Unit – I: Mergers- types of merger– theories of mergers- operating, financial and managerial

synergy of mergers – value creation in horizontal, vertical and conglomerate mergers –

internal and external change forces contributing to M & A activities- Impact of M & A on
stakeholders.

1. Mergers-
Meaning and Definition of Merger
The word 'amalgamation' is used for merger by Income Tax Act, 1961 of India. The
merger refers to combining two or more companies into one company. It can either be done
by merging of one or more companies into the existing company or framing a new company
by merging two or more existing company. The word 'amalgamation' is used for merger by
Income Tax Act, 1961 of India.
According to the Companies Act, 1956, the term amalgamation includes 'absorption'.
In S.S Somayajula vs. Hop Prudhommee and Co. Ltd., the learned Judge refers to
amalgamation as "A state of things under which either two companies are joined so as to
form a third entity or one is absorbed into or blended with another". The merger is done in the
following two types:
1) Merger by absorption
2) Merger by consolidation
1) Merger by absorption: Combining two or more companies into the existing company is
known as absorption. In this kind of merger, one company loses its entity and goes into
liquidation and all other companies remain the same. For example, there are two companies
A Ltd. and B Ltd., company B Ltd. is merged into A Ltd. All the assets and liabilities of the
company B Ltd will be acquired by company A Ltd. and company B Ltd. will be liquidated.
2) Merger by consolidation: The combination of two or more companies for forming one
new company is known as consolidation. This is also called as triangular merger.
Amalgamation is sometimes used in place of consolidation.. Like the two companies A Ltd.
and B Ltd. Are merged to form a new company known as AB Ltd. or C Ltd.
There is difference between merger through absorption and merger through consolidation. In
absorption, one company acquire another company, no new company is made while in
consolidation, both the companies are merged to make a new company. In consolidation, the
companies are of same size while in absorption the size of the companies is different. Usually
the small company is merged into big company. Both absorption and consolidation are used
correspondently while the ways and issues of both the forms of mergers are the same.
Characteristics of Mergers
The distinct characteristics of mergers are as follows:
1) Association of Two or More Business Units: Mergers involve association of two or more
business units, in which the individual identities of all the involved entities are lost.
2) Formation of New Business Unit: A new and large business entity is formed by
combining two or more small business units.
3) Assets and Liabilities: A company's assets and liabilities get authorised into the assets and
liabilities of another company.
4) Similar Shareholders: The shareholders of one or more small business units get merged
and become shareholders of the newly formed company.
5) Issue of New Stocks: New stocks are issued for a new entity and the stocks of the merged
companies are surrendered.
6) Similar Aims and Basis: Mergers are generally held between companies who have similar
aims and basis. In the other case, it happens when two or more companies want to combine
their area of expertise in order to form a single entity with wider scope.
7) Administrative Control: In a merger, both the companies hold control over the
administrative power and services, which are provided to the employees and staff members.
2. Types of merger
The various types of mergers are shown in the following
1. Types of Mergers
2. Horizontal Merger
3. Conglomerate Merger
4. Reverse Merger
5. Vertical Merger
6. Congeneric Merger
7. Other Kinds of Merger
1) Horizontal Merger: The companies which are selling same products and services are
combined it is called as horizontal merger. For example, if there is merger between two
hotels it is known as horizontal merger.
2) Vertical Merger: This type of merger occurs when the firm acquires either the upstream
or the downstream of another firm. In upstream merger, the firm supplying raw-materials is
merged and in downstream selling to the customers or the distribution channel is merged.
This type of merger occurs within different department like production or distribution
between the firms producing same line of products and services. It is done among two or
more companies producing same products.
3) Conglomerate Merger: The merger happens between two different company are known
as conglomerate merger. These type firms are not of same type either horizontally or
vertically. This kind of merger is done to diversify the activity. The common characteristics
can be technology, distribution channel, etc.
Types of Conglomerate Mergers
i) Product Extension Merger: The merger happens among the firms which are selling
different products but has same production process or market channel is known as product
extension merger.
ii) Market Extension Merger: When there is merger among the company selling the same
products, but have different market for selling a product is known as market extension
merger.
iii) Pure Merger: In pure merger, the merger happens among different firms.
4) Congeneric Merger: In congeneric merger, the firm of same industry is merged but they
do not have anything in common like buyer, customer or supplier like a merger between man
salon and female salon.
5) Reverse Merger: In the reverse merger, a profit earning company merges into the loss
bearing company and the identity of profit earning company is lost.
