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Mergers and

Leveraged Buyouts,
Joint Ventures and
Strategic Alliances

Mergers and Acquisitions


Buyout (LBO
A Leveraged Buyout is an acquisition of a
Company in which the acquisition is
substantially financed through debt.
Management Buyout: When the Top
Managers buy their company from its owners
employing debt, the leveraged buyout is
called Management Buyout (MBO)

M and A- LBO


The following firms are generally the targets for

High growth ,High Market Share firms
High Profit potential firms
High Liquidity and high debt capacity firms
Low operating risk firms
The evaluation of LBO transactions involves the
same analysis as for mergers and acquisitions.
The DCF approach is used to evaluate an LBO

M and A

Joint Ventures
A joint venture represents a combination of subsets
of assets contributed by two ( or more) business
entities for a specific purpose and a limited duration.
Joint Venture participants continue to exist as
separate firms with a joint venture representing a
newly created business enterprise.
The Joint Venture can be organized as a
partnership. A corporation or any other form of
business organization the participating firms choose
to select.

M and A Joint Venture



Characteristics of JVs: (As per Contract Law)

Contribution by partners of money, property, effort,
knowledge, skill or other asset to a common
Joint property interest in the subject matter of the
Right of mutual control or management of the
Expectation of profit. ,and presence of adventure
Right to share in the profit
Usual limitation of the objective to a single
undertaking or adhoc enterprise.

M and A- Joint Ventures

JVs are of limited scope and duration. They

represent only a small fraction of each participants
total activities. Each partner must have something
unique and important to offer to the venture and
simultaneously provide a source of gain to the other
However the sharing of information or assets
required to achieve the objective need not extend
beyond the JV.
In other words, the participants competitive
relationship need not be affected by the JV

M and A - JVs

and mergers display similar timing

characteristics. The Correlation between
completed mergers and Joint Venture
startups is more than 0.95, highly significant
statistically. JVs and mergers are likely to be
stimulated by factors that affect total
investment generally. A succession of JVs
can enable firms to achieve market
penetration into newer areas over a period of

M and A - JVs
Rational for JVs:
Strategic Planning: JVs used in combination with
internal developments, mergers. Minority
investments as a time-phased program in
formulating and executing a firms long term strategy
for value-increasing growth.
Knowledge acquisition:
The complexity of the knowledge to be transferred is
a key factor in determining the contractual
relationship between the partners in the JV.

M and A - JVs

Risk Reduction

Risk is reduced in a number of ways. Activities can

be expanded with smaller investment outlays than if
financed independently.. Exploration of Gold, silver,
copper and petroleum resources involves some kind
of a JVs
Tax Aspects
International Aspects: JVs can be used to reduce
the risk of expanding into a foreign enviornment.The
contribution of the local partner in the form of
specialized knowledge and local conditions can be
crucial to the success of the JV

M and A JVs
Failure and Success:
Some of the reasons for failures of JVs are:
a) Pre planning for the JV was not complete.
b) The hoped for technology could not be
c) Agreements could not be reached on
alternative approaches to solving the basic
objectives of the JV.


M and A - JV
d) Managers with expertise in one company
refused to share knowledge with their
counterparts in the JV.
e) Management difficulties might be
compounded because the parent companies
are unable to share control or make
compromise on difficult issues.


M and A- JVs




Essentials for success of JVs:

Each participant must bring something of value to
the activity.
Participants should engage in careful preplanning
The Resulting agreement or contract should
provide for flexibility in the future as required
The planning should include provisions for
termination arrangements including provisions for
for a buyout by one of the participants.

M and A- JVs
e) Key executives must be assigned to
implement the JV.
f) A distinct unit in the organization structure
needs to be created with requisite authority
for negotiating and making decisions.


M and A Strategic Alliances

Strategic Alliances:
Strategic Alliances are are informal or formal
decisions or agreements between two or more firms
to cooperate in some form of a relationship.
Strategic alliances represent a form of alliance for
exploratory learning.
In high-technology industries where turbulence and
change dominate, strategic alliances are used to
scan market-entry possibilities, to monitor new
technological developments and to reduce the risks
and costs of developing new products and


M and A Strategic Alliances

As industries mature. learning and flexibility
becomes less important, so integration
through M & A becomes more likely.


M and A Strategic Alliances

Essential Characteristics of a strategic
The Creation of a new entity is not necessary.
The relative sizes of the firms can be unequal
Synergistic value is created from combining
different resources.
Adaptability and flexibility is required

M and A Strategic Alliances

Partner firms pool resources and expertise rather

than transferring specialized knowledge so that the
partners will have a continuing need for each other

The alliance cam add value to the partnering firms

by creating an organizational mechanism that better
aligns decision authority with decision knowledge.

Strategic Alliances must have a well defined

strategic theme and a clear focus.

M and A Strategic Alliances

Organizational relationships in strategic alliance

should facilitate communication to achieve shared
control on the decision making process.

High level Management group to occupy important

place in the firms organizational

Structure to manage inter firm relationships,

communication and personal interactions to
develop trust and effective working relationships

Takeover- hostile/friendly
Defenses against hostile
While the threat of takeover tones up the
efficiency of the target company, some
protection is necessary for the promoters
who have set up and nurtured the company.
Some of thee methods to protect the
of the target company are:
a) Buy Back of shares: Incumbent
management may be enabled to ward off

Take Over- Protection to Target

the Corporate raiders. Buy back of shares enables a
company to counter an aggressive takeover bid.
If the shares are bought at a premium to ward off the
threat of an unfriendly takeover, they are labeled as
green mail. Target firms can resist takeover attempts
once purchase of own company shares, where a
firm makes a tender offer for a given amount of its
own shares while excluding targeted stockholders..


Take over- Protection to the

Target Co.

Poisson Pill: It is a financial device designed

to prevent a firm from being acquired without
the consent of the management. They are
also called share right plans (SPRs) through
issue of share rights to existing shareholders
to buy shares at a fixed price say after 10
years. These right issues are priced quite
high( est. on the basis of time horizon) and
cannot be executed or traded immediately.

Takeover- Protection to target


They may also be cancelled or bought back

at a trivial price by the Co. The rights could
be triggered if someone acquire 20 % of
these shares. When the rights are triggered,
it is the poison on the pill. In the event of a
merger, holders of the SRPs can buy the
shares in the merged firm at half the price
increasing the cost of merge rto the bidder.

Takeover- Protection to the

Target Co.
Golden Parachutes:
To ensure that the takeover is successful, provision of
compensation to top management in case they lose their job as a
result of the merger.
Crown Jewels:
When faced with a takeover threat, firms threaten to sell all major
assets .
White Knights: Firms facing hostile takeover may
arrange to be acquired by friendly individuals firms or mutual
funds and ward off corporate raiders. White knights are
compensated for rescuing the firm by grant of exceptional terms


Takeover- Protection for a

target Co.
The anti takeover techniques are the defensive
tactics Companies adopt to ward off the raiders.
Merger as a Shield: Merger of a co (. with its
associate ) is an effective shield from raiders
since they raise the cost of acquiring a controlling
company. The increased market capitalization
resulting out of the merger as compared to its pre
merger is a good defense against the corporate
raiders. A quick increase in the market capitalization
through a merger can make the takeover quite
expensive and difficult.



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