Mergers and Acquisitions

© Oxford University Press 2011. All rights reserved.

 Concept of Merger

A strategy where two or more companies agree to combine their

operations with mutual consent

Buying entity is called the Merged or Surviving Entity and the one
merging with it is called Merging Entity.

Under merger one company survives and the other loses its corporate
existence and the Surviving Entity acquires all the assets and liabilities
of the merging company and may either retains its identity or get
re-christened.

Laws in India use the term 'amalgamation' for merger

© Oxford University Press 2011. All rights reserved. 2

 The Income Tax Act,1961
[Section 2(1A)]

Amalgamation as the merger of one or more companies

with another or the merger of two or more companies to
form a new company, in such a way that all assets and
liabilities of The amalgamating companies become assets
and liabilities of the amalgamated company and
shareholders not less than nine-tenths in value of the
shares in the amalgamating company or companies
become shareholders of the amalgamated company

© Oxford University Press 2011. All rights reserved. 3

 2 Forms of Mergers or Amalgamation

1) Merger through Absorption:

Is a combination of two or more companies into an 'existing company’
Absorption is a type of merger in which one company absorbs the other
company and is seen as one 'existing company. ' Only one company
survives absorption, while the others lose their identities

For Example:
Bank of Madura was absorbed into ICICI Bank

© Oxford University Press 2011. All rights reserved. 4

 2 Forms of Merger
2) Merger through Consolidation:
Is a combination of two or more companies into a 'new company’
Here all companies are legally dissolved and a new entity is
created.
Acquired company transfers its assets, liabilities, and shares to the
acquiring company for cash or exchange of shares

For Example:

© Oxford University Press 2011. All rights reserved. 5

 Classification of Mergers

1. Horizontal Merger
Two companies that are in direct competition and sharing the same
product lines and markets combine

Based on the assumption that it will provide synergy and allow

enhanced cost efficiencies to the new business.
Examples of Synergistic Benefits: staff reduction and reductions
in related costs, economies of scale, opportunity to acquire
technologies unique to the target company and increased market
reach and industry visibility.
For Examples: Integration of Facebook, Whatsapp, Instagram &
Messenger

© Oxford University Press 2011. All rights reserved. 6

 Classification of Mergers

2. Vertical Merger:
Mergers of where one's product is a necessary component or
complement of the other's.

A vertical merger is the merger of two or more companies that provide

different supply chain functions for a common good or service. Most
often, the merger is effected to increase synergies, gain more control of
the supply chain process, and ramp up business

E.g - Example: Merger between Zee Entertainment Enterprises Limited

Ltd. (ZEEL), a broadcaster, and Dish TV India Limited, a distribution
platform operato

© Oxford University Press 2011. All rights reserved. 7

 Types of Vertical
Mergers
3. Market-extension merger:
Merger between two companies that sell the same products in
different markets.

4. Product-extension merger:
Occurs when two companies selling different but related products
in the same market merge together. Merger designed to increase
the type/range of products that a company sells in a particular
market

© Oxford University Press 2011. All rights reserved. 8

 Types of Vertical Mergers

5. Forward integration:
One where the target firm is involved in the
next stages of production / operation

6. Backward Integration:
One where the target company is involved in the previous stages of
production / operation.
For Example: A manufacturer of a product merges his firm with the provider
of the raw materials. By eliminating the provider of raw materials, the
manufacturer can achieve collusion in the upstream market.

© Oxford University Press 2011. All rights reserved. 9

 Conglomerate Mergers

A conglomerate is a corporation made up of several different,

independent businesses

“One in which there is no economic relationships between the

acquiring and the acquired firm”
•Involve firms that are in different or unrelated business activity
•Preferred by firms that plan to increase their product lines
•Control a range of activities in various industries that require different
skills in the specific managerial functions of research, applied
engineering, production, marketing, and so on

•Attained mainly by external acquisition and mergers and is not

generally possible through internal development
•Firms operating in different geographic locations
also prefer conglomerate mergers

© Oxford University Press 2011. All rights reserved. 10

 Types of Conglomerate Mergers

Pure Conglomerate:
Involve firms that have nothing in common

Mixed Conglomerates:
Involve firms that are looking for product extensions or
market extensions

© Oxford University Press 2011. All rights reserved. 11

 Accretive Merger
Accretive implies ‘value creation’
Occur when a company with a high PE Ratio (price to
earnings ratio) purchases a company with a low PE Ration
(price to earnings ratio)

A merger and acquisition (M&A) deal is said to be

accretive if the acquiring firm's earnings per share (EPS)
increase after the deal goes through. If the resulting deal
causes the acquiring firm's EPS to decline, the deal is
considered to be dilutive

© Oxford University Press 2011. All rights reserved. 12

 Dilutive Merger
Dilutive implies ‘destruction’ or ‘dilution’

One where the EPS of the acquiring company tends to fall

post merger resulting in decline in the share prices too

Decline due to the market forces presuming the merger

would destroy value and would not result in synergies post
merger.

