merger & acquisiation

8/3/2019 Merger & Acquisiation

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MF-0011 (Merfers and Acquisitions)

Q. No. 1 What is the basis for valuation of a target company.

Ans: Whether you use a professional business appraiser or attempt a self-evaluation, it is helpful tounderstand the basic methods of valuation that may be used to determine a value for your company--or acompany you are thinking of acquiring. A professional business appraiser typically applies severaldifferent methods of valuation that fit into these categories and uses the knowledge gained to pick one ortwo methods that make the most sense to arrive at a range of values for a company. The three mostwidely-accepted approaches to valuation are the Comparable Worth method, the Asset Valuation method,and the Financial Performance method.

The Comparable Worth Method

The notion of comparable worth reflects the performance and potential selling prices of publicly andprivately held companies compared to yours, in order to arrive at a value. The appraiser examinespublicly held companies that operate in the same or similar industry, providing the same or similarproducts and/or services. The justification for this method is that potential buyers will not pay more forthe target company than what they would spend for a similar company that trades publicly. The appraisermust carefully choose the publicly held companies with which to compare. Obviously, the companiesshould be as similar to the target as possible, particularly with regard to geographical location(s) and therelationship to suppliers.

Because it is not possible to find companies that are the same as the target company in all respects, it isimportant for the appraiser to use the available data as "creatively" as possible. For example, because ofdifferences in the businesses' sales volumes, it is more useful to compare the ratio of sales to costs, ratherthan absolute amounts of sales to each other. Comparisons of this type will provide a clearer picture of thestrengths and weaknesses of the target company relative to those of others in its industry.

Once the appraiser arrives at a preliminary range of values using this method, it is necessary to adjust theprices for situations particular to the target company. If, for example, the target company has profits thatare consistently above industry averages, thanks to an unusually low cost structure, then its value must beadjusted upward to account for that competitive advantage. As with all methods of valuation, all pricesand subsequent adjustments must be backed up. Buyers or investors must be able to see and understandthe justification for a valuation higher than that of apparent comparables, or they will not be willing topay the premium.

If the target business is a closely held company, this method can present some difficulties. The goals offinancial reporting for a publicly held company can be quite different from those for a closely heldcompany. A publicly held company's management strives to show high earnings on its financial reports,in order to attract people to buy its stock and therefore to improve its price-to-earnings ratio. A closely

held company's management may be a solo entrepreneur or small group wishing to minimize the earningsshown on its financial reports, in order to minimize its tax burden. Both goals are legitimate, but clearlysome confusion would arise if an appraiser tried to compare the key financial ratios of a closely heldcompany with those of similar but publicly traded companies in the industry.

The Asset Valuation Method

If a company has a large portion of its value wrapped up in fixed assets, an appraiser may lean towardssome type of asset valuation when attempting to price it. The justification for asset valuation is that the


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buyer will pay no more for the target company than it would cost to obtain a comparable set of substituteassets. Within these guidelines, the appraiser can choose how to value the substitute assetscalculatingthe "Cost of Reproduction," that is, of constructing a substitute asset using the same materials as theoriginal but at current prices, or the "Cost of Replacement," that is, of obtaining the same asset at currentprices while adhering to modern standards and using modern materials. The appraiser also considers thetime that would be required until replacement or new assets could be put in place and made usable.

The asset valuation method involves examining every asset held by the company, both tangible andintangible. A great degree of detail is required in order to arrive at a fair valuation. The appraiser mustassess all machinery and equipment, real estate, vehicles, office furniture and fixtures, land and inventory.The value of intangibles like patents and customer lists should also be included. These intangibles oftenare referred to as the company's goodwill, the difference in value between the company's hard assets andits true value. It is more difficult to convince buyers of the value of intangibles, since they usually want tobe able to see and verify the assets in order to feel comfortable with the price.

Generally it is in the seller's best interest to supply the business appraiser with as much concrete detail aspossible about the company's intangibles. The greater the value of goodwill that can be attributed tospecific, well-defined intangibles, the higher the company's valuation is likely to be set. For example,

rather than lumping patents that the company holds under the intangible goodwill category, list the patentsas separate assets and include specifics pertaining to each one, such as date of expiration and effect on thecompany's operations.

Financial Performance Methods

Perhaps the most commonly-used set of valuation methods in the context of small-to-medium companyacquisitions, financial performance methods attempt to measure historical performance as well as predictfuture performance in determining the value of the seller's business to the buyer on a post-closing basis.These methods include Net Present Value (NPV), Internal Rate of Return (IRR) and Return onInvestment (ROI).

