Mergers and Acquisitions
PARVESH AGHI
Tata Steel- Corus $ 12.2 billion Vodafone- Hutchison Essar $ 11.1 billion Airtel-Zain $ 10.7 billion Hindalco- Novelis $ 6 billion Ranbaxy –Diaiichi Sankyo $ 4.5 billion ONGC- Imperial Energy $2.8 billion NTT DoCoMo Tata tele $2.7 Billion HDFC-Centurion Bank $2.4 billion Tata Motors-Jaguar-landRover $2.3 billion Sterlite-ASACRCO $ 1.8$ billion
India's 10 largest M&A deals
Tata Steel- Corus
Tata Steel-Corus: $12.2 billionOn January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion.The deal is the largest Indian takeover of a foreign company till date and made Tata Steel the world's fifth-largest steel group
Vodafone- Hutchison
Vodafone-Hutchison Essar: $11.1 billionOn February 11, 2007, Vodafone agreed to buy out the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for $11.1 billion.This is the second-largest M&A deal ever involving an Indian company.Vodafone Essar is owned by Vodafone 52%, Essar Group 33% and other Indian nationals 15%.
Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led Aditya Birla Group flagship, acquired Canadian company Novelis Inc in a $6-billion, all-cash deal in February 2007.Till date, it is India's third-largest M&A deal.The acquisition would make Hindalco the global leader in aluminium rolled products and one of the largest aluminium producers in Asia. With post-acquisition combined revenues in excess of $10 billion, Hindalco would enter the Fortune-500 listing of world's largest companies by sales revenues
Hindalco- Novelis
Marking the largest-ever deal in the Indian pharma industry, Japanese drug firm Daiichi Sankyo in June 2008 acquired the majority stake of more than 50 per cent in domestic major Ranbaxy for over Rs 15,000 crore ($4.5 billion).The deal created the 15th biggest drugmaker globally, and is India's 4th largest M&A deal to date
Ranbaxy –Diaiichi Sankyo
New Delhi, March 25 -- India's largest telecom service provider Bharti Airtel is set to become a large global player, with the Zain board on Wednesday approving closure of the deal under which Bharti would buy Zain's Africa operations for an enterprise value of $10.7 billion (Rs 49,000 crore). The two companies will make a formal announcement on Thursday, a senior executive close to the deal said. Currently, Bharti's non-India operations include Sri Lanka and Bangladesh. This acquisition will take its footprint to 15 African countries.
Airtel-Zain $ 10.7 billion
YEAR PURCHASER PURCHASED Transaction value (in mil. USD
2000 AOL TIME WARNER 164,747
2000 GLAXO SMITHKLINEBEECHAM
75,961
2004 ROYAL DUTCHPETORLEUM
SHELL TRANSPORT CO
74,559
2006 AT &T INC BELL SOUTH CORP
72,671
2001 COMCAST CORP
AT & T BROADBAND
72,041
2009 JP MORGAN CHASE
BANK ONE CORP
58,761
Major M&A in the 2000s
Lecture Agenda
Motives behind M&A Conceptual framework Reasons for M & A Problems with M & A Attributes of effective acquisitions Types of Mergers History of M & A M & A in India
Economy of scale Increase revenue or market share Synergy Cross selling Taxation Resource transfer Diversification Empire Building
Motives behind M&A
CONCEPTUAL FRAMEWORK
MEANING OF MERGERS ACQUSITIONS AMALAMATIONS TAKEOVERS ABSORPTIONS
A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger and competitive advantage
MERGER
Merger is a transaction that results in transfer of ownership and control of a corporation.
When one company purchases another company of an approximately similar size. The two companies come together to become one.
Two companies usually agrees to merge when they feel that they can do something together that they can’t do on their own.
MERGERS
Merger refers to the merging of one company into another or two companies getting merged to form a new corporate entity.
A merger is popularly understood to be fusion of two companies
MERGER
MERGER In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal.
A merger can take place in following four ways :
By purchase of assets
By purchase of common share.
Ways of Merger
The asset of company Y may be sold to company X . Once
this is done company Y is then legally terminated and company X survives
The common share of company Y may be purchased by company X. when company X holds all the shares of company Y it is dissolved .
By exchange of share for assets
Exchange of shares for shares
Ways of Merger
Company X may give its share to stake holders of
company Y for its net assets. Then company Y is
terminated by its shareholders who now holds
shares of company X
Company X gives its shares to the share holders of company Y and then company Y is terminated
A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of business
ACQUSITION
Acquisition or take over denotes a company acquiring controlling stake in another so that the acquirer can have management control over the other firm
Generally , acquisition is the purchase by one company of a substantial part of the assets or securities of another .