© Oxford University Press 2011. All rights reserved. 13

Merger vs Acquisition

© Oxford University Press 2011. All rights reserved. 14

 Acquisition
• An attempt made by one firm to gain a majority interest in another
firm

• Firm attempting to gain a majority interest is called the acquiring firm

and the other firm is called the target firm

• Acquiring firm pays for the net assets, goodwill, and brand name of
the company bought.

• Actions through which companies seek to achieve economies of

scale, increased efficiency, and enhanced market visibility

© Oxford University Press 2011. All rights reserved. 15

 Acquisitions may lead to:

1. A subsequent merger (not the other way around)

2. Establishment of a parent- subsidiary relationship

3. A strategy of breaking up the target firm and disposing of part

or all its assets

4. Conversion of the target firm into a pvt. firm

© Oxford University Press 2011. All rights reserved. 16

 Types of Acquisitions

Assets Purchase
• Acquiring firm purchases specific identifiable assets of
the business
• Assets perceived as having potential to add value to the
acquiring company
• May also assume specified liabilities perceived as having
potential to add value to the acquiring company
• Help the acquiring company to reduce the risk of taking
on unknown liabilities such as seller’s contracts,
employees, etc.

• Google's $50 million acquisition of Android

in 2005
© Oxford University Press 2011. All rights reserved. 17
 Stock Purchase
The acquirer purchases the entire outstanding equity of the
target company

Acquirer purchases the entire company and all assets and

liabilities of the business that come with it

Stock purchase does not cause any disruption in the

operations which can continue as usual.

Adani Group acquired a 29.18 per cent stake in NDTV by buying a

company backed by the television network's founders, Radhika
Roy and Prannoy Roy. Thereafter, it made an open offer to acquire
an additional 26 per cent from public shareholders

© Oxford University Press 2011. All rights reserved. 18

Tools of Analysis - SWOT

© Oxford University Press 2011. All rights reserved. 19

BCG Matrix (Boston Consulting Group Model)

© Oxford University Press 2011. All rights reserved. 20

Cash Cows
Cash cows should continue to be “milked” with as little
investment as possible given that additional time, capital, and
efforts wouldn’t yield much in a low growth industry

Dogs
Dogs are the least favorable in the BCG Matrix, the opportunity
cost of utilizing resources for other favorable products is too
high. Dogs should therefore be divested and sold to another
company

© Oxford University Press 2011. All rights reserved.

Question Marks
Question marks are the business units operating with low market share in a
high-growth market. These products tend to reduce a company’s cash flow
initially because they require heavy investment in order to grow. If the unit
performs well, question marks have a chance to becomes stars and
eventually into cash cows once the industry growth declines. If the product
fails to gain traction, the question mark becomes a dog. Question marks
must be analyzed thoroughly and carefully to determine whether they are
worth the investment required to grow market share.

Stars
The Stars are business units with both high market share and a high growth
industry.As the stars continue to boom, additional investment
generates excess cash, making stars extremely valuable
products for a company. The hope is that eventually as
the industry growth rate dies down, the stars
become cash cows © Oxford University Press 2011. All rights reserved.
© Oxford University Press 2011. All rights reserved.
© Oxford University Press 2011. All rights reserved.
© Oxford University Press 2011. All rights reserved.
 GE Matrix

© Oxford University Press 2011. All rights reserved. 26

© Oxford University Press 2011. All rights reserved.
 Companies prefer Merger over Acquisition due to:

A merger does not require cash.

A merger may be accomplished tax-free for both parties.
A merger lets the target company realize the appreciation potential of
the merged entity, instead of being limited to sales proceeds.
A merger allows the shareholders of smaller entities to own a smaller
piece of a larger pie, increasing their overall net worth.
A merger of a privately held company into a publicly held company
allows the target company shareholders to receive a public company’s
stock.
A merger allows the acquirer to avoid many of the costly and
time-consuming aspects of asset purchases, such as the assignment
of leases and bulk-sales notifications.
Merger is of considerable importance when there are minority
stockholders. The transaction becomes effective and dissenting
shareholders are obliged to go along once the buyer obtains the
required number of votes in support of the merger.

© Oxford University Press 2011. All rights reserved. 28

 Motives behind Mergers and Acquisitions

Synergy
Operating synergy
Financial synergy
Examples:
When HUL acquired Lakme, it helped them to enter the cosmetics
market through an established brand.
When Glaxo and Smithkline Beecham merged, they not only gained
market share but also eliminated competition between each other.
Tata tea acquired Tetley to leverage Tetley’s international marketing
strengths.

