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PART-II

A. TURNAROUND MANAGEMENT AND ITS FACTORS The present business scenario is one wherein constant change is the name of the game. For any firm to survive in any industry, there has to be constant monitoring and improvement of its systems and operations. When a firm faces severe cash crisis or a consistent downtrend in its operating profits or net worth, it is on its way to becoming insolvent. The slide cannot be prevented unless appropriate actions, both internal and external, are initiated to change the future prospects. This process of bringing about a revival in the firm’s fortunes is what is termed as “Turnaround Management”. It deals with all aspects of business from personal protection to reviewing in detail the financial, market and sales plans of the business along with cash flow projections, pricing, staffing and product and services contributions. It discusses how to deal with and establish relationships with bankers, creditors and vendors as well as the steps to take in downsizing, including the best ways to let people go. It takes an in-depth look at the competition, customers, trends and the future of the business from a blank paper planning perspective. Kevin Muir emphasizes that in a turnaround situation, major changes need to be made and that planning and implementing the plans are essential.

To be concrete, Turnaround management is a process dedicated to corporate renewal. It uses analysis and planning to save troubled companies and returns them to solvency. Turnaround Management involves management review, activity based costing, root failure causes analysis, and SWOT analysis to determine why the company is failing. Once analysis is completed, a long term strategic plan and restructuring plan are created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround professionals begin to implement the plan, continually reviewing its progress and make changes to the plan as needed to ensure the company returns to solvency. There are 3 phases in any Turnaround Management. 1 The diagnosis of the impending trouble or the danger signals 2. Choosing appropriate Turnaround Strategy 3. Implementation of the change process and its monitoring.

Phase I: Watching out for the danger signal Do companies turn sick overnight and qualify as potential candidates for turnaround, or do they become sick slowly, which can be stopped by timely corrective action? Obviously only the latter is possible. But in reality, most companies do not recognize this fact.. The following are some of the universally accepted danger signals, which a company should watch out for: · Decreasing market share / Decreasing constant rupee sales · Decreasing profitability · Increased dependence on debt / Restricted dividend polices · Failure to plough back the profits into business / Wrong diversification at the expense of the core business. · Lack of planning · Inflexible CEO / Management succession problems / Unquestioning Board of Directors · A management team unwilling to learn from competitors. Phase II: Choosing appropriate Strategy Hoffer, an expert management guru, classifies Turnaround Management into two broad categories. They are 1. Strategic Turnaround As the name itself suggests, strategic turnaround choices may force the company to completely change its current way of operations. The choices under this method are  A new way to compete in the existing business  Entering into an altogether new business Under the first choice, the focus is either on increasing the market share in a given product market frame work or in repositioning the product market relationship. The increase in market share can be achieved by improving product quality perception through dealer push or by a consumer pull. Alternatively, entering a new business as a turnaround strategy can be approached through the process of product portfolio management. 2. Operating Turnarounds Basically they are of 4 types and the strategy adopted depends on the various situations in which the firm is. All these strategies focus on short-term effects only. 1 Asset reduction strategies 2 Revenue increasing strategies 3. Cost cutting strategies 4 Combination strategies

· If the firm is operating substantially but not extremely below its breakeven level. then the appropriate turnaround strategy is to generate extra revenues. because of the inability of the State Electricity Boards and private sector to set up new power plants. Phase III: Implementation of the change process Implementation plays an important role in any turnaround management. it decided to diversify into Watch industry. The case of Bharat Heavy Electricals Limited The company was started with the objective of producing power generating equipments and virtually enjoyed monopoly. Due to this timely diversification. The success or otherwise of a Turnaround strategy depends on the commitment shown by the top management as also the operating management. The watch division came to the rescue and it generated cash profits to keep the company going. Under this method all the three namely cost reducing. Combination strategies have a direct favourable impact on cash flows as well as on profits. it must take steps to reduce its assets. revenue generating and asset reduction actions are pursued simultaneously in an integrated and balanced manner. · Operating closer but below breakeven levels calls for application of combination strategies. Identification of an appropriate strategy by itself will not guarantee success. Similarly partial adoption of a strategy is also not useful. it is imperative for the management to be aware of its position in the industry in which it is functioning as also its status in the overall scheme of things. cost reduction strategies are preferable as they are easy to carry out and the firms’ profits rise once the unnecessary costs are cut down. Metropolitan Transportation and Defense production. The selected strategy needs to be pursued relentlessly and with all out effort to make it work. . This will reduce the level of fixed costs and help in reducing the total costs of the firm. After nearly a decade of operation. BHEL is now one of the rare profit making PSUs Conclusion It can be thus seen that for Turnaround management to be implemented. To offset this depression. But as the years went by. Success Stories The case of Hindustan Machine Tools HMT was formed to manufacture machine tools with a foreign collaborator. The effect of this diversification was felt only after 57 years when the main business of HMT crashed and the company started incurring losses.· If a firm is operating much below the Breakeven level. BHEL ventured into Telecommunications. · If the firm is operating around or above the breakeven level. its capacity utilisation fell down tremendously.

