Mergers And Acquisitions_PPT


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Mergers And Acquisitions -:

Mergers A nd Acquisitions - Features And Objectives


Mergers And Acquisitions - Features And Objectives The consolidation of companies is called Mergers and Acquisitions (M&A). If we differentiate both the terms, mergers refer to the combination of two companies to form one, while acquisitions are one company taking over the other company. One of the major aspects of the corporate finance world is M&A. Undoubtedly, it is the fastest way to grow small businesses.

WHAT ARE THE CHARACTERISTICS OF MERGERS AND ACQUISITIONS? Value creation is the prime feature of M&As as two separate companies come together into an individual stand due to this reason. Along with the benefits, there are certain risks involved in these unions too which cannot be ignored.  During an M&A process, the prime aspects and characteristics are given as follows: :

WHAT ARE THE CHARACTERISTICS OF MERGERS AND ACQUISITIONS? Value creation is the prime feature of M&As as two separate companies come together into an individual stand due to this reason. Along with the benefits, there are certain risks involved in these unions too which cannot be ignored.  During an M&A process, the prime aspects and characteristics are given as follows:


COMMUNICATION : During any Merger or Acquisition (M&A), communication is the key as these types of events are very crucial in nature. This is not only applicable to communication between the two executives or owners of both the companies in question, but also the subordinates and employees. If proper and adequate information is not passed on to the employees, they are going to look for other jobs because they might lack security here. During such a critical process, low employee retention can really be harmful to the company. 2. GROWTH AND DEVELOPMENT : The main purpose of M&As is usually the growth and development of the business. Any business that wants to grow has basically two options, either acquire a company or just star up some new project. Only the rise in production volume is not growth. Growth can be geographically, demographically, and in products too. New goods and services can be brought up by the business which is also called product/service expansion. Also, new locations and countries can be targeted for expansion. Many M&As take place between companies of different countries so that the firms reach new areas for conducting business globally. New audiences are also targeted for the purpose of business development. Businesses may be able to add to their distribution network or expand its geographic service area by expanding geographically.


3. TRANSPARENCY : Transparency is absolutely necessary throughout the M&A process. Right from the initial discussion to the commencement of the new firm and after that too, there must be open discussion and honest communication between the parties. Everything must be made clear prior to avoid any confusions in the future. A non-disclosure agreement is also signed most of the time for risking the limit of somebody withholding information. This is done among all the parties who have direct involvement in this event. The information must be disclosed very carefully regarding legal situations, business finances, and anything other than that which could have an impact on the purchase. This is legally required in many cases. 4. DEFINED GOALS : Well-defined goals are a very important pre-requisite during the accomplishment of mergers and acquisitions. When a company is purchasing another business, a pre-designed goal or objective is necessary because the vision of the acquisition should be well thought-after. When a successful Merger and Acquisition(M&A) takes place, the territories are expanded, sales are boosted, patents are acquired and an all-new market is entered. The aims of the business are identified at an early stage so that the processes can be started on the right foot.


5. DISCOUNTED CASH FLOW (DCF) : A prime valuation tool in M&A is a discounted cash flow analysis that determines the current value of the company. This is calculated on the basis of forecasted future cash flows. The estimated free cash flows are discounted in comparison to the present value using the weighted average costs of capital (WACC) of the company. This value is difficult to get, but with the help of a few tools, this valuation method can work easily. 6. REPLACEMENT COST : Considering various cases, acquisition is many times based on the cost of replacement of the target company. It takes a long period of time for assembling good management, purchase of right equipment and acquiring a property. This method is used to establish a certain price but does not make sense in a service industry where the prime assets are ideas and people. Costs can be reduced by eliminating staffing redundancies. 7.MULTIPLE BIDDERS : The most profitable deal for sellers normally occurs when there are several potential bidders. Sellers can obtain better deal terms, a higher price, or both by leveraging the competitive situation. The selling company can go into a significant disadvantage if they negotiate with just one single bidder. This is mainly when the selling company agrees on signing an exclusivity agreement that limits its ability to speak to other potential buyers for a specific period of time. Most of the time, the sellers try to set up a competitive bidding process or an auction to avoid being restricted by exclusive demands. Every bidder can be played off against another for arriving at a favorable deal. There can be cases where there is only one serious potential bidder but the perception where there are numerous parties interested really helps in the negotiations.  

WHAT ARE THE OBJECTIVES OF MERGERS AND ACQUISITIONS? While the key objective of an M&A always is to grow the organization, they actually take place because of more reasons than one. There can be numerous causes for an M&A to occur. There are several aims that the managers and the company aim for making the union happen. Various objective of M&A is mentioned below in detail: :

WHAT ARE THE OBJECTIVES OF MERGERS AND ACQUISITIONS ? While the key objective of an M&A always is to grow the organization, they actually take place because of more reasons than one. There can be numerous causes for an M&A to occur. There are several aims that the managers and the company aim for making the union happen. Various objective of M&A is mentioned below in detail:


SECURITY : There is a security against failure enjoyed by smaller companies when they merge with a huge industry giant. The larger firm has the capacity and financial resources to handle expensive lawsuits and paddle through the market storms. On the other hand, when faced with similar situations, small businesses tend to go bankrupt on their own. The small firms gain the prestige and reputation of a highly respected and well-known industry brand name while large companies gain new talent and ideas. If the M&A is occurring between two moderately-sized companies, they both may consider that combined resources represent a higher security for both. 2. SCALES OF ECONOMIES : The main objective of M&As is basically to achieve economies of scale, that is, to increase the final output and the firm size as a whole. The cost per item is reduced by spreading the fixed cost over a huge quantity. The efficiency is also increased by specialization of the production process leading to cost advantages. Additionally, by implementing a more effective firm structure, economies of scale are achieved efficiently. Improvement in economies of scale taken place as the firm is able to purchase raw materials in greater quantities, for example, costs can be reduced.


