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MERGERS AND ACQUISITIONS

TITLE OF THE PAPER:


MERGERS AND ACQUISITIONS
AREA OF PRESENTATION:

FINANCIAL MANAGEMENT

NAME OF THE INSTITUTE:


A.J.INSTITUTE OF MANAGEMENT (AJIM)
{TRASFORMATIONAL INSTITUTE FOR MANAGERIAL EXCELLENCE (TIME)}

KOTTARA-CHOWKI BYPASS ROAD, ASKOKNAGAR POST MANGALORE-575006

EMAIL ID:
Bharathpavenje@gmail.com
AUTHORS NAME:
BHARATH.P
PHONE NUMBER:
+919739459820

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ABSTRACT
Corporate mergers and acquisitions (M&As) have become popular across the globe during
the last two decades thanks to globalization, liberalization, technological developments and
intensely competitive business environment. The synergistic gains from M&As may result
from more efficient management, economies of scale, more profitable use of assets,
exploitation of market power, and the use of complementary resources. Interestingly, the
results of many empirical studies show that M&As fail to create value for the shareholders of
acquirers. In this backdrop, the paper discusses the causes for the failure of M&As by
drawing the results of the following areas.

This paper is an attempt to evaluate the impact of Mergers on the performance of the
companies. Theoretically it is assumed that Mergers improves the performance of the
company due to increased market power, Synergy impact and various other qualitative and
quantitative factors. Although the various studies done in the past showed totally opposite
results. Four parameters; Total performance improvement, Economies of scale, Operating
Synergy and Financial Synergy. My paper shows that Indian companies are no different than
the companies in other part of the world and mergers were failed to contribute positively in
the performance improvement

Keywords: Mergers, Acquisitions

TABLE OF CONTENTS
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CHAPTER I:
INTRODUCTION…………………………………………………………………………..4-5

1.1 WHAT IS MERGER?.....................................................................................5

1.2 WHAT IS ACQUISITION?............................................................................6

1.3 WHAT IS TAKEOVER…………………......................................................7

CHAPTER II: REVIEW OF


LITERATURE………………………………………………….8

CHAPTER III:

REASONS OF MERGERS TO THE COMPANY……………………………………...10-11

CHAPTER IV: M&A ACTIVITIES IN INDIA………………………………………….12-13

CHAPTER V: CASE STUDY……………………………………………………………14-18

CHAPTER VI: CAUSES FOR FAILURE OF M&A……………………………………20-23

CHAPTER VII: CONCLUSION……………………………………………………………24

BIBLIOGRAPHY……………………………………………………………………………25

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CHAPTER I:
INTRODUCTION
M&A are very important tools of corporate growth. A firm can achieve growth in several
ways. It can grow internally or externally Internal Growth can be achieved if a firm expands
its existing activities by up scaling capacities or establishing new firm with fresh investments
in existing product markets. It can grow internally by setting its own units in to new market
or new product. But if a firm wants to grow internally it can face certain problems like the
size of the existing market may be limited or the existing product may not have growth
potential in future or there may be government restriction on capacity enhancement. Also
firm may not have specialized knowledge to enter in to new product/ market and above all it
takes a longer period to establish own units and yield positive return. One alternative way to
achieve growth is resort to external arrangements like Mergers and Acquisitions, Takeover or
Joint Ventures. External alternatives of corporate growth have certain advantages. In case of
diversified mergers firm can use resources and infrastructure that are already there in place.
While in case of congeneric mergers it can avoid duplication of various activities and thus
can achieve operating and financial efficiency

M&A has become a daily transaction now-a-days. Mergers and acquisitions are an important
area of capital market activity in restructuring a corporation and had lately become one of the
favored routes for growth and consolidation. The reasons to merge, amalgamate and acquire
are varied, ranging from acquiring market share to restructuring the corporation to meet
global competition. One of the largest and most difficult parts of a business merger is the
successful integration of the enterprise networks of the merger partners. The main objective
of each firm is to gain profits. M&A has a great scope in sectors like steel, aluminum,
cement, auto, banking & finance, computer software, pharmaceuticals, consumer durable
food products, textiles etc. It is an indispensable strategic tool for expanding product
portfolio’s, entering into new market, acquiring new technologies and building new
generation organization with power & resources to compete on global basis. With the
increasing number of Indian companies opting for mergers and acquisitions, India is now one
of the leading nations in the world in terms of mergers and acquisitions. Till few years ago,

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rarely did Indian companies bid for American-European entities. Today, because of the
buoyant Indian economy, supportive government policies and dynamic leadership of Indian
organizations, the world has witnessed a new trend in acquisitions. Indian companies are now
aggressively looking at North American and European markets to spread their wings and
become global players. Almost 85 per cent of Indian firms are using Mergers and
Acquisitions as a core growth strategy.

