UNIT III

World Financial Environment; Cross-national Co-operation and Agreements; Tariff

and Non-Tariff Barriers, WTO, Regional Blocks.
Cross Border Mergers & Acquisition-Reasons for mergers & Acquisition, Why do M
& A fail?-Stages involved in M & A-Regulations of M & As.

WORLD FINANCIAL ENVIRONMENT

Definition:
World financial environment represents the conditions for activity in the economy
or in the financial markets around the world. It can be influenced by something
major, such as the credit worthiness of one country's debt.

World financial environment = international money + monetary asset (foreign

currency + foreign deposits + investment + assets)

FUNCTIONS OF FINANCIAL ENVIRONMENT:

1. To link the savers & investors

2. To monitor the performance of investment
3. To achieve optimum allocation of risk bearing
4. To makes price related information
5. To promoting the financial deepening &broadening

OBJECTIVES OF FINANCIAL ENVIRONMENT

1. Raises Fund: Financial services work as an effective tool for increasing funds in
an economy. It gives numerous financial instruments to individuals, investors,
corporations, and institutions where they can invest their money thereby raising
funds from them.
2. Encourages Savings: These services give different types of convenient
investment opportunities that can grow people’s savings. A mutual fund is one
such good alternative where people can invest and earn reasonable returns
without much risk.
3. Deployment of Funds: Financial services allow the proper deployment of
financial resources into fruitful means. There are various investment avenues
and instruments available in the financial market where people can invest their
funds for earning income.
4. Reduces Risk: Risk minimization is an important role played by financial
services. These services assist in increasing the risk and protect people against
damages by providing insurance policies.
5. Economic Growth: Financial services help the government in achieving the
overall extension of the economy. The government can easily grow both short-
term and long term funds for its many needs. It aids in increasing overall
infrastructural facilities and employment opportunities in a country.

STRUCTURE/ COMPONENENTS OF FINANCIAL ENVIRONMENT:

1. Financial Institutions
2. Financial Regulators
3. Financial Markets
4. Financial Instruments
5. Financial Services

1. Financial Institutions

The Financial Institutions act as a mediator between the borrower and the investor.
The investor’s savings are mobilized either directly or indirectly through the
Financial Markets.

The main functions of the Financial Institutions are mentioned below:

 A short-term liability can be transformed into a long-term investment

 It aids in the conversion of a risky investment into a risk-free investment
 Also serves as a medium of service denomination, which means, it can meet a
small deposit with large loans and a large deposit which small loans
 One of the best examples of a Financial Institution is the Bank. People with
excess amounts of money make savings in their accounts, and people in dire
need of money take loans.

2. Financial Regulators
Financial Regulators belong to the government bodies which are liable for
regulating, inspecting, controlling the functions of several financial institutions like
banks, insurance companies, business entities, Non-banking financial companies
(NBFCs), etc.
Financial Regulators are the apex bodies of financial institutions of respective
sectors that register and function under these financial regulatory institutions.

Some examples of financial regulators in India are mentioned below.

 RBI (Reserve Bank of India)

 IRDA (Insurance Regulatory and Development Authority)
 SEBI (Securities Exchange Board of India)
 PFRDA (Pension Fund Regulatory and Development Authority)
 FMC ( Forward Market Commission)

3. Financial Markets
The marketplace where buyers and sellers communicate with each other and
engage in the trading of money, bonds, shares, and other assets is called a financial
market.