ACQUSITION
Strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio
ACQUISITION
Mergers & Acquistions
MERGERSACQUISITION
S
Combining of two business entities under
common ownership
Two firms coalesce and share resources in order to realize a common goal
On firm buys the assets or shares of another firm
Take over implies the acquiring firm is larger than the target. Reverse take over takes place if the target firm
is larger than the acquirer
Mergers & Acquistions
MERGERSACQUISITION
S
parent stocks are usually retired and new stock
issued
name may be one of the parents’ or a combination
can be a controlling share, a majority, or all of the target
firm’s stock
can be friendly or hostile
one of the parents usually emerges as the dominant
management
usually done through a tender offer
An acquisition where the target firm did not solicit the bid of the acquiring firm
TAKEOVER
Problems inAchieving Success
Problems inAchieving Success
Integrationdifficulties
Inadequate evaluation of target
Too muchdiversification
Large orextraordinary debt
Inability toachieve synergy
Managers overlyfocused on acquisitions
Too large
Increasedmarket power
Overcomeentry barriers
Lower riskcompared to
developing new products
Cost of newproduct development
Increased speedto market
Increaseddiversification
Avoid excessivecompetition
Acquisitions
Reasons forAcquisitions
Reasons for AcquisitionsReasons for Acquisitions
Example: Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance Group
Example: Watson Pharmaceuticals’ acquisition of TheraTech
Example: British Petroleum’s acquisition of U.S. Amoco
Increased Market PowerAcquisition intended to reduce the competitive balance of the industry
Overcome Barriers to EntryAcquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive
Buying established businesses reduces risk of start-up ventures
Lower Cost and Risk of New Product Development
Example: Kraft Food’s acquisition of Boca Burger
Reasons for AcquisitionsReasons for Acquisitions
Increased Speed to MarketClosely related to Barriers to Entry, allows market entry in a more timely fashion
DiversificationQuick way to move into businesses when firm currently lacks experience and depth in industry Philip Morris acquired Millers' Brewing for $ 227 million
Reshaping Competitive ScopeReshaping Competitive ScopeFirms may use acquisitions to restrict its dependence on a single or a few products or marketsAirtel-Zain
Problems with Acquisitions
Example: Marks and Spencer’s acquisition of Brooks Brothers
Example: Intel’s acquisition of DEC’s semiconductor division
Integration DifficultiesDiffering financial and control systems can make integration of firms difficult
Inadequate Evaluation of Target“Winners Curse” bid causes acquirer to overpay for firm
Large or Extraordinary DebtLarge or Extraordinary DebtCostly debt can create onerous burden on cash outflows
Example: Ford and Jaguar
Example: Quaker Oats and Snapple
Example: GE--prior to selling businesses and refocusing
Inability to Achieve SynergyJustifying acquisitions can increase estimate of expected benefits
Problems with Acquisitions
Overly DiversifiedAcquirer doesn’t have expertise required to manage unrelated businesses
Managers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy
Too LargeLarge bureaucracy reduces innovation and flexibility
Example: Quaker Oats and Snapple
Inability to Achieve SynergyJustifying acquisitions can increase estimate of expected benefits
Problems with Acquisitions
Overly DiversifiedAcquirer doesn’t have expertise required to manage unrelated businesses
Managers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategyExample ; Ford and Jaguar
Too LargeLarge bureaucracy reduces innovation and flexibility
The M & A have been broadly categorized into :
HorizontalVerticalConglomerate
Types of Mergers and Acquisitions
Types of Mergers and Acquisitions Horizontal Mergers- between competing companies Vertical Mergers- Between buyer-seller relation-ship companies Conglomerate Mergers- Neither competitors nor buyer-seller relationship
A horizontal mergers results in the consolidation of firms that are direct rivals- that is sell , substitutable products within overlapping geographic markets. This form of merger results in expansion of a firm’s operation in a given line product line and at the same time eliminates competitor.
Horizontal Mergers
ADVANTAGES
REDUCTION OF COMPETITION
INCREASED MARKET POWER
PUTTING AN END TO PRICE CUTTING
ECONOMIES OF SCALE IN PRODUCTION
When two firms working in different stages of production or distribution of the same join together ,it is called vertical merger . A Vertical Merger is one in which one the buyer expands backwards and merges with the firm supplying raw material or expands forward in the direction of ultimate consumer.
