Introduction to Corporate Restructuring

Corporate Restructuring
Activities related to expansion or contraction of a

firms operations or changes in its assets or financial or ownership structure are referred to as corporate restructuring.
Corporate restructuring can be defined as any

change in the business capacity or portfolio that is carried out by an inorganic route or a change in the capital structure of a company that is not a part of its ordinary course of business or any change in the ownership of or control over the management of the company or a combination thereof.

Three parts of Corporate restructuring

Change in the business capacity or portfolio

by an inorganic route Acquisition of Jaguar Land rover from Ford by Tata Motors, Merger of RPL with RIL, Acquisition of L&T cement division as a separate company (Ultratech cement) by Grasim, etc. Change in the capital structure IPO, FPO, buyback of shares Change in the ownership or control over its management Merger, demerger, acquisition, sell-off, delisting

Corporate restructuring
The term corporate restructuring encompasses three

distinct, but related, groups of activities; expansions including mergers and consolidations, tender offers, joint ventures, and acquisitions; contraction including sell offs, spin offs, equity carve outs, abandonment of assets, and liquidation; and ownership and control including the market for corporate control, stock repurchases program, exchange offers and going private (whether by leveraged buyout or other means).

Activities not termed as Corporate restructuring

Initial creation of a corporate structure

Change in the internal command structure or

hierarchy Change in the business processes Reengineering Downsizing Other activities like ERP, TQM, Franchising, Networking and Licensing

Main forms of corporate restructuring

Mergers and Acquisitions

Divestiture
Demerger (spin off/split up/split off) Carve out Joint venture Buy-back of shares Delisting of shares LBO/MBO

CHAPTER 1

Why Corporate Restructuring?

Increased Competition Advent of a new and more efficient
technology

Emergence of new markets Emergence of new classes of consumers Demographic changes Business cycles

Wise organizations undertake changes to increase their cutting edge over the competitors and enhance their leadership position.

Reasons for corporate restructuring

Economies of scale

Operating economies/cost reduction

Synergy Reduction in Tax Liability Managerial effectiveness Utilization of Surplus funds Change in fiscal and Government Policies Liberalization, Privatization and Globalization

Reasons for corporate restructuring

Core Competencies

Enhancing Shareholder Value

Incompatible Company Objectives Evolving Appropriate Capital Structure

Economies of scale
Economies of scale arise when increase in

volume of production leads to a reduction in cost of production per unit. When two or more companies combine, certain economies are realized due to the larger volume of operations of the combined entity. These economies arise due to increased production capacity, strong distribution networks, effective engineering services, R&D facilities and others.

Operating Economies
A combination of two or more firms may result in

reduction of costs due to operating economies. A merged firm may avoid overlapping. Various functions may be consolidated and duplicate channels may be eliminated by implementing proper planning and control system

Synergy
Synergy refers to a situation where the combined

firm is more valuable than the sum of the individual combining firms. Synergy may arise from enhanced managerial capabilities, creativity, innovativeness, R&D, Productivity improvements, elimination of duplication etc.

Reduction in Tax Liability

In India profitable company is allowed to merge

with a sick company to set-off against its profits, the accumulated losses and unabsorbed depreciation. When Polyleofins Industries which supplied 40,000 tones of ethylene to NOCIL, merged with NOCIL, a substantial savings on sales tax and excise duty was achieved

Managerial Effectiveness
One of the potential benefits of merger is an

increase in managerial effectiveness. This may occur if the existing management team, which is performing poorly, is replaced by a more efficient one.

Utilization of Surplus funds

A firm in a mature industry may generated a lot of

cash but may not have opportunities for profitable investment. Such a firm may have to distribute more dividends or even buy back its shares. But most of the managements make further investments even though they many not be profitable. In such a situation a merger with another firm involving cash compensation often represents a more efficient utilization of surplus funds.

Change in Fiscal and Government Policies

De-regulation/De-control have led many

companies to tap new markets and customer segments and at the same time has left the domestic market to survive on their own due to withdrawal of government protection. Domestic firms need to face competition from powerful global giants. Hence to survive in the changed business environment, companies have to pursue restructuring . For e.g. adoption of LPG policy by India in 1991.

Core Competencies
Core competency results in restructuring

It is a specific factor that a business perceives to

be central to its functioning. Core competencies are the collective learning in organizations, involving co-ordination of diverse production skills and integration of multiple streams of technologies. Core competencies often provide impetus for many companies to restructure.

Enhancing Shareholder Value

Every company aims at enhancing shareholder

value. Value enhancing companies will attract investors while shareholders will shy away from value destroying companies. Value destroying companies need to restructure in order to survive, grow and generate adequate returns that meet investors expectations.

Incompatible Company Objectives

When company objectives are no longer

compatible with the current portfolio, restructuring is planned. Decline in demand, high competitive pressures, and quicker product-line obsolescence signify such incompatibility. Such companies face a declining revenue and market share, and difficulty to survive.

Evolving Appropriate Capital Structure

Companies are either over-capitalized or under-

capitalized opt for restructuring which help them to evolve a balanced capital structure. Minimizes the cost of capital and increases earnings

Main Forms of corporate restructuring

Expansion Contraction

Mergers and Acquisitions 2. Tender Offers 3. Asset Acquisition 4. Joint Venture

1.

1.
2. 3. 4. 5.

Spin-off Split-off Divestitures Equity carve out Split-up

Main Forms of corporate restructuring

Corporate Control
Anti take-over

Change in Ownership Structure

Leveraged Buyouts Master Limited

defences Share Repurchase Exchange offers Proxy contents

Partnerships Going private ESOPs

Mergers and Acquisitions

Merger: It is defined as the fusion of two or

more companies through direct acquisition of the net assets of the others(s). It results when the shareholders of more than one company, usually two, decide to pool the resources of the companies under a common entity. Acquisition: It is a strategy where one firm buys a controlling or 100% interest in another firm. The buying firm is known as acquiring and the seller is known as target company.

Types of Merger
Horizontal Merger

Vertical Merger
Conglomerate Merger Market Extension Merger Product Extension Merger Reverse Merger Forward triangular merger Reverse triangular merger

Horizontal Merger
A horizontal merger involves two firms operating

and competing in the same kind of business activity. Horizontal merger is when two equally competing companies combine together to form a single entity. It is a part of the market consolidation process. Example: Ford announced the sale of the two British iconic cars to Tata Motors Ltd. Ford acquired Jaguar for $2.5 billion in 1989 and Land Rover for $2.75 billion in 2000 but put them on the market after posting losses of $2.16 billion in 2006 the heaviest in its 103-year history. The loss of the two products were Rs.1,777 crore in

Examples of Horizontal Merger

HDFC Banks merger with Centurion Bank of

Punjab and Walt Disney Companys acquisitions of 17.2% stake in UTV Software Communication to increase its stake to 32.10% in the company. Daimler-Benz and Chrysler, HP-Compaq are also examples of horizontal mergers.

Roll Up
Roll up is when a large company in the industry

start acquiring small companies from the same industry where it is operating. For example Microsoft acquired small companies in software market like Forethought, Fox software, NextBase, Netwise, eShop, Dimension X, cooper and peters, LinkAge Software, Zoomit, Sendit, NetGames etc. Google acquired companies like Outride, Picasa, Where2, YouTube, Jot spot, Feed Burner, Peak Stream, Panoramio, Adscape, Neven Vision etc.

Vertical Merger
Vertical merger occurs when two companies in

the same industry but at different stages of production cycle combine. Examples: General Motors merged with Bridgestone Tyres and Michelin Tyres.

Conglomerate Merger
A merger between firms that are neither

competitors nor potential or actual customers or suppliers of each other is called Conglomerate Merger. It involves firms engaged in unrelated business activities. Example: Time Warner AOL, Asian PaintsBerger International, Ranbaxy-Nippon Chemiphar Co.Ltd, Coca cola company bought Columbia Pictures etc.

