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Business activities that expand or contract a firm s operations or substantially modify its financial structure or bring about a significant change in its organizational structure and internal functioning. It may include activities such as Mergers ( also called as Amalgamations in India ) Acquisitions/Takeovers Purchase of business units Demergers ( spin off/split up ) Leveraged Buyout
Corporate Restructuring Business activities that expand or contract a firm s operations or substantially modify its financial structure or bring about a significant change in its organizational structure and internal functioning. It may include activities such as Mergers ( also called as Amalgamations in India ) Acquisitions/Takeovers .
Ashok Leyland Ltd absorbed Ductron Castings Ltd Consolidation : Two or more companies combine to form a new company.MERGER A merger refers to a combination of two or more companies into a single company. Absorption : one company absorbs another company. Hindustan Instruments Ltd. Indian Reprographics Ltd combined to HCL Ltd . This combination may be either through absorption or consolidation. Indian Software Co Ltd. Hindustan Computers Ltd.
America Online Inc and Time Warner Inc to form a new company as AOL Time Warner. .Examples of Mergers : Merger of Air India Limited and Indian Airlines Limited resulted as a new Company viz National Aviation Company of India Limited (NACIL). Merger of Reliance Petroleum Limited with Reliance Industries Limited.
. it is known as acquisition. Scharf. . If the willingness is absent. If there exist willingness of the company being acquired. which enables the acquirer to exercise control over the affairs of the company. the acquirer must buy more than 50 percent of the paid up equity of the acquired company to enjoy complete control. According to Charles A. it is known as takeover. In theory.Acquisitions or Takeovers A takeover generally involves the acquisition of certain block of equity capital of a company. the element of willingness on the part of the buyer and seller distinguishes an acquisition from a takeover.
acquired the US-Canadian aluminum giant Novelis Inc. a subsidiary of the AV (Aditya Vikram) Birla Group of Companies (Aditya Birla Group).Examples For Acquisitions : Tech Mahindra acquired Satyam Computer Services Ltd. India-based Hindalco Industries Limited (Hindalco). (steel producers) Ranbaxy Laboratories Ltd has acquired Romania s largest independent generics drug company. . Tata Steel completed acquisition of Corus Group plc. Terapia SA.
in exchange for their shares in the XYZ Co. stock-for-stock transaction or a combination of both .The acquiring company ( ABC Co ) acquires the assets & liabilities of acquired/merging company/target company ( XYZ Co ). So the shareholders of XYZ Co. A M&A deal can be executed by means of a cash transaction. receive shares of the ABC Co.
Motives for Mergers .
If firms A and B merge. 2+2=5! . is expected to be greater than (VA+VB) . Synergy is used to refer to the idea that the combination of two companies would allow for more cost efficient and profitable operation. while another company has a terrible product but great distribution techniques. For example. the sum of independent values of A and B. if one company has an outstanding product but no way in which to distribute.Synergy Principal economical rationale of a merger is that ³the value of the combined entity is expected to be greater than the sum of the independent values of merging entities´. then potentially the two companies could create synergy with a merger. the value of the combined entity V(AB).
. the companies hope to benefit from the following: Advantages of Mergers and Acquisitions Economies of Scale : When two or more companies combine. lowering the costs of the company relative to theoretically the same revenue stream. thus increasing profit.By merging. economies of scale arises when increase in the volume of production leads to a reduction in the cost of production per unit. This refers to the fact that the combined company can often reduce duplicate departments or operations.
A merge may expand two companies' marketing and distribution. giving them new sales opportunities. Improved market reach and industry visibility: Greater market share and Companies buy companies to reach new markets and grow revenues and earnings.BENEFITS : Acquiring new technology: By buying a smaller company with unique technologies. . a large company can maintain or develop a competitive edge.
Strategic Benefits Lower Financing Costs .Other Advantages : Staff reductions Tax Benefits Extending product/service portfolio Reduces competition if a rival is taken over.
meaning decisions are more difficult to make and causing disruption in the running of the business.The disadvantages of mergers and acquisitions are: Diseconomies of scale if business becomes too large. Clashes of culture between different types of businesses can occur. especially at management levels ± this may have an effect on motivation. reducing the effectiveness of the integration. which leads to higher unit costs. . May be a conflict of objectives between different businesses. May need to make some workers redundant.
They serve the same market and sell the same product. With Reliance Industries Ltd . EX : Merge of Reliance Petrochemicals Ltd.TYPES OF MERGER Horizontal Merger : A merger of two companies who are direct competitors of one another. Forward Integration where it merges its customers. Like merger between a company and a customer or between a company and a supplier. With Tata Finance Ltd Vertical Merger : A merger of firms engaged at different stages of production in an industry. Backward Integration where company merges its suppliers. EX : Tata Industrial Finance Ltd.
Market Extension Merger : Merger between two companies selling same products in different markets. Conglomerate Merger : Merger of firms engaged in unrelated lines of business. . Consolidation Merger With this merger. Purchase Mergers One company purchases another.Product Extension Merger : Merger between two companies selling different products of related category in the same market. both companies are combined and formed under a new entity.
( often to its own name ). Public company will be the legal acquirer and private company will be accounting acquirer . A reverse merger is a method by which a private company can become a publicly traded company without the expense and the time requirements Involved in an IPO.Reverse Merger : A merger of private company with an existing public shell company. Private company obtains the majority of the shell¶s stock ( usually 90% ). The private company normally will change the name of the public corporation.
. . a public shell corporation controlled by Halter Financial Group .. and THT Heat Transfer Technology Co.. Following the close of the reverse merger transaction. Inc. Ltd.. BTHC VIII will change its name to THT Heat Transfer Technology Co. Ltd. a PRC company.Example of Reverse Merger : Reverse Merger transaction between BTHC VIII.
( Also called as Preferential Allotment ) . ( Also called as Open Market Purchase ) Friendly Takeover: Target company¶s Management and board of directors agree to an Acquisition by another company.Types of Acquisition Hostile Takeover: A hostile takeover is a type of corporate takeover which is carried out against the wishes of the board of the target company.
Keys to a Profitable Merger Comparative Ratios Price-Earnings Ratio (P/E Ratio) ± P/E ratio is that it is a prediction or more likely an expectation of the company's performance in the future. P/E Ratio = Market Value per Share Earnings per Share . Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be.
other companies or the market itself.Enterprise-Value-to-Sales Ratio (EV/Sales) . again. while being aware of the price-to-sales ratio of other companies in the industry. acquisitions are based on the cost of replacing the target company. the acquiring company makes an offer as a multiple of the revenues. . Price to sales is calculated by dividing a stock's current price by its revenue per share for the trailing 12 months: PSR = Share Price Revenue per share Replacement cost In a few cases. A ratio for valuing a stock relative to its own past performance.With this ratio.
the opportunity may be a good one. If the value arrived at through DCF analysis is higher than the current cost of the investment.Discounted Cash Flow is the most accurate and reliable tool used to evaluate whether a merger or acquisition with be a profitable one. The purpose of DCF-Valuation is to determine the value of a company in terms of its future cash flows. Calculated as: .
The tender offer is then frequently advertised in the business press. the acquiring company will arrive at an overall price that it's willing to pay for its target in cash. they start with a tender offer.Mergers and Acquisitions: Doing The Deal Preliminary Assessment or Business Valuation In this first step of Merger and Acquisition Process. shares or both. . stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it. the market value of the target company is assessed. Working with financial advisors and investment bankers. Start with an Offer When the CEO and top managers of a company decide that they want to do a merger or acquisition.
The Target's Response Once the tender offer has been made. they will go ahead with the deal. or the specific terms of the deal may not be attractive Using a Poison Pill A strategy used by corporations to discourage a hostile takeover by another company . Accept the Terms of the Offer . Attempt to Negotiate The tender offer price may not be high enough for the target company's shareholders to accept.If the target firm's top managers and shareholders are happy with the terms of the transaction. the target company can do one of several things.
Closure of the deal of merger or acquisition: Finally. stock or both. the acquiring company will pay for the target company's shares with cash. the merger deal will be executed by means of some transaction. . In a merger in which one company buys another. once the target company agrees to the tender offer and regulatory requirements are met.
Cultural misfit.Why mergers fail ? Lack of management foresight. Acquiring company's management team inexperienced at M&A. Loss of key employees Inability to overcome practical challenges. . Ineffective corporate governance.
Special \ Merger & Acquisitions Calls (SMC) is the tag used.Capital IQ provides the latest information about Mergers & Acquisition deals and overall market activity which helps the invsetors. Updates on Conference calls regarding special events like mergers & acquisitions to shareholders. . investors and analysts.
it should be planned carefully. A merger will be successful when its purpose is accomplished. As the chances of failure in M & A can be high. .CONCLUSION : A merger may be effective or successful to deliver the immediate objective but may be failed to deliver all the theoretically defined benefits.
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