The Financial Market can be divided into Four Types

a) Capital Market – Designed to finance long-term investment, the Capital

market deals with transactions that are taking place in the market for over a
year. The capital market can be divided into three types:

 Corporate Securities Market

 Government Securities Market
 Long Term Loan Market

b) Money Market – Mostly controlled by the Government, Banks, and other

Large Institutions, the type of market is approved for small-term investments
only. It is a wholesale debt market that works on low-risk and highly liquid
instruments. The money market can be divided into two types:

 Organized Money Market

 Unorganized Money Market

c) Foreign exchange Market – One of the most developed markets across the
world, the Foreign exchange market, deals with the provisions associated
with multi-currency. The transfer of funds in the market is held based on the
foreign currency rate.

d) Credit Market – A market where short-term and long-term loans are granted
to individuals or Organizations by various banks and Financial & Non-
Financial Institutions is called the Credit Market.
4. Financial Instruments
A financial instrument refers to a monetary document/ contract between two
parties that are traded in the financial markets (Money market, capital market, or
derivative market). It describes an asset of one party and at the same time, the
liability of another party.

The Financial Instruments can be classified as follows:

I. Money Market Instruments:

a) Certificate of Deposit: It is the dematerialized form of funds lent to the

corporation fora stipulated time period against interest earned. The working
procedures are the same as fixed deposits (FDs) given any special negotiation.

b) Commercial Papers: It is unsecured short term debt instruments usually

having a maturity period (7days to year) typically issued by large-cap
fundraising companies.
c) Treasury Bills: It is also a short-term debt instrument issued by the central
government of India only having a maturity period of up to a year.

d) Repurchase Agreement (Repo): The commercial banks and other financial

institutions borrow funds from the Reserve Bank of India for a shorter time
through Repurchase Agreement by selling government-approved securities
with a guarantee to repurchase in a future date.

e) Call Money: Whenever a loan is given for one day and has to be repaid the
next day, it is known as call money.

f) Commercial Bills: The commercial Bills are also traded in the money market
and utilized to raise funds against receivables (Due payments). Such the
practice of raising funds at a discount is called bill/ invoice discounting.

g) Bankers Acceptance: It is another money market instrument that is widely

used in the financial market. A banker’s acceptance refers to the extension of
a loan to the stipulated banks against a signed guarantee of repayment in the
future.

II. Capital Market Instruments:

The capital market instrument refers to the long term capital financing
instrument (debt and equity) traded on the recognized stock exchanges. The
corporations arise such financial instruments to promote long term funds
from the general public.
  Equity Shares
 Preference Shares
 Debentures
 Corporate Bonds

III. Derivative Instruments:

The derivatives are those financial instruments that don’t have their own
value. Instead, its value is derived from underlying assets. It is utilized to
hedge the risk associated with price fluctuations of the securities.

 Forward
 Futures
 Options
 Swaps
 Exchange-traded Funds

5. Financial Services

The four categories of financial services that are offered in India.

a) General Banking Services: The services offered by the commercial banks or

other banking institutions like a deposit of money, granting loans/ advances,
Bill discounting, credit/ debit card, account opening, etc.

b) Insurance Services: Under these kinds of services various insurance policies

like life insurance, health insurance, car insurance, etc. comes under it.

c) Investment Services: The different financial institutions such as

stockbrokers, merchant and investment bankers, primary dealers provide
investment and asset management services to businesses and corporations.

 Loan syndication
 Underwriting of securities
 Trading of stocks and other securities
 Mergers and acquisitions
 Fundraising services
 Depository services
 Online share trading
 Credit rating services
 d) Foreign Exchange Services: These are the specific services that deal in
exchange for foreign currencies.

FUNCTIONS OF FINANCIAL ENVIRONMENT

1. Approves payment system: Financial services play an important role in the

proper movement of funds among peoples. As it enables people to
successfully make their payments without any hassle. Thus, financial
instruments which facilitate financial transactions are Credit cards, debit
cards, bill of exchange, and cheque.

2. Proper Utilization of Funds: Financial services help the inefficient allocation

of funds. These serve as a means through which peoples invest their ideal
lying resources into better investment plans for generating incomes.

3. Maintains Liquidity: Sufficient funds in the economy are maintained with

the help of Financial Services. As it links the one who needs funds to those
who can supply funds because of sufficient savings. Many services like loans
and credit cards enable people to procure needed funds easily.

4. Raises Standard of living: These services play a vital role in improving the
living standards of people. On hire purchase system availing these services,
Customers are easily ready to purchase costly goods. People can have the
benefits of quality and luxury items.

5. Promotes trade: Both domestic and foreign trade in a country is promoted

by financial services. Forfaiting and factoring companies in the financial
market promote the export of goods to foreign markets and further the sales
of products in the domestic market. In addition to this insurance and banking
offices also support trade activities in-country.

6. Improve Employment Opportunities: The formation of employment

opportunities is another important function of financial services. Many
financial institutions employ a large number of people for selling these
services. They pay commissions to their employees out of the profit earned by
selling these financial services.

7. Balanced Regional Development: Financial services help in the balanced

regional development of the country. All the essential sectors of the economy
such as the primary sector, secondary sector, and tertiary sector can procure
the required funds through these services. This results in regional
inequalities and brings balanced development in a country.
ADVANTAGES OF FINANCIAL ENVIRONMENT

1. Provides Payment System: The financial system gives a payment

mechanism for the smooth flow of funds between peoples in an
economy. Buyers and sellers of goods or services can perform
transactions with each other due to the presence of a financial system.

2. Links Savers and Investors: The financial system works as a means of

bridging the gap between savings and investment. It takes money from
those with whom it is lying idle and transfers it to those who want it for
investing in productive ventures.

3. Reduces Risk: It aims at reducing the risk by increasing it among a

large number of individuals. The financial system issues funds among a
large number of peoples due to which risk is given by many peoples.

4. Helps in Capital Formation: The financial system has an efficient role

in the capital formation of the country. It allows big corporations and
industries to get the needed funds for performing or expanding their
operations thereby leading to capital formation in the nation.

5. Raises Standard of Living: It increases the standard of living of

peoples by supporting regional and rural development of the country.
The financial system encourages the development of weaker sections
of society in cooperative societies and rural development banks.

6. Enhance Liquidity: Managing optimum liquidity in an economy is

another important role played by the financial system. It means free
movement of funds from households (savers) to corporate (investors)
which assures sufficient availability of funds in the economy.

7. Promotes Economic Development: The fiscal system influences the

step of economic growth or development of an economy. It aims at
maximum utilization of all financial resources by investing all idle lying
resources into helpful means which leads to the creation of wealth.
DISADVANTAGES OF FINANCIAL ENVIRONMENT

1. Lack of Coordination among Financial Institutions: The financial system

allows a lack of coordination among numerous financial institutions. The
presence of a large number of financial institutions and government roles in
managing authorities of these institutions leads to a lack of coordination.

2. Monopolistic Market Structure: Many institutions in the Indian financial

system hold a monopolistic state in the market. LIC and UTI are two
institutions that have taken a large part of the life insurance business and the
mutual fund industry. These large structures could commence to
mismanagement or inefficiency of funds.

3. High Rate of Interest: There is a possibility of the high-interest rate required

by several financial institutions in the fiscal system of our country. Many
institutions due to their monopolistic structure in the market may charge
high or unreasonable interest rates.

4. Inactive Capital Market: Our country’s fiscal system meets the problem of
the inactive capital market. All corporations in India are mostly able to
acquire funds through development banks and do not need to go to the
capital market.

5. Imprudent Financial Practice: The financial system of India has grown

imprudent financial systems due to the dominance of development banks.
Development banks provide funds to corporations in the form of term loans
which makes the capital structure of borrowed concerns uneven. These banks
even allow the use of unfair debts which is against the capital structure.
WORLD TRADE ORGANIZATION
The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO
agreements, negotiated and signed by the bulk of the world’s trading nations and
ratified in their parliaments. The goal is to help producers of goods and services,
exporters, and importers conduct their business.