Turnaround Management involves the formulation and implementation of a strategic plan and a set of actions for corporate renewal and restructuring. With the corporate sector positioned for a giant leap in India. a Root Cause Analysis is made and a turnaround plan is devised and executed. BUSINESS ECONOMICAL REASONS.Consultants play an invaluable part here since they help in identifying and vetting the strategy in the light of the prevailing situations. Often with the help of outside turnaround consultants or strategy consultants. thus ensuring effective turnaround of the organisation. The root causes of strategic distress are: • Poor Vision • Poor Strategy • Poor Execution • Acts of God – certain risks which cause irreparable damage MORE IMMEDIATE CAUSES INCLUDE WEAK MANAGEMENT. When a firm faces severe cash crisis or a consistent down trend in its operating profits / net worth. profitability and strategic viability. restructuring the business. Survive the crisis • Return to normalcy: Return to normal operations. assuming that the firm still offers the potential to return to financial solvency. OVERINVESTMENT / UNDER-INVESTMENT ETC. are initiated to change the future prospects. STEPS IN TURNAROUND MANAGEMENT PROCESS • Management Change: Consultants may be called in to manage the turnaround of the firm • Situational Analysis: Assess the situation and future business viability • Emergency Action Plan: Implement emergency steps. The slide cannot be prevented unless appropriate actions. This process of bringing about a revival in the firm’s fortunes is what is termed as “TURNAROUND MANAGEMENT”. profitability and growth . so as to stay in the race. it is time organisations took stock of their performances. typically during times of severe corporate financial distress. Develop strategic survivor plan • Business restructuring: Implement the plan. both internal and external. WEAK ECONOMY. it is on itsway to becoming insolvent.

occur at the same time. The author searched and identified studies that contained systematic empirical evidence about the effectiveness of TMS including comparison of successful and unsuccessful recovery attempts. it encourages organisational learning that may prevent future identical breakdowns since it trains the organisation to quickly spot a decline and appropriately react to it. and Riggs.A corrective is an action taken in quick response to decline. Additionally.Stages of Organisational Turnaround – Boyne This theoretical framework was suggested by Boyne (2006) as a generic model that had been distilled from various stage models of decline and recovery in private organisations. In other words. can be considered as permanent declines. Patton. This model constitutes a managerial process that reflects and simplifies seven stages that may be complex. The author concludes that the model of TMS is derived from the private sector literature but offer a useful platform for the public organisation context. In LAs for instance. 1976). Nonetheless. One of the problems in researching organisational failure is making the separation between a natural.The first stage refers to the causes of the failure. the prompt establishment of a psychologist team for children in reaction to a terror attack could be considered as a corrective action. and performance continued to deteriorate. This action prevents a deep decline from developing and avoids the need to implement TMS. A corrective action distinguishes between the two. 2003) emphasised the stages that a failing organisation goes through. corrective action not only helps the organisation to escape from failure. cases in which unsuccessful or no corrective actions were employed. This search was limited to a journal article as a rough quality control and search of keywords in which 21 comparative studies yield the suggested model. compressed or extended. disordered. In such cases. Additionally. the situations could be considered as temporary declines but not as turnaround situations. 2. While the previously presented model: „Stages of Organisational Turnaround‟ (McKiernan. 1. . five qualitative studies describing success stories of recovery processes derived from the public sector are analysed in order to evaluate whether the model can be applied to public organisations. in cases where successful corrective actions were employed. Boyne‟s model emphasises the crossroads in managerial strategies during a recovery process. temporary decline and a permanent one (Schendel. By contrast. Corrective Action and Recovery to Avert a Turnaround Situation. The Onset of Decline. and TMS were not used. stages and aspects that were covered earlier will be briefly presented to avoid repetition. Repeated cases of decline later on would find a management that has already dealt with such situations. performance returned to be normal.

Search for New Strategies. perhaps because political or managerial skills were missing. 1989). as described in stage 5. Selection of New Strategies . approval of a recovery plan may involve democratic procedures such as consultation with local volunteers. and prevent further psychological and emotional damage and deterioration. in turn lead to stakeholder resistance. repositioning. and reorganisation. When no recovery strategy was found and approved.A quick response to a crisis could support the education system in this case. such as the council. 4. The search for new strategies includes preliminary steps such as diagnosing the causes of failure and determining present organisational needs. in accordance to the democratic process. This recognition could trigger the search for new strategies to prevent terminal decline.b. drawing a lesson afterwards could be an organisational learning act that would help in similar future crises. Turnaround Situation . This problem is severe since it occurs after the failure has struck and although the management admitted its existence it failed to start a recovery process. 7. the leaders of a failing organisation might recognise that a new course of action is required. In LAs.The ideal outcome of the implementation of TMS is turnaround in organisational performance. private-public participation and partnership.Selection of new strategy is not guaranteed. 5. These procedures might delay the implementation of the recovery plan especially if it involves a retrenchment of services which might. The management implements TMS: retrenchment. 5. In addition. However.The selection of new strategies is a formal managerial act that ends in agreed strategies as part of the recovery plan. b. Political considerations like those mentioned above or lack of managerial skills may find the management with no clear and approved strategy. The implementation of TMS could lead to one of the three options presented in stage 7.This stage refers to the core organisational failure. Implementation of New Strategies. 6. a. However. 3. coalition deals. not every search for strategies ends up in selection of strategies. which is permanent failure (Meyer and Zucker.This is the core managerial act during the recovery process. the LA will fall into a combination of low performance and high persistence. and official voting of council members. No Escape Strategy Found. Turnaround. the selection of these strategies has to be approved by other bodies.At a later point in time. .

Turnaround specialists create and implement rolling 100 day work plans detailing the key initiatives being targeted to improve business performance and ensure that the initiatives are implemented in a timely. loss of customers or increased competition. efficient manner. Generally. the more options we have to restructure the business. as well as lateral thinking ability and the ability to stay calm under pressure. The earlier we get engaged. management consulting/CFO.However. The work focuses around improving cash flow. HR skills. . negotiation & stakeholder management. the relevant benchmark is the return to the level of performance that was CORPORATE TURN AROUND STRATEGY In many cases. The key is to critically assess the troubled entity’s business plan and review profit and loss to determine the causes of underperformance such as rising production costs. Many clients seek their advice for general profit improvement. project management. The three key elements of any turnaround are:  financial restructuring. A turnaround practitioner will use skills in insolvency/corporate finance/audit. Turnaround experts do not just work with businesses in trouble. exploring all strategic options and developing a comprehensive turnaround strategy. the businesses that end up in receivership have not heeded early warning signs and sought the right assistance at the appropriate time. communicating with key stakeholders to re-build their support. stabilizing operations. financial modelling. Companies must be willing to admit they need help. Timing is crucial when a company is underperforming. The turnaround specialist will undertake strategic.  operational restructuring and  stakeholder management. there are no clear-cut timescales and criteria to define whether a process has been successful or not. financial and operational reviews to identify areas of underperformance and then work with management to implement strategies to improve the overall performance of the business.

