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“ Mergers” refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies and similar entities that can aid, finance, or help a growing company in a given industry grow rapidly without having to create a subsidiary or other child entity. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse
the terms merger and acquisition mean slightly different things. the buyer "swallows" the business and the buyer's stock continues to be traded.merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company. DISTINCTION BETWEEN MERGERS AND ACQUISITIONS Although often used synonymously. the target company ceases to exist. From a legal point of view. usually one with no business and limited assets. . the purchase is called an acquisition. When one company takes over another and clearly establishes itself as the new owner.
as part of the deal's terms. one company will buy another and. actual mergers of equals don't happen very often. however. therefore. Usually. simply allow the acquired firm to proclaim that the action is a merger of equals. But when the deal is unfriendly (that is. . by describing the deal euphemistically as a merger. when the target company does not want to be purchased) it is always regarded as an acquisition. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. even if it is technically an acquisition.In practice. deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time. Being bought out often carries negative connotations.
however. Share holder wealth maximization may.OBJECTIVES OF MERGERS AND ACQUISITIONS The immediate objective of an acquisition is self-evidently growth and expansion of the acquirer's assets. According to the managerial utility theory. be supplanted by the self-interest pursuit of managers making those decisions. A more fundamental objective may be the enhancement of shareholders' wealth through acquisitions aimed at accessing or creating sustainable competitive advantage for the acquirer. acquisitions may be driven by mangerial ego or desire for power. shareholder wealth maximization is posited as a rational criterion for investment and financing decisions made by managers. sales and market share. In modern finance theory. empire building or perquisites that go with the size of the firm. Shareholder wealth maximization perspective .
it is extremely important that the M&A be properly evaluated. a proper . the discount rate is the riskadjusted rate with a market-determined risk premium for risk. all firms' decisions including acquisitions are made with the objective of maximizing the wealth of the shareholders of the firm. With acquisitions. Under uncertainty. should yield zero or positive net present value. the shareholder wealth maximization criterion in satisfied when the added value created by the acquisition exceeds the cost of acquisition : EVALUATION OF MERGERS AND ACQUISITIONS For a merger to be successful. This means that the incremental cash-flows from the decision. when discounted at the appropriate discount rate.In this neo-classical perspective. The value of the merged entity should be greater than the sum of the individual values of the single entities. For this.
the value of the merged entity should be greater than the sum of the individual entities. The final value should increase by at least one and a half times the value of the acquirer. Asset and brand valuation:- . Thumb rule for Acquisitions:The initial value of the each firm is taken as 150% the turnover in the previous period. Otherwise the managers will not be doing due Diligence to their duty. The share value has to increase and also the value of the firm should increase as a whole. A few models are described below : Due Diligence:Under the due Diligence principle. The company should be in a position to command better financial terms from financial institutions.model for evaluation are to be followed.
In the .The combined value of assets and the increase in the brand as a result of acquisition can be used as a basis to measure the value of the acquisition. Future Cash Flows from Individual Assets. by convention (and at a rate of 30% in China).:This is the most common value of calculating the value of an acquisition. The cash flows are discounted at a rate of 18% in India. Various methods are prescribed for asset and brand valuation. etc. Depreciation and Replacement cost:The depreciation cost and replacement cost method takes into account the depreciation cost and replacement cost of the assets got by the acquirer and the transaction costs included should be greater than the premium he has paid for it. The future cash flows from the merged firms should exceed the individual cash flows for the firms. But the method used must be consistently followed for both the firms for the valuation to be valid. Brands.
· A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie.case of synergies and integrations. . increasing their overall net worth. · A merger lets the target (in effect. the seller) realize the appreciation potential of the merged entity. this is affected by the savings in taxes. ADVANTAGE & DISADVANTAGE The Advantages are: · A merger does not require cash. the value of shareholders' wealth increases. instead of being limited to sales proceeds. · A merger may be accomplished tax-free for both parties. the risk is reduced and for other strategic acquisitions. In the case of diversification.
despite the liquidity restrictions of SEC Rule 144a. which leads to higher unit costs. reducing the effectiveness of the integration. · A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases. The disadvantages of mergers and acquisitions are: Diseconomies of scale if business becomes too large. · Of considerable importance when there are minority stockholders is the fact that upon obtaining the required number of votes in support of the merger. the transaction becomes effective and dissenting shareholders are obliged to go along. such as the assignment of leases and bulk-sales notifications. .· A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock. Clashes of culture between different types of businesses can occur.
meaning decisions are more difficult to make and causing disruption in the running of the business.this may have an effect on motivation.May need to make some workers redundant. May be a conflict of objectives between different businesses. BENEFITS OF MERGERS AND ACQUISITIONS . especially at management levels .
