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Merger Slide 3: A transaction where two firms agree to integrate their operations because they have resources and capabilities that together may create stronger competitive advantage. The term ‘merger’ refers to a combination of two or more companies into a single company and this combination may be either through consolidation or absorption. Merger Slide 4: A consolidation is a combination of two or more companies into a third entirely new company formed for the purpose. The new company absorbs the assets, and possibly liabilities, of both original companies which ceases to exist. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. Generally, mergers take place between two companies of more or less the same size. In case of absorption one company absorbs another company i.e. it purchases either the assets or shares of that company. The merger by absorption is always friendly in nature i.e. both the companies agree to the terms of absorption. 3 Types of Mergers : 3 Types of Mergers Horizontal Vertical Conglomerate Slide 6: Raw Materials Finished Goods TYPES OF MERGERS AUTOS GLASS BLUE JEANS DENIM FABRIC Horizontal mergers : Horizontal mergers A horizontal merger 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 the expansion of a firm’s operation in a given line product line and at the same time eliminates competitor. Examples: Boeing-McDonnell Douglas; Staples-Office Depot(unconsummated); Chase Manhattan-Chemical Bank; Southern Pacific RR-Sante Fe RR; Pabst-Blatz; LTV-Republic Steel; Konishiroku Photo-Minolta. Slide 8: Raw Materials Finished Goods TYPES OF MERGERS AUTOS GLASS BLUE JEANS DENIM FABRIC Vertical Mergers : Vertical Mergers When two firms working in different stages of production or distribution of the same product join together, it is called Vertical Merger. A Vertical Merger is one in which the buyer expands backwards and merges with the firm supplying raw material or expands forward in the direction of the ultimate consumer. The economic benefits of this type of merger stem from the firm’s increased control over the acquisition of raw material or the distribution of finished goods. Examples: Time Warner-TBS; Disney-ABC Capitol Cities; Cleveland Cliffs Iron-Detroit Steel; Brown Shoe-Kinney, Ford-Bendix. Slide 10: Raw Materials Finished Goods TYPES OF MERGERS AUTOS GLASS BLUE JEANS DENIM FABRIC Conglomerate mergers : Conglomerate mergers A Conglomerate merger involves two firms in totally unrelated activities. A conglomerate is a firm that has external growth through a 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 operations in different unrelated lines of business with an increased sense of operating synergies. Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance; PepsiCo-Pizza Hut; Proctor & Gamble-Clorox. Slide 12: Product extension conglomerate mergers involve firms that sell non-competing products use related marketing channels of production processes. Market extension conglomerate mergers join together firms that sell competing products in separate geographic markets.Examples: Scripps Howard Publishing—Knoxville News Sentinel; Time Warner-TCI; Morrison Supermarkets-Safeway; SBC Communications-Pacific Telesis A pure conglomerate merger unites firms that have no obvious relationship of any kind. Examples: BankCorp of America-Hughes Electronics ;R.J. Reynolds-Burmah Oil & Gas; AT&T-Hartford Insurance Slide 13: Raw Materials Finished Goods TYPES OF MERGERS AUTOS GLASS BLUE JEANS DENIM FABRIC Slide 14: By purchase of asset By exchange of share for asset Exchange of shares for shares By purchase of common share A merger can takes plays in following four ways: By purchase of asset : 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. By purchase of asset By purchase of common shares : 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 By exchange of shares for asset : 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 holds shares of company X. By exchange of shares for asset Exchange of shares for shares : Company X gives its shares to the shareholders of company Y and then company Y is terminated. Exchange of shares for shares 1.Asian Paints-Berger International : Year-2002 Asian Acquired 50.1% controlling stake in Berger International. Deal Rs.57.6 Crores Berger International has no operation in India but formed Berger Paints India Ltd. in Calcutta(subsidiary) Objective:-enter into the South East Asian market, growth. Such as Singapore, Thailand, Myanmar, Bahrain, Malta, UAE, Jamaica, Barbados and Trinidad, and Tobago. 1.Asian Paints-Berger International EXAMPLES 2.Ranbaxy-Tokyo based Nippon Chemiphar Co. Ltd : 2002 Pharmacy market Ranbaxy (RLL) Helps to understand Japanese regulatory framework and market environment. Product advantage 2.Ranbaxy-Tokyo based Nippon Chemiphar Co. Ltd EXAMPLES 3.AOL sells call centre to Essar : April 1st 2008 Aegis BPO of Essar takes over to acquire AOL call centre in white field It is estimated at $100 million Payable in cash. Purpose is to enhance its voice and non voice offerings in the technological support space. 