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“Comparative Evaluation Strategies in Mergers

and Acquisitions”






Business Organizations while going for corporate restructuring in the form

of Mergers or Acquisitions do test the water from various perspectives. This

is where arises the importance of conducting an exercise for evaluating

strategies for the project and then a comparison has to be made so that the

interest of the stakeholders of both the entity is not disturbed.

To do the evaluation method of valuing a firm and the impact of merger in

the organization, primary data and analytical discussion was obtained from

KPMG and Mr. Anindo Dutta (C.A). Further analysis of recent mergers was

done to arrive at the conclusion. This thesis is an attempt made to find out

the optimum evaluative strategies used by companies in mergers and

acquisition, which commences from valuing the firm to evaluating the

merged entity.

To do the evaluation the capital budgeting decision has to be done by very

carefully estimating the projected free cash flows. For doing so, one has to

have an in-depth knowledge to forecast the market the merged entity is

entering into. Once this is done then comes the mode of paying the acquired

firm. The optimum strategy for paying the acquired firm will depend upon

the nature of acquisition.

Once the payment mode is determined then an evaluation is to be done to

find out whether the brand, the organization culture strategically fits each

other. Then once all these evaluations are done then only the M&A deal

should be finalized, for which, a team has to be formed with representative

comprising from both the corporation.

In Indian Inc M&A activity has grown to unprecedented level and will grow

even further. Companies will merge with each other in and particularly - the

textile, FMCG, IT & BPO sector in India have witnessed maximum business

restructuring for the year 2006. However, with more than half of these deals

fails to deliver their expected results, and so comparison of evaluation

strategies in M&A is central to merger and acquisition decision making.


I take this opportunity to express my deep sense of gratitude to my thesis

guide Professor Ramakrishna for his valuable guidance, keen interest and

helpful criticism during the course of study.

I express my sincere thanks to Project Guide Ms. Rashmi Sundriyal, for

providing all necessary help during the project work.


Table of Contents

Introduction & Literature Review

Mergers and Acquisition: An overview

Background of the Problem

Benefits and Scope of the Research

Problem Context

The Corporate perspective

Case Study

Valuing Synergy

Evaluation Strategies in M&A

Tata Tea ties the knot with Tetley








Thesis Response Sheet


Mergers and Acquisition: An overview

Merger is an inevitable phenomenon of the nature, which is very promptly

reflected in the formation of the universe itself. Even the human race started

with a merger of two cells only and since human civilization started we find

lot many examples where kings, came out from the kingdom and dreamed

about merging other territories to gain strength and power.

Business world has also been not an exceptional from this phenomenon.

Every day we find news from different sectors of industries about mergers

and acquisitions taking place to enhance synergy or to achieve specific

financial goal either in the form of cost saving and economies of scale. At

the same time, it is obvious that there is an increase in access to capital or

believes that undervalued company can be turned around.

However, with more than half of the deals fails to deliver their expected

results, a comparison of evaluation strategies in M&A is central to merger

and acquisition decision making. Each deal is so unique in terms of size,

industry focus, or geographical orientation and the evaluation strategies that

there cannot be only one-evaluation strategies, which is uniformly


One must see that the deal must deliver the long-term growth and sustained

profitability. Emphasis should be on how the two companies fit together in a

practical or financial sense, and not on whether they could truly combine to

make a whole that was greater than the sum of its parts.

As the world becomes a truly global market place, more and more overseas

mergers take place and India is not an exceptional too. Globalization,

privatization and relaxation of controls have triggered unprecedented

upsurge in cross border M&A by Indian companies. However, the process of

restructuring of Indian industry did not commence immediately after

liberalization. It was the industrial slow down since 1996 to 1998, which

squeezed the profit margins of Indian corporate entities and forced them to

restructure their operations to achieve grater competitiveness

India has acquired 120 foreign companies between 2001-02 for consolidated

amount of $1.6 billion followed by 305 in 2003 worth $4.4 billion, 316

overseas acquisitions worth $9.3 billion in 2004 and in 2005 the number has

gone up to 355 acquisitions worth around $11 billion.

The continuing popularity of mergers and acquisitions is probably a

reflection of the wide spread belief that acquisitions provide an easy route to

achieve growth. And when it comes to mergers, unlike traditional organic

growth, it enables companies to radically alter the dynamics of business by

achieving growth, cost savings and competitive advantage.

While conducting a comparison exercise of evaluation strategies in M&A

the following issues should duly be considered:

• Identification of the sources of the firm’s current and future competitive


• How sustainable and unique the identified strengths are?

• Will the competitor replicate the strategy followed?

• Will the strategy create shareholder value?

• Various components of corporate governance such as the independence of

the board of directors, the activism of large shareholders.

However, to make a merger fully successful one cannot ignore the human

and cultural issues as M&A result in meeting of two autonomous corporate

cultures. When companies are acquired or combined, people almost

immediately start to focus on differences in the companies. Employees

initially perceive the other company’s culture as ‘external influence’ and

frequently reject it. Especially this applies in an acquisition where the

acquiring company see themselves as the winners, and the acquired

company, the losers.

In addition to this when a merger takes place, company employees become

concerned about job security and rumors start flying. Combining two

companies can create interpersonal conflict, role confusion, uncertainty

about change and worry of redundancy.

Another aspect that should duly be considered is that in order to grow and

expand companies must go for M&A in businesses that they understand


Leading corporate houses have undertaken restructuring exercises and M&A

is one of the most effective methods of corporate restructuring. Hence,

M&A has become an integral part of the long-term business strategy of

corporate enterprises. Even Indian financial services industry has

recognized the need for corporate restructuring and many

banks in the country are moving in this direction.

However, there is always an argument against convergence,

suggesting that increasing competition, the arrival of the

global companies means in future a handful of global

institutions will dominate. Some felt that the Indian

corporate would become polarized, with global giants at one-

end and niche players at another.[Refer to: M & As in Banking

Industry: A tool for Competitiveness by S.P.R. Vittal]

M&A: A conceptual discussion

Business combination or business restructuring can take in the forms of

mergers, acquisitions, amalgamation and takeovers and all have played an

important role in the external growth of a number of leading countries in the


There is a great deal of confusion and disagreement regarding the exact

meanings of all these terminologies mentioned above. In fact, some of them

are used interchangeably. Although the term Merger and Acquisition are

often uttered synonymously, but the terms merger and acquisition mean

slightly different things. Again all these terms has a separate legal definition.

An acquisition occurs, when one company takes over another and palpably

emerges as the new owner; the purchase is called an acquisition. From legal

point of view, the target company ceases to exist and the buyer's stock

continues to be traded.

A merger occurs when two or more companies combine into one company

or one or more companies may merge with an existing company. Merger or

amalgamation may take two forms: 1) Merger through absorption

2) Merger through consolidation

1) Merger through absorption

Absorption can be defined as the process of combining two or more

companies into an existing company where all the companies except one

lose their identity. For example absorption of Tata Fertilizers Ltd by Tata

Chemicals Ltd.

2) Merger through consolidation

On the contrary consolidation is a combination of two or more companies

into a new company and in this form of merger, all companies are legally

dissolved to form a new entity. In a consolidation, the acquired company

transfers its assets, liabilities and shares to the acquiring company.

Mergers can be again broadly classified in the following way:

Horizontal merger: This is a combination of two or more firms in similar

type of production or merging of firms in the same stage of industry or same

area of business is known as horizontal merger.

Vertical merger: Combination of two or more firms involved in different

stages of production or distribution, in order to reduce the cost of

production, is known as vertical merger.

Conglomerate merger: This is a combination of firms engaged in unrelated

lines of business activity. Example ITC with Tribeni Tissues.

However whatever be the form of merger it’s undertaken with the following

motives or in order to achieve the following benefits:

1) Limit competition

2) Utilize under-utilized market power

3) To grow and enhance profitability in the industry

4) To achieve economies of scale

5) Establish a transnational bridgehead without excessive start- up costs.

Background of the Problem

In today’s world of intense global competition all corporate behemoths

resort to M&A with an attempt to attain surges in inorganic growth. But

there are enormous reasons of why such M&A fails to add value or to

achieve the desired synergy. Some of them are penned down below:

Improper valuation: The key to a successful M&A is when the right price

and not a penny more are paid, but in most of the cases companies end up in

paying more. While the share holders of the acquired company, particularly

if they receive cash, do well but the continuing shareholders end up with the

obnoxious burden of overpriced assets which with definite conviction dilute

their future earnings. Such being the milieu what becomes important is

proper valuation of the business and specially intangible assets.

Boasting overstated synergies: There is no doubt that an acquisition can

create synergy but many times companies with uncontrollable palpitations

end up in over stating this so called synergy. This occurs mainly due to over

estimating the rate of cost reduction and over valuing the net working

capital. Overestimating such synergies leads to a failure of the merger.

Cultural clash: Lack of proper communication acts as a disaster in case of

overseas mergers where many cultural differences exist. Moreover, cultural

differences do result in failure of plans implementation and thereby paves

the way for the failure of the merger.

Poor Business Fit: When the product or services does not fit naturally into

the acquirer’s marketing, sales, distribution system and not to be left out the

demographical requirements of the product or services of the merged entity,

then it may creep in delays in efficient integration.

Over Leverage: Cash acquisitions frequently result in the acquirer assuming

too much debt. Future interest costs consume a great portion of the acquired

company’s earnings. An even most serious problem results when the

acquirer reports to cheap short-term financing options and then has difficulty

refunding on a long-term basis.

Boardroom Split: When mergers are structured with 50/50 Board

representation or with substantial representation from the target, due

attention should be given to determine the compatibility of the directors

following the merger. For example when global IT services giant Electronic

Data Systems Corporation(EDSC) acquired Bangalore based Mphasis BFL

Ltd on June 23, 2006 Jerry Rao continued to remain chief executive at

Mphasis because of his expertise in management and understanding the


Some of the problems are aforementioned but the list is endless. Such being

the milieu before M&A these problems should be duly addressed. But this

study ‘Comparative Evaluation Strategies in Mergers and Acquisitions’ will

be addressing the first two problems that is finding out a proper valuation

model for the firm to be acquired on the one hand and on the other hand it

will also focus on to find out a proper model for valuing synergy.

Objective of the Research

The present Research is planned to study the measures that can be discerned

as could probably engineer a success in M&A and identify the ingredients

that are required to be followed to better a deal as it can be done or

negotiated. For this the objectives are as follows:

(1) To compare the processes like valuation of the firm and synergy


(2) To find out an adequate strategy for paying the acquired firm so that

there is no over leverage problem in the future.

(3) To determine an optimum evaluation strategy in M&A.

Benefits and Scope of the Research

With India waking up into a new millennium, M&A have become essential

for inorganic growth. This is palpable in textile industry which in the May

and June of 2006, witnessed lots of overseas acquisitions; like Malwa

Industries acquiring mill major Tintolavanderie from Italy and Raymond’s

acquired Portugal based Regency Textiles Portugesa Limittada. As stated in

‘The Temerity of Textiles’ of Business& Economy, 16th June, 2006- the new

mantra for Indian textile majors to go global is cross border acquisitions .

Agrees, Ajai Sahai, Director General, Federation of Indian Export (FIEO),

“More and more overseas acquisition will continue in the acquisition”

In such a milieu, the present Research becomes extremely important, as the

primary focus of the study is to evaluate strategies in Merger & Acquisition

and finding out an optimum mix of making payment to the acquired firm.

Even analyst feels that the M&A route is an ideal way for corporate

restructuring. Starting from small independent organizations to global

behemoths all is trying this option of growth.

The reason can be anything but one core reason is M&A means

improvement in capital structure, which enables to take new and diversified

activities. However, a major bottleneck to improve the capital structure is

poor payment made to the acquired company during the pre-merger. In other

words, it weakens the financial position of the company. To avoid this

problem often companies acquire a major stake earlier and later do the

complete acquisition. Like for example International Marketing & Sales

Group Plc (IMSG) acquired major stakes in India’s Candid Marketing and

the remaining they are going to acquire by 2010.

The following cases will be analyzed with respect to arrive fruitful


Takeover by Tata Tea of Tetley: It has been more than a decade of Tata Tea-

Tetley Group engagement and the matrimony is now brewing sizzling hot

opportunities for both of them. Tata Tea’s UK based collaborator Tetley

Group is the innovator of the concept of ‘tea bag’ and by value and volume

among the top 20 grocery brands in UK. In mid 2000, Tata Tea bought UK

based Tetley for 271pound.

Hypothetical case study: With the help of Charter Accountant and KPMG a

hypothetical case study has been developed which covers almost all the

problems associated to valuation in today’s corporate world.

Problem Context

The Corporate Perspective

On June 23, 2006 global IT giant Electronic Data Systems Corporation

acquired 83 million shares of Bangalore based Mphasis BFL Ltd for Rs

1,748 crore.

‘Indian haute couture bigwigs are going shopping; the new ‘mantra’ for

Indian textile majors to go global is through cross-border acquisitions;’

‘The Temerity of Textiles’, Business& Economy, 16th June, 2006. Malwa

Industries acquired mill major Tintolavanderie from Italy and Third

Dimension for a total consideration of about $11 million on May 2006. On

the same league, Gujarat Heavy Chemicals acquired Dan River Raymond on

May 27, 2006 and Raymond’s acquired Portugal based Regency Textiles

Portugesa Limittada.

Apart from these over seas acquisitions by Indian Inc, the year 2000

witnessed the largest ever-overseas acquisition by an Indian company, as

Tata Tea acquired the Tetley group for 271million pounds. However, during the

past decade lots of global behemoth has also acquired companies from the

homely milieu. Like, in 2001, Frito-Lay India took over Uncle Chipps from

Amrit Banaspati group for an undisclosed price. As per the acquisition

agreement, Frito-Lay, along with the Uncle Chipps brand also acquired a

few unused assets from Amrit Banaspati.

With so many M&A happening, what becomes important is valuation of the

target company and the estimated synergy in post merger. When it comes to

valuation of the acquired company often problem arises in valuing the Swap

ratio. Now the question arises what is a swap ratio.

“Swap ratio is the ratio of the share exchange rate of one of the merging

company with the share exchange rate of the other company,” replies

Professor A.Sandeep, IIPM. If company A and company B is merging, then

Swap ratio would be:

Swap ratio = Exchange Rate of Company A / Exchange Rate of Company B

Through different case studies and discussions, an attempt has been made to

evaluate the various strategies used for valuing the target firm and synergy,

which are discussed in later chapters.

Case Study



Based on information gathered from KPMG and going through the recent

business new the hypothetical case study on Mergers and Acquisitions has

been developed. I took the help of my project guide (Professor

Ramakrishna) and C.A Mr. Anindo Dutta to make the valuations as practical

as possible. Some of the valuation strategies that has been incorporated, is

extract from my M.Com classes of Dr. Malayendu Shah H.O.D of finance,

Calcutta University

The assumptions, which are the keystone of the case study, are enumerated


 It is assumed that the existing undertakings are operating at a level

below optimum but when they combine their resources and efforts,

they can reduce the cost of production including selling and

administrative expenses. It will take 4-5 years to achieve this synergy.

 Both the companies do not have any Preference Share Capital.

 All the shares are fully paid up and authorized share capital of Mittal

Food ltd. is of 157497 shares of rupees 10 each and of Mahanagar

Restaurant Ltd is of 25000 shares of Rs 10 each.

 Depreciation is calculated on Diminishing Balance Method.

 There is no interest to be paid by Mahanagar Restaurant Ltd after

merger on debt capital, as the loan taken from Mittal Food ltd would

be adjusted.

 The earnings of both the firm for the year 2005 has been taken for

calculating the E.P.S after merger.

 Both the companies are listed companies.

 Financial year for both the companies closes at 31st December.

Point to be noted: The prevailing tax rate for each year has changed

Mittal Food ltd. (M.F.L) was established in 1995 to manufacture steel

generally used for producing home appliances and machines. The company

invested Rs.4 lacks in a small concern called Mahanagar Restaurant Ltd

(M.R.L). During the past 5 years, M.F.L‘s sales have grown at an average of

about 10%\year, which is below the industry benchmark, and P.A.T have

grown at about 8%. The fluctuating profit of the company has caused its P.E

ratio to be much low.

To reduce its earning instability M.F.L is now planning to acquire 51%

ownership in M.R.L, which has a poor management, and to make it, its

subsidiary. Currently M.F.L‘s share is selling for Rs. 75 in the market. The

synergies for acquiring M.R.L are enumerated below:

1. The target company belonged to the related business so it will help in

vertical merger and penetrate in newer area.

2. It has generated a stalwart goodwill among the consumer and is time

honoured as a good Quick Service Restaurant (Q.S.R).

3 It had 50 outlets in Delhi and Mumbai. The revenue generated

from these outlets will help in maintaining a stable PE ratio.

MRL is known for its quality of products and services including. It has a

strong logistic throughout its 50 outlets spread across the capital and

Mumbai. The company is planning to make its maiden entry in Kolkata.

Due to poor management and lack of innovative dishes, the company’s

performance was bogged down with the entry of new kids in the block. The

company could not pay heed to product innovation due to the high cost of

raw material and processed items required for such Endeavour.

MRL’s sales have grown at an average of 6% per year. The company’s

earning has been low due to decline in sales and the average market price

of company’ s shares in recent times has been lower than its book value.

The board of MRL thinks that when they took a loan from MRL, it helped

them to deal with their financial inadequacy and now if they join with

M.F.L, they can get raw material and process ingredients at lower costs

from the humungous product portfolio of MFL. Moreover, MFL’s supply

chain will enable easy availability of the products in all the outlets.

The current price of MRL’s share is Rs. 28 only. MFL thinks that if they

could acquire MRL, they could turn around the company and increase its

share value in the market. However, M.R.L favoured merger with M.F.L

instead of becoming a subsidiary. According to shareholders of M.R.L, if

one company is made a subsidiary of other the idea behind the synergy

would fall and there will not be any unified command as it tantamount to be

dominated by the parent company.

But M.F.L wanted to acquire M.R.L and claimed to grow their sales by 8%

within 3-4 yrs but as M.R.L has so low growth rate in sales, MFL will be

paying them for each share an amount much lower than their current market

price. MRL agreed to that but their condition was to get raw materials at a

much more lower costs which will help to reduce cost of goods sold at least

64% of sales. MFL anticipates that to support sales growth of 8% of M.R.L,

they have to bear a capex equal to 5% of sales for the first 5 yrs.

Now the million-dollar question arises whether both the companies will

have an increased E.P.S in the post merger milieu and what price M.F.L

should pay to M.R.L if they merge with each other. From M.R.L’s point of

view, a vertical integration of upstream suppliers like Reliance

Petrochemicals ltd. with Reliance Industries ltd in the year 1992 will help

the company to achieve the desired result of synergy and reduce the cost of


The financial statement (in a summarized form) issued by both the

companies for the year ended 31st December 2005 are given below.

