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GLOBAL MERGERS AND ACQUISITIONS
MERGER
When two or more firms agree to go forward as a
single new company rather than remain separately
owned and operated. Merger happens in a friendly
manner
A transaction where two firms agree to integrate their
operations because they have resources and
capabilities that together may create stronger
competitive advantage. The term ‘merger’ refers to a
combination of two or more companies into a single
company and this combination may be either through
consolidation or absorption.
A consolidation is a combination of two or more
companies into a third entirely new company formed
for the purpose. The new company absorbs the assets,
and possibly liabilities, of both original companies
which ceases to exist. When two firms merge, stocks of
both are surrendered and new stocks in the name of
new company are issued. Generally, mergers take
place between two companies of more or less the
same size. In case of absorption one company absorbs
another company i.e. it purchases either the assets or
shares of that company. The merger by absorption is
always friendly in nature i.e. both the companies agree
to the terms of absorption.
DIFFERENT TYPES OF MERGER
• Horizontal Merger
• Vertical Merger
• Concentric Merger
• Conglomerate Merger
1) HORIZONTAL MERGER
Consolidation of firms that are direct rivals- that is, sell
substitutable products. The horizontal merger is
between two companies who compete in the same
industry. They combine their operations and gain
strength. It helps the companies to:-
Improve performance
Increase capital
Increase profit
Decrease competitors
Increases edge over competitors
Example of Horizontal Merger:-
LIPTON INDIA AND BROOKE BOND INDIA
Lipton India was merged with Brooke Bond India in
1993-94 to form Brooke Bond Lipton India Limited
(BBLIL).
The principal objective behind this type of merger is
to:-
• achieve economies of scale in the production
process through the carrying off of duplication of
installations, services and functions
• widening the line of products
• decreasing working capital and fixed assets
investment
• getting rid of competition
• minimizing advertising expenses
• enhancing the market capability
• getting more dominance in the market.
2) VERTICAL MERGER
When 2 firms working in different stages of production
or distribution of the same product join together.
Vertical merger happens when two or more company
in the same industry but in different fields combine
together in the business. In this form, Companies in
merger decide to combine all the operations and
production under one shelf.
The economic benefits of this type of merger stem
from the firm’s increased control over the acquisition
of raw material or the distribution of finished goods.
3) CONCENTRIC MERGER
Two or more companies in association are some way or
other related to production processes, business
markets or basic required technologies.
It includes the extension of product line or acquiring
components that are all the way required in daily
operations.
4) CONGLOMERATE MERGER
A merger between firms that are involved in totally
unrelated business activities.
Two types of conglomerate mergers:
• Pure conglomerate mergers involve firms with
nothing in common.
• Mixed conglomerate mergers involve firms that
are looking for product extensions or market
extensions.
EXAMPLES OF CONGLOMERATE MERGER
TIME WARNER- AOL
• Time Warner Inc. (formerly AOL Time Warner) is
an American multinational media corporation
headquartered in the Time Warner Center in New
York City.
AOL Inc. is an American global brand company
that develops, grows, and invests in brands and
web sites.
In 2000, AOL and Time Warner merged under
the name AOL Time Warner.
ACQUISITION
Acquisition refers to one company buying out another
to combine the bought entity within itself. Acquisition
increases the interest of the acquiring company in the
target or acquired company. A transaction where one
firm buys another firm with the intent of more
effectively using a core competence by making the
acquired firm its subsidiary within its portfolio of
business.
With acquisition, one firm takes over another and
establishes its power as the single owner. Generally,
the firm which takes over is the bigger and stronger
one. The relatively less powerful, smaller firm loses its
existence, and the firm taking over, runs the whole
business with its own identity. Unlike the merger,
stocks of the acquired firm are not surrendered, but
bought by the public prior to the acquisition, and
continue to be traded in the stock market.
When a deal is made between two companies in
friendly terms, it is typically proclaimed as a merger,
regardless of whether it is a buy out. In an unfriendly
deal, where the stronger firm swallows the target firm,
even when the target company is not willing to be
purchased, then the process is labeled as acquisition.
Often mergers and acquisitions become synonymous,
because, in many cases, a bigger firm may buy out a
relatively less powerful one and compel it to announce
the process as a merger. Although, in reality an
acquisition takes place, the firms declare it as a merger
to avoid any negative impression.