Merger:

Merger is defined as combination of two or more companies into a single company


where one survives and the others lose their corporate existence. The survivor acquires all the
assets as well as liabilities of the merged company or companies. Generally, the surviving
company is the buyer, which retains its identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to
Transferee Company in consideration of payment in the form of:

• Equity shares in the transferee company,


• Debentures in the transferee company,
• Cash, or
• A mix of the above modes.

Classifications Mergers and Acquisitions


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• Horizontal

o A merger in which two firms in the same industry combine.

o Often in an attempt to achieve economies of scale and/or scope.

• Vertical

o A merger in which one firm acquires a supplier or another firm that is closer
to its existing customers.

o Often in an attempt to control supply or distribution channels.

• Conglomerate

o A merger in which two firms in unrelated businesses combine.

o Purpose is often to ‘diversify’ the company by combining uncorrelated assets


and income streams

• Cross-border (International) M&As

o A merger or acquisition involving a Canadian and a foreign firm an either the


acquiring or target company.

Acquisition:

Acquisition in general sense is acquiring the ownership in the property. In the context
of business combinations, an acquisition is the purchase by one company of a controlling
interest in the share capital of another existing company.

Methods of Acquisition:

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An acquisition may be affected by

(a) agreement with the persons holding majority interest in the company management
like members of the board or major shareholders commanding majority of voting
power;
(b) purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d) purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz. means
of cash, issuance of loan capital, or insurance of share capital.

Takeover:

A ‘takeover’ is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. the process of
takeover, transaction involved in takeover, determination of share exchange or cash price and
the fulfillment of goals of combination all are different in takeovers than in mergers. For
example, process of takeover is unilateral and the offeror company decides about the
maximum price. Time taken in completion of transaction is less in takeover than in mergers,
top management of the offered company being more co-operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying a


movement in the company.

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What will it take to succeed?

Funds are an obvious requirement for would-be buyers. Raising them may not be a
problem for multinationals able to tap resources at home, but for local companies, finance is
likely to be the single biggest obstacle to an acquisition. Financial institution in some Asian
markets is banned from leading for takeovers, and debt markets are small and illiquid,
deterring investors who fear that they might not be able to sell their holdings at a later date.
The credit squeezes and the depressed state of many Asian equity markets have only made an
already difficult situation worse. Funds apart, a successful Mergers & Acquisition growth
strategy must be supported by three capabilities: deep local networks, the abilities to manage
uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in without
them are likely to be stumble.

CHAPTER II: REVIEW OF LITERATURE

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Sirower (1997) stated that, “despite a decade of research, empirically based academic
literature can offer managers no clear understanding of how to maximize the probability of
success in acquisition programs”

Writing in Hogarty (1970) reviews 50 years of research and finds no major empirical
studies that conclude mergers are more profitable than alternative investments. After 35
years, although we have a better understanding of the causes and consequences of mergers
and acquisitions (M&A) activities, it is not clear that mergers create positive wealth effects
for the acquiring companies. During this period, the literature grew to include studies that
range from straightforward event studies looking at abnormal returns before and after
mergers to more complex theoretical models involving signaling mechanisms by acquirers
through bidding (Fishman, 1988). The evidence indicates that target companies earn
significant positive abnormal returns but that the experience of acquiring firms is mixed
(Jensen and Ruback, 1983; Huang and Walkling, 1987).

CHAPTER III:

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Economics/Reasons of Mergers to the company

A number of mergers, take-overs and consolidation have taken place in our country in the
recent times. One of the major reasons cited, for such mergers, is the liberalization of

the Indian economy. Liberalization is forcing companies to enter new businesses, exit from
others, and consolidate in some simultaneously. The following are the other important
reasons for mergers or amalgamations.