Differences between Mergers and Acquisitions

Characterist ics Key decision Merger Usually by consensus Acquisition May be forced

Firm size
Source of finance

Generally between firms of Generally by a large-sized firm equal size

Jointly financed by the combining firms Completely financed by the acquiring firm which is generally large in size

Executed by Exchanging shares of the new legal entity for an equal number of shares in the partner companies or stock swaps
Result Formation of a new legal entity

Paying cash or by issuing shares in a specified proportion

Target firm ceases to exist

Takeover
A takeover is an acquisition where the target

firm did not solicit the bid of the acquiring firm. It is a strategy of acquiring control over the management of another company either directly by acquiring shares or indirectly by participating in the management. The regulatory framework of takeover is governed by the SEBI (substantial Acquisition of shares and Takeovers) Regulations, 1997

TAKE-OVER Take over is the other form of acquisition. A company can have effective control over another company also by holding minority ownership. Takeover means acquisition of not less than 25% of the voting power in a company. Section 372 of the company Act 1956 defines the limits of a companys investment in the shares of the other company to 10%. If the company wants to invest more than 10%, it has to be approved in the shareholders general meeting and by the central govt. Acquiring more than 10% of the subscribed share capital may result in takeover of the company.

Consolidation
It involves creation of a new company owning

assets, liabilities, liabilities and businesses on going concern basis of two or more companies, both/all of which cease to exist.

What is Amalgamation?
This term is used only in India. It includes

both Merger and consolidation. Thus amalgamation can be in the form merger or consolidation. Amalgamation can be in the nature of merger or in the nature of purchase (AS-14).

Mergers
STRUCTURE 1
A = Amalgamating Company: Ceases to Exist B = Amalgamated Company B receives all of As assets and liabilities Shareholders of A receive shares in B and maybe

other benefits like debentures, cash

A Tr

B
transfer assets and liabilities

Example:
For example, absorption of Tata Fertilisers Ltd

(TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Mergers
STRUCTURE 2
A, B and C = Amalgamating Companies: Cease to exist D = Amalgamated Company: may or may not have

existed before Merger All assets and liabilities of A, B and C transferred to D Shareholders in A,B and C get shares in D.

A B C D

For example:
Merger of Hindustan Computers Ltd, Hindustan

Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called

HCL Ltd.

Examples of Acquisitions
Acquisition of Corus by Tata Steel

Acquisition of Novelis by Hindalco

Acquisition of Spice Communications by Idea

cellular Acquisition of Ranbaxy by Daiichi Sankyo Acquisition of Hutchison Essar by Vodafone Acquisition of Sahara Airlines by Jet Airways Acquisition of Deccan Airways by King Fisher Airlines

Asset Acquisitions
It implies buying of tangible or intangible assets

In case of asset acquisitions, the acquirer may

limit its acquisitions to those parts of the target firm which match with their needs. For example, Lafarge of France acquired only the cement division of Tata group. It only acquired the 1.70 million ton cement plant and the assets related to such division from Tata Group.

Contd
Such assets may also be intangible in nature.

For example coca-cola acquired some popular

brands like Thumps-Up, Limca, Gold spot etc related to soft drinks from Parle and paid a total consideration of Rs.1.70 crore.

Joint Venture
It is an arrangement in which two or more

companies contribute to the equity capital of a new company in pre-decided proportion. Examples: Maruti Suzuki, Daewoo Motors and DCM group, Hero Motors and Honda

Contraction
Contraction

is the second form of restructuring. In the case of contraction, generally the size of the firm gets reduced. Contraction may take place in the form of spin-off, spilt-off, Divestitures, spilt-ups and equity-carved out

Spin-offs
Spin-off involves transfer of all or substantially

all the assets, liabilities, loans and business (on a going concern basis) of one of the business divisions or undertakings to another company whose shares are allotted to the shareholders of the transferor company on a proportionate basis. A spin-off does not result in an infusion of cash to the parent firm. Example: by spinning off its investment division, Kotak Mahindra Capital Finance Ltd. formed a subsidiary known as Kotak Mahindra

Spin offs
Company A without Subsidiary B

Subsidiary B

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.

Spin offs (2)

Company A after spinoff

Shareholders receive Shares of company B

New company B

Old shareholders still own shares of company A, which now only represent ownership of A without B.

Split-offs
In case of split-off, a new company is created in

order to takeover the operations of an existing division or unit of a company. A portion of the existing shareholder of the company obtains stocks in the new company in exchange for stocks of the parent company. As a result of this, the equity capital of the parent company is reduced resulting in downsizing.