6) Other Kinds of Merger: The various other types of mergers are as follows:
i) De Facto Merger: It is the merger where there is just the purchase of assets of another
company but in legal term it is known as merger. It is not announced as the merger but has
the acquisition of assets of one firm and voting stock of another firm.
ii) Cash Merger: In this type of merger the firm acquires the share of the company in
exchange of cash in place of exchanging their own shares. It is done when the shareholder of
target firm wants to be related with the new firm made due to the merger.
iii) Short-Form Merger: In this merger, the parent company acquires the total voting
rights in the subsidiary company. It does not follow any provision of statutory compliance
and is also economical.
3. Theories of mergers-Operating: The theories of mergers are discussed below:
1. Efficiency Theories
A. Differential Managerial Efficiency/Managerial Synergy
 B. Inefficient Management
C. Pure Diversification
D. Operating Synergy
E. Financial Synergy
F. Strategic Re-Alignment
G. Undervaluation
2. Information and Signaling
3. Agency Problems and Managerialism
A. Agency Problemn
B. Managerialism
C. Hubris Hypothesis
4. Free Cash flow Hypothesis
5. Market Power
6. Tax Consideration
7.Re- Distribution
1) Efficiency Theories: These theories hold that mergers and other forms of asset re-
deployment have potential for social benefits. They generally involve improving the
performance of incumbent management or achieving a form of synergy. Unfortunately,
during the heyday of the conglomerate merger activities of the late 1960s, exaggerated claims
were made for synergy which came to be referred to as the *2+2 5" effect.
But, while the claims for synergy achieved through asset re- deployment were
exaggerated, there is a solid basis for achieving positive net present value investments by
recombining the activities of business operations. Efficiency Theories may be of following
ypes:
i) Differential Managerial Efficiency: The most general theory of mergers that can be
formulated involves differential efficiency. In everyday language, if the management of firm
A is more efficient than the management of firm B and if after firm A acquires firm B, the
efficiency of firm B is brought upto the level of efficiency of firm A, efficiency is increased
by merger.
Note that this would be a social gain as well as a private gain. The level of efficiency
in the economy would be raised by such mergers.
The One difficulty in the differential efficiency theory is that if one firm in the carried
to its extreme, it would result in firm with the greatest economy, indeed in the world
managerial efficiency. Clearly, problems of coordination in the firm or of managerial
capacity limit would arise before that result was reached.
The theory suggests that there are firms with below average efficiency or that are not
operating upto their potential, however defined. It is further suggested that firms operating in
similar kinds of business activity would be most likely to be the potential acquirers. They
would have the background for detect- ing below-average or less-than-full-potential
performance and have the managerial know-how for improving the performance of the
acquired firm.
The differential efficiency explanation can be formulated more vigorously and may be
called a managerial synergy hypothesis. If a firm has an efficient management team whose
capacity is in excess of its current managerial input demand, the firm may be able to utilize
the extra managerial resources by acquiring a firm that is inefficiently managed due to
shortages of such resources.
ii) Inefficient Management: The inefficient-management theory may be difficult to
distinguish from the differential efficiency theory previously discussed or the following
agency problem theory. In one sense, inefficient management is simply not performing upto
its potential.
Another control group might be able to manage the assets of this area of activity more
effectively. Or inefficient management may simply represent management that is inept in an
absolute sense.
Several observations can be made on the theory:
a) The theory assumes that owners (or shareholders) of acquired firms are unable to replace
their own managers, and thus it is necessary to invoke costly mergers to replace inefficient
managers.
b) If the replacement of incompetent managers were the sole motive for mergers, it should be
sufficient to operate the acquired firm as a subsidiary rather than to merge it into the acquirer
c) One clear prediction made by the theory is that the managers of the acquiring firm will be
replaced after the merger.
ii) Pure Diversification: Diversification refers to a strategy of buying firms outside of a
company's current primary lines of business. There are two commonly used justifications for
diversification. The first relates to the creation of financial synergy, resulting in a reduced
cost of capital. The second common argument for diversification is for firms to shift from
their core product-lines or markets into product-lines or markets that have higher growth
prospects. Such diversification can be either related or unrelated to the firm's current products
or markets.
The product-market matrix identifies a firm's primary diversification options. If a firm
is facing slower growth in its current markets, it may be able to accelerate growth by selling
its current products in new markets that are somewhat unfamiliar and, therefore, more risky.
For example, pharmaceutical giant Johnson&Johnson's announced unsuccessful
takeover attempt of Guidant Corporation in late 2004 reflected its attempt to give its medical
devices business an entry into the fast-growing market for implantable devices, a market in
which it does not currently participate. Similarly, a firm may attempt to achieve higher
growth rates by developing or acquiring new products, with which it is relatively unfamiliar
and selling them anto familiar and less risky current markets.
iv) Operating Synergy/Business Synergy: Operating synergy consists of both economies of
scale and economies of scope. Gains in efficiency can come from either factor and from
improved managerial practices. Such synergies are important determinants of shareholder
wealth creation.
v) Financial Synergy: (Lowering the Cost of Capital): Financial synergy refers to the
impact of mergers and acquisitions on the cost of capital (i.e., the minimum return required
by investors and lenders) of the acquiring firm or the newly formed firm resulting from the
merger or acquisition.
vi) Strategic Re-Alignment to Changing Environments: The strategic re-alignment theory
suggests that firms use M&As as ways of rapidly adjusting to changes in their external
environments. Although change can come from many sources, only changes in the regulatory
environment and technological innovation are considered. During the last 20 years, these two
factors have been major forces in creating new opportunities for growth or threats to a firm's
primary line of business, made obsolete by new technologies or changing regulations.
vii) Undervaluation: Some studies attribute merger motives. to the undervaluation of target
companies. One cause of undervaluation may be that management is not operating the
company up to its potential. This is then an aspect of the inefficient management theory. A
second possibility is that the acquirers have inside information. How they acquired this
special information may vary with circumstances, but if the bidders possess information
which the general market does not have, they may place a higher value on the shares than
currently prevails in the market.
Another aspect of the undervaluation theory is the difference between the market
value of assets and their replacement costs.
 The undervaluation theory even in this account is not much different from the
inefficient management or differential efficiency theory. Why would a firm add to its
capacity at a time when corporate assets on average sell below their replacement costs? It
must be true that the acquiring firm is more efficient than an average firm or at least than the
acquired firm. Thus, then undervaluation theory cannot standalone and efficiency rationale.
2) Information and Signaling: It has been suggested in the literau that the shares of the
target firm in a tender offer experience ard revaluation even if the offer turns-out to be
unsuccessful.
Two forms of this information hypothesis can be distinguisheu is that the tender offer
disseminates information that the trget shares are undervalued and the offer prompts the
market to revalue those shares. No particular action by the target firm or any others is
necessary to cause the revaluation. This has been called the "sitting on a gold mine"
explanation. The other is that the offer inspires target firm management to implement a more
efficient business strategy on its own. This is the "kick in the pants" explanation. No outside
input other than the offer itself is required for the upward revaluation.
An important variant of the information hypothesis is signaling theory. The theory of
signaling states that particular actions may convey other significant forms of information.
The signaling concept was used by Ross in connection with capital structure
decisions. Ross describes how signaling and managerial compensation arrangements can be
used to deal with information have that Ross postulates managers-insiders asymmetry.
information about their own firms not possessed by outsiders. When this occurs, Ross shows
that the capital structure decision is not irrelevant and an optimal capital structure may exist
if:
i) The nature of the firm's investment policy is signaled to the market through its capital
structure decision, and
ii) The manager's compensation is tied to the truth or falsity of the capital structure signal.
3) Agency Problems and Managerialism
i) Agency Problems: It arises basically because contracts between managers (decision or
control agents) and owners (risk bearers) cannot be costlessly written and enforced. Resulting
(agency) costs include:
a) Costs of structuring a set of contracts;
b) Costs of monitoring and controlling the behavior of agents by principals;
c) Costs of bonding to guarantee that agents will make optimal decisions or principals will be
compensated for the consequences of sub-optimal decisions; and
d) The residual loss, i.e., the welfare loss experienced by principals, arising from the
divergence between agents' decisions and decisions to maximize principals' welfare. This
residual loss can arise because the costs of full enforcement of contracts exceed the benefits.
ii) Managerialism: The managerialism explanation for conglomerate mergers was set forth
most fully by Mueller. Mueller hypothesizes that managers are motivated to increase the size
of their firms and he argues, therefore, that managers adopt a lower investment hurdle rate.
But in a study critical of earlier evidence, Lewellen and Huntsman present findings that
manager compensation is significantly correlated with the firms profit rate, not its level of
sales.
