© Oxford University Press 2011. All Rights Reserved

Chapter 3
Oxford University Press 2011. All rights reserved.
A strategy where two or more companies agree to

combine their operations with mutual consent
Buying entity is called the Merged or Surviving Entity and

the one merging with it is called Merging Entity.
Under merger one company survives and the other loses

its corporate existence and the Surviving Entity acquires
all the assets and liabilities of the merging company and
may either retains its identity or get re-christened.
Laws in India use the term 'amalgamation' for merger
Amalgamation as the merger of one or more companies

with
another or the merger of two or more companies to form a
new company, in such a way that all assets and liabilities
of
The amalgamating companies become assets and
liabilities
of the amalgamated company and shareholders not less
than nine-tenths in value of the shares in the
amalgamating company or companies become
shareholders of the amalgamated company
Merger through Absorption:

Is a combination of two or more companies into
an 'existing company
Here all companies except one lose their identity
For Example:
Absorption of Tata Fertilizers Ltd (TFL) by Tata Chemicals Ltd
(TCL). TCL, an acquiring company / buyer, survived after
merger while TFL, an acquired company / seller, ceased to
exist. TFL transferred its assets, liabilities and shares to TCL.
Merger through Consolidation:

Is a combination of two or more companies into a
'new company
Here all companies are legally dissolved and a new
entity is created.
Acquired company transfers its assets, liabilities,
and shares to the acquiring company for cash or
exchange of shares
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.
Amalgamation means an amalgamation pursuant

to the provisions of the Companies Act, 1956 or
any other statute, which may be applicable to
companies
Amalgamation in the nature of merger is an

amalgamation
All the assets and liabilities of the transferor company

become, after amalgamation, the assets and liabilities
of the transferee company
Shareholders holding not less than 90% of the face

value of the equity shares of the transferor company
become equity shareholders of the transferee
company by virtue of the amalgamation
The above to exclude the equity shares already held

therein, immediately before the amalgamation, by the
transferee company or its subsidiaries or their
nominees
The consideration is discharged by the transferee

company wholly by the issue of equity shares in the
transferee company
Cash may be paid in respect of fractional shares, if
any
The business of the transferor company is intended
to be carried on by the transferee company after
amalgamation
No adjustment is intended to be made to the book
values of the assets and liabilities of the transferor
company when they are incorporated in the
financial statements of the transferee company
except to ensure uniformity of accounting policies.
Merger movements often occur when the economy

experiences sustained high rates of growth as it
reflects favourable business prospects
The movements coincide with developments in the

business environment
Often result in efficient resource allocation, reallocation

processes and efficient resource utilization
The waves occur when firms respond to new

investment and profit opportunities arising out of
changes in economic conditions and technological
innovations
..
In each of the waves mistakes have been repeated and

failures have been common
Unlike in the past, M & A have become a global

phenomenon and are no longer restricted to the US
A new trend being observed is the rise of emerging

market acquirer.
Research shows that merger waves result from a

combination of economic, regulatory, and technological
shocks (Mark Mitchell and J. H. Mulherin, 1996)
.
10
Economic shocks deal with economic expansion

that motivates companys to expand in order to
meet the ever growing demand
Regulatory shocks occur when regulatory barriers

are eliminated paving the way for corporate
communication
Technological shocks represent changes in

technology that not only change the existing
industries but also create new ones.
11
Occurred after the Great Depression of 1883
Peaked between 1898 and 1902 and ended in

1904.
Professor Ralph Nelsons study Industries

affected were primary metals, food products,
petroleum, products, chemicals, transportation
equipment, fabricated metal products, machinery
and bituminous coal
Wave saw horizontal mergers and industry

consolidations resulting in near monopolistic
market structures.
Giants born during this wave included J.P Morgans

U. S. Steel,
DuPont Inc., Standard Oil, General
12
Electric, Eastman Kodak, American Tobacco Inc.
Sherman Act enacted to control creation of

such monopolies yet mergers continued
Reasons responsible for the growing number of

