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“One plus one makes three: this equation is the special alchemy of a merger or an acquisition”

Presented by,

Why they have worked so far?

 Mergers  Merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated.  Acquisitions  When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Types of Mergers
 Horizontal mergers  Two firms operating in the same kind of business activity, usually in the same stage of production.  Main purpose to obtain economies of Scale. E.g. GlaxoSmithKline Beecham merger  Vertical mergers  Two or more companies at different stages of Production  Main purpose is reduction of inventories and working capital investment. E.g. Nocil- Polyolefins

Types of Mergers
 Conglomerate mergers  Firms engaged in unrelated business activities  Main purpose is risk reduction through diversification as well as utilization of financial resources and increased leverage. E.g. Brook Bond Lipton- HLL  Reverse mergers  Merger between a healthy and a sick unit  Main purpose to take advantage of tax savings under the Income Tax Act (under Section 72 A)

Why mergers worked in India?
 Real big mergers have happened within cohesive

business groups. E.g. RCL and RIL, HLL and BBLIL, ICICI and ICICI Bank.  Fewer post merger power struggles and internal clashes

Why Companies seek to merge?
 As a fastest route to growth
 Achievement of corporate goals and objectives  Cost of building an organisation may exceed the cost

of acquisition  Fewer risks (leap-frogging effect of Acquisitions)  Tax advantages and increased leverage

Merger Motives
 Efficiency Theory
 More efficient firms acquire less efficient firms and realize

gains though improved managerial efficiency. E.g. EnfieldEicher Motors  Market Power Theory  Merger to have increased market power leading to collusion and monopoly. E.g. Aban Lloyd- Hitech Drilling  Operating synergies Theory  Merger achieves levels of activity at which economies of scale or scope may be achieved through various synergies. E.g. HLL-Brook Bond Lipton

Merger Motives
 Financial Synergies
 Merged entity will have lower cost of capital due to lower cost

of internal funds as also due to higher leveraging capacity. E.g. Mafatlal Fine Spinning- Mafatlal Industries  Tax motivated Mergers  Tax savings achieved by merging a high-tax-bracket company with a loss making or low-tax-bracket company. E.g. Murugappa Electronics- EID Party  Increasing Promoters Stakes  Increases the promoters stakes and hence helps in vertical integration. E.g. RPPL-RPEL-RIL (RIL stakes increased from 23% to 33%)

Measuring Post merger Performance
 Operating synergies
 Increase in sales, earnings or margins or reduction in cost.  Studied through increase in operating profit margins (OPM), net

profit margins (NPM), return on capital employed (ROCE) and cost of production (COP) as a percentage of sales.  Financial Synergies  Increased cash flows or leverage.  Studied through operating cash flows (OCF) and debt/equity ratio (D/E).  Risk reduction  Studied through variability of earning taken as the average profit after tax (PAT) fro which standard deviation and coefficient of variation (COV) are considered as representative measures.

Measuring Shareholders Returns
 Parameter used  Return on Equity (ROE)  ROE = Net profit margin x Asset Turnover x Equity Multiplier

“Though synergetic motives drive most mergers, they are not always achieved, they do not necessary translate into improved shareholders returns. However there is high probability of shareholders benefitting if the synergies are actually realized post merger.”

Customer Specific Pricing
 Technology has sharpened the pricing tool and has  Expanded the breadth and depth of information about consumers.  Made possible the instantaneous delivery of customized pricing offers to individual customers.  Recent advances in Information Technology have greatly sharpened the pricing tool, permitting even finer consumer segmentation.

The Pricing process
 Gathering and Analysis of Data  Active data collection: consumers provide personal data in exchange for information or services. E.g. Pepsi and Marlboro.  Passive data collection: underlying technology itself provides the information without customer’s active participation.

 Designing and Making pricing Offers  Specific price – Specific customer – Specific time Triggers  Possible with advanced technology ( internet, personal wireless devices, chip based transmitting devices.)

Gathering and Analyzing Data  Reversing the cycle of the traditional pricing process and gauging a customer’s likely price threshold.  Companies learning to organize and analyze their enormous collections of customer data. Designing and making pricing offers  Individualized delivery.  Businesses can create and deliver pricing offers in response to an increasingly wide array of triggers.

From Promise to Advantage
 Think “big picture”
 Embrace the right technology  Plan for broad operational challenges  Prepare customers  Anticipate regulatory hurdles  Count on a bumpy ride