take the benefit of the synergy between the
companies, expanding the research capacity, expand operations into the new
segments and to increase shareholder value etc.

When two companies combine to form one company, it is termed as Merger of

companies and at the same time, acquisitions are where the company takes over
one company.

In the case of a Merger, the acquired company ends to exist and becomes part of
the acquiring company. In the case of Acquisition, the acquiring company takes
over the majority stake in the acquired company, and the acquiring company
continues to be in existence. 

MOTIVES FOR MERGERS AND ACQUISITION:

Some of the different number of motives for merger and acquisition are:

1. Synergies through Consolidation:

Synergy implies a situation where the combined firm is more valuable than the
sum of the individual combining firms. This is defined as two plus two is equal to
five phenomenon. Synergy refers to benefits other than those related to economies
of scale.

Operating economies are one of the part of synergy benefits but apart from that
synergy may also arise from enhanced managerial capabilities, creativity,
innovativeness, R&D and market coverage capacity due to the complementarily of
resources and skills and a widened horizon of opportunities.

Usually undervalued firm are targeted for acquisition by other firms. The
fundamental motive for the acquiring firm to takeover a target firm may be the
desire to increase the wealth of the shareholders of the acquiring firm.  
This is possible only if the value of the new firm is expected to be more than the
sum of individual value of the target firm and the acquiring firm.

2. Diversification:

A commonly stated motive for mergers and acquisitions is to achieve risk

reduction through diversification. The extent, to which risk is reduced, depends
upon on the correlation between the earnings of the merging entities.

While negative correlation brings greater reduction in risk, positive correlation

brings lesser reduction in risk. If investors can diversify on their own by buying
stocks of companies which propose to merge, they do not derive any benefits from
the proposed merger.

Any investor who wants to reduce risk by diversifying between two companies,
has to simply buy the stocks of those two companies and merge them into a
portfolio. Diversification into new areas and new products can also be a motive for
a firm to merge another with it.

3. Increased Market Power: A merger can increase the market share of the
merged firm. The increased market share improves the profitability of the firm due
to economies of scale.

The bargaining power of the firm with labour, suppliers and buyers is also
enhanced. The merged firm can also exploit technological breakthroughs against
obsolescence and price wars.

Thus, by limiting competition, the merged firm can earn super normal profit and
strategically employ the surplus funds to further consolidate its position and
improve its market power.

TYPES OF MERGER AND ACQUISITION:

The various types of Merger and Acquisition are:

1. Horizontal Merger:
A merger occurring between companies in the same industry. Horizontal merger is
a business consolidation that occurs between firms who operate in the same space,
often as competitors offering the same good or service.

Horizontal mergers are common in industries with fewer firms, as competition

tends to be higher and the synergies and potential gains in market share are much
greater for merging firms in such an industry.

2. Vertical Merger:

A merger between two companies producing different goods or services for one
specific finished product. A vertical merger occurs when two or more firms,
operating at different levels within an industry's supply chain, merge operations.
Most often the logic behind the merger is to increase synergies created by merging
firms that would be more efficient operating as one.

3. Conglomerate Merger:

A merger between firms that are involved in totally unrelated business activities.
There are two types of conglomerate mergers: pure and mixed. Pure conglomerate
mergers involve firms with nothing in common, while mixed conglomerate
mergers involve firms that are looking for product extensions or market extensions.

4. Market Extension Merger:

A market extension merger takes place between two companies that deal in the
same products but in separate markets. The main purpose of the market extension
merger is to make sure that the merging companies can get access to a bigger
market and that ensures a bigger client base.

5. Product Extension Merger:

A product extension merger takes place between two business organizations that
deal in products that are related to each other and operate in the same market. The
product extension merger allows the merging companies to group together their
products and get access to a bigger set of consumers. This ensures that they earn
higher profits.
BENEFITS OF MERGER AND ACQUISITION:

1. Betterment of the company and its results:

The prime aim of mergers and acquisitions is to bring about a synergetic growth
for both the companies involved and improve the performance of the companies.
Value generation are the key aims for every merger and acquisition. The greater
market share which is a cause of merger and acquisition the lead to the generation
of more profit and generation.

2. Elimination of Excess Capacity:

When industries have grown to an extent, a point of excess capacity tends to

happen. When more and more companies enter the same industry, the supply
continues to rise, which further brings down the prices. 

With new companies entering the market, the supply-demand graph of the existing
companies gets disrupted, which leads to a decline in prices.

Thus, companies merge or acquire to get rid of the excess supply in the market and
to rectify the declining prices because if the price keeps on declining at a certain
point, it becomes impossible for many companies to survive in the market.

3. Growth Acceleration:

Merger and Acquisition increase market shares and brings about more profit and
revenues.

When a target company has absorbed the sales and customers of it are also taken
over, and as a result, it brings more sales, more revenues, and more profit.

4. Strategies to Roll Up:

Many small markets in the market face a higher cost of production to facilitate
their sales. Their operations are not feasible and they do not enjoy economies of
scale too.
So it is best to get acquired as an acquisition can prove to be a benefit for the target
company as it would help the company survive in the market and enjoy, at times,
economies of scale with the help of a target seeking company.

EXAMPLES OF MERGER AND ACQUISITION:

1. EBay and Skye (Failed):

In 2005, eBay Inc., purchased Skype for $2.6 billion. The purchase price was
extremely high considering that Skype had only $7 million in revenues.

Meg Whitman, CEO of eBay's, justified the acquisition by arguing that Skype
would improve the auction site by giving its users a better platform for
communicating. Ultimately eBay's users rejected Skype's technology considering it
unnecessary for conducting auctions, and the rationale for the purchase dissipated. 

Two years after the acquisition, eBay informed its shareholders that it would write
down the value of Skype by $900 million. In 2011, eBay was fortunate to find a
higher bidder for Skype. It sold Skype to Microsoft and realized a $1.4 billion
profit.

While the eBay and Skype merger failed because eBay miscalculated its customers'
demand for Skype's product, other M&A deals have failed for completely different
reasons.

2. Google and Android (Successful):

On July 11, 2005 Google purchased a little start-up company called Android. The
merger became successful by using the skills of its new Android team members for
three years in developing an operating system for mobile devices. This culminated
in the launch of the first public version of Android in 2008. Today, Android is the
most popular mobile Operating System in the world by a large margin.

Android was founded in Palo Alto by Andy Rubin along with the other co-workers
Rich Miner, Nick Sears, and Chris White a couple of years before Google bought
it. The original idea for the company was to create an operating system for digital
cameras and that’s how Android OS was initially pitched to early investors. That
soon changed because the market of the digital camera started shrinking, as
customers ditched them for mobile phones. That’s when the team decided to make
an open-source Operating System for phones.

As Android Inc., need to survive before its next deal. Google asked the co-
founders to meet of Android, to see if they could help the company. In their second
meet Android co-founders showed off a prototype of their mobile OS. And that
was good enough because Google quickly offered to acquire Android.

Google acquired Android for just $50 million. At Google, the team led by Rubin
developed a mobile device platform powered by the Linux kernel. Google
marketed the platform to handset makers and carriers on the promise of providing a
flexible, upgradable system. Google had lined up a series of hardware component
and software partners and signalled to carriers that it was open to various degrees
of cooperation on their part.

II. JOINT VENTURE:

A Joint Venture is a commercial enterprise in which two or more organizations

combine their resources to gain a tactical and strategic edge in the market.
Companies often enter into a Joint Venture to pursue specific projects.

The Joint Venture may be a new project with similar products or services or it may
involve creating an entirely new firm with different core business activities.
Companies initiate a Joint Venture through a contractual agreement between all
concerned parties.

JOINT VENTURE AGREEMENTS:

Joint venture agreements are termed as an agreement entered into by parties for a
particular period or for a particular purpose. It can also be said that joint venture
agreements are said to be concluded when two parties enter into an agreement to
share their resources to achieve a certain commercial purpose.
In case of a contractual joint venture, the contract is entered into to carry out a
particular purpose and this kind of joint venture does not assume the status of
separate entity.

These agreements are entered into to tackle certain market by deploying the
resources of both the parties. Contract is an essential prerequisite for the existence
of a joint venture which is fulfilling every condition which concludes a contract
and must not be contrary to basic provisions of the law of contract. 

Some of the most common examples are franchisee arrangements, licensing

agreements, and purchasing and distribution agreements.

TRENDS RELATING TO JOINT VENTURE:

There are increasing number of clients entering into joint ventures rather than
acquiring assets or companies outright. There are a number of key issues which
parties should consider before embarking on a Joint Venture.

1. Shareholdings and foreign ownership restrictions:

One of the key decisions which parties need to make prior to entering into a Joint
Venture is the percentage shareholding which each party will hold. Often, in order
to ensure an equal division of power, where there are only two parties, they will
elect to have a 50/50 Joint Venture.

However, before such a decision is taken, the parties need to consider, in

conjunction with local counsel, whether there are any foreign ownership
restrictions in the jurisdiction in which the Joint Venture will be incorporated.

Restrictions become more permissive with respect to foreign investment. In the

event that the Restrictions are abolished altogether, this will allow the relevant
party to either acquire the entirety of the JV Company or to sell its entire
shareholding in the Joint Venture Company. 

2. Business Plan:
Usually Business Plans are dealt with in a number of different ways. The optimal
approach is to append an agreed version of the business plan to the Agreement.
However, due to commercial practicalities, this is often not possible at the time that
the Agreement is entered into. In such circumstances a number of alternatives can
be used. 

Firstly, the parties may set out the key parameters of a future business plan. The
business plan, once finalised, will contain projected cash flow statements, monthly
projected profit and loss accounts, management reports, etc. for the Joint Venture
Company. Such a clause could also include a long stop date by which time the
parties should have put the business plan into place.

Parties may also wish to give the Joint Venture a lead in time prior to putting any
formal business plan into place. In such a case, it may be useful to include detailed
provisions in the Agreement with regard to how the parties will agree upon the
final business plan.

Such provisions could include the date and location at which the parties will meet,
the personnel from each of the parties who will be involved in the development of
the business plan and the dispute resolution mechanism which will be applied in
the event that the parties are unable to agree upon a final business plan.

3. Duration of the Joint Venture:

Another factor for the parties to consider is the length of the Joint Venture and
consequently how the Joint Venture will be terminated. The parties may intend that
the Joint Venture will be short or long term in nature or for an indefinite period.
This will depend upon their respective strategic objectives and the purpose of the
Joint Venture. 

At the point of the termination of a Joint Venture, relations between the parties
may have deteriorated. Therefore, it is important to have provisions in place which
clearly specify the process. Which should help to avoid any further disagreements
between the parties or any unnecessary delay in the termination process.

4. Regulatory consents for Joint Venture Operation:

Prior to embarking on a Joint Venture, the parties should also consider whether any
regulatory consents are required for the Joint Venture to operate.

The Joint Venture or parties may need to enter into certain contracts with, and
obtain licences from, the relevant regulatory body in the country where the relevant
resources are located. The parties and their legal advisers will also need to work
closely with local counsel in relation to such matters. 

The parties must also consider anti-bribery and anti-money laundering legislation.
They need to ensure that the Joint Venture and the parties will be able to operate
effectively and efficiently while also adhering to the anti-bribery and anti-money
laundering legislation which is applicable to them.

5. Shareholder and board reserved matters:

It is common for an Agreement to set out certain matters which the management of
the Joint Venture cannot undertake without the approval of all or a majority of the
shareholders. An Agreement may also specify certain matters which require
approval by all or a majority of the board. Such matters will depend on the
commercial rationale of the parties and the level of insight which they wish to have
at board and shareholder level. 

Matters which are often deemed to be shareholder reserved matters include the
winding up of the Joint Venture, material acquisitions or disposals by the Joint
Venture, the entering into of any financing arrangements over a certain value, or
any amendment to the name of the Joint Venture, the articles of association of the
Joint Venture, the business plan for the Joint Venture or the employment terms of
key individuals. 

Board reserved matters include amending the tax residency, accounting reference
date or auditors of the Joint Venture company, the making of a loan by the Joint
Venture company, any licensing or transfer of any intellectual property which the
Joint Venture company owns, or the Joint Venture company entering into any
related party transaction. 

6. Dividend:
The dividend policy of a Joint Venture depends upon the purpose of the Joint
Venture and the commercial rationale of the parties. The parties’ aim for the Joint
Venture may be to simply generate profits for shareholders and not to grow or
expand. In such a case, the dividend policy of the Joint Venture will be to
distribute all available profits of the Joint Venture, subject to applicable company
laws. 

By contrast, where the parties intend to grow the business of the Joint Venture, or
expand and invest in new property or machinery, the Joint Venture will likely want
to retain a considerable portion of the profits which can be reinvested into the
business.

Shareholders commonly do not feel in a position to be able to decide on the

dividend policy at the date that the Joint Venture is incorporated or the
shareholders’ agreement is entered into. In such a case, the shareholders may make
any decisions on the implementation of or any amendment to the dividend policy a
shareholder reserved matter. 

Any dividend policy will also need to take into account any loan repayments which
the Joint Venture is required to make, either to third party providers or the
shareholders, and which are likely to take priority over any dividend payments.

CONCLUSION:

Many companies find that the best way to get ahead is to expand ownership
boundaries through mergers and acquisitions. Mergers create synergies and
economies of scale, expanding operations and cutting costs. Investors can take
comfort in the idea that a merger will deliver enhanced market power. 

Additional capital can fund growth organically or through acquisition. M&A

comes in all shapes and sizes, and investors need to consider the complex issues
involved in M&A. The most beneficial form of equity structure involves a
complete analysis of the costs and benefits associated with the deals. 
PLAGIARISM REPORT: