Master in Business Administration – Semester 3 MF0011– Mergers and Acquisitions - 4 Credits Assignment Set- 1 (60 Marks

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Note: Each question carries 10 Marks. Answer all the questions. Q.1 What are the basic steps in strategic planning for a merger? Basic steps in Strategic planning in Merger Any merger and acquisition involve the following critical activities in strategic planning processes. Some of the essential elements in strategic planning processes of mergers and acquisitions are as listed here below. 1. Assessment of changes in the organization environment 2. Evaluation of company capacities and limitations 3. Assessment of expectations of stakeholders 4. Analysis of company, competitors, industry, domestic economy and international economies 5. Formulation of the missions, goals and polices 6. Development of sensitivity to critical external environmental changes 7. Formulation of internal organizational performance measurements 8. Formulation of long range strategy programs 9. Formulation of mid-range programmes and short-run plans 10. Organization, funding and other methods to implement all of the proceeding elements 11. Information flow and feedback system for continued repetition of all essential elements and for adjustment and changes at each stage 12. Review and evaluation of all the processes In each of these activities, staff and line personnel have important Responsibilities in the strategic decision making processes. The scope of mergers and acquisition set the tone for the nature of mergers and acquisition activities and in turn affects the factors which have significant influence over these activities. This can be seen by observing the factors considered during the different stages of mergers and acquisition activities. Proper identification of different phases and related activities smoothen the process of involved in merger. Q.2 What are the sources of operating synergy?
The third reason to explain the significant premiums paid in most acquisitions is synergy. Synergy is the potential additional value from combining two firms. It is probably the most widely used and misused rationale for mergers and acquisitions.

Sources of Operating Synergy Operating synergies are those synergies that allow firms to increase their operating income, increase growth or both. We would categorize operating synergies into four types: 1. Economies of scale that may arise from the merger, allowing the combined firm to become more cost-efficient and profitable. 2. Greater pricing power from reduced competition and higher market share, which should result in higher margins and operating income. 3. Combination of different functional strengths, as would be the case when a firm with strong marketing skills acquires a firm with a good product line 4. Higher growth in new or existing markets, arising from the combination of the two firms. This would be case when a US consumer products firm acquires an emerging market firm, with an established distribution network and brand name recognition, and uses these strengths to increase sales of its products. Operating synergies can affect margins and growth, and through these the value of the firms involved in the merger or acquisition

Q.3 Explain the process of a leveraged buyout.
A leveraged buyout (or LBO, or highly leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved.[1] If the company subsequently defaults on its debts, the LBO transaction will frequently be challenged by creditors or a bankruptcy trustee under a theory of fraudulent transfer[2] Companies of all sizes and industries have been the target of leveraged buyout transactions, although because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged buyout, some features of potential target firms make for more attractive leverage buyout candidates, including:
Low existing debt loads; A multi-year history of stable and recurring cash flows; Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost secured debt; • The potential for new management to make operational or other improvements to the firm to boost cash flows; • Market conditions and perceptions that depress the valuation or stock price
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What Investors Need to Know about the Process of a Leveraged Buyout

Give sufficient examples. For an investor considering the leveraged buyout process.6 What are the motives for a joint venture. Consider that the process of a leveraged buyout using private equity is essentially financing against the actual value of the company. the company will be worth more and the future plans of the company can be established to grow it aggressively to make up for this investment Q. explain with an example of a joint venture. capital is raised or obtained through a lending source. but that have a past history of stability and growth. Once the company is identified and receptive to an investment idea. . debt is paid off.5 Study a recent merger that you have read about and discuss the synergies that resulted from the merger. a good rule of thumb is to understand that the investment comes with some degree of risk.The actual process of a leveraged buyout financing using private equity is actually not too complicated. Once this debt is paid off. and the company undergoes a transfer of power to make sure it is being managed more effectively for growth. just as with any investment. company owners in this situation will start looking for others who share a common goal in their industry and consider investment opportunities. Q. The investment firm looks for companies who appear to be in temporary financial stress. minus any existing debt that the company has.4 What are the cultural aspects involved in a merger. Q. Generally. debt. the process of making an offer to finance a company buy-out requires an assessment of the actual assets vs.

Evaluation of the value of assets. Q. And introduced the cash flow method in the application of M & A valuation.2 (60 Marks) Note: Each question carries 10 Marks. 2. The current assessment of the prevailing values of assets are book value method. The development of practice business valuation techniques put forward new requirements. Book value method is based on traditional accounting net assets recorded in the book to determine the acquisition price method. Less uncertainty. from the acquisition of theory with concrete examples. Less risk. without considering the intangible assets balance sheet items. The value of assessment is an essential part of mergers and acquisitions. market value method and the liquidation value method. how the value of this potential opportunity to reasonable valuation. focuses on the history and status quo. the target of mergers and acquisitions business valuation method. First. the market value method is the stock market The average price of a recent actual transaction value as a business reference. by the target company and the contrast between the light of business analysis. business transaction price as a reference. to determine the appropriate ratio of M & A Price: liquidation value of the method is in the enterprise as a whole have lost the ability to add value in case of an asset assessment. the value of a target company in M & A assessment techniques in a new topic. the overall value of the enterprise can effectively evaluate and get a reasonable assessment. Drawback is that it has a single enterprise assets as a starting point. Answer all the questions.4 Credits Assignment Set. The basic content of the value of assets. the current market value of listed companies is equivalent to the stock price multiplied by the number of shares issued. (B) the market comparison method of valuation Market comparison method of valuation refers to the property market. (A) of the asset value method 1. Such method has the advantage of objectivity. Fixed price of market . Only select the appropriate assessment methods. in some basis. to analyze the advantages and disadvantages. This method is mainly suitable for the target enterprise value of non-existence of the circumstances and objectives of M & A business enterprise may choose law as the basis of the transaction. Differences necessary adjustments. ignoring the overall profitability. the acquisition method of valuation of the Target Enterprise M & A is a very complicated system.1 What is the basis for valuation of a target company? Paper Keywords: mergers and acquisitions business valuation target Abstract: This paper studies on the status of Chinese and foreign enterprises. with the goal of using the same or similar business transactions and market transactions.Master in Business Administration – Semester 3 MF0011– Mergers and Acquisitions . Asset value method is the key to select the appropriate asset appraisal values.

The difficulty of integration also depends on the degree of control desired by the acquirer. finance. marketing. you should be able to: · Discuss the alternative acquisition integration approaches · Describe the political.15 Answer to SAQs and TQs 5. The value creation in merger depends upon this integration.1 Introduction This unit explains the process involved in merger integration. Objectives After studying this unit. 5. On the other hand. cultural and change management perspectives on integration · Discuss the problems that may arise in the integration process · Discuss about the Managerial challenges of Mergers and acquisition The most difficult part of merger or acquisition is the integration of the acquired company into the acquiring company. Extent of integration is defined by the need to maintain the separateness of the acquired business. if the intention is total integration of manufacturing.transactions in order to determine the overall value of the assets of the target company an assessment method Q. The post-merger integration process starts after the successful deal of merger. personnel etc. integration become quite complex. To start with you need to know the various aspects which need to be integrated in the post-merger entity.. You will also be able to understand about major problems and challenges involved in the mergers and acquisition in this unit. The process of post-merger integration involves: · Evaluation of organizational cultural fit · Development of integration approach . The rationalist view of acquisitions is as below: The acquirer may simply desire financial consolidation leaving the entire management to the existing managers. The post-merger and acquisition integration of the firm is a crucial task to be accomplished for effective performance.2 Discuss the factors in post-merger integration process. There is a need to determine the manner in which the acquired company will be integrated into the acquiring firm’s culture.

Therefore. Management Team. · Structural Adjustments The acquired company may design the new organization structure and redefine the roles. the acquiring company should take all employees into confidence and decide the authority and responsibility relationships. A proper understanding of culture of two organizations. · Authority and responsibility In order to avoid any confusion and indecisiveness. authorities and responsibilities of the employees. There are various stages in the process of integration. Marketing & Sales and Brands. Some of the functional areas of importance are: Accounting. clear communication and training can help to bridge the cultural gaps. management should prepare a plan for skill and competencies up-gradation through training. The human side of the M&A is another aspect of integration. R&D. In involves integration of various functional areas at the functional level in order to synergize. This involves the emotional integration of personnel of the organization. organization and culture between acquirer and acquired · Results Integration of two organizations is not a matter of just changing the organization structure and establishing a new hierarchy of authority. · Communication The plan of integration should be communicated to all employees and also their involvement in making integration smooth and easy and remove any ambiguity or fear in the minds of the staff. If there is difference in the skills and competencies of employees of merging company. The process of integration itself has to be planned so that the acquired or merged company integrates smoothly. 5. Procurement.· Matching strategy.policies. the acquiring company should prepare a detailed strategic plan for integration based on its own and the target company’s strength and weakness.2 Integration Planning The success of an integration process depends upon the role of acquisition and the nature of managers involved in the transaction and implementation. · Cultural integration Management should focus on the cultural integration of the employees. procedures and styles. Another important aspect of integration is the cultural integration of acquiring and acquired firms. merger and acquisition requires a detailed planning for integration as given below: · Integration plan Once the merger or acquisition took place. . · Skill and competencies up-gradation The acquired company can conduct a survey of employees to make an assessment of the gaps in the skills and competencies.

Regulatory bodies like RBI. plant layout. It must put proper financial control in place so that resources are optimally utilized and wastage is avoided. work schedule. SEBI etc would also ensure adherence to their respective guidelines and regulations. suppliers’ relations etc. pollution control measure etc. including a frame of reference to guide strategic decisions making · Commitment and motivation of personnel · Establishment of new leadership The integration would involve induction of the directors of the acquired company on the Board of acquiring company. and dealer net-work. 5. but also the entire technical aspects covering technical know-how. debt structure and controlling regulations. A cohesive team is required at board level as well as senior executive level. Installation of management in the process of integration involves combination of issues related to: · Selection or transfer of managers · Changes in organizational structure · Development of consistent corporate culture. The consolidation of operation covers not only the production process. Stock Exchanges. distribution channels. plant and equipments. manpower requirements. particularly depending upon terms and conditions . At top level also. Such obligations depend upon the size of the company. In all or some of these cases legal documentation would be involved. It should be ensured at the time of integration that the company out its legal obligations in all related and requisite areas. The rights and the interests of the stake holders should be protected with the new or changed management of the acquiring company. product designs. blending the acquired company’s operations with its own operation. project engineering. or induction of persons outside who have expertise in directing and policy planning. · Installation of top management Merger and acquisition affect the top management structure. A list of such factors is give below in brief: · Legal obligation Fulfillment of legal obligation becomes essential in post-merger integration. · Consolidation of operations Acquiring company has to consolidate the operations. adoption of new technology and engineering requirements in the production process.· Control System It is to ensure that it is in control of all resources and activities of the merged entity. changes are required.3 Factors in post-merger integration There are many factors which require attention of the management and tend to widen its role in postmerger integration. in the process leading to the final product. schedule of implementation.

revalue its assets and reallocate reserves. financial structure is reorganized as per the scheme of arrangement. To carry off this approach. Corporate policy prescribes guidelines that govern the decision making process and regulates the implementation of the decisions. Generally. merger or amalgamation approved by the shareholders and creditors.4 Implementation of integration process There are many ways to implement integration. 5. MIS and communication channels are the important factors to be taken into consideration in the process of integration. accounting responsibility. it is also necessary that resources be properly allocated for planned programme for utilization of scarce and limited resources available to a firm so as to direct the production process to result into optimal production and operational efficiency. Control as an activity of management involves comparison of performance with predetermined standards. This is done on the basis of market surveys and recommendations of the marketing experts. You must send senior-level leaders out to talk with employees. the integration of financial structure would be a post-merger event which might compel the company to change its capital base. · Toning up production and marketing management With regard to the size of the company and its operational scale. however. Decisions are taken on the basis of feasibility studies done by the experts. Sometimes on happening of certain uncontrollable events. But in the case of takeover or acquisition of an undertaking made by one company of the other through acquiring financial stake by way of acquisition of shares. Revamping of marketing strategy is also essential in post-merger integration. planning is associated with control. · Rationalizing financial resources It is important to revamp the financial resources of the company to ensure availability of financial resources and liquidity. the financing plans have got to be verified.of the merger to adjust in suitable positions the top executive of the acquired company to create congenial environment within the organization. its production line is to be adjusted during post-merger period. and essential values . material. The mechanism of corporate control encompassing delegation of power and power of control. strategy. · Corporate planning and control Corporate planning to a large extent is guided by the corporate policy. and establish “one company” measurement processes to minimize the natural tendency to compare one group’s results to the others’. · Integration of financial structure This is an important aspect which concerns most of stake holders of the company. In each area of corporate activities whether it is personnel. the integration must be: · Driven by a crystal-clear vision of the new organization. financial – management. Pricing policy also deserve attention for gaining competitive strength in the different market segments. For tuning up of production. including its intended mission (core purpose). encourage cross-organizational reflections at the end of partnering experiments (to capture and pass on lessons learned). reviewed and changed.

The fourth is size related and derives from the increased size of the combined entity relative to the pre-combination firms. interactive. will be the two strongest messages the new organization receives about what is to be expected and valued. and responsive to feedback · Cognizant of human needs for inclusion. revenue enhancement . across the system and in sync with the needs of ongoing day-to-day operations · Open. which should be networked together to create an integrated learning system. the way the team members are selected and the way they act. the first three require operational capability transfer between the acquiring and the acquired firms. manufacturing facilities. quality control.The capabilities and benefits under this source are: sales force. and choice In addition. resource allocation. human resource management. order. purchasing power. risk diversification. packaging. as well as vertically. access to financial resources. Specifically.The specific capabilities and benefits transferable under this are: design. Out of the above four sources of added value. individually and collectively. Members of this group must make a commitment to work together to ensure the success of the new system. the merging companies need to form a dedicated merger project organization. material handling. the Merger Executive Committee is the driving force behind the transition to the new entity. These capabilities and benefits lead to one or more of the three broad sources of value: cost savings. · Functional skills . leadership. vision.Market power. 5.The capabilities and benefits are: strategic direction. cost of capital reduction are the important capabilities and benefits under this heading. self-control. trade marks. brand names. There are four broad sources of added value as given below: · Operating resources sharing . training and organizational routines · General management . management style to motivate staff · Size benefits .· Owned and executed by and with key stakeholders · Fluidly coordinated and flexibly self-adjusting · Continually providing communication laterally. marketing. techniques. product development. office space etc.5 Post-merger integration model This stage of the acquisition process is a major determinant of the success of the acquisition in creating value. relations with suppliers. production. From the beginning. distribution channels. promotion. financial planning and control.

Acquired firm’s capabilities must be nurtured by the acquirer with judicious and limited intervention. there is a great need for autonomy. .6 Strategic interdependence and autonomy Haspeslagh and Jemison model the trade-off between the need for strategic interdependence and the need for autonomy for the acquired firm as shown here below: At the two extremes is complete preservation and complete absorption.Intervention by the parent is passive and more in the nature of a financial portfolio motivated by risk reduction.Need simultaneous protection and permeability of the boundary between two firms .Two firms initially co-exist but gradually become interdependent. reduction in capital costs .In a preservation acquisition. · Holding Company .No sharing of operational resources takes place.Operational resourced need to be pooled to eliminate duplication . The extent of integration depends upon the degree of strategic interdependence between the two firms as a precondition for capability transfer and value creation. Most acquisitions require a mixture of interdependence and autonomy. such as financial control while allowing the acquired firm to develop and exploit its capabilities to the full .and real options. but there may be a gradual transfer of functional skills. integration implies a full consolidation of the operations.Under this.Acquisition aimed at reducing production capacity in a declining industry dictates an absorption approach. organization and culture of both firms over time . . · Preservation . 5.The acquirer uses the acquisition as a learning opportunity that may be central to a strategy such as platform building · Symbiosis . This leads to four types of post-acquisition integration: · Absorption .

An important aspect of integration is the cultural integration of the acquiring and acquired firms.Parent seeks no interaction among the portfolio companies . or product quality improver etc. 5. There are four different types of organizational culture as mentioned below: .7 Political and cultural aspects of integration The value chains of the acquirer and the acquired. the acquirer should have regard to these political relationships.. the value creation may not result from the integration process. if acquired employees are not to feel unfairly treated.)’ · Learn from customer versus ‘We know what is best for the customer’ The above illustrative culture may provide basis for the classification of organizational culture. The integration of social interaction and political relationships represents the informal processes and systems which influence people’s ability and motivation to perform. This integration process has three dimensions: the technical. The culture of an organization is embodied in its collective value systems. The technical integration is similar to the capability transfer discussed above. ideologies myths and rituals. If the capabilities to be transferred are not properly identified owing to deficiencies of the pre-acquisition decision making. At the time of integration.Line between preservation and holding company types may not be quite distinct in some acquisitions Acquired company managers select an appropriate integration approach that will lead to exploitation of the capabilities of the two firms for securing sustainable competitive advantage. beliefs. They can motivate people and can become valuable sources of efficiency and effectiveness. need to be integrated in order to achieve the value creation objectives of the acquirer. norms. The following are the illustrative organizational diverse cultures which may have to be integrated during post-merger period: · Strong top leadership versus Team approach · Management by formal paper work versus management by wandering around · Individual decision versus group consensus decision · Rapid evaluation based on performance versus Long term relationship based on loyalty · Rapid feedback for changes versus formal bureaucratic rules and procedures · Narrow career path versus movement through many areas · Risk taking encouraged versus ‘one mistake you are out’ · Risky activities versus low risk activities · Narrow responsibility arrangement versus ‘Everyone in this company is salesman (or cost controller. political and cultural.

The main characteristics are: emphasis on team commitment. uncertainty and cultural ambiguity. efficient and standardized culture service · Task/achievement . In assessing the advisability of an acquisition. · Thirdly.· Power . 5. Thus. loss of commitment. The differences between the national and the organizational culture influence the cross-border acquisition integration. Such stressful experience may lead to their loss of morale. · Finally. Mergers between certain types can be disastrous. negative evaluation of counterparts.8 Cultural profiling and assessment of cultural compatibility The steps for cultural profiling and assessment of cultural compatibility are as follows: · The first step towards cultural integration and aligning culture to strategy is the profiling of the cultures of the merging firms. seeks to nurture personal development of individual members Poor cultural fit or incompatibility is likely to result in considerable fragmentation.9 Human resources management issues In the course of integration the merging firms have to confront the following issues: . · The next step is the evaluation of the compatibility of the cultures and identifying the areas of potential conflict. which may be experienced as stressful by organizational members. task determines organization of work.The important features are: emphasis on equality. needs creative environment · Person/support .The main characteristics are: essentially autocratic and suppressive of challenge. merging firms must consciously and proactively seek to transform the cultures of their organizations 5. emphasis on individual rather than group decision making · Role . emphasis on formal rules and procedures. the acquirer must consider cultural risk in addition to strategic issues. values fast. anxiety and ethnocentrism between top management teams of the acquired and acquiring firms. Differences in culture may lead to polarization. workshops and working together needs to be set up. flexibility and worker autonomy. confusion and hopelessness and may have a dysfunctional impact on organizational performance. a cultural awareness programme through education.The important features are: bureaucratic and hierarchical. a new culture has to be evolved.

· Board-level changes Board-level positions may have to be revamped to align directorial expertise with the emerging needs of the post-merger business. Board-level changes could also be inspirational for the rest of the organization. The choice of the right person for the right job is important. head count reduction is perhaps inevitable.. However. Accent on merit is as important as the integrity of the process of managerial appointments. They do not consider that the implementation process is one where mutual learning between the acquirer and the acquired takes place and the process is especially adaptive in the light of this learning. They tend to forget that the blueprint was based on incomplete information.10 Problems in integration The post-merger integration problems may arise from three possible sources: · Determinism Determinism is a characteristic of managers who believe that the acquisition blue print can be implemented without change and without regard for ground realities. 5. changing the performance evaluation and reward system may be a necessary element in evolving a new culture because of their power to motivate staff and influence their behaviour. and altering the balance to introduce more pay-toperformance sensitivity may engender resentment and resistance. special bonuses or stock options or generous earn-outs etc). head count reduction should be driven not by legal minimalism but by transparently genuine concern for the welfare of the people being made redundant. etc.e. CEO. COO. · Key people retention The uncertainty during a merger often leads senior managers to end it by leaving. This is particularly so where the merging partners had experienced performance problems which triggered the merger. heads of functions such as R & D. there will be rival claims for senior executive positions such as the chairman. · Management and workforce redundancy In merger with its emphasis on efficiency savings through consolidation of duplicate functions or production sites. if both merging firms had these positions prior to the merger. Companies often arrange for counselling. training and outplacement programme to alleviate the distress to the employees.. Often these people probably already wealthy may be empted to stay not with offers of more wealth but with positions of power and prestige that reflect their merit. However. The new board should change leaders so that they can carry out the change process dictated by the merger. Such choices are based on tribal affiliations of the acquirer. · Choosing the right people for the right position In all integration types. heads of divisions. Determinism leads to a rigid and . · Aligning performance evaluation and reward system The balance between basic compensation (salary) and performance-related compensation (bonuses. stock options) may differ between two firms. Key people retention may be achieved through devices such as ‘golden hand cuffs’ (i. CFO.