. The key signs that should start senior management’s alarm bells ringing are:             Actual/potential bank covenant breaches Working capital growth outstripping revenue growth Profit warnings/missing forecasts/declining margins General industry downturn or industry consolidation Loss of key management personnel or increase in staff turnover Difficulty in obtaining general finance Management “buying” sales at the expense of margin Creditor or debtor ageing issues Competitor risk ATO and Super arrears Loss of a major customer Post merger integration issues Cash flow is the key Any improvement in working capital – the amount of cash tied up in accounts receivable. the aim is to deliver strategies which rapidly improve profitability and cash flow. inventory and accounts payable .is beneficial. especially in current deteriorated market conditions. if businesses don’t have the right systems and controls in place to manage their working capital.Warning signs to look for These include when management has been too focused on growing revenue without considering the impact on margins and profit. Extra capital can be used to pay down debt. The following is a summary of the 6 essential elements required (in our view) to achieve a successful turnaround. we need to know what drives their business. how to achieve above industry benchmarks and more importantly implement strategies that increase the financial performance and value of their business. or if businesses don’t have the right management team depth of skill and don’t review financial and operational performance regularly. fund capital expenditure. To do this. For specialist performance improvement and turnaround management firms. satisfy seasonal cash requirements or further invest in growth initiatives such as research and development.

inbound logistics. An ability to release internal working capital and secure external funding. Some of the practices need to be used judiciously and some avoided when dealing with a stable company. Revenue enhancement as a turnaround strategy Revenue enhancement focusses on increasing sales through improvement of systems. etc. operations.   . 1. Understanding and applying turnaround practices in non-crisis situations can. Operations management processes . BENEFITS A successful turnaround creates value for all stakeholders and retains employment for many employees and management. new products. Ability to prove business viability by demonstrating the various initiatives that will restore earnings and cash flow 2. and aftersales service to increase turnover through more effective sales force performance.to increase performance on quality and lead time. Studying turnarounds and turnaround practices can help CEOs and business owners maintain and grow healthy and profitable businesses. outbound logistics . Many of the techniques and practices used in turnarounds are good management fundamentals and differ only in emphasis and execution between turnarounds and stable companies. Ability to manage “all” key stakeholders and keep them all moving in the right direction 3. Credible management which might mean making certain replacements to bolster the credibility of management 4. improved functionality and range of products. processes and technology in the primary value chain activities: Customer management processes such as sales and marketing. new markets. Turnaround management is everyday business and its practices and principles should be part of every CEO’s and business owner’s bag of tricks. An ability to maintain or enhance the reputation of the business 5. however. be the difference between long-term success or failure. better promotion. An ability maintain supplier credit and terms 6.1.

 thereby raising customer satisfaction through increased service delivery capability. 2. Asset reduction as a turnaround strategy Working capital reduction is common to any turnaround. and the sales associated with those fall away too. .thereby inhibiting the organisation's ability to create. Increasing sales are required if the distressed company operate below breakeven. We don't believe in cutting costs to the bone . 3. revenue enhancement often follows after cost reduction and/or asset reduction initiatives have generated cash. especially in turnaround situations where salaries and wages represent a large portion of the cost structure. Removing more and more chunks eventually means that some business units or product lines cannot be supported anymore. Cost reduction often involves retrenchment of employees. If the business is in a financial crisis and revenue enhancement cannot be funded. Revenue enhancement takes longer to have effect than cost reduction though. fulfil and administer demand.Research and Development to increase the ability to offer the market new products. Innovation processes . Overhead and direct costs in the primary value chain and support functions are normally reduced to a level that can be borne by the level of sales that will remain after cost cutting. The lead time for revenue enhancement is normally longer than that of cost reduction. Overhead cost reduction takes place in chunks. Cost reduction as a turnaround strategy: Cost reduction is the turnaround strategy having the fastest impact on the bottom line.

cutback action takes the form of shrinking into profitability by means of portfolio disinvestment. Depending on the turnaround situation. reorganisation can be limited to leadership alignment. revenue enhancement. if the distressed company is too far below breakeven. divisions. the extent of reorganisation required goes as far as changes in top management and in the organisational structure. TURNAROUND STRATEGIES 1. Reorganisation is invariably required to ensure success of the other turnaround strategies viz. and outsourcing of value chain activities in order to focus on the remaining profitable or potentially profitable business units or sections of the value chain. Reorganisation as a turnaround strategy: In our experience. reorganisation always forms part of turnaround management. working capital reduction. however. management. the turnaround strategy is normally to shrink the business into profitability. It entails restructuring. organisational structure. strategic repositioning. In this situation. As with cost reduction. Reorganisation deals with all the people issues in the business. reskilling and turnaround leadership revitalisation to yield improved leadership. operations and assets.However. cost reduction or asset reduction. Often. closure and outsourcing of business units involves retrenchment of employees. organisational alignment and culture. restaffing. This involves closure or sale of business units. Such down-scoping represents a kind of strategic repositioning by itself. and better management systems for planning and control of the company. In such cases. . revenue enhancement and cost reduction strategies alone will not suffice. Portfolio disinvestment through selling off assets is often used as mechanism to raise cash for the turnaround.