Mittal Foods Ltd
Summarized P/L statement for the last five years (Rs in 000)

Year 2001 2002 2003 2004 2005

Net Sales 5470 6150 6642 7529 8056

Cost of good sold 3900 4500 5467 5480 5975

Depreciation 110 155 139 125 143

Selling & Admin 671 788 970 1003 1020


Total expenses 4681 5443 6576 6608 7138

EBIT 789 707 66 921 918

Interest 132 152 160 191 284

EBT 657 555 94 730 634

Tax 353 292 - 368 226

PAT 304 263 - 362 408

Per share data

Year 2001 2002 2003 2004 2005

EPS (Rs) 1.93 1.67 1.81 2.3 2.59

Book Value (Rs) 25.28 26.00 26.41 26.75 27.55

Market Value (Rs) 54.34 61.25 57.5 71.25 75.00

Summarized Balance Sheet
As on 31st December 2005

ZLiabilities (Rs. In thousand)

Sources of Funds

Shareholders Fund
Paid up capital (1, 57, 497 shares
Of Rs. 10 each) 1575
Reserve and surplus 3155 4730

Borrowed Funds
Secured 1203
Unsecured 967 2170

Current Liabilities 1860



Gross Block 4748

Less depreciation 143

Net Block 4605


Loan to MSUL 400

Other Deposit 29 5034

Current Assets 3726


Mahanagar Restaurant’s Ltd
Summarized P/L statement for the last five years (Rs in 000)

Year 2001 2002 2003 2004 2005

Net Sales 1442 1490 1580 1721 1823

Cost of good sold 995 1055 1150 1244 1323

Depreciation 37 40 45 45 85

Selling & Admin 260 275 280 292 302


Total expenses 1292 1370 1475 1581 1710

EBIT 150 120 105 140 113

Interest 19 20 20 30 35

EBT 131 100 85 110 78

Tax 45 34 25 35 27

PAT 86 66 60 75 51

Per share data

Year 2001 2002 2003 2004 2005

EPS (Rs) 3.44 2.64 2.40 3.00 2.12

Book Value (Rs) 23.76 25.00 26.28 27.65 30.00

Market Value (Rs) 30.84 44.04 42.25 25.48 28.0

Summarized Balance Sheet
As on 31st December 2005

Liabilities (Rs. In thousand)

Sources of Funds

Shareholders Fund
Paid up capital (25000 shares
Of Rs. 10 each) 250
Reserve and surplus 320 570

Borrowed Funds
Loan from MSL 400

Current Liabilities 178



Gross Block 457

Less depreciation 85

Net Block 372

Investment 23

Current Assets 753


Now M.F.L is trying to find out the value of M.R.L in order to determine whether it’s

worth to merge with M.R.L. For this we will use the D.C.F approach to determine the

value of M.R.L. and try to find out the valuation of synergy.

D.C.F approach

On the onset of this method, we estimate the free flow by projection of sales. As stated

earlier M.S.U.L in the last 5 years has grown at an average rate of 6% but M.S.L claims,

they can increase the sales to 8%. As conspicuous from the Q1 Result, 2006 of the home

grown FMCG giant, Dabur India Ltd, it took 1 year to achieve the desired sales growth

from acquired brands Odonil, Odomos, Odopic and Sanifresh from the stable of Balsara.

Therefore, we assume M.R.L’s sales would remain at 6% for 1st 2 years, 7% on the 3rd

year (2008) and thereafter 8%. So the sales will be Rs 1932, Rs 2048, Rs 2191, Rs2366,

and Rs 2555 respectively for the year 2006, 2007, 2008, 2009, and 2010.

Availability of raw materials at cheaper costs and due to the operating efficiencies (as

observed in case of Reliance Industries ltd with Reliance Polypropylenes ltd). The cost

of goods sold (COGS) will be reduced to 64%. Lets assume it will take sometime for

M.S.U.L to reduce this cost. So COGS can be assumed to be 66% in 2006, 2007 and

65% for 2008 and thereafter 64%. Regarding selling and admin expenses generally it has

been seen it reduces in the 1st 2 years but due to inability of the merged organization to

cope up with the increase in the volume of sales it increases and then it falls

dramatically. Depreciation can be estimated keeping in mind the anticipated capex in

each year (which is 5% of the sales) and average annual depreciation rate. As stated

earlier depreciation will be calculated by diminishing balance method at 11%. Thus

depreciation from 2006 to 2009 is

DEP06 = 0.11 (372+CAPEX06)

= 0.11(372+0.05*1932)















The 2nd step is to estimate the cost of capital. Since we are determining

MRL’s value, the discount rate should be MRL’s average cost of capital. For the year

2005, the outstanding debt of the company is 4 lacks and interest paid @ 8.75%/ annum

is Rs 35 thousand. We assume higher marginal rate of interest, say 15% on the after tax

basis. The cost of debt would be 0.15(1-0.35) = 0.0975= 9.75%, where 35% is the tax

rate including VAT and Service Tax of 12.5% applicable from 31.04.06. If we assume

that the company has been paying about 80% of its earning and retaining 20%, there fore

prevailing cost of equity

80% of 2.12
(Ke) = ______________ =0.0605 or 6.05%

The average return on equity (PAT/NETWORTH)= (53000/570000) = 9% Thus the

company’s growth rate = 0.20*0.09=0.018 or 1.8%

Therefore MRL’s future Ke = 6.05+1.8 = 7.85%


Amount (RS in 000) Weight Cost W

Eighted cost

Equity 570 0.587 0.0785 0.046

Debt 400 0.413 0.0975 0.041

970 1.000 0.087

9% (approx)

Increase in N.W.C:

Present W.C = 753000-178000 = 575000

Percentage of W.C to sales = 575000/1823000 = 32%

Year 2005 2006 2007 2008 2009 2010

(Rs. In thousand)