OBJECTIVES OF WORLD TRADE ORGANISATION (WTO)

1. Creating and Enforcing International Trade Regulations:

The General Agreement on Trade in Services, the Trade-Related Aspects of
Intellectual Property Rights Agreement, and the Agreement on International Trade
in Goods, all serve as the foundation for the World Trade Organization (WTO).
The WTO uses a multilateral dispute settlement system to enforce its rules when
one of its member countries violates a trade agreement. The methods and decisions
must be respected and adhered to by the members through signed agreements.
Creating and Enforcing International Trade Regulations

2. Making the Decision Making Process More Transparent:

The WTO has made an effort to promote transparency in decision-making by
encouraging participation and, in particular, the use of the consensus rule. Such
measures work together to increase institutional transparency.

3. Collaboration between International Economic Institutions:

The onset of globalization has made strong collaboration amongst multilateral
institutions necessary. The World Trade Organization, the International Monetary
Fund, the United Nations Conference on Trade and Development, and the World
Bank are some international economic institutions These institutions help develop
and carry out a framework for international economic policy. Policy making may be
disturbed in the absence of regular cooperation and mutual participation.

4. Serving as the World’s Leading Forum:

The WTO is the international platform for regulating and negotiating additional
trade liberalization. The foundation of WTO liberalization initiatives is based on
members’ benefits to make the best use of their comparative advantages as a result
of a free and fair trade system.

5. Settlements of Trade Disputes:

Before the WTO, trade disputes usually arise from the breach of agreements
between the member nations. Such trade disputes are settled through a multilateral
system with predetermined rules and regulations.
FUNCTIONS OF WORLD TRADE ORGANISATION (WTO)

1. Implementation of Trade Policy Review Rules:

The member nations of the world organizations have come to an overall consensus
due to the stability and assurance of trade agreements. The rules are examined to
make sure that the multilateral trading system continues even in the face of
continuously changing trade conditions. Additionally, it helps in creating a reliable
and transparent foundation for conducting business.

2. Discussion of Plans of Member Nations:

Trade negotiations within the global trading system are made possible through
WTO. Without trade negotiations, the economy may stagnate, and issues related to
dumping and tariffs might go unsolved. Consistent trade discussions are also a
requirement for further trade liberalization.

3. Administrating and Carrying out Bilateral and Multilateral Trade

Agreements:
The parliaments of different member nations must ratify any bilateral and
multilateral trade agreements. The non-discriminatory trading system can not be
implemented until such ratification occurs. Every member will be ensured to be
treated fairly in the marketplace of other countries due to the signed contracts.

4. Settlement of Trade Disputes:

Trade disputes are addressed by the WTO’s dispute settlement process.
Independent tribunal specialists interpret the agreements and issue judgments
mentioning the essential obligations of the involved member nations. It is advised to
consult with other members to resolve disagreements.

5. Best Possible Use of the World’s Resources:

By utilizing the trade capabilities of developing countries, resources all around the
world can be used to their maximum potential. For least-developed economies, a
special provision in the WTO agreement is necessary. Such initiatives include more
significant trading opportunities, a longer duration to implement commitments, and
to provide assistance to build infrastructure.
 TARIFF AND NON-TARIFF BARRIERS

TARIFF BARRIERS
Tariff barriers—Tariff barriers are taxes imposed by a government on imports or
exports of goods. These taxes can be used to increase the cost of imported products,
make inputs available to domestic producers at more competitive prices and raise
revenues for governments.

NON-TARIFF BARRIERS
A non-tariff barrier is any measure, other than a customs tariff, that acts as a barrier
to international trade. These include: regulations: Any rules which dictate how a
product can be manufactured, handled, or advertised.