The economic benefits of this type of merger stems from the firm’s increased control over the acquisition of raw material or distribution of finished goods.
Vertical Mergers
Vertical merger
Acquisition of a supplier or distributor of one or more products
Increase of market power by controlling more of the value chain
ADVANTAGES LOWER BUYING COST OF MATERIAL
LOWER DISTRIBUITION COST
ASSURED SUPPLIES AND MARKET
COST ADVANTAGE
A Conglomerate merger involves two firms in totally unrelated activities .
A conglomerate is a firm that has an external growth through number of mergers of companies whose business are not related either horizontally or vertically .
A conglomerate may have operations in manufacturing ,electronics , banking , fast food restaurants and other unrelated businesses .
This form of business results in the expansion of a firm’s operation in different unrelated lines of business with an increased sense of operating synergies
Conglomerate Merger
Three types of Conglomerate Mergers
1. Product Extension mergers- broaden the product line of the firms
2. A geographic –market extension merger involves two firms whose operations have been conducted in no overlapping geographic areas
3. Pure conglomerates mergers involve unconnected or unrelated business activities under a single banner.
Conglomerate Mergers
CONGLOMERATE MERGER
UNRELATED INDUSTRIES MERGEPURPOSE DIVERSIFICATION OF RISK
Ex:Time warner-(they were into media & movie production) & AOL-(leading American website)
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Why M&A? Market Intensification:
Horizontal Integration – Buying a competitorAcquisition of equity stake in IBP by IOCAT&T merger into SBC enables the latter to access
the corporate customer base and exploit the predictable cash flows typical of this telephony section
Market Extensions – New markets for Present productsMaersk – Pipavav : strategic objective of investing in
a container terminal in the west coastBharat Forge’s acquisition of CDP (Germany)S&P’s proposed acquisition of CRISIL
41
Why M&A?
Vertical Integration : Internalization of crucial forward or backward activities• Vertical Forward Integration – Buying a
customerIndian Rayon’s acquisition of Madura
Garments along with brand rights
• Vertical Backward Integration – Buying a supplier
IBM’s acquisition of Daksh
42
Why M&A?
Diversification: Overcome Barriers to Entry• Product Extension: New product in Present
territoryP&G acquires Gillette to expand its product
offering in the household sector and smooth out fluctuations in earning
• Free-form Diversification: New product & New territories
Flight Centre’s proposed acquisition of Friends Globe
Indian Rayon’s acquisition of PSI Data Systems
43
Why M&A? Advantages: Greater Economic Clout:
Proposed merger of Petroleum PSUs P&G merger with Gillette expected to correct
balance of power between suppliers and retailers.
Economies of scale and Sharing Overheads: Size really does matter IOC & IBP
Synthesized capabilitiesProposed merger of nationalized banks
History of Mergers and Acquisitions
Several major merger movements have occurred in the United States
Each was more or less dominated by a particular type of merger.
Merger movements occurred when the economy experienced sustained high rates of growth
Early Merger movements
Mergers and Acquisitions are triggered by economic factors. The macroeconomic environment, which includes the growth in GDP, interest rates and monetary policies play a key role in designing the process of mergers or acquisitions between companies or organizations
History of Mergers and Acquisitions
History of Mergers and Acquisitions Activity in United States
The First Wave 1897-1904 After 1883 depression Horizontal mergers Create monopolies The Second Wave 1916-1929 Oligopolies The Clayton Act of 1914 The Third Wave 1965-1969 Conglomerate Mergers Booming Economy The Fourth Wave 1981-1989 Hostile Takeovers Mega-mergers Mergers of 1990’s Strategic mega-mergers
The first wave mergers commenced from 1897 to 1904.
During this phase merger occurred between companies, which enjoyed monopoly over their lines of production like railroads, electricity etc.
The first wave mergers that occurred during the aforesaid time period were mostly horizontal mergers that took place between heavy manufacturing industries.
First Wave Mergers
Majority of the mergers that were conceived during the 1st phase ended in failure since they could not achieve the desired efficiency.
The failure was fuelled by the slowdown of the economy in 1903 followed by the stock market crash of 1904.
The legal framework was not supportive either. The Supreme Court passed the mandate that the anticompetitive mergers could be halted using the Sherman Act.
First Wave Mergers
First Wave Mergers 1897-1904-horizontal Mergers Monopolistic Market structure Mega merger between US Steel and Carnegie
Steel . It also merged with 785 separate firms-75% of Steel production of US.