W.C 575 618 655 701 757 818

In N.W.C 43 37 46 56 61

Mahanagar Steel Utensils

Estimation of Cash Flows for next five years

Particulars 2005 2006 2007 2008 2009 2010

Net Sales 1823 1932 2048 2191 2366 2555
COGS 1323 1275 1351 1424 1514 1635
Selling & Admin Exp 302 302 302 328 355 332
Depreciation 85 52 57 63 69 75
Total Exp 1710 1629 1710 1815 1938 2042
PBT 113 303 338 376 428 513
Tax @ 35% 106 118 132 150 180
PAT 197 220 508 278 333
Add Depreciation 52 57 63 69 75
Funds From
Operation 249 277 571 347 408
Less Increase in N.W.C
( 32% of net sales) 43 37 46 56 61
Cash from operation 206 240 525 291 347
Less Capex 97 102 110 118 128
Net Cash flow to M.S.L 109 138 415 173 219
P.V.F @ 9% 0.92 0.84 0.77 0.71 0.65
Present Value 100 116 320 122 142

Total Value of MRL= 100 +116+ 320+122+142= Rs 8, 00,000

Present value of M.R.L is Rs. 8, 00,000.00

Value of M.R.L’s shares Rs.
M.R.L’s value 8, 00,000.00
Less debt 4, 00,000.00
Therefore value of MRL’s shares 4, 00,000.00

Value per share = Rs. (4, 00,000.00/25000) = Rs.16

The maximum price per share M.F.L is prepared to pay for M.R.L’s share is Rs.16,

which is below the current market price Rs.28. But MFL’s market price per share is Rs

75 so there is a possibility that market value of MRL will also increase.

Now the question arises, how should M.S.L finance acquisition of M.S.U.L?

It can be done in two ways either in cash offer or exchange of shares.

Cash offer: a cash offer is a straightforward means of financing a merger. It does not

cause any dilatation in E.P.S and the ownership of the existing shareholders of the

acquiring company MSL will have to pay Rs.4, 00,000.00 for acquiring M.S.U.L.

Share exchange: A share exchange offers will result into the sharing of ownership of the

acquiring company M.F.L between its existing shareholders (Existing shareholders of

M.R.L’s). The earnings and benefits would also be shared between these two groups of

shareholders. The precise extent of net benefits that accrue to each group depends on

exchange ratio. Like in case of Reliance de-merger owner of 40shares, got 40 Shares of

Reliance Energy Ventures Ltd and the existing share holders did not have to


To pay Rs.4, 00,000 as its current market price per shares Rs.75, the company must

exchange 5333 shares and hence post merger, M.F.L would have 1,62,830(1,57,497 +

5333)shares. In the combined firm, M.R.L’s shareholders would hold 3.3% of shares.

M.S.L would be offering 5333 shares for 25,000 out standing shares of M.R.L, which

means 0.21 shares of M.F.L for one share of M.R.L. The book value of M.F L’s and

MRL’s share in 2005 is respectively Rs.27.55 and Rs.30. So from the book value point of

view, M.F.L could offer 0.92 (27.55/30) shares for each outstanding share of M.R.L

without diluting present book value so M.F.L wont have a problem if they offer 0.21 of

its shares to M.R.L.

Impact on E.P.S: Let’s now find out if E.P.S be diluted if it exchanged 5333 shares to

M.S.U.L? As assumed earlier we take the earnings of both the firms for the year 2005 for

computing E.P.S after merger.

Mittal Foods Ltd: - Impact of mergers on E.P.S

Rs (in thousand)

M.F.L’s PAT before merger (P.A.Ta) 408

M.R.L’s PAT if merged with M.S.L (Pat) 53

PAT of the combined firms offer merger

(PATa+PATb= P.A.Tab) 461

M.F.L’s E.P.S before merger (E.P.Sa) Rs.2.59

Maximum no of M.F.L’s shares maintaining E.P.S of Rs.2.59

That is (4, 61,000/2.59) = 1, 77,992

M.F.L’s outstanding shares before merger = 1, 57,497

Maximum number of shares to be exchanged without diluting E.P.S

= (1, 77,992-1, 57,497)

= 20,495

Therefore M.F.L could exchange (20,495/25,000) = 0.81 of its shares for one share of

M.R.L with out diluting its E.P.S after merger. Since, it is exchanging 0.21 shares. Its

E.P.S after merger would be as shown below: -

P.A.Tab = 4, 61,000

Total no of shares after merger = 1, 62,830

Therefore E.P.Sab = (4, 61,000/1, 62,830)

= Rs.2.83
Merger of M.F.L with M.R.L: - Impact on P.A.T


(Before merger) (After merger)

PAT (Rs in 000) 408 53 461

No. Of Shares 1, 57,497 25,000 1, 62,830
EPS (Rs) 2.59 2.12 2.83
Mkt value 75 28.10 75
Total Mkt
(Rs in lack) 118.12 4 122.12
1, 57,497* Rs.75 = 1, 18, 12,275+4, 00,000
= (1, 22, 12,275/1, 62,830)
= Rs.75

Impact on P/E ratio: The P/E ratio of combined firm would decline from MFL P/E ratio
P/E ratio of MFL = (75/2.59)
= 28.9
And combined firm would be = (75/2.83) = 26.5
But, M.R.L will have an increase in P/E ratio
As its P/E ratio = (28.1/2.12) = 13.25


Synergy is the magical force that allows for enhanced cost efficiencies of the new

business, which can take in the form of revenue enhancement and cost savings.

The form of synergy is enlisted below:

Staff reductions – To some extent merger reduces labor.

Economies of scale - Whether it is purchasing a small stationery or acquiring a

brand, Economies of scale can be achieved any way. Economies of scale help to

reduce cost of production.

Acquiring new technology – Synergies might occur by acquiring new technology.

Improved market reaches and market share- Often Companies to penetrate in

newer areas acquire a local company. And synergy can be achieved by the benefits

of the marketing and distribution of local company.

There ought to be economies of scale in the combined firm, but in many cases,

one and one add does not equal to two. Not necessarily every merger will result in

synergy. First of all there has to be a cultural fit between the two merging

organization and then only synergy can be achieved. But to have a synergy in long

run what requires is that the product or service delivered by the organization might

fit the organization product portfolio. Agrees, Samarjit Singh, MD of Candid

Marketing, “See acquisition has to be strategically fit both in terms of brand and

culture. HLL’s acquisition of Modern foods fitted the brand but there was no

cultural fit between the two organizations.” According to 4Ps- Business and

Marketing’s article, ‘Not Just anybody, please…’ unable to sustain losses HLL is

putting up Modern Food for sale.

Now the million dollar question arises how to value synergy? Synergy tantamount

to Net Economic Value (NEV) which arises from the extra value generated by the

combined firm.