Contd
In case of split-off, there is no question of cash

inflow to the parent company. Example: Dabur India Ltd. decided to split-off the Pharma segment and transfer it to a new company Dabur Pharma Ltd.

Divestitures
A divestiture involves sale of a portion of a

company to an external party. A company may choose to sell an undervalued operation which is unrelated or non-strategic to its core business activities Sale proceeds may be utilized for investing in profitable investment opportunities Divestiture is considered to be a form of contraction for the selling company.

Divestitures
Company A without Subsidiary B
Subsidiary B

Company C

Divestitures (2)
Company A w/o subsidiary B
Cash, securities or assets as consideration

Old Sub B Company C

Equity carve outs

Also called partial IPO

Parent company sells a percentage of the

equity of a subsidiary to the public stock market Receives cash for the percentage sold Can sell any percentage, often just less than 20%, just less than 50%, are chosen.

Equity carve out (partial IPO)

Company A without subsidieary B

Subsidiary B

Shareholders implicitly own 100% of equity of subsidiary B through their Company A shares.

Equity carve out (partial IPO)

Company A without subsidieary B

Portion of Sub B equity Not sold X % of Company B shares

X % of sub B equity sold To market for cash In IPO

Shareholders now own 100% of Company A (without B) And (1-X)% of Company B implicitly Through their company A shares

Split-ups
In the case of a split up, the entire company is

broken up in series of spin-offs. As a result, the parent company no longer exists and only the new spin-offs continue to survive. Example: AP state electricity board was split up in 1999 as a part of power sector reforms. The power generation division and the transmission and distribution division of APSEB was transferred to two different companies namely APGEN Co. and APTRANA Co. As a result of such split-up, the APSEB ceased to exist.

Corporate control
Corporate

control is another type of restructuring which involves obtaining control over the management of the firm. Corporate control generally includes anti-take over defense, share repurchases, exchange offers and proxy contests.

Anti-Takeover Defences
It is a technique followed by a company to

prevent forcefully acquiring of its management. Takeover defenses can be pre-offer defences and Post-offer defenses. Preventive defenses include staggered board, super majority clause, poison pills, dual class recapitalization and golden parachute Post-offer defenses greenmail, Pacman defense, Litigation, Asset restructuring and Liability restructuring.

Share Repurchase
Repurchasing its own shares from the market.

Also known as buyback of shares

Tender offer method and open market method Strengthening of promoters controlling

position. Takeover defense reduces the number of shares available to the potential buyer.

Exchange Offers
Generally provides an option to exchange a

portion or all of their holding for a different class of securities of the firm. Exchange offers help company to change its capital structure while holding the investment policy unaltered.

Proxy Contests
It is a way to take control of a company

without owning a majority of its voting right. It is an attempt by a bidder to use his voting rights and garner the support from other shareholder with a view to expel the incumbent board or management.

Change in Ownership Structure

Leveraged buyout (LBO)

Master Limited Partnerships (MLPs)

Going Private Employee Stock Option Plan (ESOP)

Leveraged Buyout
LBO is the purchase of assets or the equity of

a company, where the buyer uses a significant amount of debt and very little equity capital of his own for payment of the consideration for acquisition. Example: Tata Tea acquired the Tetley brand in 2000 for 271 million.

Master Limited Partnerships (MLPs)

Master limited partnership (MLP) is a limited

partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.

Going Private
It is repurchasing of all of a companys

outstanding stock by employees or a private investor. As a result of such an initiative, the company shares stops being publicly traded.

Employee Stock Option Plan (ESPOP)

The term employee stock option plan means

the option given to the whole-time directors, or employees of a company the right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price. For example: ESOPs by Infosys Ltd.

