Chapter :03

Merger & Acquisitions

Introduction

Mergers and Acquisitions (Merger and

Acquisitions) are the most popular form of
corporate restructuring for expanding or
increasing the size and volume of business.
Merger

Merger refers to a situation when two or more

existing firms combine together and form a new
entity.
A merger may occur in two ways:
(i) Merger through absorption
(ii) Merger through consolidation
(i) Merger through absorption

Absorption is combination of two or more companies

in to an existing company
All companies except one lose their identity in merger
through absorption.
Exmaple: TCL is acquring company (Buyer ) survied
after merger with TFL ( Tata Ferilizers Ltd) ,an aquired
company (seller) ceased to exist.TFL tranfer its
assets ,libilities and shares to TCL
(ii) Merger through consolidation

A consolidation is a combination of two or more

companies in to new company.
In this types of merger ,all companies are legally
dissolved and new entity is created.
Example: Hindustan instruments ltd and Indian
Reprographic Ltd to entirely new company called HCL
Ltd.
Classificatio of Mergers.
Horizontal Merger
Vertical Merger
Conglomerate Merger
Triangular Merger
Forward Triangular merger
Reverse Triangular merger
Purchase Merger
Horizontal Mergers
It is merger occuring between companies producing similar
goods or offering similar services.
Such companies that are direct competition and share the
same product lines and markets.
This types of merger occurs frequently as aresult of larger
companies attempting to create more efficient economic scale.
Horizontal companies permits the surving company control
grater share of the market and it is hopped gain economic
scale.
 
Example of Horizontal merger
The merger of HP and Compaq are examples of horizontal
merger.
Facebook and Instagram
Disney-Pixar
Vertical Merger

Vertical Merger is a merger between companies in the

same industry, but at different stages of production
process. In another words, a vertical merger occurs
between companies where one buys or sells
something from or to the other.
A vertical merger (also called vertical integration) is
a merger between a manufacturer and a supplier. 
For example, Pepsi’s merger with restaurant chains
that it supplies with beverages is a vertical merger.
Example of Vertical merger
XYZ Ltd. is a textile manufacturer. ABC Ltd. is the
supplier of cotton to XYZ Ltd. since many years. XYZ
Ltd. and ABC Ltd. decide to merge their business.
We can see that both the business entities are involved
in the different stages of the production process. The
reason for merging is to bring efficiency in operations
by cutting the extra costs and increase the profits of
both the businesses.
Suppose company XYZ produces shoes. Company
ABC produces leather. ABC has been XYZ's leather
supplier for many years, and they realize that by
entering into a merger together, they could cut costs
and increase profits. They merge vertically because
the leather produced by ABC is used in XYZ's shoes.
Conglomerate Merger

Conglomerate Merger is a merger between companies

in different industries.
These mergers typically occur between firms within
different industries or firms located in different
geographical locations.
There are two types of conglomerate mergers: pure
and mixed. Pure conglomerate mergers involve firms
with nothing in common, while mixed conglomerate
mergers involve firms that are looking for product
extensions or market extensions.
A leading manufacturer of athletic shoes, merges with a soft
drink firm. The resulting company is faced with the same
competition in each of its two markets after the merger as the
individual firms were before the merger
The July 31, 1995, merger combined ABC's nationwide
broadcast channels and, crucially, ESPN with Disney's
film studios and theme parks. Just over a decade later,
before Disney's next big acquisition push, revenue had
jumped more than 70%; earnings per share increased
50%
Triangular Merger

A Triangular merger refers to the acquisition of a local

company throgh a share swap with local subsidary that
is wholly owned by a foreign buyer.
A simple words, a foreign company buys a local
company by exchanging the shares of its subsidiary
located in country of local company.
Forward Triangular merger
In the the forward triangular merger, the acquired
company merges with and into a merger subsidiary of
the acquiring company, with the merger
subsidiary surviving the merger.The forward
triangular merger can be contrasted with the reverse
triangular merger in which the acquired
company survives the merger.
Reverse merger
In a reverse merger, investors of the private company
acquire a majority of the shares of a public shell company,
which is then combined with the purchasing entity.
Investment banks and financial institutions typically use
shell companies as vehicles to complete these deals.
A reverse merger is an attractive strategic option for
managers of private companies to gain public company
status.
 The acquiring company is weaker or smaller than the one
being gobbled up, this is termed a reverse merger. Typically,
reverse mergers take place through a parent company
merging into a subsidiary, or a profit-making firm merging
into a loss-making one.
when Godrej Soaps — profitable and with a turnover
of ₹437 crore — did a reverse merger with loss-making
Gujarat Godrej Innovative Chemicals (turnover of ₹60
crore), the resulting firm was named Godrej Soaps.
Purchase Merger