For the multi-business unit or multi-product line situation.asset structure of the business. to focus on the core business. Debt Re-Structuring C. normally requires investment inter alia in new technology and people. Stakeholders often require short-term results first before finally approving a longer-term plan. Conversely. but which won't show results in the foreseeable future. Strategic repositioning changes the mission and customer value proposition of the distressed company by changing what products are offered to what markets and in which fashion. as in asset reduction. lack of turnaround funding often prohibits this line of action. In doing so it changes the revenue .2. The impact of stakeholder support on turnaround strategy Stakeholders are seldom interested in a turnaround plan that may look good on paper. Investment Basis A. and switching costs exist. For the single business unit business. yielding improved profitability and return on capital employed. Innovation in Products B. shrinking or refocusing the business. however. strategic repositioning entails a compete rethink of why it is in business and how it is to achieve a sustainable competitive advantage. . Strategic repositioning as a turnaround strategy: Strategic repositioning holds the most potential but is the most neglected turnaround strategy according to academic research. strategic repositioning may additionally entail portfolio disinvestment. Growth. if at all. When properly employed. If the business is in severe distress.cost . it may entail growing the portfolio to enhance sales and profitability. strategic repositioning yields the most spectacular and sustainable turnaround results. 3. Valuation 4. Strategic repositioning is therefore in practice more often employed after cost reduction has been successful. It may do so by either growing.

As a result they are able get a better market position in spite of the reductions they made and increase productivity and efficiency. its main focus is to generate revenue with new innovations and change in product portfolio and market position. Selection of turnaround strategies therefore has to heed turnaround phasing requirements.  In turnaround management it is therefore imperative to resolve the financial crisis. some of them manage to overcome the resistance. to reduce financial losses. These procedures are used to generate resources. and prevent financial losses. embark on the major restructuring programme involving revenue enhancement and strategic repositioning using finance of a longer-term nature. extrapolating alternative sources of revenue and modifying the image or the mission of a company.Repositioning The Repositioning strategy. downsizing and outsourcing. 6. Retrenchment The Retrenchment strategy of the turnaround management describes wideranging short-term actions. Despite that many companies are inhibited to perform cutbacks. and rapidly show an impact on cash flow and the bottom line to prove survivability. typically: Stabilise the business. also known as entrepreneurial strategy. cost reduction and working capital reduction using shortterm or internally generated finance. entering new markets. Most practitioners even mention. and execute first-stage restructuring such as reorganisation. This can be done by selling assets. This includes the development of new products. Having gained the support and confidence of stakeholders. Retrenchment is therefore all about an efficient orientation and a refocus on the core business. 5. . abandoning difficult markets. that a successful turnaround without a planned retrenchment is rarely feasible. that caused the poor performance. to stabilize the company and to work against the problems. with the intention to utilize those for more productive activities. The essential content of the Retrenchment strategy is therefore to reduce scope and the size of a business. stopping unprofitable production lines.

Instead they rely on their past experience for running the business or belittle the situation as short-termed. a development of new markets/ projects or an expansion in other business areas. . It is also indispensable to be aware. There are also situations.7. if they change effective organized routines or introduce new administrative overheads and guidelines. the organisation discredits and the resources left will run out as time goes by. like the removal of efficient routines or resources. which are not able to think impartial about certain problems. where CEO’s do notice that a current strategy isn’t successful as it should be. where top managers or the Chief Executive Officer (CEO) are replaced by new ones. that new CEO’s can cause problems. This turnaround strategy is used. As result qualified employees resign. which are supposed to end in a successful managerial performance. On the other hand are innovative core competencies implemented.Replacement Replacement is a strategy. For an example. where the declining process will be continued. which conclude in an increase of knowledge and a stabilization of the company value. because it is theorized that new managers bring recovery and a strategic change. The first step here is to analyse the existing structures within the organisation. Is a company against a Replacement of a leader. that they are capable or even qualified enough to accomplish a turnaround. as a result of their different experience and backgrounds from their previous work. Replacement is especially qualified for situations with opinionated CEO’s. The established leaders fail therefore to recognize that a change in the business strategy is necessary to keep the company viable. could this end in a situation. But this hasn’t to imply. This examination may end with a closure of some divisions. Renewal With a Renewal a company pursues long-term actions. which are obstructive to achieve a turnaround. A Renewal may also lead to consequences within a company. 8.

This kind of action is more precisely referred to as a "merger of equals. target companies will often agree to be purchased when they know they cannot survive alone. that's the reasoning behind M&A. often of about the same size. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies.Hurdles or Challenges Three critical hurdles or challenges that management faces in any repositioning program 1. the buyer "swallows" the business and the buyer's stock continues to be traded. problem. This rationale is particularly alluring to companies when times are tough. When one company takes over another and clearly established itself as the new owner. From a legal point of view. cost-efficient company. the target company ceases to exist. Because of these potential benefits. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous. Strong companies will act to buy other companies to create a more competitive. Design: What type of restructuring is appropriate for dealing with the specific challenge. or opportunity that the company faces? 2.LIVE EXAMPLE Defining M&A The Main Idea One plus one makes three: this equation is the special alchemy of a merger or an acquisition. . agree to go forward as a single new company rather than remain separately owned and operated.at least. Execution: How should the restructuring process be managed and the many barriers to restructuring overcome so that as much value is created as possible? 3. Marketing: How should the restructuring be explained and portrayed to investors so that value created inside the company is fully credited to its stock price? B. the terms merger and acquisition mean slightly different things. the purchase is called an acquisition. Two companies together are more valuable than two separate companies . a merger happens when two firms." Both companies' stocks are surrendered and new company stock is issued in its place. MERGER AND ACUISITION. In the pure sense of the term.

