Unit-1

Mergers
&
Acquisitions
 Mergers
It’s a combination of two or more companies into a single
company where one survives and other lose their corporate
existence.
The shareholders of two companies, deciding to pool the
resources of the companies under a common entity to do the
business activity is called merger.

06/06/2020
 Vodafone India and Idea
Cellular Merger
 SBI merger with its Associate
Bank & Bhartiya Mahila Bank.
 The merger of Fortis
Healthcare India and Fortis
Healthcare International.
 MERGER
“Combining of two or
more commercial
organizations into one in
order to increase efficiency
and sometimes to avoid
competition”.
REVERSE MERGER
“As a commercial term, it
means when a Healthy
Company (in terms of size,
capital or listing status)is
merging in a Weak Company
(in terms of size, or unlisted)”.
 DEMERGER
“Separation of a large Company into two or
more smaller organization”
“Division of a Company with two or more
identifiable business units into two or more
separate companies ”

SECTION – 2(19AA) of Income Tax Act, 1961.

 Categories of Merger
1. Amalgamation
2. Absorption
3. Combinations
4. Acquisitions
5. Takeover
6. Demergers
 Amalgamation

Amalgamation: is used when two or more companies’ carries

on similar business go into liquidation and a new company is
formed to take over their business.
 Absorption
Absorption is a combination of 2 or more companies
into an existing co.
All companies except one lose their identity in a
merger through absorption.
 Combinations/ Consolidation
Contractual and statutory process or action where two or more
entities come together to form a more solid or stronger entity.
What are the Major Reasons Behind Consolidations?
Streamlining the management and improving decision making.
Saving resources, money, and to reinvest funds.
Launching new services in faster and easier ways.
Improving security
Streamlining provision of customer services.
 Acquisitions
Acquisition means acquiring the ownership in the company.
When 2 companies become one but with the name and control
of the acquirer, and the control goes automatically into the
hands of the acquirer.
 Takeover
A takeover generally involves the acquisition of a certain
stake in the equity capital of a company which enables the
acquirer to exercise control over the affairs of the company.
Ex: HINDALCO took over INDAL by acquiring a 54% stake in
INDAL from its overseas parent, Alcan.
 Demergers
Demerger or split or division of a company is opposite of
mergers and amalgamations.
 Balaji Telefilms have considered and approved the demerger
between the Company and Balaji Motion Pictures Limited
(BMPL).
 IIFL Holdings has decided to demerge ‘5Paisa Digital
Undertaking’ from IIFL Holdings Ltd (IIFL) into its fully
owned subsidiary 5Paisa Capital Ltd (5Paisa).
 Types of merger
1. Horizontal Mergers
2. Vertical Mergers
3. Conglomerate Mergers
Horizontal Mergers
 This involves two firms operating in the same kind of
business activity. Both acquiring and the target company
belong to same industry.
 Flipkart’s acquisition of eBay India for $500 million in
2017.
 Facebook acquired Whatsapp for US$ 19 Billion in 2014.
Vertical Merger
This occurs between firms in different stages of production
and operation. Expands the promoting backward integration to
integrate sources of supply and forward integration towards
market outlets.
Vertical Forward Integration – Buying a customer: - Indian
Rayon’s acquisition of Madura Garments along with brand
rights.
Vertical Backward Integration – Buying a supplier: - IBM’s
acquisition of Daksh
Conglomerate Merger
Conglomerate merger represents a merger of firms engaged in
unrelated lines of business.
3 types of Conglomerate merger:
 Product-extension mergers (concentric mergers) (New product in
Present territory) - P&G acquires Gillette
 Geographic market-extension merger - Pizza Hut
 Pure conglomerate mergers - Indian Rayon’s acquisition of PSI
Data Systems.
Motives of Mergers
1. Procurement of Supplies
2. Market Expansion
3. Financial Strength
4. Diversification
5. Taxation Benefits
6. Managerial Motives
7. Acquisitions of specific Assets
8. Growth Advantage
9. Revamping Production Facilities
Acquisition
An acquisition, also known as a takeover or a buyout, is the
buying of one company (the ‘target’) by another.

2014. Microsoft acquired Nokia for USD 7 Billion.

2017. Axis Bank’s acquisition of Free Charge for $60 million
 MERGER ACQUISITION
i. Merging of two organization in i. Buying one organization by
to one. another.
ii. It is the mutual decision. ii. It can be friendly takeover or
iii. Merger is expensive (higher hostile takeover.
legal cost). iii. Acquisition is less expensive than
merger.
iv. Through merger shareholders
can increase their net worth. iv. Buyers cannot raise their enough
capital.
v. It is time consuming and the
v. It is faster and easier
company has to maintain so much
transaction.
legal issues.
vi. The acquirer does not experience
vi. Dilution of ownership occurs in
the dilution of ownership.
merger.
 Theories of mergers
I. Efficiency theories
A. Differential managerial efficiency
B. Inefficient management
C. Operating synergy
D. Pure diversification
E. Strategic realignment to changing environments
F. Undervaluation
 II. Information and signaling
III. Agency problems and managerialism
IV. Free cash flow hypothesis
V. Market power
VI. Taxes
VII. Redistribution.
 I. Efficiency theories
Differential Efficiency
The differential efficiency explanation can be formulated
more vigorously and may be called a managerial synergy
hypothesis. If a firm has an efficient management team whose
capacity is in excess of its current managerial input demand, the
firm may be able to utilize the extra managerial resources by
acquiring a firm that is inefficiently managed due to shortage of
such resources.
 I. Efficiency theories
Inefficient Management
Inefficient management is simply not performing up to its
potential. Another control group might be able to manage the
assets of this area of activity more effectively.
If the replacement of incompetent managers were the sole
motive for mergers, it should be sufficient to operate the
acquired firm as a subsidiary rather than to merge it into the
acquirer.
 I. Efficiency theories
Synergy
Synergy is a term that is most commonly used in the context of
mergers and acquisitions (M&A).
Synergy, or the potential financial benefit achieved through
the combining of companies, is often a driving force behind a
merger.
 Synergy
Synergy is ability of merged company to generate higher
shareholders wealth than the standalone entities
BENEFITS
 Staff reductions
 Economies of scale
 Acquiring new technology
 Improved market reach
 Synergy
The term synergy refers to the benefits resulting from merger
and acquisition. The synergy may be of three types:-
1. Financial synergy
2. Operating synergy
3. Managerial synergy.
 I. Efficiency theories
Pure Diversification
Diversification of the firm can provide managers and other
employees with job security and opportunities for promotion
and, other things being equal, results in lower labor costs.
 I. Efficiency theories
Strategic Realignment to Changing Environments
The strategic planning approach to mergers implies either the
possibilities of economies of scale or tapping an underused
capacity in the firm's present managerial capabilities.
 I. Efficiency theories
Undervaluation
Some studies attribute merger motives to the undervaluation of
target companies. One cause of undervaluation may be that
management is not operating the company up to its potential.
 Theories of mergers
II. INFORMATION & SIGNALING
It attempts to explain why target shares seem to be permanently
revalued in a tender offer whether or not it is successful.
 Theories of mergers
III. AGENCY PROBLEMS AND MANAGERIALISM
It may result from a conflict of the interest b/w managers &
shareholders or b/w shareholders & debt holders. A number of
organization& market mechanisms serve to discipline self-
serving managers & takeovers are viewed as the discipline of
last resort.
Managerialism: Managers want to increase the size of the
company through mergers so as to increase their power and pay
packages.
 Theories of mergers
IV. FREE CASH FLOW HYPOTHESIS
It says that takeover take place because of the conflicts b/w
managers & shareholders over the pay out of free cash flows.
Hypothesis assumes that free cash flow should be paid out to
shareholders reducing the power of mgmt. & subjecting
managers to the security of the public capital markets more
frequently.
 Theories of mergers
V. MARKET POWER
It claims that merger gains are the result of increased
concentration leading to collusion & monopoly effects.
There are three sources through which market power can be
achieved. They are
1. Product differentiation
2. Entry barriers
3. Market share
 Theories of mergers
VI. TAX EFFECTS
Carryover of net operating losses & tax credits, stepped-up asset
basis & the substitution of capital gains for ordinary income are
among the tax motivations.
 Theories of mergers
VII. REDISTRIBUTION
A final theory of the value increases to shareholders in
takeovers is that the gains come at the expense of other
stakeholders in the firm.
Redistribution among stakeholders is the main source of value
increase in mergers.
Hubris Hypothesis of Takeovers
The hubris (or pride) hypothesis (Roll, 1986) implies that
managers seek to acquire firms for their own personal motives
and that the pure economic gains to the acquiring firm are not
the sole motivation or even the primary motivation in the
acquisition.
 Impact of M & A on stakeholders
 Employees
 Competitors
 Customers
 Advisors
 Lenders
 Vendors
 Government Regulators