Mergers and Acquisitions

Presented By:

Presented to:
Prof. Parsuraman
What is all about?

“The buying, selling and combining of

different companies to grow rapidly without
having to create another business entity.”
 What Does Merger Mean?

The combining of two or more companies, generally

by offering the stockholders of one company
securities in the acquiring company in exchange for
the surrender of their stock.
 Benefits of merger

 Diversification of product and service offerings

 Increase in plant capacity
 Larger market share
 Utilization of operational expertise and research and
development (R&D)
 Reduction of financial risk
 Why do mergers fail ?
 Lack of human integration
 Mismanagement of cultural issues
 Lack of communication
Acquisition

When one company takes over another and clearly

established itself as the new owner, the purchase is
called an acquisition.

Acquisition is generally considered negative in

nature.
 SYNERGIES RELATED TO ACQUISITION

 Economies of scale
 Staff reductions
 Acquiring new technology
 Improved market reach and industry visibility
 Taxation
 Corporate Strategies in M&A
 Why?
 Gain market share
 Economies of scale
 Enter new markets
 Acquire technologies
 Strategic Benefit
 Complementary resource
 Tax shields
 Utilization of surplus funds
 Managerial Effectiveness
 Integrate vertically
 Mechanics of a Merger
 Legal Procedure
 The MOA to be scrutinized

 Intimation to Stock Exchanges

 Approval of draft amalgamation proposal

 Application to the Court

 Notice to shareholders and creditors

 Filing the order

 Transfer of assets and liabilities

 Issue of shares and debentures

 Mechanics of Merger (Cont..)
 Tax Aspects
 Section 2(a) of the Income Tax Act defines amalgamation
 Depreciation for tax purposes
 Accumulated losses
 Unabsorbed Depreciation
 Capital Gains Tax
Accounting for Amalgamation is done according to Accounting
Standard 14 (AS-14) issued by the Institute of Chartered
Accountants of India
Reasons for Problems in
M &A Achieving Success
Increased Integration
market power difficulties

Overcome Inadequate
entry barriers evaluation of target

Cost of new Large or

product development extraordinary debt

Increased speed Inability to

to market M &A achieve synergy

Lower risk Too much

compared to developing diversification
new products

Increased Managers overly

diversification focused on acquisitions

Avoid excessive
competition Too large
 Gains from M&As
Synergy is the additional value created (∆V) :

V  VAT -(VA VT )

Where:
VT = the pre-merger value of the target firm
VA - T = value of the post merger firm
VA = value of the pre-merger acquiring firm
 Reasons for Acquisitions

Increased Market Power

Acquisition intended to reduce the competitive balance of the industry

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make “start-ups”
economically unattractive

Lower Cost and Risk of New Product Development

Buying established businesses reduces risk of start-up ventures
Reasons for Acquisitions

Increased Speed to Market

Closely related to Barriers to Entry, allows market entry in a more
timely fashion

Diversification
Quick way to move into businesses when firm currently lacks experience
and depth in industry
 Types of Merger

1. Horizontal Merger

2. Vertical Merger

3. Conglomerate Merger

4. Concentric Merger
Horizontal Merger

Horizontal mergers are those mergers where

the companies manufacturing similar kinds of
commodities or running similar type of
businesses merge with each other.
 Examples of Horizontal Merger

 Lipton India and Brooke Bond.

 Bank of Mathura with ICICI Bank.

 BSES Ltd with Orissa Power Supply Company.

 Associated Cement Companies Ltd Damodar Cement.

Vertical Merger

A merger between two companies producing

different goods or services.
 Example of Vertical Merger
 Time Warner Incorporated, a major cable operation, and the
Turner Corporation, which produces CNN, TBS, and other
programming.

 Pixar-Disney Merger
 Conglomerate Merger
 A merger between firms that are involved in totally
unrelated business activities.
 Two types of conglomerate mergers:
 Pure conglomerate mergers involve firms with nothing in
common.
 Mixed conglomerate mergers involve firms that are looking
for product extensions or market extensions.
Example of Conglomerate Merger

 Walt Disney Company and the

American Broadcasting Company.
Concentric Merger

A merger of firms which are into similar type

of business.
 Example of Concentric Merger

 Next link is a competitive local exchange carrier offering

services in 57 cities and building a nationwide IP network.
 Concentric, a national ISP, offers dedicated and dial-up
Internet access, high-speed DSL and VPN services across
the U.S. and overseas.
 Top Acquisitions
Transaction value
Rank Year Purchaser Purchased
(in mil. USD)

America Online
1 2000 Time Warner 164,747
Inc. (AOL)

Glaxo Wellcome SmithKline

2 2000 75,961
Plc. Beecham Plc.

Comcast AT&T Broadband

3 2001 72,041
Corporation & Internet Svcs

Sanofi-Synthelabo
4 2004 Aventis SA 60,243
SA

Pharmacia
5 2002 Pfizer Inc. 59,515
Corporation

JP Morgan Chase &

6 2004 Bank One Corp 58,761
Co
Conclusion