Acquiring new technology:

For example: Mergers amongst logistics companies
such as a land transport entity with an
airline cargo company

© Oxford University Press 2011. All rights reserved. 29

Improved profitability
For example, European Media Group Bertelsmann, Pearson, etc.
have driven their growth by expanding into US through M & A.

Acquiring a Competence:
For example: Similarly IBM merged with Daksh for acquiring
competencies that the latter possessed.

Entry into new markets

For example: The merger of Orange, Hutch and Vodafone was
carried out to achieve this objective.

© Oxford University Press 2011. All rights reserved. 30

Cross-Border Acquisitions

© Oxford University Press 2011. All rights reserved.

 Concept of Cross Border Acquisitions

⚫ Is merger of companies that have headquarters in two different countries

⚫ Treated on a different platter as they are governed by different set of laws

⚫ For Example:

© Oxford University Press 2011. All rights reserved.

 Benefits of Cross Border Acquisitions

● Expansion of markets
● Possibility of raising funds abroad
● Synergistic benefits
● Technology Transfer
● Tax Planning and benefits
● Foreign Exchange Earnings
● Countering recessionary pressures
● Facilitates Greenfield investments

© Oxford University Press 2011. All rights reserved.

 Difficulties in Cross Border
Acquisitions
● Legal Problems
For Example: when Sony Corporation acquired Columbia Pictures in 1989, it
had to face a lot of legal problems that stemmed from the recruitment of
senior management who were under contract at Time Warner

● Accounting Issues
For Example: When HLL merged with BBIL, the two companies has to
harmonize their accounting as both the companies were following different
accounting policies and the internal controls also differed. While HLL used
US GAAP, BBIL prepared its accounts using Indian Accounting Standards

© Oxford University Press 2011. All rights reserved.

 Difficulties in Cross Border
Acquisitions
● Technological differences
For Example: Columbia Pictures were in movie production, while Sony’s
competencies were in movie and television business. While Sony was
innovative and believed in developing and using latest technology, Columbia
was a bit slow in this respect. Each wanted to stick to its core competencies and
technology causing integration problems.

● Strategic Issues
For Example: Merger of British Petroleum’s (BP) and Mobil’s downstream
operations across Europe. The strategic logic has been size and market power
required to compete against the other major oil companies and even
supermarket chains with gas pumps in Europe. Significant cost savings can be
realized by eliminating duplicate facilities and employees, and by rationalizing
purchasing and cutting overhead.

© Oxford University Press 2011. All rights reserved.

 Difficulties in Cross Border
Acquisitions
Fundamental differences across countries
For Example: The employees of the merging entities might have differences in
culture such as employees being accustomed to easy access to top
management, flexible work schedules or even a relaxed dress code. When
the two entities merge the new management may not approve of such
practices. This may cause resentment and shrinking productivity and result in
conflict between the partners.

HR Issues
For Example: The merger of Bridgestone and Firestone faced tremendous
HR issues. The employees of Firestone had a feeling of mistrust and stress,
perceived restrictions in career plans and attacks on established cultural
traditions. Firestone workers went on a strike when Bridgestone initiated cost
cutting measures to tackle the huge losses incurred. Had the feeling of
mistrust and stress been addressed, the strike could have been averted.

© Oxford University Press 2011. All rights reserved.

 Integrating Cross Border
Acquisitions
• Trust - Value creation happens only after a deal is done

• Integration needs to be planned before entering into a deal

• Provide training to the executives of the acquiring

• Developing a clear communication plan so that the

communication channels remain open throughout the integration
process

• Address the stakeholders concern in a proactive manner.

© Oxford University Press 2011. All rights reserved.

 End of Session

© Oxford University Press 2011. All rights reserved.

Q 1. Which two leading telecommunication companies merged with each other in the year
2018?

BSNL and Idea

Vodafone and Idea
Bharti Airtel and BSNL
Jio and Vodafone
BSNL and Jio

Q 2. Which online food delivery platform acquired Uber Eats in 2020, for around $350 million?

Swiggy
Zomato
Flipkart Groceries
Amazon Pantry
None of the Above

© Oxford University Press 2011. All rights reserved.

Q 3. Which leading private sector bank acquired digital payment company, Freecharge from
Snapdeal in 2017?

Axis Bank
HDFC Bank
ICICI Bank
Citi Bank
None of the Above

Q 4. IDFC Bank and non-banking financial company (NBFC) Capital First announced the
completion of their merger in which year?

2020
2005
2016
2017
2018

© Oxford University Press 2011. All rights reserved.