3.AOL sells call centre to Essar EXAMPLES 4.HP and Compaq Product line synergy : 2002 Deal for $25 billion Exchange ratio 0.6325 in shares of HP for 1 share in Compaq Compaq is good in consumer desk top, better distribution net work HP is global leader in printers and scanners. Purpose- large customer base and elimination of computer overlapping product lines 4.HP and Compaq Product line synergy EXAMPLES 5.ITC with ITC Bhadrachalam Paperboards Ltd.(Tax Benefits) : 2001 March End. ITCBPL- is subsidiary of ITC ITCBPL had a accumulated losses of Rs.125 crores. The loss due to high depreciation rate. ITC had a profit of Rs.1000 crores Take over benefits one time to reduce tax of 100 crores. 5.ITC with ITC Bhadrachalam Paperboards Ltd.(Tax Benefits) EXAMPLES 6.Godrej Soap Took over Transelektra Domestic products (cultural barriers) : One company may have entrepreneurial and risk taking style of functioning. Other company may have extreme bureaucratic and procedural orientation. Managers at the middle level were sent to various Godrej sites for training so that they could have a first hand experience of systems and practices and such managers were playing as change agents. 6.Godrej Soap Took over Transelektra Domestic products (cultural barriers) EXAMPLES 7. Warner Hindustan- Park Davis(Cultural failure) : Warner- task focused and formal organization Park Davis-people driven It had lowered their performances. IBM with Lotus development Corporation AT&T joint venture with Spanish and Swiss Telecom 7. Warner Hindustan- Park Davis(Cultural failure) EXAMPLES 8. Exxon-Mobil Merger : Broken in 1911 Reunited in 1989 Deal amount $ 82 million 8. Exxon-Mobil Merger EXAMPLES ACQUISITIONS : Acquisition refers to one company buying out another to combine the bought entity within itself. Acquisition increases the interest of the acquiring company in the target or acquired company. A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm its subsidiary within its portfolio of business. ACQUISITIONS Slide 28: With acquisition, one firm takes over another and establishes its power as the single owner. Generally, the firm which takes over is the bigger and stronger one. The relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the stock market. Slide 29: When a deal is made between two companies in friendly terms, it is typically proclaimed as a merger, regardless of whether it is a buy out. In an unfriendly deal, where the stronger firm swallows the target firm, even when the target company is not willing to be purchased, then the process is labeled as acquisition. Often mergers and acquisitions become synonymous, because, in many cases, a bigger firm may buy out a relatively less powerful one and compel it to announce the process as a merger. Although, in reality an acquisition takes place, the firms declare it as a merger to avoid any negative impression. Slide 30: Whether the deal results in a merger or an acquisition also depends on the way it is announced. In other words, the difference lies in how the purchase is communicated to and received by the target company's board of directors, shareholders and employees. Slide 31: Lack of technical & managerial talent Effects of trade cycles Adoption of modern technology Elimination of competition Economies of large scale business Personal ambition Government pressure Desire to unified control & self -sufficiency Patent rights Desire to enjoy monopoly power Mergers & Acquisition Motives for Mergers and Acquisitions Motives for Mergers and Acquisitions Motives for Mergers & acquisitions : Economies of large scale business: One of the most important reasons for M&A is that a large-scale business organization enjoys both internal and external economies which generally lead to reduction in cost and increase in profits. Motives for Mergers & acquisitions Slide 33: Elimination of competition This is also one of the motivating factors for M&A because it eliminates severe, intense and wasteful expenditure by different competing organizations. Slide 34: Adoption of modern technology The adoption of modern scientific technology by a corporate organization requires large resources which may be out of reach of an individual firm. This may induce M&A of different firms. Slide 35: Lack of technical and managerial talent In the developing countries at the earlier stages of industrialization, scarcity of entrepreneurial, managerial and technical talent is also one of the important factors that leads to M&A Slide 36: Effect of Trade Cycles Trade cycles are the periods of ups and downs in an economy. Ups are the periods of boom when production is on large scale, profits are more, employment is maximum and new firms crop up indiscriminately in all directions. This situations creates unhealthy competition and acts as a motivating factors for M&A. on the other hand, downs are the period of depression when economic activity reaches to its lowest point. During depression, only efficient and large firms manage to survive and inefficient firms, to reduce the risk of failures, preferred to be merged or acquired by strong firms. Slide 37: Desire to enjoy monopoly power M&A leads to monopolistic control in the market. In the situation