Mergers and Acquisitions may generate tax gains. Benefits of Mergers and Acquisitions are the main reasons for which thecompanies enter into these deals. The principal benefits from mergers and acquisitions can be listed as increased value generation. Mergers and Acquisitions can generate cost efficiency through economies of scale. it expects that the newly generated . increase in cost efficiency and increase in market share. The main benefits of Mergers and Acquisitions are the following: also leads to tax gains and can even lead to a revenue enhancement through market share gain.Benefits of Mergers and Acquisitions are manifold. Companies go for Mergers and Acquisition from the idea that. can increase revenue and can reduce the cost of capital. When a company buys out another. can enhance the revenue through gain in market share and can even generate tax gains. the joint company will be able to generate more value than the separate firms.
The flagship company. Reliance pursued a strategy of backward vertical integration . Ambani (1932-2002). with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 28 billion.shareholder value will be higher than the value of the sum of the shares of the two separate companies INTRODUCTION OF COMPANIES Reliance Industries Limited The Reliance Group. is a Fortune Global 500 company and is the largest private sector company in India. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Reliance Industries Limited. Starting with textiles in the late seventies. founded by Dhirubhai H. is India's largest private sector enterprise.
being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. fibre intermediates. 25. fibre intermediates.269 crore (US$ 34.in polyester. The Group's activities span exploration and production of oil and gas. petroleum refining and marketing. petrochemicals. petroleum refining and oil and gas exploration and production . retail and special economic zones. petrochemicals (polyester.39. cash profit of Rs. plastics.. net profit (excluding . 1. textiles.205 crore (US$ 6.3 billion). Reliance enjoys global leadership in its businesses.7 billion). Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance Retail Limited) and Reliance Industrial Infrastructure Limite Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. plastics and chemicals).to be fully integrated along the materials and energy value chain.
8 billion) and net worth of Rs. 2008 Reliance Petroleum Limited Reliance Petroleum Limited ("RPL" or the "Company").exceptional income) of Rs. was set up to harness an emerging value creation opportunity in the global refining sector. . which is amongst the largest and most efficient in the world. 15. Currently.449 crore (US$ 20.261 crore (US$ 3. This global sized. thus offering significant synergies. RPL is subsidiary of RIL. one of India's largest private sector company with a significant presence across the entire energy chain and a global leadership across key product segments. RPL was formed to set up a greenfield petroleum refinery and polypropylene plant in the Special Economic Zone (SEZ) at Jamnagar in Gujarat.3 billion) as of March 31. highly complex refinery is being located adjacent to RIL's existing refinery and petrochemicals complex. 81.
The state-of-the-art. Jamnagar has emerged as the ‘Refining Hub of the World’ with the largest refining complex with an aggregate refining capacity of 1. This record has been achieved in spite of the significant shortfall in engineering and construction resources that has impacted most other refinery projects globally. . which is a new benchmark for building a grass-root refinery of this scale and complexity. This refinery has been built with a significant capital cost competitive advantage. UOP and Foster Wheeler amongst others. both in terms of complex refining capacity and earnings potential. RPL achieved the milestone by leveraging the project management skills of the Reliance group together with world-class implementation partners like Bechtel. globally competitive RPL refinery has been completed in 36 months from concept to commissioning. With the completion of the RPL refinery.24 million barrels of oil per day in any single location in the world.The commissioning of the RPL refinery catapults Reliance into the league of the largest refiners globally.
.RELIANCE INDUSTRIES AND RELIANCE PETROLEUM BOARDS APPROVE MERGER • Merger is India’s largest ever. • RPL shareholders to receive 1 (one) share of RIL for every 16 (sixteen) shares of RPL. No fresh treasury stock created. • RIL’s holding in RPL to be cancelled.
• RIL to become the world’s largest producer of Ultra Clean Fuels at single location.7 million shareholders.92 crore . • Merger to unlock greater efficiency from scale and synergies. RIL will issue 6.subject to necessary approvals. 2 March 2009: The Boards of Directors of Reliance Industries Limited (RIL)and Reliance Petroleum Limited (RPL) today unanimously approved RPL’s merger with RIL.• RIL to be a top 10 private sector refining company globally. • RIL to have 3. The exchange ratio recommended by both boards is 1 (one) share of RIL for every 16 (sixteen) shares of RPL. • Merger to be EPS accretive. MUMBAI.
new shares.643 crore. Chairman and Managing Director. The merger will enhance value for shareholders of both companies.thereby increasing its equity capital to Rs 1.” Merger Benefits and Synergies The merger will unlock significant operational and financial synergies that exist between RIL and RPL. Commenting on the merger. while complementing RIL’s product range. Mukesh Ambani. It creates a platform for value-enhancing growth and reinforces RIL’s position as an integrated global energy company. There will befurther gains from reduced . RIL consolidates a worldclass. It is a significant step in our goal to be among the largest global corporations. Reliance Industries Ltd said: “This merger follows Reliance Industries’ philosophy ofcreating enduring value for all our stakeholders. The merger is EPSaccretive for RIL. complex refinery with minimal residual project risk. Through this merger.
