Mergers & Acquisition

Introduction
Mergers & Acquisitions are common ways
companies try to grow quickly
Unfortunately, more than 50% of mergers fail
Mergers & Acquisitions need to be part of an
overall strategy, otherwise they will likely fail

Theme
Successful M&A
integration requires
that you plan before
M&A integration starts

Merger - transaction that results in a wholly new firm

Acquisition - transaction in which one firm is absorbed by another

Mergers, Acquisitions and

Takeovers
Merger: a strategy through which two firms agree to
integrate their operations on a relatively coequal basis
Acquisition: a strategy through which one firm buys
a controlling interest in another firm with the intent of
making the acquired firm a subsidiary business within
its own portfolio

Takeover: a special type of an acquisition strategy

wherein the target firm did not solicit the acquiring
firms bid

A merger is a transaction that results in

the transfer of ownership and control
of a corporation.

Merger
A transaction where two firms agree to
integrate their operations on a relatively
coequal basis because they have
resources and capabilities that together
may create a stronger competitive
advantage

 the 2 firms combine all assets &

liabilities
Acquirer = target
Usually take a new name
JP Morgan/Chase Manhattan becomes JP
Morgan Chase

 Target firm shares disappear

Target shareholders get either
1)
2)

Shares in new firm

Cash

Exchange Ratio = # shares in new firm given for

each share of Target firm
Ex) # target = 250 million & ER = 1.25
# New = 1.25 x 250 M = 312.5 M
Buyer firm shares are kept as shares in new firm
( in effect their ER = 1).

3 Types of Mergers
Economists distinguish between
three types of mergers:
1. Horizontal
2. Vertical
3. Conglomerate

Horizontal Mergers
A horizontal merger results in
the consolidation of firms that
are direct rivalsthat is, sell
substitutable products within
overlapping geographic
markets.

Vertical Mergers
The merger of firms that
have actual or potential
buyer-seller relationships

Conglomerate Mergers
Consolidated firms may sell related
products, share marketing and
distribution; or they may be wholly
unrelated channels and perhaps
production processed.

Product extension conglomerate

mergers involve firms that sell noncompeting products use related
marketing channels of production
processes.

Market extension conglomerate

mergers join together firms that sell
competing products in separate
geographic markets.
A pure conglomerate merger unites
firms that have no obvious
relationship of any kind.

MERGER AND ACQUISITIONS EXAMPLES

DIFFERENT FORMS
HORIZONTAL MERGER : COMPETING IN SIMILAR BUSINESSES
IN SAME MARKETS

VERTICAL MERGER : A SORT OF VERTICAL INTEGRATION

MARKET-EXTENSION MERGER : SELLING SAME PRODUCTS IN
DIFFERENT MARKETS

PRODUCT-EXTENSION MERGER : SELLING DIFFERENT BUT

RELATED PRODUCTS IN SAME
MARKET

Integration Growth Strategies

VERTICAL INTEGRATION
Toward the Source of Supply
Backward

HORIZONTAL
INTEGRATION

Similar
Businesses
Acquired
Forward

Toward the Customer

STRATEGIES BEHIND M&A

REDUCE COMPETITION
COST EFFICIENCY
AVOID BEING A TAKEOVER TARGET
IMPROVE EARNINGS AND REDUCE SALES VARIABILITY
MARKET AND PRODUCT LINE ISSUES
ACQUIRE RESOURCES
SYNERGY
TAX SAVINGS
CASHING OUT

 Synergy (from the Greek syn-ergos,

meaning working together) is the term used to
describe a situation where different entities
cooperate advantageously for a final outcome.
Simply defined, it means that the whole is
greater than the sum of the individual parts. If
used in a business application it means that
teamwork will produce an overall better result
than if each person was working toward the
same goal individually.

Acquisition
A transaction where one firm buys another
firm with the intent of more effectively
using a core competence by making the
acquired firm a subsidiary within its
portfolio of businesses

Acquisition Integration-Defined
integration (nt-grshn) n. 1620
The act of forcing two different groups,
commonly opposed to each other, to unite
or battle until one [typically the seller] wears
down and the other [typically the buyer]
rises in triumph and moves on to the next
deal.

