Module 4

Merger process

Steps in Merger

1. Screening and investigation of merger proposal:

When there is an intention of acquisition or merger, the primary step is that of screening. The motives and the needs are to be adjusted against three strategic criteria i.e., business fit, mgt and financial strength. 2. Negotiation stage: Its the stage in which the bargain is made in order to secure the highest price by the seller and the acquirer keep to limit the price of the bid.

3. Approval of proposal by Board of DirectorsDeciding upon the considerations of the deal and terms of payments, the proposal will be put for the Board of Directors approval.

4. Approval of share holdersAs per the provisions of the Companies Act 1956 the shareholders of both seller and the acquirer companies hold meeting under the directions of the National Company Law Tribunal and consider the scheme of amalgamation. A separate meeting for both preference and equity shareholder is convened for this purpose.

5. Approval of creditors/financial institutions/banksApprovals from all these are to be sought for as per the respective agreement with each of them and their interest are considered in drawing up the scheme of merger.

6. Tribunals approval: Is required for confirming the scheme of amalgamation. The Tribunal shall issue orders for winding up of the amalgamating company without dissolution on receipt of the reports from the official liquidator and Regional Director that the affairs of the amalgamating company have not been conducted in a manner prejudicial to the interest of its members or to public interest.

7. Approval of Central Government:is required on the recommendation made by the specified authority under Sec 72A of the Income Tax Act, if applicable 8 Integration stage: the structural and cultural aspects of the two organizations, if carefully integrated in the new organization, will lead to successful merger and ensure that expected benefits of the merger are realized.

MERGER PROCESS: FIVE STAGE MODEL

Post-Acquisition Audit

Corporate strategy

Post-Acquisition Integration

Organizing for Acquisitions Deal Structuring

STAGE 3

1. CORPORATE STRATEGY DEVELOPMENT

Business strategy is concerned with ways of achieving, maintaining, or enhancing competitive advantage in product markets. Corporate strategy is concerned with ways of optimizing the portfolios of business that a firm currently owns & with how this portfolio can be changed to serve the interests of the corporations stakeholders.

M & A is one such activity which achieves the objectives of both corporate and business strategies.

2. ORGANISING FOR ACQUISITION

One of the major reasons for the observed failure of many acquisitions may be that firms lack the organization of resources and capabilities for making acquisitions. It is also likely that the acquisition decision-making processes within firms are far from the models of economic rationality that one may assume. Success for effective acquisition integration is determined at least partly by the thoroughness, clarity and forethought with which the value creation logic in blueprinted at the acquisition decision stage.

3. Deal Structuring and Negotiating

This stage consists of

Valuing target companies, taking into account how the acquirer plans to leverage its own assets with those of the targets. Choice of advisors to the deal such as investment bankers, lawyers etc. Performing due diligence Determining the range of negotiation parameters

4.Post-Acquisition Integration

This is a very important stage, the objective of which is to put in place a merged organization that can deliver the strategic and value expectations that drove the merger in the first place. Integration has the characteristics of a change mgt programme but here three types of change may be involved: Change of the target firms Change of the acquiring firms Change in the attitude and behavior of both to accommodate co-existence or fusion of the two firms.

5. Post Acquisition Audit and Organization Learning

The importance of organizational learning to the success of future acquisitions needs much greater recognition, given the high failure rate of acquisitions. Post merger audit by internal auditors can be acquisition specific as well as being part of an annual audit. Internal auditors have a significant role in ensuring organizational learning and its dissemination.

Due Diligence process

DUE DILIGENCE PROCESS

SET THE OBJECTIVES 1. Acquire knowledge 2. Acquire market share and brand name 3. Acquire technology, products 4. Acquire a geographical presence 5. Diversification 6. Squeeze out competition 7. Growth 8. Synergy

THE SELECTION CRITERIA AND INFORMATION COLLECTION

Size of revenue, profit and asset of the target Management team Clearly identifiable market and customer base Maturity of the products, services and technology Marketing channel Market share Quality of accounting records Expected rate of return Intended Investment size Expected rate of return and payback period

EVALUATION AND STRUCTURING THE OFFER

Measure historical performance Set the valuation Preparation of term sheet

DUE DILIGENCE AND DOCUMENTATION

which includes: Investment fit financial resources to be required Strategic fit - management strengths brought with this merger

Marketing fit-promotion, brand names, customer mix

Operating fit labour force, technology etc

Management fit- leadership style, strategic thinking

Financial fit sales, profitability, return on capital

Information required to make due diligence work

Corporate records Financial records Tax records Regulatory records Debt records Employment records Property records Miscellaneous records

Process of merger integration

Integration of Systems Processes Procedures Strategy Reporting systems, etc. Integration of people

Human resource management issues during integration

Changing the BODs Choosing the right people for right positions Management and workforce redundancy Aligning performance evaluation and reward systems Key people retention

The role of HR in Mergers and Acquisitions

Key conclusions HR performance in integration is a key driver of M&A success 44% of senior executives report that integration is the greatest source of error in M&A and that overcoming human capital challenges is more important to integration success than any other aspect of integration

Steps to Build Positive HR Climate

Articulate a vision for the combined organization. Create and communicate transparency in actions. Actively build trust and confidence. . Prepare employees for change. Focus on training and development for the personnel to adjust to the new job situation.

Phase One : Pre Merger

Need for a pre merger analysis to find the extent of difference in systems, culture & service conditions. To identify the problem areas and preparing a plan of action for these areas. These could include excess staff, compensation need for relocation, changes in jobs, difference in hierarchical levels. To make an assessment as to when the differences can be harmonized whether some time should be allowed before changes are introduced or changes should be done immediately.

PHASE TWO : After Merger - STAGE One

Give people some time for adjustment. During this period take up follow-up action to:
Initiate many goodwill measures Communicate well to quell rumors Build Trust Create a vision / image for the combined firm

Maintain and improve the level of morale & motivation of the employees

PHASE TWO : After Merger Stage - Two

Develop and Communicate the Image for the merged entity Manage differences in culture Manage differences in HR Systems Harmonize service conditions Harmonize wages & salaries Involve employees in decision making Train employees to cope up with the changes Take steps to retain the best employees Recruit and select key people for key positions

PHASE TWO : After Merger Stage - Three

In this stage, attempts are made to create a homogeneous company with no trace of erstwhile companies. For this, the leadership role needs to be redefined into one with a clear vision for the future. Thus, this stage seeks to create not a union of multiple organizations but a single organization with one culture and one unique way of doing things.

Challenges in M&A
1. Challenges in competitive strategy planning 2. Challenges in organizing for acquisitions 3. Challenges in deal structuring and negotiation. 4. Challenges in post merger acquisition integration 5. Challenges in post-acquisition audit and organizational learning

Challenges in M&A