Net Present Value is probably the most common financial-performance calculation used by appraisers in apre-acquisition valuation. It is a capital-budgeting model that compares the present value of the proposedtransaction's benefits and costs. The difference between benefits and costs is the net present value of theproposed deal. A positive NPV means that the proposed transaction's benefits exceed its costs, and thedecision to undertake the deal increases the value of the buyer and its shareholder wealth. A negativeNPV means that the proposed transaction's costs exceed benefits, and the decision to undertake it woulddecrease the value and shareholder wealth of the buyer. Zero NPV means that the proposed transaction'sbenefits are equal to costs, and the decision to make the deal does not change the value of the buyer or thewealth of its shareholders.

Internal Rate of Return is a capital-budgeting model represented by the discount rate that equates theprice with the anticipated profits from the proposed transaction. Computing the IRR is tantamount toanswering the following question: If the proposed transaction were similar to a bank account, whatinterest rate would the bank have to offer in order to produce the same benefits as the proposed deal? Toevaluate the seller's business using the IRR, the appraiser takes two steps: calculating the IRR andcomparing the IRR to the required rate of return. Acceptable proposed transactions are those with an IRRgreater than the required return. Proposed transactions should be rejected if the IRR is lower than therequired rate of return. Shareholders are indifferent when the IRR is equal to the required rate of return.


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Return on Investment Ratio may be used in certain cases to decide whether to acquire a target company.Taken as an average of the recent years' earnings compared to equity and long-term debt, the ROI can beuseful in providing an important benchmark for the buyer. It is important to remember, however, thatsuch decisions must be based on the interaction of numerous factors; and the whole picture, not justfragments, must be studied in order to make a sound decision. Evaluating a company's financial healthand future growth prospects is a very involved process through which the professional business appraiser

is trained to lead the potential buyer.

It's Not So Simple

The professional appraiser (or whoever is conducting the analysis) should not use any one valuationmethod without considering other methods or other factors. One method may overlook key aspects of thebusiness that will be uncovered only after further investigation required for another method is completed.For example, if the appraiser utilizes several methods and consistently arrives at a range of $2.2 million to$2.6 million, then an asset valuation that yields a result of only $1.5 million can be eliminated if theappraiser finds that the value of the company's assets is not a fair approximation of its entire value whenintangibles or other market or competitive trackers are added in. And if the asset valuation method werethe only one used, then the company would be dramatically underpriced.

Proper valuation of a company is never simple. A method that appears to be too simple probably is. Forpurposes other than merger-and-acquisition transactions, simple methods are commonly used, and areactually prescribed by law in some cases. However, it is wiser to invest a bit more time and effort initiallythan to experience remorse over an inappropriate initial valuation after the deal has been concluded.

One term commonly heard in the business world as a simple way of calculating ca company's value is"industry multipliers" or "multiples." Multipliers are set by unknown entities based on unknown factorsthat most likely were valid at one time in a particular market, but may no longer hold true. For example, itmay be said that in Industry X, the price to pay for a business is five times the company's annual earningsor amount of goodwill. However, it would be difficult to convince a well-informed potential buyer topurchase a company for a price defined only by such a formula. From the seller's perspective, there is noguarantee that the company is not worth more than the amount arrived at by using a simple formulawithout basis. In fairness to both parties, the appraiser should not be taking the easy way out of this task.

Evaluating the Final Report

At the end of the analysis, the appraiser produces a final report detailing the range of values for thebusiness. Paradoxically, just when the formal valuation process seems to have ended, the acquisition teammust evaluate the impact the report will have on the actual price and structure of the transaction.

If the acquiring company perceives that it will benefit from the economies of scale that will be created byan acquisition, it may be willing to pay more than would otherwise be expected, known as the

"acquisition premium," an added cost to the buyer's shareholders and a windfall to the seller'sshareholders. But if the buyer is really just looking to acquire only certain assets or views the acquisitionas a short-term tactic, then the price it is willing to pay may not even approach the price given by theappraiser. From the seller's point of view, if the founders or owners are really not very eager to give upthe business just yet, the negotiated price may be driven higher. However, if the seller is motivated to sellquickly, the negotiated price could plummet.