M & As were:
Unwillingness of U.S. Supreme Court to literally interpret the

anti monopoly provisions of the Sherman Act
Some States relaxed Corporation Laws that enabled
companies to secure capital, create stock in other companies
and expand their operations unabated
Development of U.S transportation system facilitated
expansion of markets
Expansion of the firms resulted in economies of scale in
production and distribution and resulted in greater efficiency
A few takeover battles saw judges and elected

officials being bribed to violate legal provisions.
13
Known as Period of Merging for Oligopoly

Saw consolidation of several industries and growth
of
oligopolistic industry structure
Wave produced fewer monopolies, more oligopolies
and many vertical mergers
Period also saw mergers between many unrelated
industries
creating first large-scale conglomerates.
Period saw disproportionate number of mergers in
primary
metals, petroleum products, food products,
chemicals and
transportation equipment
Corporations born during this wave General Motors,
IBM, John Deere and Union Carbide
14
Radio as a medium of advertising became popular

Era of merchandising and product differentiation
started
The Public Utility Holding Company Act, 1935
empowered the SEC to regulate corporate structure
and voting rights
Wave ended with the stock market crash on October
29, 1929 the largest single day drop
Companies stopped focusing on expansion and
sought merely to maintain solvency amidst declining
demand
15
Decade saw large companies taking over smaller

firms with the motive of getting tax relief
Firms encouraged to sell businesses to outsiders

since the estate taxes were very high and it was
very expensive selling businesses within the
family
Mergers did not result in concentration of

economic power since most of them held very
insignificant portion of the industrial assets
16
Known as Conglomerate merger period
Saw intensive merger activity backed by booming

economies
Unusual element of this period was - smaller firms

targeted larger companies for acquisition
Mergers resulted in diversified conglomerates
Prominent conglomerates born were Long-TemcoVought (LTV), Litton Industries and ITT
Many small firms moving into areas outside their

core business activities
Legal environment made expansion tougher

17
Celler-Kefauver Act passed to prevent or prohibit the

anticompetitive acquisition of a firms assets
Made horizontal and vertical mergers tougher

resulting in formation of conglomerates for expansion
Wave continued until 1968 when Litton Industries

announced that its quarterly earnings had declined
first time in fourteen years
Market turned sour to conglomerates and the selling

pressure on stock prices increased
Anti-trust lobby was hell bent upon preventing

mergers for they believed they are anti competitive
and result in abuse of monopoly power.
18
Tax Reform Act passed in 1969 to curb manipulative

accounting practices that created paper earnings that
would temporarily support stock prices
Curb on financing acquisitions through debt by stating

that bonds would be treated as common stock for the
purpose of EPS computations nullifying increase in
earnings on paper
Conglomerates also became unpopular for:
Was observed that buyers often overpaid for diverse companies

purchased
Companies often moved away from specialization resulting in
deteriorating performances
For Example: Revlons core cosmetics business suffered when
they ventured into health care
19
Known as era of Hostile Takeovers
Saw a dramatic decline in the number of mergers
Decade saw some trendsetting events such as:
A change in the acceptable takeover behaviour

Hostile takeover of major established companies started
For Example:
INCO (International Nickel Companys) attempt to takeover ESB, the

largest battery maker
United Technologies bid for Otis Elevator
Colt Industries attempt of hostile takeover move of Garlock
Industries
Sanctioning of aggressive advances by investment Banks

Investment Bankers started offering consultancy services in
anti-takeover defences
20
Known as Wave of Megamergers
Hostile takeovers increased dramatically
Large firms became acquisition targets
Mergers seen in oil and gas industry, drugs, medical

equipments, banking and petroleum industry.
Leading megamergers included:
Chevron and Gulf Oil

Philip Morris and Kraft
Texaco and Getty Oil
DuPont and Conoco
British Petroleum and Standard Oil of Ohio
U.S. Steel and Marathon Oil
Kohlberg Kravis and Beatrice
21
Concept of Corporate Raider made its appearance
Corporate Raiders / Company Breaker are investors

who engage in the act of directed or orchestrating a
hostile takeover of a company
Often goes after a corporation, with an eye on

selling off the assets of the company as a means of
generating huge profits
Investment Bankers played aggressive role in

pursuing for M & yielded huge risk-free income
Offensive and Defensive strategies became common

