MF-0011 (Merfers and Acquisitions) Q. No. 1 What is the basis for valuation of a target company.

Ans: Whether you use a professional business appraiser or attempt a self-evaluation, it is helpful to understand the basic methods of valuation that may be used to determine a value for your company--or a company you are thinking of acquiring. A professional business appraiser typically applies several different methods of valuation that fit into these categories and uses the knowledge gained to pick one or two methods that make the most sense to arrive at a range of values for a company. The three most widely-accepted approaches to valuation are the Comparable Worth method, the Asset Valuation method, and the Financial Performance method. The Comparable Worth Method The notion of comparable worth reflects the performance and potential selling prices of publicly and privately held companies compared to yours, in order to arrive at a value. The appraiser examines publicly held companies that operate in the same or similar industry, providing the same or similar products and/or services. The justification for this method is that potential buyers will not pay more for the target company than what they would spend for a similar company that trades publicly. The appraiser must carefully choose the publicly held companies with which to compare. Obviously, the companies should be as similar to the target as possible, particularly with regard to geographical location(s) and the relationship to suppliers. Because it is not possible to find companies that are the same as the target company in all respects, it is important for the appraiser to use the available data as "creatively" as possible. For example, because of differences in the businesses' sales volumes, it is more useful to compare the ratio of sales to costs, rather than absolute amounts of sales to each other. Comparisons of this type will provide a clearer picture of the strengths and weaknesses of the target company relative to those of others in its industry. Once the appraiser arrives at a preliminary range of values using this method, it is necessary to adjust the prices for situations particular to the target company. If, for example, the target company has profits that are consistently above industry averages, thanks to an unusually low cost structure, then its value must be adjusted upward to account for that competitive advantage. As with all methods of valuation, all prices and subsequent adjustments must be backed up. Buyers or investors must be able to see and understand the justification for a valuation higher than that of apparent comparables, or they will not be willing to pay the premium. If the target business is a closely held company, this method can present some difficulties. The goals of financial reporting for a publicly held company can be quite different from those for a closely held company. A publicly held company's management strives to show high earnings on its financial reports, in order to attract people to buy its stock and therefore to improve its price-to-earnings ratio. A closely held company's management may be a solo entrepreneur or small group wishing to minimize the earnings shown on its financial reports, in order to minimize its tax burden. Both goals are legitimate, but clearly some confusion would arise if an appraiser tried to compare the key financial ratios of a closely held company with those of similar but publicly traded companies in the industry. The Asset Valuation Method If a company has a large portion of its value wrapped up in fixed assets, an appraiser may lean towards some type of asset valuation when attempting to price it. The justification for asset valuation is that the

buyer will pay no more for the target company than it would cost to obtain a comparable set of substitute assets. Within these guidelines, the appraiser can choose how to value the substitute assetscalculating the "Cost of Reproduction," that is, of constructing a substitute asset using the same materials as the original but at current prices, or the "Cost of Replacement," that is, of obtaining the same asset at current prices while adhering to modern standards and using modern materials. The appraiser also considers the time that would be required until replacement or new assets could be put in place and made usable. The asset valuation method involves examining every asset held by the company, both tangible and intangible. A great degree of detail is required in order to arrive at a fair valuation. The appraiser must assess all machinery and equipment, real estate, vehicles, office furniture and fixtures, land and inventory. The value of intangibles like patents and customer lists should also be included. These intangibles often are referred to as the company's goodwill, the difference in value between the company's hard assets and its true value. It is more difficult to convince buyers of the value of intangibles, since they usually want to be able to see and verify the assets in order to feel comfortable with the price. Generally it is in the seller's best interest to supply the business appraiser with as much concrete detail as possible about the company's intangibles. The greater the value of goodwill that can be attributed to specific, well-defined intangibles, the higher the company's valuation is likely to be set. For example, rather than lumping patents that the company holds under the intangible goodwill category, list the patents as separate assets and include specifics pertaining to each one, such as date of expiration and effect on the company's operations. Financial Performance Methods Perhaps the most commonly-used set of valuation methods in the context of small-to-medium company acquisitions, financial performance methods attempt to measure historical performance as well as predict future performance in determining the value of the seller's business to the buyer on a post-closing basis. These methods include Net Present Value (NPV), Internal Rate of Return (IRR) and Return on Investment (ROI). Net Present Value is probably the most common financial-performance calculation used by appraisers in a pre-acquisition valuation. It is a capital-budgeting model that compares the present value of the proposed transaction's benefits and costs. The difference between benefits and costs is the net present value of the proposed deal. A positive NPV means that the proposed transaction's benefits exceed its costs, and the decision to undertake the deal increases the value of the buyer and its shareholder wealth. A negative NPV means that the proposed transaction's costs exceed benefits, and the decision to undertake it would decrease the value and shareholder wealth of the buyer. Zero NPV means that the proposed transaction's benefits are equal to costs, and the decision to make the deal does not change the value of the buyer or the wealth of its shareholders. Internal Rate of Return is a capital-budgeting model represented by the discount rate that equates the price with the anticipated profits from the proposed transaction. Computing the IRR is tantamount to answering the following question: If the proposed transaction were similar to a bank account, what interest rate would the bank have to offer in order to produce the same benefits as the proposed deal? To evaluate the seller's business using the IRR, the appraiser takes two steps: calculating the IRR and comparing the IRR to the required rate of return. Acceptable proposed transactions are those with an IRR greater than the required return. Proposed transactions should be rejected if the IRR is lower than the required rate of return. Shareholders are indifferent when the IRR is equal to the required rate of return.