More than 3000 companies disappeared. General Electric , Navistar, Standard Oil, Du-
Pont, American Tobacco-90% of market share Transformation of regional firms into national
firms. Exploited the economies of scale.
Table-1 Year Number of mergers 1897 69 1898 303 1899 1208 1900 340 1904 79
Problems of the first Wave Financial factors Fraudulent financing Stock Market crash in 1904 and Banking
panic of 1907 Closure of many banks and formation of
Federal Reserve System. Easy finance ends here. The US President Teodore Roosevelt and
President William Taft made a crack down on Large Monopolies.
As a result: ???? What happened to Standard Oil?
Standard Oil(SO) Broken in to 30 Companies. SO of New Jersey named EXXON SO of New York named MOBIL SO of California renamed CHEVRON SO of Indiana renamed AMOCO
The second wave mergers that took place from 1916 to 1929 focused on the mergers between oligopolies, rather than monopolies as in the previous phase.
The economic boom that followed the post world war gave rise to these mergers.
Technological developments like the development of railroads and transportation by motor vehicles provided the necessary infrastructure for such mergers or acquisitions to take place.
The government policy encouraged firms to work in unison. This policy was implemented in the 1920s.
Second Wave Mergers
Second Wave Mergers 1916-1929 Oligopolies industry structure Industries like primary metals, petrolium
products, food products, chemicals Outside the previously consolidated heavy
manufacturing industries.
Vertical mergers In the mining and metal industries(1920)
Prominent Corporations General Motors, IBM, Union Carbide, John DEERE Between 1926 and 1930- there were 4600
mergers took place Result of which between 1919 and 1930 12,000
manufacturing , mining,public utility and banking firms disappeared.
This period rail transportation, motor vehicle transportation became national market.
Radios in homes, entertainment enhanced the competition.
Mass merchandising, national brand advertising
Enhance productivity as a part of war effect.
The firms were urged to work together rather than compete
The second wave came to an end when stock market crashed on October 29,1929.
Investment Bankers played in the first two phases of mergers.
Second Wave Mergers
The mergers that took place during this period (1965-69) were mainly conglomerate mergers.
Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust laws.
The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were financed from equities; the investment banks no longer played an important role
The third Wave-1965-1969
The 3rd wave merger ended with the plan of the Attorney General to split conglomerates in 1968.
It was also due to the poor performance of the conglomerates.
Some mergers in the 1970s have set precedence. The most prominent ones were the INCO-ESB merger; United Technologies and OTIS Elevator Merger are the merger between Colt Industries and Garlock Industries.
The third Wave-1965-1969
The third Wave-1965-1969 Merger activity reached its highest level
during this period Booming of economy Conglomerate merger period-80% Diversification strategy It is because of ANTI TRUST enforcement Federal government adopted a stronger
antitrust enforcement both with horizontal and verticle merger.
1963-1361 mergers; 1970-5152 mergers
Management sciences Management principles were applied in
industries. Management graduates were employed to
manage conglomerate mergers. There were 6000 mergers which leads to
25000 firms disappeared. Investment Bankers do not finance most of
these mergers
Finance for mergers Equity financing Boom in stock market prices Many conglomerate merger failed The Revlon –cosmetic entered into health
care and failed and suffered in cosmetic industry.
The 4th wave merger that started from 1981 and ended by 1989 was characterized by acquisition targets that were much larger in size as compared to the 3rd wave mergers.
Mergers took place between the oil and gas industries, pharmaceutical industries, banking and airline industries.
Foreign takeovers became common with most of them being hostile takeovers. The 4th Wave mergers ended with anti takeover laws, Financial Institutions Reform and the Gulf War.
The Fourth Wave-1981-1989
The Fourth Wave-1981-1989 Recession in 1974-75 Hostile merger Take over or targeting on target company’s
board of directors. If the board accepts, it is considered friendly,
and if it opposes it, it is deemed to be hostile. The great mergers such as Oil companies-
21.6%Of dollar values of merger and acquisitionsDrugs and medical equipment industries due to
deregulation in some industriesDeregulation of airline industries
The Fourth Wave-1981-1989 Investment bankers played an aggressive
role. M&A advisory services became a lucrative
source of income for Goldman Sachs Innovation in acquisition techniques
The 5th Wave Merger (1992-2000) was inspired by globalization, stock market boom and deregulation.
The 5th Wave Merger took place mainly in the banking and telecommunications industries.
