I.I.F.T.

Subject: Mergers and Acquisitions

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Mergers And Acquisition

Synopsis:
1) Introduction 2) Definition 3) What makes Mergers and Acquisitions 4) Difference between Mergers and Acquisition 5) Advantages 6) Disadvantages 7) Examples 8) Conclusion

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Introduction
Mergers and Acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

Definition
The main idea: - One plus one makes three. The equation is specially based on Merger or Acquisition. The key principle behind buying a company is to create share holder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies together. 1. Acquisition: An acquisition is the purchase of one company by another company. Acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. All acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Acquisition has become one of the most popular ways since 1990. Companies choose to grow by acquiring others to increase market share, to gain access to promising new technologies, to achieve synergies in their operations, to tap well-developed distribution channels, to obtain control of undervalued assets, and a myriad of other reasons. So, because of the appeal of instant growth, acquisition is an increasingly common way to expand. 2. Mergers: The combining of two or more entities into one is called merger. Therefore, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.

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What makes Mergers and Acquisitions?

These motives are considered for making of mergers and acquisitions: 1. Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. 2. Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing 3. Synergy: Better use of complementary resources. 4. Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. 5. Geographical Diversification: This is designed to smooth the earnings results of a company, which over the long term smoothen the stock price of a company, giving conservative investors more confidence in investing in the company. 6. Empire building: Managers have larger companies to manage and hence more power. 7. Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. 8. Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. 9. Resource Transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

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Difference between Mergers and Acquisitions

Though the two words mergers and acquisitions are often spoken in the same breath and are also used in such a way as if they are synonymous, however, there are certain differences between mergers and acquisitions. Merger 1) The case when two companies (often of same size) decide to move forward as a single new company instead of operating business separately. 2) The stocks of both the companies are surrendered, while new stocks are issued afresh. 3) It is the mutual decision. Acquisition 1) The case when one company takes over another and establishes itself as the new owner of the business. 2) The buyer company swallows the business of the target company, which ceases to exist. 3) It can be friendly takeover or hostile takeover. 4) Acquisition is less expensive than merger. 5) It is faster and easier transaction.

4) Merger is expensive than acquisition (higher legal cost). 5) It is time consuming and the company has to maintain so much legal issues. 6) Through merger, shareholders can increase their net worth. 7) Dilution of ownership occurs in mergers.

6) Buyers cannot raise their enough capital. 7) The acquirer does not experience the dilution of the ownership. 8) Dr. Reddy's Labs acquired Betapharm through an agreement amounting $597 million.

8) For example, Glaxo Wellcome and SmithKline Beehcam ceased to exist and merged to become a new company, known as Glaxo SmithKline

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Advantages of Mergers and Acquisitions

1. Greater Value Generation Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after Mergers or Acquisitions would be greater than the sum of the shareholder values of the parent companies. 2. Tax gain and Revenue Enhancement Mergers and Acquisitions also lead to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition because the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies. 3. Gaining Cost Efficiency When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced. 4. Increase in market share An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization. 5. Additional Benefits
1. 2. 3. 4. 5. 6.

To enter a new market. To introduce new products through Research and Development To achieve Administrative benefits. To increased market share. To gain higher competitiveness. For industry know how and positioning.

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Disadvantages of Mergers and Acquisitions

Apart from the advantageous effects of mergers and acquisitions, there are some bad aspects too. These are as follows: 1. Effect of image of one partner over another After a merger or an acquisition, both the partners become complementary to each other. In such a case, if the market image of one company is bad, it effects the consumer response towards the product of another company also. 2. Dominance of one Company If one company is comparatively having higher market share than another, it starts behaving in a dominant way. It forces another firm directly or indirectly to implement its own rules and regulations. This badly effects the healthy organizational environment. 3. Delay in decision making When two firms combine, they use to take every decision mutually. Therefore, every decision is passed through the hands of CEOs of both firms. It consumes time and cause delays. 4. Leakage of Technology In case, two companies from different countries combine, there always remains a threat of technology leakage from one country into another country. This sometimes creates a threat to the domestic firms of the country from which the technology is leaked. 5. Conflicts and Disputes create heavy Losses Any conflict or dispute arising between the two merged firms creates heavy losses. The partners sometimes sue each other in the court of law. This makes their bad image in the market and people start shifting on to the substitute products. 6. Cultural Differences When two firms from different countries combine, they encounter with cultural differences among them. No two countries have same culture and therefore, this difference of culture creates clashes between the two partners.

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Examples of Mergers and Acquisitions

1. Tata Steel - Corus: $12.2 billion: January 30, 2007. Largest Indian take-over. After the deal, Tata became the 5th largest steel co. 100 % stake in Corus paying Rs 428/- per share.. 2. Vodafone - Hutchison Essar: $11.1 billion: Telecom sector. 11th February 2007. 2nd largest takeover deal, 67 % stake holding in Hutch. 3. Hindalco - Novelis: $6 billion: June 2008, Aluminium and Copper sector Hindalco acquired Novelis Hindalco entered the Fortune-500 listing of world's largest companies by sales revenues. 4. Ranbaxy - Daiichi Sankyo: $4.5 billion : Pharmaceuticals sector. June 2008, largest-ever acquisition deal in the Indian pharma industry. Daiichi Sankyo acquired the majority stake of more than 50 % in Ranbaxy for Rs 15,000 crore. 15th biggest drugmaker. 5. ONGC - Imperial Energy: $2.8billion: January 2009, Acquisition deal. Imperial energy is a biggest Chinese co. ONGC paid 880 per share to the shareholders of imperial energy. ONGC wanted to tap the Siberian market. 6. NTT DoCoMo - Tata Tele: $2.7 billion: November 2008, Telecom sector Acquisition deal. Japanese telecom giant NTT DoComo acquired 26 per cent equity stake in Tata Teleservices for about Rs 13,070 cr. 7. HDFC Bank - Centurion Bank of Punjab: $2.4 billion: February 2008, Banking sector Acquisition deal. CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. 8. Tata Motors - Jaguar Land Rover: $2.3 billion : March 2008, Automobile sector Acquisition deal gave tuff competition to M&M after signing the deal with ford. 9. Sterlite - Asarco: $1.8 billion: May 2008 Acquisition deal. Sector copper. 10. Suzlon - RePower: $1.7 billion: May 2007, Acquisition deal Energy sector. Suzlon is now the largest wind turbine maker in Asia. 5th largest in the world. 11. RIL-RPL merger: $1.68 billion : March 2009, Merger deal amalgamation of its subsidiary. Reliance Petroleum with the parent company Reliance industries ltd.

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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. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.

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