22
Megadeals often financed with large amounts of debt.

For Example: Leveraged Buyouts
Conflicts between The Federal and State

Governments increased as State Governments started
passing anti-takeover legislations at the behest of
local companies which was seen by Federal
Government as infringement of interstate commerce
Deals motivated by Non U.S. companies that desired

to expand into larger and more stable U.S market.
Different sectors responded to deregulation

differently. For Example: Response of broadcasting
sector quicker than air transport
23
Period saw a major economic transition such as

increase in aggregate demand, longest post-war
expansion of companies and rise in stock market values
Phase saw large megamergers happening, few hostile

deals and more strategic mergers
Fad of financing merger deals through debt also got

eroded and increased use of equity financing noticed.
Roll ups became popular i.e. fragmented industries

consolidated through large scale acquisition of
companies
Trend very common in industries such as funeral

printing, office products and floral products
24
Prominent consolidated companies:
Office Products USA

Floral USA
Fortress Group
US Delivery Systems
Coach USA
Comforts Systems USA
Privatization of State owned enterprises seen
Concept of Emerging Market Bidders evolved
Companies built through acquisition of private

businesses and consolidation of relatively smaller
competitors in emerging markets
25
Examples:
Mittal takeover of Arcelor
Dubai based Ports World takeover of Peninsular
and Oriental Navigation Company
Tata Steel takeover of Corus Group
European nations started erecting barriers to
impede takeover of national champions.
Examples:
Merger of Suez SA and Gaz De France SA by the French

Government to fend away Italian utility Enel SpA;
Spain enforced a new law to prevent German E.On AGs
takeover bid of Spanish utility Endesa SA
26
Traditional View
Focussed on competition
Often resulted in horizontal
mergers and created a
condition of monopolistic
competition
Basic motivation was
survival in the market
through growth generally
achieved through mergers
and acquisitions.
Motto was make them like
us and the selection of the
target was based on its size
and quality.
Modern View
Vehicle to change the control
of the firms assets
Process of allocation and
reallocation of resources by
firms in response to changes
in the economic conditions
and technological
innovations of the market.
Tool of gaining competitive
advantage and a strategy for
attaining growth.
Focus on effective integration
for creating shareholder
value and improving
competitive strength of the
business
27
Horizontal Merger
Two companies that are in direct competition and sharing
the same product lines and markets combine
Based on the assumption that it will provide synergy and
allow enhanced cost efficiencies to the new business.
Examples of Synergistic Benefits: staff reduction and
reductions in related costs, economies of scale,
opportunity to acquire technologies unique to the target
company and increased market reach and industry
visibility.
For Examples: Daimler Benz and Chrysler, Glaxo
Wellcome Plc. and SmithKline Beecham Plc., Exxon and
Mobil, Volkswagen and Rolls Royce and Lamborghini, Ford
and Volvo and so on.
28
Result in creating large entities that can cause ripple

effects in the sector and sometimes throughout the
economy as are perceived as anti-competitive
Provide the new entity an unfair competitive
advantage over its competitors
Regulatory authorities grant permission but impose
ex ante obligations on the merged entity, where the
merger would otherwise be perceived as anti
competitive.
For Example: In both the US and Europe, National
Regulatory Authorities impose conditions on a
merger perceived as anti-competitive
29
Vertical Merger:
Mergers of non-competing companies where one's
product is a necessary component or complement
of the other's
Typified by one firm engaged in different aspects of
production say, growing raw materials,
manufacturing, transporting, marketing, and/or
retailing.
Can achieve pro-competitive efficiency benefits
such as lower transaction costs, lead to synergistic
improvements in design, production and distribution
of the final output product and enhance competition
30
Market-extension merger:
Merger between two companies that sell the same
products in different markets.
Product-extension merger:
Occurs when two companies selling different but related
products in the same market merge together
Merger designed to increase the type/range of products
that a company sells in a particular market
Forward integration:
One where the target firm is involved in the next stages
of production / operation
31
Backward Integration:
One where the target company is involved in the previous
stages of production / operation.
For Example: A manufacturer of a product merges his
firm with the provider of the raw materials. By eliminating
the provider of raw materials, the manufacturer can
achieve collusion in the upstream market.
Balanced integration:
One where the company sets up subsidiaries that both
supply them with inputs and distribute their outputs
32
For Example:
Usha Martin and Usha Beltron
Time Warner Inc. and Turner Corporation
Silicon Graphics Inc.'s and Alias Research Inc. and
Wavefront Technologies Inc.
Apple and Intel
Reliance Industries and Reliance Petrochemicals Limited
Tata Industrial Finance Ltd. and Tata Finance
HUL and TOMCO
Torrent Group and Ahmedabad Electric Company and
Surat Electric Company and so on
33
Viewed as anti-competitive for they can rob the supply