It is an essential aspect of the valuation process that while detailed methods of valuation can provide asolid starting point, that often remains all they provide. The final negotiated price can vary widely and


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depend on diverse factors, including market conditions, timing of the negotiations and of the valuationdate, internal motivation and goals of both buyer and seller, operating synergies that will result from thetransaction, the structure of the transaction and other factors that may not even be explicitly defined.

Q.1 What are the basic steps in strategic planning for a merger?Answer:

Mergers & Acquisitions are strategic decisions which are taken by the management of any company afterthrough examination of many important facts and considerations. Since decisions regarding Mergers &

Acquisitios, like capital budgeting decisions are irreversible in nature it is very important that dueattention must be paid to some basic issues before planning about it.

Hence the strategic planning can be broken down into five steps:

Step 1: Pre Acquisition ReviewThe first step is related with the assessment of companys own situation to determine if a Merger &Acquisition strategy should be implemented or is there any other alternative? If a company expectsdifficulty in the future when it comes to maintaining growth, core competencies, market share, return oncapital, or other key performance variable, then a Merger & Acquisition (M & A) program may benecessary. If a company is undervalued or fails to protect its valuation, it may find itself the target of amerger. Therefore, the pre-acquisition review will include issues like the projected growth rate, inability

of the company to sustain its market share in the future because of the potential threat from its competitorfirms, under valuation of the company etc.The company must address to a fundamental question. Would the Merger help improve the situationregarding the above or not? Will it affect the valuation in a positive manner?

Step 2: Searching and Screening of the targetsThe second step in the Merger & Acquisition process is to search for those companies which can be thepotential takeover candidates. It is important for the merging company to see whether the company to be


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strategies etc. The Post Merger Integration Phase is the most difficult phase within the M & A Process. Itis the responsibility of the management of the two companies to bring the two companies together andmake the whole thing work. This requires extensive planning and design throughout the combinedorganization.If post merger integration is successful, then it should result in the generation of synergy and that is thefinal objective of any Merger & Acquisition program.

Create Operating or Financial Synergy

The third reason to explain the significant premiums paid in most acquisitions is synergy. Synergy is thepotential additional value from combining two firms. It is probably the most widely used and misusedrationale for mergers and acquisitions.

Sources of Operating Synergy

Operating synergies are those synergies that allow firms to increase their operating income, increasegrowth or both. We would categorize operating synergies into four types:

1. Economies of scale that may arise from the merger, allowing the combined firm to become more cost-efficient and profitable.

2. Greater pricing power from reduced competition and higher market share, which should result in highermargins and operating income.

3. Combination of different functional strengths, as would be the case when a firm with strong marketingskills acquires a firm with a good product line

4. Higher growth in new or existing markets, arising from the combination of the two firms. This wouldbe case when a US consumer products firm acquires an emerging market firm, with an establisheddistribution network and brand name recognition, and uses these strengths to increase sales of itsproducts.

Operating synergies can affect margins and growth, and through these the value of the firms involved inthe merger or acquisition.

Sources of Financial Synergy

With financial synergies, the payoff can take the form of either higher cash flows or a lower cost ofcapital (discount rate). Included are the following:


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A combination of a firm with excess cash, or cash slack, (and limited project opportunities) and a firmwith high-return projects (and limited cash) can yield a payoff in terms of higher value for the combinedfirm. The increase in value comes from the projects that were taken with the excess cash that otherwisewould not have been taken. This synergy is likely to show up most often when large firms acquire smallerfirms, or when publicly traded firms acquire private businesses.

Debt capacity can increase, because when two firms combine, their earnings and cash flows maybecome more stable and predictable. This, in turn, allows them to borrow more than they could have asindividual entities, which creates a tax benefit for the combined firm. This tax benefit can either be shownas higher cash flows, or take the form of a lower cost of capital for the combined firm.

Tax benefits can arise either from the acquisition taking advantage of tax laws or from the use of netoperating losses to shelter income. Thus, a profitable firm that acquires a money-losing firm may be ableto use the net operating losses of the latter to reduce its tax burden. Alternatively, a firm that is able toincrease its depreciation charges after an acquisition will save in taxes, and increase its value.

Clearly, there is potential for synergy in many mergers. The more important issues are whether thatsynergy can be valued and, if so, how to value it.