Return on Investment Ratio may be used in certain cases to decide whether to acquire a target company. Taken as an average of the recent years' earnings compared to equity and long-term debt, the ROI can be useful in providing an important benchmark for the buyer. It is important to remember, however, that such decisions must be based on the interaction of numerous factors; and the whole picture, not just fragments, must be studied in order to make a sound decision. Evaluating a company's financial health and future growth prospects is a very involved process through which the professional business appraiser is trained to lead the potential buyer. It's Not So Simple The professional appraiser (or whoever is conducting the analysis) should not use any one valuation method without considering other methods or other factors. One method may overlook key aspects of the business that will be uncovered only after further investigation required for another method is completed. For example, if the appraiser utilizes several methods and consistently arrives at a range of $2.2 million to $2.6 million, then an asset valuation that yields a result of only $1.5 million can be eliminated if the appraiser finds that the value of the company's assets is not a fair approximation of its entire value when intangibles or other market or competitive trackers are added in. And if the asset valuation method were the only one used, then the company would be dramatically underpriced. Proper valuation of a company is never simple. A method that appears to be too simple probably is. For purposes other than merger-and-acquisition transactions, simple methods are commonly used, and are actually prescribed by law in some cases. However, it is wiser to invest a bit more time and effort initially than to experience remorse over an inappropriate initial valuation after the deal has been concluded. One term commonly heard in the business world as a simple way of calculating ca company's value is "industry multipliers" or "multiples." Multipliers are set by unknown entities based on unknown factors that most likely were valid at one time in a particular market, but may no longer hold true. For example, it may be said that in Industry X, the price to pay for a business is five times the company's annual earnings or amount of goodwill. However, it would be difficult to convince a well-informed potential buyer to purchase a company for a price defined only by such a formula. From the seller's perspective, there is no guarantee that the company is not worth more than the amount arrived at by using a simple formula without basis. In fairness to both parties, the appraiser should not be taking the easy way out of this task. Evaluating the Final Report At the end of the analysis, the appraiser produces a final report detailing the range of values for the business. Paradoxically, just when the formal valuation process seems to have ended, the acquisition team must evaluate the impact the report will have on the actual price and structure of the transaction. If the acquiring company perceives that it will benefit from the economies of scale that will be created by an acquisition, it may be willing to pay more than would otherwise be expected, known as the "acquisition premium," an added cost to the buyer's shareholders and a windfall to the seller's shareholders. But if the buyer is really just looking to acquire only certain assets or views the acquisition as a short-term tactic, then the price it is willing to pay may not even approach the price given by the appraiser. From the seller's point of view, if the founders or owners are really not very eager to give up the business just yet, the negotiated price may be driven higher. However, if the seller is motivated to sell quickly, the negotiated price could plummet. It is an essential aspect of the valuation process that while detailed methods of valuation can provide a solid starting point, that often remains all they provide. The final negotiated price can vary widely and

depend on diverse factors, including market conditions, timing of the negotiations and of the valuation date, internal motivation and goals of both buyer and seller, operating synergies that will result from the transaction, the structure of the transaction and other factors that may not even be explicitly defined.