organizational or political issue. markets and customers of the acquired firm. This is particularly important in mergers that seek to leverage each company’s information on customers. Such hostility leads to a non-co-operative attitude among managers and vitiating the atmosphere for a healthy transfer. · Value Destruction At personal level. rationalization increases only the potential . the target firm managers may be given positions which fail to acknowledge their seniority in the pre acquisition target or their expertise. However. 5. IS compatibility between acquirer and the acquired companies must be seriously considered even at the pre-deal stage. 5. They should have overlapping characteristics like shared technology or markets to exploit synergies. markets or processes with that of the other company as in banking and insurance merger. For instance. operational. The compatibility of IS must be considered as thoroughly as any strategic. · The acquirer should think through what potential skill contribution it can make to the acquiree · The acquirer must respect the products. Where the integration task is delegated to the operational managers of the two firms without visible involvement or commitment of the top management. IS integration in merger depends on a mix of both technical and organizational factors. if integration experience is contrary to their expectations. · Information system (IS) integration IS integration is a critical. or in the merger of two banks. The top management must be intervened to avoid frictions that arise between groups of managers in the integration process. and eliminate duplication will drive the first weeks and months of post-merger integration. the integration process can degenerate into mutual frictions.unrealistic programme of integration and builds up hostility from managers. Organizational compatibility must be considered alongside IS synergies. · Leadership Vacuum The management of the interface requires tough and enlightened leadership from the top managers of the acquirer. streamline. an urgent need to rationalize. · The acquirer should provide appropriately skilled top management for the acquiree within a year · The acquirer should make several cross-company promotions within a year.11 Five rules for integration process Peter Drucker provides the following five rules for the integration process: · Ensure that the acquired firm has ‘common core unit’ with the parent. the acquisition is value destroying for managers. but often neglected part of the overall integration programme. Value destruction may take the form of reduced remuneration in the post acquisition firm or loss of power or of symbols of corporate status. again smooth integration is not possible.12 Managerial Challenges · Clearly. Where there is perceived value destruction of this kind.

and spinning off non-core businesses. capitalizing on product and market synergies.3 List out the defense strategies in the face of a hostile takeover bid. the merging companies need to take a very careful Q. to show what they are capable of. Shared visioning activities and cross-company merger project teams can provide opportunities to meet new people and gain new perspectives and skills. It arises from ongoing encounters between people and groups with different world views. good people do not step forward – they walk away to take on new challenges elsewhere. and it transforms the whole into something greater than the sum of its parts. it doesn’t have to be this way. performance excellence. the webs that make the organization work break down and fall apart. function. · Most post-merger implementation plans seem to assume that if the merger’s financial priorities are thoroughly addressed. organization. when innovations are abandoned in favour of outdated practices just because one group is considered the “home team” and the new one deemed expendable. . and have a voice. These are not the conditions under which synergistic growth is likely. uncertainty.of the new company to yield greater value to its shareholders. No matter how visionary the leader or competent the financier. on top of keeping the day-to-day business performing. when pride in the company and pride in one’s work are eroded through ill treatment at the hands of merger managers. It is one thing to design a new architecture and relationships on paper. distraction. And therein lies the challenge. they have no means or motivation to tell the new system designers the hidden secrets of success and supportability. fear. and dehumanization. or level of responsibility – even. To harness the valuable differences between two merging companies and convert them into opportunities for innovation. Managed in a holistic way. They feel pressure most urgently to demonstrate the wisdom and value of the investment decision by recovering the costs of the merger and boosting short-term and intermediate-term share price performance. · When selection processes do not seem fair and open. · Most mergers are seen as times of chaos. limitation. Work-redesign processes give functional team members the chance to innovate. · Changes in organizational design or expansions in job scope offer many the challenge of taking on a new job. · Another challenge is that merger managers must juggle strategy. The process is painful. moving closer to fulfilling some of their own. systems. long-held aspirations for their work and their lives. But it never happens automatically. perhaps. Synergy requires the engagement and commitment of the whole organization. and experience. a merger can become an opportunity for people to learn. grow. the human foundation will take care of itself. and the results costly. they lose interest in making business processes better. and market leadership. each quickly learns that synergy cannot be generated solely from above – or realized simply by reducing headcount. knowledge. staffing. Fortunately. streamlining operations. When knowledge capital is lost through turnover of key individuals during a merger. quite another to bring them to life. The synergy created by a successful merger is a dynamic energy. If they are not asked for their opinions. So they focus on restructuring to realize the benefits of creating economies of scale. When people stop caring. and culture.