DIFFERENCE BETWEEN TARIFF BARRIERS AND NON-TRAIFF BARRIERS

BASIS FOR
TARIFF BARRIERS NON-TARIFF BARRIERS
COMPARISON
Meaning Tariff Barriers implies the taxes Non-tariff barriers cover all the
or duties imposed by the restrictions other than taxes
government on its imports, so as imposed by the government on its
to provide protection to its imports, so as to provide protection
domestic companies and to the domestic companies and
increase government revenue. discriminate new entrants.
Permissibility World Trade Organization World Trade Organization
allowed the imposition of tariff abolished the imposition of import
barriers to its member nation quotas and voluntary export
but at a reasonable rate only. restraints.
Nature Explicit Implicit
Form Taxes and Duties Regulations, Conditions,
Requirements, Formalities, etc.
Revenue Government receives revenue No revenue is received by the
government
Affects It affects the price of imported It affects the quantity or price or
goods. both of the imported goods.
Monopolistic As the government charges The monopolistic organization
Organizations import duty, monopolistic charges high prices through low
groups can be controlled. output.
Profit High profits made by the Importers can make more profits.
importers can be controlled.
TYPES OF TARIFF BARRIERS

1. Specific Duty: Specific duty is based on the physical characteristics of goods.

When a fixed sum of money, keeping in view the weight or measurement of a
commodity, is levied as tariff, it is known as specific duty.

For instance, a fixed sum of import duty may be levied on the import of every barrel
of oil, irrespective of quality and value. It discourages cheap imports. Specific duties
are easy to administer as they do not involve the problem of determining the value
of imported goods. However, a specific duty cannot be levied on certain articles like
works of art. For instance, a painting cannot be taxed on the basis of its weight and
size.

2. Ad valorem Duty: These duties are imposed “according to value.” When a fixed
percent of value of a commodity is added as a tariff it is known as ad valorem duty. It
ignores the consideration of weight, size or volume of commodity.

3. Combined or Compound Duty: It is a combination of the specific duty and ad

valorem duty on a single product. For instance, there can be a combined duty when
10% of value (ad valorem) and Re 1/- on every meter of cloth is charged as duty.
Thus, in this case, both duties are charged together.

4. Sliding Scale Duty: The import duties which vary with the prices of commodities
are called sliding scale duties. Historically, these duties are confined to agricultural
products, as their prices frequently vary, mostly due to natural factors. These are
also called as seasonal duties.

5. Countervailing Duty: It is imposed on certain imports where products are

subsidised by exporting governments. As a result of government subsidy, imports
become more cheaper than domestic goods. To nullify the effect of subsidy, this duty
is imposed in addition to normal duties.

6. Revenue Tariff: A tariff which is designed to provide revenue to the home

government is called revenue tariff. Generally, a tariff is imposed with a view of
earning revenue by imposing duty on consumer goods, particularly, on luxury goods
whose demand from the rich is inelastic.

7. Anti-dumping Duty: At times, exporters attempt to capture foreign markets by

selling goods at rock-bottom prices, such practice is called dumping. As a result of
dumping, domestic industries find it difficult to compete with imported goods. To
offset anti-dumping effects, duties are levied in addition to normal duties.
8. Protective Tariff: In order to protect domestic industries from stiff competition
of imported goods, protective tariff is levied on imports. Normally, a very high duty
is imposed, so as to either discourage imports or to make the imports more
expensive as that of domestic products.

TYPES OF NON-TARIFF BARRIERS

1. Quota System: Under this system, a country may fix in advance, the limit of
import quantity of a commodity that would be permitted for import from various
countries during a given period. The quota system can be divided into the following
categories:

(a) Tariff/Customs Quota (b) Unilateral Quota

(c) Bilateral Quota (d) Multilateral Quota

2. Product Standards: Most developed countries impose product standards for

imported items. If the imported items do not conform to established standards, the
imports are not allowed. For instance, the pharmaceutical products must conform to
pharmacopoeia standards.

3. Domestic Content Requirements: Governments impose domestic content

requirements to boost domestic production. For instance, in the US bailout package
(to bailout General Motors and other organisations), the US Govt. introduced ‘Buy
American Clause’ which means the US firms that receive bailout package must
purchase domestic content rather than import from elsewhere.

4. Product Labelling: Certain nations insist on specific labeling of the products. For
instance, the European Union insists on product labeling in major languages spoken
in EU. Such formalities create problems for exporters.

5. Packaging Requirements: Certain nations insist on particular type of packaging

materials. For instance, EU insists on recyclable packing materials, otherwise, the
imported goods may be rejected.

6. Consular Formalities: A number of importing countries demand that the

shipping documents should include consular invoice certified by their consulate
stationed in the exporting country.

7. State Trading: In some countries like India, certain items are imported or
exported only through canalising agencies like MMTC. Individual importers or
exporters are not allowed to import or export canalised items directly on their own.
8. Preferential Arrangements: Some nations form trading groups for preferential
arrangements in respect of trade amongst themselves. Imports from member
countries are given preferences, whereas, those from other countries are subject to
various tariffs and other regulations.

9. Foreign Exchange Regulations: The importer has to ensure that adequate

foreign exchange is available for import of goods by obtaining a clearance from
exchange control authorities prior to the concluding of contract with the supplier.

10. Other Non-Tariff Barriers: There are a number of other non – tariff barriers
such as health and safety regulations, technical formalities, environmental
regulations, embargoes, etc.

REGIONAL TRADING BLOCS

Preferential Trade Area − Preferential Trade Areas (PTAs), the first step towards
making a full-fledged RTB, exist when countries of a particular geographical region
agree to decrease or eliminate tariffs on selected goods and services imported from
other members of the area.

TYPES OF REGIONAL TRADING BLOCS

1. Preferential Trade Area − Preferential Trade Areas (PTAs), the first step
towards making a full-fledged RTB, exist when countries of a particular
geographical region agree to decrease or eliminate tariffs on selected goods and
services imported from other members of the area.
2. Free Trade Area − Free Trade Areas (FTAs) are like PTAs but in FTAs, the
participating countries agree to remove or reduce barriers to trade on all goods
coming from the participating members.
3. Customs Union − A customs union has no tariff barriers between members, plus
they agree to a common (unified) external tariff against non-members. Effectively,
the members are allowed to negotiate as a single bloc with third parties, including
other trading blocs, or with the WTO.
4. Common Market − A ‘common market’ is an exclusive economic integration. The
member countries trade freely all types of economic resources – not just tangible
goods. All barriers to trade in goods, services, capital, and labor are removed in
common markets. In addition to tariffs, non-tariff barriers are also diminished or
removed in common markets.

REGIONAL TRADING BLOCS – ADVANTAGES

1. Foreign Direct Investment − Foreign direct investment (FDI) surges in TRBs
and it benefits the economies of participating nations.
2. Economies of Scale − The larger markets created results in lower costs due to
mass manufacturing of products locally. These markets form economies of scale.
3. Competition − Trade blocs bring manufacturers from various economies,
resulting in greater competition. The competition promotes efficiency within firms.
4. Trade Effects − As tariffs are removed, the cost of imports goes down. Demand
changes and consumers become the king.
5. Market Efficiency − The increased consumption, the changes in demand, and a
greater amount of products result in an efficient market.

REGIONAL TRADING BLOCS – DISADVANTAGES

1. Regionalism − Trading blocs have bias in favor of their member countries. These
economies establish tariffs and quotas that protect intra-regional trade from outside
forces. Rather than following the World Trade Organization, regional trade bloc
countries participate in regionalism.
2. Loss of Sovereignty − A trading bloc, particularly when it becomes a political
union, leads to partial loss of sovereignty of the member nations.
3. Concessions − The RTB countries want to let non-member firms gain domestic
market access only after levying taxes. Countries that join a trading bloc needs to
make some concessions.
4. Interdependence − The countries of a bloc become interdependent on each
other. A natural disaster, conflict, or revolution in one country may have adverse
effect on the economies of all participants
CROSS BORDER MERGERS & ACQUISITION
A merger is an agreement that unites two existing companies into one new
company. There are several types of mergers and also several reasons why
companies complete mergers. Mergers and acquisitions (M&A) are commonly done
to expand a company’s reach, expand into new segments, or gain market share. All
of these are done to increase shareholder value. Often, during a merger, companies
have a no-shop clause to prevent purchases or mergers by additional companies.

TYPES OF MERGER:

1. Horizontal merger: A merger between companies that are in direct

competition with each other in terms of product lines and markets
2. Vertical merger: A merger between companies that are along the same
supply chain (e.g., a retail company in the auto parts industry merges with a
company that supplies raw materials for auto parts.)
3. Market-extension merger: A merger between companies in different
markets that sell similar products or services
4. Product-extension merger: A merger between companies in the same
markets that sell different but related products or services
5. Conglomerate merger: A merger between companies in unrelated business
activities (e.g., a clothing company buys a software company)

TYPES OF ACQUISITION
1. Horizontal Acquisition
Horizontal acquisitions (often called ‘horizontal mergers’) involve gaining market
share through consolidation. Both companies should be operating in the same space,
providing more or less the same products and services. The increased scale of the
new company should give it increased bargaining power and a better competitive
position than the two companies previously had when they were on their own. In
most industries, the largest players either obtained or maintained their leadership
position through horizontal acquisitions.
2. Market Extension Acquisition
A market extension acquisition is a variation of a horizontal acquisition, whereby
the companies in question are in different geographic locations. Ultimately, the aim
is still consolidation, but within a wider geography.
Cross-border acquisitions are the most commonly seen form of the market
extension acquisition, and are particularly common in industries like food retail and
retail banking.
3. Vertical Acquisition
If a horizontal acquisition describes a company buying a competitor operating on
the same level of the production chain, a vertical acquisition describes what
happens when one company acquires another at a different level of the production
or value chain. A vertical acquisition occurs when a company focusing on any one of
these areas acquires another with a focus on one of the others.
4. Conglomerate Acquisition
Our consumption patterns increasingly revolve around conglomerates, who have
become experts in acquisitions. The conglomerate acquisition occurs when a large
company has grown through a series of bolt-on acquisitions, usually with a diverse
range of product and service lines, geographies, and industry outlooks. Everybody is
familiar with the names of the world’s largest consumer product conglomerates
such as Proctor & Gamble, Nestle, GlaxoSmithKline, and others. When we think of
their product lines, they can include anything from pet food to detergent, dairy
products to frozen foods.
5. Congeneric Acquisition
A congeneric acquisition (also referred to as a ‘concentric acquisition’ or 'product
extension merger') is a twist on the horizontal acquisition, where, rather than
having the same products or service lines, the two companies involved in the deal
have different product lines and service, even if they broadly serve the same market.
This overlap between the companies creates synergies (whereby the two companies
become greater than the sum of their parts). A typical example usually given by
corporate finance textbooks which exhibits this distinction in a simple fashion is an
ice-cream manufacturer buying a wafer manufacturer.
6. Reverse Takeover (SPAC)
Reverse takeovers or ´SPAC´(Special Purpose Acquisition Company) deals have
spiked over the past five years. In this form of acquisition, a private company
acquires a public company with the intention of using it to go public, and avoid the
usually costly IPO process. Depending on how the deal is structured, a reverse
takeover can also involve the public company acquiring the private company.
However, the ultimate aim is always for the private company to take control of the
newly merged company and for it to be publicly listed.
7. Acqui-hire
At a time when the biggest companies in the world are defined as much by their
talent and intellectual property as their capital assets, the acquire form of
acquisition is a proven way for companies to ensure that they’re winning the talent
race in their industry.
This is most commonly seen in the technology sector, where a shortage of
programmers at the very highest levels means that the big tech companies will do
almost anything to get their hands on value adding talent - including buying their
company.