Acquisition Integration-Process
Appoint an Integration Team
Learn the Business
Develop a Detailed Integration Plan and
Timetable
Implement Change Promptly
Communicate Strategy and Market the
Strengths of the Combined Organization
Monitor the Progress

Reasons for Making

Acquisitions
Increase
market power

Overcome
entry barriers

Cost of new
product development

Learn and develop

new capabilities

Acquisitions

Increase speed
to market

Reshape firms
competitive scope

Increase
diversification

Lower risk compared

to developing new
products

Mergers & Acquisitions

Merger
A

AB

Acquisition/Takeover
A

Reasons for Making

Acquisitions:

Increased Market Power

Factors increasing market power

when a firm is able to sell its goods or services above
competitive levels or
when the costs of its primary or support activities are
below those of its competitors
usually is derived from the size of the firm and its
resources and capabilities to compete

Market power is increased by

horizontal acquisitions
vertical acquisitions
related acquisitions

Reasons for Making

Acquisitions:

Overcome Barriers to Entry

Barriers to entry include

economies of scale in established competitors

differentiated products by competitors
enduring relationships with customers that create
product loyalties with competitors

acquisition of an established company

may be more effective than entering the market as a
competitor offering an unfamiliar good or service that is
unfamiliar to current buyers

Cross-border acquisition

Reasons for Making

Acquisitions:

Cost of New Product Development

and Increased Speed to Market
Significant investments of a firms resources are
required to
develop new products internally
introduce new products into the marketplace

Acquisition of a competitor may result in

lower risk compared to developing new products

increased diversification
reshaping the firms competitive scope
learning and developing new capabilities
faster market entry
rapid access to new capabilities

Reasons for Making

Acquisitions:

Lower Risk Compared to Developing

New Products
An acquisitions outcomes can be estimated
more easily and accurately compared to the
outcomes of an internal product development
process
Therefore managers may view acquisitions as
lowering risk

Reasons for Making

Acquisitions:
Increased Diversification
It may be easier to develop and introduce new
products in markets currently served by the firm
It may be difficult to develop new products for
markets in which a firm lacks experience
it is uncommon for a firm to develop new products
internally to diversify its product lines
acquisitions are the quickest and easiest way to
diversify a firm and change its portfolio of
businesses

Reasons for Making

Acquisitions:
Reshaping the Firms Competitive Scope
Firms may use acquisitions to reduce their
dependence on one or more products or
markets
Reducing a companys dependence on specific
markets alters the firms competitive scope

Reasons for Making

Acquisitions:

Learning and Developing New Capabilities

Acquisitions may gain capabilities that the firm
does not possess
Acquisitions may be used to
acquire a special technological capability
broaden a firms knowledge base
reduce inertia

Strategic Tactics in M&A

Grow market share quickly (market penetration)

Improve the use of cash on-hand
Provide additional products for existing customers (product
development)
Recruit hard to find personnel
Expand into new markets (market development/diversification)
Gain control of brands
Access to distribution channels
Widen the organizations product range
Gain access to new technology
Economies of scale

Takeover

An acquisition where the target firm did not

solicit the bid of the acquiring firm
IBMs acquisition of Lotus in 1995;
Oracles bid for PeopleSoft in 2003

Varieties of Takeovers
Merger

Takeovers

Acquisition

Acquisition of Stock

Proxy Contest

Acquisition of Assets

Going Private
(LBO)

 Definition
A strategy that may accompany a
hostile takeover. A proxy contest occurs when
the acquiring company attempts to convince
shareholders to use their proxy votes to install
new management that is open to the takeover
. The technique allows the acquired to avoid
paying a premium for the target. also called
proxy fight.

 Proxy Contest definition :

A battle for the control of a firm in which a
dissident group seeks, from the firm's
other shareholders, the right to vote those
shareholders' shares in favor of the
dissident group's slate of directors. Also
called proxy fights.

Amalgamation
Section 2(1B)

Amalgamation, in relation to companies, means the

merger of one or more companies with another
company or the merger of two or more companies to
form one company.
Mergers Not defined under the Income-tax Act, 1961.
However, in common parlance, merger means
combination of two or more commercial organizations
into one

Conditions
All properties to be transferred to the
amalgamated company
All liabilities to be transferred to the
amalgamated company
Shareholders holding at least 3/4th in value of
shares of the amalgamating company should
become shareholders of the amalgamated
company

Sector wise
wise Break-UpBreak-Up- PE deals by value

Jan 2007

Feb 2007

Source: Dealtracker, Grant Thornton 2007Jan 2007

Motives & Benefits of Mergers

Limit competition
Utilise under-utilised market power
Achieve diversification
Gains economies of scale and increase income
with proportionately less investment
Overcome the problem of slow growth and
profitability in ones own industry
Displace existing management
Synergy

Accounting for M & A

Merger & Acquisition involves a complex
accounting treatment.
A merger defined as amalgamation in India,
involves the absorption of the target co.
The merger should be structured as Pooling
of Interests Method.
The acquisition should be structured as a
Purchase Method

Accounting for M & A

Pooling of Interests Method:
The Balance Sheets and Profit & Loss
Accounts items are combined without
recording the effect of merger. This implies
that assets and liabilities of the acquiring
and acquired firms are added at its bookvalues without making any adjustments.
Purchase accounting is generally used
under other financing arrangements

Accounting for M & A

Purchase Method:
The assets and liabilities of the acquiring firm
after the acquisition of the target co. are
adjusted for the purchase price paid to the
target co. the assets and liabilities are revalued.
If the acquirer pays a price greater than the fair
market value of the assets and liabilities, the
excess amount is shown as goodwill in the
acquiring co.s books. Or otherwise as capital
reserve.