Economies of Scale: An amalgamated company will have more resources at its command
than the individual companies. This will help in increasing the scale of operations and the
economies of large scale will be availed.

These economies will occur because of more intensive utilization of production facilities, etc.
these economies will be available in horizontal mergers (companies dealing in same line of
products) where scope of more intensive use of resources is greater. The economies will
occur only up-to a certain point of operations known as optimal point. It is a point where
average costs are minimum. When production increases from this point, the cost per unit will
go up.

Operating Economies: A number of operating economies will be available with the merger
of two or more companies. Duplicating facilities in accounting, purchasing and marketing.
Etc. will be management emerging from the amalgamation. The amalgamated companies will
be in a better position to operate than the amalgamating companies individually.

Growth and Diversification: As stated earlier, merger/amalgamation of two or more firms


has been used as a dominant business strategy to seek rapid growth and diversification. The
merger improves the competitive position of the merged firm as it can command an increased
market share. It also offers a special advantage because it enables the merged firm to leap
several stages in the process of expansion. In a saturated market, simultaneous expansion and
replacement through merger/takeover is more desirable than creating additional capacities
through expansion. A merger proposal has a very high growth appeal, and its desirability
should always be judged in the ultimate analysis in terms of its contribution to the market

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price of the shares of the merged firm. The merged firm can also seek reduction in the risk
levels through diversification of the business operations. The extent, to which risk is reduced,
however, depends on the correlation between the earning of the merging (combining) firms.
A negative correlation between the combining firms always brings greater reduction in the
risk whereas a positive correlation leads to less reduction in risk.

Utilization of Tax Shields: When a company with accumulated losses merges with a profit
making company it is able to utilize tax shields. A company having losses will not be able to
set off losses against future profits, because it is not a profit earning unit. On the other hand if
it merges with a concern earning profit then the accumulated losses of one unit will be set of
against the future profits of the other unit. In this way the merger will enable the concern to
avail tax benefits.

Increases in Value: The value of the merged company is greater than the sum of the
independent values of the merged companies. For example, if X Ltd. and Y Ltd. merge and
form Z ltd., the value of Z Ltd. Is expected to be greater than the sum of the independent
values of X Ltd. & Y Ltd.

Eliminations of Competition: The merger of two or more companies will eliminate


competition among them. The companies will be able to save their advertising expenses thus
enabling them to reduce their prices. The consumers will also benefit in the form of cheaper
or goods being made available to them.

Economic Necessity: Economic necessity may force the merger of some units. It their are
two sick units, government may force their merger to improve their financial position and
overall working.

CHAPTER IV:
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M&A Activities in India:


M&A Activities in India:
In 2007, there were a total of 676 M&A deals and 405 private equity deals, in 2007, the total
value of M&A and PE deals was USD 70 billion, Total M&A deal value was close to USD
51 billion, Private equity deals value increased to USD 19 billion
Growth Drivers:
• Globalization and increased competition
• Concentration of companies to achieve economies of scale
• Cash Reserves with corporate

Trends:
• Cross-border deals are growing faster than domestic deals
• Private Equity (PE) houses have funded projects as well as made a few acquisitions in India

Major M&A Deals Undertaken Abroad by India Inc.


 Tata steel buys Corus Plc : 12.1$ billion
 Hindalco acquired novelis: 6$ billion
 Tata buy jaguar and land rover: 2.3$ billion
 Essar steel buys Algoma Steel: 1.58$ billion
 Vodafone buys hutch: 11$ billion
 POSCO to invest in building steel manufacturing plants and facilities in India by 2016
 Goldman Sachs Plans investment in private equity, real estate, and private wealth
management

In year 2008..
• M&A deals in India in 2008 totaled worth USD 19.8 bn

• Less compared to last year which stood at 33.1 bn $.

• Decline of M&A activity was in line with the global activity.

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• Cross border M&A totaled 8.2 ban $ compared to 18.7 ban $.

Target Country Deal value


Acquirer Industry
Company targeted ($ ml)

Corus Group Steel


Tata Steel UK 12,000
plc

Hidalgo Novelist Canada 5,982 Steel

Daewoo
Videocon Electronics Korea 729 Electronics
Corp.