Whether the deal results in a merger or an acquisition
also depends on the way it is announced. In other
words, the difference lies in how the purchase is
communicated to and received by the target
company's board of directors, shareholders and
employees.
In India, accounting for amalgamations is governed by
Accounting Standard-14 (AS-14) by the institute of
Chartered Accountants of India. AS-14 stipulates that
amalgamation means amalgamation pursuant to the
provisions of the companies act, 1956 or any other
statue as may be applicable to companies. Accounting
Standard-14
It classifies amalgamations into two broad categories:
Amalgamation in the nature of merger
Amalgamation in the nature of
purchase/acquisition
AMALGAMATION IN THE NATURE OF MERGER
The first category covers those amalgamations where
there is a genuine pooling i.e. not merely assets and
liabilities of the amalgamating companies but also of
the shareholder’s interest and of the business of these
companies such amalgamations are in the nature of
‘merger’.
An amalgamation would come within this fold if all the
following conditions are satisfied:
1) All the assets and liabilities of the transferor
company become the assets and liabilities of the
transferee company after such amalgamation.
2) Shareholders holding not less than 90% of the equity
shares of the transferor company(other than the
equity share already held immediately before the
amalgamation by the transferee company or its
subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of
the amalgamation.
3) The consideration for the amalgamation receivable
by those equity shareholders of the transferor
company who agree to become equity shareholders of
the transferee company is discharged by the transferee
company wholly by the issue of the equity shares in the
transferee company, except that cash may be paid in
respect of any fractional shares.
4) The business of the transferor company, after
amalgamation, is intended to be carried on by the
transferee company.
5) No adjustment is intended to be made in the book
values of the assets and liabilities of the transferor
company when they are incorporated in the financial
statements of the transferee company except to
ensure uniformity of accounting policies.
AMALGAMATION IN THE NATURE OF
ACQUISITION/PURCHASE :
On the other hand, second category covers those
amalgamations which are in effect a mode by which
one company acquires another company and as a
consequence, the shareholder of a company which is
acquired normally do not continue to have a
proportionate share in the equity of the combined
entity; or the business of the company which is
acquired is not intended to be continued. Such
amalgamations are amalgamations in the nature of
‘purchase’.
If any of the above conditions of Amalgamation in the
nature of merger is not fulfilled , the amalgamation
would be in the nature of purchase and hence be
covered under category B viz. purchase or acquisition.
MOTIVES FOR MERGERS AND ACQUISITION
a)Economies of large scale business
org enjoys both internal and external
economies
lead to reduction in cost and increase in
profits
b)Elimination of competition
MOTIVES FOR MERGERS & ACQUISITIONS
Economies of large scale business
Elimination of competition
Adoption of technology
Lack of technical & managerial talent
Effects of trade cyclesDesire to enjoy monopoly power
Desire to unified control & self- sufficiency
Personal Ambition
Govt. Pressure
• eliminates severe, intense and Wasteful
expenditure by different competing organization
c) Adoption of technology
The adoption of modern technology by a
corporate org requires large resources which may
be out of reach of an individual firm. This may
induce M&A of different firms.
d)Lack of technical & managerial talent
• In the developing countries at the earlier stages of
industrialization, scarcity of entrepreneurial,
managerial and technical talent is also one of the
important factors that leads to M&A.
e)Effects of trade cycles
Trade cycles are the periods of ups and downs
in an economy.
Ups are the periods of boom when production
is on large scale, profits are more, employment is
max. and new firms crop up indiscriminately in all
directions. This situations creates unhealthy
competitor and acts as a motivating factors for
M&A.
On the other hand, downs are the period of
depression when economic activity reaches to its
lowest point. During depression, only efficient and
large firms mange to survive and inefficient firms,
to reduce the risk of failure, preferred to be
merged or acquired by the strong firms.
f) Desire to enjoy monopoly power
M&A leads to monopolistic control in the
market. In the situation of monopoly, affirm can
easily make adjustments in the supply and price of
products and can also increase the profit of the
firm.
g) Desire to unified control & self- sufficiency
• Firms which depend on other units for their raw
material s requirement or which are engaged in
diff process of product for ensuring uninterrupted
supply of raw materials are encouraged and
benefitted by M&A. By bringing such firms under
unified control, their dependence on other firms
can be avoided.