employees and shareholders. actual mergers of equals don't happen very often. when the target company does not want to be purchased . deal makers and top managers try to make the takeover more palatable. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. even if it's technically an acquisition. In practice. In other words. Apart from this increase in volume of  . one company will buy another and. This is because any kind of merger actually improves the purchasing power as there is more negotiation with bulk orders. as part of the deal's terms. simply allow the acquired firm to proclaim that the action is a merger of equals. Usually. by describing the deal as a merger. and a new company.that is. Apart from that staff reduction also helps a great deal in cutting cost and increasing profit margins of the company.it is always regarded as an acquisition. Being bought out often carries negative connotations. the resulting business is sure to gain tremendous profit in terms of financial gains and work performance. Cost efficiency is another beneficial aspect of merger and acquisition. was created. The key factor contributing to the explosion of this innovative form of restructuring is the massive number of advantages it offers to the business world. the real difference lies in how the purchase is communicated to and received by the target company's board of directors. however. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. When two or more companies get together and are supported by each other. therefore.For example. Merger and acquisition has become the most prominent process in the corporate world. Following are some of the known advantages of merger and acquisition:  The very first advantage of M&A is synergy that offers a surplus power that enables enhanced performance and cost efficiency. DaimlerChrysler. But when the deal is unfriendly . both Daimler-Benz and Chrysler ceased to exist when the two firms merged.

From the business structure perspective.   Types of Mergers and Acquisitions There are many types of mergers and acquisitions that redefine the business world with new strategic alliances and improved corporate philosophies. . Horizontal Merger This kind of merger exists between two companies who compete in the same industry segment.  With a merger it is easy to maintain the competitive edge because there are many issues and strategies that can e well understood and acquired by combining the resources and talents of two or more companies. A combination of two companies or two businesses certainly enhances and strengthens the business network by improving market reach. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition. In this form. some of the most common and significant types of mergers and acquisitions are listed below: 1. This offers new sales opportunities and new areas to explore the possibility of their business. This enables the merged firm to take advantage of hi-tech technological advancement against obsolescence and price wars. and enhanced profits. increased capital. With all these benefits. It is like encompassing all the requirements and products of a single industry segment. a merger and acquisition deal increases the market power of the company which in turn limits the severity of the tough market competition.production results in reduced cost of production per unit that eventually leads to raised economies of scale. the companies in merger decide to combine all the operations and productions under one shelter. Vertical Merger Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. 2. The two companies combine their operations and gains strength in terms of improved performance.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. 4. this kind of merger occurs when one company purchases another. Acquired assets can be written-up to the actual purchase price. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. Like mergers. and the difference between the book value and the purchase price of the assets can depreciate annually.As the name suggests. it may be different in name only. 6. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements. business markets. a brand new company is formed and both companies are bought and combined under the new entity. acquisitions . This is just a unification of businesses from different verticals under one flagship enterprise or firm. Co-Generic Merger Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes. Market-extension merger Two companies that sell the same products in different markets.With this merger. or basic required technologies. o Consolidation Mergers . There are two types of mergers that are distinguished by how the merger is financed. an acquisition may be only slightly different from a merger. We will discuss this further in part four of this tutorial. Conglomerate Merger Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. The tax terms are the same as those of a purchase merger. 5. Acquisitions As you can see. reducing taxes payable by the acquiring company. Each has certain implications for the companies involved and for investors: o Purchase Mergers . Product-extension merger Two companies selling different but related products in the same market. the sale is taxable. In fact.3. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. The purchase is made with cash or through the issue of some kind of debt instrument.

Another type of acquisition is a reverse merger. Therefore. which is common in smaller deals. . a deal that enables a private company to get publicly-listed in a relatively short time period. usually one with no business and limited assets. as in some of the merger deals we discuss above. It is a technical concept that needs to be estimated carefully. all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts.are actions through which companies seek economies of scale. is for one company to acquire all the assets of another company. efficiencies and enhanced market visibility. and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure. Other times. which means that Company Y will have only cash (and debt. Of course. stock or a combination of the two. A conflict in the choice of technique is the main reason for the failure of many mergers. the asset value can be determined both at the market price and the cost price. Valuation The number as well as the average size of merger and acquisition deals is increasing in India. In an acquisition. a company can buy another company with cash. and all parties feel satisfied with the deal. For instance. The use of different valuation techniques and principles has made valuation a subjective process. Unlike all mergers. The merger and acquisition valuation is the building block of a proposed deal. Company Y becomes merely a shell and will eventually liquidate or enter another area of business. Another possibility. The private company reverse merges into the public company. if they had debt before). The success of a merger or acquisition depends on whether this synergy is achieved. it is important that the merging parties should first discuss and agree upon the methods of valuation. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company. During post liberalization. acquisitions are more hostile. Company X buys all of Company Y's assets for cash. Acquisitions are often congenial. increase in domestic competition and competition against cheaper imports have made organizations merge themselves to reap the benefits of a large-sized company.there is no exchange of stock or consolidation as a new company. all acquisitions involve one firm purchasing another .

Discounted Cash Flow (DCF) . . This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets . Naturally. while the buyer will try to get the lowest price that he can. Naturally. acquire property and get the right equipment. an acquiring company makes an offer that is a multiple of the earnings of the target company. but deal makers employ a variety of other methods and tools when assessing a target company. both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible. Here are just a few of them: 1. while being aware of the price-to-sales ratio of other companies in the industry. they must ask themselves how much the company being acquired is really worth. The acquiring company can literally order the target to sell at that price. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill – capital expenditures – cash taxes change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). There are. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. Enterprise-Value-to-Sales Ratio (EV/Sales) . but few tools can rival this valuation method.The following are two examples of the many comparative metrics on which acquiring companies may base their offers: A.With the use of this ratio.are hard to value and develop. many legitimate ways to value companies. Replacement Cost . 2. DCF is tricky to get right. again.Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them. 3. The most common method is to look at comparable companies in an industry. B. For simplicity's sake. suppose the value of a company is simply the sum of all its equipment and staffing costs. or it will create a competitor for the same cost.A key valuation tool in M&A. discounted cash flow analysis determines a company's current value according to its estimated future cash flows. however.people and ideas .With this ratio. acquisitions are based on the cost of replacing the target company. In order to do so. the acquiring company makes an offer as a multiple of the revenues.In a few cases. Comparative Ratios . Price-Earnings Ratio (P/E Ratio) . it takes a long time to assemble good management. Admittedly.

