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MERGERS

By Saurav Dhingra

MERGERMerger: the share holders of two companies deciding to pool the resources of the companies under a common entity to do the business activity is called merger. Two companies agree to go forward as a single company rather than separately owned and operated. Both companies stocks are surrendered and new stock is issued in its place. TATA-CORUS-$13 Billion Daimler- Benz & Chrysler -> Daimler Chrysler.

CONT....
Merger is an external strategy for growth of the organization. A merger is combination of two or more organization in which one acquires the assets and liabilities of the other in exchange for shares or cash, or both the org are dissolved, and the assets and the liabilities are combined and new stock is issued. For the org, which acquires another, it is an acquisition. For the organization , which is acquired, it is a merger. If both organizations dissolve their identity to create a new organization, it is consolidation.

TYPES OF BUSINESS COMBINATIONS


Mergers through absorption Mergers through consolidation

MERGERS THROUGH ABSORPTION

Merger through absorption: absorption is a combination of 2 or more companies into an existing co. All cos except one lose their identity in a merger through absorption.

Ex: Absorption of Tata Fertilizer Ltd (TFL) by Tata Chemicals LTd (TCL) TCL an acquiring co (buyer); survived after merger while TFL an acquired co ( a seller) ceased to exist. TFL transferred its assets, liabilities and shares to TCL under the scheme of merger.

MERGERS THROUGH CONSOLIDATION

Consolidation: two or more companies combine to form a new company. In this form of merger all companies are legally dissolved and a new entity is created.

In a consolidation, the acquired company transfers its assets, liabilities and shares to the new company for cash or exchange of share. Ex : Merger or amalgamation of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian software co Ltd and Indian Reprographics ltd in 1986 to an entirely new co, called HCL ltd.

LARGEST M & A DEALS IN INDIA

1.Tata steel Corus-$12billon- fifth largest steel group . 2.Vodafone Hutchison-$11.1 billon 3.Hindalco Novelis -$6 billon one of the largest Aluminum producers in Asia .

4.Ranboxy- Daiichi Sankyo - $ 4.5 billon- 15th bigger drug maker globally.

CATEGORIES OF MERGERS:
Horizontal Merger Vertical Merger Conglomerate Merger Concentric Merger

HORIZONTAL MERGERThis is a combination of two or more firms in similar type of production, distribution or area of business. Horizontal merger involves two firms operating and competing in the same kind of business activity. Motives: 1. Elimination or reduction in competition 2. Putting an end to price cutting 3. Economies of scale in production 4. Research and development 5. Marketing and management. Ex: combining of book publishers or two manufg cos to gain dominant mkt share. (Mittals Strategy) The acquisition of American Motors by Chrysler in 1987 represents a horizontal combination or merger. Horizontal merger increase monopoly power of the combined firm.

VERTICAL MERGER

Vertical merger occurs when a firm acquires firms Upstream from it or firms downstream from it. In case of an Upstream merger it extends to the firms supplying raw materials and to those firms that sell eventually to the consumer in the event of a down-stream merger. when co combines with the supplier of materials it is called backward merger and when it combines with the customer it is known forward merger. EX: Vertical Forward Integration Buying a customer

1. 2. 3. 4. 5.

Indian Rayons acquisition of Madura Garments along with brand rights Vertical Backward Integration Buying a supplier IBMs acquisition of Daksh

Merits: Low buying cost of materials Lower distribution costs Assured supplies and market Increasing or creating barriers to entry for potential competitors Placing them at a cost disadvantage.

CONGLOMERATE MERGERConglomerate merger represents a merger of firms engaged in unrelated lines of business.
3 types of Conglomerate merger: a) Product-extension mergers broaden the product lines of

firms. These are mergers between firms in related business activities and may also be called concentric mergers.
P&G acquires Gillette to expand its product offering in the household sector and smooth out fluctuations in earning.

Product Extension: New product in Present territory

b)

c)

A geographic market-extension merger involves two firms whose operations have been conducted in non overlapping geographic areas. Ex: Pizza Hut a fast food chain restaurant centered in USA, sought to wow Indian customers by opening their restaurant in all most all major urban centers of India. Pure conglomerate mergers involves unrelated business activities. These would not qualify as either product-extension or market extension. New product & New territories Indian Rayons acquisition of PSI Data Systems.

CONCENTRIC MERGER

Concentric mergers take place when there is a combination of two or more organizations related to each other either in terms of customer functions, customer groups, or the alternative technologies used. Thus, a footwear company combining with hosiery firm making socks or another specialty footwear company, or with a leather goods company making purses, handbags, and so on.

IMPORTANT ISSUE IN MERGERStrategic Issue Financial Issue Managerial Issue Legal Issue in Mergers Relate

1. STRATEGIC ISSUE

Strategic issues relate to the commonality of strategic interests between the buyer and the seller firms. It is important to consider the extent to which a merger may lead to positive synergistic effects.

2.FINANCIAL ISSUE

Financial issue relate to the valuation of the seller firm and the sources of financing for mergers to take place. Valuation involves assessing the value of the seller firm.

3.MANAGERIAL ISSUE

Managerial issue in mergers relate to problems of managing firms after the merger has taken place. It is important to note that the perception of how the management will take place after a merger also matters and effects the process of the merger itself.

4.LEGAL ISSUE

Legal issue in mergers relate to the provisions made in law for the purpose of mergers. In India, the provisions relating to mergers and amalgamation, and other schemes, are contained in The Companies Act, 1956.

WHY DO MERGERS TAKE PLACE ?


Gain market share Economics of scale Enter new market Acquire technology Utilization of surplus funds Managerial effectiveness Vertical integration Strategic objective

MOTIVES AND BENEFITS OF MERGER


Limit competition Utilize the under-utilized market power, human and physical and managerial skills Overcome the problem of slow growth and profitability Achieve diversification Gain economies of scale Entering in to foreign market with less cost

ADVANTAGES
Accelerated growth expanding its existing markets, entering in new markets Enhanced profitability economics of scale , operating economics , synergy . Diversification of risk systematic risk Reduction in tax liability Financial benefits eliminating the financial constraint , deploying surplus cash, enhancing debt capacity , lowering the financing costs . Increased market power .