Dr. Reddy’s Pharmaceutica


Beta harm Germany 597
Labs l

Suzlon
Hansen Group Belgium 565 Energy
Energy

Kenya
HPCL Petroleum Kenya 500 Oil and Gas
Refinery Ltd.

Ranbaxy Pharmaceutica
Terapia SA Romania 324
Labs l

Tata Steel NatSteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada 239 Telecom

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CHAPTER V:
CASE STUDY

Report: Ranbaxy & Daiichi Sankyo Co. Ltd. Merger

The present study discusses the implications of the merger between Ranbaxy and Daiichi
Sankyo, from an intellectual property as well as a market point of view. This analysis is
particularly important at this point because of a variety of reasons including the growing
preference for generics, increasing dominance of emerging markets such as India, fast
approaching patent expiry etc. Also, given the fact that this involves between 2 players who
are among the largest among their respective markets, this deal is of great significance.

Background

Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy Laboratories Ltd.
from its promoters. Daiichi Sankyo expects to increase its stake in Ranbaxy through various
means such as preferential allotment, public offer and preferential issue of warrants to
acquire a majority in Ranbaxy, i.e. at least 50.1%. After the acquisition, Ranbaxy will operate
as Daiichi Sankyo’s subsidiary but will be managed independently under the leadership of its
current CEO & Managing Director Malvinder Singh.

The main benefit for Daiichi Sankyo from the merger is Ranbaxy’s low-cost manufacturing
infrastructure and supply chain strengths. Ranbaxy gains access to Daiichi Sankyo’s research
and development expertise to advance its branded drugs business. Daiichi Sankyo’s strength
in proprietary medicine complements Ranbaxy’s leadership in the generics segment and both
companies acquire a broader product base, therapeutic focus areas and well distributed risks.
Ranbaxy can also function as a low-cost manufacturing base for Daiichi Sankyo. Ranbaxy,

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for itself, gains smoother access to and a strong foothold in the Japanese drug market. The
immediate benefit for Ranbaxy is that the deal frees up its debt and imparts more flexibility
into its growth plans. Most importantly, Ranbaxy’s addition is said to elevate Daiichi
Sankyo’s position from #22 to #15 by market capitalization in the global pharmaceutical
market.

Synergies

The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their respective
presence in the developed and emerging markets. While Ranbaxy’s strengths in the 21
emerging generic drug markets can allow Daiichi Sankyo to tap the potential of the generics
business, Ranbaxy’s branded drug development initiatives for the developed markets will be
significantly boosted through the relationship. To a large extent, Daiichi Sankyo will be able
to reduce its reliance on only branded drugs and margin risks in mature markets and benefit
from Ranbaxy’s strengths in generics to introduce generic versions of patent expired drugs,
particularly in the Japanese market.

Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and have
profound strength in striking lucrative alliances with other pharmaceutical companies.
Despite these strengths, the companies have a set of pain points that can pose a hindrance to
the merger being successful or the desired synergies being realized.

With R&D perhaps playing the most important role in the success of these two players, it is
imperative to explore the intellectual property portfolio and the gaps that exist in greater
detail. Ranbaxy has a greater share of the entire set of patents filed by both companies in the
period 1998-2007. While Daiichi Sankyo’s patenting activity has been rather mixed,
Ranbaxy, on the other hand, has witnessed a steady uptrend in its patenting activity until
2005. In fact, during 2007, the company’s patenting activity plunged by almost 60% as
against 2006.

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Significant Differences in Patenting

Daiichi Sankyo had a more diverse technology spread compared to Ranbaxy. The top four
IPCs of Ranbaxy and Daiichi Sankyo accounted for almost 94% and 72% of the total number
of patent families analyzed, respectively.

An IPC gap analysis for the two players revealed that patent families of these companies
were spread across 43 different IPCsHormones and gastro-intestinal drugs are exclusive
therapeutic areas that Tea Pharmaceuticals has obtained approvals for compared to Ranbaxy
and Daiichi Sankyo in the same period. Barr Pharmaceuticals, on the other hand, held 54
ANDA approvals filed across 15 therapeutic segments. The unique segments of Barr
Pharmaceuticals include hormones, uro-genital drugs and bone disorder drugs.