there are the extra costs that the parts of the business face if separated. can be very attractive options for companies and their shareholders. and help the parent's management to focus on core operations. making it more difficult to attract interest from institutional investors. When a firm divides itself into smaller units. Meanwhile." These corporate restructuring techniques. Most importantly. investors are better equipped to gauge the value of the parent corporation. possibly making it harder to tap credit markets and costlier finance that may be affordable only for larger companies. And the smaller size of the firm may mean it has less representation on major indexes. can help a company raise additional equity funds. separating a subsidiary from its parent can reduce internal competition for corporate funds. The parent company might attract more investors and. there is a publicly traded stock to motivate and reward them. or demergers. especially because their efforts are buried in the firm's overall performance. For instance. . tracking stock or carve-out is that "the parts are greater than the whole. shareholders get better information about the business unit because it issues separate financial statements. Disadvantages That said. the idea of getting smaller might seem counterintuitive. Advantages The rationale behind a spinoff. For employees of the new separate entity. ultimately. With separate financial disclosure. the division of expenses such as marketing. it may be losing the synergy that it had as a larger entity. more capital. A break-up can also boost a company's valuation by providing powerful incentives to the people who work in the separating unit. But corporate break-ups. For investors. Also. administration and research and development (R&D) into different business units may cause redundant costs without increasing overall revenues.Break Ups As mergers capture the imagination of many investors and companies. This is particularly useful when a company's traditional line of business differs from the separated business unit. de-merged firms are likely to be substantially smaller than their parents. which involve the separation of a business unit or subsidiary from the parent. Stock options in the parent often provide little incentive to subsidiary managers. that's great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company.

Each has advantages and disadvantages for companies and investors. also known as a divestiture. It is very important to convert business strategies to set of drivers or a source of motivation to help the merger succeed in all possible ways. Sell-Offs A sell-off. MERGERS AND ACQUISITION STRATEGIES Strategies play an integral role when it comes to merger and acquisition.  . Some take experience from the past associations. spinning off a unit to existing shareholders or issuing tracking stock. Every company has different cultures and follows different strategies to define their merger. As a result. The company should also understand and evaluate all the risks involved and the relative impact on the business. market share. The market may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. There should be a strong understanding of the intended business market. doing an equity carve-out. A sound strategic decision and procedure is very important to ensure success and fulfilling of expected desires. and some hear their own voice and move ahead without wise evaluation and examination. Following are some of the most essential strategies of merger and acquisition that can work wonders in the process:  The first and foremost thing is to determine business plan drivers. All of these deals are quite complex.Restructuring Methods There are several restructuring methods: doing an outright sell-off. and the technological requirements and geographic location of the business. some take lessons from the associations of their known businesses. management and the board decide that the subsidiary is better off under different ownership. is the outright sale of a company subsidiary. Normally. sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy.

The integration process should be taken in line with consent of the management from both the companies venturing into the merger. board members. Many companies around the world have merged with each other with a motive to expand their businesses and enhance revenue. stakeholders. employee selection. Dalmia Cement acquiring Orissa Cement.16 billion. and Osler Hoskin & Harcourt LLP in Toronto. Sullivan & Cromwell LLP in New York. Apart from these there are other successful mergers in India as follows: . Then there is an important need to assess the market by deciding the growth factors through future market opportunities. ensure that all those involved in the merger including management of the merger companies. Restructuring plans and future parameters should be decided with exchange of information and knowledge from both ends.    MERGERS AND ACQUISITIONS IN INDIA Global M&A is one of the most happening and fundamental element of corporate strategy in today's world. and investors agree on the defined strategies. All these are recent merger and acquisition 2010 valued at about USD 2. Mallesons Stephen Jaques in Sydney. This involves considering the work culture. Once approved. There are domestic deals like Penta homes acquiring Agro Dutch Industries. Edelweiss Capital acquiring Anagram Capital. Slaughter & May in London. Recent mergers and acquisitions 2011 are Lipton Rosen & Katz in New York. and customer's feedback. the merger can be taken forward to finalizing a deal. ACC taking over Encore Cement and Addictive. recent trends. At the end. In the span of few years there are many companies coming together for betterment across the globe. Even in India merger and acquisition has become a fashion today with a cut throat competition in the international market. and the working environment as well.

These two acquisitions were the India-based Associate Cement Companies (ACC) and the UK-based Aggregate Industries (AI).000 tons of pure white salt annually. This merger between the two made it convenient and easy for the Reliance power to handle all its power projects as it now enjoys easy availability of natural gas. Merger of Reliance Power and Reliance Natural Resources with a deal of US $11 billion is another biggest deal in the Indian industry. This is one of the most successful recent mergers and acquisitions 2010 that made Tata even more powerful with a strong access to British Salt's facilities that are known to produce about 800.7 billion to set new benchmarks in the telecom industry. the deal with ACC was relatively more complex. While the deal with AI increased shareholder value and involved two parties.     Holcim's Acquisitions in 2005 Abstract: The case explains the two acquisitions made by Holcim. Holcim entered into an alliance with Gujarat Ambuja Cement . the Dental Corp at about Rs 450 Crore. Tata Chemicals took over British salt based in UK with a deal of US $ 13 billion. Zain is known to be the third largest player in Africa and being acquired by Airtel it is deliberately increasing its base in the international market. ICICI Bank's acquisition of Bank of Rajasthan at aout Rs 3000 Crore is a greta move by ICICI to enhance its market share across the Indian boundaries especially in northern and western regions. in 2005. Airtel acquired Zain in Africa with an amount of US $ 10. Fortis Healthcare acquired Hong Kong's Quality Healthcare Asia Ltd for around Rs 882 Crore and is now on move to acquire the largest dental service provider in Australia. the Switzerland-based cement company.

