Introduction to Mergers

Unit-1

Objectives
To provide a basic understanding of the critical
importance of corporate restructuring in current day
business efforts.
To develop among students the specialized
knowledge of the various components of Mergers
and Acquisitions.
To integrate theories, concepts and applications
concerning discharge of managerial responsibilities
in financial operations.

Scheme of Study
Part I Theoretical Framework of Mergers
Definition, importance, types, strategies, theories, Motives of MERGER. Joint
Ventures & Strategic Alliances.

Part II Legal Framweork for Mergers &

Acquisitions
Legal Aspects of Mergers, Regulation by SEBI, Takeover Code, Scheme of
Amalgamation, Approval from court.

 Part III Financing Mergers

Valuation of Business, Cash flow basis, computation of impact on EPS and
Market Price, Determination of Exchange Ratio, MBO, LBO, Boot Strapping

Part IV Takeovers
Hostile Takeover, Defence against Hostile Takeover, Post Mergers HR and
Cultural issues.

Corporate Restructuring
Authors views.
Chandra 2007 Corporate restructuring refers to a
broad array of activities that expand or contract a
firms operations or substantially modify it financial
and organisational structure.
Weston 2005 Corporate restructuring refers to
liquidating projects in some areas and redirecting
assets to other existing or new areas.

Authors views.
Bowman and Singh (1997) are of the opinion that the
current space of restructuring exercises is induced by
the simultaneous changes in the product markets
and changes in the capital markets.
Muller (1988) argues that the changing culture and
image of the company are the most important
rationale infuencing restructuring

Collective Definition : Corporate Restructuring can be defined as any change

in the business capacity or portfolio that is carried
out by an inorganic route or a change in the capital
structure of a company that is not a part of its
ordinary course of business or any change in the
ownership of or control over the management of the
company or a combination thereof.

Dabur Restructuring Story

Dabur India is the 4th Largest FMCG Company in India

Strategic Business Units in Health care, Personal care and Food products
Product marketed in over 50 countries
Dabur has a turnover of Rs.1899.57 crore with powerful brands like Dabur
Amla, Dabur Chyawanprash, Real, Vatika and Hajmola
Leader in Herbal Digestives with 90% market share
History of Dabur
Set up in 1884 by Dr S K Burman, it started off with a direct mailing system to send
medicines. The company also marketed allopathic drugs.
1896, Burman started production of ayurvedic drugs.
In the early 1900s, the next generation of Burmans took a conscious decision to
focus more on the Ayurvedic medicines market.
In 1940, Dabur launched Dabur Amla Hair Oil, and in 1949, the company launched
Chyawanprash.
In 1972, Dabur shifted base from Kolkata to New Delhi
In 1978, Dabur launched the Hajmola tablet

Why Restructuring ?
Image : Ayurvedic Company
Association: 35 - plus age group
Problems :

Diversified into too many product ranges

Image

Association with a particular age group and hence losing on the other
potential customers
Lower Sales and Profits

Restructuring Process
Dabur India plans to divest some unprofitable brands in order to
concentrate on its core operations
Dabur has also appointed consultancy Noble & Hewitt to restructure its
personnel department and revamp its human resource development section.
Entered new potential areas and targeted the youth as well school
children.
Set itself a new brand strategy

JK Tyre Restructuring Story

In 1997, JK tyre acquired majority stake in
Vikrant tyres
Non-tyre business, viz, sugar and agri seeds,
have been demerged into two separate
entities, namely JK sugar limited and JK Agrigenetics respectively.

JK tyre planning tobuy Birlas Kerosam

industried, in uttrakhand

Reasons for Restructuring

1.
2.
3.
4.
5.
6.
7.
8.

Change in Fiscal and Government Policies

Liberalization, Privatization and Globalization
Information Technology Revolution
Divestment
Enhancing shareholder value
Evolving Appropriate capital structure
Environmental changes
Transferring Corporate Assets

Barriers to Restructuring

Resistance to Change
Poor Communication
Absence of Requisite Skills
Failure to understand Benefits of Restructuring
Organizational Workload

Forms of Restructuring

Introduction
Mergers and acquisitions (M&A) are complex,
involving many parties.
Mergers and acquisitions involve many issues,
including

Corporate governance.
Form of payment.
Legal issues.
Contractual issues.
Regulatory approval.