The Implementation process

1. Communicate goals and objectives (1/2 day)
To make sure everybody understands why the organisations merge and what is
going to be achieved; Drafting of the integration plan
2. Identify key opportunities and challenges (1/2 day)
How can we synergize from bringing the organisations together and which
problem we may face. Will our corporate and national cultures work together?
3. Concerns about the Future (1/2 day)
To identify the demotivating factors for integrating. Reducing peoples fear is
essential in successful integration.
4. Cultural differences (1/2 day)
What is culture and why are we different and how do we deal with this diversity.
In which areas will we accept diversity and in which areas will we not?
5. Prepare for change - networking (2 days)
A 2 day course, where the employees will improve their self-confidence and
learn to seek opportunities outside their usual network

Workshops with people from both companies

6. How do we succeed - Quickwins (1 day)
Groups of people from both companies will identify quickwins that can serve as
models for the ongoing integration process. The results of the organisational
effectiveness analysis is used as input.
7. Prioritise management issues in the integration process (1/2 day)
The groups identify key areas for the management to focus on based on the
current work and the results of the analysis.
8. Follow up and adjust integration plan
Assess the current plan and make the necessary adjustments.

The Implementation process

Company A

Company B

Communicate goals
and objectives

Communicate goals
and objectives

Identify key opportunities and

challenges
Concerns about the future and the other
company
How to deal with cultural differences

Identify key opportunities and

challenges
Concerns about the future and the other Consolidation
company
How to deal with cultural differences

Preparation for change

Preparation for change

Learn how to network

Results of
organisation
effectiveness
assesment

Learn how to network

How do we succeed?
Quickwins (what can we do right now)
Identify key focus areas for
management in the transition process
Agree on action plan
Follow up and adjust action plan

Consolidation
Results of
organisation
effectiveness
assesment

Top Deals In Commodities Sector

2006

Acquirer

Target

Acquisitio
n (Mn
USD)

Holcim

Gujarat Ambuja Cements

Limited

470.00

Essar Group

Essar Oil Limited

760.81

Aban Lloyd Chiles

Offshore

Sinvest ASA

446.00

Mittal Investments

Omimex de Columbia

425.00

Chevron
Corporation
Acquirer

Reliance Petroleum
Target Limited

300.00
Acquisitio
n (Mn
USD)

Hindalco Industries

Novelis Inc

6,000.00

Rain Commodities

GLC Carbon Canada Inc

360.89

Holcim

Ambuja Cement India

Limited

117.00

Mittal Investments

GSSRL HPCLs Bhatinda

711.11
Refinery Source: Dealtracker, Grant Thornton 2007

Tata Steel

Corus

2007

13,650.00

Reverse merger
Definition
Acquisition by a public firm (typically, only a
shell company) of a private firm by transferring
over 50 percent of its own stock (thus, handing
over its controlling interest) to the private firm.
Seen often as an easy way to take a private firm
public, it actually jeopardizes the firm's existence
because the original owners of the shell will be
tempted to cash out (liquidate) their holdings
whenever the firm attempts to enhance the
market value of its stock (shares).

 reverse merger definition - finance

A technique used by private companies to go public
without registering an initial public offering (IPO). A
reverse merger occurs when a private company acquires
or merges with a public company that is little more than a
shell. That is, although the public company is listed on a
stock exchange, such as the NASDAQ, or trades in the
over-the-counter (OTC) market, its primary business has
failed and it has sold off most of its assets and
discontinued operations. Reverse mergers became
popular after the stock market bubble burst in 2000 and
the initial public offering market virtually shut down. Also
called a back-door listing.

TWO IMPORTANT STRATEGIC TERMINOLOGIES IN M&A

POISON PILL : WHEN A HOSTILE SUITOR TRIES TO CAPTURE A
COMPANY THEN IT GRANTS ITS SHAREHOLDER
TO BUY THE ADDITIONAL STOCK AT A HEFTY
DISCOUNT EXCLUDING THE ACQUIRER AND THUS
DILUTES HIS SHARE.
WHITE KNIGHT : THE MANAGEMENT MAY SEEK OUT A
POTENTIAL ACQUIRER OR WHITE KNIGHT.
IT WILL OFFER AN EQUAL OR HIGH PRICE
THAN THE HOSTILE BIDDER.

THANK YOU ALL