Mergers and Acquisitions Motives

Friedrich Tranutwein Merger Motive Model has

summarized seven major theories or motives of M&A. These seven theories are: 1. Monopoly theory 2. Efficiency theory 3. Raider theory 4. Valuation theory 5. Empire Building theory 6. Process theory 7. Disturbance theory

Monopoly theory
This theory explains M&A as being planned

and executed to achieve market share and market power. This theory confirms that M&A is primarily used as growth strategy. Monopoly theory works in three ways: a) Market leaders trying to consolidate their position further b) Profitable and cash-rich companies trying to gain market leadership c) Market entry strategy

Example
Mittal Steel acquiring Arcelor was the case of

a market leader consolidating its leadership position. With the acquisition of Arcelor, the second largest steel company in the world, the production capacity of Mittal Steel increased to 116 million tonnes, leaving behind the second largest producer Nippon Steel whose production capacity is just 36 million tonnes. (market consolidation)

Example .(market consolidation motive)

Reliance Industries Limited (RIL) acquired

Indian Petrochemicals Corporation Limited (IPCL) to consolidate its leadership position. RIL could control at least two-third of the total Indian petrochemicals market of all kinds of products put together and in case of specific products like High Density Polyethylene, LDPE etc. its market share went up to 80%

Example
Tata

steel acquiring Corus and Grasim acquiring Larsen and Toubros (L&T) cement division are cases of companies trying to gain market leadership through acquisitions. Tata steel capacity after its acquisition of Corus, with a capacity of approximately 18 million tonnes, increased to 28 million tonnes. Fifth Largest global steel company after acquisition.

Example
Vodafones acquisition of Hutchison Essar

was a market entry strategy. Vodafone, as a part of its global expansion strategy, was looking at entering into the lucrative Indian market. Tata Tea acquiring Tetley, Tata Steel acquiring NatSteel and thereafter Corus, Hindalco acquiring Novelis are examples of Indian corporate wanting to capture global markets through acquisitions, rather than through conventional export route.

Efficiency Theory
This theory explains M&A as being planned

and executed to achieve synergies thereby adding to enterprise valuation. The rationale is to create value. Synergies can be broadly classified into two: 1. Revenue generating synergies 2. Cost reduction synergies

Revenue generating synergies & Cost reduction synergies

Revenue generating synergy can be described

as the generation of higher growth rate and turnover than the individual companies growth rate during independent operations. If the combined operations result in cost savings, in any of the areas, viz., manufacturing, marketing, operations, manpower etc., it would be the case of cost reduction synergy.

Example
Merger of ICICI with ICICI Bank where one of

the objectives was to enhance fee based income. ICICI not being a bank had to lose substantial fee based income. The limited size of the balance sheet of ICICI Bank restricted the amount of non-fund based facilities that it could offer to its clients. Therefore after merger, fee based income was expected to grow substantially on the back of a very large-sized balance sheet.

Important points about synergy theory

Revenue generating synergies are far more

difficult to achieve than cost reducing synergies. Estimated synergies fail to materialize due to unforeseen events. Overestimation of synergies by the management to justify the control premium it pays for acquisition.

Main type of synergies

Manufacturing synergy

Operations synergy
Marketing synergy Financial synergy Tax synergy

The classification into revenue generating and cost savings is a cross classification, which could be applied to any of the five types of synergies.

Synergies in Tata Steel-Corus Deal

Tata

steel expected synergy was about US$300-350 million per year. Synergies in procurement of materials, in market place, in shared services etc. In August 2008, the Financial Express reported that Tata steel had said that in FY 08, Tata steel and Corus had jointly realized synergy benefits of US$76 million.

Manufacturing synergy
Combining the core competencies of the

acquirer company and target company in different areas of manufacturing, technology, design and development, procurement etc. M&M acquisition of Jiangling Motors one of the objectives was to combine M&Ms design and development strength with low cost manufacturing capabilities of Jiangling. Tata Motors acquisition of Daewoos commercial vehicles unit

Operations synergy
Rationalization of the combined operations by

sharing facilities such as warehouses, transportation facilities, software and common services such as Accounts and Finance, Tax, HR, Administration etc. Acquisition of Deccan Airways by Kingfisher Airlines Kingfisher expected to achieve substantial savings (to the tune of Rs. 300 crores in the first year itself) through operations synergies such as rationalization of routes, reduction of number of flights on the same routes, sharing of commercial and ground handling staff ,etc.

contd
Oriental Bank of commerce takeover of Global

Trust Bank Operations synergy arose from the fact that OBC had strong branch network in north, but had not explored the western and southern part of India where GTB had a strong network and franchise.

Marketing synergy
It involves using either the common sales

force or distribution channel or media to push the products and brands of both the acquirer and target companies at lower cost. Leveraging on brand equity of one of the two companies to push the sale of the other companys products. Marketing synergy can involve acquiring better pricing power because of combination.