Agency theory suggests that when the market for manager or does not solve the
agency problem, the market for firms o merger activity will come into play. This theory
suggests therefore, that merger activity is a method of dealing with the agency problem. The
managerialism theory argues that the agency problem is not solved, and the merger activity is
a manifestation of the agency problems of inefficient, external investments by managers.
il) Hubris Hypothesis: When bidding takes place for a valuable object with an uncertain
value, the winning bid is likely to represent a positive valuation error. This result is likely to
hold even though the valuable object is worth the same amount to all bidders (a common
value auction) and the estimates of value are unbiased, so the mean of the estimates is equal
to the common value of the valuable object. The positive valuation error represents the
winner s curse.
Capen, Clapp, and Campbell, based on their analysis of sealed-bid competitive lease sales,
presents a diagram which depicts the relation between the high estimate to true value as a
function of the degree of uncertainty and the number of bidders. Roll analyzes the effect in
takeover activity, Postulating strong market efficiency in all markets, the prevailing market
price o the target already reflects the full value, of the firm. The hign valuation of the bidder
(over the target's true economiC va he states, results from hubris the bidder's excessive sC
confidence (pride, arrogance). Hubris is one of the factors wne cause the winner's curse
phenomenon to occur.
4) Free Cash flow Hypothesis (FCFH): The pay-out of free low can serve an important role
in dealing with the conflict D managers and shareholders. Free cashflow as cashflow in c net
ess of the amounts required to fund all projects that have Po capita present values when
discounted at the applicable cost o Cm is to pital. Such free cash flow must be paid-out to
shareholders if the to firm Mergers and Acquisitions (Cap be efficient and to maximize share
price. The pay-out of Free Cash flow (FCF) reduces the amount of resources under the
control of managers and thereby reduces their power.
Paying-out the current amount of excess cash, that managers bond their promise to
pay-out future cash flows. An effective way to do this is by debt creation without retention of
the proceeds of the issue. By issuing debt in exchange for stock, e.g., managers bond their
promise to payout future cashflows more effectively than any announced dividend policy
could achieve. The control function of debt is most important in organizations that generate
large cashflows, but whose outlook involves low growth or an actual reduction in size.
Increased leverage involves costs, and it increases the risks of bankruptcy costs. There are
agency costs of debt as well. One is for the firm to take on highly risky projects which benefit
shareholders at the expense of bondholders.
5) Market Power: The market power theory suggests that firms merge to improve their
monopoly power to set product prices at levels not sustainable in a more competitive market.
There is very little empirical support for this theory. Many recent studies conclude that
increased merger activity is much more likely to contribute to improved operating efficiency
of the combined firms than to increased market power.
6) Tax Considerations: There are two important issues in discussing the role of taxes'as a
motive for M&As:
i) Tax benefits, such as loss carry forwards and investment tax credits can be used to offset
the combined firms' taxable income. Additional tax shelter is created if the acquisition is
recorded under the purchase method of accounting, which requires the net book value of the
acquired assets to be re valued to their current market value. The resulting depreciation of
these generally higher asset values also reduces the amount of future taxable income
generated by the combined companies
i) The taxable nature of the transaction frequently plays a more important role in
determining if the merger takes place than any tax benefits that accrue to the acquiring
company. The tax-free status of the transaction may be viewed by the seller as a prerequisite
for the deal to take place. A properly structured transaction can allow the target shareholders
to defer any capital gain resulting from the transaction. If the transaction is not tax- free, the
seller normally wants a higher purchase price to compensate for the tax liability resulting
from the transaction.
7) Re-Distribution: Tax saving is a form of re-distribution fron. ms of tax collector to the
firm that achieves tax benefits. Other fothe re-distribution may be involved. Some argue that
the gains achieved of by mergers and tender offers go to the shareholders. It is argued d o the
shareholder the source of the gains represent re-distribution to the shareholder from a number
of other stakeholders. These include bondholder in the form of reduced values, labor in the
form of reduced ages and/or reduced employment, and consumers in the form of restricted
supply and/or higher prices.
4. Financial and managerial synergy of mergers –
Financial Synergies
In contrast with business and market synergies, the existence of financial synergies is
controversially discussed among academics and practitioners. The cost of capital could be
reduced if the merged firms have uncorrelated cash flows (i.e., so-called co-insurance),
realize financial economies of scale from lower securities and transactions cost, or result in a
better matching of investment opportunities with internally excess cash flows with one
generated funds. Combining a firm whose internally generated cash flow is insufficient to
fund its : investment opportunities may result in a lower cost of borrowing.