Three New Drug Application (NDA) and Biologic License Application (BLA) approvals by
the US FDA were obtained by Ranbaxy as of 6 September 2008 for the period January 2003-
September 2008, while in the same period, Daiichi Sankyo obtained only two approvals.
Teva Pharmaceuticals obtained five NDA and BLA approvals while Barr Pharmaceuticals
did not obtain any approvals.

Post-acquisition Objectives

In light of the above analyses, Daiichi Sankyo’s focus is to develop new drugs to fill the gaps
and take advantage of Ranbaxy’s strong areas. To overcome its current challenges in cost
structure and supply chain, Daiichi Sankyo’s primary aim is to establish a management
framework that will expedite synergies. Having done that, the company seeks to reduce its
exposure to branded drugs in a way that it can cover the impact of margin pressures on the
business, especially in Japan. In a global pharmaceutical industry making a shift towards
generics and emerging market opportunities, Daiichi Sankyo’s acquisition of Ranbaxy
signals a move on the lines of its global counterparts Novartis and local competitors Astellas
Pharma, Eesei and Takeda Pharmaceutical. Post acquisition challenges include managing the
different working and business cultures of the two organizations, undertaking minimal and
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essential integration and retaining the management independence of Ranbaxy without


hampering synergies. Ranbaxy and Daiichi Sankyo will also need to consolidate their
intellectual capital and acquire an edge over their foreign counterparts.

Conclusion

In summary, Daiichi Sankyo’s move to acquire Ranbaxy will enable the company to gain the
best of both worlds without investing heavily into the generic business. The patent
perspective of the merger clearly indicates the intentions of both companies in filling the
respective void spaces of the other and emerge as a global leader in the pharmaceutical
industry. Furthermore, Daiichi Sankyo’s portfolio will be broadened to include steroids and
other technologies such as sieving methods, and a host of therapeutic segments such as anti-
asthmatics, anti-retrovirals, and impotency and anti-malarial drugs, to name a few. Above all,
Daiichi Sankyo will now have access to Ranbaxy's entire range of 153 therapeutic drugs
across 17 diverse therapeutic indications. Additional NDAs from the US FDA on anti-
histaminics and anti-diabetics is an added advantage.

Through the deal, Ranbaxy has become part of a Japanese corporate framework, which is
extremely reputed in the corporate world. As a generics player, Ranbaxy is very well placed
in both India and abroad although its share performance belies its true potential. Ranbaxy is
also an emerging branded drug manufacturer possessing tremendous clout in terms of
strategic alliances with some of the biggest players in the industry. Given Ranbaxy’s
intention to become the largest generics company in Japan, the acquisition provides the
company with a strong platform to consolidate its Japanese generics business. From one of
India's leading drug manufacturers, Ranbaxy can leverage the vast research and development
resources of Daiichi Sankyo to become a strong force to contend with in the global
pharmaceutical sector. A smooth entry into the Japanese market and access to widespread
technologies including, plant, horticulture, veterinary treatment and cosmetic products are
some things Ranbaxy can look forward as main benefits from the deal.

However, the recent ban on the US imports of more than 30 Ranbaxy drugs is a major pain
point for the company now. While Daiichi Sankyo has stressed that it going ahead with the

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deal, it raises some concerns over the impending benefits and has in fact already affected
Ranbaxy’s share performance in September 2008. Post the deal, Ranbaxy’s debt will be
significantly reduced and will impart more flexibility to pursue growth opportunities. The
acquisition corroborates the strong possibility for similar moves in the future, particularly
from Japanese players who have begun displaying confidence in Indian patent laws and
respect for intellectual property rights

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Valuation in a merger: Determination of share exchange ratio


1. Net Value Asset (NAV) Method

NAV is the sum total of value of asserts (fixed assets, current assets, investment on the
date of Balance sheet less all debts, borrowing and liabilities including both current and
likely contingent liability and preference share capital). Deductions will have to be made
for arrears of preference dividend, arrears of depreciation etc

The three steps necessary for valuing share are:

 Valuation of assets

 Ascertainment of liabilities

 Fixation of the value of different types of equity shares.