of monopoly, a firm can easily make adjustment in the supply and price of products and can also increased the profit of the firm. Slide 38: Patent rights The exclusive right to use the invention of any new machines, method or idea is one of the reasons favoring M&A. Patents have given monopoly position to many firms in the market at national and international levels. Slide 39: Desire to unified control and self sufficiency Firms which depends on other units for their raw material requirements or which are engaged in different process of product for ensuring uninterrupted supply of raw materials are encouraged and benefited by M&A. By bringing such firms under unified control, their dependence on other firms can be avoided. Slide 40: Personal Ambition One of the factors favoring M&A is personal ambition of becoming the chief of a personal empire. The desire of a person to increase profits and enlarge his own industrial empire is the factor at the back of many M&A. Slide 41: Government Pressure Whenever the government of a country feels that the competition among firms is providing harmful to the country or it want to improve overall efficiency of industrial undertakings, it can pressurize for M&A through legislation. Slide 42: Integration difficulties Larger or extraordinary debt Inadequate evaluation of target Inability to achieve synergy To much diversification Managers overly focused on acquisitions Problems in achieving success ACQUISITIONS Problems with Acquisitions : Integration difficulties: Differing financial and control system can make the integration of the firms difficult Example: Intel’s acquisition of DEC’s semiconductor division. Inadequate evaluation of target: “ Winners curse “ bid causes acquirer to overpay for firm . Example: Marks and Spencer’s acquisition of Book Brothers. Large or extraordinary debt: Costly debt can create onerous burden on cash outflows. Example: AgriBioTech’s acquisition of dozens of small seed firms. Problems with Acquisitions Problems with Acquisitions : Inability to achieve synergy: Justifying acquisitions can increase the estimate of expected benefits. Overly Diversified: Acquirer doesn’t have expertise required to manage unrelated business. Managers overly focused on acquisitions: Managers may fail to objectively access. Problems with Acquisitions Accounting Standard-14 : In India, accounting for amalgamations is governed by Accounting Standard-14 (AS-14) by the institute of Chartered Accountants of India. AS-14 stipulates that amalgamation means amalgamation pursuant to the provisions of the companies act, 1956 or any other statue as may be applicable to companies. Accounting Standard-14 Slide 46: It classifies amalgamations into two broad categories: Amalgamation in the nature of merger Amalgamation in the nature of purchase/acquisition Slide 47: The first category covers those amalgamations where there is a genuine pooling i.e. not merely assets and liabilities of the amalgamating companies but also of the shareholder’s interest and of the business of these companies such amalgamations are in the nature of ‘merger’. Slide 48: On the other hand, second category covers those amalgamations which are in effect a mode by which one company acquires another company and as a consequence, the shareholder of a company which is acquired normally do not continue to have a proportionate share in the equity of the combined entity; or the business of the company which is acquired is not intended to be continued. Such amalgamations are amalgamations in the nature of ‘purchase’. Amalgamation in the nature of Merger : An amalgamation would come within this fold if all the following conditions are satisfied: All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after such amalgamation. Shareholders holding not less than 90% of the equity shares of the transferor company(other than the equity share already held immediately before the amalgamation by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. Amalgamation in the nature of Merger Slide 50: 3. The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of the 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, after amalgamation, is intended to be carried on by the transferee company. 5. No adjustment is intended to be made in the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies. Amalgamation in the nature of acquisition/purchase : If any of the above conditions is not fulfilled, the amalgamation would be in the nature of purchase and hence be covered under category B viz. purchase or acquisition. Amalgamation in the nature of acquisition/purchase CONCLUSION : CONCLUSION A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another. An M&A deal can be executed by means of a cash transaction, stock-for-stock transaction or a combination of both. The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones - synergy is the logic behind mergers and acquisitions. CONCLUSION : CONCLUSION One size doesn't fit all Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations. Some may better perform with Mergers & Acquisition, and some may not. You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.