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Theory/Motives of Mergers

1. Monopoly Theory
2. Efficiency Theory
3. Raider Theory
4. Valuation Theory
5. Empire building Theory

1. Monopoly Theory
Monopoly theory is planned
and executed to achieve
market share and market
power, at times including
pricing power

Monopoly theory works in

three ways


Market leaders trying to

consolidate their position
Profitable and cash rich
companies trying to gain
market leadership
Market entry strategy



1. Market leaders trying to consolidate their position further

Mittal Steel

Arcelor Steel

Arcelor Mittel

Mittal was global leader in steel when it acquired Arcelor

Arcelor second largest steel company in the world
Post Acquisition capacity levels

116 mn tonnes

36 mn tons
Arcelor Mittel

Nippon steel second largest player

1. Market leaders trying to consolidate their position further


Merger of IPCL and Reliance

IPCL was the second largest petrochemical company in
With the acquisition of IPCL, RIL could control at least
two third of the total Indian petrochemicals market for all
kinds of products put together,
In the case of specific products like High Density
Polyethylene, (HDPE), LDPE, Polyvinyl Chloride (PVC),
Polypropylene (PP), Mono Ethylene Glycol (MEG) etc, its
market share went up to 80 to 90 %

2. Profitable and cash rich companies trying to gain market leadership

Tata steel has a capacity of around 5 million tonnes in

Acquisition of corus with a capacity or around 26
million tonnes, pushed up Tata Steels ranking from
56th global steel company to the 5th largest global steel

2. Profitable and cash rich companies trying to gain market


Grasims acquisition of L&Ts cement division

In 2003-2004 Grasim has a capacity of 13 million tonnes
L&T was the market leader with a capacity of 18million tonnes
Acquiring L&Ts cement division made Grasim the market leader in
India with 31 million tonnes
It also made Grasim the eighth largest producer of cement in the world.

3. Market entry strategy

Vodafone as a part of its global expansion strategy,

was looking for entering the lucrative Indian Market.
Non availability of band width for new aspirants and
other licensing issues compelled it to follow the
acquisition route than setting up a green field
operation in India

3. Market entry strategy

2. Efficiency Theory
Efficiency theory is designed and executed to
achieve synergies
Types of Synergies

Revenue generation
Cost Reduction

M&Ms design and

Development strength with
Low cost manufacturing
Jiangling Motors Capabilities of Jiangling


Tata motors had a technology

For vehicles up to 200 bhp
Only. Daewoo can make
vehicles in the 200 400 bhp
R&D strength of Daiichi
Sankyo combined with the
Efficient manufacturing of


Aiming at vast distribution

Network to leverage on the
Strong brand equity of
Lakme in the womens
cosmetic business

Either a reduction in weighted

Average cost of capital or a
Better gearing ratio or improved
Financial parameters


RPL established in 1982

Issued shares at a price of Rs 10
During IPO
Later merged with RIL in 1992
at a share ratio of 1: 10 had
the same effect of coming out
with an issue of Rs 100 per share
Rationalization of routes, reduction
In combined number of flights
Sharing of commercial and ground
Handling staff


Tyco cable assets had a data

transfer capacity of 10-15 terabites
Which is 10 times the operational
Capacity of VSNL.

3. Raider Theory

The acquirer (PE funds) acquires controlling

stake in cash needy companies at much lower
valuation than potential valuation.
In India, the unlisted companies are concerned
it would be possible for PE funds to acquire
equity shares at a price that is below the
present intrinsic value of the company.

4. Valuation Theory
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 and
Who estimates the real intrinsic value to be much higher
than the present value market capitalization of the

4. Valuation Theory
Acquirer feels the intrinsic
Value to be higher than the
Market capitalization

Market is imperfect
Market is perfect

Information gap

Substantial off
balance sheet or
undervalued non
operating assets

Are being encased

by the present

Cyclical pattern of

Boom is followed by Cash rich companies

recession vice versa acquire undervalued
companies during

Acquirer has
different view on
future cash flows
To encash upon
these assets

5. Empire building theory

M&A as being planned and executed by managers

for expanding their own empire rather than creating
wealth for shareholders.
Top management of companies resort to acquisition
to grow in size to build their empires without
bothering whether such acquisitions would enhance
the shareholders wealth or have a negative impact

Take over tactics

Take over tactics

Dawn Raid
Bear hug
Saturday night special
Proxy fight

Dawn Raid
In this tactic, brokers acting on behalf of acquirer/raider swoop
down on stock exchanges at the time of its opening and buy all
available shares before the target company wakes up.
An acquirer can get a sizable chunk in dawn raid only if the
scrip is highly liquid in comparison to its total paid up
Shareholders when they sense the strategy, decide to hold
back the shares for better price and thereby reducing the
liquidity and making the dawn raid fail.
Dawn raid is more expensive
Not possible in India due to regulation

Bear Hug
The acquirer makes a very attractive tender offer to the
management of the target company for the latters
shareholders and asks them to consider the same offer in the
interest of the shareholders.
Such an offer is backed by the acquirers preparedness to make
a hostile open offer to the public shareholders if the board of
the target company rejects the offer
If the management rejects the offer, chances are there that the
public shareholders, particularly institutional shareholders
would favorably respond to the offer either through private
negotiated deals of in the subsequent hostile open offer made
by the acquirer.

Saturday night special

This is the same tactic as bear hug, but made on the
Friday or Saturday night asking for a decision by
The idea behind this is to give very little time to the
promoter/board of the target company to set up their
This is also called God Father Offer

Proxy fight
The acquirer convinces majority shareholders to issue proxy
rights in his favour, so that he can remove the existing
directors from the board of the target company and appoint his
own nominees thereby taking control of the target company.
This method of acquisition is not sustainable since the acquirer
will have to keep on acquiring proxies from the geographically
scattered shareholders
Not possible in India, since such removal or appointment of
Directors will be treated as an acquisition of control over the
target company requiring the acquirer to make an open offer.

Take over Tactics in India

Take over Tactics in India

Market accumulation followed by an open offer
Negotiated deal with financial institutions followed by
an open offer
Negotiated deal with a break way promoter faction
followed by an open offer.
Direct offer to the shareholders of the target company