PROBLEMS IN MERGER & ACQUISITION
a)Integration Difficulties
When two companies merge with each other, the
companies do not mingle or integrate with each other
in a proper manner. Differing financial and control
system can make the integration of the firms difficult. If
integration of the merged or acquired firms are not
proper, then the profitability of these firms also will
declined which in turn can even lead to shut down of
the firm.
b)Inadequate evaluation of target
If the acquirer firm does not evaluate the targeted firm
through market research and analysis, then it may
even lead to excess payment/bid for the purchase of
the targeted firm as they are willing to buy that firm for
their success or to attain maximum profit. It may lead
to inadequate evaluation of the target.
c)Larger or extraordinary debt
Costly debt can create onerous burden on cash
outflows
Ex;- Agri Bio Tech’s Acquisition of Dozens of small seed
firms
d)Inability to achieve synergy
Two firms merge with each other to attain the synergic
effect. But when these two firms does not integrate
with each other in a proper manner due to differing
financial and control system, it may even lead to an
equation of (1+1)<1. The main concept behind every
merger and acquisition is to attain maximum
integration which in turn leads to synergic effect
through reduction in cost, maximization of profits etc.
e)Too much diversification
Acquirer doesn’t have expertise required to mange
unrelated business. If a company is having a
conglomerate merger, then that company must have
some knowledge with respect to that product/service.
Otherwise the merger or acquisition will fail due to
excess diversification.
f)Mangers overly focused on acquisitions
Managers may fail to objectively access due to over
focus in the targeted company. After the merger or
acquisition the manager must be given a training as to
how they are required to manage the new company in
an accurate manner. Manager must not overly focus
on the acquisition because it may lead to less focus to
their core business product which may reduce their
profitability position of the firm.
ADVANTAGES OF ACQUISTION
Generally, corporate restructuring activities like
mergers and acquisitions are carried out to realize
economic gains. For justification of such transactions,
the combined worth of the two firms must be more
than individual worth of each. A few potential benefits
of an acquisition include realization of economies of
scale, tax advantages, and elimination of inefficiencies
as well as combination of complementary resources.
Apart from these, there are several other benefits of
an acquisition. These include revenue enhancement,
cost reduction, lesser taxes as well as change in capital
requirements. An increase in revenue is generally
caused by strategic benefits, market power and
marketing gains. Strategic benefits correspond to the
opportunities of entering new business lines.
Marketing gains take place due to effective advertising,
an improved product mix and economies of
distribution. Moreover, an acquisition might reduce
competition, which leads to an increase in market
power.
A bigger firm might be capable of operating in a more
efficient manner as compared to two small firms, this
reduces costs. Moreover, economies are realized when
two firms possess complementary resources. For
instance, a particular firm has a surplus production
capacity while its counterpart has inadequate capacity.
Tax advantages are also realized in acquisitions when
the target firm carries the assets at prices lower than
their market values. Therefore, for tax purposes, the
assets can be more valuable if they owned any other
organization. This increases the tax basis after an
acquisition. Moreover, the acquiring company would
depreciate the assets on the basis of higher market
values leading to additional benefits.
The payment of interests on debt is a tax-deductible
expenditure while the payment of dividends from
equity ownership is not. Though the utilization of
financial leverage leads to tax benefits, debts also
increase the possibility of financial distress if the
acquiring firm is unable to meet the interest payments
on acquisition debts. Besides this, a firm having surplus
funds might intend to take over another firm. This is
because the distribution of money in the form of
dividends or the use of money or repurchase of shares
would increase the income tax for shareholders. During
an acquisition, income taxes are not paid by the
shareholders.
Additional benefits of an acquisition include improving
the market power through purchase of competitors,
acquiring proprietary rights to services or products,
compensating for the weaknesses in key areas of
business as well as penetration of new geographical
regions.
CASE STUDY
HINDALCO- NOVELIS ( A FAILURE)???????
Hindalco Industries Limited is structured into
two strategic businesses aluminium and copper
with an annual revenue of US $14 billion and a
market capitalization in excess of US $ 23 billion.
Novelis- the world leader in aluminium rolling
(producing 19% of the world's flat-rolled
aluminium products) and is also the world leader
in the recycling of used aluminium beverage cans.
DEAL
In 2007, Indian aluminium giant Hindalco acquired
Atlanta based company Novelis Inc, a world leader in
aluminium rolling and flat-rolled aluminium products.
MOTIVATION FOR THE ACQUISITION FOR HINDALCO
To become the biggest rolled aluminium
products maker and 5thlargest integrated
aluminium manufacturer in the world.