M&A analysis requires the application of

valuation tools to evaluate the M&A decision.
Copyright 2013 CFA Institute

15

Example of a merger:
AMR and U.S. Airways
November
2012

July 2012

U.S. Airways
proposes
merger to
bankrupt
AMR.

April 2012

AMR creditors
encourage AMR to
merge with another
airline, instead of
emerging from
bankruptcy alone.

AMR and U.S.

Airways begin
merger
discussions.

U.S. Airways proposes

merger, with its
shareholders owning
30% of the new
company.

September
2012

Details of the
merger are
worked out.
Merger filed
with the FTC
under HartScott-Rodino
Act.
February 2013

Copyright 2013 CFA Institute

16

Mergers and acquisitions Definitions

Merger with Consolidation
Company

Company

Company
B

Acquisition

Company

Company

X
Company
Y

Copyright 2013 CFA Institute

17

Mergers and Acquisitions Definitions

Parties to the acquisitions:
The target company (or target) is the company being
acquired.
The acquiring company (or acquirer) is the company
acquiring the target.

Classified based on endorsement of parties

management:
A hostile takeover is when the target company board
of directors objects to a takeover offer.
A friendly transaction is when the target company
board of directors endorses the merger or acquisition
offer.
Copyright 2013 CFA Institute

18

Merger Waves
(Boom Periods)

Horizontal Consolidation (1897-1904)

Increasing Concentration (1916-1929)
The Conglomerate Era (1965-1969)
The Retrenchment Era (1981-1989)
Age of Strategic Megamerger (1992-2000)
Age of Cross Border and Horizontal Megamergers
(2003-2007)

Causes and Significance

of M&A Waves
Factors contributing to merger waves:
Shocks (e.g., technological change, deregulation, and escalating
commodity prices)
Ample liquidity and low cost of capital
Overvaluation of acquirer share prices relative to target share prices
Why it is important to anticipate M&A waves:
Financial markets reward firms pursuing promising opportunities early
on and penalize those that follow later in the cycle.
Acquisitions made early in the wave often earn substantially higher
financial returns than those made later in the cycle.

Horizontal Consolidation (1897-1904)

Spurred by
Drive for efficiency,
Lax enforcement of antitrust laws
Westward migration, and
Technological change
Resulted in concentration in metals,
transportation, and mining industry
M&A boom ended by 1904 stock market crash
and fraudulent financing

Increasing Concentration (1916-1929)

Spurred by
Entry of U.S. into WWI
Post-war boom
Boom ended with
1929 stock market crash
Passage of Clayton Act which more clearly
defined monopolistic practices

The Conglomerate Era (1965-1969)

Conglomerates buy earnings streams to boost their
share price
Overvalued firms acquired undervalued high
growth firms
Number of high-growth undervalued firms
declined as conglomerates bid up their prices
Higher purchase price for target firms and
increasing leverage of conglomerates brought era
to a close

The Retrenchment Era (1981-1989)

Strategic U.S. buyers and foreign multinationals
dominated first half of decade
Second half dominated by financial buyers
Buyouts often financed by junk bonds
Drexel Burnham provided market liquidity
Era ended with bankruptcy of several large LBOs and
demise of Drexel Burnham

Age of Strategic Megamerger

(1992-2000)
Dollar volume of transactions reached record in each year
between 1995 and 2000
Purchase prices reached record levels due to
Soaring stock market
Consolidation in many industries
Technological innovation
Benign antitrust policies
Period ended with the collapse in global stock markets and
worldwide recession

Age of Cross Border and

Horizontal Megamergers (2003 2007)
Average merger larger than in 1980s and 1990s, mostly
horizontal, and cross border
Concentrated in banking, telecommunications, utilities,
healthcare, and commodities (e.g., oil, gas, and metals)
Spurred by
Continued globalization to achieve economies of scale and
scope;
Ongoing deregulation;
Low interest rates;
Increasing equity prices, and
Expectations of continued high commodity prices
Period ended with global credit market meltdown and 20082009 recession