Unit-1 Introduction to Merger and Acquisition

Program Semester Subject Code Subject Name Unit number

: MBA :I : MF 0011 : Mergers and Acquisitions :1

Unit Title

: Introduction to Merger and Acquisition

Lecture Number : 1

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Unit-1 Introduction to Merger and Acquisition

Meaning of Mergers and Acquisitions

Merger: a combination where two or more than two companies combine into one company. Eg: If Company A and Company B merge to and only

Company A or B exists afterwards.

It is also defined as Amalgamation, especially in Indian law. Merger or Amalgamation may take two forms
Merger through Absorption and Merger through Consolidation.

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Unit-1 Introduction to Merger and Acquisition

Meaning of Mergers and Acquisitions

Absorption: Absorption is a combination of two or more than two companies into an existing company.

Consolidation:
The fusion of two or more than two company into a new company in which all the existing companies are legally dissolved and a new entity or company is created. Eg. Company A and Company B consolidate to form Company c.

B Limited A Limited

C Limited

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Unit-1 Introduction to Merger and Acquisition

Meaning of Mergers and Acquisitions Acquisitions

The acquisition of assets by one company from another company Both companies may continue to exist in acquisitions. An acquisition is also known as a takeover It may be friendly or hostile. In former case, the companies Cooperate in negotations and in Latter case, the target board has no prior knowledge of the offer.

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Unit-1 Introduction to Merger and Acquisition

Motives behind the Mergers and Acquisitions

Plausible reasons
Strategic benefits- To Expand or enter into a particular industry.

Economies of scale- Arises due to utilization of production capacities,

distribution network, R & D facilities etc.

Economies of vertical integration- When companies of different stages of

production merge, economies of vertical integration are realized.

Complementary resources- A small firm with an innovative product may need the marketing reach, then, with the merger of two firms it may be

possible to successfully manufacture and market the innovative product.

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Unit-1 Introduction to Merger and Acquisition

Tax Shield- When a loss making firm merge with a profit making firm, its accumulated losses can be set off against the profits of the profit making firm and tax benefits can be realized.

Utilization of surplus funds- A firm may have lot of cash but may not have opportunities for profitable investments. So, merger will help in more efficient utilization of surplus funds.

Managerial Effectiveness- .Merger is done to increase managerial effectiveness. If the existing management team which is performing

poor is replaced by a more effective management team.

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Unit-1 Introduction to Merger and Acquisition

Advantages and Disadvantages of Mergers and Acquisitions

Advantages
From the viewpoint of Shareholders From the viewpoint of Promoters From the viewpoint of Managers From the viewpoint of Consumers

Disadvantages
A merger must be approved by votes of the stockholders of each firm
The cooperation of the target firm existing management is almost a necessity for a merger Creates a conflict of objective between different businesses It also results dissatisfaction among current staffs

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Unit-1 Introduction to Merger and Acquisition

Types of Mergers and Acquisitions

Horizontal: A merger of two competing firms which are engaged in the production of similar products or services. It helps to obtain economies of scale in production by
Eliminating duplication of facilities, Widening the product line, reduction in investment, Elimination of competition in product market, Increase market share,

Reduction in advertising costs etc

Eg: Hypothetical Merger of Omni cola and Juice up. This will result If these two companies merge to form a single company ( call it Omni up) with Omni cola 23% and Juice up 17.5% of the market gives the new Omni up firm over 40% of the market. Merger of Tata & Tetley, Kingfisher Airlines and Air Deccan.

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Unit-1 Introduction to Merger and Acquisition

Vertical: When two or more companies involved in different stages of activities

like

production

or

distribution

combine

with

each

other

the

combination is called Vertical merger. Eg: Merger of Kingfisher and air deccan Two types of vertical combinations.

Forward

Integration-

In

this,

manufacturer

combines

with

its

customers. A good example of forward integration is when a farmer sells his/her crops at the local market rather than to a distribution center. Backward IntegrationIn this, manufacturer combines with the supplier of raw material. A good example would be if a bakery business bought a wheat farm in order to reduce the risk associated with the dependency on flour.
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Unit-1 Introduction to Merger and Acquisition

Types of Mergers and Acquisitions

Circular Combination: Companies engaged in the production of different products seek combination to share common distribution and research facilities in order to obtain

economies by elimination of duplication of cost.

Examples :
HLL merger with BROOKE BOND LIPTON INDIA LTD.

Conglomerate: It is the combination of companies engaged in unrelated businesses. Such a combination helps in
lowering of cost of capital, optimum utilisation of financial resources and Increasing market share.

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Unit-1 Introduction to Merger and Acquisition

Steps to a Successful Merger

Provide a consistent message from the top down to both sides. Have consistent accountability and compensation throughout the firm for similar positions.

Develop new ways of organizing the company to help bridge corporate

culture differences. Establish measurable objectives particularly in areas that need to work together.

Revamp the incentive compensation plan to recognize the extra work

required. Plan a variety of different ways for the groups to get to know each other.

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