In 2005. was one of the world's leading suppliers of cement. Issues: » Why companies go in for acquisitions alliances. Holcim was also involved in consulting and trading services related to engineering.215 million and a net income of CHF 914 million. Holcim's acquisition strategy was based on the level of maturity of the market where the acquired companies were located . Switzerland-based Holcim Group (Holcim).Limited (GACL) to acquire ACC. which was a supplier of aggregates. asphalt and ready-mix concrete. » How market maturity of a company affects its acquisition decisions. AI. » How strategies alliances/acquisitions create value. Holcim acquired Aggregate Industries (AI) based in Leicestershire. the company had sales of CHF 13. The case explains how the deal was structured and how it gave the companies involved certain operational advantages. The case also covers the criticisms that were raised against the deal. the Glaris. UK and Associated Cement Companies Ltd (ACC) in India. In 2004. It held majority and minority stakes in a number of companies in more than 70 countries. aggregates and ready-mix concrete. Holcim adopted the inorganic growth strategy and was on an acquisition spree in the 1990s and 2000s. Introduction In 2005. Details pertaining to other acquisitions carried out by Holcim in the late 1990s and the early 2000s are also mentioned in the case. added value to Holcim's operations through integration in mature markets like the US .

It strengthened its position as an integrated supplier of building materials by expanding its market presence through strategic acquisitions. In 2001. where demand for cement was increasing at a higher pace than in Europe and the United States BACKGROUND Holcim was founded in 1912 in the village of Holderbank7 in Switzerland. Germany. In the same year the company also acquired a Cyprus-based cement company.8%. In January 2004. In 2003. KG at Baden-Wurttemberg. aggregates/concrete and other products/services. It invested in African countries like South Africa. it increased its stake in PT Semen Cibinong Tbk8 from 12.5% to 75%. the company took over Cementos de Hispania SA of Spain.. while ACC was meant to bring in sustained revenues to Holcim due to the potential of the cement industry in an emerging economy like India. and Egypt in the 1930s. The following decades saw the company entering the Asia Pacific region. Holcim announced that it has increased its stake in the Moscow-based Alpha Cement JSC to 68. Acquiring AI .. In 2004. In the same year. In 2005. Holcim acquired AI and ACC. and in a decade it expanded to other European markets by investing in a number of cement companies. The company's operating segments included cement/clinker. Holcim implemented a longterm growth strategy. Holcim went ahead with the acquisition of Plevenski Cement AD from the Greece-based Titan Cement Company SA in December 2003. the company also acquired Rohrbach Zement & Co. Over the years Holcim has increased its stake in a number of companies through which it has been operating in a number of markets. In Bulgaria. Holcim acquired 70% of Novi Popovac Cement Factory's share capital in Serbia. Holcim invested in the North American markets. Bogaz Madencilik. In the 1950s and 1960s.and UK.

Outlook Not only did the deals with AI and ACC result in Holcim's entry into the two attractive markets of UK and India." 3 .Roy Disney Jr.8 million tonnes of asphalt.0 million cubic metres of ready-mix concrete and 3. AI produced 66. Acquiring ACC Background of the Deal The cement industry in India was so highly fragmented that even in 2004. In 2003. "Animation has always been the heart and soul of the Walt Disney Company and it is wonderful to Bob Iger and the company embrace that heritage by bringing the outstanding animation talent of the Pixar team back into the fold. The two acquisitions helped Holcim to achieve increased capacity and sales in all the product and geographic segments. the company employed over 8.7 million tonnes of pre-cast concrete products. but it also brought in immediate revenues to Holcim.459 million from £1.378.1 million in 2003 from £134.600 people working in more than 650 locations by the end of 2003. Introduction . AI's revenues increased to £1. US. With an installed capacity of approximately 150 MT in 2005. the 146.4 million tonnes of aggregates.5 million in 2002.2 million in 2002. Norway and Channel Islands.38 MT of installed capacity under large plants category was controlled by as many as 55 companies. in 2006. With operations in UK. 11.About AI In 2003. 7. Half of the company's revenues came from the US. the Indian cement industry in 2004-05 was the second largest cement producer in the world accounting for approximately 6% of the global production. The company reported a seventh successive year of profit with profit before tax increasing to £140.

characters. Creative Strategies said. Asserting this. Disney and Pixar were to work from their separate headquarters at Burbank. While all of Pixar's films like Toy Story. But Robert Iger (Iger). (Apple). Disney's animation films like Treasure Planet. He would also become a member of Disney's Board of Directors. owing to differences with Disney's then CEO Michael Eisner (Eisner). for US$ 1. the major shareholder in Disney with an equity stake of approximately 7%. according to Nelson Gayton. "This acquisition combines Pixar's preeminent creative and technological resources with Disney's unparalleled portfolio of world-class family entertainment. respectively. theme parks and other franchises."Analysts said that the deal was more important to Disney than to Pixar. The deal expected to be finalized by May 2006 would make Steve Jobs (Jobs). This seemed expensive for Disney.Walt Disney Company (Disney) announced that it would acquire its animation partner. 2006. especially when compared to Viacom's acquisition of DreamWorks SKG in December 2005. "His biggest impact will be to . Pixar had announced that it would partner with another distribution company in 2006. which had 59 films.4 billion in stock. Home on the Range and Brother Bear had performed below expectations. Disney got a library of six Pixar films.4 billion deal. However. and Emeryville (both in California). Pixar for US$ 7. Even after the merger.On January 24. In the US$ 7. In January 2004. resulting in vast potential for new landmark creative output and technological innovation that can fuel future growth across Disney's businesses. 2005. who took over from Eisner on September 30. "Any premium that Disney might have paid for the Pixar acquisition must also be evaluated in light of the nature of the animation content that Pixar produces and the distribution possibilities it offers via new technologies. Professor at Wharton. Disney had been in partnership for producing and distributing animation films with Pixar since 1991." Industry analysts were of the view that. apart from gaining access to Pixar's technology. Disney's press release said.6% equity stake in Pixar. Tim Bajarin. revived talks with Pixar and finally succeeded in acquiring it. CEO of Apple Computer Inc. The Incredibles and Finding Nemo were successful. President.6 billion. This was because Jobs had a 50. Some analysts felt that the deal was priced a bit higher than expected. the US based media and entertainment company . it was important that Disney got a person of the caliber of Jobs on its board.