2. Yield Value Method

This method also called profit earning capacity method is based on the assessment of
future maintainable earnings of the business. While the past financial performance serves
as guide, it is the future maintainable profits that have to be considered. Earnings of the
company for the next two years are projected (by valuation experts) and simple or
weighted average of these profits is computed

3. Market Value Method

This method is applicable only in case where share of companies are listed on a
recognized stock exchange. The average of high or low values and closing prices over a
specified previous period is taken to be representative value per share.

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CHAPTER VI:
CAUSES FOR FAILURE OF MERGERS AND ACQUISITIONS

It is clear from the findings of the earlier scientific studies and reports of consultants that
M&As fail quite often and consequently, failed to create value or wealth for shareholders of
the acquirer company. A definite answer as to why mergers fail to generate value for
acquiring shareholders cannot be provided because mergers fail for a host of reasons. Some
of the important reasons for failures of mergers are discussed below:

Size Issues: A mismatch in the size between acquirer and target is one of the reasons found
for poor acquisition performance. Many acquisitions fail either because of ‘acquisition
indigestion’ through buying too big targets or by not giving the smaller acquisitions the time
and attention it required Moreover, when the size of the acquirer is very large when
compared to the target firm, the percentage gains to acquirer will be very low when compared
to the higher percentage gains to target firms. They find that the smaller acquirer companies
do more profitable acquisitions while larger acquirer companies do deals that cause their
shareholders to lose acquisitions.

Diversification: Very few firms have the ability to successfully manage the diversified
businesses. Lot of studies found that acquisitions into related industries consistently
outperform acquisitions into unrelated around 42% of the acquisitions that turned sour were
conglomerate acquisitions in which the acquirer and acquired companies lacked familiarity
with each other’s businesses. Unrelated diversification has been associated with lower
financial performance, lower capital productivity and a higher degree of variance in
performance for a variety of reasons including a lack of industry or geographic knowledge, a
lack of focus as well as perceived inability to gain meaningful synergies. Unrelated
acquisitions which may appear to be very promising may turn out to be a big disappointment
in reality. For example, Datta et al. find that the presence of multiple bidders and the
conglomerate acquisitions have a negative impact on the wealth of the bidding shareholders.

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Poor Organization Fit: Organizational fit is described as “the match between administrative
practices, cultural practices and personnel characteristics of the target and acquirer” states
that organisation structure with similar management problem, cultural system and structure
will facilitate the effectiveness of communication pattern and improve the company’s
capabilities to transfer knowledge and skills. Need for proper organization fit is stressed by
management. Mismatch of organization fit leads to failure of mergers.

Poor Strategic Fit: A Merger will yield the desired result only if there is strategic fit
between the merging companies. But once this is assured, the gains will outweigh the losses.
Mergers with strategic fit can improve profitability through reduction in overheads, effective
utilization of facilities, the ability to raise funds at a lower cost, and deployment of surplus
cash for expanding business with higher returns. But many a time lack of strategic fit
between two merging companies, especially lack of synergies results in merger failure.
Strategic fit can also include the business philosophies of the two entities (return on
investment versus market share), the time frame for achieving these goals (short-term versus
long term) and the way in which assets are utilized high capital investment or an asset
stripping mentality

Striving for Bigness: Size is an important element for success in business. Therefore, there is
a strong tendency among managers whose compensation is significantly influenced by size to
build big empires the concern with size may lead to acquisitions. Size maximizing firms may
engage in activities which have negative net present value Therefore when evaluating an
acquisition it is necessary to keep the attention focused on how it will create value for
shareholders and not on how it will increase the size of the company. finds that the results of
his study are consistent with the takeovers being motivated by maximization of management
utility reasons, rather than by the maximization of shareholders wealth.

Poor Cultural Fit: The relationship between cultural fit and acquisition implementation is
highly related. It is difficult to undergo a successful implementation without adequately
addressing the issues of cultural fit. Cultural fit between an acquirer and a target is often one
of the most neglected areas of analysis prior to the closing of a deal. However, cultural due

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diligence is every bit as important as careful financial analysis. Lack of cultural fit between
the merging firms will amount to misunderstanding, confusion and conflict.

Limited Focus: If merging companies have entirely different products, markets systems and
cultures, the merger is doomed to failure. Added to that as core competencies are weakened
and the focus gets blurred the effect on bourses can be dangerous. Purely financially
motivated mergers such as tax driven mergers on the advice of accountant can be hit by
adverse business consequences. Conglomerates that had built unfocused business portfolios
were forced to sell non-core business that could not withstand competitive pressures. The
Tatas for example, sold their soaps business to Hindustan Lever i.e. merger of Tata Oil Mill
Company with Hindustan Lever Limited (Banerjee [7]).

Failure to Examine the Financial Position: Examination of the financial position of the
target company is quite significant before the takeovers are concluded. Areas that require
thorough examination are stocks, saleability of finished products, value and quality of
receivables, details and location of fixed assets, unsecured loans, claims under litigation, and
loans from the promoters. A London Business School study in 1987 highlighted that an
important influence on the ultimate success of the acquisition is a thorough audit of the target
company before the takeover (Arnold [5]). When ITC took over the paper board making unit
of BILT near Coimbatore, it arranged for comprehensive audit of financial affairs of the unit.
Many a times the acquirer is mislead by window-dressed accounts of the target

Failure to Take Immediate Control: Control of the new unit should be taken immediately
after signing of the agreement. ITC did so when they took over the BILT unit even though
the consideration was to be paid in 5 yearly instalments. ABB puts new management in place
on day one and reporting systems in place by three weeks

Failure of Top Management to follow Up: After signing the M&A agreement, the top
management should be very active and should make things happen. Initial few months after
the takeover determine the speed with which the process of tackling the problems can be
achieved. It is very rarely that the bought out company is firing on all cylinders and making a

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lot of money. Top management follow-up is essential to go with a clear road map of actions
to be taken and set the pace for implementing once the control is assumed

Failure of Leadership Role: Some of the roles leadership should take seriously are
modeling, quantifying strategic benefits and building a case for M&A activity and
articulating and establishing high standard for value creation. Walking the talk also becomes
very important during M&As

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MERGERS AND ACQUISITIONS

CHAPTER VII: CONCLUSION


Mergers and acquisition has become very popular over the years especially during the last
two decades owing to rapid changes that have taken place in the business environment.
Business firms now have to face increased competition not only from firms within the
country but also from international business giants thanks to globalization, liberalization,
technological changes and other changes. Generally the objective of M&As is wealth
maximization of shareholders by seeking gains in terms of synergy, economies of scale,
better financial and marketing advantages, diversification and reduced earnings volatility,
improved inventory management, increase in domestic market share and also to capture fast
growing international markets abroad. But astonishingly, though the number and value of
M&As are growing rapidly, the results of the studies on the impact of mergers on the
performance from the acquirers’ shareholders perspective have been highly disappointing. In
this paper an attempt has been made to draw the results of some of the earlier studies while
analyzing the causes of failure of majority of the mergers. While making the merger deals, it
is necessary not only to look into the financial aspects of the deal but also to analyse the
cultural and people issues of both the concerns for proper post-acquisition integration and for
making the deal successful. But it is unfortunate that in many deals only financial and
economic benefits are considered while neglecting the cultural and people issues.
Thus in nut shell we can say that M&A have become common in our country’s business set
up. There is a tremendous need for people to grow and become global players expanding
their business spheres.

If success is to be achieved in M&A cohesive, well integrated and motivated workforce is


required who is willing to take on the challenges that arise in the process of M&A and there
should be proper organization among employees and they should be provided with proper
working conditions.

BIBLIOGRAPHY:
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1. Pandey, I.M., financial management, New Delhi, vikas publishing house pvt. Ltd.,
1978. Khan&Jain, financial management, Tata McGraw hills
2. H.R. MACHIRAJU, Mergers Acquisitions and Takeovers, New Age International (P)
Limited, 2003, Page 169
3. J. Fred Weston & Samuel C. Weaver, Tata McGraw Hill Publishing Company
Limited, New Delhi, 2002, Page 3
4. David m. schweiger, Merger and Integration, McGraw Hill, 2002, page 4
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2000
6. Abhyankar, A., K.Y. Ho and H. Zhao, “Long-Run Post–Merger Stock Performance of
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Economics, 15(10), (2005), 679-690.
7. Agrawal, A., J.F. Jaffe and G.N. Mandelker, “The Post-Merger Performance of
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8. Chandra, P., Financial Management: Theory and Practice, 2001, Fifth Edition, Tata
McGraw-Hill Publishing Company Limited, New Delhi.

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