To have access to higher-end products and
superior technology
To have low-cost alumina and aluminium
production facilities combined with high-end
aluminium rolled product capabilities due to
vertical integration
Motivation for the Acquisition for Hindalco
To double Hindalco's turnover , it catapults
the Group right to the threshold of the Fortune
500 group of companies.
To benefit from the increasing Global and
Domestic Demand for aluminums
Post-acquisition, over 50 % of the group's
business could come from operations outside
India, which is currently at 30 %, marks its
increased internationalization
To increase foothold in the very concentrated
industry
FUNDING STRUCTURE
The Enterprise Value of Novelis was $6 billion
- $3.6 billion and $2.4 billion debt
To buy the $3.6 billion worth of Novelis
equity, Hindalco borrowed almost $2.85 billion
and the remaining was funded by the group
companies and its cash reserves
Novelis shareholders received US$44.93 in
cash for each outstanding common share, roughly
15 per cent premium to the market price.
Hindalco would refinance the $2.4-billion debt
on Novelis's balance sheet, though they will be
repaid with Novelis's cash flows.
Two special purpose vehicles were set up for
the purpose. The first, AV Metals, based in Canada,
raised the recourse finance and actually acquired
Novelis. The other handled the non-recourse
finance.
Hindalco's treasury contributed $450 million,
while SL Iron Ore Mining, another group company,
contributed $300 million as debt.
WHAT WENT WRONG
In 2008, with the debt market tightening,
Hindalco had to dilute its equity through a 1:3
rights issue to raise a little over $ 1 billion.
The balance of about $ 2 billion of the bridge
loan would have to be repaid by sourcing domestic
or international debt financing and liquidation of
treasury.
Further, high interest costs, which rose by
over 490% loan increased from Rs 3.13 billion in
FY07to Rs 18.49 billion in FY08.
Finally Hindalco’s earning per share in FY08
dropped to Rs.15.76, from Rs. 26.73 in FY07, a fall
of 41%
ESSENTIAL REQUIREMENTS TO BE KEPT IN MIND
WHILE CONSIDERING A TARGET CO. FOR ACQUISITION
OR MERGER
Economical Environment
Political Environment
Impact of Global Terrorism
Work Culture
Merger and Acquisition Strategy
ECONOMICAL ENVIRONMENT
The company must give due consideration to:-
• What is the type of economy?
It is much easier to do business in a country where
resources are owned and controlled by the private
sector (Market Economy) as compared to a country
where it is controlled by the Government (Command
Economy).
• Reforms initiated by various governments to
liberalize their economy.
POLITICAL ENVIRONMENT
Stable legal system
&
Stable political system
Leads to Long-Term stability of the business
IMPACT OF GLOBAL TERRORISM
Terrorism has added a new dimension, which
directly or indirectly affects the conduct of
business.
It even affects the control of Govt. on national
economy and resources.
Eg:- 1)Countries like Iraq where no business
leader would like to sink his investment.
2) Similar risk was felt by General Electric in
the summer of 2002, when India and Pakistan
nearly went to war due to terrorist activities
sponsored by Pakistan . GE has invested more
than $ 80 million in Banglore (India) for
creating largest research center outside U.S.A.
War between India and Pakistan would have
greatly hampered their business.
WORK CULTURE
The work culture of an organization is greatly
influenced by the national work culture
This also includes level of corruption, which an
organization is likely to face during the process of
takeover and later on for smooth conduct of the
business.
Eg:- German employees at an IBM facility in
Munich will be influenced more by German culture
than by IBM culture .
MERGER AND ACQUISITION STRATEGY
A company needs have a clear-cut policy
regarding merger and acquisition.
The M&A cell should be assisted by business
analyst, representative of financial
institution/investment bankers, technical experts,
valuators and lawyers specializing in this field.
Cell must have direct axis to the business
leader/decision making authority.
Sophisticated software that can handle
financial analysis, projections, valuation, and so on
is available in the market and help of these can be
taken.
Once the targeted company has been
identified, option of finalizing deal through
negotiation must be considered.
PROCESS OF MERGER AND ACQUISITION
STEP 1:-Finalization of target co. for acquisition or
merger
Information about targeted companies must
be collected from all possible sources & if required
business intelligence agencies could also be hired
to collect additional information which may not be
easily available.
Finalization of target co. for acquisition or merger
Formulating the approach for acquisition
Working out the agreement
Integrating the merged/acquired co.
