https://sites.google.com/site/tribhuvansite/eecgStrategic Management, Business Policy & Corporate Strategy Strategic management is the art and science of formulating, implementing and evaluating cross-functional decisions that will enable an organization to achieve its objectives. It is the process of specifying theorganization's objectives, developing policies and plans to achieve these objectives, and allocating resources to implement the policies and plans to achieve the organization's objectives. Strategic management, therefore, combines the activities of the various functional areas of a business to achieve organizational objectives. It is the highest level of managerial activity, usually formulated by theBoard of directorsand performed by the organization'sChief Executive Officer(CEO) and executiveteam.Strategic management provides overall direction` to the enterprise and is closely related to the field ofOrganization Studies.

Strategic management is an ongoing process that assesses the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment. (Lamb, 1984:ix)

Strategy is the grand design or an overall plan which an organization chooses in order to move or react towards the set objectives by using its resources. Strategies most often devote a general programme of action and an implied deployment of emphasis and resources to attain comprehensive objectives. An organization is considered efficient and operationally effective if it is characterized by coordination between objectives and strategies. There has to be integration of the parts into a whole. Strategy helps the organization to meet its uncertain situations with due diligence. Without a strategy, the organization is like a ship without a rudder. It is like a tramp, which has no particular destination to go to. Without an appropriate strategy effectively implemented, the future is always dark and hence, more are the chances of business failure.

MEANING OF STRATEGYThe word strategy has entered in the field of management from military where it refers to apply the forces against an enemy to win a war. Originally, the word strategy has been derived from Greek strategos which means generalship. The word was used first time around 400 BC. The word strategy means the art of the general to fight in war.The dictionary meaning of strategy is, the art of so moving or disposing the instrument of warfare as to impose upon enemy, the place time and conditions for fighting by one self.In management, the concept of strategy is taken in more broader terms. According Glueck, Strategy is the unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges of the environment and is designed to ensure that basic objectives of the enterprise are achieved through proper implementation process.It lays stress on the following:a) Unified comprehensive and integrated plan.b) Strategic advantage is related to challenges of environment.c) Proper implementation ensures achievement of basic objectives.Another definition of strategy is given below which also relates strategy to its environment. Strategy is organizations pattern of response to its environment over a period of time to achieve its goals and mission.This definition lays stress on the following:a) It is organizations pattern of response to its environment.b) The objective is to achieve its goals and mission.However, various experts do not agree about the precise scope of strategy. Lack of consensus has lead to two broad categories of definitions: strategy as action inclusive of objective setting and strategy as action exclusive of objective setting.Strategy As Action Inclusive of Objective SettingIn 1960s, chandler made an attempt to define strategy as the determination of basic long term goals and objective of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals.This definition provides for three types of actions involved in strategy:i) Determination of long term goals objectivesii) Adoption of courses of actioniii) Allocation of resources.Strategy As Action Exclusive of Objective SettingThis is another view in which strategy has been defined. It states that strategy is a way in which the firm, reacting to its environment, deploys its principal resources and marshalls its efforts in pursuit of its purpose. Michael Porter has defined strategy as Creation of a unique and valued position involving a different set of actives. The company that is strategically positioned performs different activities from rivals or performs similar activities in different ways.The people who believe this version of the definition call strategy a unified, comprehensive and integrated plan relating to the strategic advantages of the firm to the challenges of the environment.After considering both the views, strategy can simply be put as managements plan for achieving its objectives. It basically includes determination and evaluation of alternative paths to an already established mission or objective and eventually, choice of best alternative to be adopted.NATURE OF STRATEGYBased on the above definitions, we can understand the nature of strategy. A few aspects regarding nature of strategy is a follows:Strategy is a major course of action through which an organization relates itself to its environment particularly the external factors to facilitate all actions involved in meeting the objective of the organization.Strategy is the blend of internal and external factors. To meet the opportunities and threats provided by the external factors, internal factors are matched with them.Strategy is the combination of actions aimed to meet a particular condition, to solve certain problems or to achieve a desirable end. The actions are different for different situations. Due to its dependence on environmental variables, strategy may involve a contradictory action. An organization may take contradictory actions either simultaneously or with a gap of time. For example, a firm is engaged in closing down of some of its business and at the same time expanding some. Strategy is future oriented. Strategy actions are required for new situations which have not arisen before in the past.Strategy requires some systems and norms for its efficient adoption in any organization.Strategy provides overall framework for guiding enterprise thinking and action.The purpose of strategy is to determine and communicate a picture of enterprise through a system of major objectives and policies. Strategy is concerned with a unified direction and efficient allocation of an organizations resources. A well made strategy guides managerial action and thought. It provides an integrated approach for the organization and aids in meeting the challenges posed by environment.ESSENCE OF STRATEGYStrategy, according to a survey conducted in 1974, includes the determination and evaluation of alternative paths to an already established mission or objective and eventually, choice of the alternative to be adopted. Strategy is characterized by four important aspects. Long term objectives Competitive Advantage Vector SynergyLONG TERM OBJECTIVESStrategy is formulated keeping in mind the long term objectives of the organization. It is so because it emphasizes on long term growth and development. Strategy is future oriented and therefore concerned with the objectives which have a long term perspective.The objectives give directions for implementing a strategy.COMPETITIVE ADVANTAGEWhenever strategy is formulated, managers have to keep in mind the competitors of the organization. The environment has to be continuously monitored for forming a strategy. Strategy has to be made in a sense that the firm may have competitive advantage. It makes the organization competent enough to meet the external threats and profit from the environmental opportunities. The changes that take place over a period of time in the environment have made the use of strategy more beneficial. While making plans, competitors may be ignored but in making strategy competitors are given due importance.VECTORStrategy involves adoptions of the course of action and allocation of resource for meeting the long term objectives. From among the various courses of action available, the, managers have to choose the one which utilizes the resources of the organization in the best possible manner and helps in the achievement of the organizational objectives. A series of decisions are taken and they are in the same direction.Strategy provides direction to the whole organization. When the objective have been set, they bring about clarity to the whole organization. They provide clear direction to persons in the organization who are responsible for implementing the various courses of action. Most people perform better if they know clearly what they are expected to do and where the organization is going.SYNERGYOnce we take a series of decisions to accomplish the objectives in the same direction there will be synergy. Strategies boost the prospects by providing synergy. STRATEGY V/S POLICIES AND TACTICSIn this subsection, the concept of strategy is compared with concept of policies and tactics.STRATEGY V/S POLICIESStrategy has often been used as a synonym of policy. However, both are different and should not be used interchangeably.Policy is the guideline for decisions and actions on the part of subordinates. It is a general statement of understanding made for achievement of objectives. Policies are statements or a commonly accepted understandings of decision making. They are thought oriented. Power is delegated to the subordinates for implementation of policies. In general terms, policy is concerned with course of action chosen for the fulfillment of the set objectives. It is an overall guide that governs and controls managerial actions. Policies may be general or specific, organizational or functional, written or implied. They should be clear and consistent. Policies have to be integrated so that strategy is implemented successfully and effectively. For example, when the performance of two employees is similar, the promotion policy may require the promotion of the senior employee and hence he would be eligible for promotion.Strategies on the other hand are concerned with the direction in which human and physical resources are deployed and applied in order to maximize the chances of achieving organizational objectives in the face of environmental variable. Strategies are specific actions suggested to achieve the objectives. Strategies are action oriented and everyone in the organization are empowered to implement them. Strategy cannot be delegated downward because it may require last minute decisions.Strategies and polices both are the means towards the end. In other words, both are directed towards meeting organizational objectives. Strategy is a rule for making decision while policy is contingent decision.STRATEGY V/S TACTICSStrategies are on one end of the organizational decisions spectrum while tactics lie on the other end.Carl Von Clausewitz, a Prussian army general and military scientist defines military strategy as making use of battles in the furtherance of the war and the tactics as the use of armed forces in battle. A few points of distinction between the two are as follows:(i) Strategy determines the major plans to be undertaken while tactics is the means by which previously determined plans are executed. (ii) The basic goal of strategy according to military science is to break the will of the army, deprive the enemy of the means to fight, occupy his territory, destroy or obtain control of his resources or make him surrender. The goal of tactics is to achieve success in a given action and this forms one part of a group of related military action. (iii) Tactics decisions can be delegated to all the levels of an organization while strategic decisions can not be delegated too low in the organization. The authority is not delegated below the levels than those which possess the perspective required for taking decisions effectively.(iv) Strategy is formulated in both a continuous as well as irregular manner. The decisions are taken on the basis of opportunities, new ideas etc. Tactics is determined on a periodic basis by various organizations. A fixed time table may be made for following tactics. (v) Strategy has a long term perspective and occasionally it may have a short term duration. Thus, the time horizon in terms of strategy is flexible but in case of tactics, it is short run and definite. (vi) The decisions taken as part of strategy formulation and implementation have a high element of uncertainty and are taken under the conditions of partial ignorance. In contrast tactical decisions are more certain as they work upon the framework set by the strategy. So the evaluation of strategy is difficult than the evaluation of tactics. (vii) Since an attempt is made in strategy to relate the organization with its environment, the requirement of information is more than that required in tactics. Tactics uses information available internally in an organization. (viii) The formulation of strategy is affected considerably by the personal values of the person involved in the process but the same is not the case in tactics implementation. (ix) Strategies are the most important factor of organization because they decide the future course of action for organization as a whole. On the other hand tactics are of less importance because they are concerned with specific part of the organization.STRATEGY AND PROGRAMMES, PROCEDURE & RULESIn this subsection, the relation ship of strategy is explained with programmes, procedure and rules.