A firm in a mature industry, whose growth is slowing, may produce cash flows well
in excess of available investment opportunities. Another firm in a high-growth industry may
have more investment S opportunities than the cash to fund them. Reflecting their different t
growth rates and risk levels, the firm in the mature industry may have a a lower cost of
capital than the one in the high-growth industry. Combining the two firms might result in a
lower cost of capital for the merged firms.
The different effects of financial synergies can be sub-divided as follows:
1) Reduced Cost of Capital Procurement: Raising capital is mostly related to fixed costs
for external parties (e.g., investment bankers, lawyers, and accountants). A larger' company,
therefore, can automatically benefit from economies of scale which has been proven by
empirical studies. In addition, a company-internal capital market, which allows the allocation
of excess funds, can result in lower costs of funding due to the avoidance of transaction costs
and C risk premium.
2) Higher Market Valuation: It has been observed that investors frequently pay higher
valuations for larger companies. Possible reasons for this habit might be that investors
assume higher corporate strength for larger companies. Further, larger companies might offer
a more flexible exit.
In the context of M&A, the potential impact of financial synergie on value creation is
most significant in conglomerate strategies, du to the higher degree of unrelatedness of the
cashflows in the different businesses.
Managerial Synergies
In contrast to the three aforementioned synergies, managerial synergie! do not have a
direct impact on revenues, costs, and investments and hence, also not on value creation.
However, they are still very important because they indirectly support business, market, and
financial synergies. Managerial synergies occur when the management of one o the
companies merging has superior abilities from which the other firm can profit. Sometimes a
change in ownership can also reduce managerial overheads.
According to Jensen and Ruback, one of the main reasons for mergers is the market
for corporate control, which they define as "A market in which alternative managerial teams
compete for the rights to manage corporate resources".
The model assumes that the main task of management is to maximize shareholder
value; if it fails to do so, competing management teams will try to takeover the firm in order
to replace the current management, and as a result managerial inefficiencies, are eliminated
and higher firm performance may be achieved. Management synergies result from a transfer
of strategic and operational know-how between the companies involved.
 On one hand, it is possible that the acquirer has more skillful managers and takes over
a target company with a less competent management team.
In this case, the management team faces the disciplinary function of the market for
corporate control. On the other hand, the combination ofcomplementary management skills in
the combined entity would also be a possible outcome of the M&A.
Overall, it is important that the management capacity in the new entity is well-
balanced. In the context of M&A, the potential impact of managerial synergies on value
creation is most significant in horizontal, less noteworthy in concentric and vertical, and least
meaningful inle conglomerate strategies.
5. Value creation in horizontal, vertical and conglomerate mergers –
Value Creation in Mergers
A merger should be attractive to the shareholders of the companies involved if it
increases the value of their shares. Value creation result from a number of factors such as
economies of scale in production, distribution and management, a technology that can be best
deployed by the surviving company, the acquisition of new channels of at distribution, and
cross-selling of each other's products.
However, experience shows that merger synergies are difficult to attain and their size
can be disappointing. Acquisitions are sometimes made to re- deploy excess corporate cash
and avoid double taxation of dividends to shareholders, but the tax argument may lead the
acquirer to overreach into areas beyond its competency. Changes in technology and the
globalization of markets have led to many recent mergers. These factors have created E
opportunities for the mergers activities. The value of the merged firms appears to be greater
than the sum of the components. This implies that value is created and increased by mergers,
reflecting underlying economics and efficiencies of corporate fusion. Other findings include:
1) Shareholders of acquired firms during the period just before the announcement date of a
merger or tender offer gain by about 15 pe cent in mergers and about 30 per cent in tender
offers. However, in earlier periods, the abnormal returns of acquired firms are indicating that
their managements were not performing-up potentials.
2) Shareholders of acquiring firms for the period before the announcement dates realize
modest positive returns, but there the not always statistically significant in earlier periods,
however, their shareholders' abnormal returns are tha acquiring firms previously had a record
of successfully managing asset growth.
3) Target residuals do not decline after the merger. This further indicates that the mergers, on
average, are based on valid economi or business reasons.
The studies summarized above generally include all types of mergers horizontal,
vertical, and conglomerate. Studies of conglomerate merger produced approximately the
same pattern of results. Pure conglomerate mergers appear to violate the Drucker imperative
of relatedness. Bu because of antitrust constraints against horizontal and vertical mergers
more than 75 per cent of the mergers and acquisitions since the earl 1950s have been
classified as "conglomerate" by the Federal Trad Commission. Furthermore, studies of
conglomerate mergers have foun that their financial market performances for their
shareholders have no been statistically different from the general market averages, or othe
broad composites such as the returns from mutual funds.