They were mostly equity financed rather than debt financed. The mergers were driven long term rather than short term profit motives. The 5th Wave Merger ended with the burst in the stock market bubble.
Fifth Wave Merger
Fifth Wave Merger Once again increased activity in merger in
1992 Mega mergers Strategic mergers Equity based Deregulations and technological changes Banking , telecommunications
entertainment and media industries High growth in banking sectors in 1990 as
banks grew greater than central banks. Banks fund M&A rather than new ventures.
Hence we may conclude that the evolution of mergers and acquisitions has been long drawn. Many economic factors have contributed its development. There are several other factors that have impeded their growth. As long as economic units of production exist mergers and acquisitions would continue for an ever-expanding economy.
Fifth Wave Merger
Fifth Wave Merger 1981-2395 1989-2366 1990-2074 companies 2001-7528 companies merged
Major Mergers in the telecom Acquirer Target Vodafone Mannes man MCL worldcom Spirit Bell atlantic GTE AT&T MeCaw Celluar SBC Pacific Telesis
Major Mergers in Media and Entertainment sector AOL Time Warner VIOCOM CBS WALT DISNEY CAPITAL ITIES/ABC AT&T MEDIA ONE TIME WARNER TURNER BRODCAST
M&A IN INDIA License era-Unrelated diversification Conglomerate merger Friendly take over and hostile bids by
buying equity shares Example: Swaraj paul attempted to raid on
Escorts Ltd.and DCM Ltd but could not succeed.
The Hindujas raided and took over Ashok leyland and Ennore Foundaries.
Chhabria Group acquired stake in Shaw Wallace, Dunlop india and Falcon Tyres.
Goenka group from culcutta took over Ceat tyres.
The Obroi-Pleasant hotels of Rane group. 1989- Tata Tea acquired 50% of the equity
shares of Consolidated Coffee Ltd from resident shareholders.
merged to form HCL Ltd??.
HCL Hindustan Computers, Hindustan
Reprographic, Hindustan Telecommunications and Indian Software Ltd.
Comparative study US India Strategic By default(ANZ&
Standard chartered Gains by invest Not benefited by
banksment bankersCapital goods consumer
goodsBorrowedEarlier debt later by equity cash/FDIAnti trust MRTP later The
competition bill 2001
By purchase of assetsBy purchase of Common shares
By Exchange of share for asset
Exchange of Shares for Shares
Merger can takes plays in folowing 4 ways
The asset of company Y may be sold to company X. Once this is done , company Y is the legally terminated and company X survives .
By Purchase of Asset
The common share of the company Y may be purchased by company X . When company X holds all the shares of company Y, it is dissolved
By purchase of common shares
Company X may give its shares to the Shareholders of company Y for its net assets. Then company Y is terminated by its shareholders who now hold shares of company X
By Exchange of share for asset
Company X gives its shares to the shareholders of the company Y and then company Y is terminated.
Exchange of Shares for Shares
Back-up
Takeover:A ‘takeover’ is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers
In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.The following main benefits accrue from the vertical combination to the acquirer company:(1) It gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products;(2) Has control over products specifications.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,Debentures in the transferee company, Cash, or A mix of the above modes.
Amalgamation
(B) Horizontal combination:It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market
C) Circular combination:Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.
D) Conglomerate combination:It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes
88
2.7 1.52.7
7.4 9.425.9
0.10.6
1.7
4.421.2
38.4
3.9 3.23.9
10.7
16.8
28.4
Inbound Outbound Domestic
1,028.1 1,087.4 1,628.2 1,976.83,935.0 4,520.0
0.7%0.5% 0.5%
1.2%
2.1%
1.2%
1.0
10.0
100.0
1,000.0
10,000.0
2002 2003 2004 2005 2006 2007*
0.0%
1.0%
2.0%
3.0%
Total Value of Global Deals % Share of india
US
D b
illio
n
Sh
are
of
Ind
ia in
glo
bal m
ark
etM&A activity in India
• Value of Indian deals grew at a CAGR of 140 % from USD 8.3 bn in CY04 to USD 47.4 bn in CY06
• Outbound M&A deals till March was USD 8.8 billion in 2007• Estimated total outbound M&A projected to be more than USD 35.0 bn in
2007
• This appears to be just the beginning of the M&A wave in India
* 2007 figure is estimatedSource : Bloomberg
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Increased corporate activity Indian corporates aspiring to become market leaders in
their business segments not only in India but also globally
Growth driversStrong growth in demand leading to increased
utilisation of existing capacityProduct portfolio and service offering enhancementAccess to new technology and marketsDerisking the business
…aided by easier access to capital supply…
90
Increased access to capital
1,750 2,000
7,500
0
2,000
4,000
6,000
8,000
CY 2004 CY 2005 CY 2006
PE F
undin
g (
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2,000
4,000
6,000
CY 2004 CY 2005 CY 2006
Public Issue (
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D m
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5,228
8,546
13,451
0
3,000
6,000
9,000
12,000
15,000
FY 2004 FY 2005 FY 2006
EC
B/
FCC
B i
ssue
(U
SD
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459613
2,552
0
500
1,000
1,500
2,000
2,500
3,000
FY 2004 FY 2005 FY 2006
AD
R/
GD
R i
ssue
(U
SD
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…reflecting in the sharp increase in M&A activity in the recent past…
Private Equity Domestic Public issue
ADR/ GDR issue ECB/ FCCB issue
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
0
200
400
600
800
1000
1200
1400
1600
Total Dollar Value of Mergers & Acquisitions (In Billions)
Total $ Value (In Billions)
Mergers and Acquisitions trend
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,Debentures in the transferee company, Cash, or A mix of the above modes.