Q.1 What are the basic steps in strategic planning for a merger? Answer:

Mergers & Acquisitions are strategic decisions which are taken by the management of any company after through examination of many important facts and considerations. Since decisions regarding Mergers & Acquisitios, like capital budgeting decisions are irreversible in nature it is very important that due attention must be paid to some basic issues before planning about it. Hence the strategic planning can be broken down into five steps: Step 1: Pre Acquisition Review The first step is related with the assessment of companys own situation to determine if a Merger & Acquisition strategy should be implemented or is there any other alternative? If a company expects difficulty in the future when it comes to maintaining growth, core competencies, market share, return on capital, or other key performance variable, then a Merger & Acquisition (M & A) program may be necessary. If a company is undervalued or fails to protect its valuation, it may find itself the target of a merger. Therefore, the pre-acquisition review will include issues like the projected growth rate, inability of the company to sustain its market share in the future because of the potential threat from its competitor firms, under valuation of the company etc. The company must address to a fundamental question. Would the Merger help improve the situation regarding the above or not? Will it affect the valuation in a positive manner? Step 2: Searching and Screening of the targets The second step in the Merger & Acquisition process is to search for those companies which can be the potential takeover candidates. It is important for the merging company to see whether the company to be

acquired has strategic compatibility with the acquiring company or not. Compatibility and fit should be assessed across a range of criteria size, kind of business, capital structure, core competencies, etc. Searching and screening process should and must be performed by the management of the Acquiring Company without taking the help of any outside agency. Dependence on external firms should be kept minimum however if it is important to take the help of any outside agency. Step 3: Valuation of the target company The third step in the Merger & Acquisition process is to perform a thorough and detailed analysis of the target company. Acquiring company must confirm that the Target Company is truly a good fit with the acquiring company. This requires a thorough review of operational, strategic, financial, and other aspects of the Target Company. This detail review is called due diligence. Due diligence is the process of identifying and confirming or disconfirming the business reasons for the proposed capital transaction. Various factors like, customer needs, strategic fit, shareholder value etc is at the core of the analysis. Several functions are involved in due diligence related to potential acquisitions, including strategy, finance, legal, marketing, operations, human resources, and internal audit services. The direction of due diligence efforts depends on what the company expects to gain from the transaction: employees, customers, processes, products, or services. Due Diligence is initiated once a target company has been selected. The main objective is to identify various synergy values that can be realized through an M & A of the Target Company. A key aspect of due diligence is the valuation of the target company. In the preliminary phases of M & A. Total value of the company is calculated keeping in mind the value of the synergy expected from the combination and costs involved in the transaction. An example should give an idea of the calculation involved. Value of Acquiring Company = Rs. 500 lakh Value of Target Company = Rs. 250 lakh Value of Synergies as per Phase I Due Diligence = Rs. 150 lakh M & A Costs = Rs. 60 lakh Total Value of Combined Company = Value of the acquiring company + Value of the target company + Value of the Synergy M & A cost Hence Total value of the combined company = 500 + 250 + 150 60 = Rs 840 lakh. Step 4: Negotiation After selecting the target company its time to start the process of negotiating. A negotiation plan is developed based on several key questions: How much resistance Acquiring Company is expected to encounter from the Target Company? What are the benefits of the Merger for the Target Company? What will be the acquiring companys bidding strategy? How much acquiring company should offer in the first round of bidding? The most common approach to acquire a company is for both companies to reach an agreement concerning the Merger & Acquisition. The idea is to go for a negotiated merger. The negotiated merger should be the preferred approach to a M & A since when both the companys agree to the deal then there are chances that the process will be a smooth one and will go a long way in making the merger a successful one. Step 5: Post Merger Integration If everything goes as per planning, the two companies announce an agreement to merge the two companies. This leads to the fifth and final phase within the M & A Process, the integration of the two companies. Every company is different in terms of operations, in terms of structure, in terms of culture, in terms of

strategies etc. The Post Merger Integration Phase is the most difficult phase within the M & A Process. It is the responsibility of the management of the two companies to bring the two companies together and make the whole thing work. This requires extensive planning and design throughout the combined organization. If post merger integration is successful, then it should result in the generation of synergy and that is the final objective of any Merger & Acquisition program.

