8/11/2019 UNIT_III_M&A

1/15

Mergers & Acquisitions

How to Expand Your Business in

Todays Environment

http://www.webmasterinternational.com/hand_shake.jpg

8/11/2019 UNIT_III_M&A

2/15

Types of TakeoversGeneral Guidelines

Takeover The transfer of control from one ownership group to another.

Acquisition The purchase of one firm by another

Merger The combination of two firms into a new legal entity

A new company is created

Both sets of shareholders have to approve the transaction.Amalgamation

A genuine merger in which both sets of shareholders must approvethe transaction

Requires a fairness opinion by an independent expert on the truevalue of the firmsshares when a public minority exists

8/11/2019 UNIT_III_M&A

3/15

Cont

Hostile Takeovers

Slowly acquire a grip (beachhead) by openmarket purchase of shares at market prices

without attracting attention.

Accumulate 20% of the outstanding shares

through open market purchase over a longer

period of time

8/11/2019 UNIT_III_M&A

4/15

Mergers & Acquisitions Defined

Mergers Acquisitions

Two firms are combined ona relatively co-equal basis

One firm buys anotherfirm

the words are often used interchangeably eventhough they mean something very different

8/11/2019 UNIT_III_M&A

5/15

parent stocks are usuallyretired and new stock issued

name may be one of the

parentsor a combination

can be a controllingshare, a majority, orall of the target firmsstock

can be friendly orhostile

Mergers Acquisitions

Mergers & Acquisitions Defined

usually done througha tender offer

one of the parents usuallyemerges as the dominantmanagement

8/11/2019 UNIT_III_M&A

6/15

Mergers & Acquisitions Defined

Types of M&A Activity

Categories

Vertical

Horizontal

Product Extension/concentricMarket Extension

Conglomerate

suppliers or customers

competitors

complementary products

complementary markets

everything else

Related

Unrelated

8/11/2019 UNIT_III_M&A

7/15

Motives/Adv./Benefit of M&A

Economies of scale and Scope

to enable benefits of scale to be achieved Scale - Production in high volumes

Scope combining marketing

To reduce competition

to co-opt an existing competitor in order to reducecompetition

Market power

increase market share

8/11/2019 UNIT_III_M&A

8/15

Cont...

Sharing complementary resources

bringing together the relative strength of each firm New market entry

to facilitate expansion into new market

To reduce risk

diversification

8/11/2019 UNIT_III_M&A

9/15

Cont... Managerial motive

to avoid being taken over (job security)

to pursue growth in size, status and higherremuneration

Removal of inefficient Management

Expertise

Monopoly gains (Avoids Competition)

Efficiency gains by elimination of

duplication/operating synergies

8/11/2019 UNIT_III_M&A

10/15

Reasons

ofmerger

Futuregoals

Mutualbenefit

s

Maximizing

profits

Expansion of

busines

s

Economy of

scale

Increasemarketshare

Costmaximization

Diversification of

risk

Goodwill

Productimproveme

nt

9/18/201410 Swati Garg/ Merger

T 10 i iti d b

8/11/2019 UNIT_III_M&A

11/15

Top 10 acquisitions made byIndian companies worldwide:

Acquirer Target CompanyCountrytargeted

Deal value ($ml) Industry

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

VideoconDaewoo

Electronics Corp.Korea 729 Electronics

Dr. Reddys

LabsBetapharm Germany 597 Pharmaceutical

Suzlon Energy Hansen Group Belgium 565 Energy

HPCLKenya Petroleum

Refinery Ltd.

Kenya 500 Oil and Gas

Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical

Tata Steel Natsteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada 239 Telecom

8/11/2019 UNIT_III_M&A

12/15

Competitive AdvantageM&A Process

Doing the Deal

Bidding FirmsPerspective

Search forRare Economies

Limit Informationto Other Bidders

Limit Information

to the Target

Avoid BiddingWars

Close the

Deal Quickly

Seek ThinlyTraded Markets

8/11/2019 UNIT_III_M&A

13/15

Competitive Advantage - Process

Doing the Deal

Target FirmsPerspective

Seek Informationfrom Bidders

Invite Other Bidders toJoin in Bidding Contest

Delay, But Do NotStop the Acquisition

8/11/2019 UNIT_III_M&A

14/15

14

Failure of M & A

Reasons:

Over-optimisation Acquirers often pay too much for their targets as a

result of flawed evaluation process that

overestimates the likely benefits;

Failure of integration management improper planning and execution of the

integration process.

8/11/2019 UNIT_III_M&A

15/15

Methods of Financing Mergers

Cash payment

pay the purchase consideration by cash Shares

issue of ordinary and preference shares

Loan capital

debentures

convertible loans