Closer analysis suggests that the so-called conglomerate mergers tha were studied did
not violate the Drucker rules. In each case, acquiring and acquired firms shared some
relatedness. For some, it was the ability to share sophisticated financial planning and control
systems or some generic managerial capabilities; for others, it was the ability to adjust
effectively to changing economic environments. In most cases, the acquiring firms had
available managerial capabilities and cashflows, but faced product markets whose growth
prospects were below average.
Value Creation in Horizontal Mergers
"Usually, conjunctions are called horizontal, if the partnering firms produce same or similar
products". Similarly, Buhner claims that "Horizontal conjunctions of firms are done by
companies that are operating with the same products within the same markets meaning they
are competing directly".
A horizontal conjunction reinforces the market position, i.e., the market share of the
integrated firm. A strong market position has advantages in negotiating with suppliers as well
as with buyers. In addition to these synergy effects based on external scale economies,
horizontal mergers can lead to a better cost structure based on internal scale economies. The
better cost structure is the result of a number of synergy effects such as:
1) Specialization advantages, which result from possibilities of division of labor in larger
organizational units.
2) Construction technology-related effects, according to which investment costs increase sub-
proportionally with increases of capacities.
3) Advantages, which result from a reduction of spare part volumes for production facilities
thanks to central warehousing.
4) to consecutive production steps reach the lowest level of cost at their least common
capacity multiple.
5) Economies due to lot sizes, as larger lots can be produced and costs can be lowered. set-up
1MliC
In a nutshell, horizontal acquisitions can generate synergy effects based on economic synergy
mechanisms as well as on resource based synergy mechanisms.
Value Creation in Vertical Mergers
Vertical mergers increase the vertical integration of a firm by taking over a customer or a
supplier. Similarly, According to Berthold, "The merger is vertical if there has been a kind of
buyer-seller relationship between the partnering firms and they thus seek integration along
the value chain".
Value creation in vertical merger can be done as:
1) Vertical mergers and acquisitions mainly reduce market 2 uncertainties, which results in
lower transaction costs. These transaction cost savings include search and information cost to
gather prices and product characteristics of suppliers, cost for contract conclusion, as well as
cost for quality control, and other costs such as administration and taxation. At the same time,
vertical mergers can reduce warehousing costs and increase capital turnover as stocks can be
reduced.
2) In a vertical merger or acquisition, a firm acquires a supplier of distributor, and the
acquirer modifies and improves the value chain through calibration of various value drivers.
For example, in the pharmaceutical industry, the manufacturer has a tendency to acquire the
drug distributor to create more value by owning its own distribution source.
3) Sometimes, vertical acquisitions lead to alienate some of the customers, even though there
are chances of increasing the firm's performance. For example, PepsiCo discovered this effect
after acquiring Pizza Hut, Taco Bell, and KFC. One objective of these channels to sell Pepsi's
drinks. Soon, Coca-Cola convinced acquisitions was to use the three restaurant chains as
distribution Wendy's and other fast food chains that selling Pepsi in their store indirectly
benefited those of their competitor that PepsiCo owned
Later, PepsiCo spun-off its three food units to form Tricon, a separate entity. Thus, many
firms balance anticipated benefits of a vertical mergers and acquisition having potential risks.
Value Creation in Conglomerate Mergers
M&A-transactions leading to diversification are conjunctions of firms that lo neither operate
in the same markets nor in the same industry. In the iterature, authors often refer to this type
of M&A transaction as conglomerate.
In conglomerate conjunctions, partnering firms do not have any relatedness between their
products and/or their markets." Similarly, Bertold points-out that, "Conglomerate
conjunctions are such between firms that have no commonalities". Value creation in
conglomerate mergers can be done as:
1) Some conglomerate mergers and acquisitions might profit from better management. This
corresponds to a transfer of scarce resources, i.e., management capabilities from one firm to
the other firm.
2) Synergy effect in conglomerate mergers is based on specific risk reduction, which lower
cost of capital. "In unrelated acquisitions, where such efficiencies (internal synergy effects)
are not expected to be present, value creation occurs nevertheless, and is associated with the
co-insurance effect." This synergy effect is based on external economics of scope. 2។
3) The co-insurance effect has been subject of an ongoing debate, in which opponents of
conglomerate mergers and acquisitions argue that shareholders can achieve co-insurance
effects better by diversifying their share portfolio, and that diversified companies create less
value than a portfolio of focused companies.