REASON FOR MERGER & ACQUISITION:

 MAXIMISING PROFITS
 FUTURE GOALS
 EXPANSION OF BUSINESS
 INCREASE MARKET SHARE
  DIVERSIFICATION OF RISK
 GOODWILL
 PRODUCT IMPROVEMENT
 ECONOMIC OF SCALE

10 REASONS WHY MERGERS AND ACQUISITIONS FAIL

1. Overpaying
This is probably the most common reason for the failure of transactions. Most
attractive target companies operate under the assumption that ‘everything is for
sale at the right price’.
This effectively translates to ‘the business is always for sale when a buyer is willing
to overpay.’
2. Overestimating synergies
Overestimating synergies go hand-in-hand with overpaying in a transaction.
Overestimating the synergies inherent in a transaction is often the first step in
overpaying.
While the idea that many costs will largely stay the same as two companies
combined is alluring, it’s also far more difficult to achieve in practice than most
managers are willing to admit. And revenue synergies are no less complicated to
achieve.
3. Insufficient due diligence
The importance of due diligence can never be emphasized enough, partly because so
many firms are evidently keen to get it over with as soon as possible.
One of the major problems that arise during the process is that the acquirer is
depending on the target company to provide information that isn’t always
complimentary to their management. This creates obvious agency problems.
4. Misunderstanding the target company
Even due diligence doesn’t guarantee that you’ll fully understand the target
company.
It gives you the best opportunity to do so, but there are plenty of cases where even a
lengthy period of due diligence doesn’t let you know what makes a company tick.
5. Lack of a strategic plan
A good ‘why’ is an essential component of all successful M&A transactions. That is,
without a good motive for a transaction, it’s doomed to failure from the outset.
Academic literature on M&A is replete with studies of managers engaging in ‘empire
building’ through M&A, and research into how hubris is a common trend in M&A.
6. Lack of cultural fit
Perhaps ‘inability to acknowledge cultural differences’ might be a better title.
Why?
Because the cultural difference in itself isn’t a problem - rather, it’s the inability (or
unwillingness) to acknowledge them and look to bridge the gap.
7. Overextending resources
‘Bolt on’ mergers and acquisitions - that is, target companies that are small in size
relative to the acquiring company - are usually considered to be the best type of
transactions.
One of the main strands of thought behind this is that they don’t require as many
resources to be acquired or to be integrated.
8. Wrong time in industry cycle
For the myriad of reasons cited for the failure of the notorious AOL/Time Warner
deal, one is seldom given: The year 2000 was not a good time for media firms to
merge.
The media industry was about to undergo the biggest shake-up in its history, from
which it is only now beginning to show signs of recovery.
9. External factors
External factors (sometimes called ‘exogenous factors’ or just ‘risk’), refers to
everything that’s out of the manager’s control. 2020 provides us with a readily
available example.
Suppose the managers of two hotel chains are considering a merger. It makes sense
on almost every level - financial, cultural, and strategic.
10. Lack of management involvement
The most obvious reason for failure is left for last. Management involvement is
something of a catch-all answer and often incorporates many of the other reasons
on this list.
No stage of the M&A process will manage itself, be it the search for a suitable target
firm to the integration of the two firms into the newly formed entity.

STAGES INVOLED IN MERGER & ACQUISITION:

1. CORPORATE STRATEGY DEVELOPMENT
 Summary of target& deal rationales
 Valuation range & transaction budget
 Target approach
 Profit margin
 Geographic location/customer base
2. ORGANISING FOR ACQUISITION
 Current financial statement
 Offer good value
 Agree on key deal terms
 Skills , knowledge & capabilities
 Sign of business line president
3. DEAL STRUCTURING AND NEGOTIATIONS
 Financial due diligence
 HR due diligence
  TAX due diligence
4. POST ACQUISITION INTEGRATION
 Agreement on financial deal terms
 Legal documentation/purchase agreement
5. POST ACQUISITION AUDIT
 Communication plan
 Assumption of legal rights.