Create Operating or Financial Synergy The third reason to explain the significant premiums paid in most acquisitions is synergy. Synergy is the potential additional value from combining two firms. It is probably the most widely used and misused rationale for mergers and acquisitions. Sources of Operating Synergy Operating synergies are those synergies that allow firms to increase their operating income, increase growth or both. We would categorize operating synergies into four types: 1. Economies of scale that may arise from the merger, allowing the combined firm to become more costefficient and profitable. 2. Greater pricing power from reduced competition and higher market share, which should result in higher margins and operating income. 3. Combination of different functional strengths, as would be the case when a firm with strong marketing skills acquires a firm with a good product line 4. Higher growth in new or existing markets, arising from the combination of the two firms. This would be case when a US consumer products firm acquires an emerging market firm, with an established distribution network and brand name recognition, and uses these strengths to increase sales of its products. Operating synergies can affect margins and growth, and through these the value of the firms involved in the merger or acquisition. Sources of Financial Synergy With financial synergies, the payoff can take the form of either higher cash flows or a lower cost of capital (discount rate). Included are the following:

 A combination of a firm with excess cash, or cash slack, (and limited project opportunities) and a firm with high-return projects (and limited cash) can yield a payoff in terms of higher value for the combined firm. The increase in value comes from the projects that were taken with the excess cash that otherwise would not have been taken. This synergy is likely to show up most often when large firms acquire smaller firms, or when publicly traded firms acquire private businesses. Debt capacity can increase, because when two firms combine, their earnings and cash flows may become more stable and predictable. This, in turn, allows them to borrow more than they could have as individual entities, which creates a tax benefit for the combined firm. This tax benefit can either be shown as higher cash flows, or take the form of a lower cost of capital for the combined firm. Tax benefits can arise either from the acquisition taking advantage of tax laws or from the use of net operating losses to shelter income. Thus, a profitable firm that acquires a money-losing firm may be able to use the net operating losses of the latter to reduce its tax burden. Alternatively, a firm that is able to increase its depreciation charges after an acquisition will save in taxes, and increase its value. Clearly, there is potential for synergy in many mergers. The more important issues are whether that synergy can be valued and, if so, how to value it. Empirical Evidence on Synergy Synergy is a stated motive in many mergers and acquisitions. Bhide (1993) examined the motives behind 77 acquisitions in 1985 and 1986, and reported that operating synergy was the primary motive in onethird of these takeovers. A number of studies examine whether synergy exists and, if it does, how much it is worth. If synergy is perceived to exist in a takeover, the value of the combined firm should be greater than the sum of the values of the bidding and target firms, operating independently. V(AB) > V(A) + V(B) where V(AB) = Value of a firm created by combining A and B (Synergy) V(A) = Value of firm A, operating independently V(B) = Value of firm B, operating independently Studies of stock returns around merger announcements generally conclude that the value of the combined firm does increase in most takeovers and that the increase is significant. Bradley, Desai, and Kim (1988) examined a sample of 236 inter-firms tender offers between 1963 and 1984 and reported that the combined value of the target and bidder firms increased 7.48% ($117 million in 1984 dollars), on average, on the announcement of the merger. This result has to be interpreted with caution, however, since the increase in the value of the combined firm after a merger is also consistent with a number of other hypotheses explaining acquisitions, including under valuation and a change in corporate control. It is thus a weak test of the synergy hypothesis. The existence of synergy generally implies that the combined firm will become more profitable or grow at a faster rate after the merger than will the firms operating separately. A stronger test of synergy is to

evaluate whether merged firms improve their performance (profitability and growth) relative to their competitors, after takeovers. On this test, as we show later in this chapter, many mergers fail. --> CC 26.1: Synergy takes a long time to show up. Some argue that the reason most studies find no synergy benefits is that they look at short time periods (five years or less) after mergers. Do you agree with this statement?

Question-01: What are the basic steps in strategic planning for a merger?