then the acquiring co. However. The primary selling tool is the premium that is offered over the existing market price of the stock. If target company does not agree. often with the objective of gaining control of the company. because the SEBI requires rather extensive disclosure. however. A ‘tender offer’ is an offer to buy current shareholders’ stock at a specified price. may directly approach the target company for its takeover. 1997. It is not possible to surprise another company with its acquisition. · They may or may not react to a tender offer.Competitive Bid This can be made by any person within 21 days of public announcement of the offer made by the acquirer. · Tender Offer In the earlier cases. if the bidder is able to obtain a list of shareholders. Tender offer can be used in two situations: · The acquiring co. The management may use techniques to discourage its shareholders from accepting tender offer by announcing higher dividends. usually for more than the present market price as an incentive to tender. The tender offer itself is usually communicated through financial newspapers. Regulation 12 of SEBI Takeover Regulations. · The tender offer may be used without any negotiations – like hostile takeover. The tender offer can also be used when there are no negotiations. · The shareholders are generally approached through announcement in the financial press or through direct communication individually. negotiations were confined to the managements and boards of directors of the companies involved. issue of bonus or rights shares etc. . Use of the tender offer allows the acquiring company to bypass the management of the company it wishes to acquire and therefore serves as a treat in any negotiations with that management. the acquiring company can make a tender offer directly to the shareholders of the company it wishes to acquire. · The reaction exclusively depends upon difference between the market price and offered price. Direct mailings are made to the shareholders of the company being bid for. . Such bids are made for equity shares carrying voting rights. and make it difficult for the acquirer to acquire controlling shares.offeror intends to obtain effective control of the offeree through voting powers.. The tender offer may or may not be acceptable to the management of the target company. Partial bid is also understood when the offeror bids all the issued non-voting shares in a company. The offer is often made by another company. Such bid shall be made through public announcement in pursuance of provisions of regulation 25 of the SEBI take over regulation 1997. Such competitive bid shall be for the equal number of shares or more for which first offer was made. but when one company simply wants to acquire another. it is necessary to make public announcement in accordance with the Regulations. may directly approach the shareholders by means of a tender offer.

· Defensive Merger .It is necessary that the company’s capital structure should contain loan capital by way of debentures to make the company less attractive to corporate raiders. · Convertible Securities .4. As per latest SEBI guidelines.Non-voting shares are a convenient method of providing for any desired adjustment of control on a merger of two companies.The director’s issue block shares to their friends and associates to continue maintaining their controlling interest and as a safeguard to the threats of dislodging their control position. then the joint system of advance defense could be termed as “Pyramiding”. · Inter locking Share Holdings or Cross Share Holdings .The target company may also launch a counter publicity programme by informing that the tender offer is not in the interest of the shareholders. This agreement is entered into.Two or more group companies acquire share of each in large quantity or one company may distribute share to the shareholders of its group company to avoid threats of takeover bids.Two or more major shareholders may enter into agreement for block voting or block sale of shares – rather than separate voting or sale of shares. the safest device of defense. · Share with non-voting rights like preference shares . · Issue of Block Shares to Friends and Associates . For this purpose they put long block shares of their own company in the hands of shareholders of friendly to make their own company least attractive for takeover bid.The directors of a threatened company may acquire another company for shares as a defensive measure to forestall two unwelcome takeover bids.1 Advance preventive measures for Defenses The target company should take precautions when it feels that takeover bid is imminent through market reports or available information. . This may also be done by issue of right shares. public announcement is necessary as mandatory bid for tender offer to acquire the shares or control in the target company. in collaboration with or without cooperation of target company’s directors who wish to exercise effective control of the company. Some of the advance measures are discussed below: · Joint Holdings or Joint Voting Agreement .4 Defenses against Takeover Bid The following Defensive method measures can be adopted to face takeover bids: 7. If the interlocking of share holdings is accompanied by joint voting agreement. 7.

. · Other preventive measures 1. Companies may form group or cartel to fight against any future bid of takeover by way of pooling funds to use it to counter the takeover bids.Directors having specialized skills in any specific technical field may enter into contract with the company with the specific approval of shareholders or the Companies Act 1956. Dissemination of favourable information among shareholders.4. This type of behaviour on the part of the directors of the company elicit confidence of shareholders in their management and control which will in many ways help preventing any takeover bid to be in or to succeed. · Long Term services Assessments .e. For defense against takeover bid. 7.2 Defense in face of takeover bid (Strategies) A company is supposed to take defensive steps when it comes to know that some corporate raider has been making efforts for takeover. · Making the possession of two company’s asset less attractive.This is possibly done by putting the assets outside the control of the shareholders by entering into various types of financial arrangements like sale and lease back. In view of these circumstances.· Dissemination to shareholders of favourable financial information. the takeover game becomes unattractive to the bidders. 2. pushing up share price) 3. Such strategy is known as “Rainy day call” 2. Maintaining a fraction of share capital uncalled. two types of strategies could be as below: · Commercial Strategies 1. Step up dividend and update share price record (i. which can be called up during any emergency like takeover bid or liquidation threat. To revalue the fixed assets periodically and incorporate them in the balance sheet 4. The prospective bidder would not be attracted due to: – Fear of non-co-operation by such director – High compensation for terminating the agreement. mortgage of assets to FIs for long term loans etc.The dissemination of information about the company’s favourable features of operations and profitability go a long way in bringing the market price of share nearer to its true assets’ value. . Reorganization of Capital structure .