PROGRAMMESA programme is a single use comprehensive plan laying down the principal steps for accomplishing a specific objective and sets an approximate time limit for each stage. It is basically concerned with providing answers to questions like: By whom will the actions be taken up? When will the actions be taken? Where will the actions be taken? Programmes are guided by organizations objectives and strategies and cover many of the other types of plans. Therefore, they provide a step by step approach to guide the action necessary to meet the objectives as set in the strategy. Programmes provide the sequence of activities in proper order which are designed to implement polices. Programmes are the instruments for coordination as they require system, thinking and action. They also involve integrated and coordinated planning efforts.

PROCEDUREIn general terms, a procedure can be defined as A series of functions or steps performed to accomplish a specific task or undertaking. Strategies, programmes, policies, budgets etc. need to be supplemented with detailed specifications i.e. how they are to / would operate. A procedure is a precise means of making a step by step guide to action that operates within a policy framework. Most companies have hundreds of procedures like for selection, promotion, transfer etc. They are essential for smooth operation of the business activities. For example procedure may include calling tenders for purchasing materials, keeping them in stock room and issuing them against requisition slips. Procedures are concerned with communication of tasks to be performed, organization interfaces and the responsibilities of the individuals involved. They describe the customary method for handling a future activity. It gives sequence of actions directed at a single goal (usually short term) that is repeatedly pursued, i. g. adopting budget, making procedures or granting sick leave to an employee against medical certificate etc. Procedure are more rigid and allow no freedom as against strategies which are flexible and are not concerned with fixed steps.