business from its competition.
For example: If a firm has been receiving material
from two separate firms and the receiving firm decides
to acquire both the firms, the merger could cause the
surviving firms competitors to go out of business
Are designed to evade pricing regulations
For example: When regulation seeks to constrain the
market power of a natural monopoly, the monopolist
may have incentives to integrate vertically into
unregulated markets in order to extract the monopoly
gains denied to them in the regulated market
34
The US Supreme Court:

One in which there is no economic relationships
between the acquiring and the acquired firm
Involve firms that are in different or unrelated
business activity
Preferred by firms that plan to increase their
product lines
Control a range of activities in various industries
that require different skills in the specific
managerial functions of research, applied
engineering, production, marketing, and so on.
.
35
Attained mainly by external acquisition and

mergers and is not generally possible through
internal development
Are also called concentric mergers
Firms operating in different geographic locations

also prefer conglomerate mergers
36
Examples include:
News Corporation
Sony
Time Warner
Walt Disney Company
Aditya Birla Group
Berkshire Hathaway
General Motors
Mahindra Group
Motorola
Tata Group
Hyundai
Mitsubishi
37
Pure Conglomerate:
Involve firmsthat have nothing in common
Mixed Conglomerates:
Involve firms that are looking for product
extensions or market extensions
38
Financial Conglomerates:
Are active in providing funds to every segment of the
operations and are the ultimate financial risk takers
Not only assume financial responsibility and control
but also play a major role in all the operating
decisions
Focus mainly on:
Improving risk-return ratio
Reducing business related risk
Improving the quality of general and functional managerial
performance
Providing effective competitive process and distinguishing
between performance based on underlying potentials in the
product market
39
Managerial Conglomerates:
Focus on providing managerial counseling and

interaction on decisions with the motive of
increasing potential for improving performance
Come into play when two firms of unequal

managerial competence combine
40
Concentric Companies:
Is one where there is a carry-over of specific

management functions or any complementarities
in relative strengths between management
functions.
Is the primary difference between managerial

conglomerate and concentric company, i.e. the
distinction between respective general and
specific management functions
41
Contribute to aggregate increase in economic power

and possible non-economic effects resulting from an
increase in the general economic concentration
Critics also fear that economic concentration would

lead to corresponding aggression in political power
by fewer but more powerful conglomerate firms,
placing major decisions, both political and economic,
in the hands of few individuals or firms that have
direct accountability to the general public
42
Accretive implies value creation
Occur when a company with a high price to

earnings ratio purchases a company with a low
price to earnings ratio.
Helps acquiring company to increases its EPS
Happens because the merger results in

operational and financial synergies and gives
boost to the earnings of the acquiring company.
43
Dilutive implies destruction or dilution
One where the EPS of the acquiring company

tends to fall post merger resulting in decline in
the share prices too
Decline due to the market forces presuming the

merger would destroy value and would not result
in synergies post merger.
44
An attempt made by one firm to gain a majority interest

in another firm
Firm attempting to gain a majority interest is called the

acquiring firm and the other firm is called the target firm
Acquiring firm pays for the net assets, goodwill, and

brand name of the company bought.
Actions through which companies seek to achieve

economies of scale, increased efficiency, and enhanced
market visibility
45
Acquisitions may lead to:

A subsequent merger
Establishment of a parent- subsidiary relationship
A strategy of breaking up the target firm and
disposing of part or all its assets
Conversion of the target firm into a private firm.
46
Too few targets
Inappropriate targets
Lack of creativity
Lack of forward planning
47
Increase the number of targets