This kind of merger occurs when one company

purchases another. The purchases is made with cash or
through the issue of some kind of debt instrument.
Acquiring companies often prefer this types of merger
because it can provide them with a tax benefit.
Motives Behind Merger.
Operating Motives.
This refers to cost saving through economics scale of
increased sale or profit.
Financial Motives:
 High debt capacity, better use of idle cash, set off loss
against profit.
HUL acquired Lakme ,it helped HUL to enter the
cosmetic Market through established brand
Acquiring New Technology:
To upgrade techonolgy,a company need not always
acquire techonology.by buying another company with
unique techonology,the buying company can maintian
or develop competitived.edge
Example: Blackberry and Treo which can incorporate
cell phone capability and email connectivity in one
device, palm pilots and tablet laptos.
Improved Profitibility:
Company explore the possibilities of a merger when
they anticipates of that it will improve profitability.
Entry in to New Markets.;
Company can individually enter in to market but may
have to face stiff competition from the existing
company and they have to battle.
here merger route is adopted
Exmple: hutch and Vodafone
Access to Fund:
Company finds it difficulty to access fund from the
capital market. This weakness deprived the company
of fund to pursue its growth objectiveness effectively.
Tax Benefit:
Merger are also adopted to reduce tax liabilities.By
merging loss Making company with high tax lability
can set off loss against target company profit.
Process of Merger and Acquisition

Process of Merger

Planning Implementation Plan

Phase

Developing 1.Search companies for acquisition.

business plan 2.Screen and prioritize potential
companies.
3.Intitate contact with the target company.
4.Negititate deal.
Develop 5.Develop integration plan.
acquit ion 6.Obtain necessary approval and close the
plan deal.
•Planning Phase
Developing Plan
Identify a target firms that fits into strategice goal of the company and increase
net cashflows and reduce risk.
Develop business plan and effectively communication the vision and mission of
the firms.
the appointing of advisors who play the role of consultants, examining the
strengths, weaknesses, opportunities, and threats of the merger;
detailing the timetable (deadline), conditions (share exchange ratio), and type of
transaction (merger by integration or through the formation of a new company);
expert report on the consistency of the share exchange ratio, for all of the
companies involved.

• Industry where company desire to compete.