RULESA rule is principle to which an action or a procedure conforms or is intended to conform. It is a standard or a norm to be followed in the conduct of a business in a particular situation. It is more rigid and demands a specific action with respect to particular situation. It does not mention any kind of time estimate or sequence as in the case of procedures. It is much more specific than a policy. It allows no liberty or leniency and does not tolerate much deviation. Rules have to be strictly followed and non compliance may entail penalty or punishment. For example, No Smoking is a rule which has to be adhered to by all the levels of management.LEVELS OF STRATEGY

It is believed that strategic decision making is the responsibility of top management. However, it is considered useful to distinguish between the levels of operation of the strategy. Strategy operates at different levels: Corporate Level Business Level Functional LevelThere are basically two categories of companies- one, which have different businesses organized as different directions or product groups known as profit centers or strategic business unit(SBUs) and other, which consists of companies which are single product companies. The example of first category can be that of Reliance Industries Limited which is a highly integrated company producing textiles, yarn, and a variety of petro chemical products and the example of the second category could be Ashok Leyland Limited which is engaged in the manufacturing and selling of heavy commercial vehicles. The SBU concept was introduced by General Electric Company (GEC) of USA to manage product business. The fundamental concept in the SBU is the identification of dicrete independent product/ market segments served by the organization. Because of the different environments served by each product, a SBU is created for each independent product/ segment. Each and every SBU is different from another SBU due to the distinct business areas (DBAs) it is serving. Each SBU has a clearly defined product/market segment and strategy. It develops its strategy according to its own capabilities and needs with overall organizations capabilities and needs. Each SBU allocates resources according to its individual requirements for the achievement of organizational objectives. As against the multi product organizations, the single product organizations have single Strategic Business unit. In these organizations, corporate level strategy serves the whole business. The strategy is implanted at the next lower level by functional strategies. In multiple product company, a strategy is formulated for each SBU (known as business level strategy) and such strategies lie between corporate and functional level strategies. The three levels are explained below.CORPORATE LEVEL STRATEGYAt the corporate level, strategies are formulated according to organization wise polices. These are value oriented, conceptual and less concrete then decisions at the other two levels. These are characterized by greater risk, cost and profit potential as well as flexibility. Mostly, corporate level strategies are futuristic, innovative and pervasive in nature. They occupy the highest level of strategic decision making and cover the actions dealing with the objectives of the organization. Such decisions are made by top management of the firm. The example of such strategies include acquisition decisions, diversification, structural redesigning etc. The board of Directors and the Chief Executive Officer are the primary groups involved in this level of strategy making. In small and family owned businesses, the entrepreneur is both the general manager and chief strategic manager.BUSINESS LEVEL STRATEGYThe strategies formulated by each SBU to make best use of its resources given the environment it faces, come under the gamut of business level strategies. At such a level, strategy is a comprehensive plan providing objectives for SBUs, allocation of resources among functional areas and coordination between them for achievement of corporate level objectives. These strategies operate within the overall organizational strategies i.e. within the broad constraints and polices and long term objectives set by the corporate strategy. The SBU managers are involved in this level of strategy. The strategies are related with a unit within the organization. The SBU operates within the defined scope of operations by the corporate level strategy and is limited by the assignment of resources by the corporate level. However, corporate strategy is not the sum total of business strategies of the organization. Business strategy relates with the how and the corporate strategy relates with the what. Business strategy defines the choice of product or service and market of individual business within the firm. The corporate strategy has impact on business strategy. FUNCTIONAL LEVEL STRATEGYThis strategy relates to a single functional operation and the activities involved therein. This level is at the operating end of the organization. The decisions at this level within the organization are described as tactical. The strategies are concerned with how different functions of the enterprise like marketing, finance, manufacturing etc. contribute to the strategy of other levels. Functional strategy deals with a relatively restricted plan providing objectives for specific function, allocation of resources among different operations within the functional area and coordination between them for achievement of SBU and corporate level objectives.

ometimes a fourth level of strategy also exists. This level is known as the operating level. It comes below the functional level strategy and involves actions relating to various sub functions of the major function. For example, the functional level strategy of marketing function is divided into operating levels such as marketing research, sales promotion etc. Three levels of strategies have different characteristics as shown in the following table.STRATEGIC DECISIONS AT DIFFERENT LEVELSDIMENSIONSLEVELS

CORPORATEBUSINESSFUNCTIONAL

TYPE OF DECISIONCONCEPTUALMIXEDOPERATIONAL

ImpactSignificantMajorInsignificant

Risk InvolvedHighMediumLow

Profit PotentialHighMediumLow

Time HorizonLong Medium Low

FlexibilityHighMediumLow

AdaptabilityInsignificantMediumSignificant

IMPORTANCE OF STRATEGYWith the increase in the pressure of external threats, companies have to make clearer strategies and implement them effectively so as to survive. There have been companies like Martin Burn, Jessops etc. that have completely become extinct and some companies which were not existing before they have become the market leaders like Reliance, Infosys, Technologies etc. The basic factor responsible for differentiation has not been governmental policies, infrastructure or labour relations but the type of strategic thinking that different companies have shown in conducting the business.Strategy provides various benefits to its users:Strategy helps an organization to take decisions on long range forecasts.It allows the firm to deal with a new trend and meet competition in a effective manner.With the help of strategy, the management becomes flexible to meet unanticipated future changes.Efficient strategy formation and implementation result into financial benefits to the organization in the form of increased profits.Strategy provides focus in terms of organizational objectives and thus provides clarity of direction for achieving the objectives.Organizational effectiveness is ensured with effective implementation of the strategy.Strategy contributes towards organizational effectiveness by providing satisfaction to the personnel.It gets managers into the habit of thinking and thus makes them, proactive and more conscious of their environments.It provides motivation to employees as it pave the way for them to shape their work in the context of shared corporate goals and ultimately they work for the achievement of these goals.Strategy formulation & implementation gives an opportunity to the management to involve different levels of management in the process.It improves corporate communication, coordination and allocation of resources.