Do not chase the one everyone else is bidding for
Compare the targets concurrently to choose the
right and the best target.
Buy firms with assets that meet the current needs to
build competitiveness
Provide adequate financial resources not be forego
targets
Identify targets that are more likely to lead to easy
integration and building synergies
Continue to invest in research and development as a
part of the firms overall strategy.
48
Assets Purchase
Acquiring firm purchases specific identifiable
assets of the business
Assets perceived as having potential to add
value to the acquiring company
May also assume specified liabilities
perceived as having potential to add value to
the acquiring company
Help the acquiring company to reduce the
risk of taking on unknown liabilities such as
sellers contracts, employees, etc.
49
Is keen on mode as they can acquire the

assets at a comparatively lower price.
Potentially reduces future capital gains tax

upon a sale of the assets.
Increases the future depreciation expense,

thereby reducing income tax.
50
Has to bear capital gains tax on difference

between bases in assets sold and purchase
price allocated to such assets which could be
substantial if assets are heavily depreciated
If the target company desires to use the

proceeds of the asset sale for paying
dividend to the stockholders, dividend would
be subject to an additional tax, thus
increasing the burden on the target company
51
Requires purchase agreement to allocate purchase

price among specific list of assets
Acquiring company must be assured that all
necessary assets are listed
Closing the deal is comparatively difficult as:
For titled assets such as vehicles and property
transferring, the ownership title of each asset
becomes a tedious task.
Consent of the shareholders is required for each
transfer.
If the entire business is being sold, each employee
must be terminated and re-hired by the acquirer.
This can create a lot of employee benefit issues
52
The acquirer purchases the entire

outstanding equity of the target company
Acquirer purchases the entire company and

all assets and liabilities of the business that
come with it
Stock purchase does not cause any

disruption in the operations which can
continue as usual.
53
Closings are simplified
Fewer contract consents and very little

paper work is required to transfer specific
assets.
All employees and employee benefits are

transferred with the stock sale.
54
Only incurs capital gain on difference between

basis in stock sold, which is not subject to
depreciation, and purchase price for stock.
No dividend has to be paid to distribute the

proceeds of sale to stockholders and therefore
double taxation can be avoided.
Not required to tackle any issues relating to

winding up of the company after closing.
55
Cannot pick and choose assets and liabilities.

Also it has to inherit everything, including
unknown liabilities such as sellers contracts,
employees, etc.
The tax basis in the assets purchased does not

get stepped up.
Potential of larger capital gains tax on a future

sale of heavily depreciated assets although lower
depreciation provision reduces the tax liability.
56
57
Generates long generic list of sub-elements
Tool is more descriptive and less analytical
Sub elements are just listed and not prioritized
Tool used only as an instrument of planning and

not implementation
58
Stars:
Companies that are high growth where the company holds a
high share.
Likely to generate adequate cash and always be self-sustaining.
Need to put in a lot of efforts in protecting their enviable
positions, protect profit margins and increase turnover to derive
cost related economies
Acquirer should try to identify such divisions in the market and if
possible acquire them at all costs
If such a division is already owned the growth strategy needs to
be aggressive and entity should invest aggressively in research
and development and expand the product portfolio.
For Example: When BMW bought Rover, experts thought its
products would help the German Auto maker reach new
customers. But the company was not able to capitalize on this
opportunity so it sold the Rover car to a British firm and Land
Rover to Ford.
59
Cash Cows:
Business can be used to support other business
units Cash Cows are divisions that hold a high
share in mature markets but do not have much
growth potential left. On account of the high
market share such divisions are able to generate
adequate profits which can be used to fund
divisions classified as Stars or Question Marks.
If an entity owns such divisions its strategy should

be to defend and maintain their position in the
market so that the division can be milked.
60
Question Marks:
Entities with low share but a very high potential for growth
as it is operating in fast-growing markets
Need a lot of cash to exploit the growth opportunities
available in the market
Generic strategy for such a division is that of high-risk
If the entity is able to generate cash through the cash cows
divisions, the same should be invested aggressively in
Question marks. If the entity is unable to generate cash then
this division should be divested as sustaining the division
with its present low share is difficult.
61
Dogs:
Businesses that have a very small share in the market and
have a very low growth potential i.e. they do not hold much
future economic promise and are on the verge of dying.
Investing in such divisions reflects a narrow view of the
business having no future except high risk.
Are cash traps and can only eat into the profits of the
company.
Acquirer should avoid acquiring such companies as they
would not add any value and would result increased losses
and turn out to be a bad buy decision.
If the company owns any such unit or division it is better to
divest such a division as soon as possible or else it would
keep accumulating losses and affect the overall profitability
of the group
62
Critics have criticised the BCG Matrix on the

grounds that it is relatively narrow in its approach
and is overly simple.
GE matrix developed to address this criticism
Also known as GE Business Screen
Is a portfolio management technique that focuses

on industry attractiveness and competitive
position
63
Two factors are further divided into 3 categories,

making it a 3 x 3 matrix
Cells then used to classify the business units into

winners, losers, question marks, average
businesses and profit producers.
64
65
Include:
Market growth
Market size
Competitive intensity and
Capital requirements.
When factors are assessed collectively it implies

that greater the market growth, the larger the
market, the lesser the capital requirements and
less the competitive intensity, the more attractive
the industry will be.
66
Other determinants of an organizations competitive

position in an industry include:
market share
technological know-how
product quality
service network
price competitiveness and
operating costs.
A business with a larger market share, technological

know-how, high product quality, a quality service
network, competitive prices and low operating enjoy
a favourable competitive position in the market.
67
The matrix suggests that:

Acquirer should invest in winners and questions marks where
the industry attractiveness and competitive position are both
favourable;
Maintain the market position of average businesses and profit
producers where industry attractiveness and competitive
position is average and
Sell losers, in case it owns any.
For Example: Unilever undertook a major exercise of assessing
its business portfolio and based on the results decided to sell
off several speciality chemical units that were not contributing
to the firms profitability. The resources generated through
such divestitures were used to acquire related businesses like
Ben and Jerry, Homemade and Slim-fast
68
Based on the logic that a corporate strategy

should be able to counter the opportunities and
threats prevailing in the organizations external
environment.
Especially true in case of the competitive strategy

which the argument states should be based on
the understanding of industry structures and the
way they change.
69
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of Forward integration
Cost relative to total purchases in industry
70
Switching costs
Buyer inclination to substitute
Price performance trade-off of substitutes
71
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation
Buyer concentration vs industry
Substitutes available
Buyers incentives
72
Absolute cost advantage

Proprietary learning curve
Access to inputs
Switching costs
Government policy
Economies of Scale
Capital requirements
Brand identity
Access to distribution
Expected retaliation
Proprietary products
73
Exit barriers
Industry concentration
Fixed costs/value added
Industry growth
Intermittent overcapacity
Product differences
Switching costs
Brand identity
Diversity of rivals
Corporate stakes
74
Model should be used at the industry level and is not

designed to be used at the industry group or industry
sector level.
Firms that compete in a single industry should at least
try and develop one of the five forces for themselves.
Fundamental issue for a diversified company is
selection of industries in which the company should
compete.
Critical issue while targeting companies for mergers,
acquisitions and diversification.
Thorough analysis of elements required to be done and
only thereafter the company should proceed with its
plans of mergers and acquisitions.
75
Both mergers and acquisitions involve one or

multiple companies purchasing all or part of another
company.
Main distinction between a merger and an

acquisition is how they are financed.
When a company takes over another company and

establishes itself as a new entity the process is
called acquisition. Here the target company ceases
to exist while the buyer company continues.
76
Merger is a process where two entities

agree to move forward as a single entity
as against remaining separately owned
and operated entities.
Mergers are typically more expensive than

acquisitions, with the parties incurring
higher legal costs.
77
The stock of the acquiring company continues to

be traded in an acquisition, while in case of a
merger the stocks of both the entities are
surrendered and the stocks of the new company
are issued in its place.
One entity buys another and allows the acquired

firm to proclaim that the action is merger and not
acquisition. This is done to ward off the negativity
often associated with acquisition.
78
A merger does not require cash.