4) Despite the focus on financial synergy effects, Buhner points-out that even in
conglomerate mergers and acquisitions; reduction of overhead costs is possible.
According to Buhner, "This reduction can mainly be realized in specific functions
such as research and development, sales or in support functions that are not product-related
such as the Legal department or in IT." However, empirical support for this argument is
missing..
Thus conglomerate M&A transactions generate synergy effects mainly based on
economic and resource-based synergy mechanisms.tributing to M & A acquisitions of the
companies. These are various factors to There are various forces or factors which affects the
mergers and considered while doing merger and acquisition:

6. Internal and external change forces contributing to M & A activities-

There are various forces or factors which affects the mergers and acquisitions of the
companies. These are various factors to be considered while doing merger and acquisition.
The factors are clasified internal and external.
Internal Factors
The factors which depend on the working of the company are known as internal factors.
Those factors are as follows:
1. Growth
2. Differentiated
3. Products
4. Following Clients
5. Diversification
6. Internal Factors
1) Growth: The growth is very important for every kind of firm and the merger will help in
various ways for achieving the immediate growth. The size and growth of the market also
helps in attaining various objective of growth. The various big firms present in the domestic
market have lower costs due to economies of scale. The merger of various multinational
medium firms helps in increasing the size required for the present competition.
2) Advantages in Differentiated Products: There is direct relationship between
multinationalization and product differentiation. Its shows the status of the parent company
which the parent company will get by producing better quality of products in domestic
market and can also reach international market by doing so.
3) Following Clients: The maintenance of long-term relationship with the customer is
important factor for international merger in the financial service industry. The firm can only
expand its business in foreign if their customers are also moving to foreign. The foreign
company in the want to maintain their relation with their customer especially with the banks
who have opened their offices in foreign countries.
4) Diversification: The international merger helps in product diversification globally. The
other countries economies are not the inherent by being dependent on the single domestic
economy. It will same so the international diversification reduces the earning risk to decrease
the systematic and non-systematic risk. For example, the cross-border merger of oil industries
has given scope geographic diversification. It also lowers the risk of excess capacity, raises
the chance for lowering the costs and for attaining large size for global work.

External Factors
The external factors are the uncontrollable factors which are as follows:
1. Economic Factors
2. Technological Factors
3. -Government/Political Factors
4. Exchange Rate Factors
1) Economic Factors: There are various macro-economic factors which affects supply and
demand of cross-border merger and acquisition. The factors which affect merger and
acquisitions are as follows:
i) Domestic Economic Expansion: In home countries, economic expansion helps in
increasing the earning and equity prices which increase the capital for investment. The high
stock prices help in increasing merger and acquisition in large-scale because a highly valued
corporate equity can be required for doing payment for acquisitions.
ii) Global Competition: The intense global competition in various manufacturing and
service industries increases the requirement of re-structuring at the global level which helps
in increasing the growth in merger and acquisitions and strategic alliances.
iii) Economies of Scale: The economies of scale can be achieved by the help of merger and
acquisitions between different multinational enterprises. It helps in decreasing the cost of
production and operation by focusing on the basic activities.
iv) Market Expansion: The new markets are opened while doing merger and acquisitions
between different firms. It also helps in producing new products and services in domestic
market and also helps in opening new market and expands the operations.
2) Technological Factors: Technology helps in contributing in merger and acquisitions. The
formation of strategic alliances at international level is in different ways but is linked to each
other. There is requirement of communication, high cost of research and the requirement of
international standards.
i) Ease of Communication: The decrease in cost of communication and the transport has led
forth merger and acquisitions of firms. It will help in expanding and also for maintaining the
competitive advantage. The various communication tools have made the international merger
possible. The growth in information and communication increased the growth in international
strategic alliances and in technology have led to increase in the partnerships and has cross-
border patenting.
ii) High Costs of R&D: The increasing cost of R&D along with uncertainty of various
technological changes have led to merger and acquisitions with multinational firms which
will help in sharing resources and risks for making new products. For example, in
pharmaceutical company, there is large cost involved in research and development for
making new medicines so the company does the merger with other pharmaceutical company
to share the cost and risk involved.
iii) Complex Technology: The presence of complex technology has increased the
requirement of the company to merge with other firms in different sector.
iv) Cross-Border R&D Alliances: The cross-border research and development is helpful for
producing global product and system standards along with possible competition and also the
path required for technological change. The high-technology sectors studies show that the
development of alliances is regular like electronic and information technology.