Corporate Restructuring: Mergers & Acquisitions, Strategic Alliances: MERGERS AND ACQUISITIONS (M&A)

Mergers and acquisitions and corporate restructuringor M&A for shortare a bigpart of the corporate finance. One plus one makes three: this equation is the specialalchemy of a merger or acquisition. The key principle behind buying a company is to

Corporate LevelStrategycreate shareholder value over and above that of the sum of the two companies.Twocompanies together are more valuable than two separate companiesat least, thatsthe reasoning behind M&A. This idea is particularly attractive to companies whentimes are tough. Strong companies will act to buy other companies to create a morecompetitive, cost-efficient company. The companies will come together hoping to gaina greater market share or achieve greater efficiency. Because of these potentialbenefits, target companies will often agree to be purchased when they know theycannot survive alone.

A corporate merger is essentially a combination of the assets and liabilities of twofirms to form a single business entity. Although they are used synonymously, there is aslight distinction between the terms merger and acquisition. Strictly speaking, onlya corporate combination in which one of the companies survives as a legal entity iscalled a merger. In a merger of firms that are approximate equals, there is often anexchange of stock in which one firm issues new shares to the shareholders of the otherfirm at a certain ratio. In other words, a merger happens when two firms, often aboutthe same size, agree to unite as a new single company rather than remain as separateunits. This kind of action is more precisely referred to as a merger of equals. Bothcompanies stocks are surrendered, and new company stock is issued in its place.When a company takes over another to become the new owner of the target company,the purchase is called an acquisition. From the legal angle, the target companyceases to exist and the buyer gulps down the business and stock of the buyercontinues to be traded.

In summary, acquisition is generally used when a larger firm absorbs a smaller firmand merger is used when the combination is portrayed to be between equals. Forthe sake of discussion, the firm whose shares continue to exist (possibly under adifferent company name) will be referred to as the acquiring firm and the firms whoseshares are being replaced by the acquiring firm will be referred to as the target firm.However, a merger of equals doesnt happen very often in practice. Frequently, acompany buying another allows the acquired firm to proclaim that it is a merger ofequals, even though it is technically an acquisition. This is done to overcome somelegal restrictions on acquisitions.Synergy is the main reason cited for many M&As. Synergy takes the form ofrevenue enhancement and cost savings. By merging, the companies hope tobenefit through staff reductions, economies of scale, acquisition of technology,improved market reach and industry visibility. Having said that, achieving synergy iseasier said than done-synergy is not routinely realized once two companies merge.Obviously, when two businesses are combined, it should results in improvedeconomies of scale, but sometimes it works in reverse. In many cases, one and one addup to less than two.

Excluding any synergies resulting from the merger, the total post-merger value of thetwo firms is equal to the pre-merger value, if the synergistic values of the mergeractivity are not measured. However, the post-merger value of each individual firm islikely to be different from the pre-merger value because the exchange ration of theshares will not exactly reflect the firms values compared to each other. The exchangeration is distorted because the target firms shareholders are paid a premium for theirshares. Synergy takes the form of revenue enhancement and cost savings. When twocompanies in the same industry merge, the revenue will decline to the extent that thebusinesses overlap. Hence, for the merger to make sense for the acquiring firmsshareholders, the synergies resulting from the merger must be more than the value lostinitially.

Different forms of Mergers Growth Strategies

There are a whole host of different mergers depending on the relationship between thetwo companies that are merging.These are:l Horizontal Merger: Merger of two companies that are in direct competition inthe same product categories and markets.

l Vertical Merger: Merger of two companies which are in different stages of thesupply chain. This is also referred to as vertical integration. A company takingover its suppliers firm or a company taking control of its distribution byacquiring the business of its distributors or channel partners are examples of thistype of merger.

l Market-extension Merger: Merger of two companies that sell the sameproducts in different markets.l Product-extension Merger: Merger of two companies selling different butrelated products in the same market.l Conglomeration: Merger of two companies that have no common businessareas.

From the finance standpoint, there are three types of mergers: pooling of interests,purchase mergers and consolidation mergers. Each has certain implications for thecompanies and investors involved:

Pooling of Interests: A pooling of interests is generally accomplished by a commonstock swap at a specified ratio. This is sometimes called a tax-free merger. Suchmergers are only allowed if they meet certain legal requirements. A pooling ofinterests is generally accomplished by a common stock swap at a specified ratio.Pooling of interests is less common than purchase acquisitions.

Purchase Mergers: As the name suggests, this kind of merger occurs when onecompany purchases another one. The purchase is made by cash or through the issue ofsome kind of debt investment, and the sale is taxable. Acquiring companies oftenprefer this type of merger because it can provide them with a tax benefit. Acquiredassets can be written up to the actual purchase price, and the difference betweenbook value and purchase price of the assets can depreciate annually, reducing taxespayable by the acquiring company. Purchase acquisitions involve one companypurchasing the common stock or assets of another company. In a purchaseacquisition, one company decides to acquire another, and offers to purchase theacquisition targets stock at a given price in cash, securities or both. This offer iscalled a tender offer because the acquiring company offers to pay a certain price if thetargets shareholders will surrender or tender their shares of stock. Typically, thistender offer is higher than the stocks current price to encourage the shareholders totender the stock. The difference between the share price and the tender price is calledthe acquisition premium. These premiums can sometimes be quite high.

Consolidation Mergers: In a consolidation, the existing companies are dissolved, anew company is formed to combine the assets of the combining companies and thestock of the consolidated company is issued to the shareholders of both companies.The tax terms are the same as those of a purchase merger. The Exxon merger withMobil Oil Company is technically a consolidation.

Acquisitions

As stated earlier, an acquisition is only slightly different from a merger. Like mergers,acquisitions are actions through which companies seek economies of scale,efficiencies, and enhanced market visibility. Unlike all mergers, all acquisitionsinvolve one firm purchasing anotherthere is no exchanging of stock or consolidatingas a new company. In an acquisition, a company can buy another company with cash,stock, or a combination of the two. In smaller deals, it is common for one company toacquire all the assets of another company. Another type of acquisition is a reversemerger, a deal that enables a private company to get publicly listed in a relativelyshort time period. A reverse merger occurs when a private company that has strongprospects and is eager to raise finance buys a publicly listed shell company, usuallyone with no business and limited assets. The private company reverse merges into thepublic company and together they become an entirely new public corporation withtradable shares. Regardless of the type of combination, all mergers and acquisitionshave one thing in common: they are all meant to create synergy and the success of amerger or acquisition hinges on how well this synergy is achieved. (Refer to casestudy-2 in Appendix-2).

MERGER AND ACQUISITION STRATEGYThere are a number of reasons that mergers and acquisitions take place. These issuesgenerally relate to business concerns such as competition, efficiency, marketing,product, resource and tax issues. They can also occur because of some very personalreasons such as retirement and family concerns. Some people are of the opinion thatmergers and acquisitions also occur because of corporate greed to acquire everything.Various reasons for M&A include:

Reduce Competition: One major reason for companies to combine is to eliminatecompetition. Acquiring a competitor is an excellent way to improve a firms positionin the marketplace. It reduces competition and allows the acquiring firm to use thetarget firms resources and expertise. However, combining for this purpose is as suchnot legal and under the Antitrust Acts it is considered a predatory practice. Therefore,whenever a merger is proposed, firms make an effort to explain that the merger is notanti-competitive and is being done solely to better serve the consumer. Even if themerger is not for the stated purpose of eliminating competition, regulatory agenciesmay conclude that a merger is anti-competitive. However, there are a number ofacceptable reasons for combining firms.

Cost Efficiency: Due to technology and market conditions, firms may benefit fromeconomies of scale. The general assumption is that larger firms are more costeffectivethan are smaller firms. It is, however, not always cost effective to grow.Inspite of the stated reason that merging will improve cost efficiency, larger companiesare not necessarily more efficient than smaller companies. Further, some large firmsexhibit diseconomies of scale, which means that the average cost per unit increases, astotal assets grow too large. Some industry analysts even suggest that the topmanagement go in for mergers to increase its own prestige. Certainly, managing a bigcompany is more prestigious than managing a small company.

Avoid Being a Takeover Target: This is another reason that companies merge. If afirm has a large quantity of liquid assets, it becomes an attractive takeover targetbecause the acquiring firm can use the liquid assets to expand the business, pay offshareholders, etc. If the targeted firm invests existing funds in a takeover, it has theeffect of discouraging other firms from targeting it because it is now larger in size, andwill, therefore, require a larger tender offer. Thus, the company has found a use forits excess liquid assets, and made itself more difficult to acquire. Often firms willstate that acquiring a company is the best investment the company can find for itsexcess cash. This is the reason given for many conglomerate mergers.

Improve Earnings and Reduce Sales Variability: Improving earnings and salesstability can reduce corporate risk. If a firm has earnings or sales instability, mergingwith another company may reduce or eliminate this provided the latter company ismore stable. If companies are approximately the same size and have approximatelythe same revenues, then by merging, they can eliminate the seasonal instability. Thisis, however, not a very inefficient way of eliminating instability in strict economicterms.

Market and Product Line Issues: Often mergers occur simply because one firm is ina market that the other company wants to enter. All of the target firms experienceand resources are readily available of immediate use. This is a very common reasonfor acquisitions. Whatever may be the explanation offered for acquisition, thedominant reason for a merger is always quick market entry or expansion . Product lineissues also exert powerful influence in merger decisions. A firm may wish to expand,balance, fill out or diversify its product lines. For example, acquisition of ModernFoods by Hindustan Lever Limited is primarily related product line.

Acquire Resources: Firms wish to purchase the resources of other firms or tocombine the resources of the two firms. These may be tangible resources such asplant and equipment, or they may be intangible resources such as trade secrets,patents, copyrights, leases, management and technical skills of target companysemployees, etc. This only proves that the reasons for mergers and acquisitions arequite similar to the reasons for buying any asset: to purchase an asset for its utility.Synergy: Synergy popularly stated, as two plus two equals five, is similar to theconcept of economies of scope. Economies of scope would occur if two companiescombine and the combined company was more cost efficient at both activities becauseeach requires the same resources and competencies. Although synergy is often citedas the reason for conglomerate mergers, cost efficiencies due to synergy are difficult todocument.

Tax Savings: Although tax savings is not a primary motive for a combination, it cancertainly sweeten the deal. When a purchase of either the assets or common stockof a company takes place, the tender offer less the stocks purchase price represents again to the target companys shareholders. Consequently, the target firmsshareholders will usually gain tax benefits. However, the acquiring company mayreap tax savings depending on the market value of the target companys assets whencompared to the purchase price. Also, depending on the method of corporatecombination, further tax savings may accrue to the owners of the target company.

Cashing Out: For a family-owned business, when the owners wish to retire, orotherwise leave the business and the next generation is uninterested in the business, theowners may decide to sell to another firm. For purposes of retirement or cashing out,if the deal is structured correctly, there can be significant tax savings.

To summarize, firms take the M&A route to seize the opportunities for growth,accelerate the growth of the firm, access capital and brands, gain complementarystrengths, acquire new customers, expand into new product- market domains, widentheir portfolios and become a one-stop-shop or end-to end solution provider ofproducts and services.

REASONS FOR FAILURE OF MERGER ANDACQUISITION

The record of M&As world over has not been impressive. Advocates of M&As arguethat they boost revenues to justify the price premium. The notion of synergy,1+1 =3, sounds great, but the assumptions behind this notion are too simplistic. In real lifethings are not that simple and rosy. Past trends show that roughly two thirds of all bigmergers have not produced the desired results. Rationale behind mergers can beflawed and efficiencies from economies of scale may prove elusive. Moreover, theproblems associated with trying to make merged entities work cannot be overcomeeasily. Reasons supporting the use of diversification have been explained in theprevious section. The potential pitfalls of this strategy are explained in this section.The conclusion that one may draw from this discussion will be that successfuldiversification would involve a well thought strategy in selecting a target, avoidingover-paying, creating value in the integration process.

The potential pitfalls that a firm is likely to encounter during diversification include:Integration Difficulties: Integrating two companies following mergers and acquisitioncan be quite difficult. Issues such as melding two disparate corporate cultures, linkingdifferent financial and control systems, building effective financial and controlsystems, building effective working relationships, etc., will come to the fore and theyhave to be contend with.

Faulty Assumptions: A booming stock market encourages mergers, which can spelldanger. Deals done with highly rated stock as currency appear easy and cheap, butunderlying assumptions behind such deals is seriously flawed. Many top managers tryto imitate others in attempting mergers, which can be disastrous for the company.Mergers are quite often more to do with personal glory than business growth. Theexecutive ego plays a major in M&A decisions, which is fuelled further by bankers,lawyers and other advisers who stand to gain from the fat fees they collect from theirclients engaged in mergers. Most CEOs and top executives also get a big bonus formerger deals, no matter what happens to the share price later.

Mergers are also driven by fear psychosis: fear of globalization, rapid technologicaldevelopments, or a quickly changing economic scenario that increases uncertainty canall create a strong stimulus for defensive mergers. Sometimes the management feelsthat they have no choice but to acquire a raider before being acquired. The idea is thatonly big players will survive in a competitive world.

Failure to carry out effective due-diligence: The failure to complete due-diligenceoften results in the acquiring firm paying excessive premiums. Due diligence involvesa thorough review by the acquirer of a target companys internal books andoperations. Transactions are often made contingent upon the resolution of the duediligence process. An effective due-diligence process examines a large number ofitems in areas as diverse as those of financing the intended transaction, differences incultures between the two firms, tax concessions of the transaction, etc.Inordinate increase in debt: To finance acquisitions, some companies significantlyraise their levels of debt. This is likely to increase the likelihood of bankruptcy leadingto downgrading of firms credit rating. Debt also precludes investment in areas thatcontribute to a firms success such as R&D, human resources development andmarketing.

Too much diversification: The merger route can lead to strategic competitiveness andabove-average returns. On the flip-side, firms may lose their competitive edge due toover diversification. The threshold level at which this happens varies acrosscompanies, the reason being that different companies have different capabilities andresources that are required to make the mergers work. Crossing these threshold limitscan result in overstretching these capabilities and resources leading to deterioratingperformance. Evidence also suggests that a large size creates efficiencies in variousorganizational functions when the firm is not too large. In other words, at some levelthe costs required to manage the larger firm exceed the benefits of efficiency createdby economies of scale.

Problems in making M&A work: Mergers can distract them from their corebusiness, spelling doom for the company. The chances for success are furtherhampered if the corporate cultures of the companies are very different. When acompany is acquired, the decision is typically based on product or market synergies,but cultural differences are often ignored. Its a mistake to assume that these issues areeasily overcome. A McKinsey study on mergers concludes that companies often focustoo narrowly on cutting costs following mergers, without paying attention to revenuesand profits. The exclusive cost-cutting focus can divert attention from the day-to-daybusiness and poor customer service. This is the main reason for the failure of mergersto create value for shareholders.

However, not all mergers fail. Size and global reach can be advantageous and toughmanagers can often squeeze greater efficiency out of poorly run acquired companies.The success of mergers, however, depends on how realistic the managers are and howwell they can integrate the two companies without losing sight of their existingbusinesses. Though the acquisition strategies do not consistently produce the desiredresults, some studies suggest certain decisions and actions that firms may followwhich can increase the probability of success.

The attributes leading to successfulacquisition suggested by various studies are that the:l Acquired firm has assets or resources that are complimentary to the acquiringfirms core business.l Acquisition is friendly.l Acquiring firm selects target firms and conducts negotiation carefully andmethodically.l Acquiring firm has adequate cash and fovourable debt position.l Merged firms maintains low to moderate debt position.l Acquiring firm has experience with change and is flexible and adaptable.l Acquiring firm maintains sustained and consistent emphasis on R&D andinnovation

STEPS IN MERGER AND ACQUISITION DEALSA firm that intends to take over another one must determine whether the purchase willbe beneficial to the firm. To do so, it must evaluate the real worth of being acquired.Logically speaking, both sides of an M&A deal will have different ideas about theworth of a target company: the seller will tend to value the company as high aspossible, while the buyer will try to get the lowest price possible. There are, however,many ways to assess the value of companies. The most common method is to look atcomparable companies in an industry, but a variety of other methods and tools areused to value a target company. A few of them are listed below.

1) Comparative RatiosThe following are two examples of the many comparative measures on whichacquirers may base their offers:P/E (price-to-earnings) Ratio: With the use of this ratio, an acquirer makes an offeras a multiple of the earnings the target company is producing. Looking at the P/E forall the stocks within the same industry group will give the acquirer good guidance forwhat the targets P/E multiple should be.EV/Sales (price-to-sales) Ratio: With this ratio, the acquiring company makes anoffer as a multiple of the revenues, again, while being aware of the P/S ratio of othercompanies in the industry.

2) Replacement CostIn a few cases, acquisitions are based on the cost of replacing the target company. Thevalue of a company is simply assessed based on the sum of all its equipment andstaffing costs without considering the intangible aspects such as goodwill,management skills, etc. The acquiring company can literally order the target to sell atthat price, or it will create a competitor for the same cost. This method of establishinga price certainly wouldnt make much sense in a service industry where the keyassetspeople and ideasare hard to value and develop.

3) Discounted Cash FlowAn important valuation tool in M&A, the discounted cash flow analysis, determines acompanys current value according to its estimated future cash flows. Future cashflows are discounted to a present value using the companys weighted average cost ofcapital. Though this method is a little difficult to use, very few tools can rival thisvaluation method.

4) SynergyQuite often, acquiring companies pay a substantial premium on the stock value of thecompanies they acquire. The justification for this is the synergy factor: a mergerbenefits shareholders when a companys post-merger share price increases by thevalue of potential synergy. For buyers, the premium represents part of the post-mergersynergy they expect can be achieved. The following equation solves for the minimumrequired synergy and offers a good way to think about synergy and how to determineif a deal makes sense. In other words, the success of a merger is measured by whetherthe value of the buyer is enhanced by the action.

The equation:

Here the pre-merger stock price refers to the price of the acquiring firm. Increase inthe value of the acquiring firm is a test of success of the merger. However, thepractical aspects of mergers often prevent the anticipated benefits from being fullyrealized and the expected synergy quite often falls short of expectations.

Some more criteria to consider for valuation include:l A reasonable purchase price - A small premium of, say, 10% above the marketprice is reasonable.

l Cash transactions- Companies that pay in cash tend to be more careful whencalculating bids, and valuations come closer to target. When stock is used foracquisition, discipline can be a casualty.

l Sensible appetite An acquirer should target a company that is smaller and in abusiness that the acquirer knows intimately. Synergy is hard to create fromdisparate and unrelated businesses. And, sadly, companies have a bad habit ofbiting off more than they can chew in mergers.

The Basics Steps in Mergers and Acquisitions

1) Initial Offer by the Intending BuyerWhen a company decides to go for a merger or an acquisition, it starts with a tenderoffer. Working with financial advisors and investment bankers, the acquiring companywill arrive at an overall price that its willing to pay for its target in cash, shares, orboth. The tender offer is then frequently advertised in the business press, stating theoffer price and the deadline by which the shareholders in the target company mustaccept (or reject) it.

2) Response from Target CompanyOnce the tender offer has been made, the target company can do one of the severalthings listed below:Accept the Terms of the Offer: If the target firms management and shareholders arehappy with the terms of the transaction, they can go ahead with the deal.Attempt to Negotiate: The tender offer price may not be high enough for the targetcompanys shareholders to accept, or the specific terms of the deal may not beattractive. If target firm is not satisfied with the terms laid out in the tender offer, thetargets management may try to work out more agreeable terms. Naturally, highlysought-after target companies that are the object of several bidders will have greaterlatitude for negotiation. Therefore, managers have more negotiating power if they canshow that they are crucial to the mergers future success.Execute a Poison pill or some other Hostile Takeover Defense: A target companycan trigger a poison pill scheme when a hostile suitor acquires a predeterminedpercentage of company stock. To execute its defense, the target company grants allshareholdersexcept the acquireroptions to buy additional stock at a heftydiscount. This dilutes the acquirers share and stops its control of the company. It canalso call in government regulators to initiate an antitrust suit.Find a White Knight: As an alternative, the target companys management may seekout a friendly potential acquirer, or white knight. If a white knight is found, it willoffer an equal or higher price for the shares than the hostile bidder.

3) Closing the DealFinally, once the target company agrees to the tender offer and regulatoryrequirements are met, the merger deal will be executed by means of some transaction.In a merger in which one company buys another, the acquirer will pay for the targetcompanys shares with cash, stock, or both. A cash-for-stock transaction is fairlystraightforward: target-company shareholders receive a cash payment for each sharepurchased. This transaction is treated as a taxable sale of the shares of the targetcompany. If the transaction is made with stock instead of cash, then its not taxable.There is simply an exchange of share certificates. The desire to steer clear of thetaxman explains why so many M&A deals are carried out as cash-for-stocktransactions.When a company is purchased with stock, new shares from the acquirers stock areissued directly to the target companys shareholders, or the new shares are sent to abroker who manages them for target-company shareholders. Only when theshareholders of the target company sell their new shares are they taxed. When the dealis closed, investors usually receive a new stock in their portfoliothe acquiringcompanys expanded stock. Sometimes investors will get new stock identifying a newcorporate entity that is created by the M&A deal.

MERGERS AND ACQUISITIONS: THE INDIANSCENARIO

M&A activity had a slow take-off in India. Traditionally, Indian promoters have beenvery reluctant to sell out their businesses since it was synonymous with failure andwas never viewed as a sensible move. This scenario changed dramatically in the 90swith the Tatas selling TOMCO and Lakme. Suddenly selling out had become asensible option. The second major reason for the slow take-off of M&A activity wasdue to the fact that even while the companies continued to decline, the banks andfinancial institutions, normally the biggest stakeholders in most Indian companieswere reluctant to change the managements. Fortunately this situation has changed forthe better. Worried about the spectre burgeoning NPAs, these institutions are nowwilling to force the promoters to sell out. The FIs and banks are flushed with fundsand they are willing to assist big companies in acquiring new companies.Indian cement industry was trendsetter in M&A in India. The cement industry wasripe for consolidation in many ways. The industry comprised of four or five dominantplayers in addition to a number of small players having economically viablecapacities, but with very small market shares. Rapid expansion by the bigger playersin a capital-intensive industry meant that these small players would naturally bemarginalized. Moreover, the excess capacity due to rapid expansion of big playersmeant that the smaller players would lose money. This situation naturally spurred themerger activity in the cement industry.

The past few years have been record years for M&A globally with mega dealsdwarfing the previous records. M&A has also become a buzzword among Indiancompanies as well. HDFC-Times Bank, Gujarat Ambuja-DLF and ICICI Bank-Centurion Bank mergers have all been in the news recently for this reason. The mergerwave in the country was catalyzed by economic liberalization in 1991. M&A activityis on the rise and the Indian industry has witnessed a spate of mergers and acquisitionsin the past few years. Mergers and acquisitions are here to stay and more are expectedto follow in the near future.

Mergers and acquisitions in India, just as in other parts of the world, are primarilyaimed at expanding a companys business and profits. Acquisitions bring in morecustomers and business, which in turn brings in more money for the companies thushelping in its overall expansion and growth. More and more companies are, therefore,moving towards acquisitions for a fast-paced growth. Consolidation has become acompelling necessity to counter the effects of increasing globalization of businesses,declining tariff barriers, price decontrols and to please the ever demanding anddiscerning customers. And these pressures are expected to intensify and relentlesslybatter every business in the future. The M&A activity is helping the companiesrestructure, gain market share or access to markets, rationalize costs and acquirebrands to counter these threats. The shareholders of many companies are alsosupporting these moves and sharp increase in share prices is an indication of thissupport.

Since size and focus are factors that matter for surviving the onslaught ofcompetition, mergers and acquisitions have emerged as key growth drivers of Indianbusiness. Tax benefits were the sole reason to justify mergers in the past but for manyIndian promoters, that is no longer an incentive. Indian companies have taken toM&A many reasons. Experts feel that Indian companies look at M&As due to the sizefactor, the niche factor or for expanding their market reach. They are also of theopinion that acquisitions help in the inorganic (and quicker) growth of the business ofa company. Besides these factors, the pricing pressures and consolidation ofglobal companies by building offshore capabilities have made M&A relevant forIndian enterprises.

Many Indian companies have also followed the M&A route to grow in size by addingmanpower and to facilitate overall expansion by moving into new market space.Another reason behind M&A has been to gain new customers. For instance, vMoksha,an IT firm, saw a rise in the number of its customers due to acquisitions as itexpanded considerably in the US market and leveraged on the existing customer base.Similarly, Mphasis added new customers in the Japanese and Chinese markets afterthe acquisition of Navion. The need for skill enhancement seems to be another majorreason for companies to merge and make new acquisitions. The Polaris-OrbiTechmerger helped in combining skill sets of both companies, which consequently led togrowth and expansion of the merged entity. Likewise, Wipro acquired GE MedicalSystems Information Techno-logy (India) to leverage its expertise in the health sciencedomain. (Refer to the following case study).

Case StudyNicholas Piramal India Ltd: Profiting from M and A

Nicholas Piramal India Ltd (NPIL), best known for its growth by mergers andacquisitions, is among the top ten companies in the domestic formulations market witha major presence in anti-bacterial, CNS & CVS-Diabetic. NPIL has expandedaggressively after the Nicholas group took over Nicholas Laboratories in 1986. Theturnover and net profit have grown at a healthy compounded annual growth (CAGR)of 33% and 45% respectively in the past decade. With more than a dozen jointventures with pharmaceutical companies in different healthcare segments, NPIL hasmastered the art of forging JVs and running them successfully.Prices of over 60% of the drugs and formulations are controlled by the governmentthrough DPCO in the Rs130 billion Indian pharmaceutical market. In the domesticbulk drugs market, low entry barriers have resulted in overcapacity and price wars.Major domestic players are, therefore, focusing on formulations, where brand imageand distribution network act as entry barriers. They are increasing their overseasmarketing and manufacturing network to enhance their exports (under patent drugs tothird world countries and generics to developed nations). In anticipation of WTOregime, multinational corporations are strengthening their operations in India bysetting up 100% subsidiaries or through marketing tie-ups with major domesticplayers. The big local players are also strengthening their operations through brandacquisitions, co-marketing and contract manufacturing tie-ups with MNCs.Following this trend, NPIL is focusing on strengthening its R&D to gear up for thepatents regime. The companys R&D facility with more than 100 scientists (acquiredfrom Hoechst Marion in 1999, renamed as Quest science Institute) is one of the bestR&D centers in India. NPIL has hived off its Falconnage (glass) and bulk drugdivision into separate entities to improve efficiencies. It is working on seven newchemical entities (NCE). The first one, an anti-malarial drug, is alreadycommercialized. NPIL has set a growth target of more than 30% through aggressiveproduct launches as well as mergers and acquisitions of brands and companies in thetherapeutic segment of anti-bacterial, CVS-diabetes, Nutrition and GI tract andCentral Nervous System (CNS).