If we consider the example of the two firms mentioned in our earlier chapter,

then :

Lets’ say Value of the combined firm is represented by V12,

Value of MFL = V1

Value of MRL = V2

EV= V12 – ( V1 + V2)

Let’s assume acquiring price is paid in cash

Cost of merger= Cash paid - V2

NEV= EV – Cost of merger

Evaluation Strategies in M&A

This discussion is based on the primary data collected after meeting with Mr.

Anand Vermani, Associate Vice President of KPMG India Private Ltd. K.P.M.G is

a Switzerland based conglomerate, which mainly acts as financial consultant and

evaluates the financial benefits of mergers.

Q) What should be the core issue before finalizing a merger deal?

Ans) Look there is no such hard and first rule that should be given core

importance in a M&A deal. But I feel where Indian corporate misses out big

time is avoiding the taxation part. The preliminary and one of the main things,

which should be taken into account while evaluating the merger deal, is

taxation. Sometimes, if the taxation deals, especially when Indian companies

go for global acquisitions, the taxation norms should be given the core

importance. If filing the tax procedure or the host country has a step motherly

attitude then there is no point to continue with the merger.

Q) How does one evaluate the long run benefits provided by the merger deal?

Ans) We mainly follow 4 methodologies to determine whether to merge or what

benefit the project is going to provide in the long run. These are:

1. D.C.F –discounted cash flow

2. CoCos – comparatively company analysis

3. COTRANS – company transaction

4. NAV –net asset value

D.C.F –in M & A, the acquiring firm is buying business of the target firm, rather

than a specific asset. The acquiring firm should appraise merger as a capital

budgeting decision, following the D.C.F approach. It should try to evaluate the

estimated sales and any other source of revenue generation for at least 5 years if

the business is not too much capital intensive.

The main drawback of this method is that, it is very intrinsic and although it

focuses in the future value but doesn’t take into Consideration the market values.

In simple words, D.C.F emphasizes more on time value of money. To counter this

drawback what I suggest is resorting to DCF with probability distribution can give

accurate result. There are three or four important variables whose probability

distribution will change the entire valuation of merger so to be on safe side, it’s

better to use W.A.C.C of the acquiring company as the P.V F.

CoCos – here the companies on which comparison is done, should ideally be a

listed company, the comparison starts from revenue generated by the companies

which are planning to merge, then we determine E.B.D.I.T(Earnings before debt,

interest and taxes) because it helps in eliminating error as it differentiates between

cash entry and book entry (as for example depreciation).

After that, it takes into consideration the enterprise value or E.V, which are

summation of market capital and the book value of debt or in other words

summation of fixed assets and working capital.

Once the E.V, the EBDIT are determined, the next step is to calculate the

multiples (the ratios). Three broad multiples used for valuation are:





To select the companies for comparison the companies are short listed

according to which are close representative of each other in terms of size, market

capitalization and product portfolio. The identical representative is chosen the ones

which has similar experience, subjective analysis, and risk of business the

companies are dealing with e.t.c. One of the main drawbacks of CoCos is that it

doesn’t takes into account the transaction premium so the next method of

valuation is used.

Co Transaction – or company transaction emphasizes on the amount involved

for acquiring the company. This is termed as cost of merger. The control premium

from 49% to 51% will create a strong variation in the cost of merger as for

example Maruti Udyog Ltd, when the company sold its 57% ownership to Suzuki

in 2003,

Suzuki has to pay a huge amount as compared to the amount being paid if it had

acquired less than 50%.

Q)In Indian Inc what are the main areas which have witness maximum M&A

activity and is expected to witness more in the coming future?

Ans) Well it’s the FMCG sector and even the IT and BPO sector. In our country,

during the last decade due to globalization and liberalization lots of I.T and B.P.O

sectors are emerging. They resort to mergers to derive the benefit off shore

sourcing. This is mainly the reason lots of overseas acquisition is taking place

recently, as for example IOC with French farms and outbound investments are

taking place. Apart from this, another strong motivating factor for M&A is risk

diversification and in this regard the banking sector has witnessed lots of

horizontal mergers like GTB with OBC.

Q) What should a manager focus first before finalizing a M&A deal?

Ans) The one and only motive of the manager should be is to see that shareholders

interest is not hampered at any cost, rather a M&A deal should be concerned only

about maximizing shareholders wealth. I mean this from a managers perspective.

Q) What factors motivates companies to go for M&A?

Ans) Well, the motivational factor depends on the size of the company and where

they want to grow. Like whether they want to grow in their own line or merge

with other related sector like in case of vertical mergers. As for example, FMCG

companies resort to mergers to penetrate in newer areas. Like in 2004 Wipro

entered in the food segment of FMCG after acquiring the Glucovita brand from


Even when companies want to go abroad they resort to overseas acquisitions. Like

I.O.C with Maurel and Prom, Essar group in Bangladesh power and steel.

Tata Tea ties the knot with Tetley

This case is analyzed, to determine how an acquisition can help to achieve the

synergy. It has been more than a decade of Tata Tea-Tetley Group engagement

and the matrimony is now brewing sizzling hot opportunities for both of them. The

second largest seller of packet tea in India, Tata tea was incorporated in 1983 and

today has 54 estates scattered in Assam, West Bengal, Tamil Nadu and Kerala.

Tata Tea’s UK based collaborator Tetley Group is the innovator of the concept of

‘tea bag’ and by value and volume among the top 20 grocery brands in UK.

Way back, in 1993 tea exports was reduced and the resultant surplus had no way

other than the domestic market, which was studded with regional brands and the

premium segment was dominated by Rs 2000 million Taj Mahal brand, from the

stable of Hindustan Lever. Such being the milieu, Tata Tea formed a joint venture

with Tetley Group and Tetley division was transferred to the venture in 1994.

The year 2000 witnessed the largest ever-overseas acquisition by an Indian

company, as Tata Tea acquired the Tetley group for 271million pounds. This is a

watershed event for both the companies as this deal reflects the coming together of

a company with very strong on tea production side and the other one very strong

on the marketing side.

The next logical step was the merger of the two entities and last year Tata Tea Ltd

merged the wholly owned subsidiary Tata Tetley Limited with itself. This was part

of the strategy of strengthening the Tata Tea portfolio.

The Tetley Group has been a ‘cash cow’ for Tata Tea and this is palpable in the

recent acquisition of Jemca by Tata Tea, which is being funded by none other than

buddy Tetley group.