Answer: Basic steps in Strategic planning in Merger : A n y m e r g e r a n d a c q u i s i t i o n i n v o l v e t h e following critical activities in strategic planning processes. Some of the essential elements in strategic planning processes of mergers and acquisitions are as listed here below :1. Assessment of changes in the organization environment2 . E v a l u a t i o n o f c o m p a n y c a p a c i t i e s a n d l i m i t a t i o n s 3. Assessment of expectations of stakeholders4. Analysis of company, competitors, industry, domestic economy and internationaleconomies5. Formulation of the missions, goals and polices 6 . Development of sensitivity to critical external enviro nmental changes7. Formulation of internal organizational performance measurements8. Formulation of long range strategy programs9. Formulation of mid-range programmes and short-run plans10. Organization, funding and other m e t h o d s t o i m p l e m e n t a l l o f t h e p r o c e e d i n g elements1 1 . I n f o r m a t i o n f l o w a n d f e e d b a c k s y s t e m f o r c o n t i n u e d r e p e t i t i o n o f a l l e s s e n t i a l elements and for adjustment and changes at each stage12. Review and evaluation of all the processes In each of these activities, staff and line personnel have important R e s p o n s i b i l i t i e s i n the strategic decision making processes. The scope of mergers and acquisition set the t o n e f o r t h e n a t u r e o f m e r g e r s a n d a c q u i s i t i o n a c t i v i t i e s a n d i n t u r n a f f e c t s t h e f a c t o r s which have significant influence over these activities. This can be seen by observing t h e f a c t o r s considered during the differe nt stages of mergers and acquisition a c t i v i t i e s . Proper identification of different phases and related activities smoothen the process ofi n v o l v e d i n m e r g e r Question2:Whatarethesourcesofoperatingsynergy? Answer: SourcesofOperatingSynergy O p e r a t i n g s y n e r g i e s a r e t h o s e s y n e r g i e s t h a t a l l o w f i r m s to increase their operating income, increase growth or both. We would categorizeo p e r a t i n g synergies into four types: 1.

Eoo i sfcl cnm o a ese that may arise from the merger, allowing the combined firm t o become more cost-efficient and profitable. Economics of scales can be seen in mergerso f firms in the same business For example : two banks combining together to create al a r g e r b a n k . M e r g e r o f w i t h C e n t u r i a n b a n k o f P u n j a b c a n b e t a k e n a s a n example of operating synergy. Both the banks after combination canexpect considerably on account of sharing of their resources and d u p l i c a t i o n o f f a c i l i t i e s a v a i l a b l e . 2. Greater pricing power from reduced competition and higher market share, whichs hould result in higher margins and o perating income. This synergy is also more likelyto show up in mergers of firms which are in the same line of business and should bemore likely to yield benefits when there are relatively few firms in the business. Whent h e r e a r e m o r e f i r m s i n t h e i n d u s t r y a b i l i t y o f f i r m s t o e x e r c i s e r e l a t i v e l y h i g h e r p r i c e reduces and in such a situation the synergy does not seem to work as desired. Anexample of limiting competition to increase pricing power is the acquisition o f universal luggage by Blow Plast. The two companies were in the same line of businessa n d w e r e i n d i r e c t c o m p e t i t i o n w i t h e a c h o t h e r l e a d i n g t o a severe price war andincreased marketing costs. After the acquisition blow past acquired a strong hold onthe market and operated under near monopoly situation. Another example is theac quisition of Tomco by H i n d u s t a n L e v e r . 3. Combination of different functional strengths , c o m b i n a t i o n o f d i f f e r e n t f u n c t i o n a l strengths may enhance the revenues of each merger partner thereby enabling each company to expand its revenues. The phenomenon can be understood in cases where o n e c o m p a n y w i t h a n e s t a b l i s h e d brand name lends its reputation to a company with upcoming product line or a company. A company with strong distribution network merges with a f i r m t h a t h a s p r o d u c t s o f g r e a t p o t e n t i a l b u t i s u n a b l e t o r e a c h t h e market before its competitors can do so. In other words the two companies should get t h e advantage of the combination of their complimentary functional s t r e n g t h s . 4. Higher growth HDFC bank cost reducing to cut costs thus a v o i d i n g

