MERGERS & ACQUISITIONS

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 MERGERS & ACQUISITIONS
MERGER:
Integration of two or more firms on co-equal basis to form a
single larger entity, with the objective of creating a sustainable
competitive advantage/getting better return on investment.
Shareholders of both companies retain interest in the merged
entity.

ACQUISITION:
One company gaining partial or complete control over another
for strategic reasons. Can also be unfriendly/
hostile and against the interest of the acquired firm.
Creates an uneven balance of ownership in the new
combined company.

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 HISTORICAL PERSPECTIVE - ABROAD
First wave 1897 to 1904 – horizontal mergers;
established large industrial houses
Second wave 1920 to 1929 – vertical & conglomerate
mergers; sectoral clusters in railroads & utilities
Third wave 1965 to 1975 – economies of scale;
mass production of consumer goods
Fourth wave 1984 to 1988 – mergers mainly in Europe;
creation of technological synergy
Fifth wave from 1995 – result of globalization (expanded
markets – automobiles & pharmaceuticals) & deregulation
(competition – telecom & utilities)

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 HISTORICAL PERSPECTIVE - INDIA
First wave 1980s – Licence raj necessitated buying companies
for quick growth; led by takeover tycoons - Swaraj Paul, Manu
Chhabria & R. P. Goenka
Second wave early 1990s – liberalisation leading to
competition; sale of non-core businesses; TOMCO sold by
Tatas to HLL
Third wave From 2000 – driven by consolidation in key sectors
like cement & telecom; Bharti Televentures & Hutch bought
smaller rivals to achieve national reach
Fourth wave Most recent – Foreign & MNC investments into
Indian cos; Holcim > ACC, Oracle > i-Flex Solns AND
Indian cos acquire abroad – Tata Steel > Natsteel; Videocon >
Thomson picture tubes; Need for global scale for survival
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 RATIONALE FOR M & A (Summary)

1. TO INCREASE MARKET POWER

2. TO OVERCOME ENTRY BARRIERS
3. COST OF NEW PRODUCT DEVELOPMENT
4. INCREASED SPEED TO MARKET
5. LOWER RISK THAN NEW PRODUCT DVPT
6. INCREASED DIVERSIFICATION
7. RESHAPING THE COMPETITIVE SCOPE
8. FOR TAX WRITE OFFS

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 RATIONALE FOR M & A

1. TO INCREASE MARKET POWER – through cost advantage,

shared resources & increased size
Increased market share & greater flexibility in pricing and
buyer incentives
When two dominant companies merge, could lead to
monopoly litigations

Contd..
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 RATIONALE FOR M & A (Contd..)
2. TO OVERCOME ENTRY BARRIERS IN NEW MARKETS
Customer relationship & product loyalty
Knowledge of local market
Advertising expenditure
Economies of scale

3. COST OF NEW PRODUCT DEVELOPMENT

Requires large investment & commitment
Success of new product is unpredictable
Return on investment may take a long time
Pharmaceutical industry – generic drugs
Contd..

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 RATIONALE FOR M & A (Contd..)
4. INCREASED SPEED TO MARKET
Faster market entry as compared to new product
development
Quickest route to new markets & new capabilities for
creating advantageous market position (but rivals could
respond fast)

5. LOWER RISK THAN NEW PRODUCT DVPT

Low risk approach to entering new products & markets (but
prevents investment in product dvpt)
Contd..

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 RATIONALE FOR M & A (Contd..)
6. INCREASED DIVERSIFICATION
Easy to introduce new products in existing markets or exiting
products in new markets (to achieve global reach) with
better chances of success
Both related & unrelated diversifications depending on fit
between the companies

7. RESHAPING THE COMPETITIVE SCOPE

Reduce dependence on a single or limited range of products
& markets (diversification vs focus on core business)

8. FOR TAX WRITE-OFFS

Combine a profitable company with a losing one to use the
losses as a tax write-off to offset the profits, while expanding
the corporation as a whole
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 THREE FORMS OF MERGERS
HORIZONTAL MERGER – Two firms in the same business
activity merge to achieve economies of scale, share
resources & skills, reduce competition – monopolization &
higher prices for consumers

Whirlpool & Kelvinator (1995)

Electrolux & Intron, Allwyn, Maharaja Appliances
Electrolux & Kelvinator, Voltas
Electrolux Kelvinator with Videocon Inds (2006)
Coke & Parle; Pepsi & Duke
Lafarge > Tata Steel & Raymonds cement divns
HLL & Dollops; Kwality & Milkfood
Contd..

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 THREE FORMS OF MERGERS (Contd..)
VERTICAL MERGER – Merger of firms in different stages of
the value chain to reduce transfer costs & increase margins,
better inventory & production management
Includes merger with a supplier, a warehousing company or a
distribution chain
Forward integration:
Coke & bottling plants
Merck & Co – Medco Containment Services
Backward integration:
McDonalds & food products vendor
HLL, Tata Tea – tea gardens

Contd..
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 THREE FORMS OF MERGERS (Contd..)
CONGLOMERATE MERGER – Merger of firms from different
businesses (related or unrelated) or geographic regions

Product extension merger – Merger of related businesses

to extend product range – concentric merger

Geographic extension merger – Merger across non-

overlapping geographic areas

Pure conglomerate merger – Merger of unrelated

businesses

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 MOTIVES FOR M & A IN INDIA
1. Instantaneous growth instead of organic growth – Sun
Pharma

2. Increase market share & bargaining power with suppliers &

dealers – HLL > TOMCO

3. Acquiring capability or network – ICICI > ITC Classic Finance

for the latter’s retail network & depositor base

4. Entering new products & markets – Ranbaxy > Crosslands

for therapeutic & dermatalogy products

5. Access to funds – TDPL < Sun Pharma

6. Gain tax benefits – ITC Bhadrachalam < ITC

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 REASONS FOR CROSS BORDER M & A
GROWTH:
Grow by investing in a buoyant economy
Grow by selling to more markets through scale economy

TECHNOLOGY:
Exploit technological advantage in new markets
Gain access to superior technology of other firm to improve
position both at home and abroad

GOVERNMENT POLICY:
To acquire access to markets with high tariff & quota barriers
Environmental & other regulations may make it easier to acquire
an existing firm
Contd..
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REASONS FOR CROSS BORDER M&A (Contd..)

DIFFERENTIAL LABOUR COSTS, PRODUCTIVITY:

To take advantage of cheap labour or more productive labour
SOURCE OF RAW MATERIALS:
Vertical mergers to get access to raw materials in resource-poor
economies (However, some countries may have restrictions on
foreign acquisition of strategic raw materials)

A merger is often handled by an investment banker,

who helps in target identification, valuation, bidding/
negotiation, capital structuring, transaction structuring,
legal documentation, acquisition financing, strategy &
implementation.

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 MANAGEMENT GUIDE FOR M&A (Contd..)
Carry over of Managerial Capabilities: Conglomerate
mergers in particular are guided by the opportunity for carry
over of specific management capabilities such as research,
application engineering, production, marketing or even
general management
FRAMEWORK FOR SUCCESSFUL MERGERS
(Five rules according to Drucker for mergers to be viable)
1. Acquirer must contribute something to the acquired firm
2. A common core of unity is required
3. Acquirer must respect acquired company’s business (& people)
4. Acquiring company must be quickly able to provide top management to
the acquired company
5. Managements in both companies should receive promotions within an
year of merger
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 BLUEPRINT FOR INTEGRATING
ACQUISITIONS
Success of integration depends not on industry type,
type of integration, purchase premium or capitalization
ratio, but on the firm’s pre- and post-integration
strategy and the ability to act quickly.
Booze-Allen Hamilton

Should bring together strategies, policies & procedures of the merging

companies

AVOID inefficient operations, communication gaps,

misunderstandings of objectives, clashes in culture &
leadership
Contd..

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 BLUEPRINT FOR INTEGRATING
ACQUISITIONS
1. At the beginning of negotiations, focus on business portfolio,
legal & financial aspects. Later switch to people and
processes (the human side of the merger)
2. As the deal closes, decide on the management structure -
settle as to who reports to whom and who is responsible for
what
3. Avoid losing external focus which could lead to loss of
customers and people
Majority of merger attempts do not succeed. Most merger
plans are kept secret initially. It is therefore difficult to
estimate as to how many proposed mergers actually happen.
Contd..
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 BLUEPRINT FOR INTEGRATING
ACQUISITIONS (Contd..)
4. Clearly determine the mutual gives & takes and communicate
to all stakeholders

5. Bring together strategies, policies & procedures of the

merging companies

6. Integrate basic work processes, computer systems, financial

systems, etc. Have the right people to address the teething
problems

7. Firm up the post-merger operational cost structure and

pricing system to get the best results

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 STRATEGIC REASONS FOR
M & A VALUE CREATION
A wrongly conceived merger will fail, no matter how good the
integration process; and a deal based on sound logic might
stumble, if the integration process is poor.

Rappaport’s study shows how key valuation parameters used in

M&A decisions can be value drivers that could be related to
generic strategies such as cost leadership or product
differentiation, as developed by Michael Porter.

Value drivers such as sales growth rate, profit margin, working

capital investment, fixed capital investment and cost of capital
relate to tactics supporting cost leadership strategy or tactics
supporting differentiation strategy depending on the approach
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