• Determine how to compete effectively
• Selecting the objective
Planning Phase
Develop Acquisition Plan
the Board of Directors calling an extraordinary shareholders’ meeting
whose item on the agenda is the merger proposal;
the extraordinary shareholders’ meeting being called to pass a
resolution on the item on the agenda;
any opposition to the merger by creditors and bondholders within 60
days of the resolution;
green light from the Italian Antitrust Authority, that evaluates the
impact of the merger and imposes any obligations as a prerequisite for
approving the merger.
Internal analysis completed and the company feels that the time is right
for a merger and acquisition strategy
• Appropriate tactic for implementing for the proposed transactions.
• Schedule or time table for completing the process of acquisition.
Implementation Phase.
1) Search Companies for Acquisitions:
The Company starts searching for potential
acquisition candidates.
The Search Process involves establishing a primary
screening process based on factor as industry, size of
transaction. Etc.
 The Search strategy includes the use of databse ,law
firms ,investment bankers and broker etc.
Implementation Phase
2) Screen and Prioritize Potential candidates.
The Screening may done on the basis of Market
Segments,Product line ,firm’s prfitability ,degree of
leverages,market share etc.
3) Initial Contact with target company
This step is one the acquirer meets the target company and put
forth the proposal of acquisition.
The method of establishing contact with the target company
differ from case to case.
Discounted cash flow method.
Book Value Method
Market Value Method.
4) Negotiate Deal
Under this step Purchase consideration is determined.
Total purchase consideration is the value of cash,stock
,new debts issues and non financial assets.
Net Purchase Price: This is the toal purchase price plus
othe assumes libilites
5) Develop integration Plan
Help acquirer determine the maximum price he can
offer to the target company for the deal.
6) Obtain Approval and close deal.
The acquirer and target company need to secure the
consent of shareholders, regulatory authorities, and
third party consent.
Documents include:
Purpose of acuisistion
Purchase Price
Mode of Payment of purchase price.
Details of Liabilities and assets taken over,
7) Implement integration:
Mergers and acquisitions are inititated with the hope
that the combined entity would generate synergies.
Reasons for failure Merger and Acquisitions.
Unrealistic Price Paid for Target
Price Paid to the target company is much more than
what should have been paid and shareholder of target
company get benefited and acquirer company ‘s
shareholder get loss.
Difficulties in cultural integration
 Every merger invlove comibining of two or more
different companies.These entity reflect different
corporate culutre ,style of leadership ,different
employee expectation and functional difference
Overstated Synergies.
Merger and acuisitions are looked upon as important of
creating synergies through increased revenue,reduce
cost,rdeuction in net working capital and
improvement in the investment,
Inconsistent Strategy
Entities that fails to assess the strategies benefits of
mergers face failure.
Regulatory Issues:
If any shareholder are not in favor of the merger ,they
might create legal obstacles and slow down the entire
process.
HR Issues
HR Issues like communication, imposition of new
corporate culture and identity this create uncertainty
anxiety among the company employees.
Reverse Merger.
A reverse takeover (RTO) is a type of merger that private
companies engage in to become publicly traded without
resorting to an initial public offering (IPO).
Initially, the private company buys enough shares to control a
publicly traded company.
The private company's shareholder then exchanges its shares
in the private company for shares in the public company. At
this point, the private company has effectively become a
publicly traded company.
Reverse meger is quicker, easier and cheaper route to
becoming a public company.
Exmples of Merger and Acquisition in india.
Tata Steel-Corus: Tata steel purchasing 100 % stake
in the Corus group .
Vodafone –Hutch : vodafone bought the controlling
interest of 67 % held by Li- shing Holdings in Hutch –
Essar for $11.1 billion.
Hindalco-Novelis: Hindaclo industries a kumar
Mangalam Birla led Aditya Birla group aquired Copper
Major Candidan company Novelis Inc.
Ranbaxy –Daiichi Sankyo: Japanese drug firms
Daiichi Sankyo acquired a majoirity stake of More than
50 % in domestic Major Ranbaxy for Over $ 4 billion.
ONGC- Imperial energy: ONGC Made takeover offer
to Imperial Energy Plc for $ 2.8 billion.
HDFC Bank – Centurion Bank of punjab: HDFC
Bank acquisition of Centurion Bank of Punjab for $ 2.4
billion
Tata Motors- Jaguar Land Rover: Tata Motors
acquired luxury auto brand –jaguar and Land Rover
from Ford Motors for $ 2.3 billion.
Suzlon-Repower. Wind Power major Suzlon Energy
acquired Germany ‘s Leading manufacture of wind
turbines REPower for $ 1.7 billion.
Amalgamation

Amalgamation is an arrangement or reconstruction.

It is process by which two or more companies are to be
absorbed or blended with another.
The amalgamating company loses its existence and its
shareholder become shareholder of new company
if two existing companies say, X Ltd. and Y Ltd. go into
liquidation to form a new company XY Ltd., it is a case of
amalgamation.
Amalgamation by classifying
(i) Amalgamation in the nature of merger
(ii) Amalgamation in the nature of purchase.
(i)

Amalgamation in the nature of merger
1. All the assets and liabilities of the transferor company become the
assets and liabilities of the transferee company after amalgamation.
2. Shareholders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity shares
already held therein, immediately before amalgamation, by the
transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee company by virtue of
amalgamation.
3. The consideration to the shareholders of the transferor company
(who agree to become equity shareholders of the transferee
company) is discharged by the transferee company wholly by issue
of equity shares in the transferee company except that cash may be
paid in respect of any fractional shares.
4. The business of the transferor company is intended
to be carried on, after the amalgamation, by the
transferee company.
Amalgamation in the Nature of Purchase:

An amalgamation is in the ‘Nature of Purchase’ if any

one or more of the five conditions specified for Merger
is not satisfied. In such kind of amalgamation
shareholders of the company which is acquired
normally do not continue to have a proportionate
share in the equity of the combined company. The
transferee company may also not intend to continue
the business of Transferor Company
Meaning of Acquisition
Acquring refers to the acquring of ownership right in
the property and assets wihtout any combination of
companies.
Acquissioton means when one company purchase the
controlling interest in the share capital of another
exisitng company in .
A) By entering into an agreement with a person or
persons holding shares of the controlling interest on
the other company.
B) By Subscribing new shares being issued by other
company.
C) By purchase shares of the other company at a tock
exchange .
Meaning of Takeover
A takeover may be defined as a series of transactions
whereby a persons ,individual & group of individuals
or a company acquires control over the assets of the
company wither directly by becoming owner of those
assets or indirectly by obtaining control of
management of the compny
Types of Takeover
Takeover may be of different types depending upon
the purpose of acquiring a company.
(a) A takeover may be straight takeover.:

(b) Ownership of company is captured to merge both

companies into one and operate as single legal
entity.
(c) Healthy company of a sick company for its revival.
(d) The fourth kind is the bailout takeover.
Purchase Merger
History of Mergers
(The First Waves (1897-1904)
The First US Merger wave began at the end of the 19th
Centuary and lasted untill 1904.
The Second Merger Wave
(1922-1929)
The Second period of business combination
activity,fostered by the federal government during
World War I,continue through the 1920s
These combination efforts were to obtain better
integration of operations,reducing costs and improve
competitive positions rather than attempts to establish
monopoly control over an industry.
Third Wave During 1963-1970
The Fourth Wave
Theories of Merger

 Three major theories

 (a)Internalisation theory
 (b) Technological competence theory
 (c)Transaction cost theory
Impact of Merger and Acquisitions on
Stakeholders

 The impact of Merger and Acquisitions on different

stakeholders is discussed below
 (i) Impact on Shareholders
 Iincrease the sharholder value is generally prime objective
of the most of merger and acquisition today
 The Value of sharholder through merger and acquisitions
could be increased either by cutting the costs by combining
similar assets in the merging concerns or by enhancing the
revenue focusing on enhancing capabilities and revenues.
 (
 (v) Impact on Organisation Culture
(ii) Impact on Employees

Merger often lead to higher workloads being placed on

remaining staff, with companies requiring flexibility
on terms of working hours ,mobility skills ,excellent
and highly motivated employees of the merged entity
may feel frustrated and may resign or they many not
give their best to the organization.
(iii) Impact on Customers

They are able to do this because new information and

communication techonolgy allow them to save cost by
operating with fewer branches or without a traditional
branch network.
(vi) Impact on Public
(iv) Impact on Government

Government and Supervisory authorities have to

provide an environment conducive for consolidation
and convergence through appropriate fiscal and
monetary policy supported by regulatory and
supervision framework.
(a) Internalisation theory

The International theory is based on the idea of

intangible assets ;in order to attract merger or
acquistions,corporations must have intangible assets
corporations make them profitable.
These assets can include knowledge of particular
market, know how in particular technology or an
enviable reputation for product quality.
The international theory assumes that purchaser of
the target corporations wants to obtain their
intangible assets.
(b) Technological competence theory

First when targeted corporations are in industries with

high technological coefficient ,potential purchasers will be
more inclined to install research and development
capacity, there thus enhancing local innovations.
Second When local corporations have low technological
capacities, merger and acquisitions may increase the
technological content of productions.
Third in acquisitions may increase engage in research but
are not on the cutting edge technology mergers and
acquisitions may result in the complete absorption of the
targeted company
Transactions Cost Theory
A Corporations may decide to acquire an important
supplier in order to ensure particular input is
avialble,to reduce supply uncertanities or to reduce
cost of this inour.
This is the basic of the transaction cost theory which
implies primarly to vertical transaction .
Other theories.
1) Efficiency theory
 This concept held that acquisitions were excepted to achieve synergies.
 Three Types of synergies are identified.
 First financial synergy aimed achieving lower cost of capital through lowering systematic risk of the
acquirer
 Second operational synergy targetd achieving operational excellence from a combined firm operations.
 Third managerial synergy was used to enhance a target competitive position by transferring
management expertise from the bidder to target.
2) Monopoly Theory
 This theory viewed this acquisitions were executed to achieve market power.
 The implications of this types of acquisitions is that conglomerates use it to cross subsidies product to
limit competition in more than one market.
3) Process Theory
 This approach indicates that strategic decions are outcomes of process governed by bounded rational
theory,central role of the organization routines ,or political power in the decision process rather than
completely rational choices.
1) Disturbance Theory
2) Valuation Theory