in new or existing markets, arising from the combination of the t w o firms. This would be case when a US consumer products firm acquires an emergingm a r k e t f i r m , w i t h a n e s t a b l i s h e d d i s t r i b u t i o n n e t w o r k a n d b r a n d n a m e r e c o g n i t i o n , and uses these strengths to increase sales of it s products.Operating synergies cana f f e c t m a r g i n s a n d g r o w t h , a n d t h r o u g h these the value of the firms involved in themerger or acquisition.Synergy results from complementary activities. This can beunderstood with the following example Example : Consider a situation where there aret w o f i r m s A a n d B . F i r m A i s h a v i n g s u b s t a n t i a l a m o u n t o f f i n a n c i a l r e s o u r c e s ( h a v i n g enough surplus cash that can be invested somewhere) while firm B is having profitableinvestment opportunities ( but is lacking surplus cash). If A and B c o m b i n e w i t h e a c h other both can utilize each other strengths, for example here A can invest its resourcei n t h e o p p o r t u n i t i e s a v a i l a b l e t o B . n o t e t h a t this can happen only when the two firms are combined with each other or i n o t h e r w o r d s t h e y m u s t a c t i n a w a y a s i f t h e y a r e one.

Question3: Explaintheprocessofaleveragedbuyout? Answer: In the realm of increased globalized economy, mergers and acquisitions have assumeds i g n i f i c a n t i m p o r t a n c e b o t h w i t h t h e c o u n t r y a s w e l l a s a c r o s s t h e b o a r d e r s . S u c h acquisitions need huge amount of finance to be provided. In search of an idealmechanism to finance and acquisition, the concept of Leverage Buyout (LBO) hase m e r g e d . L B O i s a f i n a n c i n g t e c h n i q u e o f purchasing a private company with the helpof borrowed or debt capital. The leveraged buyout are cash transactions in naturewhe re cash is borrowed by the acquiring firm and the debt financing represents 50% o r more of the purchase price. Generally the tangible assets of the target company areu s e d a s t h e c o l l a t e r a l s e c u r i t y f o r t h e l o a n s b o r r o w e d b y a c q u i r i n g f i r m in order tofinance the acquisition. Some times, a proportionate amount of the long term financingis secured with the f ixed assets of the f irm and in order to raise the balance amount ofthe total purchase price, unrated or low rated debt known as junk bond financing is u t i l i z e d . M d sop r h s o e f uc a e There are a number of types of financing which can be used in anLBO. These include : Senior debt :

this is the debt which ranks ahead of all other debt and equity capital inthe business. Bank loans are typically structured in up to three t r e n c h e s : A , B a n d C . The debt is usually secured on specific assets of the company, which means the lendercan automatically acquire these assets if the company breaches its obligations underthe relevant loan agreement; therefore it has the lowest cost of debt. These obligations a r e u s u a l l y q u i t e s t r i n g e n t . T h e bank loans are usually held by a syndicate of b anksand specialized funds. Typically, the terms of senior debt in an LBO will requirerepayment of the debt in equal annual installments over a period o f a p p r o x i m a t e l y 7 years. Subordinated debt : This debt ranks behind senior debt in order of priority on anyliquidation. The terms of the subordinated debt are usually less stringent than seniordebt. Repayment is usually required in one bullet payment at the e n d o f t h e t e r m . Since subordinated debt gives the lender less security than senior debt, lending costsa r e t y p i c a l l y h i g h e r . A n i n c r e a s i n g l y i m p o r t a n t form of subordinated debt is the highyield bond, often listed on Indian markets. High yield bonds can either be senior or s u b o r d i n a t e d securities that are publicly placed with institutional investors. They are fixed rate, publicly traded, long term securities with a looser covenant package thansenior debt though they are subject to stringent reporting requirements. Mezzanine finance : This is usually high risk subordinated debt and is regarded as a type of intermediate financing between debt and equity and an alternative of high yield bonds. An enhanced return is made available to lenders by the grant of an equity k i c k e r w h i c h c r y s t a l l i z e s u p o n a n e x i t . A f o r m o f t h i s i s c a l l e d a PIK, which reflects interest paid in kind, or rolled up into the principal, and generally includes an a t t a c h e d e q u i t y w a r r a n t . L a so k: on t c This can be a form of equity financing if it is convertible into equity capital. The question of whether loan stock is tax deductible should be investing ate dthoroughly with the companys advisers. Preferenceshare: T h i s f o r m s p a r t o f a c o m p a n y s s h a r e c a p i t a l a n d u s u a l l y g i v e s preference shareholders a fixed dividend and fixed share of the companys equity.