3) Government/Political Factors: The cross-border merger and acquisition will help in
market liberalization which will increase the industrial globalization process. The
liberalization of International capital movement and FDI in 1990s has increased the cross-
border transaction on the large scale and includes various countries. The various government
factors helping for merger and acquisition are as follows:
i) Regulatory Reforms: The various regulatory reforms done in various e industries like
electricity, finance and telecommunications which has established in 1998 (WTO agreement)
on the basic telecommunications. It will help in increasing merger and acquisition and
strategic alliances by the formation of new markets and chances of merger and acquisitions in
developed and also developing countries.
ii) Privatization: Privatization helps to increase merger and acquisitions across border and
opening-up economies for gaining advantage of competition.
iii) Globalization and Liberalization: The globalization and liberalization which is bringing
changes in the corporate governance helps in cross-border merger and acquisitions and
Galliance in number of countries.

iv) Other Factors: The various other factors affecting cross-border merger and acquisition
are:
a) Combination of two or more financial market and any kind of changes and development in
corporate governance.
b) The increase in the power of the shareholder, effect of International institutional investors
and restructuring according to the background of a financial convention required for the
Creation of shareholder value will also increase M&As in various countries.
4) Exchange Rate factors: The international mergers may get affected from foreign
exchange rate. The difference between domestic and foreign currency will influence the
efficient price paid for an acquisition, its financing, production costs of using the acquired
firm and the amount of profit. The accounting convention can increase the profit and loss of
currency translation. The multinational firm incurs other costs for managing the exchange
rate risk.
7. Impact of M & A on stakeholders.
Impact of Mergers and Acquisitions onStakeholders
 The impact of mergers and acquisitions on various sectors of the company may differ.
Mergers and acquisitions are aimed at improving profits and productivity of a company.
Simultaneously, the objective is also to reduce expenses of the firm. However, mergers and
acquisitions are not always successful. At times, the main goal for which the process has
taken place loses focus.
The success of mergers, acquisitions, or takeovers is determined by a number of
factors. Those mergers and acquisitions, which are resisted not only affects the entire
workforce in that organization but also harm the credibility of the company. In the process, in
addition to deviate from the actual aim, psychological impacts are also many. Studies have
suggested that mergers and acquisitions affect the senior executives, labor force, and the
shareholders. They are as follows:
1) Impact of Mergers and Acquisitions on Workers or Employees: It is a well-known fact
that whenever there is a merger or an acquisition, there are bound to be lay-offs. In the event
when a new resulting company is efficient business-wise, it would require less number of
people to perform the same task. Under such circumstances, the company would attempt to
downsize the laborforce. If the employees who have been laid-off possess sufficient skills,
they may in fact benefit from the lay-off and move-on for greener pastures.
But, it is usually seen that the employees those who are laid-off would not have
played a significant role under the new organizational set-up. This accounts for their removal
from the new organizational set-up.
These workers in turn would look for re-employment and may have to be satisfied
with a much lesser pay package than the previous one. nevertheless, the workers will have to
compromise for the same. If Even though this may not lead to drastic unemployment levels,
not drastically, the mild undulations created in the local economy cannot be ignored fully.
2) Impact of Mergers and Acquisitions on Top Level Management: Impact of mergers
and acquisitions on top level management may actually involve a "clash of the egos". There
might be variations in the cultures of the two organizations. Under the new set-up, the
manager may be asked to implement such policies or strategies, which may not be quite
approved by him. When such a situation arises, the main focus of the organization gets
diverted and executives become busy either in settling matters among themselves or moving-
on.
If however, the manager is well-equipped with a degree or has sufficient qualification,
the migration to another company may not be troublesome at all.
3) Impact of Mergers and Acquisitions on Shareholders: the shareholders can be
categorize into two parts:
i) Shareholders of the Acquired Firm: The shareholders of the acquired company benefit
the most. The reason being, it is seen in majority of the cases that the acquiring company
usually pays a little excess than it what should. Unless a man lives in a house he has recently
bought, he will not be able to know its drawbacks.
So that the shareholders forgo their shares, the company has to offer an amount more
than the actual price, which is prevailing in the market. Buying a company at a higher price
can actually prove to be beneficial for the local economy.
ii) Shareholders of the Acquiring Firm: They are most affected. If one measure the benefits
enjoyed by the shareholders of the acquired company in degrees, the degree to which they
were benefited, by the same degree, these shareholders are harmed. This can be attributed to
debt load, which accompanies acquisition.