Marketing synergy - Examples

When HUL acquired Lakmes brand and business,

the objective was to use the vast distribution network of Lakme to leverage on the strong brand equity of Lakme in the womens cosmetics business. Acquisition of Universal Luggage by Piramals Blow Plast the objective was to use the common distribution channel and sales force to push both the companies products, which were targeted at the same market segments except for pricing differences and thereby effect a substantial savings in sales force and other marketing costs. Another objective was to gain improved pricing power by using complementary rather than competitive marketing strategies of the two companies.

Financial and Tax synergy

Financial

synergy involves combining the balance-sheets of both companies to achieve improved financial performance. Only Merger not acquisition will lead to financial and tax synergy. Tax synergy involves merger of a loss making company with a profitable company to avail tax benefits by writing-off accumulated losses and depreciation of the loss-making company against its profits. (Merger of profit making company with a loss making company is known as reverse merger.) Merger of RPL with RIL (1991-92)

Valuation theory
This

theory explains the M&A as being planned and executed by the acquirer who has better information about the valuation of the target company than the stock market as a whole and who estimates the real intrinsic value to be much higher than the present market capitalization of the company. Therefore, such a acquirer is ready to pay premium over the present market price to acquire control over the target company.

Contd
Valuation theory is in sharp contrast to the

efficient markets theory. Information gaps, costs and critical inside information intrinsic value can be valued more than market capitalization by the acquirer. Different views on the future course of the economy or the company intrinsic value can be valued more than market capitalization by the acquirer. Off balance sheet assets or substantially undervalued non-operating assets to be used more efficiently by the acquirer, hence more value to the company than the stock market.

Contd
Cyclical

pattern of Economies and stock markets Acquiring undervalued companies at the end of recession and just before the economy starts looking up expecting better cash flows and hence intrinsic value more than the market capitalization.

Raider Theory
Raider theory explains the M&A activity in the

specific context of PE funds, where the acquirer acquires controlling stake in cash needy companies at much lower valuation than potential valuation or even present valuation, just to transfer the wealth from existing shareholders to themselves without any strategic intent of running these companies themselves.

Empire building theory

This theory tries to explain M&A as being

planned and executed by managers for expanding their own empire rather than creating wealth for shareholders. This is also known as managerial hubris.

HUBRIS HYPOTHESIS
Hubris hypothesis implies that managers look

for acquisition of firms for their own potential motives and that the economic gains are not the only motivation for the acquisitions. This theory is particularly evident in case of competitive tender offer to acquire a target. The urge to win the game often results in the winners curse. It refers to the ironic hypothesis which states that the firm which overestimates the value of the target mostly wins the contest.

Why do mergers fail?

Excessive

premium

Winners

curse

hypothesis. Target firm would achieve higher price at the expense of the acquiring firm. Capital market imperfection overestimation of the fair value of target company share price. In a competitive bidding process, bidders tend to overestimate the value of the target firm. Ascending price auction system

Why do mergers fail?

to integrate due to size, organisational form, strategies, culture, management policy etc. Also known as post integration issues. Issues regarding size require careful attention. Neither too big target nor too small target is desirable as a partner. When the target is too big, the mergers might fail due to acquisition indigestion and when too small, by not giving enough time and attention required.
Failure

Why do mergers fail?

Poor Cultural fit Cultural fit can be measure

through management behaviour, decision making process and the level of teamwork. Poor cultural fit leads to misunderstanding, confusion and conflict. Very difficult to measure usually found after the merger.

Why do mergers fail?

Agency problem Shareholders and

management objectives differ and often conflict with each other. Lucrative mergers may be rejected by the managers.

Conclusion
There are a number of reasons for frequent failure of mergers to create values for shareholders, especially, of acquiring firms. Of those, the problem of adverse selection seems to be neglected by decision-makers frequently. This, combined with self-interests of managers, is why firms do not stop merging. Mismatches between acquiring and acquired firms are assumed to be a common reason why they fail to benefit from a merger as predicted in theory. At the same time, solving this problem is not easy. Factors leading to overvaluation of target firms seem to make it even more difficult for combined firms to run business profitably.