Corporate M&A takes place to enhance synergy by maximizing shareholders

wealth. However, often it results in a dent financial goal. After going through the

case study and recent acquisitions like Tata Tea, the recommendations are stated

below. But the case was developed based on information derived from KPMG so

financial evaluation was possible only for that case. For evaluating other

strategies of M&A, it was resorted to recent M&A.

Evaluating financial data

The economic gains from the merger of M.F.L would come from the higher sales

growth and improved profitability due to the reduction in the cost of good sold.

From M.F.L’s point of view, it should merge with M.R.L rather making it a

subsidiary because cost reduction and united command is not there in a subsidiary

and holding relation. Moreover, merging will enable an increase in P.A.T by Rs1,

97,000 for the year ended 31st December 2006 from Rs 57,000 of 31st December

2005 and E.P.S of Rs.0.24 after merger. The risk can be diversified too.

From M.R.L’s point of view, the merger will help them to get processed material

at cheaper cost of production. The E.P.S of the company will increase by 33.5%.

The market value of MRL will increase and the supplies of raw material or

intermediary product will be safe guarded.

Evaluating the other strategies

For future growth, business organizations have always resorted to M&A. This is

specially applicable in case of textile and FMCG industry. But what becomes

important is to see whether the acquisition fits both the companies. To evaluate

such fit one has to do the SWOT analysis not only from financial point, but also

from other keystones like cultural, brand perception, domain of growth etc.

Acquisitions have to be strategically fitting, in terms of both brand and culture. If

there are cultural mismatch between two organizations, then no acquisitions can

success and its bound to have a failure. Exactly what happened when HLL

acquired Modern Foods. And at the same time Coca Cola, being a MNC from the

country of Uncle Sam took atleast five years to match with Indian business

culture and then they acquired Thums Up.

Another core issue that has to be addressed is to find out an adequate strategy for

paying the acquired firm. So that by paying less the acquired firm doesn’t suffer

and at the same the by paying more the acquirer doesn’t have to bear the burden of

over debt which might result in leverage problem in the future. This is palpable in

case of Aviva acquiring AmerUS. According to the concept of European

Embedded Value or EEV, Aviva is paying 1.9 times EEV for AmerUS, which is

much more as compared to 1.6 EEV paid by France’s AXA when it acquired

Winterthur. By doing so Aviva is taking a risk as its financial condition, which

only consists of $2.52 billion cash as per its balance sheet on 31st December, 2005,

is not strong enough.

Then what becomes important is to take a proper capital budgeting decision. This

has to be done by very carefully estimating the projected free cash flows. Then

multiplying or extrapolating their terminal value. For doing so one has to have a

through knowledge to forecast the market the merged entity is entering into. After

the terminal value of free cash flows are known, then Cost of Capital in terms of

financing the merger deal has to be find out. As mentioned earlier and one of the

objective of this study is to determine the optimum strategy for paying the

acquired firm. Once the cost of capital is determined then it has to be converted

into present value by multiplying it with the discounted factor. As evinced from

the case study its always advice able that the discounting factor should be the

Weighted Average Cost of Capital of the acquired firm.

In Indian Inc M&A deal activity has grown to unprecedented level and will grow

even further in future in Indian corporate world. Companies will merge with each

other in this trend but generally only half of these mergers have succeeded in

adding value. To add value the aforementioned recommendations should duly be

followed. That is the strategies should be evaluated in such a way that it benefits

both the firm. The brand fitness, cultural fitness as well as the mode of payment

should be cross checked several times. At the same time what becomes important

is to evaluate the M&A deal from Capital Budgeting point of view. The amount to

be paid to the target company for the M & A must be evaluated by using well

expected valuation methods.

Once the M&A deal is approved, a team has to be formed with representative

comprising from both the corporation which will be headed by the chief

information officer (CIO) to evaluate, execute and implement the entire process

The synergies from the M& A need to be carefully estimated in different

scenarios-best, normal and worst case.


With more than half of the M&A deal failing to deliver their expected results and

as per Business Standard’s article on 14th August, 06 only 2 out of every 10 M&As

can be coined as successful. So a comparison of evaluation strategies in M&A is

central to merger and acquisition decision making. This will enable whether the

two companies fit together in a practical or financial sense and not on whether

they could truly combine to make a whole that was greater than the sum of its


But before doing such competition, as learnt from KPMG what becomes important

is to identify the sources of the firm’s current and future competitive strengths. In

other words to determine, how sustainable and unique are the identified strengths?

This will enable to stop the focus on differences in the companies, which

employees immediately start doing once the deal is implemented. Based on these

identified sustainable strengths of both the organizations, the synergy has to be

estimated and by doing so corporations cab avoid the ‘great expectation’ of the

overstated synergy.

Then the valuation of the target company is to be done and then other strategies

are to be evaluated. And as assumed while developing the case study the

organization are operating below the optimum level, holds in case of real

corporate world. Due to financial or any other constraint, no business organization

irrespective of its size operates to an optimum level. While evaluating the

strategies this has to be considered. Because of this drawback of not performing in

optimum level organizations comes together to overcome each other’s bottlenecks.

This is synergy takes birth and such synergy takes a time to be achieved. This time

limit depends on the parameters of the nature of business, its size and several other


Once the valuation of the target firm is done, then what becomes important is to

find out the modem of payment. This can be done in two ways, one is by cash

offer and the second one is by exchanging shares or allotting shares to the

shareholders of the acquired company. When it comes allotment of shares, it has

to be remembered that one has to keep in mind the impact on EPS, after all the

ultimate objective of a manager is to maximize shareholders wealth. Then the

taxation issue also becomes important, which according to Mr. Anand Vermani is

one of the major reasons for failure of M&A deals to add value.

In the over all Indian Inc scenario - the textile, FMCG, IT & BPO sector in India

have witnessed maximum business restructuring for the year 2006.


Most of the M&A deals in Indian Inc has failed to add value because of not

conducting a proper comparative evaluation of the various strategies involved both

in pre-merger scenario and in post merger scenario. Where Indian companies

misses out big time is in checking too quickly and ignoring the SWOT analysis of

M&A DEAL. Not only that, most of the managers focusing too narrowly on the

impact of mergers in the day-to-day operation of the business. With definite

conviction, this tantamount to a recipe for disaster.