Pending cases in labour/consumer/tax tribunal) · Tactical / Defense Strategies 1. 4. The possible motive for the management of the target company to do so is not to lose the management of the company. In a white square transaction. A target company is said to use a “white knight” when its management offers to be acquired by a friendly company to escape from a hostile takeover.The white knight defense involves choosing another company with which the target prefers to be combined. An alternative company might be preferred by the target because it sees greater compatibility. The white square sometimes is required to vote its shares with the target management.The transfer is not in the interest of the company and public. or the new bidder might promise not to break up the target or engage in massive employees’ dismissal. companies have been given power to refuse to register the transfer of shares under relevant sections of Companies Act 1956.The transfer is prohibited by a court order . 5. The board may make attempt to win over the shareholders through raising their emotional attachment.The transfer is in contravention of the law .g. With the higher bid offered by the “white knight” the predator might not remain interested in acquisition and hence the target company is protected from losing to corporate raid. The difference being that the white square does not acquire control of the target. White knight offers a higher bid to the target company than the present predator to avert the takeover bid by hostile suitor. loyalty and patriotism etc. Research based arguments should be prepared to show and convince the shareholders that the offer is incapable of managing the business. A refusal to register is permitted if: . 3.5. These transactions often are accompanied by a stand-still agreement that limits the amount of additional target stock the white square can purchase for a .A legal requirement relating to the transfer of shares is not complied with . It is the responsibility of the directors to accept a takeover bid.The white square is a modified form of a white knight. White Square . Trace out the various discouraging commercial features of the functioning of the acquiring company (e. a company must inform the transferee and the transferor within 60 days. Operation “White Knights” . Recourse to legal actions In order to defuse situation of hostile takeover attempts. the target sells a block of its stock to a third party it considers to be friendly. If this is done. The directors of the company may persuade their friends and relatives to purchase the shares of the offeree company 2. 6.

The triggering event could be the accumulation of a specified percentage of target shares or the announcement of a tender offer. Such features in the bylaws are called “Shark Repellent” character. Companies adopt this tactic as precautionary measure against prospective bids. If the Pac Man defense is used. The provision usually calls for a lumpsum payment or payment over a specified period at full or partial rates of normal compensation. Preferred stock enables the board to tailor the characteristics of that stock to fit the transaction and so usually is used in white square transaction. 9. In return. The special rights take many forms but they all make it costlier . sells these valuable assets at its own initiative leaving the rest of the company intact. the above defense can be used only before the predator makes public announcement of its intention to take over the target company 7. it is said to sell the “Crown Jewel”. 10. The company as a defense strategy. “Golden Parachutes” . “Shark Repellent” character . each would be ruled as subsidiaries of the other and be unable to vote its shares against the corporate parent.It is making counter bid for the bidder.When a target company uses the tactics of divestiture. generous dividends. This reduces their resistance to takeover. When a company offers hefty compensations to its managers if they get ousted due to takeover.specified period of time and restricts the sale of its target stock. should both firms buy substantial stakes in each other.control clause. As per SEBI takeover regulation. 8. The severity of the defense may lead the bidder to disbelieve that the target actually will employ the defense. There is a risk that under state law. and/or a discount on the target shares.Golden parachutes are separation provisions of an employment contract that compensate managers for the loss of their jobs under a change-of. Eg: Share holder’s approvals for approving combination proposal are fixed at minimum by 80-95% of the shareholders meeting. This envisages a termination packages for senior executives and used as a protection to the directors of the company against the takeover bid. ‘Pac-Man’ strategy: . 6.The companies change and amend their bylaws and regulations to be less attractive for the corporate raider company. in its own interest.Poison pills represent the creation of securities carrying special rights exercisable by a triggering event. This happens when the target company is quite larger than predator. Disposing of “Crown Jewel” . it is extremely costly and could have devastating financial effects for both firms involved. Instead of selling these valuable assets. Under this strategy the target company attempts to takeover the hostile raider. the company is said to offer golden parachutes. The Pac-Man defense is essence involves the target counter offering for the bidder. Swallowing “Poison Pills” strategy . This severe defense is rarely used and in fact usually is designed not to be used. the company may also lease them or mortgage them to creditors so that the attraction of free assets to the predator is over. the white square often receives a seat on the target board. usually giving the right of first refusal to the target. The precious assets in the company are called “crown jewel” to depict the greed of the acquirer under the takeover bid. These precious assets attract the rider to bid for the company’s control.

Merger and acquisition activity in general has had negative impacts on bondholders’ wealth. All the above strategies are experience based and have been successfully used in developed nations and some of them have been tested by Indian companies also. “Grey Knight” . or changes in corporate policy.A friendly party of the target company who seeks to takeover the predator. the target company might issue convertible securities. which are converted into equity to deter the efforts of the offer. This was particularly true when leverage increases where substantial. This poison put feature seeks to protect against risk of takeover-related deterioration of target bonds. A large block of shares is held by an unfriendly company which forces the target company to repurchase the stock at a substantial premium to prevent the takeover. Green Mail . 13. Poison Put . at the same time placing a potentially large cash demand on the new owner. 11. The large block investors involved in greenmail help bring about management changes either changes in corporate personnel. Another example.4. Although not required. thus raising the cost of an acquisition. As a tactical strategy. Poison pills can be adopted by the board of directors without shareholder approval. or have superior skills at evaluation potential takeover targets. or because such conversion dilutes the bidders shares and discourages acquisition. 7. The target company may adopt a combination of various strategies for successfully averting the acquisition bid. 12. directors often will submit poison pill adoptions to shareholders for ratification. Target Company might rise borrowing distorting normal Debt to Equity ratio. This is an expensive defense mechanism.A covenant allowing the bondholder to demand repayment in the event of a hostile takeover. The purpose of the premium buyback presumably is to end a hostile takeover threat by the large block holder or green mailer.It refers to an incentive offered by the management of the target company to the potential bidder for not pursuing the takeover.3 Financial Defensive Measures The firm could become a takeover target of another firm seeking to benefit from an association with highly efficient firm in terms of: · High sales growth · High profit margin · Low stock price · Highly liquid balance sheet .to acquire control of the target firm. The management of the target company may offer the acquirer for its shares a price higher than the market price.

a nine member board might be divided into three classes. A firm fitting the afore-mentioned description would do well to take at least some of the following steps as defensive measure against takeover: · Increase debt with borrowed funds used to repurchase equity · Increase dividends on remaining shares · Structure loan covenants to force acceleration of repayment in the event of takeover · Liquidate the securities portfolio and draw down excess cash · Invest continuing cash flows from operations in profitable projects · Use some of the excess liquidity to acquire other firms · Divest subsidiaries · Realize the true value of undervalued assets by selling them of or restructuring.5 Anti takeover amendments Anti takeover amendments generally impose new conditions on the transfer of managerial control of the firm through a merger or tender offer or by replacement of the board of directors. For instance. The rationale here is to ensure continuity of policy and experience. each year. 7. There are four major types of anti takeover amendments as below: · Supermajority Amendments It requires shareholders’ approval by at least two-thirds vote and sometimes as much as 90 percent of the voting power of outstanding capital stock for all transactions involving change of control. Fair price amendments defend against two-tier tender offers that are not approved by the target’s board. a new majority shareholder . Pure supermajority provisions would seriously limit management’s flexibility in takeover negotiations. with only three members standing for election to a three year term. A uniform offer for all shares to be purchased in a tender offer and in a subsequent cleanup merger or tender offer will avoid the supermajority requirement. however. Thus. · Fair-price Amendments Fair price amendments are supermajority provisions with a board-out clause and additional clause waiving the supermajority requirement if a fair price is paid for all the purchased shares.A combination of these factors can simultaneously make a firm an attractive investment opportunity and facilitate its financing. the supermajority provisions have a board-out clause that provides the board with the power to determine when and if the super majority provision will be in effect. · Classified Board This anti takeover amendment provides for staggered or classified boards of directors to delay effective transfer of control in a takeover. The fair price is defined as the highest price paid by the bidder during a specified period. The fair price amendment is the restrictive in the class of supermajority amendments. In most existing cases.

This device is a defense against hostile takeover bids.An individual or a company can continue acquiring the shares of another company without making any offer to the other shareholders. a greater shareholder vote is required to elect a single director. Also the central government needs to be intimated whenever such holding exceeds 10% of the subscribed capital.6 Legal measures against Takeovers Company Act 1956 restricts individual or a company or a group of individual from acquiring shares. the target company and the stock exchange shall be notified · Limit to Share Acquisition . including nomination of candidates to the board of directors. The approval of the central government is necessary if such investment exceeds 10% of the subscribed capital of another company.Reincorporation in a state with more accommodating anti takeover laws . together with the shares held earlier. · Authorization of Preferred stock The board of directors is authorized to create a new class of securities (like preferred stock) with special voting rights.If holding company of the acquiring company exceeds 10%. 7.Abolition of cumulative voting where it is not required by state law . This may be issued to friendly parties in a control contest. 7.Provisions with respect to the scheduling of shareholders’ meetings and introduction of agenda items. The salient features of the guidelines are: · Notification of Takeover .would have to wait at least two annual meetings to gain control of the board of directors. · Other anti takeover actions Other amendments that management may propose as a takeover defense include: . in a public company to 25% of the total paid up capital. These precautionary measures are against the takeover bids of public limited company. Under this type.If an individual or a company acquires 5% or more of the voting capital of a company. · Offer price . a public offer to purchase a minimum of 20% of the shares shall be made to the remaining share holders through a public announcement.7 Guidelines for Takeovers SEBI has provided guidelines for takeovers. until the individuals or the company acquire 10% of the voting capital. · Public Offer .

details of the offerer’s existing holdings in the offerer company etc. Q. its intention to continue the offer company’s business and to make major change and L.The offer price shall not be less than the average of the weekly high or low of the closing prices during the last six months preceding the date of announcement. Explain through an example.4 What are the legal compliance issues a company has to adhere to in case of a merger. .6 Choose any firm of your choice and identify suitable acquisition opportunity and give reasons for the same..The offer should disclose the detailed terms of the offer. · Offer Documents . Q. · Disclosure .The offer document should contain the offer’s financial information.. identity of the offerer.T commercial justification for the offer Q.5 Take a cross border acquisition by an Indian company and critically evaluate.

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