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Mergers & Acquisitions

Saurabh Shekhar

1/27/2009 Saurabh Shekhar.07bs3884,IBS Hyderabad 1

Mergers & Acquisitions:????

• A merger is a combination of two or more corporations

in which only one corporation survives and the merged
corporations go out of business.

• An acquisition refers to the process of gaining partial or

complete control of one company by another company
for some strategic reasons.

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The consolidation
or combination
Merger of one firm with

The purchase of
one firm by
another so that
Acquisition ownership

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Classifications : Mergers and Acquisitions
• Horizontal
– A merger in which two firms in the same industry combine.
– Often in an attempt to achieve economies of scale and/or scope.

• Vertical
– A merger in which one firm acquires a supplier or another firm that is
closer to its existing customers.
– Often in an attempt to control supply or distribution channels.

• Conglomerate
– A merger in which two firms in unrelated businesses combine.
– Purpose is often to ‘diversify’ the company by combining uncorrelated
assets and income streams

• Cross-border (International) M&As

– A merger or acquisition involving firms from two different countries

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Mergers and Acquisition Activity

• M&A activity seems to come in ‘waves’ through the

economic cycle domestically, or in response to
globalization issues such as:

– Formation and development of trading zones or

blocks (EU, North America Free Trade Agreement

– Deregulation

– Sector booms such as energy or metals

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Overcapacity Market Industry
M&A Roll-up-M&A Extension M&A as R&D Convergence

Example DaimlerChrysler Service Pepsi’s acquisition Intel’s dozens of AOL’s acquisition

merger Corporation of Gatorade acquisitions of Time-Warner
International small high tech
more than 100 companies
acquisitions of
funeral homes
Objectives Eliminating Efficiency of larger Synergy of similar Short cut Anticipation of
capacity, gaining operations (e.g., but expanded innovation by new industry
market share, and economies of product lines of buying it from emerging; culling
increasing scale, superior geographic small companies resources from
efficiency management) markets firms in multiple
industries whose
boundaries are
Percent of
all M&A
deals 37% 9% 36% 1% 4%

Source: J.L. bower, “ Not All M&As Are Alike – andSaurabh Shekhar.07bs3884,IBS
That Matters,” Hyderabad
Harvard Business Review 79:3 (2001), 92-101 6
Technological Cisco and Microsoft both use acquisitions to ensure
change they maintain their strong competitive positions

When the Tribune Company merged with Times-Mirror in

Demographic 2000, it acquired Spanish-language “Hoy” to target the
change growing U.S Hispanic market

Geopolitical IBM divested its PC division to a Chinese company as that

change country emerges

Trade Wal-Mart acquired Mexican retail giant, Cifra, in wake of

liberalization NAFTA

AT&T divested local operations into “Baby Bells” and set off a
state of almost constant M&A
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Introduction Growth Maturity

M&As tend to be M&As tend to be for M&As primarily for

R&D and product- acquiring products dealing with over
related that are proven and capacity in the
gaining acceptance industry

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Motivations for Mergers and

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Managerial Motivations for M&As

• Managers may have their own motivations to pursue M&As.

The two most common, are not necessarily in the best
interest of the firm or shareholders, but do address common
needs of managers

• Increased firm size

– Managers are often more highly rewarded financially for building a bigger
business (compensation tied to assets under administration for example)
– Many associate power and prestige with the size of the firm.

• Reduced firm risk through diversification

– Managers have an undiversified stake in the business (unlike
shareholders who hold a diversified portfolio of investments and don’t
need the firm to be diversified) and so they tend to dislike risk (volatility
of sales and profits)
– M&As can be used to diversify the company and reduce volatility (risk)
that might concern managers.
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Synergy – a Quest for Holy Grail

• Popular definition: 1 + 1 = 3

• Roundabout definition: If am I willing to pay 6 for the

business market-valued at 5 there has to be the
Synergy justifying that

• More technical definition: Synergy is ability of

merged company to generate higher shareholders
wealth than the standalone entities

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Synergy – a Quest for Holy Grail

WHAT IS IT? – cont’d

• Synergy value is created from economies of

integrating a target and acquiring a company; the
amount by which the value of the combined firm
exceeds the sum value of the two individual firms.

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Value Creation Motivations for M&As
Operating Synergies
• Operating Synergies
– Economies of Scale
• Reducing capacity (consolidation in the number of firms in the
• Spreading fixed costs (increase size of firm so fixed costs per unit
are decreased)
• Geographic synergies (consolidation in regional disparate
operations to operate on a national or international basis)
– Economies of Scope
• Combination of two activities reduces costs
– Complementary Strengths
• Combining the different relative strengths of the two firms creates
a firm with both strengths that are complementary to one another.

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Value Creation Motivations for M&A
Efficiency Increases and Financing Synergies

• Efficiency Increases
– New management team will be more efficient and add
more value than what the target now has.
– The combined firm can make use of unused
production/sales/marketing channel capacity

• Financing Synergy
– Reduced cash flow variability
– Increase in debt capacity
– Reduction in average issuing costs
– Fewer information problems

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Value Creation Motivations for M&A
Tax Benefits and Strategic Realignments
• Tax Benefits
– Make better use of tax deductions and credits
• Use them before they lapse or expire (loss carry-back, carry-forward
• Use of deduction in a higher tax bracket to obtain a large tax shield
• Use of deductions to offset taxable income (non-operating capital
losses offsetting taxable capital gains that the target firm was unable
to use)
• New firm will have operating income to make full use of available CCA.

• Strategic Realignments
– Permits new strategies that were not feasible for prior to the
acquisition because of the acquisition of new management
skills, connections to markets or people, and new

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•Move expensive
•Inherit adjunct businesses
•Cannot spread commitment over several
years (one-time, all-or-nothing decision)
•Potential for organizational conflict
•Critical Mass
•Access to complementary assets
•Reduced competition

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Move from an acquisitions strategy, to acquisition as the manifestation of

Strategic Fit Don’t let acquisitions determine your


Pre-Conditions for A ready meeting of minds on what business

Success is about
A model to improve both parties’ competitive

Pre-Merger Discussions Focusing on how the model will work

Agreeing a price where both benefit
Demonstrating “success without a heavy

Post-Merger Integration Re-establishing the Governing Objective

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Mergers and acquisitions can transform a business, but
they can also be a risky, uncertain means of achieving
shareholder value
 Poor due diligence
• Hidden merger costs
• Massive leadership challenge
• Unpredictable events

Some lessons
 Does it fit with our current strategy? Is it a manifestation of it?
 Is it capable of integration with our existing business?
 Will it enhance our competitive advantage?
 Do the economics stand up to the test? Most acquisitions are
killed by the premium required, which cannot be recaptured.

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A merger or acquisition only creates an

opportunity. It is execution that creates

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