Empirical Evidence on Synergy

Synergy is a stated motive in many mergers and acquisitions. Bhide (1993) examined the motives behind77 acquisitions in 1985 and 1986, and reported that operating synergy was the primary motive in one-third of these takeovers. A number of studies examine whether synergy exists and, if it does, how much itis worth. If synergy is perceived to exist in a takeover, the value of the combined firm should be greaterthan the sum of the values of the bidding and target firms, operating independently.

V(AB) > V(A) + V(B)

where

V(AB) = Value of a firm created by combining A and B (Synergy)

V(A) = Value of firm A, operating independently

V(B) = Value of firm B, operating independently

Studies of stock returns around merger announcements generally conclude that the value of the combinedfirm does increase in most takeovers and that the increase is significant. Bradley, Desai, and Kim (1988)examined a sample of 236 inter-firms tender offers between 1963 and 1984 and reported that thecombined value of the target and bidder firms increased 7.48% ($117 million in 1984 dollars), on

average, on the announcement of the merger.

This result has to be interpreted with caution, however, since the increase in the value of the combinedfirm after a merger is also consistent with a number of other hypotheses explaining acquisitions, includingunder valuation and a change in corporate control. It is thus a weak test of the synergy hypothesis. Theexistence of synergy generally implies that the combined firm will become more profitable or grow at afaster rate after the merger than will the firms operating separately. A stronger test of synergy is to


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evaluate whether merged firms improve their performance (profitability and growth) relative to theircompetitors, after takeovers. On this test, as we show later in this chapter, many mergers fail.

--> CC 26.1: Synergy takes a long time to show up. Some argue that the reason most studies find nosynergy benefits is that they look at short time periods (five years or less) after mergers. Do you agreewith this statement?

Question-01: What are the basic steps in strategic planning for a merger?

Answer:Basic steps in Strategic planning in Merger :Any merger and acqu is i t ion invo lve the

following critical activities in strategic planning processes. Some of the essential

elements in strategic planning processes of mergers and acquisitions are as listed

here below :1. Assessment of changes in the organization environment2.

Evaluation of company capacities and limitations3. Assessment of expectationsof stakeholders4. Analysis of company, competitors, industry, domestic economy and

internationaleconomies5. Formulation of the missions, goals and polices6.

Deve lopmen t o f sens i t i v i t y t o c r i t i ca l ex te rna l env i ronmen ta l changes7 .

Formu la t ion o f in te rna l o rgan iza t iona l pe r fo rmance measurements8 .

Fo rmu la t i on o f l ong range s t ra tegy p rog rams9 . Fo rmu la t i on o f m id - range

p rog ramme s and shor t - run p lans10 . Organ iza t ion , fund ing and o the r

methods to imp lement a l l o f the p roceed inge lements11 . In fo rmat ion f low

and feedback sys tem fo r con t inued repe t i t ion o f a l l essen t ia l elements and

for adjustment and changes at each stage12. Review and evaluation of all the processes

In each o f these ac t iv i t ies , s ta f f and l ine pe rsonne l have impor tan t

Respons ib i l i t i e s i n the strategic decision making processes. The scope of

mergers and acquisition set the t one f o r t he na tu re o f me rge rs and

acqu is i t i on ac t i v i t i e s and i n t u rn a f f ec t s t he f ac to rs which have significant

influence over these activities. This can be seen by observing t he f ac to rs

cons ide red dur ing the d i f fe ren t s tages o f mergers and acqu is i t ion

ac t iv it ie s. Proper identification of different phases and related activities smoothen

the process of invol ved in me rge r

Question 2: What are the sources of operating synergy?

Answer:

Sources of Operating Synergy

Operat ing synerg ies are those synerg ies that a l low f i rmsto increase the i r

operating income, increase growth or both. We would categorizeoperating

syne rg ies i n to f ou r t ypes :

1.


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Economiesofscale

t h a t m a y a r i s e f r o m t h e m e r g e r , a l l o w i n g t h e c o m b i n e d f i r m

t o become more cost-efficient and profitable. Economics of scales can be seen in mergerso f

f i rms in the same bus iness

For example :

two banks combining together to create alarger bank. Merger of HDFC bank

with Centurian bank of Punjab can be taken as anexample of cost reducing

operating synergy. Both the banks after combination canexpect to cut costs

considerably on account of sharing of their resources and thusavoiding

dup l ica t ion o f fac i l i t i es ava i lab le .2 .

Greater pricing power

f rom reduced compe t i t i on and h ighe r ma rke t sha re , wh i chshou ld resu l t i n

h ighe r ma rg ins and ope ra t i ng i ncome . Th i s syne rgy i s a l so mo re l i ke l y t oshow up i n me rge rs o f f i rms wh ich a re i n t he same l i ne o f bus iness and

shou ld bemore l i ke l y t o y i e ld bene f i t s when t he re a re re la t i ve l y f ew f i rms

i n t he b us in es s. W h en t h e r e a r e m o r e f i r m s i n t h e i n d u s t r y a b i l i t y o f

f i r ms t o ex e r c i se r e l a t i ve l y h i g he r p r i c e reduces and in such a situat ion

the synergy does not seem to work as desired.

Anexample

o f l im i t ing compet i t ion to inc rease p r ic ing power i s the acqu is i t ion

ofuniversal luggage by Blow Plast. The two companies were in the same line of

bus inessand were in d i rec t compet i t ion w i th each o the r lead ing to asevere p r ice war and increased marke t ing cos ts . A f te r the acqu is i t ion b low

past acqu i red a s t rong ho ld on the marke t and opera ted under near

monopo ly s i t ua t i on . Ano the r examp le i s t heacqu i s i t i on o f Tomco by

Hindus tan Lever .3.

Combination of different functional strengths

, comb ina t ion o f d i f fe ren t func t iona l strengths may enhance the revenues of

each merger partner thereby enabling each company to expand its revenues. The

phenomenon can be understood in cases where one company w i th an es tab l i shed

brand name lends i t s repu ta t ion to a company w i th upcoming p roduc t l ine

o r a company. A company w i t h s t rong d i s t r i bu t i on ne two rk me rges w i t h a

f i rm tha t has p roduc ts o f g rea t po ten t ia l bu t i s unab le to reach themarke t

before its competitors can do so. In other words the two companies should getthe

advan tage o f t he comb ina t i on o f t he i r comp l imen ta ry f unc t i ona l

s t rengths.4 .

Higher growth


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i n n e w o r e x i s t i n g m a r k e t s , a r i s i n g f r o m t h e c o m b i n a t i o n o f t h e

t w o firms. This would be case when a US consumer products firm acquires an

e m e r g i n g m a r k e t f i r m , w i t h a n e s t a b l i s h e d d i s t r i b u t i o n n e t w o r k a n d

b r a n d n a m e r e c o g n i t i on , and uses these strengths to increase sa les o f i ts

products.Operat ing synergies canaffect margins and growth, and through

these t he va lue o f t he f i rms i nvo l ved i n t hemerge r o r acqu i s i t i on.Syne rgyresu l t s f rom comp lementa ry ac t i v i t ies . Th is can beunders tood w i th the

fo l low ing examp le

Example :

C o ns i de r a s i tu at i on wh er e th er e a r et w o f i r m s A a n d B . F i r m A i s

h a v i n g s u b s t a n t i a l a m o u n t o f f i n a n c i a l r e s o u r c e s ( h a v i n g e noug h

su rp lus cash t ha t can be i nves ted somewhe re ) wh i l e f i rm B i s hav ing

p ro f i t ab le inves tmen t oppo r tun it i e s ( bu t i s l a ck ing su rp lus cash ) . I f A and

B combine with eachother both can utilize each other strengths, for example

here A can invest i ts resourcein the opportunit ies avai lable to B. note thatth is can happen on ly when the two f i rms a re comb ined w i th each o the r o r

in o t her w ords they m ust ac t i n a way as i f they ar e one.

Question 3: Explain the process of a leveraged buyout?

Answer: In the realm of increased globalized economy, mergers and acquisitions

have assumedsign i f icant importance both wi th the count ry as wel l as

across the boarders. Suchacquisit ions need huge amount of f inance to beprovided. In search of an idealmechanism to finance and acquisition, the concept

of Leverage Buyout (LBO) hasemerged. LBO is a f inancing technique of

pu rchas ing a p r iva te company w i th the he lpo f bo r rowed o r deb t cap i ta l .

The leve raged buyou t a re cash t ransac t ions in na tu rewhere cash is

bo r rowed by t he acqu i r i ng f i rm and t he deb t f i nanc ing rep resen ts 50%

ormore of the purchase price. Generally the tangible assets of the target company

areused as the co l la te ra l secur i t y fo r the loans bor r owed by acqu i r ing f i rm

in o rde r t o f i nance t he acqu i s i t i on . Some t imes , a p ropo r t i ona te amoun t o f

t he l ong t e rm f i nanc ing i s secu red w i t h t he f i xed asse t s o f t he f i rm and i n

o rder to ra ise the ba lance amount o f the to ta l pu rchase p r ice , un ra ted o r

l o w r a t ed d eb t kn o wn a s j u n k b o nd f in a nc i n g i s u t i l i z e d .

Modes of purchase

There are a number of types of financing which can be used in anLBO. These

include :

Senior debt :


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th is i s the deb t wh ich ranks ahead o f a l l o the r deb t and equ i ty cap i ta l

in the bus iness . Bank loans a re typ ica l l y s t ruc tu red in up to th ree

trenches : A, B and C.The debt is usually secured on specific assets of the

company, which means the lendercan automatically acquire these assets if the

company breaches its obligations underthe relevant loan agreement; therefore it

has the lowest cost of debt. These obligationsare usually quite stringent. Thebank loans a re usua l l y he ld by a synd ica te o f banksand spec ia l i zed

funds . Typ ica l l y , the te rms o f sen io r deb t in an LBO wi l l

requ i re repayment o f the deb t in equa l annua l ins ta l lmen ts over a pe r iod

of app rox im ate ly 7years.

Subordinated debt :

Th is deb t ranks beh ind sen io r deb t in o rder o f p r io r i t y on any l iqu ida t ion .

The te rms o f the subord ina ted deb t a re usua l l y less s t r ingen t than

sen io rdeb t . Repayment i s usua l l y requ i red in one bu l le t payment a t the

end of the term.Since subordinated debt gives the lender less security thansenior debt, lending costsare typical ly h igher. An increasingly important

fo rm o f subord ina ted deb t i s the h ighy ie ld bond , o f ten l i s ted on Ind ian

m a r k e t s . H i g h y i e l d b o n d s c a n e i t h e r b e s e n i o r o r s u b o r d i n a t e d

s e c u r i t i e s t h a t a r e p u b l i c l y p l a c e d w i t h i n s t i t u t i o n a l i n v e s t o r s .

T h e y a r e

f i xed ra te , pub l i c ly t raded , long te rm secur i t ies w i th a looser covenan t

package thansen io r deb t though they a re sub jec t to s t r ingen t repor t ing

requ i remen ts .

Mezzanine finance :

Th is i s usua l l y h igh r i sk subo rd ina ted deb t and i s rega rded as a type o f

in te rmed ia te f inanc ing be tween deb t and equ i ty and an a l te rna t ive o f h igh

yield bonds. An enhanced return is made available to lenders by the grant of an

equity k i cke r wh i ch c rys ta l l i zes up on an ex i t . A f o rm o f t h i s i s ca l l ed a

PIK , wh ich re f l e c t s i n t e res t p a id i n k ind , o r ro l l ed up i n t o t he p r i nc ip a l ,

and genera l l y inc ludes an a t t a c h e d e q u i t y w a r r a n t .

Loan stock :

Th is can be a f o rm o f equ i t y f i nanc ing i f i t i s conve r t i b l e i n t o equ i t y

cap i ta l . The ques t ion o f whe ther loan s tock is tax deduc t ib le shou ld beinves t i ng a te d tho rough ly w i th the co mp any s adv i se rs .

Preference share :

Th is f o rms p a r t o f a comp any s sha re cap i t a l and usua l ly g i ves preference

shareholders a fixed dividend and fixed share of the companys equity.


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Ordinary shares :

Th i s i s t he r i sk ies t pa r t o f a LBOs cap i t a l s t ruc tu re . Howeve r ,o rd ina ry

sha reho lde rs w i l l en joy ma jo r i t y o f t he ups ide i f t he company i s

success fu l .

Question 4: What are the cultural aspects involved in a merger. Give sufficientexamples.Answer:

The va lue cha ins o f the acqu i re r and the acqu i red , need to be in teg ra ted

in o rde r t o achieve the value creation objectives of the acquirer. This integration

process has three d i m e n s i o n s : t h e t e c h n i c a l , p o l i t i c a l a n d c u l t u r a l .

