M&As: Overview

Concept
 Growth of a company can be thru:
- organic/ internal channels/ capital budgeting exercises
- inorganic growth/ external channels/ M&As

 Merger: combining of two or more companies into a single

Company

 Acquisition: of one company by another

- acquisition of assets or of entire company or of only intangible
assets (brand/ goodwill)
- can be friendly or hostile depending upon target’s reaction
 Corporate Restructuring
Term M&As used in a generic way used to represent many different types
of corporate structuring exercises
 Expansion:  Corporate Control
- M&As - Takeover bids
- Tender Offers - Share repurchases
- Asset Acquisition - Exchange offers
- Joint Ventures - Proxy contests

 Contraction:  Changes in ownership structures

- Spin offs - Leveraged buyouts (LBOs)
- Split offs - Junk bonds
- Divestitures - Going private
- Equity Carve outs - ESOPs and MLPs
- Asset Sale
Expansion
Form of restructuring which results in increase in size of the
firm

 Merger: Can be thru

 Amalgamation:

- fusion of two or more companies to form a new company

- both companies lose their individual identities
- generally in case of firms of equal size
 Absorption:

- fusion of a small company with a large company

- after merger, smaller company ceases to exist
 Tender Offer: make a public offer to acquire shares
of target company to gain its management control
 Asset Acquisition: buying of assets of another
company: tangible or intangible assets
 Joint Venture: two parties enter into an agreement to
pool resources towards a common business goal,
and share risks and returns; mostly for limited
duration
Contraction
Form of restructuring which results in reduction in size of the firm

 Spin Offs:
 Pro rata distribution of shares in subsidiary to own shareholders
 No fresh infusion of cash
 Split offs: new company created out of an existing division/ unit
 Split ups: entire firm broken down into new companies
 Divestiture: sell a portion of the firm to outside party
 Equity carve out: portion of own/ subsidiary company’s equity sold thru
an equity offering/ IPO; mostly, the parent retains majority control
 Assets Sale: tangible/ intangible/ both
Corporate Control
Form of corporate restructuring which involves obtaining
control over the firm’s management

 Takeover defenses:
 pre bid/ post bid

 in case of hostile attempts

 Share repurchase:
 leads to reduction in equity base

 strengthens promoters position

 sometimes used as a takeover defense

 Exchange offers:
 of one class with another class of securities
 normally of higher market value
 changes leverage structure
 Proxy Contests: garner support to pass own
resolution/ change management
Changes in Ownership Structure
Form of corporate restructuring which results in change in
ownership pattern/ structure

 Leveraged Buyout: use of debt to finance an acquisition

transaction
 Going Private: transformation of public corporation into private by
sale of equity interest to small group of investors
 ESOPs
 MLPs: combines benefits of partnership form and company form
of entity
Merger Waves in USA
 The First wave: 1897-1904
- mainly of horizontal mergers
- resulted in formation of monopolies
- financial factors/ stock market crash of 1904 led to its end

 The Second wave: 1916-1929

- several industries consolidated
- resulted in oligopolistic industry structure
- again ended with stock market crash of 1929
- investment bankers played a key role in both the above waves

 The Third wave: 1965-1969

- conglomerate merger period, diversifications
- due to tougher antitrust enforcement
- many failed due to little knowledge of acquired industries
- mostly financed thru equity
Merger Waves in USA
 The Fourth wave: 1981-1989
- period of mega mergers, more of hostile variety
- deregulation in industries led to large number of players and hence their
consolidation
- Investment bankers/ merger specialists played an active role in advising and
syndicating funds
- concept of LBOs, debt financing, emerged
- junk bond market emerged

 The Fifth wave: 1992 till date

- emphasis on strategy: strategic mergers
- globalization led to cross border M&As
- consolidation , hence oligopolistic structure

Each wave began with upturn of economic activity in the country and ended with
the crash/downturn
Indian Scenario
 During licensing era, companies indulged in unrelated
diversifications depending upon availability of licenses
 Became conglomerates with sub optimal portfolio of assorted
businesses
 Takeover bids/ corporate bids common
 Active arrangement of takeover of sick undertakings by BIFR
 Liberalization led to more streamlined M&A activity
 Globalization led to more cross border deals
 Active involvement of SEBI
 More friendly Competition Act has replaced MRTP Act
M&As: Objectives

 Economies of scale: operating cost advantage thru increased volume

of operations in terms of production activity/ R&D activity/ marketing
and distribution/ transport, storage, inventories/ managerial economies
 Synergies: from complementary activities/ resources, thus
combined value = stand alone value of acquiring firm+ stand alone
value of acquired firm + value of synergy
 Increase market share, consolidate market position
 Economies of scope: widening of portfolio of products and services
 Increase geographical coverage
 Faster growth : reduce gestation period of setting up a new project
 Tax advantages : accumulated losses set off to reduce tax liability
 In case of global mergers, their Indian setups merge by default
 Acquire intangible asset advantage, brands
M&As: Objectives (contd.)
 Vertical Integration: backward or forward
 Acquire key customer profile of the target
 Acquire a company with key managerial/ workforce talents
 Replace weaker management of a company by acquiring management
control
 Acquire a company with key technology/ knowledge processes

Thus primary objective is to create a strategic advantage by

paying a price for the target that is lower than total resources
required for internal development of a similar strategic position;
alternatively, derive synergies through merger
Concept of Synergy
 Results from complimentary activities
 Two firms strong in two different areas complimentary to each other
 Hence, provide added advantage
 Thus, combined strength/value of merged entity is more than sum of
the two individual/ standalone firms
 Eg.
 Strong R&D team of one firm , efficiently organized production department of
another, can be used together
 One firm has well established brands but lacks marketing organization, can
merge with another having strong marketing set up
 Combined value = individual value of two firms + value of synergy
 Net gain from merger (exclusive of costs)
Reasons for failure of M&As
 Payment of higher price: can dilute shareholders’
earnings
 Cultural clash: conflicting management styles,
differing employee expectations, communication
channels, formal/ participative…..
 Overstated/ overestimated synergies
 Failure to integrate operations
 Inconsistent business strategy of acquirer and
acquired firms
 Poor business fit: product/service of acquired
company does not fit into acquirer’s sales,
distribution systems or geographic requirements
 Inadequate due diligence: some of the financial and business
risks of seller may go undetected
 Over leverage/ inappropriate financing structure: may create
liquidity/ servicing problems
 Boardroom split: lack of compatibility amongst directors of the
two companies merged
 Regulatory/ unexpected delays in implementation of merger: can
lead to loss of valuable employees, customer, supplier
relationships

Hence proper planning and execution of M&A transaction is

a must for it to succeed and not backfire