A merger may be accomplished tax-free for both parties.
A merger lets the target company realize the appreciation
potential of the merged entity, instead of being limited to sales
proceeds.
A merger allows the shareholders of smaller entities to own a
smaller piece of a larger pie, increasing their overall net worth.
A merger of a privately held company into a publicly held
company allows the target company shareholders to receive a
public companys stock.
A merger allows the acquirer to avoid many of the costly and
time-consuming aspects of asset purchases, such as the
assignment of leases and bulk-sales notifications.
Merger is of considerable importance when there are minority
stockholders. The transaction becomes effective and
dissenting shareholders are obliged to go along once the buyer
obtains the required number of votes in support of the merger.
79
Synergy
Operating synergy
Financial synergy
Examples:
When HUL acquired Lakme, it helped them to enter the cosmetics
market through an established brand.
When Glaxo and Smithkline Beecham merged, they not only gained
market share but also eliminated competition between each other.
Tata tea acquired Tetley to leverage Tetleys international marketing
strengths.
Acquiring new technology:

For example: Mergers amongst logistics companies such as a
land transport entity with an airline cargo company
80
Improved profitability
For example, European Media Group Bertelsmann,
Pearson, etc. have driven their growth by expanding into
US through M & A.
Acquiring a Competence:
For example: Similarly IBM merged with Daksh for
acquiring competencies that the latter possessed.
Entry into new markets

For example: The merger of Orange, Hutch and Vodafone
was carried out to achieve this objective.
81
Access to funds
Company finds it difficult to access funds
from the capital market.
Deprives the company to pursue its
growth objectives effectively.
So merger pursued
For example: TDPL merged with Sun
Pharma since TDPL did not have funds to
launch new products.
82
Tax benefits
For example: Ashok Leyland Information
Technology (ALIT) was acquired by Hinduja
Finance, a group company, so that it could set off
the accumulated losses in ALITs books against its
profits.

83
Identifying value drivers in M & As

Value created through M & A = Increase in
synergy minus Decrease in premium
84
Increasing synergy
Decreasing the premium
Managerial skills
Boosting marginal revenue
Lowering total costs
Reducing marginal Costs through operating

synergy
Reduction in beta
85
Thank you!

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Chapter 3

Oxford University Press 2011. All rights reserved.

A strategy where two or more companies agree to

Buying entity is called the Merged or Surviving Entity and

Under merger one company survives and the other loses

Laws in India use the term 'amalgamation' for merger

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Amalgamation as the merger of one or more companies

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Merger through Absorption:

Here all companies except one lose their identity

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Merger through Consolidation:

Amalgamation means an amalgamation pursuant

Amalgamation in the nature of merger is an

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All the assets and liabilities of the transferor company

Shareholders holding not less than 90% of the face

The above to exclude the equity shares already held

The consideration is discharged by the transferee

Merger movements often occur when the economy

The movements coincide with developments in the

Often result in efficient resource allocation, reallocation

The waves occur when firms respond to new

In each of the waves mistakes have been repeated and

Unlike in the past, M & A have become a global

A new trend being observed is the rise of emerging

Research shows that merger waves result from a

Economic shocks deal with economic expansion

Regulatory shocks occur when regulatory barriers

Technological shocks represent changes in

Occurred after the Great Depression of 1883

Peaked between 1898 and 1902 and ended in

Professor Ralph Nelsons study Industries

Wave saw horizontal mergers and industry

Giants born during this wave included J.P Morgans

Sherman Act enacted to control creation of

Reasons responsible for the growing number of

Unwillingness of U.S. Supreme Court to literally interpret the

A few takeover battles saw judges and elected

Known as Period of Merging for Oligopoly

Radio as a medium of advertising became popular

Decade saw large companies taking over smaller

Firms encouraged to sell businesses to outsiders

Mergers did not result in concentration of

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Known as Conglomerate merger period

Saw intensive merger activity backed by booming

Unusual element of this period was - smaller firms

Mergers resulted in diversified conglomerates

Many small firms moving into areas outside their

Legal environment made expansion tougher

Celler-Kefauver Act passed to prevent or prohibit the

Made horizontal and vertical mergers tougher

Wave continued until 1968 when Litton Industries

Market turned sour to conglomerates and the selling

Anti-trust lobby was hell bent upon preventing

Tax Reform Act passed in 1969 to curb manipulative

Curb on financing acquisitions through debt by stating

Conglomerates also became unpopular for:

Was observed that buyers often overpaid for diverse companies

Known as era of Hostile Takeovers

Saw a dramatic decline in the number of mergers