Used as though they were

synonymous, the terms

‘MERGER’ AND

‘ACQUISITION’

mean slightly different things. 

MERGER :

Happens when two firms, often of about the same size, agree to go

forward as a single new company rather than remain separately owned and

operated. (Daimler-Benz and Chrysler ).

CONCEPT = MERGER OF EQUALS

ACQUISITION :

When ‘A’ takes over ‘B’ and clearly establishes

itself as the new owner, the purchase is called an acquisition.

From a legal point of view, the ‘B’ ceases to exist, ‘A’

"swallows" ‘B’ and stock of ‘A’ continues to be traded.

CONCEPT = BIGGER FISH FRIES THE - WILLING SMALLER

Mergers and acquisitions are a foreign direct

investment entry mode, Multinationals use

these methods for entering into new markets.

The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies.

Rationale is particularly alluring when times are tough.

Strong companies will act to buy other companies to create a more competitive, cost-efficient company .

• In practice, however, actual mergers of equals don't happen very often.

• Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to claim - it a merger of equals, even if it's technically an acquisition.

• Being bought out often carries negative connotations.

TATA-CORUS

TATA CORUS (Now renamed as - TATA steel )

102 years in steel bazaar. 2nd in Europe , 1st in UK.

World’s 56th largest . World’s 6th largest.

Production Capacity of 30 Million. 371st rank in fortune list.

Founder : J.N. Tata 40,000 people worldwide.

Presence in 26 nations. Presence in 50 nations.

Respective profiles PRE-aquisition

The Deal

• Tata acquired Corus, which was four times larger than its size and the largest steel producer in U.K. .

• Was officially announced on April 2nd, 2007 at a price of 608 pence (approx. 486 Rs.) per ordinary share in cash.

• The deal was a 100% acquisition and the new entity is run by one of Tata’s steel subsidiaries.

• Deal type – acquisition

• Approximate value – $ 12 billion (US) .

TATA-CORUS specific

Opportunities

1. Catapults Tata Steel into the league of top 10 global steelmakers considering that Corus is at least three times

larger than Tata Steel (in terms of revenues and production capacities).

2. Augmented its crude steel capacity to 27 mtpa .

3. Besides, the deal between a large player with a significant presence and a strong distribution network (Corus) and an outfit that is the lowest-cost producer of steel (Tata Steel)

suggests synergies.

Issues and challenges

1.Valuation and funding

Increasing financial risk, as Tata Steel went on a debt-raising spree to finance a major part of the cost of

acquisition. Out of the $12 billion it financed 4 through equity .

2. Manage the cultural and

organizational differences

PRE-Merger Profiles

DAIMLER - BENZ CHRYSLER

Europe’s Largest Industrial Company US Based Company

Operations in

1.Passenger Cars2.Commercial Vehicles3.Aerospace4.Services 5.Directly Managed Businesses (Rail, 6.Automotive Electronics and Diesel Engines)

Operations in

1.Cars2.Minivans3.Sport-utility vehicles4.Trucks

Employs 3,00,000 people Motto - “We produce cars and trucks that people will want to buy, will enjoy driving and will want to buy again”

Why the merger ?

FOR DAIMLER FOR CHRYSLER

The perfect storm . Merger or perish .

For it was not able to reap rewards fully of the booming US economy.

High costs for Daimler .

Create a much larger global enterprise to compete in major world markets .

The Deal

Synergies

• World Leader in Transportation .• Revenue Enhancement .• Minimum overlap in Markets and Customers .• Complete Spectrum of Products .• Lower Costs and Higher Productivity .• Cheaper Labor .• Exchange of Technology .• Higher Bargaining Power .

• Opposite management thinking .

• Authoritative Germans vs. Creative Americans .

• German replaces an American as Chrysler’s president .

• Lack of governance .

• Low level contact between the two top level management

• guys .

• The American dynamism faded under subtle German pressure.

• It bled cash for almost an year, owing to mismanagement.

• Cultural Differences.

• Employee bias was rampant in the merged organization.

Issues• Daimler (Germans) relied heavily on quality and Chrysler (Americans) inclined

towards being cost-effective .

• Allegations of “fraud and deceit” on former Daimler executives .

• Falling share price.

• Falling sales and huge losses owing to volatile US auto industry .

• Synergies not working out to be as expected .

• Chrysler hell bent on producing “big” cars .

• Daimler Chrysler’s market cap in the recent years was almost equal to what Daimler’s was before the merger !

Conclusions

We are in a position to draw the following conclusions about M&A (collectively) conveniently .

Opportunities :1. Synergies - Synergy is ability of merged company to generate higher shareholders wealth than the standalone entities .

2. Benefits of better management – Since now the management is spearheaded by a team combined with 2 different management practices , it gives the newly formed team great opportunity to exploit resources , labor in hand .

3.Influx of capital – ‘X’ capital of one and ‘Y’ capital of another CO. combine to form ‘X+Y’ capital and undertake similar operations there by reducing the costs of production remarkably.

Contd..

4. New technology – greater capital inflow gives the newly formed company to acquire latest and advanced technology to undertake operations.

5. To get access to greater amounts of raw material , labor at cheaper costs .

6. Access to patents and trade marks.

7. Total built up capacity increases relatively .

8. Easier entry into new markets

9. Channels of distribution increase.

1. Overpriced purchase – it may so happen in order to definitely takeover a company ends up paying more than the assessment.

2. Miscalculation regarding the purchase consideration.

3. Labor unrest – labor may be at unrest with the management , if the management is biased or even if labor is unhappy with the new combined policies/new management’s policies because change is always unwelcome .

Issues and challenges :

4. Conflict of interest in the two managements –

In case of a merger , even an acquisition where the purchaser is accommodating the management of the seller , there may be conflict of interest as the two managements may have been driven by different driving forces.

5. Affects liquidity of the purchaser –

It may happen that the purchaser decides to opt out of debt financing to lower the financial risk ,instead pays part in cash and rest through equity-swap thereby affecting its liquidity in a different manner.

6. Legal hurdles –

Companies opting for a merger or an acquisition may be at two different geographical locations , having different legal frameworks.

Means that the companies will have to cross many legal hurdles to make sure that the compliance to law holds good .

Contd…

But on what do the issues ,

opportunities and

challenges

from a

M&A actually depend ?

It depends on the SWOT analysis of the company ,which consequently would conceive the basis of - strengths , weaknesses , opportunities , threats that the company/companies accrues/accrue from a MERGER or an ACQUISITION .

Acknowledgements

Google.com

Wikipedia.com

Slideshare.com

Investopedia.com

Special thank you to teachers and mates for constant and material feedback.

THANK YOU !

Created and presented by :Raaghav Bhatia , Shaheed Bhagat Singh college .