But successful acquirers take a different approach. Like Dabur when it acquired

Balsara, they tested all the disciplined prioritization and fundamental strategies

and principles. Despite being a Finance thesis, strategies that are to be evaluated

cannot ignore another crucial issue- culture. Even in global corporate milieu too

many merger-bound CEOs do not pay heed to this key factor, which is so much

potential that it can make or break an M&A deal. Like HLL’s acquisition of

Modern Food, did not match with the culture of both the organization and now

HLL has plans to sale Modern food. Cultural due diligence can is a systematic

device for making fanatic cost-effective assessments of the cultures of both

acquirer firm and the target firm.

Combining two business organization, is a humungous legal and operational

challenge and this is where evaluating all the strategies in M&A becomes

important. The best practice of this exercise can reduce the risk involve in M&A

largely. Now the million-dollar question arises, how to commence the exercise of

comparative evaluation strategies of M&A? It will onset from taking a complete

look at all the relevant sources of value and risk by determining the value of the

target firm. This increases the chances of a successful acquisition.

Conventionally, M&A integrations have been undertaken, as a measure to save

costs and to eliminate redundancy. On this keystone, today’s acquirers start over

estimating the synergies. So it is very important to evaluate synergy and then need

to realize (as shown in the case study), it takes some time to achieve the desired

synergy. So companies should not hurry up to achieve the equation of ‘One plus

One makes three’. And the key principle behind buying a company should be to

create shareholder value and not merely focusing on operational synergy. The

market value of the two companies together should be more valuable than two

separate companies. The case study that has been discussed earlier evinces how

the marketing value of the combined firm has to be determined.

Behemoths will keep on buying smaller companies to create a more competitive

company. And this is palpable in the FMCG world which has witnessed the

maximum M&A deals of Indian Inc. Not only in FMCG in other domain also

companies will come together hoping to gain a greater market share or to achieve

greater efficiency. And this might result in monopoly which can affect the overall


Often a booming stock market encourages mergers, which can create trouble for

the country’s economy. Deals done with highly rated stock is easy and cheap, but

there is no proper strategic thinking behind it.

In overall after developing the entire thesis, the implications are the M&A deal

must deliver the long-term growth and sustained profitability. And emphasis

should be on how the two companies fit together in a practical or financial sense,

rather than on whether they could truly combine to make a whole that was greater

than the sum of its parts.


 Article by Professor A.Sandeep.

 Articles by Dr.Malayendu Shah, HOD – Finance, Calcutta


 Articles by Prof. Aswath Damodaran (Guru of Valuation).

 Business Standard (Making marriages work, 14th August, 2006)

 Business and Economy ( 16th June, 28th July, 2006)

 4Ps- Business and Marketing (4th August-17th August, 2006)

 ICFAI finance Reader Feb 2005.

 “Financial Management” by Prof. I.M Pandey.

 “Merchant Banking” by Prof. M.Y Khan.

 Public Releases by MTNL.

 URLs:

 www.stern.nyu.edu

 M & As in Banking Industry: A tool for Competitiveness

by S.P.R. Vittal




‘Beat us or join us’ is the recent slogan of today’s corporate world which is

fiercely competitive. This competition paradoxically, gives rise to threats, cross

fire and trade rivalry, which paves the way for sickness and closure of corporate

enterprise. So many corporate organizations are resorting to business restructuring

in the form of mergers and acquisition.

However, companies before going for mergers or takeover do exercise an

evaluative strategy for the project. These evaluative strategies have to be very

friendly and not hostile because unless it is a win-win situation for both partners

no mergers or acquisition can take place.

Mergers and takeovers are motivated and negotiated based on these evaluation

strategies so one cannot ignore the importance of evaluation strategies in Mergers

and Acquisition. Unless it is a hostile takeover, the acquirer company should

follow a proper evaluation strategy for valuing the target company.

The Government also has a policy to safeguard the interest of shareholders and

investors before going for a merger. So the evaluation method used in Mergers and

Acquisitions it has to keep in mind that it should be a win-win situation for both

the parties on one hand and at the other hand it should be not against the interest of

shareholders and investors.

This thesis is an attempt to find out the evaluative strategies used by companies in

mergers and acquisition and comparing them based on their ability to fulfill the

parameters mentioned above.

IIPM faculty member Professor Ramakrishna would guide and assist me in the

thesis. The research methodology would commence from collecting data, both

from primary and secondary sources followed by an in-depth analysis of collected



Thesis Response Sheet- 1

• Name- Nitin Sharma

• ID Number- D04002940

• Title of the Study -Comparative Evaluation Strategies in Mergers and


• Date when the Guide was consulted – 29. 06.06

• The outcome of the discussion

The format, data collection method, sources for collecting primary data

was determined. We also had a discussion of the problems that may occur

while evaluating the strategies in M&A

• The Progress of the Thesis

How to overcome the aforementioned problem was determined and

overall the objective of my research was palpably established.

Thesis Response Sheet- 2

• Name- Nitin Sharma

• ID Number- D04002940

• Title of the Study -Comparative Evaluation Strategies in Mergers and


• Date when the Guide was consulted – 02.08.06

• The outcome of the discussion

The main problem and core areas to be focused like valuation of the firm

and synergy was determined.

Thesis Response Sheet- 3

• Name- Nitin Sharma

• ID Number- D04002940

• Title of the Study -Comparative Evaluation Strategies in Mergers and


• Date when the Guide was consulted –27.11.06

• The outcome of the discussion

Some changes are made in the case study and the recommendation part was


• The Progress of the Thesis

The problem part was completed.

Thesis Response Sheet- 4

• Name- Nitin Sharma

• ID Number- D04002940

• Title of the Study -Comparative Evaluation Strategies in Mergers and


• Date when the Guide was consulted –25.12.06

• The outcome of the discussion

The recommendation part was changed entirely and my guide did some

value addition to it.

• The Progress of the Thesis

The recommendation part was completed.

Thesis Response Sheet- 5

• Name- Nitin Sharma

• ID Number- D04002940

• Title of the Study -Comparative Evaluation Strategies in Mergers and


• Date when the Guide was consulted –27.01.07

• The Progress of the Thesis

End of the thesis


1) What should be the core issue before finalizing a merger deal?

2) How does one evaluate the long run benefits provided by the merger deal?

3) In Indian Inc what are the main areas which have witness maximum

M&A activity and is expected to witness more in the coming future?

4) What should a manager focus first before finalizing an M&A deal?

5) What factors motivates companies to go for M&A?

6) How are the strategies for M&A to be evaluated?