financial management sem ii unit-6 mergers and acquisitions
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F\NANC...\AL MA-NA6JEMeN ·-r SEMl[ UN1T
3.1 INTRODUCTIONMERGjER.sRA-ME H
AND Aees> U \..51 T I a f · ;-MEt-1T 4
The corporate world is undergoing a paradigm shift, from expansion and
diversification to ever-increasing mergers and acquisitions (M&As! Merger waves
"egan in #$$% following the depression that ended that ear! The first merger
wave came a"out due to the economic expansion that occurred at the time (www!
learnmergers!com! The initial trend was dominated " a few 'mega' deals involving! corporate giants! owever, toda the whole picture is undergoing a sea change!
)ompanies have started reali*ing that in the increasingl competitive, changing,
and challenging environment, M&As can "oost the value of their "usinesses!
· Mergers and acquisitions have "ecome a strategic tool that is "eing effectivel
used to acquire esta"lished "rands and to expand to emerging and often low cost
mar+ets, particularl mar+ets that provide an enormous num"er of s+illed wor+ers!
The help counter competition, acquire new consumers, get a technological
edge, improve "ottom lines, etc! t is no wonder then that the corporate world
is fast reali*ing that M&As are here to sta!
3.2 CONCEPT OF MERGER
A merger is a tool used " companies to increase their long-term profita"ilit
" expanding their operations! Mergers are carried out with mutual consent
"etween the two companies merging with each other! The compan "uing the
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Mergers and Arquisitions - 81
other compan is called the merged or surviving entit, and the one merging
with it is called the merging entit!
A merger is thus a strateg where two or more companies agree to com"ine their
operations! nce the merger happens, one compan survives and the other loses
its corporate identit! The surviving compan acquires all the assets and lia"ilities
of the merging compan! t either retains its identit or is re-christened!The simplest definition of merger is,' a com"ination of two or more "usinesses
into one "usiness'! .aws in ndia use the term 'amalgamation' for merger! The
ncome Tax Act, #/0# 12ection 3( lA4 defines an amalgamation as the merger
of one or more companies with another, or the merger of two or more compa
nies to form a new compan, in such a wa that all assets and lia"ilities of the
amalgamating companies "ecome the assets and lia"ilities of the amalgamated
compan! 2hareholders holding not less than nine-tenths in value of the sha!res
in the amalgamating compan or companies "ecome shareholders of the amal
gamated compan (ncome Tax Act, #/0l 5are Act!
Thus, as descri"ed in the act, mergers or amalgamations ma ta+e two forms
(www!"usiness!gov!in , as descri"ed in 2ections %!3!# and %!3!#!
3.2.1 Merger through Abor!t"o#
A"sorptiq6q7 .amalgamation pursuant to the provisions of the )ompanies Act, #/=0 or an
other statute that ma "e applica"le to companies6
An amalgamation satisfies' all the following conditions6
> After amalgamation, all the assets and lia"ilities of the transferor compan
"ecome the assets and lia"ilities of the transferee compan!> 2hareholder s holding not less than /?@ of the face valu e of the equit
6oh areA o'f the transferor -compa. (ather than the ec u'it 6; ha re ; B lread held
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%2 Merger and Acquisitions
therein, immediatel "efore the amalgamation, CD the
transferee compan, its su"sidiaries, or their nominees
"ecome equit shareholders of the Etrans feree compan
" virtue of the amalgamation!
> The consideration for the amalgamation receiva"le " those
equit share
holders of the transferor compan who agree to "ecome
equit shareholders of the transferee compan is
discharged " the transferee compan wholl " the
issue of equit shares in the transferee compan,
except that cash
J ma "e paid in respect of an fractional shar s!> The "usiness of the transferor compan is intended to "ecarried on, after
the amalgamation, "
thetransferee corr!pan! E
> Fo ad7ustment is intended to "e made to the "oo+
values of the assets and lia"ilities of the transferor
compan when the are incorporated in the financial
statements of the transferee compan, except to ensure
uniformit of accounting policies!The principal idea "ehind M&As is to create shareholder
value that is over and a"ove the sum of the two merging
companies! This is achieved " creating a more competitive
and cost-efficient compan " gaining greater mar+et
share!
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3.& CONCEPT OF AC'UISITION
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Mergers and Acquisitions /%
the acquiring firm "ecomes the legal owner and controller
of the "usiness of the target firm! The acquiring firm pas
for the net assets, goodwill, and "rand name of the
compan "ought!
Acquisitions are actions through which companies see+
to achieve economies of scale, increased efficienc, and
enhanced mar+et visi"ilit! n an acquisition, unli+e in a
merger, there is no exchange of stoc+ or consolidation as a
new com pan even though it involves one compan
purchasing another!
2ome prominent acquisitions include the following6
> oogle's largest acquisition in March 3??$ when it
acquired Ista"lishment of a parent-su"sidiar relationship
> A strateg of "rea+ing up the target firm and
disposing off part or all its assets
> )onversion of the target firm into a private firm
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3.1 ( DISTINCTION )ET*EEN MERGERS AND AC'UISITIONS
Heople ver often tal+ of mergers and acquisitions in the same "reath and treat
them as snonms! owever, the two terms are slightl different! The differ
ences "etween a merger and an acquisition are important to value, negotiate,
and structure a client's transaction! 5oth mergers and acquisitions involve one
or multiple companies purchasing all or part of another compan! The main
distinction "etween a merger and an ac(p!Disition is how the are financed!
Jhen a compan ta+es over another compan and esta"lishes itself as a new
entit, the process is called acquisition! ere the target compan ceases to exist
while the "uer compan continues!
A merger, on the other hand, is a process where two entities agree to move
forward as a single entit as against remaining separatel owned and operated
entities! Mergers are tpicall more expensive than acquisitions, with the parties
incurring higher legal costs!
The stoc+ of the acquiring compan continues to "e !traded in an acquisition,
whereas in case of a merger, the stoc+s of "oth the entities are surrendered and
the stoc+s of the new compan are issued in its place!
n realit, one entit "us another and allows the acquired firm to proclaimthat the action is merger and not acquisition! This is done to ward off the nega
tivit often associated with acquisitions!
Ker often, it is noticed that companies prefer mergers over acquisitions though
it ma sound unusual! 2ome of the more frequentl encountered reasons are as
follows (Mastracchio and Lunitch 3??36
A merger does not require cash!
> A merger ma "e accomplished tax-free for "oth parties!
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08 Mergers and Acquisitions
> A merger lets the target compan reali*e the appreciation potential of th6!
merged entit, instead of "eing limted to sales proceeds!
> A merger allows the shareholders of smaller entities to own a smaller pieceof a lare r pie, increasing their overall net worth!
> A merger of a privatel held compan into a pu"licl held compan allows
the target compan shareholders to receive a pu"lic compan's stoc+!
> A merger allows the acquirer to avoid man of the costl and time-consuming
aspects of asset purchases, such as the assignment of leases and "ul+-sales
notifications! -
J • Merger is of consid ra"le importance when there are minorit stoc+holders!The transaction "ecomes effective and dissenting shareholders are o"liged
to go along once the "uer o"tains the required num"er of votes in support
of the merger !
ne ver often finds that sometimes the deal is ver unfriendl- the
acquiring compan manipulates events and forcefull ta+es over the target!
2uch a deal is called a hostile ta+eover! t would therefore not "e wrong to sa
that a purchase is considered a merger or an acquisition on the "asis of
whether the purchase is friendl or hostile, and how it is announced! owever,
the fact remains that M&As are strategies targeted at snerg!
.11 MOTI+ES )E,IND MERGERS AND AC'UISITIONS
Jhile one often hears )Is saing that M&As are inspired " a desire to diversif
or achieve higher growth rate, the reasons could "e varied! 2ome of the com
monl identified reasons are as follows6
3.11.1 S-#erg-
2nerg Gs the most essential component of mergers! n mergers, snerg
"etween t'he participating firms determines the increase in value of the com
"ined entit! n other words, it refers to the difference "etween the value of
the com"ined firm and the value of the sum of the participants (
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Mergers and Acquisitions ?/
firm and the com"ined firm can set off such losses against its profits, a
financial snerg, +n ·as tax sh Eield, occurs! The following are some
examples6
'P en Q. acquired .a+me, it helped Q. to enter the cosmetics
mar+et
·-P'· through an esta"lished "rand!
> Jhen laxo and 2mith+line 5eecham merged, the not onl gained
mar+et share, "ut also eliminated competition "etween each other!
> Tata Tea acquired Tetle to leverage Tetle's international
mar+eting strengths!
3.11.2 A/u"r"#g Ne0Teh#olog-
To remain competitive, companies need to constantl upgrade their
technolog and "usiness applications! To upgrade technolog, a compan
need not alwas acquire technolog! 5 "uing another compan with
unique technolog, the "uing compan can maintain or develop a
competitive edge! A good example is a merger of a logistics compan
such as a land transport entit with an air line cargo compan! Another
example is a merger "etween 5lac+"err and Treo which can
incorporate cell phone capa"ilit and email connectivit in one
device; palm pilots and ta"let laptops can provide "enefits to "oth
the entities!
3.11.3 I!roe$Pro"tab"l"t-
)ompanies explore the possi"ilities of a merger when the anticipate that
it wili improve their profita"ilit! The results of the nternational
5usiness wners 2urve, 3??, carried out " rant Thompson,conducted across 30 countries in I rope, Africa, Asia-Hacific, and the
Q2, showed that %; 9o of "usinesses use M&A to maintain or improve
profita"ilit! 8or example, Iuropean Media roup 5ertelsmann, Hearson,
and others have driven their growth " expanding into the Q2 through
M&As!
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3.11.4 A/u"r"#g aCo!ete#-
)ompanies also opt "r M&As to acquire a competenc or capa"ilit that
the do not have, and which the other firm does! 8or example, the
))-E/ alliance made the retailer networ+ and depositor "aseavaila"le to t'tl'eP ging entit! 2imilarl, 5M merged with
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II0 Merger s and Acquisitions··
3.11.& Ae to Fu#$
ften a compan finds it difficult to access funds from the capital mar+et! This
wea+ness deprives the compan of funds to pursue its growth o" 7ec tives effec
tivel!Dn such case·s; a )ompan ma decide to merge with another companthat is viewed as fund-rich! 8or example, T
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3.13 REASONS FOR FAI9URE OF MERGERS AND AC'UISITIONS
Jhile there is often a great hpe when a merger or acquisition is announced, the
end result is not alwas positive! Ruite often, M&As destro rather than add value
to the acquirer's "usiness! The most common reasons for failure are as follows! -
(.::\"" } 3.13.1 U#real"t" Pr"e Pa"$ or Target . · .
!!!!!!!!E6,!,; The process of M&A involves valuation of the target compan and paing a
price for ta+ing over the assets of the compan! Ruite often, one finds that the price paid to the target compan is much more than what should have "een paid!
Jhile the shareholders of the target compan stand "enefited, the shareholders
of the acquirer end up on the losing side! This is "ecause the have to carr the
"urden of the overpriced assets of the target compan which dilutes the future
earnings of the acquirer! aving "id over-enthusiasticall; the "uer ma find
that the premium paid for the acquired compan's shares (the so-called 'winner 's
curse' wipes out an gains made from the acquisition (enrS3??3!
This phenomenon is generall noticed in the later e·ars when the acquirer has
to revalue the assets and write of goodwill "oo+ed at the time of lG#&A!
3.13.2 D""ult"e "# Cultural I#tegrat"o#
Iver merger involves com"ining of two or more different entities! These enti
ties tef#ect different corporate cultures, stles of leadership, differing emploee
expectations and functional differences! f the merge r is implemented in a wa
that does not deal sensitivel with the companies ' p eople and their different
corporate cultures, the process ma turn out to "e a disaster! There ma "e
acute contrasts "etween the attitudes and values of the two companies, especiall
J
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I 14 Mergers and Acquisitions
if the new partnership crosses national "oundaries!
Jhile the process is "eing executed, these
differences are +nown "ut often ignored! As ears
pass " and the com"ined entit tries to snergi*e
the operations, these differences surface and often
lead to failure of the merger! 8or example, the
merger of
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Mergers and acquisitions are loo+ed upon as an
important instrument of creating snergies through
inoreased revenue, reduced costs, reduction in net
wor+ing capital and improvement in the investment
intensit! verestimation of these can lead to failure
of mergers!
3.13.4 I
#tegr at"o# D" "ul
t"e
)ompanies ver often face integration difficulties,
i!e!, the com"ined entit has to adapt to a new set of
challenges given the changed circumstances! To
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dothis, the compan prepares plans to integrate the
operations of the com"ining enti ties! I the
information availa"le on related issues is inadequate
or inaccurate, integration "ecomes difficult!
3.13.5 I#
o#"te#t Str ateg-
J Mergers and acquisitions that are driven " sound "usiness
strategies are the
ones that succeed! Intities that fail to assess thestrategic "enefits of mergers face
failure! t is therefore important to understand the
strategic intent! This has "een discussed later in the
chapter!
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3.13.& P
o
o
r )
u
"#
e
F
"
t
Mergers and acquisitions also fail when the products
or services of the merging entities do not n,aturall fit
into the acquirer's overall "usiness plan! This delas
efficient and effective integration and causes failure! 8or example,
the decision3.
of Q. to ta+e over the "usiness of Modern5a+er!
3.13.1
I#a$e/uateDueD"l"
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