RPL shareholders will receive 1 (one) share of RIL for every 16 (sixteen) RPL shares held by them.24 million barrels per day (MBPD) of crude processing capacity. The merger is expected to reduce the earnings volatility for RPL shareholders and allowsthem to participate in the full energy value chain of RIL. • Owning 1. the largestrefining capacity at any single location in the world. most complex refineries. The appointed date of merger of RPL with RIL is 1st April 2008. • Emerging as the world’s 5th largest producer of Polypropylene Merger Details: Under the terms of the proposed merger.operating costs arising from synergies of a combined operation. The merger will result in RIL • Operating two of the world’s largest. .
4% increase in equity base from Rs 1.643 crore. Pvt.RIL will cancel its holding in RPL. the promoter holding in RIL will reduce from 49. Ltd. Consequently.0% Advisors to the merger are as follows: Valuation Advisors Transaction : Ernst & Young Pvt.92 crore new equity shares to the existing shareholders of RPL. and Kotak Mahindra Capital Co Ltd. This will result in a 4.574 crore to Rs 1. Ltd. Financial Consultants Pvt. and Morgan Stanley India Co.Based on the recommended merger ratio. RIL will issue 6. Ltd. Advisors : JM .0% to 47.
while that of RPL would be Rs 30. Legal : Amarchand Mangaldas & Suresh A. and the timetable for implementation. Advisor & Tax Advisor : PriceWaterhouse and Coopers Pvt. will be communicated separately. 2009. (for RIL) and Citigroup Global Markets India Pvt. FUTURE OF RPL SHAREHOLDERS Book value of RIL shareholder as of March 31. Ltd.Fairness Opinion : DSP Merrill Lynch Ltd. The proposed merger is subject to all necessary approvals. Ltd (for RPL). which is likely to be the effective date of the merger. Shroff & Co. . All other procedural aspects ofthe proposed merger. would be 700.
Therefore. it works out to about 16-17. So there has been an accretion in the value of the fixed assets of thecompany. a shareholder of Reliance Industries will be shouting if the ratio isanywhere more than 24 to 1 because that is the ratio working out.000 crore can be taken at about Rs 30. If market value is the criteria for swap ratio. there has not been much accretion. Ratio would definitely be negative for RPL shareholders.000 croreas of today. “Thismerger is not being mooted or moved with a view to have any tax advantagebecause RPL as such is entitled. while RPL being a new company. based on the bookvalue. Theproject cost of RPL of Rs 27. therefore RPL’s profitswould be exempted for the first five years being an EOU (Export Oriented Unit).How he arrived at book value: Reliance Industries has been in existence for the last30 years. FUTURE OF RIL SHAREHOLDERS Tulsian said that RPL itself is entitled under Section 10AA. all its profits will be exempted .000-33.
it has also been learnt that Mergers and acquisitions are not a panacea for corporate ills. merchant bankers. Corporate India has been quick to grab the opportunity and try for the maximum success rate.for the first five yearsto the extent of 100% of Section 10AA being a 100% EOU. managers. . This has created a market for M&A and M&A specialists in the form of consultants. etc.” CONCLUSION Mergers and acquisitions in India have grown on a rampant scale after the introduction of the takeover code. Negotiated takeovers with the proper synergy to back them and managerial willingness to manage the process smoothly have resulted in the few successes that were seen in India. In a short time.
INDEX INTRODUCTION DISTINCTION BETWEEN MERGERS AND ACQUISITIONS OBJECTIVES OF MERGERS AND ACQUISITIONS EVALUATION OF MERGERS AND ACQUISITIONS ADVANTAGE & DISADVANTAGE BENEFITS OF MERGERS AND ACQUISITIONS IN T R O D U C T I O N O F CO M P A N I E S Reliance Industries Limited Reliance Petroleum Limited RELIANCE INDUSTRIES AND RELIANCE PETROLEUM BOARDS APPROVE MERGER .
Merger Benefits and Synergies FUTURE OF RPL SHAREHOLDERS FUTURE OF RIL SHAREHOLDERS CONCLUSION .
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