Ordinary shares : This is the riskiest part of a LBOs capital structure. However,o rdinary shareholders will enjoy majority of the upside if the company is successful. Question 4: What are the cultural aspects involved in a merger. Give sufficientexamples.Answer: The value chains of the acquirer and the acquired, need to be integrated i n o r d e r t o achieve the value creation objectives of the acquirer. This integration process has three d i m e n s i o n s : t h e t e c h n i c a l , p o l i t i c a l a n d c u l t u r a l . T h e t e c h n i c a l i n t e g r a t i o n i s s i m i l a r t o the capability transfer discussed above. The integration of social interaction and political relationships represents the informal processes and systems which influence peoples ability and motivation to perform. At the time of i n t e g r a t i o n , t h e a c q u i r e r should have regard to these political relationships, if acquired employees are not to feel u n f a i r l y t r e a t e d . A n i m p o r t a n t aspect of integration is the cultural integration of the acquiring a n d acquired firms. The culture of an organization is embodied in its c o l l e c t i v e v a l u e systems, beliefs, norms, ideologies myths and rituals. They can motivate people and can become valuable sources of efficiency and effectiveness. The following are the i l l u s t r a t i v e o r g a n i z a t i o n a l d i v e r s e c u l t u r e s w h i c h m a y h a v e t o b e i n t e g r a t e d d u r i n g post-merger period: Strong top leadership versus Team approach M a n a g e m e n t b y f o r m a l p a p e r w o r k v e r s u s m a n a g e m e n t b y w a n d e r i n g a r o u n d Individual decision versus group consensus decision Rapid evaluation based on performance versus Long term relationship based on l o y a l t y Rapid feedback for changes versus formal bureaucratic rules and procedures N a r r o w c a r e e r p a t h v e r s u s m o v e m e n t t h r o u g h m a n y a r e a s Risk taking encouraged versus one mistake you are out R i s k y a c t i v i t i e s v e r s u s l o w r i s k a c t i v i t i e s Narrow responsibility arrangement versus Everyone in this company is salesman (or cost controller, or product quality improver etc.) Learn from customer versus W e know what is best for the customer The above illustrative culture may provide bas is for the classification of organizational culture. There are four different types of organizatio nal culture as mentioned below: P e ow r - The main characteristics are: essentially autocratic and suppressive ofc h a l l e n g e ; e m p h a s i s o n i n d i v i d u a l r a t h e r t h a n g r o u p d e c i s i o n m a k i n g Role - The important features are: bureaucratic and hierarchical; emphasis on f o r m a l rules and procedures; values fast, efficient and standardized culture service

Task/achievement - The main characteristics are: emphasis on team commitment; t a s k d e t e r m i n e s organization of work; flexibility and worker autonomy; needs creativeenvironment

Person/support
- The important features are: emphasis on equality; seeks to nurture personal development of individual membersP o o r c u l t u r a l f i t o r incompatibility is likely to result in considerable f r a g m e n t a t i o n , uncertainty and cultural ambiguity, which may be experienced as stressful by

Q. No: what are the motives of a joint venture, explain with an example of a joint venture?

A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares. In European law, the term 'joint-venture' (or joint undertaking) is an elusive legal concept, better defined under the rules of company law. In France, the term 'joint venture' is variously translated as 'association d'entreprises', 'entreprise conjointe', 'coentreprise' and 'entreprise commune'. But generally, the term societe anonyme loosely covers all foreign collaborations. In Germany,'joint venture' is better represented as a 'combination of companies' (Konzern)[1] On the other hand, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-venturers". The venture can be for one specific project only - when the JV is referred to more correctly as a consortium (as the building of the Channel Tunnel) - or a continuing business relationship. The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for one-time contracts. The JV is dissolved when that goal is reached. Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson and Penske Truck Leasing. A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits. A joint venture is not to be taken lightly. For a businessperson to embark on a joint venture, he or she needs to be committed and willing to work cooperatively with the other party involved. A person involved in a joint venture can no longer make all of the decisions for the business alone. For it to be truly a joint venture, there has to be 100% commitment from both sides. [2] When determining whether or not to embark on a joint venture, it is important to ensure both parties are a match with the projected client base. In a joint venture, each party must complement the other in business. Sometimes, a misunderstanding or a lack of communication can destroy a joint venture. Therefore, it is necessary for both parties to be capable of communicating what they are able to offer to the project and what their expectations are. Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short term and long term successes are both important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary.