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PROJECT REPORT
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The Indian economy has been growing with a rapid pace and has
been emerging at the top, be it IT, R&D, pharmaceutical, infrastructure,
energy, consumer retail, telecom, financial services, media, and
hospitality etc. It is second fastest growing economy in the world.
India’s economy grew at 6.1% in the first quarter & 7.9 per cent in
the second quarter of this fiscal - among the highest growth rates in the
world. This growth momentum was supported by the double digit growth
of the services sector at 12.7% and manufacturing sector at 9.2% in the
second quarter of 2008-09.
What is Merger?
In economics or business sense of the term, merger may be
referred to as the establishment of a larger company as a result of the
amalgamation of two companies. Here the deal is made between two
companies in friendly terms. 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
same size. Mergers comprise the process of "stock swap". "Stock swap"
is a process, in which the risk undertaken by the shareholders are
equally borne by the shareholders of both the companies.
Types of Mergers:
Mergers are classified into these types:
Horizontal mergers:
Vertical mergers:
Conglomerate mergers:
Concentric Mergers:
Merger of two firms that are so related that there is a carryover of
specific management functions (research, manufacturing, finance,
marketing, etc.
STAFF
REDUCTIO
N
RESOURSE ECONOMIE
TRANSFER S OF SCALE
IMPROVED
MARKET NEW
REACH MOTIVES TECHNOLO
GY
INCREASE
MARKET
TAXES SHARE
CROSS
SELLING
• Cross selling: For example, a bank buying a stock broker could then sell
its banking products to the stock brokers customers, while the broker
can sign up the bank’ customers for brokerage account. Or, a
manufacturer can acquire and sell complimentary products.
Synergy
Synergy is the magic force that allows for enhanced cost efficiencies of
the new business. Synergy takes the form of revenue enhancement and
cost savings.
Let's face it, it would be highly unlikely for rational owners to sell if
they would benefit more by not selling. That means buyers will need to
pay a premium if they hope to acquire the company, regardless of what
pre-merger valuation tells them.
Valuation Matters
Valuation Method
What to Look For
a stock buy-back.
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Goal: Pick the company that best matches your corporate strategy.
Build a list of potential acquisition targets and narrow them down to one
or two that have the best chance of success. Create a matrix that allows
you to compare the candidates against your Strategy. Then bring your
team together to discuss the pros and cons.
Finally, once the target company agrees to the tender offer and
regulatory requirements are met, the merger deal will be executed by
means of some transaction. In a merger in which one company buys
another, the acquiring company will pay for the target company's shares
with cash, stock or both.
A cash-for-stock transaction is fairly straightforward: target
company
shareholders receive a cash payment for each share purchased. This
transaction is treated as a taxable sale of the shares of the target
company.
If the transaction is made with stock instead of cash, then it's not
taxable. There is simply an exchange of share certificates. The desire to
steer clear of the tax man explains why so many M&A deals are carried
out as stock-for-stock transactions.
When a company is purchased with stock, new shares from the
acquiring company's stock are issued directly to the target company's
shareholders, or the new shares are sent to a broker who manages them
for target company shareholders. The shareholders of the target
company are only taxed when they sell their new shares.
When the deal is closed, investors usually receive a new stock in
their portfolios - the acquiring company's expanded stock. Sometimes
investors will get new stock identifying a new corporate entity that is
created by the M&A deal.
Buyer always wants to buy low, but seller wants to sell high!
And Section 396 deals with the power of the central government to
provide for an amalgamation of companies in the national interest. In
any scheme of amalgamation, both the amalgamating company or
companies and the amalgamated company should comply with the
requirements specified in sections 391 to 394 and submit details of all
the formalities for consideration of the Tribunal. It is not enough if one
of the companies alone fulfils the necessary formalities. Sections 394,
394A of the Companies Act deal with the procedures and the
requirements to be followed in order to effect amalgamations of
companies coupled with the provisions relating to the powers of the
Tribunal and the central government in the matter of bringing about
amalgamations of companies.
After the application is filed, the Tribunal would pass orders with
regard to the fixation of the dates of the hearing, and the provision of a
copy of the application to the Registrar of Companies and the Regional
Director of the Company Law Board in accordance with section 394A and
to the Official Liquidator for the report confirming that the affairs of the
company have not been conducted in a manner prejudicial to the
interest of the shareholders or the public. Before sanctioning the scheme
of amalgamation, the Tribunal has also to give notice of every
application made to it under section 391 to 394 to the central
government and the Tribunal should take into consideration the
representations, if any, made to it by the government before passing
any order granting or rejecting the scheme of amalgamation. Thus the
central government is provided with an opportunity to have a say in the
matter of amalgamations of companies before the scheme of
amalgamation is approved or rejected by the Tribunal.
Flawed Intentions:
Coping with a merger can make top managers spread their time
too thinly and neglect their core business, spelling doom. Too often,
potential difficulties seem trivial to managers caught up in the thrill of
the big deal.
The chances for success are further hampered if the corporate cultures
of the companies are very different. When a company is acquired, the
decision is typically based on product or market synergies, but cultural
differences are often ignored. It's a mistake to assume that personnel
issues are easily overcome. For example, employees at a target
company might be accustomed to easy access to top management,
flexible work schedules or even a relaxed dress code. These aspects of a
working environment may not seem significant, but if new management
removes them, the result can be resentment and shrinking productivity.
More insight into the failure of mergers is found in the highly
acclaimed study from McKinsey, a global consultancy. The study
concludes that companies often focus too intently on cutting costs
following mergers, while revenues, and ultimately, profits, suffer.
Merging companies can focus on integration and cost-cutting so much
that they neglect day-to-day business, thereby prompting nervous
customers to flee. This loss of revenue momentum is one reason so
many mergers fail to create value for shareholders.
But remember, not all mergers fail. Size and global reach can be
advantageous, and strong managers can often squeeze greater
efficiency out of badly run rivals.
Indian outbound deals, which were valued at US$ 0.7 billion in 2000-
01, increased to US$ 4.3 billion in 2005, and further crossed US$ 15
billion-mark in 2006. In fact, 2006 will be remembered in India’s
corporate history as a year when Indian companies covered a lot of new
ground. They went shopping across the globe and acquired a number of
strategically significant companies.
Mergers and Acquisitions in 2009
In the first six months of 2009, Indian companies were involved in 136
M&A deals, down nearly 54% from the same period last year.
“The biggest reason for the fall was the lack of liquidity” “This
particularly affected cross-border deals as no leverage or buying finance
was available. It was only companies with cash in hand that went
hunting for targets.”
ONGC Videsh Ltd’s purchase of the UK’s Imperial Energy Corp. Plc. for
$1.9 billion,
Sesa Goa Ltd’s $350 million takeover of Dempo Mining Corp. Pvt. Ltd.
At least 50% of the deals in the first half of 2009 were domestic
acquisitions, against 40% last year.
The most preferred destination for Indian acquirers was the US, with
seven of the 31 outbound targets located in that country, followed by
the UK with three deals.
However, M&A activity in IT and ITeS had fallen from 27% in the first
half of 2008, and manufacturing deals from 20%.
Why?
• IBM bought Lotus for $ 3.2 bn. (more than 100% premium)
1. Don’t try to swallow something larger than your own head. If the
company you’re acquiring is almost as large as your own, it’s
going to take major amounts of time and effort to work the people
issues and organizational details of the new company. If the
merger is too complicated, you may not survive the process.
2. The bigger the hype, the harder the fall. You never want your
investors and customers to think that the long-term success of
your company hinges entirely on the success of a single M & A.
Too much can go wrong and, if it does, you look very, very foolish.
4. 4. The more you buy, the greater your risk. You can grow a
business by gobbling up smaller firms, but without a strategy that
puts those acquisitions into context, you’ll be vulnerable to any
market shift that puts the acquired companies under stress.
5. 5. Too many chefs spoil the broth. While it’s natural to want to
keep talented management onboard after a merger, you’ve got be
certain they know that they’re no longer running the show.
Otherwise, you’re just setting yourself up for turf wars and endless
management conflict.
Conclusion