3. INCENTIVES TO MANAGERS : M&As are basically inspired by the goals and personal interests of the company’s top management. It is usually guaranteed that the managers enjoy more prestige and power after an M&A. This is also referred to as ‘empire building’ where the managers begin to favor the size of the firm more than the actual performance. This could be reinforced by the ego of the managers and their intentions for building the biggest company in the industry in terms of size. This is also because the size of the company goes hand-in-hand with the compensation of the managers. Huge companies can afford to give higher salaries and bonuses to their executives and managers. The interests of the managers may not be totally favorable to those of the shareholders. 4. DIVERSIFICATION : Many times, M&As take place for the purpose of diversification such as offering new products and services or entering into new markets. Furthermore, the risks are also diversified relating to the operations of a company. The shareholders are not always happy with the situation where an M&A occurs with the aim of risk diversification. This is because, in many situations, the shareholders can diversify the risks through investment portfolios easily whereas going through an M&A is a risky and long transaction for this purpose. The conglomerate M&As, market-extension, and product-extension M&As are usually motivated by the objective of diversification.


5.TAX BENEFITS : When two or more firms merge or during an acquisition, many tax implications arise. Due to an M&A, many tax benefits can be enjoyed by using net operating losses to shield income or taking advantage of existing tax laws. In the case where a loss-making company is acquired by a profit-making firm, the tax burden is reduced by using net operating losses (NOL) of the target firm. Moreover, a company that can upsurge its depreciation charges after an M&A, can save on tax costs and increase in value. The company’s surplus funds, unused tax losses, write-up of depreciable assets, and unused debt capacity also create tax benefits. 6. ELIMINATING COMPETITION : The M&As are done on a large scale for the purpose of eliminating competition in the industry. It is usually done for substantially decreasing competition or for the creation of a monopoly status in the market. This eliminated competition and a solo status can prove very beneficial to the company. They can have the freedom to keep their prices higher and enjoy profits for the business. 7.BRAND IMAGE : The mergers that take place on a huge scale create a media giant and demands a higher prestige in the market. Most managers really appreciate the prestige of working and creating for a big company. This can also lead to a rise in their salaries. When two companies merge together, the new brand that is formed enjoys the brand image of both the firms. There is also talent-sharing where the talents of reputed managers are put into this new firm. The good image of the managers also adds to the higher market reputation enjoyed by the resulting company.


8. MARKET SHARE : The basic objective behind horizontal M&A is that less number of competitors will increase the prices in a specific market and lead to a rise in market power. This kind of M&A is particularly favorable in saturated markets because internal growth would result in excess in supply and thus decrease in prices. If there are numerous sellers in a competitive type of market, few M&A deals will not affect the pricing power so much. Usually, it is possible for the oligopolistic companies to upsurge their pricing power through M&A. This is however strictly monitored by market authorities and local competition. Whenever an M&A occurs, they gain a higher share in the market which leads to a reduction in competition. Thus, the newly formed company can also raise its prices. There is a proper regulation that takes place by the government for mergers for preventing monopoly to take place. The government wants to avoid a situation where one company owns the complete market for one single product. In such a circumstance, a company can set any price that it likes of the product or service. On the other hand, when there is proper competition, companies are motivated to improve their services and lower their prices to gain consumers, but this can cause a reduction in their profitability too. Since the two firms are in the same industry, collecting their resources may result in a higher market share.


9. SYNERGY EFFECT : When two companies combine together to form a third one, there is a synergy effect achieved as this combination creates an added value. A huge company is considered to bear a low amount of risks, thus, financial synergy is achieved through cheaper access to capital. The main motive is to make the best use of these financial resources for the shareholders and improving overall financial performance. Operational synergy is achieved by combining functions such as distribution and production, or by transfer of knowledge. Managerial synergy is realized when a new management style enters the business from the acquirer to the target company leading to higher efficiency. Management expertise is considered unilateral and transferable. Strategically, the firm is now focused on developing and improving business processes, that are closely linked to competitive advantage. A successful M&A results in economies of scale, elimination of certain costs, and access to new technologies. The occurrence of all these events leads to improvement in the cost structure of a firm. Positive synergies mainly improve the revenue-generating ability of the company leading to product diversification, R&D activities and market expansion. This also increases the wealth of the shareholders. 10.MARKET POWER : The prime objective of an M&A is to gain a higher share in the market. This helps the company to enjoy the power of monopoly in the industry. Higher prices can be, thus, set by the firm because of this status. Hence, mergers are regulated frequently by the government. However, because the companies operate in several industries, it is debatable whether this specific merger genuinely increases market power.


Accrete Business Advisory in Mumbai, crafts strategies for approaching potential acquisition candidates and negotiating the structure and terms of a possible transaction are very crucial matters in which our team of experts has extensive and in-depth experience. The Advisory assists in the M&A process including all the steps involved from start to finish such as planning, due diligence, research, closure, and implementation activities. Proper expertise is provided of markets, opportunities and trends for helping our clients in the identification of appropriate acquisition targets and assessing tactical growth strategy. For More Information Contact  Accrete Business Advisory  11/13 MK Amin Marg, 1st Floor, King Lane, Bora Bazaar, Mumbai – 400001 .

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