T h e t e c h n i c a l i n t e g r a t i o n i s s i m i l a r t o the capab i l i t y t rans fe r

d iscussed above . The in teg ra t ion o f soc ia l in te rac t ion and po l i t i ca l

re la t ionsh ips rep resen ts the in fo rma l p rocesses and sys tems wh ich

in f l uence peop le s ab i l i t y and mot iva t ion to pe r fo rm. A t the t ime o f

i n teg ra t ion , the acqu i re r should have regard to these political relationships, if

acquired employees are not to feel u n f a i r l y t r e a t e d . A n i m p o r t a n t

a s p e c t o f i n t e g r a t i o n i s t h e c u l t u r a l i n t e g r a t i o n o f t h e a c q u i r i n g

a n d acqu i red f i rms. The cu l tu re o f an o rgan iza t ion is embod ied in i t s

co l l e c t i ve va lue systems, beliefs, norms, ideologies myths and rituals. They can

motivate people and can become valuable sources of efficiency and effectiveness. The

following are thei l l u s t r a t i v e o r g a n i z a t i o n a l d i v e r s e c u l t u r e s w h i c h m a y

h a v e t o b e i n t e g r a t e d d u r i n g post-merger period: Strong top leadership

versus Team approach Management by formal paper work versus

management by wandering around Individual decision versus group consensus

decision Rapid evaluation based on performance versus Long term relationship

based on l o y a l t y Rapid feedback for changes versus formal bureaucratic rules

and procedures Narrow career path versus movement through many areasRisk taking encouraged versus one mistake you are out R i s k y a c t i v i t i es

v e r s u s l o w r i s k a c t i v i t i e s N a r r o w r e s p o n s i b i l i t y a r r a n g e m e n t v e r s u s

Eve ryone i n t h i s company i s sa lesman (o r cos t con t ro l l e r , o r p roduc t

qua l i t y imp rove r e t c . ) Lea rn f rom cus tomer ve r sus We know wha t i s

bes t f o r t he cus tome r The above i l l u s t ra t i ve cu l t u re may p rov ide bas i s

fo r t he c lass i f i ca t i on o f o rgan i za t i ona l cu l t u re . The re a re f ou r d i f f e ren t

types o f o rgan iza t iona l cu l tu re as ment ioned be low:

Power

- The main characteristics are: essentially autocratic and suppressiveo fcha l lenge ; emphas is on ind iv idua l ra the r than g roup dec is ion mak ing

Role

- The impo r tant f ea tu res a re : bu reaucra t i c and h ie ra rch i ca l; emphas i s on

formalrules and procedures; values fast, efficient and standardized culture

service


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Task/achievement

- The main characteristics are: emphasis on team commitment;task determines

organ iza t ion o f work ; f lex ib i l i t y and worker au tonomy; needs

c rea t i veenv i ronmen t

Person/support

- The impo r tan t f ea tu res a re : emphas i s on equa l i t y ; seeks t o nur tu re

pe rsona l d e v e l o p m e n t o f i n d i v i d u a l m e m b e r s P o o r c u l t u r a l f i t o r

i n c o m p a t i b i l i t y i s l i k e l y t o r e s u l t i n c o n s i d e r a b l e

f r a g m e n t a t i o n , u n c e r t a i n t y a n d c u l t u r a l a m b i g u i t y , w h i c h m a y b e

exper ienced as s t ress fu l by


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Q. No: what are the motives of a joint venture, explain with an example of a joint venture?

Ajoint venture is a business agreement in which parties agree to develop, for a finite time, anew entity and newassetsby contributingequity. They exercise control over theenterpriseandconsequently share revenues, expenses and assets. There are other types of companies such as JVlimited by guarantee, joint ventures limited by guarantee with partners holding shares.

In European law, the term 'joint-venture' (or joint undertaking) is an elusive legal concept,better defined under the rules of company law. In France, the term 'joint venture' is variouslytranslated as 'association d'entreprises', 'entreprise conjointe', 'coentreprise' and 'entreprisecommune'. But generally, the term societe anonyme loosely covers all foreign collaborations. InGermany,'joint venture' is better represented as a 'combination of companies' (Konzern)[1]On the other hand, when two or more persons come together to form a temporary partnershipfor the purpose of carrying out a particular project, such partnership can also be called a jointventure where the parties are "co-venturers".The venture can be for one specific project only - when the JV is referred to more correctly as aconsortium(as the building of theChannel Tunnel) - or a continuing business relationship. Theconsortium JV (also known as a cooperative agreement) is formed where one party seeks

technological expertise or technical service arrangements, franchise and branduse agreements,management contracts, rental agreements, for one-time contracts. The JV is dissolved whenthat goal is reached.Some major joint ventures includeDow Corning,MillerCoors,Sony EricssonandPenske TruckLeasing.A joint venture takes place when two parties come together to take on one project. In a jointventure, both parties are equally invested in the project in terms of money, time, and effort tobuild on the original concept. While joint ventures are generally small projects, majorcorporations also use this method in order to diversify. A joint venture can ensure the success ofsmaller projects for those that are just starting in the business world or for establishedcorporations. Since the cost of starting new projects is generally high, a joint venture allows both

parties to share the burden of the project, as well as the resulting profits.A joint venture is not to be taken lightly. For a businessperson to embark on a joint venture, he orshe needs to be committed and willing to work cooperatively with the other party involved. Aperson involved in a joint venture can no longer make all of the decisions for the business alone.For it to be truly a joint venture, there has to be 100% commitment from both sides.

[2]When determining whether or not to embark on a joint venture, it is important to ensure bothparties are a match with the projected client base. In a joint venture, each party must complementthe other in business. Sometimes, a misunderstanding or a lack of communication can destroy ajoint venture. Therefore, it is necessary for both parties to be capable of communicating whatthey are able to offer to the project and what their expectations are.Since money is involved in a joint venture, it is necessary to have a strategic plan in place. Inshort, both parties must be committed to focusing on the future of the partnership, rather than justthe immediate returns. Ultimately, short term and long term successes are both important. Inorder to achieve this success, honesty, integrity, and communication within the joint venture arenecessary.
http://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/European_lawhttp://en.wikipedia.org/wiki/European_lawhttp://en.wikipedia.org/wiki/Company_lawhttp://en.wikipedia.org/wiki/Company_lawhttp://en.wikipedia.org/wiki/Joint_venture#cite_note-0http://en.wikipedia.org/wiki/Joint_venture#cite_note-0http://en.wikipedia.org/wiki/Joint_venture#cite_note-0http://en.wikipedia.org/wiki/Consortiumhttp://en.wikipedia.org/wiki/Consortiumhttp://en.wikipedia.org/wiki/Channel_Tunnelhttp://en.wikipedia.org/wiki/Channel_Tunnelhttp://en.wikipedia.org/wiki/Channel_Tunnelhttp://en.wikipedia.org/wiki/Franchisinghttp://en.wikipedia.org/wiki/Franchisinghttp://en.wikipedia.org/wiki/Brandhttp://en.wikipedia.org/wiki/Brandhttp://en.wikipedia.org/wiki/Dow_Corninghttp://en.wikipedia.org/wiki/Dow_Corninghttp://en.wikipedia.org/wiki/Dow_Corninghttp://en.wikipedia.org/wiki/MillerCoorshttp://en.wikipedia.org/wiki/MillerCoorshttp://en.wikipedia.org/wiki/MillerCoorshttp://en.wikipedia.org/wiki/Sony_Ericssonhttp://en.wikipedia.org/wiki/Sony_Ericssonhttp://en.wikipedia.org/wiki/Sony_Ericssonhttp://en.wikipedia.org/wiki/Penske_Truck_Leasinghttp://en.wikipedia.org/wiki/Penske_Truck_Leasinghttp://en.wikipedia.org/wiki/Penske_Truck_Leasinghttp://en.wikipedia.org/wiki/Penske_Truck_Leasinghttp://en.wikipedia.org/wiki/Joint_venture#cite_note-1http://en.wikipedia.org/wiki/Joint_venture#cite_note-1http://en.wikipedia.org/wiki/Joint_venture#cite_note-1http://en.wikipedia.org/wiki/Joint_venture#cite_note-1http://en.wikipedia.org/wiki/Penske_Truck_Leasinghttp://en.wikipedia.org/wiki/Penske_Truck_Leasinghttp://en.wikipedia.org/wiki/Sony_Ericssonhttp://en.wikipedia.org/wiki/MillerCoorshttp://en.wikipedia.org/wiki/Dow_Corninghttp://en.wikipedia.org/wiki/Brandhttp://en.wikipedia.org/wiki/Franchisinghttp://en.wikipedia.org/wiki/Channel_Tunnelhttp://en.wikipedia.org/wiki/Consortiumhttp://en.wikipedia.org/wiki/Joint_venture#cite_note-0http://en.wikipedia.org/wiki/Company_lawhttp://en.wikipedia.org/wiki/European_lawhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Assets

merger & acquisiation

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