Amalgamation
Attributes of Effective Acquisitions
Attributes of Effective Acquisitions
Complementary Assets or ResourcesBuying firms with assets that meet current needs to build competitiveness
++
Friendly AcquisitionsFriendly AcquisitionsFriendly deals make integration go more smoothly
++
Careful Selection ProcessCareful Selection ProcessDeliberate evaluation and negotiations is more likely to lead to easy integration and building synergies
++
Maintain Financial SlackMaintain Financial SlackProvide enough additional financial resources so that profitable projects would not be foregone
++
Attributes of Effective Acquisitions
Attributes of Effective Acquisitions
Low-to-Moderate DebtLow-to-Moderate DebtMerged firm maintains financial flexibility
++
FlexibilityFlexibilityHas experience at managing change and is flexible and adaptable
++
Emphasize Innovation Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy
++
Horizontal Acquisitions
◦Acquisition of a company competing in the same industry
◦The increase of market power by exploiting cost-based and revenue-based synergies
◦Character similarities between the firms lead to smoother integration and higher performance
Horizontal Mergers HORIZONTAL MERGER – SIMILAR LINES OF
ACTIVITY as Ford announced the sale of the two
British iconic cars to Tata Motors Ltd. Ford acquired Jaguar for $2.5 bn in 1989
and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.
Why do mergers fail? Unfortunately, mergers are inherently risky. For every way to do them
right, there are probably 10 ways to do them wrong. Here are my top 10 most common, preventable merger failure modes. Just one is enough to spell doom, but many mergers suffer from several:
Flawed corporate strategy for either or both companies One company sugarcoats the truth; the other buys a PowerPoint pitch Sub-optimum integration strategy for the situation Cultural misfit, loss of key employees after retention agreements are up Acquiring company’s management team inexperienced at M&A Flawed assumptions in synergies calculation Ineffective corporate governance, plain and simple Two desperate companies merge to form one big desperate company CEO of one or both companies sells the board and shareholders a bill of
goods An impulse buy or panic sell gets shoved down the board’s throat
Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation.There are three distinct types of corporate synergies:
Revenue A revenue synergy refers to the opportunity of a combined corporate entity to
generate more revenue than its two predecessor stand alone companies would be able to generate. For example, if company A sells product X through its sales force, company B sells product Y, and company A decides to buy company B then the new company could use each sales person to sell products X and Y thereby increasing the revenue that each sales person generates for the company.
Management Synergy in terms of management and in relation to team working refers to the
combined effort of individuals as participants of the team. Positive or negative synergy can exist. The condition that exists when the organization's parts interact to produce a joint effect that is greater than the sum of the parts acting alone.
Cost A cost synergy refers to the opportunity of a combined corporate entity to reduce or
eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity. Examples include the head quarters office of one of the predecessor companies, certain executives, the human resources department, or other employees of the predecessor companies.
Corporate synergy
Mergers or Amalgamations A merger is a combination of two or more businesses into one business. Laws in India use
the term 'amalgamation' for merger. The Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company.
Thus, mergers or amalgamations may take two forms:- Merger through Absorption:- An absorption is a combination of two or more companies
into an 'existing company'. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd (TCL). TCL, an acquiring company(a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.
Merger through Consolidation:- A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created . Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.
Absorption/consolidation