Post acquisition/merger plan
Final evaluation of targeted company will broadly depend on the following:
1. Purpose of Merger or Acquisition
2. Financial information (Strength & Weakness
of Company)
3. Management and organization Information
4. Environment of the country where targeted
company is located
STEP 2:- Formulating the approach for acquisition
Final recommendation must be put up to the
Board of Directors for their approval.
Convince the management/business leader of
targeted company to explore the idea of affiliating
with the acquirer and that it is going to gain from
the proposal.
If the management of targeted company is
willing to be acquired or get merged, the process
of discussion must continue. The first few
discussions will normally be confined to
generalities such as why two companies should
combine, gains for both, financial position,
organizational structure and out look.
During the preliminary talks, targeted
company may like to know approx price & other
broad terms of condition before it is willing to
continue to discuss the deal seriously. Acquirer
must do his homework well & be prepared to
submit the proposed terms & conditions.
STEP 3:- Working out the agreement
The agreement for merger or acquisition should be
done in two stages.
a preliminary agreement between two
companies
final agreement
Once the agreement is approved by Board of Directors,
announcement of acquisition/merger should be made.
This announcement must highlight the advantages/
gains to both the organization, their employees,
shareholders and customers.
STEP 4:- Integrating the merged/acquired co.
To get full benefit from any acquisition or
merger plan, it is essential that the two companies
must get integrated rapidly and effectively.
To achieve this, it is essential to formulate an
integration plan.
It must cover management function,
accounting controls, budgeting control and
functional control.
In case of merger, it is essential to give due
importance and share to both companies in
running the new organization.
To achieve effective & smooth integration, it is
essential to have integration cell comprising of key
personnel of both the companies.
STEP 5:- Post-Merger Integration
There is generally tendency to become casual
once deal has been finalized.
Both the parties feel so relieved and at times
they fail to realize that the real problems come
when dealing with the nuts & bolts of the
merger/takeover.
Hence it is important to prepare for rapid
responses to unanticipated situations.
Human relation aspects need special
attention.
In the year 2000, the Americas accounted for
approximately 60% of worldwide deal value and
40% of the number of transactions. Today, those
figures have declined to 45% of worldwide value
and 30% of total number.
One country responsible for this trend is
CHINA
Chinese government is behind much of this
planned activity as it has emphasized consolidation
in basic industries such as mining, chemicals, steel
and power.
TOP INDIAN MERGERS & ACQUISITION IN INDIA
1)THE RELIANCE – BRITISH PETROLEUM DEAL
Reliance – BP deal finally came through in July
2011 after a 5 month wait.
Reliance Industries signed a 7.2 billion dollar deal
with UK energy giant BP, with 30 percent stake in
21 oil and gas blocks operated in India
2)GVK POWER ACQUIRES HANCOCK COAL
It is one of the biggest overseas acquisitions
initiated by India in September 2011
Hyderabad-based GVK Power bought out
Australia’s Hancock Coal for about 1.26 billion
dollars.
The acquisition includes a majority of
• the coal resources,
• railway line and
• port infrastructure of Hancock Coal,
• along with the option for long term coal supply
contracts.
3) THE VEDANTA – CAIRN ACQUISITION
• December 2011 finally saw the completion of
the much talked about Vedanta – Cairn deal that
was in the pipeline for more than 16 months.
• Touted to be the biggest deal for Indian energy
sector
• Vedanta acquired Cairn India for a nearly 8.6
billion dollars.
• Although the Home Ministry cleared the deal, it
has highlighted areas of concern with 64 legal
proceedings against Vedanta.
4)TATA STEEL AND CORUS
On January 31, 2007, Tata Steel Ltd., one of the
leading Steel producers in India, acquired the
Anglo-Dutch Steel producer Corus Group for
US$12.11 billion.
Corus was 2.5 times bigger than TATA
It took 9 rounds for Tata to acquire Corus. In the
1st bid Tata had closed the deal at US $7.6 billion
and later it ended up by paying US $12.11 billion,
making it an expensive turnover.
This acquisition was the biggest overseas
acquisition by an Indian company.
Tata steel emerged as the 5th largest steel
producer in the world.
After acquisition Tata benefitted itself from Corus:
Distribution network of Europe
Expertise in steel making for automobiles
In return Corus benefitted from Tata Steel’s
expertise in low cost manufacturing of steel.