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MERGERS Meaning: A merger is a combination of two companies where one corporation is completely absorbed by another corporation.

The less important company loses its identity and becomes part of the more important co What Mergers actually mean:

A merger is a combination of two companies where one corporation is completely absorbed by another corporation. It may involve absorption or consolidation. In absorption one company acquires another company. For example, Hindustan Lever Limited acquired Tata Oil Mills Company.In consolidation, two or more companies combine to form a new company. For example, Hindustan Computers Limited, Hindustan Instruments Limited, Indian Software Company Limited, and Indian Reprographics Limited combined to form HCL Limited. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. A merger extinguishes the merged corporation, and the surviving corporation assumes all the rights, privileges, and liabilities of the merged corporation. A merger is not the same as a consolidation, in which two corporations lose their separate identities and unite to form a completely new corporation. In India mergers are called amalgamations in legal parlance. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:    Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above mode

To reduce advertising cost and improve public image of the offeree company. etc. overhead costs in buying department. savings in transportation costs. To obtain improved production technology and know-how from the offeree company To reduce cost. To obtain a new market outlets in possession of the offeree.PURPOSE OF MERGERS Purposes for mergers are short listed below: (1)Procurement of supplies: To safeguard the source of supplies of raw materials or intermediary product. improvement of quality of product. improve quality and produce competitive products to retain and improve market share. (3) Market expansion and strategy: To eliminate competition and protect existing market. To share the benefits of suppliers economies by standardizing the materials (2)Revamping production facilities: To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources. To obtain new product for diversification or substitution of existing products and to enhance the product range. To standardize product specifications. to obtain economies of purchase in the form of discount. expanding market and aiming at consumers satisfaction through strengthening after sale services. Strategic control of patents and copyrights . Strengthening retain outlets and sale the goods to rationalize distribution.

. secure additional financial facilities. To enhance gearing capacity. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation. To dispose of surplus and outdated assets for cash out of combined enterprise. product expansion. but might feel resource constraints with limitations of funds and lack of skill managerial personnel s. (7) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities. accounting. etc. To offer better satisfaction to consumers or users of the product (6) Own developmental plans: The purpose of acquisition is backed by the offeror company s own developmental plans. vertical. various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination. eliminate competition and strengthen its market position. To improve EPS (Earning per Share) (5) General gains: To improve its own image and attract superior managerial talents to manage its affairs. borrow on better strength and the greater assets backing. market extensional or other specified unrelated objectives depending upon the corporate strategies. valuation. To avail tax benefits. Thus.(4) Financial strength: To improve liquidity and have direct access to cash resource.

. economies of scope.(8) Corporate friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. the value of the combined entity. (9) Desired level of integration: Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. V (AB). is expected to be greater than (VA+VB). tax shields. if firms A and B merge. Some of them appear to be plausible in the sense that they create value. The purpose and the requirements of the offer or company go a long way in selecting a suitable partner for merger or acquisition in business combinations. Plausible reasons: The most plausible reasons in favor of mergers are strategic benefits. Such integration could be operational or financial. economies of vertical integration. the sum of the independent values of A and B. utilization of surplus funds. economies of scale. economies of scale. diversification. This gives birth to conglomerate combinations. For example. others seem to be dubious as they don t create value. The combining corporates aim at circular combinations by pursuing this objective. complementary resources. A variety of reasons like growth. managerial effectiveness and so on are cited in support of merger proposals. and managerial effectiveness. REASONS WHY COMPANIES MERGE The principal economic rationale of a merger id that the value of the combined entity is expected to be greater than the sum of the independent values of the merging entities.

Even in conglomerate mergers there is scope for reduction of certain overhead expenses. and research and development facilities. Vertical integration. simultaneous expansion and replacement (through merger) makes more sense than creation of additional capacity through internal expansion Economies of scale: When two or more firms combine. If a company does everything in-house it may not get the benefit of outsourcing from independent suppliers who may be more efficient in their segments of the value chain. data processing systems and so on. It offers a special timing advantage because the merger alternative enables the firm to leap frog several stages in the process of expansion. For example: proctor and gamble can enjoy economies or scope if it acquires a consumer product company that benefits from its highly regarded consumer marketing skills. certain economies are realized due to larger volume of operations of the combined entity.Strategic benefit: As a pre-emptive move it can prevents competitor from establishing a similar position in that industry. however. It may entail less risk and even less cost In a saturated market . For example. is not always a good idea. economies of vertical integration may be realized. These economies arise because of more intensive utilization of production capacity. Economies of scale are prominent in horizontal mergers where the scope of more intensive utilization of resources is greater. the merger of a company engaged in oil exploration and production (like ONGC) with a company engaged in refining and marketing (like HPCL) may improve coordination and control. Economies of vertical integration: When companies engaged at different stages of production or value chain merge. . Economies of scope: A company may use a specific set of skills or assets that it possesses to widen the scope of its activities. distribution networks.

markets. its accumulated losses and/or unabsorbed depreciation can be set off against the profits of the profit making firm and the tax benefits can be quickly realized. where as Asea was not. most managements have a tendency to make further investments. A good example of a merger of companies which complemented each other well is the merger of Brown Bovery and Asea that resulted in AseaBrownBovery (ABB). Prima facie. This may occur if the existing management team. DUBIOUS REASONS: Often mergers are motivated by a desire to diversify and lower financing costs. it may make sense for them to merge. The firm with accumulated losses and/or unabsorbed depreciation may not be able to derive tax advantages for a long time. Such a firm ought to distribute generous dividends and even buy back its shares. even though they may not be profitable. Utilization of surplus funds: A firm in a mature industry may generate a lot of cash but may not have opportunities for profitable investment. these objectives look worthwhile. a merger with another firm involving cash compensation often represents a more efficient utilization of surplus funds. which is performing poorly. In such a situation.Complementary resources: If two firms have complementary resources. Managerial effectiveness: One of the potential gains of merger is an increase in managerial effectiveness. Another allied benefit of a merger may be in the form of greater congruence between the interests of the managers and the share holders. However. whereas Brown Bovery did not. Asea excelled in management. is replaced by a more effective management team. . Tax shields: When a firm with accumulated losses and/or unabsorbed depreciation merges with a profit making firm. However. when it merges with a profit making firm. The technology. if the same is possible. but they are not likely to enhance value. and cultures of the two companies fitted well. Brown Bovery was international. tax shields are utilized better.

the opportunity gains in alternative investments. managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status. from the gains and achievements of the company i. Shareholders may gain from merger in different ways viz.e.e.Diversification: A commonly stated motive for mergers is to achieve risk reduction through diversification. depends on the correlation between the earnings of the merging entities. While negative correlation brings greater reduction in risk. corporate diversification may be the only feasible route to risk reduction. Diversification of product line. Economies of scales. perks and fringe benefits. (2) From the standpoint of managers Managers are concerned with improving operations of the company. The sale of shares from one company s shareholders to another and holding investment in shares should give rise to greater values i. through      Realization of monopoly profits. 2) If investors do not have the opportunity of home made diversification because one of the companies is not traded in the marketplace. Corporate diversification. Acquisition of human assets and other resources not available otherwise. to which risk is reduced. positive correlation brings lesser reduction in risk. may offer value in at least two special cases 1) If a company is plagued with problems which can jeopardize its existence and its merger with another company can save it from potential bankruptcy. however. MOTIVATIONS FOR MERGERS AND ACQUISITIONS The following are the motives from which the merger or acquisition takes place (1) From the standpoint of shareholders Investment made by shareholders in the companies subject to merger should enhance in value. of course. One or more features would generally be available in each merger where shareholders may have attraction and favor merger. Mergers where all these things are the guaranteed . The extent. Better investment opportunity in combinations.

after sales service. where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult. Both workers and communities will suffer on lessening job opportunities. . quality of products. (3) Promoter s gains Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. etc. mergers with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to uplift of the economy in general. (4) Benefits to general public Impact of mergers on general public could be viewed as aspect of benefits and costs to:    Consumer of the product or services. General public affected in general having not been user or consumer or the worker in the companies under merger plan. Workers of the companies under combination. any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. At the same time.outcome get support from the managers. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control. preventing the distribution of benefits resulting from diversification of production activity. Secondly. (b) Workers community The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: firstly. (a) Consumers The economic gains realized from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favor of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in price level.

This enforces competition in the market as consumers are free to substitute the alternative products. Such monopolists affect social and political environment to tilt everything in their favor to maintain their power ad expand their business empire. implements its production plans as per the objectives and economizes on working capital investments. Therefore. scarcity of resources and purchased products.e. TYPES OF MERGERS AND ACQUISITIONS Merger depends upon the purpose of the offeror company it wants to achieve. Economic power is to be understood as the ability to control prices and industries output as monopolists. In other words. . Every merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees. The following main benefits accrue from the vertical combination to the acquirer company i. consumers and does not create hindrance in administration of the Government polices. it is difficult to generalize that mergers affect the welfare of general public adversely or favorably. circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company. Based on the offerors objectives profile. horizontal. 2. combinations could be vertical. (A) Vertical combination: A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. Has control over products specifications. in vertical combinations. the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. These advances result into economic exploitation. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods. It gains a strong position because of imperfect market of the intermediary products.(c) General public Mergers result into centralized concentration of power. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. 1.

(C) Circular combination: Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. . (D) Conglomerate combination: It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. increase in market segments and exercise better control on market. reduction in investment in working capital. in a common market.(B) Horizontal combination: It is a merger of two competing firms which are at the same stage of industrial process. but somewhat related products. larger company to pool their products and sell them with greater success to the already common market that the two separate companies shared. The acquiring company obtains benefits in the form of economies of resource sharing and diversification. reduction in advertising costs. Product-extension Merger This merger is between two companies that sell different. Merger enhances the overall stability of the acquirer company and creates balance in the company s total portfolio of diverse products and production processes. This allows the new. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line. SOME MORE TYPES OF MERGERS: Market-extension Merger This involves the combination of two companies that sell the same products in different markets. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS. elimination in competition concentration in product. A market-extension merger allows for the market that can be reached to become larger and is the basis for the name of the merger. The acquiring firm belongs to the same industry as the target company. lowering average cost of capital and thereby raising present worth of the outstanding shares.

# Accessing new markets # maintaining growth momentum # acquiring visibility and international brands # buying cutting edge technology rather than importing it # taking on global competition # improving operating margins and efficiencies # developing new product mixes . though much of it depends on the way the deal is implemented. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. Advantages of M&A s: The general advantage behind mergers and acquisition is that it provides a productive platform for the companies to grow. It is a way to increase market penetration in a particular area with the help of an established base.ACCRETIVE MERGERS Those in which an acquiring company's earnings per share (EPS) increase.