Mintz had poached Walt's employees to create an Oswald's series in his own studio. He visualized a new character in the form of a mouse and planned to name it 'Mortimer. Alice's Wonderland. Walt also learned that he did not legally own the rights for Oswald. failed to impress the audience who felt that Mickey resembled Oswald closely. After his break-up with Mintz." Background Note Disney In 1923. Walt refused and parted ways. Walt's first animation film featuring Mickey. bringing with him an animation film. the name was changed to Walt Disney Studio.500. Later. after making Alice Comedies for four years. This marked the beginning of Disney Brothers Cartoon Studio.' but on his wife's suggestion changed it to 'Mickey. In 1927. Plane Crazy (released in May 1928). M. After a year. However.' This marked the birth of the world famous 'Mickey Mouse' (Mickey). 1923. Winkler had handed over the business to her husband Charles Mintz (Mintz). On October 16. by that time. but couldn't find distributors. Walt created the second Mickey feature film titled The llopin' Gaucho. agreed to distribute the Alice Comedies and bought each character for US$ 1. it was not easy for Walt to sell the new Mickey to the distributors as it had to compete with the popular Felix the Cat and Oswald. Walt wanted to create a character stronger than Oswald. as Oswald gained popularity. When Mintz demanded that Walt should work exclusively for him. Initially. a distributor.J Winkler (Winkler). . Walt Elias Disney (Walt) arrived in California from Kansas City. Walt tried to re-negotiate his contract for higher money. with Walt's brother Roy Disney (Roy) sharing an equal partnership in the venture. By this time. Walt created a new character called Oswald the Lucky Rabbit to start a new animation series.help guide Disney into the digital age and be the mediator of this major media company's content to the world of next-generation digital content delivery.

It started with five shows which included the popular shows Desperate Housewives and Lost. Analysts felt that Iger would find it difficult to strike a new deal as proposed by Jobs as it was heavily loaded in favor of Pixar. Disney extended its partnership with Pixar to a co-production agreement in 1997. the Disney Board elected Iger as the company's CEO to succeed Eisner on September 30. Iger got a call from Jobs who hinted at a possible discusion on working together again. Disney was to get 87% of the distribution proceeds.iTunes. The film was a huge success and generated over US$ 360 million in worldwide revenues. With this rapprochement. Including distribution fees. Iger adapted the proposal his own way. 2005.. According to the agreement. Jobs also started re-negotiating on the Disney-Pixar agreement.. Pixar was to receive compensation based on the revenue obtained from distributing these films and related products. Disney entered into an agreement with Pixar for developing and producing three computer animated feature films. Analyst felt that the agreement gave Pixar an expert partner in the film business with great marketing capabilities The first film under the agreement was Toy Story which was released in November 1995. The Acquisition In March 2005. Iger said that the deal with Apple was finalized in just three days. However. In October 2005. .The Disney-Pixar Partnership In May 1991. Iger and Jobs signed a deal to sell the past and current episodes of television shows of its ABC and Disney channels through iTunes. Disney agreed to market and distribute these movies. under which Pixar agreed to produce five original computer-animated feature films. He asked for Disney's content to be distributed over the Internet through Apple's online store . in a span of ten years. It was the first computer animated feature film that was of one hour and twenty one minutes duration. After the release of Toy Story. Meanwhile. Jobs was pleased with the Iger's suggestion of linking up to offer videos through iTunes. there was speculation that Disney might acquire Pixar. Disney agreed to produce movies to be developed and directed by Pixar's John Lasseter.

not only because of where Disney's previous distribution relationship with Pixar seemed headed." While there were several possible synergies that could arise from the acquisition. "Iger just put a gun to his head. like theme parks and television. but also because of Pixar's potential value to Disney's 'family entertainment' brand and assets. Nelson Gayton. . might make Iger second to the powerful and experienced Jobs. Further. Its first full computer animation film Chicken Little (released in November 2005) fared only marginally well. "I believe that the acquisition of Pixar was of utmost strategic importance to Disney. the acquisition gave it ownership of the world's most famous computer animation studio and its talent. the creative genius behind Pixar's block busters. Disney would get the necessary push in creativity which it seemed to lack in recent times. Analysts said that having Jobs on the Disney board would certainly give the company the necessary technology edge and direction. The rise of Jobs to the Disney board as the single largest shareholder could become a major worry for Iger as Jobs was slightly unpredictable. who had been at the helm for more than twenty years. in charge of the new division.. The merger. An industry analyst termed the move bold but predicted that Iger might leave Disney in a year. The Road Ahead On the several benefits Disney would derive. with Lasseter.The Rationale Analysts said this deal was more important to Disney than to Pixar. there were also some potential trouble spots for Disney. in place of the partnership with Pixar. saying." Analysts felt Iger had to be careful as he was still trying to create his own identity after being under the shadow of Eisner. For Disney.. The deal would bring the technology company Apple (through Steve Jobs) closer to Disney. Professor at Wharton School of Business said. and Iger could further increase the digital content that was being offered through Apple. that feed off this brand. The timing was also perfect as its own animation films had failed one after another. with whom it had teamed up to create block busters since the 1990s.